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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT**

 

**PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDED JUNE 30, 2009**

**COMMISSION FILE NUMBER 0-9355**

 

**CUBICENERGY, INC.**

(Exact Nameof Registrant as Specified in its Charter)

 

| **TEXAS**                 | ** ** | **87-0352095**                        |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification No.) |

 

**9870 PLANO ROAD, DALLAS, TEXAS 75238**

(Addressof Principal Executive Offices)

 

**972-686-0369**

(Registrant’sTelephone Number)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of  Class**           | ** ** | **Name of  Exchange on Which Registered** |
|-------------------------------|------------|-------------------------------------------|
| Common Stock, $0.05 par value |       | NYSE Amex, LLC.                           |

 

Securitiesregistered under Section 12(g) of the Exchange Act: **None**

 

Indicateby check mark if registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes o  No x

 

Indicateby check mark if registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yeso  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. 

 

| Large  accelerated filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company x |

 

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

 

Statethe aggregate market value of the common stock, par value $0.05 per share, heldby non-affiliates computed by reference to the price at which the common stockwas last sold, or the average bid and asked prices of such common stock, as ofthe last business day of the registrant’s most recently completed second fiscalquarter: As of December 31, 2008 aggregate market value held bynon-affiliates was $42,057,496.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date: As of September 4, 2009, therewere 64,674,565 shares of Common Stock outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE: None.

 

 

 

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**Special note regardingforward-looking statements**

 

This annual report on Form 10-Kcontains forward-looking statements, as defined in Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements, other than statements ofhistorical facts, are forward-looking statements. These forward-lookingstatements relate to, among other things, the following: our future financialand operating performance and results; our business strategy; market prices;and our plans and forecasts.

 

Forward-looking statementsare identified by use of terms and phrases such as “may,” “expect,” “estimate,”“project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,”“potential,” “should,” “could” and similar words and phrases. Although webelieve that the expectations reflected in these forward-looking statements arereasonable, they do involve certain assumptions, risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements. You should consider carefully the statements underthe “Risk Factors” section of this report and other sections of this report,which describe factors that could cause our actual results to differ from thoseset forth in the forward-looking statements, including, but not limited to, thefollowing factors:

 

·                  our ability to generatesufficient cash flow from operations, borrowings or other sources to enable usto service our debt and fully develop our undeveloped acreage positions;

 

·                  the volatility in commodityprices for oil and natural gas;

 

·                  the possibility that theindustry may be subject to future regulatory or legislative actions (includingany additional taxes);

 

·                  the presence orrecoverability of estimated oil and natural gas reserves and the actual futureproduction rates and associated costs;

 

·                  the ability to replace oiland natural gas reserves;

 

·                  lease or title issues ordefects to our oil and gas properties;

 

·                  environmental risks;

 

·                  drilling and operatingrisks;

 

·                  exploration and developmentrisks;

 

·                  competition, includingcompetition for acreage in natural gas producing areas;

 

·                  management’s ability toexecute our plans to meet our goals;

 

·                  our ability to retain keymembers of senior management;

 

·                  our ability to obtain goodsand services, such as drilling rigs and other oilfield equipment, and access toadequate gathering systems and pipeline take-away capacity, to execute ourdrilling program;

 

·                  general economic conditions,whether internationally, nationally or in the regional and local market areasin which we do business, may be less favorable than expected, including thatthe United States economic slow-down might continue to negatively affect thedemand for natural gas, oil and natural gas liquids;

 

·                  continued hostilities in theMiddle East and other sustained military campaigns or acts of terrorism orsabotage;

 

·                  our ability to market oiland natural gas due to pipeline capacity; and

 

·                  other economic, competitive,governmental, legislative, regulatory, geopolitical and technological factorsthat may negatively impact our business, operations or pricing.

 

All forward-lookingstatements are expressly qualified in their entirety by the cautionarystatements in this paragraph and elsewhere in this document. Other than asrequired under the securities laws, we do not assume a duty to update theseforward-looking statements, whether as a result of new information, subsequentevents or circumstances, changes in expectations or otherwise.

 

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**CUBIC ENERGY, INC.**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                           | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                                                 |     |
| Item 1.      | Business                                                                                                             | 1        |
| Item 1A.     | Risk Factors                                                                                                         | 18       |
| Item 1B.     | Unresolved  Staff Comments                                                                                           | 27       |
| Item 2.      | Properties                                                                                                           | 27       |
| Item 3.      | Legal Proceedings                                                                                                    | 27       |
| Item 4.      | Submission  of Matters to a Vote of Security Holders                                                                 | 28       |
|              |                                                                                                                 |     |
| **PART II**  |                                                                                                                 |     |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases  of Equity Securities | 29       |
| Item 6.           | Selected  Financial Data                                                                                             | 32       |
| Item 7.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 33       |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 44       |
| Item 8.      | Financial  Statements and Supplementary Data                                                                         | 44       |
| Item 9.      | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 44       |
| Item 9A.          | Controls and  Procedures                                                                                             | 44       |
| Item 9B.          | Other Information                                                                                                    | 46       |
|              |                                                                                                                 |     |
| **PART III** |                                                                                                                 |     |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                              | 47       |
| Item 11.     | Executive  Compensation                                                                                              | 49       |
| Item 12.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 56       |
| Item 13.     | Certain  Relationships and Related Transactions, and Director Independence                                           | 57       |
| Item 14.     | Principal  Accountant Fees and Services                                                                              | 58       |
|              |                                                                                                                 |     |
| **PART IV**  |                                                                                                                 |     |
| Item 15.     | Exhibits  and Financial Statement Schedules                                                                          |     |

 

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**PART I**

 

**Item 1.    Business.**

** **

**GENERAL**

** **

Cubic Energy, Inc. (referred to as “Cubic”,“we”, “our”, “us” or the “Company”) is an independent energy company engaged inthe development and production of, and exploration for, crude oil, natural gasand natural gas liquids. Our oil and gas assets are concentrated principally inTexas and Louisiana. At June 30, 2009, our total proved reserves were21,076,880 Mcfe.

 

Our predecessor was incorporated in October 1978.Cubic was incorporated in 1999 in the State of Texas. Our principal executiveoffice is located at 9870 Plano Road, Dallas, Texas 75238, and our telephonenumber is (972) 686-0369.

 

**HISTORY**

 

In December 1997, we entered into a StockPurchase Agreement (the “Agreement”) pursuant to which the Company issued12,500,000 shares of our common stock in exchange for the conveyance to theCompany of certain oil and gas properties by Calvin A. Wallen, III and hisaffiliates. In connection with the Agreement, three of the five members of theBoard of Directors resigned and new directors were appointed, including Mr. Wallen,who also became President and CEO of the Company.

 

Prior to the Agreement, we focused primarily onthe acquisition of non-operated working interests and overriding royaltyinterests in oil and gas properties. Subsequent to the Agreement in December 1997,we moved our headquarters from Tulsa, Oklahoma to Garland, Texas in order toutilize an affiliate’s assembled team of experienced management whosesubstantial expertise lay in acquisition, exploitation and development and theability to manage both operated and non-operated oil and gas properties.Current management believes that the ability to operate the vast majority ofour own properties, through this affiliate, will result in significant costsavings to the Company. In addition, after reviewing our existing propertyportfolio and refining our new business strategy, the management team initiateda divestment strategy to dispose of our non-strategic assets in non-core areasin order to concentrate on building core reserves. Pursuant to this strategy,we have acquired additional properties in our core areas, primarily inLouisiana, as well as establishing a drilling program for the drilling ofexploratory, development and infill wells, a strategy previously unavailable tous due to the technical expertise and experience required and the lack ofavailable resources. We have made substantial progress in redirecting ourstrategic business efforts and believe that attractive opportunities remain fordevelopment of our remaining assets and acquisition of future assets.

 

OnFebruary 6, 2006, the Company entered into a Purchase Agreement withTauren Exploration, Inc. (“Tauren”), an entity wholly owned by Calvin A.Wallen III, the Company’s Chairman of the Board and Chief Executive Officer,with respect to the purchase by the Company of certain Cotton Valley leaseholdinterests (approximately 11,000 gross acres; 5,000 net acres) held by Tauren.Pursuant to the Purchase Agreement, the Company acquired from Tauren a 35%working interest in approximately 2,400 acres and a 49% working interest inapproximately 8,500 acres located in DeSoto and Caddo Parishes, Louisiana,along with an associated Area of Mutual Interest (“AMI”) and the right toacquire at “cost” (as defined in the Purchase Agreement) a working interest inall additional mineral leases obtained by Tauren in the AMI, in exchange for (a) $3,500,000in cash, (b) 2,500,000 unregistered shares of Company common stock, (c) anunsecured 12.5% short-term promissory note in the amount of $1,300,000, whichnote is convertible into Company common stock at a conversion price of $0.80per share (the “Tauren Note”), and (d) a drilling credit of $2,100,000.

 

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On March 5, 2007,Cubic entered into a Credit Agreement with Wells Fargo Energy Capital (“WellsFargo”) providing for a revolving credit facility of $20,000,000 and aconvertible term loan of $5,000,000 (the “Credit Facility”). In connection withentering into the Credit Facility, the Company issued to Wells Fargo warrants,with five-year expirations, for the purchase of up to 2,500,000 shares ofCompany common stock at an original exercise price of $1.00 per share. The term loan wasinitially convertible into 5,000,000 shares of Cubic common stock at anoriginal conversion price of $1.00 per share. The Revolving Note is subject toa borrowing base (the “Borrowing Base”), initially set at $4,000,000, and issubject to periodic review. On July 27, 2007, Wells Fargo increased theBorrowing Base to $6,600,000 in order to fund the drilling and casing costs oftwo new wells in the Company’s Johnson Branch acreage in Caddo Parish,Louisiana. On September 7, 2007, Wells Fargo increased the Borrowing Baseto $8,600,000 in order to fund the remaining drilling and casing costs of fivewells drilled since the beginning of fiscal 2008, the drilling and casing costsof two new wells, and the costs of installing a gathering/sales line andassociated equipment in the Company’s Johnson Branch acreage. On November 19,2007, Wells Fargo increased the Borrowing Base to $14,500,000 in order to fundthe completion costs and casing of eight wells already successfully drilled andthe drilling of four additional wells located in the Company’s Johnson Branchacreage. On May 8, 2008, Wells Fargo increased the Borrowing Base to$20,000,000 in order to fund the completion costs and casing of the fourrecently-drilled wells located in the Company’s Johnson Branch acreage(including two vertical wells drilled into the Bossier/Haynesville shales) andthe drilling of two additional wells located in the Company’s BethanyLongstreet acreage in Caddo and DeSoto Parishes. On June 26, 2009, WellsFargo decreased the Company’s borrowing base to $7,500,000. Thisredetermination required the Company to make a payment of $12,500,000 by September 1,2009. Wells Fargo has issued the Company extensions to November 1, 2009. TheCompany has the option of making this payment in five equal installments.

 

The terms of the CreditFacility, among other things, prohibit the Company from merging with anothercompany or paying dividends, and limit additional indebtedness, sales ofcertain assets and investments. Upon the repayment in full of the CreditFacility, and with respect to certain properties, upon the occurrence of theconditions set forth in Section 2.14 of the Credit Agreement, the Companyagreed to convey a net profits interest to Wells Fargo in an amount equal to 5%of Cubic’s net interest in certain of its Louisiana properties.

 

On May 6, 2008, the Company issued asubordinated promissory note in the amount of $2,000,000 (the “SubordinatedNote”) to Diversified Dynamics Corporation (the “Lender”), an entity controlledby William Bruggeman who beneficially owns more than 5% of the common stock ofthe Company, and who subsequently became a director of the Company. TheSubordinated Note bears interest at a fluctuating rate equal to the sum of theprime rate plus two percent (2%) per annum, and matures on April 30, 2010.As consideration for the loan made by the Lender pursuant to the SubordinatedNote, the Company agreed to convey to the Lender, upon the repayment in full ofthe indebtedness evidenced by the Subordinated Note and the repayment in fullof the senior indebtedness evidenced by the Credit Facility with Wells Fargo,an undivided 0.375% net profits interest in the future production ofhydrocarbons from or attributable to Cubic’s net interest in its Louisianaproperties. The proceeds of the Subordinated Note were used for generalcorporate and working capital purposes.

 

On May 8, 2008, the Credit Facility withWells Fargo was amended by the First Amendment to the Credit Agreement (the “FirstAmendment”). Material provisions of the First Amendment included the following:(i) the Company may not prepay all or any part of the principal balanceoutstanding on the Term Loan prior to its maturity on March 1, 2010; and (ii) theamount of the Borrowing Base was increased to $20,000,000, which amount wasfully drawn upon, on August 20, 2008.

 

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**STRATEGY**

** **

Our strategy with respect to our domesticexploration program seeks to maintain a balanced portfolio of drillingopportunities that range from lower risk, field extension wells to higher risk,high reserve potential prospects. Our focus is primarily on explorationopportunities that can benefit from advanced technologies, including 3-Dseismic, designed to reduce risks and increase success rates. We develop prospectsin-house with an affiliate and through strategic alliances with explorationcompanies that have expertise in specific target areas. In addition, weevaluate some externally generated prospects and plan to participate in some ofthese opportunities to enhance our portfolio.

 

We are currently focusing our domesticexploration activities to develop our undeveloped leasehold opportunities inLouisiana and Texas. Currently we have exploration opportunities and seek toacquire additional leasehold interests in Caddo and DeSoto Parishes inLouisiana, and in Palo Pinto, Callahan and Eastland Counties in Texas.  These areas are a part of geologic studiesutilizing regional trend surface analysis, 2-D and 3-D seismic data, AVOanalysis and/or vast sub-surface control. Prospects have been developed fromapproximately 4,000 to 12,000 feet in depth in the: Bossier/Haynesville shales;Cotton Valley, Hosston, Gloyd, Pettet, Paluxy, and Strawn sandstones; Bendconglomerate; and Caddo limestone.

 

**PRINCIPALOIL AND GAS PROPERTIES**

** **

The following table summarizes certaininformation with respect to our principal areas of operation at June 30,2009:

 
| ** ** | ** ** | **Proved Reserves**        | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas**  | ** ** | **Percent** | ** ** | **Present Value** | ** ** |
| ** ** | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent** | ** ** | **of Proved** | ** ** | **(Discounted** | ** ** |
| **Area**   | ** ** | **(Bbls)**                 | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**     | ** ** | **Reserves** | ** ** | **@ 10%)** | ** ** |
| Louisiana  |       | 126,158                    |       | 20,301,424 |       | 21,058,371     |       | 99.9 | % | $ | 10,792,200 |   |
| Texas      |       | 51                         |       | 18,203     |       | 18,509         |       | 0.1 | % | 10,190 |   |
| Total      |       | 126,209                    |       | 20,319,627 |       | 21,076,880     |       | 100.0 | % | $ | 10,802,390 |   |

 

Our Texas properties are situated in Palo Pinto,Eastland and Callahan Counties. Our Louisiana properties are situated in CaddoParish and in DeSoto Parish. At June 30, 2009, the Louisiana propertiescontained the vast majority of our proved reserves, a situation that is expectedto continue. The Texas properties consist primarily of wells acquired by theCompany in several transactions between 1991 and 2002 and through overridingroyalty interests reserved in farm-out agreements in 1998 and 1999. The vastmajority of the Louisiana properties were acquired on or about October 1,2004, January 11, 2005 and February 6, 2006.

 

Our net production for the fiscal year ended June 30, 2009 for allof the Company’s wells averaged approximately 766 Mcf of natural gas per day, 5barrels of oil per day and 213 gallons of natural gas liquids per day ascompared to approximately 624 Mcf of natural gas per day, 5 barrels of oil perday and 122 gallons of natural gas liquids per day in the fiscal year ended June 30,2008.

 

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**RECENT DEVELOPMENTS**

 

On Friday, June 26, 2009, theCompany received a letter from NYSE Amex, LLC (the “Exchange”) stating that theExchange believes that the Company is not in compliance with Section 1003(a)(iv) ofthe Exchange’s Company Guide as the Company has sustained losses or itsfinancial condition has become impaired to the extent that it appearsquestionable, in the opinion of the Exchange, as to whether the Company will beable to continue operations and/or meets its obligations as they mature. OnMonday, July 27, 2009, the Company submitted its compliance plan to theExchange detailing how the Company intends to regain compliance. On September 15,2009, the Exchange notified the Company that the Exchange has accepted thecompliance plan, and granted the Company an extension until December 28,2009 to evidence its compliance with the Exchange’s continued listingstandards.

 

On Monday, June 29, 2009, theCompany announced it received a letter from Wells Fargo informing the Companythat Wells Fargo has made a redetermination of the Borrowing Base, whichreduced the Borrowing Base from $20.0 million to $7.5 million, requiring apayment of $12.5 million from the Company to Wells Fargo. Through waivers,Wells Fargo extended the due date for the payment until November 1, 2009,and the Company has the right to pay the deficiency in five monthlyinstallments as provided in the Credit Facility.

 

The Company is focused on capitalrestructuring and regaining full compliance on the Exchange. Capitalrestructuring is intended to support capital expenditures for non-operatedworking interests, to fund horizontal drilling, to fracture stimulate additionalzones of certain Johnson Branch wells and to test the Bossier shale. Thecapital restructuring is an integral part of the Company’s’ strategic plan toregain full compliance on the Exchange.

 

**GAS GATHERING**

 

Cubic has developed its infrastructure inJohnson Branch with approximately 16 miles of gathering lines and pipelineconstructed for its currently producing wells and any further completions. Inaddition, a Johnson Branch tap, common point and compression facility werecompleted in November 2007 and are currently operational. The Company hasalso developed its infrastructure with approximately 7.8 miles of gatheringlines and owns two taps in its Bethany Longstreet acreage.

 

**MARKETINGOF PRODUCTION**

** **

### **Crude Oil and Natural Gas**

###  

Our production consists mainly of natural gas.We market our operated production of natural gas to three purchasers (i) inTexas, Enbridge G & P, LP, and (ii) in Louisiana, EROC GatheringCompany, LP and NGTS, LP. We sell our crude oil and condensate production at ornear the well-site; although in some cases it is gathered by us or others anddelivered to a central point of sale. Our crude oil and condensate productionis transported by truck or by pipeline and is typically committed toarrangements having a term of one year or less. We have not engaged in crudeoil hedging or trading activities. We utilize short-term gas contracts withprices that are related to market conditions in varying degrees and have notengaged in natural gas hedging or futures trading.

 

We believe we would be able to locate alternatepurchasers in the event of the loss of any one of these purchasers, and thatany such loss would not have a material adverse effect on our financialcondition or results of operations. Revenue from the sale of natural gas totaled$1,671,503 for fiscal 2009 and represented 90% of our total oil and gasrevenues for that fiscal year.

 

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### **Price Considerations**

###  

Crude oil prices are established in a highlyliquid, international market, with average crude oil prices that we receivegenerally fluctuating with changes in the futures price established on theNYMEX for West Texas Intermediate Crude Oil (“NYMEX-WTI”). The average crudeoil price per barrel received by us in fiscal 2009 was $60.00 as compared to$102.17 in fiscal 2008. Natural gas and natural gas liquids prices in thegeographical areas in which we operate are closely tied to established priceindices which are heavily influenced by national and regional supply and demandfactors and the futures price per MMbtu for natural gas delivered at Henry Hub,Louisiana established on the NYMEX (“NYMEX-Henry Hub”). At times, these indicescorrelate closely with the NYMEX-Henry Hub price, but often there aresignificant variances between the NYMEX-Henry Hub price and the indices used toprice our natural gas. Average natural gas prices received by us in each of ouroperating areas generally fluctuate with changes in these established indices.The average natural gas price per Mcf received by us in fiscal 2009 was $5.98as compared to $9.01 in fiscal 2008. The average natural gas liquids price pergallon received by us in fiscal 2009 was $1.12 compared to $1.66 in fiscal2008.

 

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**OIL AND GAS RESERVES**

 

The following tables set forth the proveddeveloped and proved undeveloped reserves at June 30, 2009, the estimatedfuture net cash flows from such proved reserves and the Standardized Measure ofDiscounted Future Net Cash Flows attributable to our reserves at June 30,2009, 2008 and 2007:

 
| ** **                 | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas**  | ** ** | **Estimated**  | ** ** | ** **   | ** ** |
|----------------------------|------------|----------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                 | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent** | ** ** | **Future Net** | ** ** | **10%**      | ** ** |
| **Category**               | ** ** | **(Bbls)**                 | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**     | ** ** | **Cash Flows** | ** ** | **Discount** | ** ** |
| Proved  Producing          |       | 2,968                      |       | 337,993    |       | 355,801        |       | $              | 956,021    |         | $          | 781,820 |   |
| Proved  Non-Producing      |       | —                     |       | —     |       | —         |       | —         |       | —       |       |
| Proved  Developed Reserves |       | 2,968                      |       | 337,993    |       | 355,801        |       | $              | 956,021    |         | $          | 781,820 |   |
| Proved  Undeveloped        |       | 123,241                    |       | 19,981,634 |       | 20,721,079     |       | 25,860,200     |       | $            | 10,020,570 |   |
| Total  Proved Reserves     |       | 126,209                    |       | 20,319,627 |       | 21,076,880     |       | $              | 26,816,221 |         | $          | 10,802,390 |   |

 
| ** **                                           | ** ** | **At June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Proved Developed Reserves:**                       |       |                 |       |   |   |   |   |
| Oil &  Natural Gas Liquids (Bbls)           |       | 2,968                |       | 23,645 |   | 3,062 |   |
| Gas  (Mcf)                                           |       | 337,993              |       | 1,019,276 |   | 1,037,238 |   |
| Mcfe                                                 |       | 355,801              |       | 1,161,146 |   | 1,055,610 |   |
| Estimated  future net cash flows (before income tax) |       | $                    | 956,021    |   | $ | 9,410,338 |   | $ | 4,694,571 |   |
| Standardized  Measure (1)                            |       | $                    | 781,820    |   | $ | 7,911,561 |   | $ | 3,704,011 |   |
|                                                 |       |                 |       |   |   |   |   |
| **Proved Undeveloped Reserves:**                     |       |                 |       |   |   |   |   |
| Oil &  Natural Gas Liquids (Bbls)           |       | 123,241              |       | 65,303 |   | 9,768 |   |
| Gas  (Mcf)                                           |       | 19,981,634           |       | 5,070,453 |   | 3,204,813 |   |
| Mcfe                                                 |       | 20,721,079           |       | 5,462,271 |   | 3,263,421 |   |
| Estimated  future net cash flows (before income tax) |       | $                    | 25,860,200 |   | $ | 37,656,434 |   | $ | 6,926,991 |   |
| Standardized  Measure (1)                            |       | $                    | 10,020,570 |   | $ | 25,199,095 |   | $ | 3,125,699 |   |
|                                                 |       |                 |       |   |   |   |   |
| **Total Proved Reserves:**                           |       |                 |       |   |   |   |   |
| Oil &  Natural Gas Liquids (Bbls)           |       | 126,209              |       | 88,948 |   | 12,830 |   |
| Gas  (Mcf)                                           |       | 20,319,627           |       | 6,089,729 |   | 4,242,051 |   |
| Mcfe                                                 |       | 21,076,880           |       | 6,623,417 |   | 4,319,031 |   |
| Estimated  future net cash flows (before income tax) |       | $                    | 26,816,221 |   | $ | 47,066,772 |   | $ | 11,621,562 |   |
| Standardized  Measure (1)                            |       | $                    | 10,802,390 |   | $ | 33,110,656 |   | $ | 6,829,710 |   |
|                                                 |       |                 |       |   |   |   |   |
| **Average price used to calculate reserves:**        |       |                 |       |   |   |   |   |
| Oil  (per Bbl)                                       |       | $                    | 66.52      |   | $ | 138.80 |   | $ | 64.46 |   |
| Natural  Gas Liquids (per Bbl)                       |       | $                    | 1.02       |   | $ | 93.86 |   | n/a |   |
| Gas  (per Mcf)                                       |       | $                    | 3.72       |   | $ | 14.10 |   | $ | 7.06 |   |

 

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*(1)   *TheStandardized Measure of Discounted Future Net Cash Flows prepared by theCompany represents the present value (using an annual discount rate of 10%) ofestimated future net cash flows from the production of proved reserves, aftergiving effect to income taxes. See “Note J - Oil and gas reserves information(unaudited)” in the Notes to the Financial Statements of the Company includedelsewhere in this Report for additional information regarding the disclosure ofthe Standardized Measure information in accordance with the provisions ofStatement of Financial Accounting Standards (“FAS”) No. 69 (“FAS No. 69”),*“Disclosures about Oil and Gas ProducingActivities.”*

 

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The information set forth in this Annual Reportrelating to our proved reserves, estimated future net cash flows and presentvalues is taken from reports prepared by the Dallas office of RPS Scotia, Inc.,an independent, petroleum engineering firm, for fiscal years 2009, 2008 and2007. The estimates of this independent petroleum engineering firm were basedupon review of production histories and other geological, economic, ownershipand engineering data provided by the Company. Information with respect toapproximately 2% of the total proved reserves as of June 30, 2009, wasprepared in-house and was not reviewed by an independent engineering firm. Noreports on our reserves have been filed with any federal agency. In accordancewith guidelines of the SEC, our estimates of proved reserves and the future netrevenues from which present values are derived are made using year end oil andgas sales prices held constant throughout the life of the properties (except tothe extent a contract specifically provides otherwise). Operating costs,development costs and certain production-related taxes were deducted inarriving at estimated future net cash flows, but such costs do not include debtservice or general and administrative expenses.

 

There are numerous uncertainties inherent inestimating oil and gas reserves and their values, including many factors beyondour control. The reserve data set forth in this Annual Report representsestimates only. Reservoir engineering is a subjective process of estimating thesizes of underground accumulations of oil and gas that cannot be measured in anexact manner. The accuracy of any reserve estimate is a function of the qualityof available data, engineering and geological interpretation, and judgment. Asa result, estimates of different engineers, including those used by us, mayvary. In addition, estimates of reserves are subject to revision based uponactual production, results of future development, exploitation and explorationactivities, prevailing oil and gas prices, operating costs and other factors,which revisions may be material. Accordingly, reserve estimates are oftendifferent from the quantities of oil and gas that are ultimately recovered andare highly dependent upon the accuracy of the assumptions upon which they arebased. There can be no assurance that these estimates are accurate predictionsof our oil and gas reserves or their values. Estimates with respect to provedreserves that may be developed and produced in the future are often based uponvolumetric calculations and upon analogy to similar types of reserves ratherthan actual production history. Estimates based on these methods are generallyless reliable than those based on actual production history. Subsequentevaluation of the same reserves based upon production history will result invariations, which may be substantial, in the estimated reserves.

 

**Costs Incurred**

 

The following table shows certain informationregarding the costs incurred by us in our property acquisition, development andexploratory activities during the periods indicated.

 
| ** **                  | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Property  acquisition costs |       | $                            | 72,385     |   | $ | 394,675 |   | $ | 481,229 |   |
|                        |       |                         |       |   |   |   |   |
| Exploratory  costs          |       | 5,928,825                    |       | 14,030,615 |   | 2,759,794 |   |
|                        |       |                         |       |   |   |   |   |
| Development  costs          |       | —                       |       | 916,613 |   | 966,879 |   |
|                        |       |                         |       |   |   |   |   |
| Total                       |       | $                            | 6,001,210  |   | $ | 15,341,903 |   | $ | 4,207,902 |   |

 

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**Drilling Results**

 

We drilled or participated in the drilling ofwells as set out in the table below for the periods indicated. The table wascompleted based upon the date drilling commenced. We did not acquire any wellsduring these periods. You should not consider the results of prior drilling activitiesas necessarily indicative of future performance, nor should you assume thatthere is necessarily any correlation between the number of productive wellsdrilled and the oil and natural gas reserves generated by those wells.

 
| ** **             | ** ** | **Year Ended June 30,** | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **Gross**                    | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **Development wells:** |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | —                       |       | — |   | — |   | — |   | — |   | — |   |
| Dry                    |       | —                       |       | — |   | — |   | — |   | — |   | — |   |
| Total  development     |       | —                       |       | — |   | — |   | — |   | — |   | — |   |
|                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Exploratory wells:** |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 6                            |       | 0.82 |   | 12 |   | 5.88 |   | 3 |   | 0.85 |   |
| Dry                    |       | —                       |       | — |   | — |   | — |   | — |   | — |   |
| Total  exploratory     |       | 6                            |       | 0.82 |   | 12 |   | 5.88 |   | 3 |   | 0.85 |   |
|                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Total wells:**       |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 6                            |       | 0.82 |   | 12 |   | 5.88 |   | 3 |   | 0.85 |   |
| Dry                    |       | —                       |       | — |   | — |   | — |   | — |   | — |   |
| Total  wells           |       | 6                            |       | 0.82 |   | 12 |   | 5.88 |   | 3 |   | 0.85 |   |

 

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**NET PRODUCTION, SALES PRICES ANDCOSTS**

 

**The following table presents certain information withrespect to production, prices and costs attributable to all oil and gasproperty interests owned by us for the fiscal years ended June 30, 2009,2008 and 2007:**

** **
| ** **                                              | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Production Volumes:**                                 |       |                         |       |   |   |   |   |
| Oil  (Bbl)                                              |       | 1,681                        |       | 1,682 |   | 967 |   |
| Natural  gas liquids (gallons)                          |       | 77,772                       |       | 44,476 |   | — |   |
| Natural  gas (Mcf)                                      |       | 279,516                      |       | 228,219 |   | 70,412 |   |
| Total  oil, natural gas liquids, and natural gas (Mcfe) |       | 300,712                      |       | 244,665 |   | 76,214 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Weighted Average Sales Prices:**                      |       |                         |       |   |   |   |   |
| Oil  (per Bbl)                                          |       | $                            | 60.00      |   | $ | 102.17 |   | $ | 61.68 |   |
| Natural  gas liquids (per gallon)                       |       | $                            | 1.12       |   | $ | 1.66 |   | $ | — |   |
| Natural  gas (per Mcf)                                  |       | $                            | 5.98       |   | $ | 9.01 |   | $ | 7.44 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Selected Expenses per Mcfe:**                         |       |                         |       |   |   |   |   |
| Production  costs                                       |       | $                            | 3.98       |   | $ | 3.60 |   | $ | 4.18 |   |
| Workover  expenses (non-recurring)                      |       | $                            | 0.12       |   | $ | 0.11 |   | $ | 1.40 |   |
| Severance  taxes                                        |       | $                            | 0.20       |   | $ | 0.29 |   | $ | 0.39 |   |
| Other  revenue deductions                               |       | $                            | 0.27       |   | $ | 0.75 |   | $ | 0.35 |   |
| Total  lease operating expenses                         |       | $                            | 4.57       |   | $ | 4.75 |   | $ | 6.32 |   |
| General  and administrative expenses                    |       | $                            | 6.45       |   | $ | 10.17 |   | $ | 17.39 |   |
| Depreciation,  depletion and amortization               |       | $                            | 2.55       |   | $ | 8.79 |   | $ | 4.76 |   |

 

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**PRODUCTIVEWELLS AND ACREAGE**

** **

### **Productive Wells**

###  

The following tablesets forth our domestic productive wells at June 30, 2009:

 
| **Oil**   | ** ** | **Gas** | ** ** | **Total** | ** ** |
|-----------|------------|---------|------------|-----------|------------|
| **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| —    |       | —  |       | 43        |       | 21.44 |   | 43 |   | 21.44 |   |

 

**Acreage**

 

The following table sets forth our undevelopedand developed gross and net leasehold acreage at June 30, 2009.Undeveloped acreage includes leased acres on which wells have not been drilledor completed to a point that would permit the production of commercialquantities of oil and gas, regardless of whether or not such acreage containsproved reserves.

 
| **Undeveloped** | ** ** | **Developed** | ** ** | **TOTAL** | ** ** |
|-----------------|------------|---------------|------------|-----------|------------|
| **Gross**       | ** ** | **Net**       | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| 1,221           |       | 505           |       | 13,245    |       | 5,572 |   | 14,466 |   | 6,077 |   |

 

As is customary in the industry, we generallyacquire oil and gas acreage without any warranty of title except as to claimsmade by, through or under the transferor. Although we have title to developedacreage examined prior to acquisition in those cases in which the economicsignificance of the acreage justifies the cost, there can be no assurance thatlosses will not result from title defects or from defects in the assignment ofleasehold rights.

 

**OPERATIONS**

** **

Oiland gas properties are customarily operated under the terms of a jointoperating agreement, which provides for reimbursement of the operator’s directexpenses and monthly per well supervision fees. Per well supervision fees varywidely depending on the geographic location and producing formation of thewell, whether the well produces oil or gas and other factors. We are not theoperator of our wells, but, in all cases, except for three wells in NorthwestLouisiana in which we have minor working interests, and which are operated byChesapeake Energy Corp., Fossil Operating, Inc. (“Fossil”), an entitywholly owned by Mr. Wallen, is the operator. Fossil charges the Company,without mark-up, for the Company’s working interest portion of the directoperating costs and overhead costs (which are comprised of administrative,supervision, office services and warehousing costs) that Fossil incurs withrespect to our wells.

 

We have contract relationships with petroleumengineers, geologists and other operations and production specialists who webelieve will be able to improve production rates, increase reserves and/orlower the cost of operating our oil and gas properties.

 

### **EMPLOYEES**

###  

At September 4, 2009, the Company had nine (9) employees,four (4) full-time and five (5) part-time. We regularly useindependent consultants and contractors to perform various professionalservices, including well-site supervision, design, construction, permitting andenvironmental assessment. We use independent contractors to perform field andon-site production operation services.

 

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### **FACILITIES**

###  

The Company’s principal executive and administrativeoffices are located at 9870 Plano Road, Dallas, Texas. The offices aresubleased on a month-to-month basis from an affiliate controlled by Mr. Wallenand the offices are owned by this affiliate. The average monthly amount chargedto the Company during the year ended June 30, 2009, was $2,229. TheCompany believes that there is other appropriate space available in the eventthe Company should terminate its current leasing arrangement.

 

**COMPETITION**

** **

**We compete with major integratedoil and natural gas companies and independent oil and natural gas companies inall areas of operation. In particular, we compete for property acquisitions andfor the equipment and labor required to operate and develop these properties.Most of our competitors have substantially greater financial and otherresources than we have. In addition, larger competitors may be able to absorbthe burden of any changes in federal, state and local laws and regulations moreeasily than we can, which could adversely affect our competitive position.These competitors may be able to pay more for exploratory prospects and may beable to define, evaluate, bid for and purchase a greater number of propertiesand prospects than we can. Further, our competitors may have technologicaladvantages and may be able to implement new technologies more rapidly than wecan. Our ability to explore for natural gas and oil prospects and to acquireadditional properties in the future will depend on our ability to conductoperations, to evaluate and select suitable properties and to consummatetransactions in this highly competitive environment. In addition, most of ourcompetitors have operated for a much longer time than we have and havedemonstrated the ability to operate through industry cycles.**

** **

**Recent increased oil and naturalgas drilling activity in east Texas and northwest Louisiana has resulted inincreased demand for drilling rigs and other oilfield equipment and services.At various times, we have and may continue to experienced temporary orprolonged shortages or unavailability of drilling rigs, drill pipe and othermaterial used in oil and gas drilling and completing. Such unavailability couldresult in increased costs, delays in timing of anticipated development or causeinterests in undeveloped oil and natural gas leases to lapse.**

** **

**Regulation**

** **

*Exploration and Production.***The exploration, production and sale of oil and natural gas are subjectto various types of local, state and federal laws and regulations. These lawsand regulations govern a wide range of matters, including the drilling andspacing of wells, allowable rates of production, restoration of surface areas,plugging and abandonment of wells and requirements for the operation of wells.Our operations are also subject to various conservation requirements. Theseinclude the regulation of the size and shape of drilling and spacing units orproration units and the density of wells which may be drilled and theunitization or pooling of oil and natural gas properties. In this regard, somestates allow forced pooling or integration of tracts to facilitate exploration,while other states rely on voluntary pooling of lands and leases. In addition,state conservation laws establish maximum rates of production from oil andnatural gas wells, generally prohibit the venting or flaring of natural gas andimpose certain requirements regarding the ratability of production. All ofthese regulations may adversely affect the rate at which wells produce oil andnatural gas and the number of wells we may drill. All statements in this reportabout the number of locations or wells reflect current laws and regulations.

 

Laws and regulations relating to our business frequentlychange, and future laws and regulations, including changes to existing laws andregulations, could adversely affect our business.

 

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*Environmental Matters**.*The discharge of oil, gas orother pollutants into the air, soil or water may give rise to liabilities tothe government and third parties and may require us to incur costs to remedydischarges. Natural gas, oil or other pollutants, including salt water brine,may be discharged in many ways, including from a well or drilling equipment ata drill site, leakage from pipelines or other gathering and transportationfacilities, leakage from storage tanks and sudden discharges from damage orexplosion at natural gas facilities or oil and natural gas wells. Dischargedhydrocarbons may migrate through soil to water supplies or adjoining property,giving rise to additional liabilities.

 

Avariety of federal and state laws and regulations govern the environmentalaspects of natural gas and oil production, transportation and processing andmay, in addition to other laws, impose liability in the event of discharges,whether or not accidental, failure to notify the proper authorities of adischarge, and other noncompliance with those laws. Compliance with such lawsand regulations may increase the cost of oil and natural gas exploration,development and production; although we do not anticipate that compliance willhave a material adverse effect on our capital expenditures or earnings. Failureto comply with the requirements of the applicable laws and regulations couldsubject us to substantial civil and/or criminal penalties and to the temporaryor permanent curtailment or cessation of all or a portion of our operations.

 

TheComprehensive Environmental Response, Compensation and Liability Act (“CERCLA”),also known as the “superfund law,” imposes liability, regardless of fault orthe legality of the original conduct, on some classes of persons that areconsidered to have contributed to the release of a “hazardous substance” intothe environment. These persons include the owner or operator of a disposal siteor sites where the release occurred and companies that dispose or arrange fordisposal of the hazardous substances found at the time. Persons who are or wereresponsible for releases of hazardous substances under CERCLA may be subject tojoint and severable liability for the costs of cleaning up the hazardoussubstances that have been released into the environment and for damages tonatural resources, and it is not uncommon for neighboring landowners and otherthird parties to file claims for personal injury and property damage allegedlycaused by the hazardous substances released into the environment. We could besubject to liability under CERCLA because our drilling and productionactivities generate relatively small amounts of liquid and solid waste, whichare subject to classification as hazardous substances under CERCLA.

 

TheResource Conservation and Recovery Act of 1976, as amended (“RCRA”), is theprincipal federal statute governing the treatment, storage and disposal ofhazardous wastes. RCRA imposes stringent operating requirements, and liabilityfor failure to meet such requirements, on a person who is either a “generator”or “transporter” of hazardous waste or an “owner” or “operator” of a hazardouswaste treatment, storage or disposal facility. At present, RCRA includes astatutory exemption that allows most oil and natural gas exploration andproduction waste to be classified as nonhazardous waste. A similar exemption iscontained in many of the state counterparts to RCRA. As a result, we are notrequired to comply with a substantial portion of RCRA’s requirements becauseour operations generate minimal quantities of hazardous wastes. At varioustimes in the past, proposals have been made to amend RCRA to rescind theexemption that excludes oil and natural gas exploration and production wastesfrom regulation as hazardous waste. Repeal or modification of the exemption byadministrative, legislative or judicial process, or modification of similarexemptions in applicable state statutes, would increase the volume of hazardouswaste we are required to manage and dispose of and would cause us to incurincreased operating expenses.

 

Thereare numerous state laws and regulations in the states in which we operate whichrelate to the environmental aspects of our business. These state laws andregulations generally relate to requirements to remediate spills of deleterioussubstances associated with oil and natural gas activities, the conduct of saltwater disposal operations, and the methods of plugging and abandoning of oiland natural gas wells which have been unproductive. Numerous state laws andregulations also relate to air and water quality.

 

Wedo not believe that our environmental risks will be materially different fromthose of comparable companies in the oil and natural gas industry. We believeour present activities substantially comply, in all material respects, withexisting environmental laws and regulations. Nevertheless, we cannot assure youthat 

 

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environmentallaws will not result in a curtailment of production or material increase in thecost of production, development or exploration or otherwise adversely affectour financial condition and results of operations. Although we maintainliability insurance coverage for liabilities from pollution, environmentalrisks generally are not fully insurable.

 

Inaddition, because we have acquired and may acquire interests in properties thathave been operated in the past by others, we may be liable for environmentaldamage, including historical contamination, caused by such former operators.Additional liabilities could also arise from continuing violations orcontamination not discovered during our assessment of the acquired properties.

 

*Marketing and Transportation.*Our sales ofnatural gas are affected by the availability, terms and cost of transportation.The price and terms for access to pipeline transportation are subject toextensive federal and state regulation. From 1985 to the present, several majorregulatory changes have been implemented by Congress and the Federal EnergyRegulatory Commission (“FERC”) that affect the economics of natural gasproduction, transportation and sales. In addition, FERC is continuallyproposing and implementing new rules affecting segments of the natural gasindustry, most notably interstate natural gas transmission companies thatremain subject to FERC’s jurisdiction. These initiatives may also affect theintrastate transportation of gas under certain circumstances.

 

Theultimate impact of the complex rules and regulations issued by FERC since1985 cannot be predicted. We cannot predict what further action FERC will takeon these matters. We do not believe that we will be affected by any actiontaken materially differently than other natural gas producers, gatherers andmarketers with which we compete.

 

Additionalproposals and proceedings that might affect the natural gas industry arefrequently made before Congress, FERC and the courts. The natural gas industryhistorically has been very heavily regulated, and there have been indicationsthat future regulatory efforts might become more vigorous, possibly resultingin more stringent regulation.

 

Oursales of crude oil and condensate are currently not regulated and are made atmarket prices. In a number of instances, however, the ability to transport andsell such products are dependent on pipelines whose rates, terms and conditionsof service are subject to FERC jurisdiction under the Interstate Commerce Act.However, we do not believe that these regulations affect us any differentlythan other crude oil producers.

 

**GLOSSARYOF CERTAIN OIL AND GAS TERMS**

** **

The following are abbreviations and definitionsof terms commonly used in the oil and gas industry, many of which are used inthis Report.

 

“**Bbl**” means a barrel of 42 U.S. gallons,used herein in reference to oil or other liquid hydrocarbons.

 

**“B****cf**” means billion cubic feet.

 

**“Bcfe”**means Bcf of natural gas equivalent;determined using the ratio of one Bbl of oil or condensate to six Mcf ofnatural gas.

 

“**Btu**”means British thermal unit, which means the quantity of heat required to raisethe temperature of one pound of water by one degree Fahrenheit.

 

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**“Casing”** means a type of pipe that is used forencasing a smaller diameter carrier pipe for installation in a well.  Casing is used to send off fluids from thehole or keep a hole from caving in.

 

“**Completion**”means the installation of permanent equipment for the production of oil or gas.

 

**“Compressor Station”** means a facility in which the pressureof natural gas is raised to facilitate its transmission through pipelines.

 

**“Condensate”** means hydrocarbons naturally occurringin the gaseous phase in a reservoir that condense to become a liquid at thesurface due to the change in pressure and temperature.

 

**“Cubic Foot”** means the volume of gas that fills onecubic foot of space under standard temperature and pressure conditions.  Standard pressure is 14.73 psi and standardtemperature is 60 degrees Fahrenheit.

 

“**DevelopedAcreage**” means the number of acres that are allocated or assignableto producing wells or wells capable of production.

 

“**DevelopmentDrilling**” or “**Development Well**”means a well drilled within the proved area of an oil or gas reservoir to thedepth of a stratigraphic horizon known to be productive.

 

“**Dry****Hole**” or “**Dry****Well**”means a well found to be incapable of producing hydrocarbons in sufficientquantities to justify completion as an oil and gas well.

 

**“Estimated Future Net Cash Flows”** means estimated future gross cash flowsto be generated from the production of proved reserves, net of estimatedproduction, future development costs, and future abandonment costs, usingprices and costs in effect as of the date of the report or estimate, withoutgiving effect to non-property related expenses such as general andadministrative expenses, debt service and future income tax expense or todeprecation, depletion and amortization.

 

“**Exploration**”is the act of searching for potential sub-surface reservoirs of gas oroil.  Methods include the use ofmagnetometers, gravity meters, seismic exploration, surface mapping, and thedrilling of exploratory test wells (known as “wildcats”).

 

“**ExploratoryDrilling**” or “**Exploratory Well**”means a well drilled to find and produce oil or gas reserves not classified asproved, to find a new production reservoir in a field previously found to beproductive of oil or gas in another reservoir or to extend a known reservoir.

 

“**Farm-In**”or “**Farm-Out**” means an agreementpursuant to which the owner of a working interest in an oil and gas leaseassigns the working interest or a portion thereof to another party who desiresto drill on the leased acreage. Generally, the assignee is required to drillone or more wells in order to earn its interest in the acreage. The assignorusually retains a royalty or reversionary interest in the lease. The interestreceived by an assignee is a “farm-in” and the assignor issues a “farm-out.”

 

**“Finding and DevelopmentCosts”**  The total costs incurred for exploration anddevelopment activities (excluding exploratory drilling in progress and drillinginventories), divided by total proved reserve additions. To the extent anyportion of the proved reserve additions consist of proved undeveloped reserves;additional costs would have to be incurred in order for such proved undevelopedreserves to be produced. This measure may differ from the measure used by otheroil and natural gas companies.

 

“**Gas**”means natural gas.

 

“**GatheringSystem**” means a system of pipelines, compressor stations and anyother related facilities that gathers natural gas from a supply region andtransports it to the major transmission systems.

 

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“**Gross**”when used with respect to acres or wells, means the total acres or wells inwhich we have a working interest.

 

“**Horizontal Drilling**”means drilling a well that deviates from the vertical and travels horizontallythrough a prospective reservoir.

 

“**Hydrocarbons**”means an organic chemical compound of hydrogen and carbon.  Hydrocarbons are a large class of liquid,solid or gaseous organic compounds, which are the basis of almost all petroleumproducts.

 

“**Lease**”means a formal agreement between two or more parties where the owner of theland grants another party the right to drill and produce hydrocarbons inexchange for payment.

 

“**Mcf**” means thousand cubic feet.

 

**“Mcfe”**means Mcf of natural gas equivalent;determined using the ratio of one Bbl of oil or condensate to six Mcf ofnatural gas.

 

“**MMbtu**” means one million Btus.

 

**“MMcf”** means one million cubic feet.

 

**“MMcfe”** means MMcf of natural gas equivalent, determinedusing the ratio of one Bbl of oil or condensate to six Mcf of natural gas.

 

**“Natural Gas Liquids”** means liquid hydrocarbons which havebeen extracted from natural gas (e.g., ethane, propane, butane and naturalgasoline).

 

“**Net**”when used with respect to acres or wells, refers to gross acres or wellsmultiplied, in each case, by the percentage working interest owned by theCompany.

 

“**NetProduction**” means production that is owned by the Company lessroyalties and production due others.

 

**“NYMEX”** New York MercantileExchange

 

“**Operator**”means the individual or company responsible for the exploration, developmentand production of an oil or gas well or lease.

 

“**Pipeline**” means all parts of a physicalfacility through which gas is transported, including pipe, valves and otherappendages attached to the pipe, compressor units, metering stations, regulatorstations, delivery stations, holders, and fabricated assemblies.

 

“**Present Value**”**,**“**PV-10**” or “**StandardMeasure**” when used with respect to oil and gas reserves, is thepre-tax present value, discounted at an annual rate of 10%, of the estimatedfuture gross revenues to be generated from the production of proved reservescalculated in accordance with the guidelines of the SEC, net of estimatedproduction and future development costs, using prices and costs as of the dateof estimation without future escalation (except to the extent a contractspecifically provides otherwise), without giving effect to non-property relatedexpenses such as general and administrative expenses, debt service, futureincome tax expense and depreciation, depletion and amortization.

 

“**ProductiveWells**” or “**Producing Wells**”consist of producing wells and wells capable of production, including naturalgas wells waiting on pipeline connections.

 

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“**ProvedDeveloped Reserves**” means reserves that can be expected to berecovered through existing wells with existing equipment and operating methods.Additional oil and gas expected to be obtained through the application of fluidinjection or other improved recovery techniques for supplementing the naturalforces and mechanisms of primary recovery will be included as “proved developedreserves” only after testing by a pilot project or after the operation of aninstalled program has confirmed through production response that increasedrecovery will be achieved.

 

“**ProvedReserves**” means the estimated quantities of crude oil, natural gasand natural gas liquids which upon analysis of geological and engineering dataappear with reasonable certainty to be recoverable in future years from knownreservoirs under existing economic and operating conditions (i.e., prices andcosts as of the date the estimate is made). Prices include consideration ofchanges in existing prices provided only by contractual arrangements, but noton escalations based upon future conditions. Reservoirs are considered provedif either actual production or conclusive formation tests support economicproducibility. The area of a reservoir considered proved includes (a) thatportion delineated by drilling and defined by gas-oil and/or oil-watercontacts, if any; and (b) the immediately adjoining portions not yetdrilled, but which can be reasonably judged as economically productive on thebasis of available geological and engineering data. In the absence ofinformation on fluid contacts, the lowest known structural occurrence ofhydrocarbons controls the lower proved limit of the reservoir. Reserves whichcan be produced economically through application of improved recoverytechniques (such as fluid injection) are included in the “proved”classification when successful testing by a pilot project, or the operation ofan installed program in the reservoir, provides support for the engineeringanalysis on which the project or program was based. Estimates of provedreserves do not include the following: (a) oil that may become availablefrom known reservoirs but is classified separately as “indicated additionalreserves”; (b) crude oil, natural gas and natural gas liquids, therecovery of which is subject to reasonable doubt because of uncertainty as togeology, reservoir characteristics or economic factors; (c) crude oil,natural gas and natural gas liquids that may occur in undrilled prospects; and (d) crudeoil, natural gas and natural gas liquids that may be recovered from oil shales,coal, gilsonite and other such resources.

 

“**ProvedUndeveloped Reserves**” means reserves that are recovered from newwells on undrilled acreage, or from existing wells where a relatively majorexpenditure is required for completion. Reserves on undrilled acreage shall belimited to those drilling units offsetting productive units that are reasonablycertain of production when drilled. Proved reserves for other undrilled unitscan be claimed only where it can be demonstrated with certainty that there iscontinuity of production from the existing productive formation. Under nocircumstances should estimates for proved undeveloped reserves be attributableto any acreage for which an application of fluid injection or other improvedrecovery technique is contemplated, unless such techniques have been provedeffective by actual tests in the area and in the same reservoir.

 

“**Reserves**” means proved reserves.

 

“**Reservoir**”means a porous and permeable underground formation containing a naturalaccumulation of producible oil and/or gas that is confined by impermeable rockor water barriers and is individual and separate from other reservoirs.

 

“**Royalty**”means an interest in an oil and gas lease that gives the owner of the interestthe right to receive a portion of the production from the leased acreage (or ofthe proceeds of the sale thereof), but generally does not require the owner topay any portion of the costs of drilling or operating the wells on the leasedacreage. Royalties may be either landowner’s royalties, which are reserved bythe owner of the leased acreage at the time the lease is granted, or overridingroyalties, which are usually reserved by an owner of the leasehold inconnection with a transfer to a subsequent owner.

 

**“Sandstone”** means rock composed mainly of sand-sizedparticles or fragments of the mineral quartz, which, because these grains arerigid, will withstand tremendous pressures without being compacted.

 

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“**Shale**”means a type of rock composed of common clay or mud.  When clay is compacted under great pressureand temperature deep in the earth, water contained in the clay is expelled, andclay turns into shale.

 

“**2-D Seismic**”means an advanced technology method by which a cross-section of the earth’ssubsurface is created through the interpretation of reflecting seismic datacollected along a single source profile.

 

“**3-D Seismic**”means an advanced technology method by which a three dimensional image of theearth’s subsurface is created through the interpretation of reflection seismicdata collected over a surface grid. 3-D seismic surveys allow for a moredetailed understanding of the subsurface than do conventional surveys andcontribute significantly to field appraisal, development and production.

 

**“Undeveloped Acreage”** means lease acreage on which wells havenot been drilled or completed to a point that would permit the production ofcommercial quantities of oil and natural gas regardless of whether such acreagecontains proved reserves.

 

“**WorkingInterest**” means an interest in an oil and gas lease that gives theowner of the interest the right to drill for and produce oil and gas on theleased acreage and requires the owner to pay a share of the costs of drillingand production operations. The share of production to which a working interestowner is entitled will always be smaller than the share of costs that theworking interest owner is required to bear, with the balance of the productionaccruing to the owners of royalties.

 

**AVAILABILITY OF INFORMATION**

** **

**We file periodic reports and proxy statements with theSecurities and Exchange Commission (the “SEC”). The public may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at100 F Street N.E., Washington, D.C. 20549. The public may obtain informationabout the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. We file our reports with the SEC electronically. The SECmaintains a website at**www.sec.gov thatcontains reports, proxy and information statements, and other informationregarding Cubic Energy, Inc. and other companies that file electronicallywith the SEC.

** **

**Our website address is**www.cubicenergyinc.com. We make available on our website free of charge copies of our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports filed or furnished pursuant toSection 13(a) of the Exchange Act as soon as reasonably possibleafter we electronically file or furnish such material with the SEC.

 

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** **

**Item 1A. Risk Factors.**

** **

Youshould carefully consider the following risk factors, in addition to the otherinformation set forth in this Report, before investing in shares of our commonstock. Each of these risk factors could adversely affect our business,operating results and financial condition, as well as adversely affect thevalue of an investment in our common stock. Some information in this Report maycontain “forward-looking” statements that discuss future expectations of ourfinancial condition and results of operation. The risk factors noted in thissection and other factors could cause our actual results to differ materiallyfrom those contained in any forward-looking statements.

 

***Servicing our debt requires a significant amount ofcash, and we will not have sufficient cash flow from our business to pay oursubstantial debt as it comes due.***

 

Ourability to make scheduled payments of the principal of, to pay interest on orto refinance our indebtedness depends on our ability to obtain additional debtand /or equity financing, which is subject to economic and financial factorsbeyond our control. Our business will not generate cash flow from operationssufficient to pay our obligations to Wells Fargo. We may be required to adoptone or more alternatives, such as selling assets, restructuring debt orobtaining additional equity capital on terms that may be onerous or highlydilutive. Our ability to refinance our indebtedness will depend on the capitalmarkets and our financial condition in the immediate future, as well as thevalue of our properties. We may not be able to engage in any of theseactivities or engage in these activities on desirable terms, which could resultin a default on our debt obligations and have an adverse effect on the marketprice of our equity securities.

 

OnJune 26, 2009 Well Fargo re-determined the Borrowing Base, which reducedthe credit limit on the Revolving Note from $20,000,000 to $7,500,000,requiring a payment of $12,500,000 from the Company to Wells Fargo. The Companyhas the right to pay the deficiency in five monthly installments.

 

Subsequentto the redetermination, the Company has received extensions of time until November1, 2009 from Wells Fargo to comply with the terms of that letter from WellsFargo dated June 26, 2009. That June 26, 2009 letter previouslyinformed the Company that the Lender made a borrowing base redetermination andwaived any failure of the Company to comply with its obligations under theCredit Agreement as a result of such redetermination until September 1,2009. There can be no assurance that Wells Fargo will grant any additionalextensions.

 

Wemay not be able to secure additional funds to make the required payments toWells Fargo. If we are not successful, Wells Fargo may pursue all remediesavailable to it under the terms of the Credit Facility including but notlimited to foreclosure on our assets. If that were to occur, our shareholdersmight lose their entire investment.

 

***We will need additionalfunding in order to make required payments to Wells Fargo, as well as to fundour drilling program.***

 

Ourbusiness is highly capital-intensive requiring continuous development andacquisition of oil and gas reserves. In addition, capital is required tooperate and expand our oil and gas field operations, to purchase equipment andto fund our drilling program.

 

AtJune 30, 2009, we had working capital of $(27,822,536). On March 5,2007, Cubic entered into the Credit Facility with Wells Fargo providing for the$20,000,000 Revolving Note and the Term Loan of $5,000,000 in order to fund thedrilling of new wells. The Company has borrowed the full amount under theCredit Facility. In addition, we are required to make payments to Wells Fargoin an aggregate amount of $12,500,000 as a result of the redetermination of ourBorrowing Base. Therefore, the Company’s capital 

 

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requirementsmust be satisfied through additional borrowings under new or renegotiatedcredit arrangements, the issuance of equity securities or other potentialtransactions.  There can be no assurancethat any of these sources of capital will be available or sufficient to satisfythe Company’s capital requirements.

 

Wehave experienced and will continue to experience significant capitalexpenditures and working capital requirements, in order to fund our drillingprogram. In addition to amounts necessary to satisfy our obligations to WellsFargo, we expect that we will require additional financing, in addition to cashgenerated from operations, to fund our expected growth. There can be noassurance, however, that additional financing will be available on acceptableterms or at all. In the event that additional capital resources areunavailable, we may curtail drilling, development and other activities or beforced to sell some of our assets on an untimely or unfavorable basis.Additionally, failure to drill on certain of our leasehold interests couldresult in the forfeiture of our interest.

 

Anyfuture issuances of equity securities would likely result in dilution to ourthen existing shareholders while incurring additional indebtedness would resultin increased interest expense and debt service charges

 

***We face significant competition, and many of our competitors have resources in excess of our available resources.***

 

The oil and gas industry is highly competitive.We encounter competition from other oil and gas companies in all areas of ouroperations, including the acquisition of producing properties and sale of crudeoil, natural gas and natural gas liquids. Our competitors include majorintegrated oil and gas companies and numerous independent oil and gascompanies, individuals and drilling and income programs. Many of ourcompetitors are large, well established companies with substantially largeroperating staffs and greater capital resources than us. Such companies may beable to pay more for productive oil and gas properties and exploratoryprospects and to define, evaluate, bid for and purchase a greater number ofproperties and prospects than our financial or human resources permit. Ourability to acquire additional properties and to discover reserves in the futurewill depend upon our ability to evaluate and select suitable properties and toconsummate transactions in this highly competitive environment.

 

***Exploratory drilling is a speculative activity that may not result in commercially productive reserves and may require expenditures in excess of budgeted amounts.***

 

Drilling activities are subject to many risks,including the risk that no commercially productive oil or gas reservoirs willbe encountered. There can be no assurance that new wells drilled by us will beproductive or that we will recover all or any portion of our investment.Drilling for oil and gas may involve unprofitable efforts, not only from drywells, but also from wells that are productive but do not produce sufficientnet revenues to return a profit after drilling, operating and other costs. Thecost of drilling, completing and operating wells is often uncertain. Ourdrilling operations may be curtailed, delayed or canceled as a result of avariety of factors, many of which are beyond our control, including economicconditions, mechanical problems, pressure or irregularities in formations,title problems, weather conditions, compliance with governmental requirementsand shortages in or delays in the delivery of equipment and services. Suchequipment shortages and delays sometimes involve drilling rigs where inclementweather prohibits the movement of land rigs causing a high demand for rigs by alarge number of companies during a relatively short period of time. Our futuredrilling activities may not be successful. Lack of drilling success could havea material adverse effect on our financial condition and results of operations.

 

Our operations are also subject to all thehazards and risks normally incident to the development, exploitation,production and transportation of, and the exploration for, oil and gas,including unusual or unexpected geologic formations, pressures, down holefires, mechanical failures, blowouts, explosions, uncontrollable flows of oil,gas or well fluids and pollution and other environmental risks. These hazardscould result in substantial losses to us due to injury and loss of life, severedamage to and destruction of property and equipment, pollution and other environmentaldamage and suspension of operations. We 

 

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participate in insurance coverage maintained bythe operator of our wells, although there can be no assurances that suchcoverage will be sufficient to prevent a material adverse effect to us if anyof the foregoing events occur.

 

***We have a history of operating losses and may not be profitable in the future.***

 

We incurred losses of $(24,762,516) and$(5,128,453) for the fiscal years ended June 30, 2009 and 2008,respectively. Our accumulated deficit as of June 30, 2009 was$(49,213,661). Historically, we have funded our operating losses, acquisitionsand drilling costs primarily through a combination of private offerings ofconvertible debt, senior secured debt, and equity securities. However, we haveno borrowing availability under the Credit Facility, and we are required tomake substantial payments to Wells Fargo as a result of the redetermination ofthe Borrowing Base. Our success in obtaining the necessary capital resources tofund those payments to Wells Fargo and future costs associated with ouroperations and drilling plans is dependent upon our ability to: (i) increaserevenues through acquisitions and recovery of our proved producing and proveddeveloped non-producing oil and gas reserves; (ii) maintain effective costcontrols at the corporate administrative office and in field operations; and (iii) obtainadditional financing, including through the exercise of outstanding warrants.However, even if we achieve some success with our plans, there can be noassurance that we will be able to generate sufficient revenues to achievesignificant profitable operations or to fund our drilling plans.

 

***We have substantial capital requirements necessary for undeveloped properties for which we may not be able to obtain adequate financing.***

 

Themajority of our oil and gas reserves are undeveloped. At June 30, 2009, wehad proved undeveloped reserves of 20,721,079 Mcfe, which representapproximately 98% of our total proved reserves of 21,076,880 Mcfe. Recovery ofthe Company’s future undeveloped reserves will require significant capitalexpenditures to further develop these reserves during fiscal year 2010 and forthe foreseeable future. No assurance can be given that our financing sources,following utilization of any available financing sources to satisfy ourobligations to Wells Fargo, will be sufficient to fully fund our planneddevelopment activities or that development activities will be either successfulor in accordance with our schedule. Additionally, any failure to see increasesin oil and gas prices or any significant increase in the cost of developmentcould result in a significant reduction in the number of wells drilled and/orreworked. No assurance can be given that any wells will produce oil or gas incommercially profitable quantities.

 

Developmentof our properties will require additional capital resources. At this time wehave significant payment obligations to Wells Fargo, but we have no commitmentsto obtain any additional debt or equity financing and there can be no assurancethat additional financing will be available, when required, on favorable termsor at all. The inability to obtain additional financing will have a materialadverse effect on us, including requiring us to cease our oil and gasdevelopment plans or farm-out development of our properties, in addition to theimpact that the exercise by Wells Fargo of its remedies might have. Anyadditional financing may involve substantial dilution to the interests of ourshareholders at that time.

 

***Oil and natural gas prices fluctuate widely and low prices could have a material adverse impact on our business and financial results.***

 

Ourrevenues, profitability and the carrying value of our oil and gas propertiesare substantially dependent upon prevailing prices of, and demand for, oil andgas and the costs of acquiring, finding, developing and producing reserves. Ourability to obtain borrowing capacity, to repay future indebtedness, and toobtain additional capital on favorable terms is also substantially dependentupon oil and gas prices. Historically, the markets for oil and gas have beenvolatile and are likely to continue to be volatile in the future. Prices foroil and gas are subject to wide fluctuations in response to: (i) relativelyminor changes in the supply of, and demand for, oil and gas; (ii) marketuncertainty; and (iii) a variety of additional factors, all of which arebeyond our control. These factors include domestic and foreign politicalconditions, the price and availability 

 

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ofdomestic and imported oil and gas, the level of consumer and industrial demand,weather, domestic and foreign government relations, the price and availabilityof alternative fuels and overall economic conditions. Furthermore, themarketability of our production depends in part upon the availability,proximity and capacity of gathering systems, pipelines and processingfacilities. Volatility in oil and gas prices could affect our ability to marketour production through such systems, pipelines or facilities. Substantially allof our natural gas production is currently sold to two gas marketing firms on amonth-to-month basis at prevailing spot market prices. Oil prices remainedsubject to unpredictable political and economic forces during fiscal years2009, 2008 and 2007, and experienced fluctuations similar to those seen innatural gas prices for those years. Natural gas prices no longer appears to becoupled with oil, while oil prices still fluctuate in response to changes in thepolicies of the Organization of Petroleum Exporting Countries (“OPEC”), changesin demand from many Asian countries and other emerging economies, currentevents in the Middle East, security threats to the United States, and otherfactors associated with the world political and economic environment.Currently, low natural gas prices are directly due to the over supply ofnatural gas and the reduction of industrial gas consumption as a result ofcurrent economic conditions. We are unable to predict what changes will occurin crude oil, natural gas and natural gas liquids prices.

 

***We are subject to uncertainties in reserve estimates and future net cash flows.***

 

Thisreport contains estimates of our oil and gas reserves and the expected futurenet cash flows from those reserves, which have been prepared by certainindependent petroleum consultants. There are numerous uncertainties inherent inestimating quantities of reserves of oil and gas and in projecting future ratesof production and the timing of development expenditures, including manyfactors beyond our control. The reserve estimates in this report are based onvarious assumptions, including, for example, constant oil and gas prices,operating expenses, capital expenditures and the availability of funds, and,therefore, are inherently imprecise indications of future net cash flows.Actual future production, cash flows, taxes, operating expenses, developmentexpenditures and quantities of recoverable oil and gas reserves may varysubstantially from those assumed in the estimates. Any significant variance inthese assumptions could materially affect the estimated quantity and value ofreserves set forth in this report. Additionally, our reserves may be subject todownward or upward revision based upon actual production performance, resultsof future development and exploration, prevailing oil and gas prices and otherfactors, many of which are beyond our control.

 

Thepresent value of future net reserves discounted at 10% (the “PV-10”) of provedreserves referred to in this report should not be construed as the currentmarket value of the estimated proved reserves of oil and gas attributable toour properties. In accordance with applicable requirements of the SEC, theestimated discounted future net cash flows from proved reserves are generallybased on prices and costs as of the date of the estimate, whereas actual futureprices and costs may be materially higher or lower. Actual future net cashflows also will be affected by: (i) the timing of both production andrelated expenses; (ii) changes in consumption levels; and (iii) governmentalregulations or taxation. In addition, the calculation of the present value ofthe future net cash flows using a 10% discount as required by the SEC is notnecessarily the most appropriate discount factor based on interest rates ineffect from time to time and risks associated with our reserves or the oil andgas industry in general. Furthermore, our reserves may be subject to downwardor upward revision based upon actual production, results of future development,supply and demand for oil and gas, prevailing oil and gas prices and otherfactors. See “Item 1.Business — Oil and Gas Reserves.”

 

***We are subject to various operating and other casualty risks that could result in liability exposure or the loss of production and revenues.***

 

Ouroil and gas business involves a variety of operating risks, including, but notlimited to, unexpected formations or pressures, uncontrollable flows of oil,gas, brine or well fluids into the environment (including groundwatercontamination), blowouts, fires, explosions, pollution and other risks, any ofwhich could result in personal injuries, loss of life, damage to properties andsubstantial losses. Although we carry insurance at levels that we believe arereasonable, we are not fully insured against all risks. We do not carrybusiness 

 

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interruptioninsurance. Losses and liabilities arising from uninsured or under-insuredevents could have a material adverse effect on our financial condition andoperations.

 

Fromtime to time, due primarily to contract terms, pipeline interruptions orweather conditions, the producing wells in which we own an interest have beensubject to production curtailments. The curtailments range from productionbeing partially restricted to wells being completely shut-in. The duration ofcurtailments varies from a few days to several months. In most cases, we areprovided only limited notice as to when production will be curtailed and theduration of such curtailments. We are not currently experiencing any materialcurtailment of our production.

 

Weintend to continue our development and exploration activities.  Exploratory drilling and, to a lesser extent,development drilling of oil and gas reserves involve a high degree of risk thatno commercial production will be obtained and/or that production will beinsufficient to recover drilling and completion costs. The cost of drilling,completing and operating wells is often uncertain. Our drilling operations maybe curtailed, delayed or canceled as a result of numerous factors, includingtitle problems, weather conditions, compliance with governmental requirementsand shortages or delays in the delivery of equipment. Furthermore, completionof a well does not assure a profit on the investment or a recovery of drilling,completion and operating costs.

 

***Our business may suffer if we lose key personnel.***

 

We depend to a large extent on the services ofCalvin A. Wallen, III, our President, Chairman of the Board, and ChiefExecutive Officer. The loss of the services of Mr. Wallen would have amaterial adverse effect on our operations. We have not obtained key personnellife insurance on Mr. Wallen.

 

***Certain of our affiliates control a majority of our outstanding common stock, which may affect other shareholders’ ability to influence matters submitted to a vote of shareholders.***

 

Asof September 4, 2009, our executive officers, directors and theiraffiliates and certain 5% shareholders hold approximately 70% of ouroutstanding shares of common stock. As a result, officers, directors and theiraffiliates and such shareholders have the ability to exert significantinfluence or control over our business affairs, including the ability tocontrol the election of directors and results of voting on all mattersrequiring shareholder approval. This concentration of voting power may delay orprevent a potential change in control.

 

***Certain of our affiliates have engaged in businesstransactions with the Company, which may result in conflicts of interest.***

 

Certainofficers, directors and related parties, including entities controlled by Mr. Wallen,the President, Chairman of the Board and Chief Executive Officer, have engagedin business transactions with the Company which were not the result of arm’slength negotiations between independent parties. Our management believes thatthe terms of these transactions were as favorable to us as those that couldhave been obtained from unaffiliated parties under similar circumstances. Allfuture transactions between us and our affiliates will be on terms no lessfavorable than could be obtained from unaffiliated third parties and will beapproved by a majority of the disinterested members of our Board of Directors.

 

***The liquidity, market price and volume of our stock are volatile, andour stock is subject to certain penny stock rules.***

 

Ourcommon stock is traded on the American Stock Exchange (the “AMEX”). Theliquidity of our common stock may be adversely affected, and purchasers of ourcommon stock may have difficulty selling our common stock, if our common stockdoes not continue to trade in that or another suitable trading market.

 

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Thereis presently only a limited public market for our common stock, and there is noassurance that a ready public market for our securities will develop. It islikely that any market that develops for our common stock will be highlyvolatile and that the trading volume in such market will be limited. As of September 4,2009, the trading price of our common stock was below $5.00 per share. Thetrading price of our common stock could be subject to wide fluctuations inresponse to quarter-to-quarter variations in our operating results,announcements of our drilling results and other events or factors. In addition,the U.S. stock market has from time to time experienced extreme price andvolume fluctuations that have affected the market price for many companies andwhich often have been unrelated to the operating performance of thesecompanies. These broad market fluctuations may adversely affect the marketprice of our securities.

 

***We may experience adverse consequencesbecause of required indemnification of officers and directors.***

 

Provisions ofour Articles of Incorporation and Bylaws provide that we will indemnify anydirector and officer as to liabilities incurred in their capacity as a directoror officer and on those terms and conditions set forth therein to the fullestextent of Texas law. Further, we may purchase and maintain insurance on behalfof any such persons whether or not we would have the power to indemnify suchperson against the liability insured against. The foregoing could result insubstantial expenditures by us and prevent any recovery from our officers,directors, agents and employees for losses incurred by us as a result of theiractions.

 

***Certain anti-takeover provisions may discourage achange in control.***

 

Provisions of Texas law and our Articles ofIncorporation and Bylaws may have the effect of delaying or preventing a changein control or acquisition of the Company. Our Articles of Incorporation andBylaws include provisions for a classified Board of Directors (although we donot currently have a classified board), “blank check” preferred stock (theterms of which may be fixed by our Board of Directors without shareholderapproval), purported limits on shareholder action by written consent in lieu ofa meeting, and certain procedural requirements governing shareholder meetings.These provisions could have the effect of delaying or preventing a change incontrol of the Company.

 

***We do not intendto declare dividends in the foreseeable future.***

 

Our Board of Directorspresently intends to retain all of our earnings for the repayment of debt andthe expansion of our business. We therefore do not anticipate the distributionof cash dividends in the foreseeable future. Any future decision of our Boardof Directors to pay cash dividends will depend, among other factors, upon ourearnings, financial position and cash requirements.

 

***Ourinternal controls over financial reporting may not be effective, which couldhave a significant and adverse effect on our business.***

 

Section 404 of theSarbanes-Oxley Act of 2002 and the related rules and regulations of theSecurities and Exchange Commission, which we collectively refer to as Section 404,require us to evaluate our internal controls over financial reporting to allowmanagement to report on those internal controls as of the end of each year. Section 404will also require our independent registered public accounting firm to attestto the effectiveness of our internal controls over financial reporting infuture periods. Effective internal controls are necessary for us to producereliable financial reports and are important in our effort to prevent financialfraud. In the course of our Section 404 evaluations, we may identifyconditions that may result in significant deficiencies or material weaknessesand we may conclude that enhancements, modifications or changes to our internalcontrols are necessary or desirable. Implementing any such matters would divertthe attention of our management, could involve significant costs, and maynegatively impact our results of operations.

 

We note that there areinherent limitations on the effectiveness of internal controls, as they cannotprevent collusion, management override or failure of human judgment. If we failto maintain an effective system of internal controls or if management or ourindependent registered public accounting firm were to discover 

 

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material weaknesses in ourinternal controls, we may be unable to produce reliable financial reports orprevent fraud, and it could harm our financial condition and results ofoperations, result in a loss of investor confidence and negatively impact ourshare price.

 

***We may not have satisfactory title to ourproperties.***

 

Ourcontract land professionals have reviewed title records or other title reviewmaterials relating to substantially all of our producing properties. The titleinvestigation performed by us prior to acquiring undeveloped properties isthorough, but less rigorous than that conducted prior to drilling, consistentwith industry standards. A title opinion obtained on the drill site prior todrilling does not necessarily ensure satisfactory title. We believe we havesatisfactory title to all our producing properties in accordance with standardsgenerally accepted in the oil and gas industry. Our properties are subject tocustomary royalty interests, liens incident to operating agreements, liens forcurrent taxes and other burdens, which we believe do not materially interferewith the use of or affect the value of such properties. At June 30, 2009,our leaseholds for some of our net acreage were being kept in force by virtueof production on that acreage in paying quantities. The remaining net acreagewas held by lease rentals and similar provisions and requires production inpaying quantities prior to expiration of various time periods to avoid leasetermination. In the normal course of our business, title defects of varyingdegrees will arise, and, if practicable, reasonable efforts will be made tocure any such defects.

 

The Company may make acquisitions of oil andgas properties from time to time subject to available resources. In making anacquisition, we generally focus most of our title and valuation efforts on themore significant properties. It is generally not feasible for us to perform anin-depth review of every property we purchase and all records with respect tosuch properties. However, even an in-depth review of properties and records maynot necessarily reveal existing or potential problems, nor will it permit us tobecome familiar enough with the properties to assess fully their deficienciesand capabilities. To the extent the seller does not operate the properties,obtaining access to properties and records may be more difficult. Even whenproblems are identified, the seller may not be willing or financially able togive contractual protection against such problems, and we may decide to assumeenvironmental and other liabilities in connection with acquired properties.

 

***We are subject to various governmental regulations which may cause us to incur substantial costs.***

 

Our operations are affected from time to time invarying degrees by political developments and federal, state and local laws andregulations. In particular, oil and gas production and related operations areor have been subject to price controls, taxes and other laws and regulationsrelating to the oil and gas industry. Failure to comply with such laws andregulations can result in substantial penalties. The regulatory burden on theoil and gas industry increases our cost of doing business and affects ourprofitability. Although we believe we are in substantial compliance with allapplicable laws and regulations, because such laws and regulations arefrequently amended or reinterpreted, we are unable to predict the future costor impact of complying with such laws and regulations.

 

Sales of natural gas by us are not regulatedand are generally made at market prices. However, the Federal Energy RegulatoryCommission (“FERC”) regulates interstate natural gas transportation rates andservice conditions, which affect the marketing of natural gas produced by us,as well as the revenues received by us for sales of such production. Sales ofour natural gas currently are made at uncontrolled market prices, subject toapplicable contract provisions and price fluctuations that normally attendsales of commodity products.

 

Since the mid-1980s, the FERC has issued aseries of orders, culminating in Order Nos. 636, 636-A, 636-B and 636-C (“Order636”), that significantly altered the marketing and transportation of naturalgas. Order 636 mandated a fundamental restructuring of interstate pipelinesales and transportation service, including the 

 

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unbundling by interstate pipelines of thesale, transportation, storage and other components of the city-gate salesservices such pipelines previously performed. One of the FERC’s purposes inissuing the orders was to increase competition within all phases of the naturalgas industry. Order 636 and subsequent FERC orders issued in individualpipeline restructuring proceedings have been the subject of appeals, and thecourts have largely upheld Order 636. Because further review of certain ofthese orders is still possible, and other appeals may be pending, it isdifficult to predict the ultimate impact of the orders on us and our naturalgas marketing efforts. Generally, Order 636 has eliminated or substantiallyreduced the interstate pipelines’ traditional role as wholesalers of naturalgas, and has substantially increased competition and volatility in natural gasmarkets.

 

While significant regulatory uncertaintyremains, Order 636 may ultimately enhance our ability to market and transportour natural gas, although it may also subject us to greater competition, morerestrictive pipeline imbalance tolerances and greater associated penalties forviolation of such tolerances.

 

The FERC has announced several importanttransportation-related policy statements and proposed rule changes,including the appropriate manner in which interstate pipelines release capacityunder Order 636 and, more recently, the price which shippers can charge for theirreleased capacity. In addition, in 1995, the FERC issued a policy statement onhow interstate natural gas pipelines can recover the costs of new pipelinefacilities. In January 1997, the FERC issued a policy statement and arequest for comments concerning alternatives to its traditional cost-of-servicerate making methodology. A number of pipelines have obtained FERC authorizationto charge negotiated rates as one such alternative. While any additional FERCaction on these matters would affect us only indirectly, these policystatements and proposed rule changes are intended to further enhancecompetition in natural gas markets. We cannot predict what action the FERC willtake on these matters, nor can we predict whether the FERC’s actions willachieve its stated goal of increasing competition in natural gas markets.However, we do not believe that we will be treated materially differently thanother natural gas producers and marketers with which we compete.

 

The price we receive from the sale of oil is affectedby the cost of transporting such products to market. Effective January 1,1995, the FERC implemented regulations establishing an indexing system fortransportation rates for oil pipelines, which, generally, would index suchrates to inflation, subject to certain conditions and limitations. Theseregulations could increase the cost of transporting oil by interstatepipelines, although the most recent adjustment generally decreased rates. Theseregulations have generally been approved on judicial review. We are not able topredict with certainty the effect, if any, of these regulations on ouroperations. However, the regulations may increase transportation costs orreduce wellhead prices for oil.

 

The ultimate impact of the complex rules andregulations issued by the FERC since the mid-1980s cannot be predicted. Wecannot predict what further action the FERC will take on these matters. We donot believe that we will be affected by any action taken materially differentlythan other natural gas producers, gatherers and marketers with which wecompete.

 

Additional proposals and proceedings that mightaffect the natural gas industry are frequently made before Congress, the FERCand the courts. The natural gas industry historically has been very heavilyregulated; and there have been indications that future regulatory efforts mightbecome more vigorous, possibly resulting in more stringent regulation.

 

Our sales of crude oil and condensate arecurrently not regulated and are made at market prices. In a number ofinstances, however, the ability to transport and sell such products aredependent on pipelines whose rates, terms and conditions of service are subjectto FERC jurisdiction under the Interstate Commerce Act. However, we do notbelieve that these regulations affect us any differently than other crude oilproducers.

 

The States of Texas and Louisiana and many otherstates require permits for drilling operations, drilling bonds and reportsconcerning operations and impose other requirements relating to the explorationfor and 

 

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production of oil and gas. Such states also havestatutes or regulations addressing conservation matters, including provisionsfor the unitization or pooling of oil and gas properties, the establishment ofmaximum rates of production from wells and the regulation of spacing, pluggingand abandonment of such wells. The statutes and regulations of these stateslimit the rate at which oil and gas can be produced from our properties.However, we do not believe we will be affected materially differently by thesestatutes and regulations than any other similarly situated oil and gas company.

 

***We are subject to various environmental risks which may cause us toincur substantial costs.***

*** ***

Our operations and properties are subject toextensive and changing federal, state and local laws and regulations relatingto environmental protection, including the generation, storage, handling andtransportation of oil and gas and the discharge of materials into theenvironment, and relating to safety and health. The recent trend inenvironmental legislation and regulation generally is toward stricterstandards, and this trend will likely continue. These laws and regulations mayrequire the acquisition of a permit or other authorization before constructionor drilling commences and for certain other activities; limit or prohibitconstruction, drilling and other activities on certain lands lying withinwilderness and other protected areas; and impose substantial liabilities forpollution resulting from our operations. The permits required for our variousoperations are subject to revocation, modification and renewal by issuingauthorities. Governmental authorities have the power to enforce compliance withtheir regulations, and violations are subject to fines, penalties orinjunctions. In the opinion of management, we are in substantial compliancewith current applicable environmental laws and regulations, and we have nomaterial commitments for capital expenditures to comply with existingenvironmental requirements. Nevertheless, changes in existing environmentallaws and regulations or in interpretations thereof could have a significantimpact on us. The impact of such changes, however, would not likely be any moreburdensome to us than to any other similarly situated oil and gas company.

 

The Comprehensive Environmental Response,Compensation, and Liability Act (“CERCLA”), also known as the “Superfund” law,and similar state laws impose liability, without regard to fault or thelegality of the original conduct, on certain classes of persons that areconsidered to have contributed to the release of a “hazardous substance” intothe environment. These persons include the owner or operator of the disposalsite or sites where the release occurred and companies that disposed orarranged for the disposal of the hazardous substances found at the site.Persons who are or were responsible for releases of hazardous substances underCERCLA may be subject to joint and several liability for the costs of cleaningup the hazardous substances that have been released into the environment andfor damages to natural resources. Furthermore, neighboring landowners and otherthird parties may file claims for personal injury and property damage allegedlycaused by the hazardous substances released into the environment.

 

We generate typical oil and gas field wastes,including hazardous wastes that are subject to the federal ResourcesConservation and Recovery Act and comparable state statutes. The United StatesEnvironmental Protection Agency and various state agencies have limited theapproved methods of disposal for certain hazardous and non-hazardous wastes.Furthermore, certain wastes generated by our oil and gas operations that arecurrently exempt from regulation as “hazardous wastes” may in the future bedesignated as “hazardous wastes,” and therefore be subject to more rigorous andcostly operating and disposal requirements.

 

The Oil Pollution Act (“OPA”) imposes a varietyof requirements on responsible parties for onshore and offshore oil and gasfacilities and vessels related to the prevention of oil spills and liabilityfor damages resulting from such spills in waters of the United States. The “responsibleparty” includes the owner or operator of an onshore facility or vessel or thelessee or permittee of, or the holder of a right of use and easement for, thearea where an onshore facility is located. The OPA assigns liability to eachresponsible party for oil spill removal costs and a variety of public andprivate damages from oil spills. Few defenses exist to the liability for oilspills imposed by the OPA. The OPA also imposes financial responsibility 

 

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requirements. Failure to comply with ongoingrequirements or inadequate cooperation in a spill event may subject aresponsible party to civil or criminal enforcement actions.

 

We own or lease properties that for many yearshave produced oil and gas. We also own natural gas gathering systems. It is notuncommon for such properties to be contaminated with hydrocarbons. Although weor previous owners of these interests may have used operating and disposalpractices that were standard in the industry at the time, hydrocarbons or otherwastes may have been disposed of or released on or under the properties or onor under other locations where such wastes have been taken for disposal. Theseproperties may be subject to federal or state requirements that could requireus to remove any such wastes or to remediate the resulting contamination. Allof our properties are operated by third parties over whom we have limitedcontrol. Notwithstanding our lack of control over properties operated byothers, the failure of the previous owners or operators to comply withapplicable environmental regulations may, in certain circumstances, adverselyimpact us.

 

***We may be responsible foradditional costs in connection with abandonment of properties.***

 

We areresponsible for payment of plugging and abandonment costs on our oil and gasproperties pro rata to our working interest. Based on our experience, weanticipate that the ultimate aggregate salvage value of lease and wellequipment located on our properties will exceed the costs of abandoning suchproperties. There can be no assurance, however, that we will be successful in avoidingadditional expenses in connection with the abandonment of any of ourproperties. In addition, abandonment costs and their timing may change due tomany factors, including actual production results, inflation rates and changesin environmental laws and regulations.

 

**Item 1B. UnresolvedStaff Comments.**

** **

None.

 

**Item 2. Properties.**

** **

A description of ourproperties is included in “Part I. Item 1. Business” and is incorporatedherein by reference.

 

**Item 3. LegalProceedings.**

** **

There are no material legal proceedings to whichthe Company is a party or to which its properties are subject.

 

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** **

**Item 4. Submission ofMatters to a Vote of Security Holders.**

** **

The Company held its AnnualMeeting of Shareholders on April 24, 2009. As of March 6, 2009, therecord date for the meeting, 62,570,654 shares of common stock were issued andoutstanding. A quorum of 50,638,054 shares of common stock was present orrepresented at the meeting.

 

The following individualswere nominated and elected to serve as directors until the Company’s AnnualMeeting of Shareholders in 2010:

 

Calvin A. Wallen, III(Chairman), Gene C. Howard, Herbert A. Bayer, Bob L. Clements, Jon S. Ross,Phyllis K. Harding, and William L. Bruggeman, Jr.

 

The Shareholders voted asfollows on the following matters:

 

1)     Election of Directors. The voting results for each of thenominees were as follows:

 
| ** **                     | ** ** | **For**    | ** ** | ** ** | ** ** | **Withheld** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|
| Calvin A. Wallen, III     |       | 50,511,318 |       | 99.7       | %          | 126,736      |       | 0.3        | %          |
| Gene C. Howard                 |       | 50,459,067 |       | 99.6       | %          | 178,987      |       | 0.4        | %          |
| Herbert A. Bayer               |       | 50,511,318 |       | 99.7       | %          | 126,736      |       | 0.3        | %          |
| Bob L. Clements                |       | 50,526,858 |       | 99.8       | %          | 111,196      |       | 0.2        | %          |
| Jon S. Ross                    |       | 50,472,537 |       | 99.7       | %          | 165,517      |       | 0.3        | %          |
| Phyllis K. Harding             |       | 50,234,834 |       | 99.2       | %          | 403,220      |       | 0.8        | %          |
| William L. Bruggeman, Jr. |       | 50,245,269 |       | 99.2       | %          | 392,785      |       | 0.8        | %          |

 

2)     Ratification of the Board of Directors’ selection of PhilipVogel as the Company’s independent registered public accountants for the fiscalyear ending June 30, 2009. The voting results were as follows:

 
| For                |   | 50,327,414 |   | 99.4  | % |
|--------------------|--------|------------|--------|-------|---|
| Against            |   | 1,351      |   | 0.0   | % |
| Abstain            |   | 309,288    |   | 0.6   | % |
| Total Shares Voted |   | 50,638,053 |   | 100.0 | % |

 

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**PART II**

 

**Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters, and Issuer Purchasesof Equity Securities**

** **

**Common Stock and Market**

 

The common stock of the Company is traded on theNYSE Amex, LLC (the “Exchange”) under the trading symbol “QBC”. Prior to August 4,2008, the common stock of the Company was traded on the Over-The-CounterBulletin Board (the “OTCBB”) under the trading symbol “QBIK”.

 

AtSeptember 4, 2009, there were 64,674,565 shares of common stockoutstanding held by approximately 813 shareholders of record.

 

Under its Articles of Incorporation, as amended,the Company is authorized to issue one class of up to 100,000,000 common shares,par value $0.05 per share, and one class of up to 10,000,000 preferred shares,par value $0.01 per share. As of September 4, 2009, there were nopreferred shares of the Company outstanding.

 

**Common Stock Price Range**

 

Thefollowing table shows, for the periods indicated, the range of high and low bidprice information for our common stock as reported by the OTCBB through August 3,2008, and thereafter the high and low sales price information on the Exchange.Any market for our common stock should be considered sporadic, illiquid andhighly volatile. Prices on the OTCBB reflect inter-dealer quotations, withoutadjustment for retail markup, markdowns or commissions, and may not representactual transactions. Our common stock’s trading range during the periodsindicated is as follows:

 
| **Fiscal Year 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|----------|------------|---------|------------|
| 1st  Quarter         |       | $        | 1.35       |    | $          | 0.91 |   |
| 2nd  Quarter         |       | $        | 1.59       |    | $          | 1.00 |   |
| 3rd  Quarter         |       | $        | 3.04       |    | $          | 1.50 |   |
| 4th  Quarter         |       | $        | 4.19       |    | $          | 2.35 |   |

 
| **Fiscal Year 2009** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|----------|------------|---------|------------|
| 1st  Quarter         |       | $        | 3.95       |    | $          | 2.10 |   |
| 2nd  Quarter         |       | $        | 2.10       |    | $          | 1.08 |   |
| 3rd  Quarter         |       | $        | 2.00       |    | $          | 1.19 |   |
| 4th  Quarter         |       | $        | 1.82       |    | $          | 1.08 |   |

 

**Changesin Securities, Use of Proceeds and Issuer Purchases of Equity Securities**

 

Through the following exercises of warrants, weissued an aggregate of 3,482,500 shares of common stock, which were notregistered under the Securities Act of 1933, as amended, during fiscal 2009. Aggregateproceeds to the Company of the aforementioned stock issuances were $2,495,952,all of which have been or is expected to be used for working capitalpurposes.  The aforementioned issuanceswere made in reliance upon an exemption from registration set forth in Section 4(2) ofthe Securities Act of 1993, as amended, which exempts transactions by an issuernot involving a public offering.

 

We did not purchase any of our equity securitiesduring the fourth quarter of fiscal 2009.

 

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**ShareholderReturn Performance Graph**

 

Thefollowing graph compares the cumulative total shareholder return on our commonstock during the five years ended June 30, 2009 with the cumulative totalshareholder return of the Russell 2000 Index and a peer group of 16 oil and gasexploration and production companies comprised of Abraxas Petroleum Corporation(AXAS), The Meridian Resources Corporation (TMR), GMX Resources Inc. (GMXR),Petrohawk Energy Corporation (HK), Chesapeake Energy Corporation (CHK),Goodrich Petroleum Corporation (GDP), Northern Oil & Gas Inc. (NOG),Comstock Resources Inc. (CRK), EXCO Resources Inc. (XCO), Penn VirginiaCorporation (PVA), XTO Energy Inc. (XTO), Quicksilver Resources Inc. (KWK),Range Resources Corporation (RRC), Encore Acquisition Company (EAC), PlainsExploration & Production Company (PXP),  and St. Mary Land and Exploration Company(SM) (collectively referred to as the “Peer Group Index”). The comparisonassumes an investment of $100 on June 30, 2004 in each of our commonstock, the Russell 2000 Index and the Peer Group Index.

 

 
| ** **          | ** ** | **6/30/2004** | ** ** | **6/30/2005** | ** ** | **6/30/2006** | ** ** | **6/30/2007** | ** ** | **6/30/2008** | ** ** | **6/30/2009** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Cubic  Energy, Inc. |       | $             | 100.00     |          | $          | 144.29        |       | $             | 114.29     |          | $          | 190.57        |       | $ | 598.57 |   | $ | 154.29 |   |
| Russell  2000 Index |       | $             | 100.00     |          | $          | 108.14        |       | $             | 122.51     |          | $          | 140.94        |       | $ | 116.59 |   | $ | 85.93 |   |
| Peer  Group Index   |       | $             | 100.00     |          | $          | 155.96        |       | $             | 196.60     |          | $          | 216.39        |       | $ | 415.71 |   | $ | 155.07 |   |

 

**DividendPolicy**

 

Wehave neither declared nor paid any dividends on our common stock since ourinception. Presently, we intend to retain our earnings, if any, to providefunds for expansion of our business. Therefore, we do not anticipate declaringor paying cash dividends on our common stock in the foreseeable future. Anyfuture dividends will be subject to the discretion of our Board of Directorsand will depend upon, among other things, future earnings, our operating andfinancial condition, our capital requirements, debt obligation agreements,general business conditions and other pertinent facts. Moreover, the terms ofthe Credit Facility prohibit the payment of dividends.

 

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**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

Thefollowing table provides information as of June 30, 2009 with respect tocompensation plans (including individual compensation arrangements) under whichequity securities of the registrant are authorized for issuance:

 
| ** **                                              | ** ** | **Number of**         | ** ** | **Weighted**       | ** **   | ** **              | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|--------------------|--------------|-------------------------|------------|
| ** **                                              | ** ** | **securities to be**  | ** ** | **average**        | ** **   | **Number of shares**    | ** ** |
| ** **                                              | ** ** | **issued upon**       | ** ** | **exercise price** | ** **   | **of common stock**     | ** ** |
| ** **                                              | ** ** | **exercise of**       | ** ** | **of outstanding** | ** **   | **remaining available** | ** ** |
| ** **                                              | ** ** | **outstanding**       | ** ** | **options,**       | ** **   | **for future issuance** | ** ** |
| ** **                                              | ** ** | **options, warrants** | ** ** | **warrants and**   | ** **   | **under equity**        | ** ** |
| ** **                                              | ** ** | **and rights**        | ** ** | **rights**         | ** **   | **compensation plans**  | ** ** |
| 2005  Stock Option Plan approved by shareholders        |       | —                |       | $                  | —       |                    | 1,106,500  |   |
| Equity  compensation plans not approved by shareholders |       | —                |       | $                  |  — |                    | —     |   |
| Total                                                   |       | —                |       |               |         | 1,106,500               |       |

 

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** **

**Item 6. Selected FinancialData.**

** **

**The following table presents a summary of our financialinformation for the periods indicated. It should be read in conjunction withour Financial Statements and related notes (beginning on page F-1 at theend of this report) and other financial information included herein.**

** **
| ** **                                                   | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| **(In thousands, except per share  data)**                   | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statements of Operations Data:**                           | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  oil and gas sales revenues                            |       | $                            | 1,858      |   | $ | 2,302 |   | $ | 583 |   | $ | 509 |   | $ | 469 |   |
| Costs  and expenses:                                         | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil  and gas production, operating and****development  costs | ** ** | 1,372                        | ** ** | 1,163 | ** ** | 481 | ** ** | 338 | ** ** | 273 | ** ** |
| General  and administrative expenses                         |       | 1,940                        |       | 2,488 |   | 1,325 |   | 1,401 |   | 395 |   |
| Depreciation,  depletion and amortization                    |       | 772                          |       | 2,152 |   | 362 |   | 179 |   | 364 |   |
| Impairment  loss on oil and gas properties                   |       | 20,391                       |       | — |   | 1,791 |   | — |   | — |   |
| Total  costs and expenses                                    |       | 24,475                       |       | 5,803 |   | 3,959 |   | 1,918 |   | 1,032 |   |
| Operating  income (loss)                                     |       | (22,617                      | )          | (3,501 | ) | (3,376 | ) | (1,409 | ) | (563 | ) |
| Non-operating  income (expense):                             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other  income, net                                           |       | 34                           |       | 46 |   | 38 |   | 6 |   | — |   |
| Interest  expense, net                                       |       | (2,045                       | )          | (1,580 | ) | (1,279 | ) | (639 | ) | (193 | ) |
| Amortization  of loan costs                                  |       | (135                         | )          | (94 | ) | (101 | ) | (67 | ) | (28 | ) |
| Total  non-operating income (expense)                        |       | (2,146                       | )          | (1,628 | ) | (1,342 | ) | (700 | ) | (221 | ) |
| Loss  on extinguishment of debt, net                         |       | —                       |       | — |   | (1,083 | ) | (660 | ) | — |   |
| Loss  from operations before income taxes                    |       | (24,763                      | )          | (5,129 | ) | (5,801 | ) | (2,769 | ) | (784 | ) |
| Income  tax expense (benefit)                                |       | —                       |       | — |   | — |   | — |   | — |   |
| Net  income (loss)                                           |       | $                            | (24,763    | ) | $ | (5,129 | ) | $ | (5,801 | ) | $ | (2,769 | ) | $ | (784 | ) |
| Net  loss per common share - basic and diluted               |       | $                            | (0.40      | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.07 | ) | $ | (0.02 | ) |
| Weighted  average common shares outstanding                  |       | 61,150                       |       | 56,974 |   | 50,338 |   | 38,477 |   | 33,113 |   |
| ** **                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statements of Cash Flow Data:**                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  provided by (used in) operating activities             |       | $                            | (2,152     | ) | $ | (1,234 | ) | $ | (1,802 | ) | $ | (964 | ) | $ | (185 | ) |
| Cash  provided by (used in) investing activities             |       | $                            | (5,589     | ) | $ | (15,513 | ) | $ | (4,052 | ) | $ | (4,800 | ) | $ | (2,122 | ) |
| Cash  provided by (used in) financing activities             |       | $                            | 5,668      |   | $ | 15,768 |   | $ | 8,717 |   | $ | 5,765 |   | $ | 2,371 |   |
| ** **                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet Data (at end of period):**                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working  capital (deficit)                                   |       | $                            | (27,823    | ) | $ | 1,747 |   | $ | 2,607 |   | $ | (1,357 | ) | $ | 576 |   |
| Oil  and gas properties, and equipment, net                  |       | $                            | 11,710     |   | $ | 26,858 |   | $ | 13,666 |   | $ | 11,820 |   | $ | 3,687 |   |
| Total  assets                                                |       | $                            | 12,127     |   | $ | 29,491 |   | $ | 18,108 |   | $ | 13,373 |   | $ | 4,415 |   |
| Long-term  liabilities, net of discounts                     |       | $                            | —     |   | $ | 22,971 |   | $ | 7,627 |   | $ | 5,155 |   | $ | 1,612 |   |
| Total  liabilities                                           |       | $                            | 28,150     |   | $ | 23,632 |   | $ | 9,313 |   | $ | 7,320 |   | $ | 1,631 |   |
| Shareholders’  equity                                   |       | $                            | (16,023    | ) | $ | 5,858 |   | $ | 8,795 |   | $ | 6,053 |   | $ | 2,784 |   |
| ** **                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Financial Data:**                                    | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-cash  stock-based compensation                           |       | $                            | 385        |   | $ | 1,255 |   | $ | 490 |   | $ | 727 |   | $ | 79 |   |

 

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**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

** **

The following discussion isintended to assist in an understanding of the Company’s historical financialposition and results of operations for each year in the three-year period endedJune 30, 2009. The following discussion is intended to assist in understandingour results of operations and our current financial condition. Our consolidatedfinancial statements and the accompanying notes included elsewhere in thisAnnual Report on Form 10-K contains additional information that should bereferred to when reviewing this material.

 

Statements in thisdiscussion may be forward-looking. These forward-looking statements involverisks and uncertainties, including those discussed below, which could causeactual results to differ from those expressed.

 

**General**

 

The Company’sfuture results of operations and growth are substantially dependent upon (i) itsability to acquire or find and successfully develop additional oil and gasreserves and (ii) the prevailing prices for oil and gas. We haveidentified numerous locations to pursue additional drilling. If we are unableto economically complete additional producing wells, the Company’s oil and gasproduction, and thus its revenues, would likely decline gradually as itsreserves are depleted. In addition, oil and gas prices are dependent uponnumerous factors beyond the Company’s control, such as economic, political andregulatory developments and competition from other sources of energy. The oiland gas markets have historically been very volatile, and any significant andextended decline in the price of oil or gas would have a material adverseeffect on the Company’s financial condition and results of operations, andcould result in a further reduction in the carrying value of the Company’sproved reserves and adversely affect its access to capital.

 

**Overview**

 

Cubic Energy, Inc. isan independent upstream energy company engaged in the development andproduction of, and exploration for, crude oil and natural gas. Our oil and gasassets and activities are concentrated exclusively in Louisiana and Texas.

 

Our corporate strategy withrespect to our asset acquisition and development efforts was to position theCompany in a low risk opportunity while building main stream high yieldreserves.  The acquisition of our Cotton Valley acreage in DeSoto andCaddo Parishes, Louisiana, puts us in a reservoir rich environment both in theCotton Valley and Bossier/Haynesville Shale formations, which we believe givesus the potential to discover additional commercial horizons that can add valueto the bottom line. We have had success on our acreage with wells drilled byachieving production from not only the Cotton Valley and Bossier/HaynesvilleShale formations, but also the Hosston formations.

 

Fiscal 2009 was achallenging year in many aspects.

 

As of June 30, 2009,the Company has successfully drilled 22 wells in its northwest Louisianaproperties (12 in its Johnson Branch acreage in Caddo Parish, and 10 in itsBethany Longstreet acreage in Caddo and DeSoto Parishes). In its Johnson Branchacreage, Cubic has drilled 12 wells through the Cotton Valley sandstones, withthree of these wells penetrating deeper into the Bossier/Haynesville shales.Two of such Bossier/Haynesville wells have been completed and are producingfrom the Haynesville formation; the third such well was completed and isproducing from the Cotton Valley formation. To date, 10 Johnson Branch wellshave been completed as hydrocarbon producers in the Cotton Valley sandstones.Additionally, in its Bethany Longstreet acreage, Cubic has eight producingwells in the Cotton Valley and Hosston formations and two producing wells inthe Haynesville Shale.

 

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During the first quarter offiscal 2009, the Company elected to participate in the horizontal drilling ofChesapeake Energy’s S Mitchell 12-15-16H1 and Clingman 11-15-15H1 wells. Thesewells are located in the Johnson Branch and Caspiana Fields of Caddo Parish,Louisiana, and are horizontally drilled to an approximate measured depth of16,500 feet, followed by a Haynesville Shale completion. Cubic has an estimated2.5% working interest in the wells. Cubic has a working interest with ChesapeakeEnergy in three Johnson Branch Cotton Valley wells: the Copeland 12-1 and theFiest 21-1. We are also participating in these Haynesville horizontal wells:the Clingman 11 H-1, the Clingman 2 H-1 and the Woolworth 15 H-1. Cubic’sfuture plans include participation in the Beauregard 21-1, and other wells insections controlled by Chesapeake Energy, Goodrich Petroleum and PetrohawkEnergy, in which Cubic has a working interest in the Haynesville Shale.

 

Participating in these wellsis expected to give Cubic’s technical personnel valuable insights in themethods and technologies to help the Company in developing and enhancing thedevelopment of the balance of our acreage.

 

During the second quarter offiscal 2009, the Company retained RBC Richardson Barr Securities, Inc., toassist the Company in exploring the sale of the Company, or substantially allof its assets. The initial interest in the Company’s assets was very positive.As natural gas prices continued their downward spiral in the beginning offiscal 2009, it became apparent to management that a bid reflecting the full valueof the Company’s assets would not be forthcoming.

 

Our financial results dependupon many factors, but are largely driven by the volume of our natural gasproduction and the price that we receive for that production. Our productionvolumes will decline as reserves are depleted unless we obtain and expendcapital in successful development and exploration activities or acquireproperties with existing production. The amount we realize for our productiondepends predominantly upon commodity prices, which are affected by changes inmarket demand and supply, as impacted by overall economic activity, weather,pipeline capacity constraints, inventory storage levels, basis differentialsand other factors. Accordingly, finding and developing oil and natural gasreserves at economical costs is critical to our long-term success.

 

During the second half offiscal 2009, oil and natural gas prices declined significantly in response tothe worldwide credit crisis, the turmoil in the global financial system and theeconomic recession in the United States and in other developed and developingcountries. In response to natural gas prices during the last quarter of fiscal2009, we reduced and refocused our 2009 capital budget on the development ofnon-proved locations in our Bossier/Haynesville shale locations. Our futuredrilling plans are subject to change based upon various factors, some of whichare beyond our control, including drilling results, natural gas prices, theavailability and cost of capital, drilling and production costs, availabilityof drilling services and equipment, gathering system and pipelinetransportation constraints and regulatory approvals. To the extent thesefactors lead to reductions in our drilling plans and associated capital budgetsin future periods, our financial position, cash flows and operating resultscould be adversely impacted.

 

Another consequence we faceas a result of declining natural gas prices is the possibility that we may berequired to recognize a non-cash impairment expense under the full cost methodof accounting, which we use to account for our oil and natural gas explorationand development activities. We had recorded a full cost ceiling impairment ofapproximately $20.4 million at June 30, 2009, at which time the Henry Hubspot market price was $3.72 per MMbtu for natural gas. If natural gas prices donot recover, we may be required to take additional impairment charges in thefuture.

 

In March 2009, the Companybegan a strategic campaign to pursue three options. First, restructure our debtand operating capital. This plan seeks to provide the capital needed fordrilling seven to ten horizontal wells during 2010-2011. Second, pursue a jointventure with a larger company that could assist with operations and allow theCompany to maintain a working interest and become a financially strong publiccompany. The third 

 

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option would be to sell the Companyor its assets. This option is the least attractive to management at this time dueto low natural gas prices, which makes it difficult for the Company to realizeacceptable shareholder value.

 

Due to a lack of cash we didvery little well workover during fiscal 2009. Without the needed fracturestimulation, natural gas production of the wells continues to fall. As theworld economy declined, so did natural gas prices. The natural gas pricedownward spiral and our lack of cash on hand to stimulate well productioncaused the Company to have impairment losses for each of the first threequarters of fiscal 2009. While it created difficulties for operations, itprovided a fortuitous situation in that we were not drilling and producing gasfor sale into this depressed natural gas market.

 

As shown in the accompanyingfinancial statements, the Company incurred a net loss of $24,762,516 during theyear ended June 30, 2009, and as of that date, the Company’s currentliabilities exceeded its current assets by $27,822,536 and its totalliabilities exceeded its total assets by $16,022,965. Those factors, as well asthe uncertain conditions that the Company faces regarding its loan agreements(as discussed in Note E), create an uncertainty about the Company’s ability tocontinue as a going concern. Management of the Company has developed a plan toreduce its liabilities through additional financing and issuance of additionalstock to shareholders. The Company’s plan includes several strategicopportunities to correct the current financial situation. The Company isinvolved in negotiations that could provide up to $40,000,000 in drillingcredits, expand it Credit Facility to $40,000,000 from its current fullutilized $25,000,000 facility and extend the term of the facility out two tothree years beyond the current maturity date of March 1, 2010. The abilityof the Company to continue as a going concern is dependent on acceptance of theplan by the Company’s bank creditors and the plan’s success. The financialstatements do not include any adjustments that might be necessary if theCompany is unable to continue as a going concern.

 

Management continues tobelieve in the value of its assets and will pursue all options that allow theCompany to leverage those assets to gain full shareholder value.

 

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**Summary Operating, Reserve and Other Data**

 

**The following table presents anunaudited summary of certain operating and oil and natural gas reserve data,and non-GAAP financial data for the periods indicated:**

** **
| ** **                                | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating Data:**                       |       |                         |       |   |   |   |   |   |   |   |   |
| Proved  Reserves (Bcfe)                   |       | 21.1                         |       | 6.6 |   | 4.3 |   | 2.9 |   | 0.5 |   |
| Production  (Mcfe)                        |       | 300,712                      |       | 244,665 |   | 76,214 |   | 59,798 |   | 70,780 |   |
| Producing  wells at end of period, gross  |       | 43                           |       | 32 |   | 22 |   | 17 |   | 17 |   |
| Producing  wells at end of period, net    |       | 21.44                        |       | 18.42 |   | 14.42 |   | 13.07 |   | 13.65 |   |
| Acreage,  gross                           |       | 14,466                       |       | 14,711 |   | 17,542 |   | 16,913 |   | 6,050 |   |
| Acreage,  net                             |       | 6,077                        |       | 6,151 |   | 7,364 |   | 7,073 |   | 2,171 |   |
|                                      |       |                         |       |   |   |   |   |   |   |   |   |
| **Production:**                           |       |                         |       |   |   |   |   |   |   |   |   |
| Oil  (Bbl)                                |       | 1,681                        |       | 1,682 |   | 967 |   | 1,047 |   | 506 |   |
| Natural  gas (Mcf)                        |       | 279,516                      |       | 228,219 |   | 70,412 |   | 53,516 |   | 67,744 |   |
| Natural  gas liquids (gallons)            |       | 77,772                       |       | 44,476 |   | — |   | — |   | — |   |
| Total  oil, gas and liquids (Mcfe)        |       | 300,712                      |       | 244,665 |   | 76,214 |   | 59,798 |   | 70,780 |   |
| Average  daily (Mcfe)                     |       | 824                          |       | 668 |   | 209 |   | 164 |   | 194 |   |
|                                      |       |                         |       |   |   |   |   |   |   |   |   |
| **Weighted Average Sales Prices:**        |       |                         |       |   |   |   |   |   |   |   |   |
| Oil (per  Bbl)                            |       | $                            | 66.52      |   | $ | 102.15 |   | $ | 61.68 |   | $ | 59.90 |   | $ | 43.32 |   |
| Natural  gas (per Mcf)                    |       | $                            | 3.72       |   | $ | 9.01 |   | $ | 7.44 |   | $ | 8.34 |   | $ | 6.61 |   |
| Natural  gas liquids (per gallon)         |       | $                            | 1.02       |   | $ | 1.66 |   | n/a |   | n/a |   | n/a |   |
| Natural  gas equivalent (per Mcfe)        |       | $                            | 6.18       |   | $ | 9.41 |   | $ | 7.65 |   | $ | 8.51 |   | $ | 6.63 |   |
|                                      |       |                         |       |   |   |   |   |   |   |   |   |
| **Selected Expenses per Mcfe:**           |       |                         |       |   |   |   |   |   |   |   |   |
| Production  costs                         |       | $                            | 3.98       |   | $ | 3.60 |   | $ | 4.18 |   | $ | 5.05 |   | $ | 3.33 |   |
| Workover  expenses (non-recurring)        |       | $                            | 0.12       |   | $ | 0.11 |   | $ | 1.40 |   | $ | — |   | $ | 0.08 |   |
| Severance  taxes                          |       | $                            | 0.20       |   | $ | 0.29 |   | $ | 0.39 |   | $ | 0.39 |   | $ | 0.34 |   |
| Other  revenue deductions                 |       | $                            | 0.27       |   | $ | 0.75 |   | $ | 0.35 |   | $ | 0.22 |   | $ | 0.11 |   |
| Total  lease operating expenses           |       | $                            | 4.57       |   | $ | 4.75 |   | $ | 6.32 |   | $ | 5.66 |   | $ | 3.86 |   |
| General  and administrative expenses:     |       |                         |       |   |   |   |   |   |   |   |   |
| Non-cash  stock-based compensation        |       | $                            | 1.28       |   | $ | 5.13 |   | $ | 6.43 |   | $ | 12.15 |   | $ | 1.12 |   |
| Other  general and administrative         |       | $                            | 5.17       |   | $ | 5.04 |   | $ | 10.96 |   | 11.27 |   | 4.46 |   |
| Total  general and administrative         |       | $                            | 6.45       |   | $ | 10.17 |   | $ | 17.39 |   | $ | 23.42 |   | $ | 5.58 |   |
| Depreciation,  depletion and amortization |       | $                            | 2.55       |   | $ | 8.80 |   | $ | 4.76 |   | $ | 3.00 |   | $ | 5.15 |   |

 

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**RESULTS OF OPERATIONS**

** **

## **Comparisonof Fiscal 2009 to Fiscal 2008**

##  

## **Revenues**

##  

OIL AND GAS SALES decreased 19% to $1,858,139for fiscal 2009 from $2,302,310 for fiscal 2008 primarily due to lower gasvolumes resulting from a steep production decline-curve and lack of funds toworkover existing wells and a 34% decrease in the weighted average sales pricefor gas (per Mcf). This decline was mitigated by the Company having an averageof approximately 22 (gross) wells on-line in Louisiana in fiscal 2009 versusapproximately 13 (gross) wells in fiscal 2008.

 

### **Costs and Expenses**

###  

OIL AND GAS PRODUCTION, OPERATING ANDDEVELOPMENT COSTS (also referred to as “LEASE OPERATING EXPENSES” elsewhereherein) increased 18% to $1,372,041(74% of oil and gas sales) for fiscal 2009from $1,162,489 (50% of oil and gas sales) for fiscal 2008 primarily due tomore wells being on-line in Louisiana, which resulted in: $104,002 increase incommon facility expenses, a $101,272 increase in chemical cost and a $64,892increase in salt water hauling costs. These increases were somewhat offset by a$102,366 decrease in costs passed-through to the Company by the purchaser ofthe Company’s gas. Such costs are deducted from the Company’s gross revenue bythe purchaser.

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)decreased 22% to $1,940,025 for fiscal 2009 from $2,488,133 in fiscal 2008 as aresult of: a $857,099 decrease in non-cash stock compensation expense due to a68% decrease in the number of shares of common stock granted versus the prioryear period. This decrease was somewhat offset by a $135,536 increase incorporate fees paid, which includes $115,042 in AMEX listing fees and a $4,000increase due to adding two more outside directors, a $48,563 increase in legalfees due in part to the support needed to address the NYSE Amex non-complianceissue; and $116,870 in contract services fees related to management’stransition to a new chief financial officer, which occurred in fiscal 2009, butdid not occur in the prior year period.

 

DEPRECIATION,DEPLETION AND AMORTIZATION (“DD&A”) decreased 279% to $771,861in fiscal2009 from $2,152,096 in fiscal 2008 primarily due to a decrease in capitalexpenditures in fiscal 2009 related to the acquisition and development of oiland gas properties.

 

IMPAIRMENT OFOIL AND GAS PROPERTIES increased to $20,390,819 in fiscal 2009 from $0 infiscal 2008. The fiscal 2009 impairment resulted from a downward revision ofour reserve estimates, which was effected by the following events: (i) weexperienced delays related to third party providers in our Bethany Longstreetacreage, including not receiving contracted-for compression services, whichtemporarily delayed our ability to produce from these wells; (ii) we didnot effectuate final completion of certain wells due to a shift in our focus tothe development of our Johnson Branch acreage in Caddo Parish, Louisiana; and, (iii) thelack of production history in wells recently brought online lead to a sharperdecline curve being utilized by RPS Scotia, Inc. in formulating thereserve estimates.

 

INTEREST EXPENSE, INCLUDING AMORTIZATION OFLOAN DISCOUNT increased 29% to $2,044,718 in fiscal 2009 from $1,579,452 infiscal 2008 primarily due to an increase in debt (before discounts) to$27,000,000 at June 30, 2009 from $23,827,800 at June 30, 2008. Thisincrease resulted from the drawing down of our revolving credit line of$3,172,200 (before discounts). The weighted average debt balance (beforediscounts) for fiscal 2009 was $26,565,452 as compared to $16,494,613 in fiscal2008. The Credit Facility with Wells Fargo also resulted in a loan discountbeing recorded. The discount is being amortized over the original three-yearterm of the debt as additional interest expense with $514,620 being recorded infiscal 2009 as compared to $516,030 in fiscal 2008. There was a decrease in thecapitalization of 

 

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interest expense to the full cost pool for oil and gas properties of $30,682 infiscal 2009 as compared to $330,608 in fiscal 2008.

 

## **Comparisonof Fiscal 2008 to Fiscal 2007**

##  

OIL AND GAS SALES increased 295% to $2,302,310for fiscal 2008 from $583,416 for fiscal 2007 primarily due to higher gasvolumes resulting from an average of approximately 13 (gross) wells beingon-line in Louisiana in fiscal 2008 versus approximately three and one-halfwells in fiscal 2007, and a 21% increase in the weighted average sales pricefor gas (per Mcf).

 

### **Costs and Expenses**

###  

OIL AND GAS PRODUCTION, OPERATING ANDDEVELOPMENT COSTS (also referred to as “LEASE OPERATING EXPENSES” elsewhereherein) increased 142% to $1,162,489 (50% of oil and gas sales) for fiscal 2008from $481,145 (82% of oil and gas sales) for fiscal 2007 primarily due to morewells being on-line in Louisiana, which resulted in: a $307,551 increase insalt water hauling and disposal costs; $126,992 in common facility expenses forproduction from the Company’s Johnson Branch wells, which did not occur in theprior year period; a $46,470 increase in contract labor costs; a $41,998increase in state taxes on production (also referred to as “severance taxes”elsewhere herein); and a $156,998 increase in costs passed-through to theCompany by the purchaser of the Company’s gas. Such costs are deducted from theCompany’s gross revenue by the purchaser and include, but are not limited to:costs to market the Company’s gas, compression fees, and the cost of fuel usedby the purchaser to convey the Company’s gas. These increases were somewhatoffset by a $79,867 drop in non-recurring workover expenses.

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)increased 88% to $2,488,133 for fiscal 2008 from $1,325,192 in fiscal 2007 as aresult of: a $765,537 increase in non-cash stock compensation expense relatedprimarily to appreciation of the Company’s common stock price, a 29% increasein the number of shares of common stock granted versus the prior year period,and full recognition in fiscal 2008 of stock compensation issued during thatyear, which vested immediately with no forfeiture provisions, rather thanamortization over the four quarters of the service period; a $141,689 increasein cash compensation expense resulting from an increase in the number ofemployees; a $39,583 increase in reserve report expenses; a $15,428 increase infees paid to our outside directors; and the following expenses, which occurredin fiscal 2008 but did not occur in the prior year period: $60,000 incontracted professional services fees related to management’s assessment of theCompany’s internal controls over financial reporting required by Section 404(a) ofthe Sarbanes-Oxley Act of 2002; $76,507 in marketing expenses; $51,030 inexpense for directors’ and officers’ insurance; and, $23,082 in corporate feesrelated to the Company’s annual shareholders’ meeting. These increases werepartially offset by a $36,279 decrease in legal fees due to non-recurrence of:the preparation of documents and filings related to a private placement ofshares of the Company’s common stock in December 2006 and the transactingof the March 2007 debt issue.

 

DEPRECIATION,DEPLETION AND AMORTIZATION (“DD&A”) increased 494% to $2,152,096 in fiscal2008 from $362,434 in fiscal 2007 primarily due to an $11,281,505, or 278%,increase in capital expenditures in fiscal 2008 related to the acquisition anddevelopment of oil and gas properties.

 

IMPAIRMENT OFOIL AND GAS PROPERTIES decreased to $0 in fiscal 2008 from $1,790,882 in fiscal2007. The fiscal 2007 impairment resulted from a downward revision of ourreserve estimates, which was effected by the following events: (i) weexperienced delays related to third party providers in our Bethany Longstreetacreage, including not receiving contracted-for compression services, whichtemporarily delayed our ability to produce from these wells; (ii) we didnot effectuate final completion of certain wells due to a shift in our focus tothe development of our Johnson Branch acreage in Caddo Parish, Louisiana; and, (iii) thelack of production history in wells recently brought online lead to a sharperdecline curve being utilized by RPS Scotia, Inc. in formulating thereserve estimates.

 

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INTEREST EXPENSE, INCLUDING AMORTIZATION OFLOAN DISCOUNT increased 24% to $1,579,452 in fiscal 2008 from $1,278,721 infiscal 2007 primarily due to an increase in debt (before discounts) to$23,827,800 at June 30, 2008 from $9,000,000 at June 30, 2007. Thisincrease resulted from the repayment of a $1,300,000 note held by Tauren on February 2,2007 from the proceeds of a December 2006 equity offering, and theretirement of $5,500,000 of indebtedness held by Petro Capital V. L.P. on March 5,2007 via the borrowing of $5,000,000 pursuant to the aforementioned Wells FargoCredit Facility’s senior convertible term loan, subsequent draws ofapproximately $16,827,800 on a related revolving line of credit, and theborrowing of $2,000,000 under the terms of the May 6, 2008 SubordinatedNote. The weighted average debt balance (before discounts) for fiscal 2008 was$16,494,613 as compared to $6,467,579 in fiscal 2007. The Credit Facility withWells Fargo also resulted in a loan discount being recorded. The discount isbeing amortized over the original three-year term of the debt as additionalinterest expense with $516,030 being recorded in fiscal 2008 as compared to$164,961 in fiscal 2007. Such increases were somewhat offset by thecapitalization of interest expense tothe full cost pool for oil and gas properties of $330,608 in fiscal 2008as compared to zero in fiscal 2007.

 

LOSS ON EXTINGUISHMENT OF DEBT was $0 in fiscal2008 as compared to $1,082,887 in fiscal 2007 due to there being no retirementof debt in fiscal 2008. On March 5, 2007, the senior debt held by Petro Capital wasretired with proceeds from the Credit Facility with Wells Fargo. In connectionwith this retirement, the Company recorded a loss on extinguishment of debt inthe amount of $(1,082,887) in fiscal 2007. Such amount included the write-offof deferred loan costs ($235,898), and the write-off of the remaining loandiscount ($846,989).

 

**Liquidity and Capital Resources**

 

### **Overview**

###  

The Company’s primary resource is its oil andgas reserves. The Company has entered into a senior credit facility, but theCompany will be required to make significant repayments of amounts borrowed by November 1,2009, as a result of a re-determination in the borrowing base on the revolvingcredit facility, primarily due to lower commodity prices.

 

OnMarch 5, 2007, Cubic entered into a Credit Agreement with Wells Fargoproviding for the Credit Facility, which consists of a convertible term loan of$5,000,000 and a revolving credit facility of $20,000,000 in order to fund thedrilling and completion of new wells. On May 6, 2008, the Company issued asubordinated promissory note in the amount of $2,000,000 to DiversifiedDynamics Corporation (see “Notes to Financial Statements — Note E — Long-termdebt” elsewhere herein).

 

On June 29, 2009, wereceived a letter from Wells Fargo Energy Capital, Inc. (the “Lender”)informing the us that the Lender has made a redetermination of the borrowingbase, which reduced the borrowing base from $20.0 million to $7.5 million,requiring a payment of $12.5 million from the Company to the Lender. Throughwaiver, the Lender originally extended the date for the payment until September 1,2009. This date has been extended to November 1, 2009 and we have theright to pay the deficiency in five monthly installments as provided in ourCredit Agreement with the Lender. If the Company is not successful in renegotiatingthis agreement the Lender can foreclose on our assets. The Company is workingclosely with the Lender to assist in avoidance of such actions.

 

Product prices, overwhich we have no control, have a significant impact on revenues from productionand the value of such reserves and thereby on the Company’s borrowing capacityin the event the Company determines to borrow additional funds. Within theconfines of product pricing, the Company must be able to find and develop oracquire oil and gas reserves in a cost effective manner in order to generatesufficient financial resources through internal means to complete the financingof its capital expenditure program.

 

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During the twelve months ended June 30,2009, the Company used cash flows from operating activities of $2,152,187 ascompared to $1,233,829 in fiscal 2008. Cash flow from operations is dependenton our ability to increase production through our development and exploratoryactivities and the price received for oil and natural gas.

 

### **Working Capital and Cash Flow**

###  

The Company’s working capital decreased to($27,822,536) at June 30, 2009 from $1,746,741 at June 30, 2008. Thisdecrease was primarily due to $27,000,000 of debt scheduled to mature on March andApril 2010, becoming a part of current liabilities during the quarterended March 31, 2009 and year ended June 30, 2009. The downturn inthe price for natural gas lowered revenue This reclassification was partiallyoffset by cash flows provided by financing activities of $5,668,152 resultingfrom $2,495,952 of proceeds from the issuance of common stock (as a result ofthe exercise of warrants), and the borrowing of $3,172,200 on theaforementioned revolving line of credit with Wells Fargo in fiscal 2009.

 

The Company anticipates the following capitalexpenditures in the remainder of fiscal 2010: re-completions of up to fourwells in its Johnson Branch acreage; the acquisition of additional leaseholdsin and around its core acreage position; final payments that may be outstandingas a result of the acquisition of rights-of-way in certain of our leases; andthe election to participate in certain horizontal Haynesville Shale wellsoperated by an unrelated third-party, which began production during the yearending June 30, 2009. As a result, our projected capital expenditures areexpected to be in a range of approximately $3,000,000 to $40,000,000 for fiscal2010. Any significant capital expenditures will depend on obtaining additionalfunds and restructuring our current indebtedness.

 

Due to the significant downturn in the price ofnatural gas, continued prudence will be exercised in the undertaking of any newoperations during the near term. No assurance can be given that all or any ofthese anticipated projects will be completed as currently anticipated. Whilethe Company is negotiating with Wells Fargo to expand its Revolving Note andextend the maturity date, we currently have very little cash on hand and ourability to continue to meet our obligations and fund the projected capitalexpenditure at this time is not certain for fiscal 2010.

 

Additionally, because future cash flows and theavailability of borrowings are subject to a number of variables, such asprevailing prices of oil and gas, actual production from existing andnewly-completed wells, the Company’s success in developing and producing newreserves, and the uncertainty with respect to the amount of funds which mayultimately be required to finance the Company’s development and explorationprogram, there can be no assurance that the Company’s capital resources will besufficient to sustain the Company’s development and exploration activities.

 

The Company’s working capital decreased to$1,746,741 at June 30, 2008 from $2,606,796 at June 30, 2007,primarily due to capital expenditures of $15,341,903 related to the drillingand completion of new wells and the aforementioned $1,233,829 use of cash fromoperating activities in fiscal 2008. These uses of cash were somewhat offset bythe borrowing of $12,827,800 on the aforementioned revolving line of creditwith Wells Fargo, the borrowing of $2,000,000 under the aforementionedsubordinated promissory note issued to Diversified Dynamics Corporation and$1,110,295 in proceeds from the issuance of stock, resulting from the exerciseof warrants, during fiscal 2008.

 

### **Capital Expenditures**

###  

The majority of our oil and gas reserves areundeveloped. As such, recovery of the Company’s future undeveloped provedreserves will require significant capital expenditures. Our managementestimates that aggregate capital expenditures ranging from a minimum ofapproximately $3,000,000 (from currently available funds and projected cashfrom operating activities) to a maximum of approximately $40,000,000 (subjectto the availability of additional financing) will be made to further developthese reserves during fiscal 2010. Moreover, additional capital expendituresmay be required for exploratory drilling on our 

 

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undeveloped acreage. The Company may increase itsplanned activities for fiscal 2010 if product prices improve and if we are ableto obtain the additional capital resources necessary to finance suchactivities. However, to the extent that: i) we are not able to renegotiate ourRevolving Note with Wells Fargo;  ii) weare not able to raise additional capital; or iii) drilling rigs, drill pipe andother material used in oil and gas drilling and completing are unavailable, ourcapital expenditures will be restricted.

 

**CapitalResources**

 

The Company plans to fund its development and exploratoryactivities through cash on hand (which was approximately $500,000 as of thedate of this filing), cash provided from operations; the potential exercises ofwarrants for cash; and one of, or a combination of, the following potentialtransactions: a private placement of common stock; a public offering of commonstock; a joint venture with a more well-financed industry partner in which wewould farm-out a to-be-determined percentage of our working interests incertain properties; or a disposition of assets.

 

Whilewe expect production from the wells drilled and completed in fiscal 2007, 2008,2009 and subsequent to the end of fiscal 2009 to provide cash flow to supportadditional drilling in fiscal 2010, the Company cannot be certain that adequatefunds will be available from cash on hand, operating cash flow, the exercise ofwarrants, and the aforementioned potential transactions to fully fund theprojected capital expenditures for fiscal 2010. Additionally, because futurecash flows, the availability of borrowings, and the ability to consummate theaforementioned potential transactions are subject to a number of variables,such as prevailing prices of oil and gas, actual production from existing andnewly-completed wells, the Company’s success in developing and producing newreserves, the uncertainty of financial markets and joint venture and merger andacquisition activity, and the uncertainty with respect to the amount of fundswhich may ultimately be required to finance the Company’s development andexploration program, there can be no assurance that the Company’s capitalresources will be sufficient to sustain the Company’s development andexploratory activities.

 

Although the Company believes it will be able toobtain funds pursuant to the above-mentioned alternatives, management cannot beassured that such capital resources will be available to the Company. If we areunable to obtain such capital resources on a timely basis, the Company maycurtail its planned development and exploratory activities.

 

**Critical Accounting Policies**

 

Thepreparation of our financial statements requires us to make a number ofestimates and assumptions relating to the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the period. When alternatives exist among variousaccounting methods, the choice of accounting method can have a significantimpact on reported amounts. The following is a discussion of our accountingestimates and judgments that management believes are most significant in itsapplication of generally accepted accounting principles used in the preparationof the financial statements.

 

***Impairment of long-lived assets and long-livedassets to be disposed of***

 

TheCompany has adopted the provisions of the Financial Accounting Standards Board’s(the “FASB”) Statement of Financial Accounting Standards (“FAS”) No. 144 (“FASNo. 144”), *Accounting for the Impairment or Disposal ofLong-Lived Assets,* effective for periods beginning July 1,2002, and thereafter. FAS No. 144 replaces FAS No. 121, and, amongother matters, addresses financial accounting and reporting for the impairmentor disposal of long-lived assets. FAS No. 144 retains the basic provisionsof FAS No. 121, but broadens its scope and establishes a single model forlong-lived assets to be disposed of by sale. In addition, the Company issubject to the rules of the Securities and Exchange Commission withrespect to 

 

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impairmentof oil and gas properties accounted for under the full cost method ofaccounting, as described below.

 

***Full cost method of accounting for oil and gasproperties***

 

TheCompany has adopted the full cost method of accounting for oil and gasproperties. Management believes adoption of the full cost method moreaccurately reflects management’s exploration objectives and results byincluding all costs incurred as integral for the acquisition, discovery anddevelopment of whatever reserves ultimately result from its efforts as a whole.Under the full cost method of accounting, all costs associated withacquisition, exploration and development of oil and gas reserves, includingsuch costs as leasehold acquisition costs, interest costs related toexploratory and development activities, and directly related overhead costs,are capitalized into the full cost pool.

 

Allcapitalized costs of oil and gas properties, including the estimated futurecosts to develop proved reserves, are amortized on the unit-of-productionmethod using estimates of proved reserves. Investments in unproved propertiesand major development projects are not amortized until proved reserves associatedwith the projects can be determined or until impairment occurs. If the resultsof an assessment indicate that the properties are impaired, the amount of theimpairment is added to the capitalized costs to be amortized.

 

Inaddition, the capitalized costs are subject to a “full cost ceiling test,”which generally limits such costs to the aggregate of the “estimated presentvalue” (discounted at a 10 percent (10%) interest rate) of future net revenuesfrom proved reserves, based on current economic and operating conditions, plusthe lower of cost or fair market value of unproved properties.

 

Salesof proved and unproved properties are accounted for as adjustments ofcapitalized costs with no gain or loss recognized, unless such adjustmentswould significantly alter the relationship between capitalized costs and provedreserves of oil and gas, in which case the gain or loss is recognized inincome.

 

***Oil and gas revenues***

 

TheCompany recognizes oil and gas revenues when oil and gas production is sold toa purchaser at a fixed or determinable price, when delivery has occurred andtitle has transferred, and if collectability of the revenue is probable.Delivery occurs and title is transferred when production has been delivered toa purchaser’s pipeline or truck. As a result of the numerous requirementsnecessary to gather information from purchasers or various measurementlocations, calculate volumes produced, perform field and wellhead allocationsand distribute and disburse funds to various working interest partners androyalty owners, the collection of revenues from oil and gas production may takeup to 60 days following the month of production. Therefore, we make accrualsfor revenues and accounts receivable based on estimates of our share ofproduction. Since the settlement process may take 30 to 60 days following themonth of actual production, our financial results include estimates ofproduction and revenues for the related time period. We record any differences,which historically have not been significant, between the actual amountsultimately received and the original estimates in the period they becomefinalized. Differences between sales and production volumes during the yearsended June 30, 2009, 2008 and 2007 were not significant.

 

***Use of estimates***

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

 

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***Certain significant estimates***

 

Management’sestimates of oil and gas reserves are based on various assumptions, includingconstant oil and gas prices. It is reasonably possible that a future event inthe near term could cause the estimates to change and such changes could have asevere impact. Actual future production, cash flows, taxes, operating expenses,development expenditures and quantities of recoverable oil and gas reserves mayvary substantially from those assumed in the estimates. The accuracy of anyreserve estimate is a function of the quality of available data, engineering andgeological interpretation, and judgment. Subsequent evaluation of the samereserves based upon production history will result in variations, which may besubstantial, in the estimated reserves. While it is at least reasonablypossible that the estimates above will change materially in the near term, noestimate can be made of the range of possible changes that might occur.

 

***Stock-based compensation***

 

TheCompany accounts for its stock-based employee compensation plans pursuant toFAS No. 123R, *Share-Based Payment*,which is a revision of FAS No. 123, *Accounting for Stock-BasedCompensation*, and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees* (“APB No. 25”). This FAS requires theCompany to recognize compensation costs related to stock-based paymenttransactions (i.e., the granting of stock options and warrants, and awards ofunregistered shares of common stock) in the financial statements. With limitedexceptions, the amount of compensation is measured based on the grant-date fairvalue of the equity issued. Compensation cost is recognized over the periodthat an employee provides services in exchange for the award. This new standardbecame effective for awards that are granted, modified or settled in cash ininterim and annual financial periods beginning after June 30, 2007.

 

***Subsequent Events***

 

InMay 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”).SFAS 165 establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. SFAS 165 sets forth (1) Theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (2) Thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and (3) Thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS 165 is effective for interim orannual financial periods ending after June 15, 2009. The adoption of thisstatement did not have a material effect on the Company’s financial statements.

 

**Other Accounting Policies and Recent Accounting Pronouncements**

 

Pleasesee “Notes to Financial Statements — Note B — Significant accounting policies”elsewhere herein.

 

**Inflation**

** **

**Although the level of inflation affects certain of theCompany’s costs and expenses, inflation did not have a significant effect onthe Company’s results of operations during fiscal 2009.**

** **

**Related Party Transactions**

** **

**A description of our related party transactions is includedin “Note F — Related party transactions” in the Notes to the FinancialStatements of the Company included elsewhere in this Report, and isincorporated herein by reference.**

 

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**Off-Balance SheetArrangements**

** **

**We do not currently use any off-balance sheet arrangementsto enhance our liquidity and capital resource positions, or for any otherpurpose.**

** **

**Item 7A. Quantitative andQualitative Disclosures About Market Risk.**

** **

**Commodity Price Risk**

** **

**We are subject to price fluctuations for natural gas andcrude oil. Prices received for natural gas sold on the spot market are volatiledue primarily to seasonality of demand and other factors beyond our control.Reductions in crude oil, natural gas and natural gas liquids prices could havea material adverse effect on our financial position, results of operations andquantities of reserves recoverable on an economic basis. Any reduction in reserves,including reductions due to price fluctuations, can adversely affect ourliquidity and our ability to obtain capital for our acquisition and developmentactivities. To date, we have not entered into futures contracts or otherhedging agreements to manage the commodity price risk for a portion of ourproduction.**

** **

**Interest Rate Risk**

** **

**As of June 30, 2009, we had $27,000,000 of long-termdebt outstanding under our Credit Facility and the Subordinated Note, each ofwhich matures in fiscal 2010 and bears interest at the prime rate plus 2.0%. Asa result, our interest costs fluctuate based on short-term interest rates.Based on the aforementioned borrowings outstanding at June 30, 2009, a 100basis point change in interest rates would change our annual interest expenseby approximately $270,000. We had no interest rate derivatives during fiscal2009.**

** **

**Item 8. FinancialStatements and Supplementary Data.**

** **

The Report ofIndependent Accountants, Financial Statements and any supplementary financialdata required by this Item are set forth on pages F-1 through F-36 of thisReport and are incorporated herein by reference.

 

**Item 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

** **

None.

 

**Item 9A. Controls andProcedures.**

** **

**Conclusion Regarding the Effectiveness of Disclosure Controlsand Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the period covered bythis report. Based on this evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective to provide reasonable assurance that informationrequired to be disclosed by us in reports we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosures.

 

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**Management’s Report on Internal Control Over FinancialReporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rules 13a —15(f) and 15d — 15(f) of the Securities Exchange Act of 1934, asamended. Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an assessment, including testing, of the effectiveness of ourinternal control over financial reporting as of June 30, 2009 based on thecriteria set forth in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Our system of internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Our internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Basedon our evaluation under the criteria set forth in *Internal Control—Integrated Framework*, our managementconcluded that our internal control over financial reporting was effective asof June 30, 2009. This Annual Report does not include an attestationreport of our independent registered public accounting firm regarding internalcontrol over financial reporting. We were not required to have, nor have weengaged our independent registered public accounting firm to perform, an auditon our internal control over financial reporting pursuant to the rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this Annual Report.

 

**Changes in Internal Control Over Financial Reporting**

 

Subsequent to ourevaluation, there were no changes in internal controls or other factors thatcould materially affect, or are reasonably likely to materially affect, theseinternal controls. We maintain a system of internal control over financialreporting. There were no changes in our internal control over financialreporting during the fourth quarter of fiscal 2009 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Inherent Limitations on Internal Control**

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected. These inherent limitationsinclude the realities that judgments in decision making can be faulty, and thatbreakdowns can occur because of simple errors. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The design of any systemof controls is also based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

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**Certifications**

 

Ourchief executive officer and chief financial officer have completed thecertifications required to be filed as an Exhibits to this Report (see Exhibits31.1 and 31.2) relating to the design of our disclosure controls and proceduresand the design of our internal control over financial reporting.

 

**Item 9B. Other Information.**

** **

None.

 

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**PART III**

 

**Item 10. Directors,Executive Officers and Corporate Governance.**

** **

**Directors and Executive Officers**

 

Thefollowing table provides information concerning each of our executive officersand directors as of September 3, 2009:

 
| ** **                      | ** ** | **Director** | ** ** | ** **                                                    | ** ** | ** ** |
|---------------------------------|------------|--------------|------------|---------------------------------------------------------------|------------|------------|
| **Name**                        | ** ** | **Age**      | ** ** | **Position(s) Held with Cubic**                          | ** ** | **Since**  |
|                            |       |         |       |                                                          |       |       |
| Calvin A.  Wallen, III     |       | 54           |       | Chairman of the Board,  President and Chief Executive Officer |       | 1997       |
|                            |       |         |       |                                                          |       |       |
| Larry G. Badgley                |       | 52           |       | Chief Financial Officer                                       |       | n/a        |
|                            |       |         |       |                                                          |       |       |
| Jon S. Ross                     |       | 45           |       | Corporate Secretary and  Director                             |       | 1998       |
|                            |       |         |       |                                                          |       |       |
| Gene C. Howard                  |       | 82           |       | Director                                                      |       | 1991       |
|                            |       |         |       |                                                          |       |       |
| Herbert A. Bayer                |       | 60           |       | Director                                                      |       | 2003       |
|                            |       |         |       |                                                          |       |       |
| Bob L. Clements                 |       | 66           |       | Director                                                      |       | 2004       |
|                            |       |         |       |                                                          |       |       |
| Phyllis K. Harding              |       | 63           |       | Director                                                      |       | 2009       |
|                            |       |         |       |                                                          |       |       |
| William L.  Bruggeman, Jr. |       | 82           |       | Director                                                      |       | 2009       |

 

CALVIN A.WALLEN, III has served as the President and Chief Executive Officer of theCompany since December 1997, and as Chairman of the Board of Directorssince June 1999. Mr. Wallen has over 20 years of experience in theoil and gas industry working as a drilling and petroleum engineer. Prior tojoining Cubic, Mr. Wallen was employed by Superior Oil and various otherdrilling contractors including Resource, Tom Brown and Rowan International. Mr. Wallenassisted in the design and construction of several land rigs with advanceddrilling systems and has domestic and international experience in drillingengineering. While employed by Rowan International, Mr. Wallen gainedexperience in drilling high angle directional wells at Prudhoe Bay on contractto Arco. In 1982, Mr. Wallen began acquiring and developing oil and gasproperties, forming a production company that has evolved into TaurenExploration, Inc. Mr. Wallen attended Texas A&M University atCollege Station, Texas.

 

LARRY G.BADGLEY joined the Company in August 2008, as a consultant, and wasappointed Chief Financial Officer in October 2008. Prior to joining theCompany, from October 2005 through September 2006, Mr. Badgleyserved as Managing Director of BridgePoint Consulting, a provider of CFOservices to venture capital-backed and early stage companies. In that capacity,Mr. Badgley was primarily responsible for strategic planning for growthcompanies. From July 1998 through October 2005, Mr. Badgleyserved as Director of Accounting and Finance for Jefferson Wells International,an international professional services firm. Prior to that time, Mr. Badgleyserved as Chief Operating Officer and Chief Financial Officer of a privatelyheld national sign manufacturer until its sale in July 1998. Mr. Badgleyreceived a BBA in Finance from Hardin-Simmons University and is a CertifiedPublic Accountant.

 

JON S. ROSS has served as a director of theCompany since April 1998 and as Secretary since November 1998. Since1989, Mr. Ross has been a practicing attorney in Dallas, Texasrepresenting over 80 business entities. He has served on several community andnot-for-profit committees and boards and has been asked to speak to corporateand civic leaders on a variety of corporate law topics. Mr. Ross graduatedfrom St. Mark’s School of Texas with honors in 1982 and graduated from theUniversity of Texas at Austin in 1986 with a 

 

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B.B.A. in Accounting. He then graduated from theUniversity of Texas School of Law in 1989 attaining a Juris Doctorate degree.

 

GENE C. HOWARD is the Senior Partner of the lawfirm of Howard, Widdows, and Bufogle, P.C. of Tulsa, Oklahoma and has beenengaged primarily in the private practice of law over the past thirty-fiveyears. Mr. Howard served in the Oklahoma State Senate from 1964 through1982 and was President Pro Tem from 1975 through 1981. In addition, he servedas the Chairman of the Board of Farmers and Exchange Bank from 1972 through1991 and on the Board of Directors of Local Federal Bank of Oklahoma. Mr. Howardis a Director of the Oklahoma State Education and Employment Group InsuranceBoard and presently acts as Chairman. Mr. Howard served as Director ofEntreCap Financial Corporation and Hinderliter Construction, Inc. from1991 to August of 1992.

 

HERBERTA. BAYER has served as a director of the Company since May 2003. From 2006to 2008, Mr. Bayer served as Global Director of Wi-Fi and MunicipalMarkets for SmartSynch, Inc., which provides GPRS and Wi-Fi Smart MeteringTechnology for Smart Grid Deployments for the electric utility industry. Priorto joining SmartSynch, Mr. Bayer served as Director of Client Services forCH2M HILL, an engineering, construction and operations company, from 2005 to2006, and National Director of Sales for Hexagram Inc. from 2003 to 2005.During his career, Mr. Bayer has worked with investor-owned utilities,government-run municipalities and electric cooperatives. His work experienceincludes work in Electronic Meter Reading, Automatic Meter Reading, LoadResearch, Internet Applications, and Wi-Fi Network Systems. Mr. Bayer’smajor course of study at Indiana State University was Business Management.

 

BOBL. CLEMENTS joined the Company’s board of directors in February 2004. Mr. Clementshas been in the wholesale food and restaurant business for over thirty years,currently controlling the largest independent producer of stuffed jalapenos andcorn dogs as well as two successful restaurants in the Rockwall, Texas area. Mr. Clementshas served and currently serves on a variety of not-for-profit and charitablecommittees and boards. Mr. Clements has a degree in the OPM Program fromthe Harvard Business School.

 

PHYLLISK. HARDING joined the Company’s board in April 2009. Ms Harding has workedas an executive advisor for Diversified Dynamics Corporation, a privately heldcorporation controlled by William L. Bruggeman, Jr., since 1990. From 2001through 2008 she served on the Board of Directors of Dayport, a leader in videopublishing, content, workflow and syndication solutions.  Dayport was acquired by EntriQ in 2008.  From 2001 to the present time she has servedon the Board of Advisors of Geospan Corporation and Geospan.com, privately heldindustry leaders in spatial imaging and visual mapping solutions.   She has worked with numerous corporations invarious industries as the head of the consulting division for Grant ThorntonLLP in Minneapolis from 1987 through 1988 and as a co-owner of CamelotConsultants, Inc. from 1989 through 1999. Ms. Harding has three decades of operational, manufacturing,turn-around and strategic leadership experience with various clients and directemployment at The Valspar Corporation (1986 through 1987) and Procter &Gamble (1975 through 1986). She is a graduate of the University of Wisconsin —Green Bay.

 

WILLIAML. BRUGGEMAN, JR. joined the Company’s board in April 2009. Mr. Bruggemanis the founder and controlling shareholder of Diversified Dynamics Corporation(founded in 1968) and its business divisions: Cat Pumps, a manufacturer of quality, industrial, positive displacement,triplex piston and plunger pumps and custom engineered pumping systems withover 40 years of experience in industrial high pressure systems; and HomeRight,a manufacturer of home improvement products. He is an entrepreneur and “angel investor” who has been involved in manysuccessful start up businesses.  He hasbeen a significant investor in the oil and gas industries since the early1990s.  He continues to be a majorshareholder of Cubic Energy, Inc. Mr. Bruggeman’s former employersinclude McCullough Corporation, John Deere, L & A Products, andMinneapolis Moline.  Mr. Bruggemanis a veteran who served thirty months in the U.S. Navy and one year in the U.S.Marine Corp. Mr. Bruggeman graduated from Hamline University with a degreein Engineering.

 

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There are no family relationships among anyof the directors or executive officers of the Company. See “CertainRelationships and Related Transactions” for a description of transactionsbetween the Company and its directors, executive officers or their affiliates.

 

**Audit Committee; Financial Expert**

 

The Audit Committee is comprised of Messrs. Howard(Chairman), Clements and Bayer. All of the members of the Audit Committee are “independent”under the rules of the SEC and the NYSE-Amex, LLC. The Board of Directors,after reviewing all of the relevant facts, circumstances and attributes, hasdetermined that Mr. Howard is the sole “audit committee financial expert”on the Audit Committee.

 

## **Compliancewith Section 16(a) of the Exchange Act**

##  

Section 16(a) of the Exchange Act requiresthe Company’s directors, executive officers, and holders of more than 10% ofthe common stock to file with the SEC reports of ownership and changes inownership of common stock. SEC regulations require those directors, executiveofficers, and greater than 10% shareholders to furnish the Company with copiesof all Section 16(a) forms they file. Based on the Company’s reviewof reports, the Company believes that the directors, executive officers, andgreater than 10% shareholders complied with all applicable Section 16(a) filingrequirements during fiscal 2009.

 

**Code of Ethics**

 

TheCompany has adopted a Code of Ethics that applies to its directors, officersand employees. The Company will provide a copy of its Code of Ethics, withoutcharge, to any stockholder who makes such request in writing to the Company,attention:  Secretary.

 

**Item 11. ExecutiveCompensation.**

** **

**CompensationDiscussion and Analysis**

 

***General*****.**Our Board ofDirectors has established a Compensation Committee, comprised entirely ofindependent non-employee directors, with authority to set all forms ofcompensation of our executive officers. Messrs. Bayer, Clements and Howardcomprised the Compensation Committee in fiscal 2009, with Mr. Howardserving as its Chairman. The Compensation Committee has overall responsibilityfor our executive compensation policies as provided in a written charteradopted by the Board of Directors. The Compensation Committee is empowered toreview and approve the annual compensation and compensation procedures for ourexecutives: the President and Chief Executive Officer, the Chief FinancialOfficer, and the Secretary. The Compensation Committee does not delegate any ofits functions to others in setting compensation.

 

When establishing basesalaries, cash bonuses and equity grants for each of the executives, theCompensation Committee considers the recommendations of the President and ChiefExecutive Officer and the Secretary, the executive’s role and contribution tothe management team, responsibilities and performance during the past year andfuture anticipated contributions, corporate performance, and the amount oftotal compensation paid to executives in similar positions, and performingsimilar functions, at other companies for which data was available, as providedby third party compensation studies. One such study, published in September 2009by Salary.com was a blind survey of over 1,000 companies located in the Dallasmetropolitan area in the “Energy & Utilities” industry with less than25 full-time equivalent employees. Another study, published in December 2004,included data from a survey of the following comparable companies: ArenaResources, Inc., ATP Oil & Gas, Berry Petroleum Company, CanadianSuperior Energy, Edge Petroleum, Goodrich Petroleum, Infinity Inc., PetroleumDevelopment Corp., The Meridian Resources Corp., and The Exploration Company.

 

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The Compensation Committeerelies upon its judgment in making compensation decisions, after reviewing theCompany’s performance and evaluating each executive’s performance during theyear. The Committee generally does not adhere to formulas or necessarily reactto short-term changes in business performance in determining the amount and mixof compensation elements. We incorporate flexibility into our compensationprograms and in the assessment process to respond to and adjust for theevolving business environment.

 

***Compensation Philosophy*****.**TheCompensation Committee’s compensation philosophy is to reward executiveofficers for the achievement of short and long-term corporate objectives andfor individual performance. The objective of this philosophy is to provide abalance between short-term goals and long-term priorities to achieve immediateobjectives while also focusing on increasing shareholder value over the longterm. Also, to ensure that we are strategically and competitively positionedfor the future, the Compensation Committee has the discretion to attributesignificant weight to other factors in determining executive compensation, suchas maintaining competitiveness, pursuing growth opportunities and achievingother long-range business and operating objectives. The level of compensationshould also allow us to attract, motivate, and retain talented executiveofficers that contribute to our long-term success. The compensation of ourPresident and Chief Executive Officer and other executive officers is comprisedof cash compensation and long-term incentive compensation in the form of basesalary, discretionary bonuses and unregistered stock awards.

 

***Elements of Our Compensation Program and Why We Pay Each Element.***For fiscal2009, our total compensation for executive officers consisted of base salary,bonuses and long-term incentives in the form of common stock awards. In settingfiscal 2009 compensation, the Compensation Committee considered the specificfactors discussed below:

 

*BaseSalary.*In setting the executive officers’ base salaries,the Compensation Committee considers the achievement of corporate objectives aswell as individual performance. Because the Compensation Committee believesthat executive compensation should be viewed in terms of a balanced combinationof cash compensation (i.e., base salaries and bonuses) and long-term incentive(i.e., grants of unregistered stock), base salaries are targeted to approximatethe low end of the range of base salaries paid to executives of similarcompanies for each position. To ensure that each executive is paidappropriately, the Compensation Committee considers the executive’s level ofresponsibility, prior experience, overall knowledge, contribution to businessresults, existing equity holdings, executive pay for similar positions in othercompanies, and executive pay within our company.

 

Basesalaries for our named executive officers in fiscal 2009 were as follows:

 
| ** **                  | ** ** | **Base Salary**     | ** ** |
|-----------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **for**             | ** ** |
| **Name**                    | ** ** | **Fiscal 2009 (1)** | ** ** |
| Calvin  A. Wallen, III |       | $                   | 200,000    |   |
|                        |       |                |       |
| Jon  S. Ross                |       | $                   | 150,000    |   |
|                        |       |                |       |
| Larry  G. Badgley           |       | $                   | 145,000    |   |

 

----

(1)                                  There were no increases in executive officers basesalaries during fiscal 2009

 

*Discretionary Bonuses.*Executive bonuses areintended to link executive compensation with the attainment of Company goals.The actual payment of bonuses is primarily dependent upon the extent to whichthese Company-wide objectives are achieved. Determination of executive bonusamounts is not made in accordance with a strict formula, but rather is based onobjective data combined with competitive ranges and 

 

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internalpolicies and practices, including an overall review of both individual andcorporate performance. For fiscal year 2009, bonuses to executives wereprimarily based upon the achievement of certain business objectives includingprogress in meeting our expected drilling and completion schedule, andobtaining additional financing. The President and Chief Executive Officer hasthe discretion to recommend to the Compensation Committee to increase ordecrease bonuses for all other executive officers, but any bonus amounts mustbe approved by the Compensation Committee.

 

*Long-Term Incentives**.*On December 29, 2005, the shareholders ofthe Company approved the 2005 Stock Option Plan (the “Plan”) under which our executiveofficers may be, among other forms of compensation, compensated through grantsof unregistered shares of our common stock and/or grants of options to purchaseshares of common stock. The Compensation Committee approves Plan grants that provideadditional incentives and align the executives’ long-term interests with thoseof the shareholders of the Company by tying executive compensation to thelong-term performance of the Company’s stock price. Annual equity grants forour executives are typically approved in January.

 

The Compensation Committeerecommends equity to be granted to an executive with respect to shares ofcommon stock based on the following principal elements including, but notlimited to:

 

·                  President and Chief Executive Officer’s andSecretary’s recommendations;

 

·                  Management role and contribution to themanagement team;

 

·                  Job responsibilities and past performance;

 

·                  Future anticipated contributions;

 

·                  Corporate performance; and

 

·                  Existing equity holdings.

 

Determination of equitygrant amounts is not made in accordance with a formula, but rather is based onobjective data combined with competitive ranges, past internal policies andpractices and an overall review of both individual and corporate performance.Equity grants may also be made to new executives upon commencement ofemployment and, on occasion, to executives in connection with a significantchange in job responsibility. The Compensation Committee believes annual equitygrants more closely align the long-term interests of executives with those ofshareholders and assist in the retention of key executives. As such, thesegrants comprise the Company’s principal long-term incentive to executives.

 

**OtherCompensation Policies Affecting the Executive Officers**

 

*Compliancewith Section 162(m) of the Internal Revenue Code*. Section 162(m) disallowsa federal income tax deduction to publicly held companies for certaincompensation paid to our Named Executive Officers to the extent thatcompensation exceeds $1 million per executive officer covered by Section 162(m) inany fiscal year. The limitation applies only to compensation that is notconsidered “performance based” as defined in the Section 162(m) rules.In designing our compensation programs, the Compensation Committee considersthe effect of Section 162(m) together with other factors relevant toour business needs. We have historically taken, and intend to continue taking,appropriate actions, to the extent we believe desirable, to preserve thedeductibility of annual incentive and long-term performance awards. However,the Compensation Committee has not adopted a policy that all compensation paidmust be tax-deductible and qualified under Section 162(m). We believe thatthe fiscal 2009 base salary, annual bonus and stock grants paid to theindividual executive officers covered by Section 162(m) will notexceed the Section 162(m) limit and will be fully deductible under Section 162(m).

 

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*StockOwnership Requirements.* The Compensation Committee does not maintaina policy relating to stock ownership guidelines or requirements for ourexecutive officers because the Compensation Committee does not feel that it isnecessary to impose such a policy on our executive officers. If circumstanceschange, the Compensation Committee will review whether such a policy isappropriate for executive officers.

 

*EmploymentAgreements.*On February 29, 2008, the Company entered intoemployment agreements with its President and Chief Executive Officer, Calvin A.Wallen, III, and Secretary, Jon S. Ross. The agreement with Mr. Wallenprovides for a base salary of $200,000 per year, while the agreement with Mr. Rossprovides for a base salary of $150,000 per year. The other terms and conditionsof the agreements are substantially consistent.

 

Both agreements provide fora term of employment of 36 months from the effective date of February 1,2008, which term shall be automatically extended by one additional month uponthe expiration of each month during the term; provided, that the Company mayterminate subsequent one-month extensions at any time. Each agreement issubject to early termination by the Company in the event that the employeedies, becomes totally disabled or commits an act constituting “Just Cause”under the agreement. The agreements provide that Just Cause includes, amongother things, the conviction of certain crimes, habitual neglect of his dutiesto the Company or other material breaches by the employee of the agreement.Each agreement also provides that the employee shall be permitted to terminatehis employment upon the occurrence of “Good Reason,” as defined in theagreement. The agreements provide that Good Reason includes, among otherthings, a material diminution in the employee’s authority, duties,responsibilities or salary, or the relocation of the Company’s principaloffices by more than 50 miles. If the employee’s employment is terminated by (a) theCompany other than due to the employee’s death, disability or Just Cause, or (b) theemployee for Good Reason, then the Company is required to pay all remainingsalary through the end of the then-current term. The foregoing severancepayment is subject to reduction under certain conditions.

 

Thefollowing table sets forth the estimated amounts that would be payable to eachof the named executives upon a termination under the scenarios outlined above,excluding termination for Just Cause or on account of death or disability,assuming that such termination occurred on June 30, 2009. There can be noassurance that these scenarios would produce the same or similar results asthose disclosed if a termination occurs in the future.

 
| ** **                              | ** ** | **Severance**   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-----------------|------------|------------|------------|
| **Without Just Cause/For Good  Reason** | ** ** | **Payment (1)** | ** ** | **Total**  | ** ** |
|                                    |       |            |       |       |       |
| Calvin  A. Wallen, III             |       | $               | 600,000    |       | $          | 600,000 |   |
|                                    |       |            |       |       |       |
| Jon  S. Ross                            |       | $               | 450,000    |       | $          | 450,000 |   |

 

----

(1)          Represents 36 months of base salary.

 

**ChiefExecutive Officer Compensation**

 

Mr. Wallen received $200,000in base salary for fiscal 2009. His annual base salary was not increased forfiscal year 2009. Mr. Wallen received no common stock awards during fiscal2009.

 

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**ChiefFinancial Officer Compensation**

 

Mr. Badgley’s salaryhas been established at $145,000 per year, plus a $300 per month healthinsurance subsidy. In the event that Mr. Badgley is terminated without cause,as determined by the Board of Directors of the Company, he will be entitled tothree months salary. The Company and Mr. Badgley did not enter into awritten employment agreement.

 

**Summary Compensation Table**

 

The following table shows information regardingthe compensation earned during the fiscal years ended June 30, 2009, 2008and 2007 by our Chief Executive Officer, our current Chief Financial Officer,our former Chief Financial Officer and our other most highly compensatedexecutive officer who was employed by us as of June 30, 2009 and whosetotal compensation exceeded $100,000 during the most recent fiscal year (the “NamedExecutive Officers”):

 
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **           | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|----------------------|------------|------------|------------|
| **Name and**                           | ** ** | **Fiscal** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**      | ** ** | **All Other**        | ** ** | ** ** | ** ** |
| **Principal Position**                 | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards (1)** | ** ** | **Compensation (2)** | ** ** | **Total**  | ** ** |
| Calvin  A. Wallen, III            |       | 2009       |       | $          | 200,000    |       | $          | —         |       | $                    | —     |       | $          | 3,600 |   | $ | 203,600 |   |
| Chairman  of the Board,                |       | 2008       |       | $          | 170,833    |       | $          | —         |       | $                    | 241,500    |       | $          | 3,600 |   | $ | 415,933 |   |
| President  and Chief Executive Officer |       | 2007       |       | $          | 150,000    |       | $          | —         |       | $                    | 120,000    |       | $          | 3,600 |   | $ | 273,600 |   |
|                                   |       |       |       |       |       |       |       |           |       |                 |       |       |       |
| Larry  G. Badgley (3)                  |       | 2009       |       | $          | 103,293    |       | $          | 750            |       | $                    | —     |       | $          | 2,700 |   | $ | 106,743 |   |
| Chief  Financial Officer               |       | 2008       |       | $          | —     |       | $          | —         |       | $                    | —     |       | $          | — |   | $ | — |   |
|                                   |       | 2007       |       | $          | —     |       | $          | —         |       | $                    | —     |       | $          | — |   | $ | — |   |
|                                   |       |       |       |       |       |       |       |           |       |                 |       |       |       |
| Jon  S. Ross                           |       | 2009       |       | $          | 150,000    |       | $          | 2,625          |       | $                    | —     |       | $          | 3,600 |   | $ | 156,225 |   |
| Secretary  and Director                |       | 2008       |       | $          | 120,833    |       | $          | 2,000          |       | $                    | 161,000    |       | $          | 3,600 |   | $ | 287,433 |   |
|                                   |       | 2007       |       | $          | 60,000     |       | $          | 23,000         |       | $                    | 38,000     |       | $          | 3,600 |   | $ | 124,600 |   |
|                                   |       |       |       |       |       |       |       |           |       |                 |       |       |       |
| Scott  D. Guffey (4)                   |       | 2009       |       | $          | 33,750     |       | $          | —         |       | $                    | 12,440     |       | $          | 900 |   | $ | 47,090 |   |
| Former  Chief Financial Officer        |       | 2008       |       | $          | 116,492    |       | $          | 1,000          |       | $                    | 103,500    |       | $          | 3,300 |   | $ | 224,292 |   |
|                                   |       | 2007       |       | $          | —     |       | $          | —         |       | $                    | —     |       | $          | — |   | $ | — |   |

 

----

| (1) |   | This column represents the dollar amount recognized for financial  statement reporting purposes with respect to the 2009 and 2008 fiscal years  for the fair value of stock grants for each of the named executive officers  in accordance with SFAS No. 123R. On January 31, 2008 we granted  our Named Executive Officers a total of 250,000 unregistered shares of common  stock as follows: Mr. Wallen, 150,000 shares; and Mr. Ross, 100,000  shares. These shares vested immediately on the grant date. On August 20,  2007, Mr. Guffey was granted 90,000 unregistered shares of common stock,  which vested on a quarterly schedule. On January 10, 2007 we granted our  Named Executive Officers a total of 272,500 unregistered shares of common  stock as follows: Mr. Wallen, 150,000 shares; and Mr. Ross, 47,500  shares. These shares vested immediately on the grant date. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | All Other Compensation consists solely of a $300 per month  reimbursement towards each officer’s medical insurance premiums. The Company  does not provide group health insurance coverage to its employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3) |   | Mr. Badgley was appointed Cubic’s Chief Financial Officer  effective October 13, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4) |   | Mr. Guffey resigned  as Cubic’s Chief Financial Officer effective October 3, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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**Fiscal2009 Grants of Plan-Based Awards**

 

No stock options were granted to executive officers last year and thusany reference to options has been omitted.

 

**Stock Grants**

 

On January 10 and January 18, 2007,the Company issued 489,500 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$391,600 and $42,000, respectively, based on the last sale price on the OTCBulletin Board of the Company’s common stock. Such amounts were amortized tocompensation expense on a quarterly basis during calendar year 2007. Anadditional $30,000 was recorded when our former Chief Financial Officerresigned during fiscal 2007. Accordingly, $186,800 and $246,800 was recorded ascompensation expense and included in general and administrative expense for thefiscal years ended June 30, 2008 and 2007, respectively. The NamedExecutive Officers received the following grants: (i) 150,000 unregisteredshares to Calvin A. Wallen, III and (ii) 47,500 unregistered sharesto Jon S. Ross.

 

On August 20, 2007, the Company issued90,000 unregistered shares to our former Chief Financial Officer pursuant tothe Plan, with such grant subject to vesting in quarterly installments over thefollowing four quarters. As of such date, the aggregate market value of thecommon stock granted was $103,500 based on the then market price on the OTCBBof the Company’s common stock. Such amount was amortized to compensationexpense on a quarterly basis during fiscal years 2008 and 2009. Accordingly,$90,563 was recorded as compensation expense and included in general andadministrative expenses for fiscal 2008. The remaining $12,937 was amortized tocompensation expense in the first quarter of fiscal 2009, which ended September 30,2008.

 

On January 31 and February 4, 2008,the Company issued 555,000 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$893,550 and $84,525 (a total of $978,075), respectively, based on thethen-market price on the OTCBB of the Company’s common stock. Recent SECguidance requires that immediately-vesting common stock grants with noforfeiture provisions be expensed at the time of grant rather than amortizedover the four quarters of the service period. Accordingly, the full $978,075was recorded as compensation expense and included in general and administrativeexpenses for the fiscal year ended June 30, 2008. The Named ExecutiveOfficers received the following grants: (i) 150,000 unregistered shares toCalvin A. Wallen, III, (ii) zero unregistered shares to Scott D.Guffey, and (iii) 100,000 unregistered shares to Jon S. Ross.

 

On January 12, 2009, the Company issued235,000 unregistered shares to three directors of the Company pursuant to thePlan.  As of such dates, the aggregatemarket value of the common stock granted was $385,400 based on the last sale price($1.64/share) on the aforementioned date, on the NYSE — Amex, of the Company’scommon stock. Such amounts were expensed upon issuance to compensation expense.

 

On January 28, 2009, the Company authorizedthe issuance of 250,000 and 122,500 unregistered shares, respectively, to theofficers and key employees of the Company pursuant to the Plan, which sharesare subject to forfeiture in the event that such recipient’s service with theCompany terminates prior to a specified date. These shares are authorized, butnot issued as of September 25, 2009.

 

**Outstanding Equity Awards atFiscal Year-End**

 

The Company had no outstanding stock options at June 30, 2009. TheCompany had no unvested stock awards at the end of fiscal 2009.

 

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**Option Exercises and StockVesting**

 

No stock options were granted to executive officers during fiscal 2009and thus any reference to options has been omitted.

 

**Information Related to Stock-Based Compensation**

 

The Company accounts for its stock-based employeecompensation plans pursuant to FAS No. 123R, *Share-BasedPayment*, which is a revision of FAS No. 123, *Accounting for Stock-Based Compensation,*and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees (“APB No. 25”)*. This Statement requires the Company torecognize compensation costs related to stock-based payment transactions (i.e.,the granting of stock options and warrants, and awards of unregistered sharesof common stock) in the financial statements. With limited exceptions, theamount of compensation cost is measured based on the grant-date fair value ofthe equity issued. Compensation cost is recognized over the period that anemployee provides services in exchange for the award. This new standard becameeffective for awards that are granted, modified or settled in cash in interimand annual financial periods beginning after June 30, 2006. See “StockGrants”.

 

**Non-Employee DirectorCompensation for Fiscal 2009**

** **
| ** **                      | ** ** | **Fees Earned** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                      | ** ** | **or Paid in**  | ** ** | **Stock**      | ** ** | ** ** | ** ** |
| **Name**                        | ** ** | **Cash (1)**    | ** ** | **Awards (2)** | ** ** | **Total**  | ** ** |
|                            |       |            |       |           |       |       |       |
| Gene  C. Howard                 |       | $               | 8,000      |           | $          | 139,400    |       | $ | 147,400 |   |
|                            |       |            |       |           |       |       |       |
| Herbert  A. Bayer               |       | $               | 8,000      |           | $          | 123,000    |       | $ | 131,000 |   |
|                            |       |            |       |           |       |       |       |
| Bob  L. Clements                |       | $               | 8,000      |           | $          | 123,000    |       | $ | 131,000 |   |
|                            |       |            |       |           |       |       |       |
| Phyllis  K. Harding             |       | $               | 2,000      |           | $          | —     |       | $ | 2,000 |   |
|                            |       |            |       |           |       |       |       |
| William  L. Bruggeman, Jr. |       | $               | 2,000      |           | $          | —     |       | $ | 2,000 |   |

** **

----

| (1) |   | Represents the amount  of cash compensation earned in fiscal 2009 for Board and Committee service.  Each non-employee director was paid a stipend of $1,000 for each Board of  Directors or Committee meeting attended (whether in person or via  teleconference) beginning with the January 7, 2009 Board meeting, with  various meetings occurring on the same date being provided one stipend.                               |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Each non-employee director as of January 2009  received: 40,000 shares of common stock for service on the Board of  Directors; 20,000 shares of common stock for service on the Audit Committee;  and, 15,000 shares of common stock for service on the Compensation Committee.  Mr. Howard received an additional 10,000 shares of common stock for  serving as the financial expert and Chairman of the Audit Committee. |

 

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**Item 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

** **

Thefollowing table sets forth the number of shares of the Company’s common stockbeneficially owned, as of September 1, 2009 by (i) each person knownto the Company to beneficially own more than 5% of the common stock of theCompany (the only class of voting securities now outstanding), (ii) eachDirector and Named Executive Officer, and (iii)   all directors and executive officers as agroup. Unless otherwise indicated, we consider all shares of common stock thatcan be issued under convertible securities or warrants currently or within 60days of September 1, 2009 to be outstanding for the purpose of computingthe percentage ownership of the person holding those securities, but do notconsider those securities to be outstanding for computing the percentageownership of any other person. Each owner’s percentage is calculated bydividing the number of shares beneficially held by that owner by the sum of62,570,564 and the number of shares that owner has the right to acquire within60 days.

 
| ** **                                         | ** ** | ** **    | ** ** | **Approximate**    | ** ** |
|----------------------------------------------------|------------|---------------|------------|--------------------|------------|
| ** **                                         | ** ** | **Number**    | ** ** | **Percent of**     | ** ** |
| **Name and Address**                               | ** ** | **of Shares** | ** ** | **Class (1)** | ** ** |
| **5% Stockholders**                                |       |          |       |               |       |
|                                               |       |          |       |               |       |
| Wells  Fargo Energy Capital, Inc.             |       |          |       |               |       |
| 1000  Louisiana 9th Floor, Houston, TX 77002       |       | 7,500,000     | (2)        | 10.7               | %          |
|                                               |       |          |       |               |       |
| Steven  S. Bruggeman                               |       |          |       |               |       |
| 5609  St. Albans Circle, Shoreview, MN 55126       |       | 4,195,705     | (3)        | 6.6                | %          |
|                                               |       |          |       |               |       |
| George  Karfunkel                                  |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | 3,375,000     |       | 5.4                | %          |
|                                               |       |          |       |               |       |
| **Named Executive Officers and Directors**         |       |          |       |               |       |
| ** **                                         |       |          |       |               |       |
| Calvin  A. Wallen, III                        |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | 10,660,574    | (4)        | 17.0               | %          |
|                                               |       |          |       |               |       |
| William  L. Bruggeman, Jr.                    |       |          |       |               |       |
| 20  Anemone Circle, North Oaks, MN 55127           |       | 18,109,535    | (5)        | 28.7               | %          |
|                                               |       |          |       |               |       |
| Bob  L. Clements                                   |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | 892,527       | (6)        | 1.4                | %          |
|                                               |       |          |       |               |       |
| Gene  C. Howard                                    |       |          |       |               |       |
| 2402  East 29th St., Tulsa, OK 74114               |       | 715,180       | (7)        | 1.1                | %          |
|                                               |       |          |       |               |       |
| Jon  S. Ross                                       |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | 433,000       | (8)        | *                  |       |
|                                               |       |          |       |               |       |
| Herbert  A. Bayer                                  |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | 425,287       | (9)        | *                  |       |
|                                               |       |          |       |               |       |
| Phyllis  K. Harding                                |       |          |       |               |       |
| 1681  94th Lane N.E., Minneapolis, MN 55449        |       | 816,463       |       | 1.3                | %          |
|                                               |       |          |       |               |       |
| Larry  G. Badgley                                  |       |          |       |               |       |
| 9870  Plano Road, Dallas, TX 75238                 |       | —        |       | *                  |       |
|                                               |       |          |       |               |       |
| All  officers and directors as a group (8 persons) |       | 32,052,566    |       | 50.7               | %          |

 

----

* Denotes less than onepercent

 

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| (1) |   | Based on a total of  62,570,564 shares of Common Stock issued and outstanding on September 1,  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes warrants to  purchase 2,500,000 shares and a promissory note convertible into 5,000,000  shares owned by Wells Fargo Energy Capital.                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3) |   | Includes 901,955 shares  held jointly by Steven S. Bruggeman and Jacqueline Bruggeman as joint tenants  with rights of survivorship; 65,250 shares held by Mr. Bruggeman’s  spouse, of which Mr. Bruggeman disclaims beneficial ownership and,  2,228,500 shares and warrants to purchase 1,000,000 shares individually held  by Steven S. Bruggeman.                                                                                                                                                                             |
| (4) |   | Includes 614,862 shares  and warrants to purchase 50,000 shares held by Tauren Exploration, Inc.,  an entity controlled by Mr. Wallen; 500,000 shares held by spouse; and,  430,000 shares held by minor children.                                                                                                                                                                                                                                                                                                                     |
| (5) |   | Includes 4138 shares  conveyed to Diversified Dynamics from Mr. Wallen as part of an interest  payment. 2,034,000 shares and warrants to purchase 600,000 shares held by  Diversified Dynamics Corporation, a company controlled by Mr. Bruggeman;  304,000 shares owned by Mr. Bruggeman: 120,000 shares owned by Consumer  Products Corp., in which Mr. Bruggeman’s spouse, Ruth, is a joint owner;  and, 15,047,397 shares owned by Mr. and Mrs. Bruggeman, as joint  tenants with rights of survivorship. |
| (6) |   | Includes 109,527 shares  held with spouse as joint tenants with rights of survivorship; and, warrants  to purchase 50,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                |
| (7) |   | Includes 322,245 shares  are held by Mr. Howard’s spouse, Belva, of which Mr. Howard  disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                             |
| (8) |   | Includes 6,000 shares  held by minor children.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (9) |   | Includes 390,287 shares  held with spouse as joint tenants with rights of survivorship.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

**Item 13. Certain Relationships and Related Transactions, andDirector Independence.**

 

**CertainRelationships and Related Transactions**

 

OnMay 6, 2008, the Company issued a subordinated promissory note in theamount of $2,000,000 to Diversified Dynamics Corporation, an entity controlledby William L. Bruggeman, Jr. who, at the time of such transaction, was thebeneficial owner of approximately 28.9% of the common stock of the Company. TheSubordinated Note bears interest at a fluctuating rate equal to the sum of theprime rate plus two percent (2%) per annum, and matures on April 30, 2010.The Company is paying interest on the note on a monthly basis.

 

In addition, all but eightwells in which the Company owns a working interest are operated by anaffiliated company, Fossil Operating, Inc. (“Fossil”), an entitywholly-owned by the Company’s President, Chief Executive Officer and Chairmanof the Board, Calvin A. Wallen III.  Inconsideration for Fossil serving as operator and to satisfy the Company’sworking interest obligations related to drilling costs and lease operatingexpenses, Cubic paid to Fossil an aggregate of $4,244,397, $14,288,122 and$4,120,012 during fiscal 2009, 2008 and 2007, respectively; and Fossil paidCubic an aggregate of $151,680, $310,407 and $384,659 during fiscal 2009, 2008and 2007, respectively for oil and gas sales. As of June 30, 2009, 2008and 2007, the Company owed Fossil $815,239, $862,895 and $1,659,786,respectively, for drilling costs and lease operating expenses, and was owed byFossil $271,615, $450,669 and $28,446, respectively, for oil and gassales.  The Company and Fossil haveoperating agreements with respect to all wells for which Fossil serves asoperator.

 

Itis the Company’s policy that any transactions between us and related partieswill be on terms no less favorable than could be obtained from unaffiliatedthird parties and will be approved by a majority of the disinterested membersof our Board of Directors.

 

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**DirectorIndependence**

 

Messrs. Howard,Clements, Bayer and Bruggeman and Ms. Harding meet the independencestandards for independent directors under the rules of the SEC and the rules ofthe NYSE Amex, LLC. Messrs. Howard, Clements and Bayer also meet theindependence standards for independent directors applicable to serving on theAudit Committee, under the rules of the SEC and the rules of the NYSEAmex, LLC.

 

**Item 14. PrincipalAccountant Fees and Services.**

** **
| ** **          | ** ** | **July 1, 2008 -** | ** ** | **July 1, 2007 -** | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **June 30, 2009**  | ** ** | **June 30, 2008**  | ** ** |
| Audit  fees         |       | $                       | 35,500     |                    | $          | 27,000 |   |
| Audit-related  fees |       | 12,300                  |       | 10,100                  |       |
| Tax  fees           |       | 5,000                   |       | 4,180                   |       |
| All  other fees     |       | 2,280                   |       | 3,400                   |       |
| Total               |       | $                       | 55,080     |                    | $          | 44,680 |   |

** **

**Audit Fees**

 

Aggregate audit fees billedfor professional services rendered by Philip Vogel & Co., PC were$35,500 for the year ended June 30, 2009 and $27,000 for the year ended June 30,2008. Such fees were primarily for professional services rendered for theaudits of our consolidated financial statements during the fiscal years ended June 30,2009 and 2008.

 

**Audit-Related Fees**

 

Aggregate audit-related feesbilled for professional services rendered by Philip Vogel & Co., PCwere $12,300 for the year ended June 30, 2009 and $10,100 for the yearended June 30, 2008. Such fees were for limited reviews of our unauditedcondensed consolidated interim financial statements.

 

**Tax Fees**

 

Aggregate income taxcompliance and related services fees billed for professional services renderedby Philip Vogel & Co., PC were $5,000 for the year ended June 30,2009 and $4,180 for the year ended June 30, 2008.

 

**All Other Fees**

 

In addition to the feesdescribed above, aggregate fees of: $2,280 were billed by Philip Vogel &Co., PC during the year ended June 30, 2009, primarily for review of our Form S-3registration statements and related amendments, attendance at our annualshareholders’ meeting; and $3,400 were billed by Philip Vogel & Co.,PC during the year ended June 30, 2008, primarily for review of our Form SB-2registration statements and related amendments, and attendance at our annualshareholders’ meeting, and for research regarding our compliance with Section 404of the Sarbanes-Oxley Act of 2002.

 

**Audit Committee Pre-Approval Policies and Procedures**

 

In accordance with Companypolicy, any additional audit or non-audit services must be approved in advance.All of the foregoing professional services provided by Philip Vogel &Co., PC during the years ended June 30, 2009 and June 30, 2008 werepre-approved in accordance with the policies of our Audit Committee.

 

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**SIGNATURES**

** **

Pursuant to requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, on September 28,2009.

 
|   | CUBIC ENERGY, INC. |
|--------|--------------------|
|   |               |   |
|   |               |   |
|   | By:                | /s/  Calvin A. Wallen, III |
|   |               | Calvin A. Wallen, III |
|   |               | President and Chief |
|   |               | Executive  Officer |
|   |               |   |
|   |               |   |
|   | By:                | /s/  Larry G. Badgley |
|   |               | Larry  G. Badgley |
|   |               | Chief Financial Officer |

 

Pursuant to requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**                      | ** ** | **Title**                                    | ** ** | **Date**                |
|------------------------------------|------------|----------------------------------------------|------------|-------------------------|
|                               |       |                                         |       |                    |
| /s/ Calvin A. Wallen, III     |       | Chairman, President and Chief Executive      |       | September 28, 2009 |
| Calvin A. Wallen, III         |       | Officer (principal executive officer)        |       |                    |
|                               |       |                                         |       |                    |
| /s/ Larry G. Badgley               |       | Chief Financial Officer                      |       | September 28, 2009 |
| Larry G. Badgley                   |       | (principal financial and accounting officer) |       |                    |
|                               |       |                                         |       |                    |
| /s/ Jon S. Ross                    |       | Secretary and Director                       |       | September 28, 2009 |
| Jon S. Ross                        |       |                                         |       |                    |
|                               |       |                                         |       |                    |
| /s/ Gene C. Howard                 |       | Director                                     |       | September 28, 2009 |
| Gene C. Howard                     |       |                                         |       |                    |
|                               |       |                                         |       |                    |
| /s/ Herbert A. Bayer               |       | Director                                     |       | September 28, 2009 |
| Herbert A. Bayer                   |       |                                         |       |                    |
|                               |       |                                         |       |                    |
| /s/ Robert L. Clements             |       | Director                                     |       | September 28, 2009 |
| Robert L. Clements                 |       |                                         |       |                    |
|                               |       |                                         |       |                    |
| /s/ Phyllis K. Harding             |       | Director                                     |       | September 28, 2009 |
| Phyllis K. Harding                 |       |                                         |       |                    |
|                               |       |                                         |       |                    |
| /s/ William L. Bruggeman, Jr. |       | Director                                     |       | September 28, 2009 |
| William L. Bruggeman, Jr.     |       |                                         |       |                    |

 

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**PART IV**

 

**Item 15. Exhibits andFinancial Statement Schedules.**

** **

**(a) (1) and(2) Financial Statements and Financial Statement Schedules**

 

See“Index to Financial Statements” on page F-1.

 

**(a) (3) Exhibits**

 

Seethe Exhibit Index immediately preceding the Exhibits filed with thisreport.

 

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

**INDEX TO FINANCIAL STATEMENTS**

 

**JUNE 30, 2009**

 
| ** **                                                  | **Page** |
|-------------------------------------------------------------|----------|
|                                                        |     |
| Independent Auditors’  Report                          | F-2      |
|                                                        |     |
| Financial  Statements:                                      |     |
|                                                        |     |
| Balance Sheets                                              | F-3      |
|                                                        |     |
| Statements of  Operations                                   | F-4      |
|                                                        |     |
| Statements  of Changes in Shareholders’ Equity         | F-5      |
|                                                        |     |
| Statements of  Cash Flows                                   | F-6      |
|                                                        |     |
| Notes to Financial Statements                               | F-7      |
| Note A – Background and general                        | F-7      |
| Note B – Significant accounting policies               | F-7      |
| Note  C – Shareholders’ equity                    | F-19     |
| Note  D – Loss per common share                        | F-22     |
| Note  E – Long-term debt                               | F-23     |
| Note F – Related party transactions                    | F-25     |
| Note G – Income taxes                                  | F-27     |
| Note H – Commitments and contingencies                 | F-29     |
| Note I – Cost of oil and gas properties                | F-30     |
| Note J – Oil and gas reserves information (unaudited)  | F-31     |
| Note K – Selected quarterly financial data (unaudited) | F-35     |
| Note  L – Subsequent events                            | F-35     |
| Note  M – Going Concern                                | F-36     |

 

F-1

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Tableof Contents

 

**INDEPENDENTAUDITORS’ REPORT**

 

**To the Board of Directors and Stockholders of Cubic Energy, Inc.,**

 

We have audited the balance sheets of Cubic Energy, Inc., a Texascorporation, as of June 30, 2009 and 2008, and the related statements ofoperations, of changes in stockholders’ equity and of cash flows for each of thethree years in the period ended June 30, 2009. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Cubic Energy, Inc.as of June 30, 2009 and 2008, and the results of its operations and itscash flows for each of the three years in the period ended June 30, 2009,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note M to thefinancial statements, the Company has experienced recurring net losses fromoperations and has uncertainty regarding its ability to meet its loanobligations.  These factors raisesubstantial doubt about its ability to continue as a going concern. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

 
|                         | **PHILIP  VOGEL & CO. PC** |
|------------------------------|-------------------------------------|
|                         |                                |
|                         |                                |
|                         | **Certified  Public Accountants**   |
|                         |                                |
| **Dallas,  Texas**           |                                |
|                         |                                |
| **September 25,  2009** |                                |

 

F-2

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**BALANCE SHEETS**

** JUNE 30, 2009 AND 2008**

** **
| ** **                                                                                                              | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                              |       |        |       |        |       |
| Current  assets:                                                                                                        |       |        |       |        |       |
| Cash  and cash equivalents                                                                                              |       | $           | 71,050     |        | $          | 2,144,002 |   |
| Accounts  receivable - trade                                                                                            |       | 200,950     |       | 165,910     |       |
| Prepaid  drilling costs                                                                                                 |       | —      |       | 33,399      |       |
| Other  prepaid expenses                                                                                                 |       | 55,063      |       | 65,344      |       |
| Total  current assets                                                                                                   |       | 327,063     |       | 2,408,655   |       |
|                                                                                                                    |       |        |       |        |       |
| Property  and equipment (at cost):                                                                                      |       |        |       |        |       |
| Oil  and gas properties, full cost method:                                                                              |       |        |       |        |       |
| Proved  properties (including wells and related equipment and facilities)                                               |       | 15,725,709  |       | 27,751,133  |       |
| Unproved  properties                                                                                                    |       | 890,715     |       | 3,254,901   |       |
| Office  and other equipment                                                                                             |       | 28,420      |       | 14,672      |       |
| Oil  and gas properties, and equipment, at cost                                                                         |       | 16,644,844  |       | 31,020,706  |       |
| Less  accumulated depreciation, depletion and amortization                                                              |       | 4,934,973   |       | 4,163,112   |       |
| Oil  and gas properties, and equipment, net                                                                             |       | 11,709,871  |       | 26,857,594  |       |
|                                                                                                                    |       |        |       |        |       |
| Other  assets:                                                                                                          |       |        |       |        |       |
| Deferred  loan costs - net                                                                                              |       | 89,700      |       | 224,434     |       |
| Total  other assets                                                                                                     |       | 89,700      |       | 224,434     |       |
|                                                                                                                    |       | $           | 12,126,634 |        | $          | 29,490,683 |   |
| **Liabilities and shareholders’ equity**                                                                           |       |        |       |        |       |
| Current  liabilities:                                                                                                   |       |        |       |        |       |
| Current  portion of long term debt                                                                                      |       | $           | 26,657,390 |        | $          | — |   |
| Accounts  payable and accrued expenses                                                                                  |       | 299,381     |       | 250,630     |       |
| Due  to affiliates                                                                                                      |       | 1,192,828   |       | 411,284     |       |
| Total  current liabilities                                                                                              |       | 28,149,599  |       | 661,914     |       |
| Long-term  liabilities:                                                                                                 |       |        |       |        |       |
| Long-term  debt, net of discounts                                                                                       |       | —      |       | 22,970,570  |       |
| Total  long-term liabilities                                                                                            |       | —      |       | 22,970,570  |       |
| Commitments  and contingencies (Note H and M)                                                                           |       | —      |       | —      |       |
| Shareholders’  equity:                                                                                             |       |        |       |        |       |
| Preferred  stock - $.01 par value, authorized 10,000,000 shares, issued none                                            |       | —      |       | —      |       |
| Common  stock - $.05 par value, authorized 100,000,000 shares, issued 62,570,564 in  2009 and 58,853,064 shares in 2008 |       | 3,128,529   |       | 2,942,654   |       |
| Additional  paid-in capital                                                                                             |       | 30,062,167  |       | 27,366,690  |       |
| Retained  earnings’ (deficit)                                                                                      |       | (49,213,661 | )          | (24,451,145 | )          |
| Total  shareholders’ equity                                                                                        |       | (16,022,965 | )          | 5,858,199   |       |
| Total  liabilities and shareholders’ equity                                                                        |       | $           | 12,126,634 |        | $          | 29,490,683 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED JUNE 30, 2009, 2008, AND 2007**

** **
| ** **                                                 | ** ** | **2009**    | ** **  | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| Revenues:                                                  |       |        |        |       |       |       |       |
| Oil  and gas sales                                         |       | $           | 1,858,139   |       | $          | 2,302,310  |       | $ | 583,416 |   |
| Total  revenues                                            |       | $           | 1,858,139   |       | $          | 2,302,310  |       | $ | 583,416 |   |
|                                                       |       |        |        |       |       |       |       |
| Operating  costs and expenses:                             |       |        |        |       |       |       |       |
| Oil  and gas production, operating and development costs   |       | 1,372,041   |        | 1,162,489  |       | 481,145    |       |
| General  and administrative expenses                       |       | 1,940,025   |        | 2,488,133  |       | 1,325,192  |       |
| Depreciation,  depletion and non-loan-related amortization |       | 771,861     |        | 2,152,096  |       | 362,434    |       |
| Impairment  loss on oil and gas properties                 |       | 20,390,819  |        | —     |       | 1,790,882  |       |
| Total  operating costs and expenses                        |       | 24,474,746  |        | 5,802,718  |       | 3,959,653  |       |
| Operating  income (loss)                                   |       | (22,616,607 | )           | (3,500,408 | )          | (3,376,237 | )          |
|                                                       |       |        |        |       |       |       |       |
| Non-operating  income (expense):                           |       |        |        |       |       |       |       |
| Other  income                                              |       | 33,544      |        | 45,697     |       | 38,037     |       |
| Interest  expense, including amortization of loan discount |       | (2,044,718  | )           | (1,579,452 | )          | (1,278,721 | )          |
| Amortization  of loan costs                                |       | (134,735    | )           | (94,290    | )          | (100,966   | )          |
| Total  non-operating income (expense)                      |       | (2,145,909  | )           | (1,628,045 | )          | (1,341,650 | )          |
| Loss  on debt extinguishment                               |       | —      |        | —     |       | (1,082,887 | )          |
| Loss  before income taxes                                  |       | (24,762,516 | )           | (5,128,453 | )          | (5,800,774 | )          |
| Provision  for income taxes                                |       | —      |        | —     |       | —     |       |
| Net  loss                                                  |       | $           | (24,762,516 | )          | $          | (5,128,453 | )          | $ | (5,800,774 | ) |
| Net  loss per common share - basic and diluted             |       | $           | (0.40       | )          | $          | (0.09      | )          | $ | (0.12 | ) |
| Weighted  average common shares outstanding                |       | 61,150,400  |        | 56,974,407 |       | 50,338,450 |       |

 

*Theaccompanying notes are an integral part of these statements.*

 

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED JUNE 30, 2009, 2008, AND 2007**

** **
| ** **                               | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Total**       | ** ** |
|------------------------------------------|------------|------------------|------------|----------------|------------|-------------|------------|-----------------|------------|
| ** **                               | ** ** | **Shares**       | ** ** | **Par**        | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| ** **                               | ** ** | **outstanding**  | ** ** | **value**      | ** ** | **capital** | ** ** | **deficit**     | ** ** | **equity** | ** ** |
| **Balance at June 30, 2006**        |       | 42,450,768       |       | $              | 2,122,540  |        | $          | 17,452,784      |       | $ | (13,521,918 | ) | $ | 6,053,406 |   |
| Stock  issued under compensation plan    |       | 542,000          |       | 27,100         |       | 406,500     |       | —          |       | 433,600 |   |
| Stock  issued for working capital        |       | 10,880,000       |       | 544,000        |       | 5,496,000   |       | —          |       | 6,040,000 |   |
| Stock  issued for placement fee          |       | 150,000          |       | 7,500          |       | (7,500      | )          | —          |       | — |   |
| Stock  issued for warrant exercises      |       | 1,818,128        |       | 90,906         |       | 726,594     |       | —          |       | 817,500 |   |
| Debt  proceeds allocated to warrants     |       | —           |       | —         |       | 1,251,051   |       | —          |       | 1,251,051 |   |
| Net  loss, year ended June 30, 2007 |       | —           |       | —         |       | —      |       | (5,800,774      | )          | (5,800,774 | ) |
| **Balance at June 30, 2007**        |       | 55,840,896       |       | $              | 2,792,046  |        | $          | 25,325,429      |       | $ | (19,322,692 | ) | $ | 8,794,783 |   |
| Stock  issued under compensation plan    |       | 697,500          |       | 34,875         |       | 1,046,700   |       | —          |       | 1,081,575 |   |
| Stock  issued for warrant exercises      |       | 2,314,665        |       | 115,733        |       | 994,561     |       | —          |       | 1,110,294 |   |
| Other                                    |       | 3                |       | —         |       | —      |       | —          |       | — |   |
| Net  loss, year ended June 30, 2008 |       | —           |       | —         |       | —      |       | (5,128,453      | )          | (5,128,453 | ) |
| **Balance at June 30, 2008**        |       | 58,853,064       |       | $              | 2,942,654  |        | $          | 27,366,690      |       | $ | (24,451,145 | ) | $ | 5,858,199 |   |
| Stock  issued under compensation plan    |       | 235,000          |       |           | 11,750     |        |       | 373,650         |       |   | — |   |   | 385,400 |   |
| Stock  issued for warrant exercise       |       | 3,482,500        |       | 174,125        |       | 2,321,827   |       | —          |       | 2,495,952 |   |
| Net  loss, year ended June 30, 2009 |       | —           |       | —         |       | —      |       | (24,762,516     | )          | (24,762,516 | ) |
| **Balance, June 30, 2009**          |       | 62,570,564       |       | $              | 3,128,529  |        | $          | 30,062,167      |       | $ | (49,213,661 | ) | $ | (16,022,965 | ) |

 

*Theaccompanying notes are an integral part of these statements.*

 

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**CUBICENERGY, INC.**

 

**STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2009, 2008, AND 2007**

** **
| ** **                                                                            | ** ** | **2009**   | ** **  | **2008**    | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|-------------|-------------|------------|------------|------------|
| **Cash flows from operating activities:**                                             |       |       |        |        |       |       |       |
| Net  (loss)                                                                           |       | $          | (24,762,516 | )           | $          | (5,128,453 | )          | $ | (5,800,774 | ) |
| Adjustments  to reconcile net (loss) to cash provided (used) by operating activities: |       |       |        |        |       |       |       |
| Depreciation,  depletion and amortization                                             |       | 1,421,216  |        | 2,762,417   |       | 545,261    |       |
| Impairment  loss                                                                      |       | 20,390,819 |        | —      |       | 1,790,882  |       |
| Stock  issued for interest                                                            |       | —     |        | —      |       | —     |       |
| Stock  issued for compensation                                                        |       | 385,400    |        | 1,255,437   |       | 489,900    |       |
| Write-off  deferred loan costs                                                        |       | —     |        | —      |       | 318,999    |       |
| Write-off  note payable discount                                                      |       | —     |        | —      |       | 1,145,359  |       |
| Change  in assets and liabilities:                                                    |       |       |        |        |       |       |       |
| (Increase)  decrease in accounts receivable - trade                                   |       | (35,040    | )           | 52,964      |       | (177,194   | )          |
| (Increase)  decrease in other prepaid expenses                                        |       | 10,280     |        | (7,974      | )          | (44,432    | )          |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | 48,751     |        | 198,966     |       | (113,964   | )          |
| Increase  (decrease) in due to affiliates                                             |       | 388,903    |        | (367,186    | )          | 43,895     |       |
| Net  cash (used) by operating activities                                              |       | (2,152,187 | )           | (1,233,829  | )          | (1,802,068 | )          |
|                                                                                  |       |       |        |        |       |       |       |
| **Cash flows from investing activities:**                                             |       |       |        |        |       |       |       |
| Acquisition  and development of oil and gas properties                                |       | (6,001,210 | )           | (15,341,903 | )          | (4,060,398 | )          |
| Increase  (decrease) in capital portion of due to affiliates                          |       | 392,642    |        | (856,585    | )          | 43,895     |       |
| Purchase  of office equipment                                                         |       | (13,748    | )           | (1,786      | )          | (5,010     | )          |
| (Increase)  decrease in advances on development costs                                 |       | 33,399     |        | 687,737     |       | (456,913   | )          |
| (Increase)  decrease in cash restricted by debt                                       |       | —     |        | —      |       | 401,723    |       |
| (Increase)  decrease in other assets                                                  |       | —     |        | —      |       | 25,000     |       |
| Net  cash (used) by investing activities                                              |       | (5,588,917 | )           | (15,512,537 | )          | (4,051,703 | )          |
|                                                                                  |       |       |        |        |       |       |       |
| **Cash flows from financing activities:**                                             |       |       |        |        |       |       |       |
| Issuance  of common stock, net                                                        |       | 2,495,952  |        | 1,110,295   |       | 6,857,500  |       |
| Proceeds  from credit facility                                                        |       | 3,172,200  |        | 12,827,800  |       | —     |       |
| Issuance  of subordinated debt                                                        |       | —     |        | 2,000,000   |       | —     |       |
| Issuance  of convertible debt and warrants                                            |       | —     |        | —      |       | 9,000,000  |       |
| Repayment  of debt                                                                    |       | —     |        | —      |       | (5,500,000 | )          |
| Payment  of note payable to affiliate                                                 |       | —     |        | —      |       | (1,300,000 | )          |
| Loan  costs incurred and other                                                        |       | —     |        | (170,000    | )          | (240,613   | )          |
| Repayment  of advances                                                                |       | —     |        | —      |       | (100,000   | )          |
| Net  cash provided by financing activities                                            |       | 5,668,152  |        | 15,768,095  |       | 8,716,887  |       |
| **Net increase (decrease) in cash and cash equivalents**                              |       | $          | (2,072,952  | )           | $          | (978,271   | )          | $ | 2,863,116 |   |
| ** **                                                                            |       |       |        |        |       |       |       |
| **Cash and cash equivalents:**                                                        |       |       |        |        |       |       |       |
| Beginning  of year                                                                    |       | 2,144,002  |        | 3,122,273   |       | 259,157    |       |
| End  of year                                                                          |       | $          | 71,050      |        | $          | 2,144,002  |       | $ | 3,122,273 |   |
|                                                                                  |       |       |        |        |       |       |       |
| Other  information:                                                                   |       |       |        |        |       |       |       |
| Cash  interest paid on debt                                                           |       | $          | 1,560,759   |        | $          | 1,394,009  |       | $ | 815,286 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

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**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note A - Background andgeneral:**

 

Cubic Energy, Inc. (the “Company”) is engaged in domestic crudeoil, natural gas and natural gas liquids exploration, development andproduction, with primary emphasis on the production of oil and gas reservesthrough the acquisition and development of proved, producing oil and gasproperties in the states of Texas and Louisiana.

 

**Note B- Significant accounting policies:**

 

**Cash equivalents**

 

For purposes of the statements of cash flows, the Company considers allcertificates of deposit and other financial instruments with original maturitydates of three months or less to be cash equivalents.

 

**Office and other equipment**

 

Office and other equipment are stated at cost and depreciated by thestraight-line method over estimated useful lives ranging from five to sevenyears. Depreciation and amortization of office and other equipment amounted to$5,193, $2,526 and $1,524 forthe years ended June 30, 2009, 2008 and 2007, respectively.

 

**Impairment of long-lived assets and long-lived assets to be disposed of**

 

TheCompany has adopted the provisions of the Financial Accounting Standards Board’s(the “FASB”) Statement of Financial Accounting Standards (“FAS”) No. 144 (“FASNo. 144”),*Accounting for the Impairment or Disposalof Long-Lived Assets*effective for periods beginning July 1,2002, and thereafter. FAS No. 144 replaces FAS No. 121, and, amongother matters, addresses financial accounting and reporting for the impairmentor disposal of long-lived assets. FAS No. 144 retains the basic provisionsof FAS No. 121, but broadens its scope and establishes a single model forlong-lived assets to be disposed of by sale. In addition, the Company issubject to the rules of the Securities and Exchange Commission withrespect to impairment of oil and gas properties accounted for under the fullcost method of accounting, as described below.

 

**Full cost method of accounting for oil and gas properties**

 

TheCompany has adopted the full cost method of accounting for oil and gasproperties. Management believes adoption of the full cost method moreaccurately reflects management’s exploration objectives and results byincluding all costs incurred as integral for the acquisition, discovery anddevelopment of whatever reserves ultimately result from its efforts as a whole.Under the full cost method of accounting, all costs associated withacquisition, exploration and development of oil and gas reserves, includingsuch costs as leasehold acquisition costs, interest costs related toexploratory and development activities, and directly related overhead costs,are capitalized into the full cost pool.

 

All capitalized costs of oil and gas properties, including theestimated future costs to develop proved reserves, are amortized on theunit-of-production method using estimates of proved reserves. Investments inunproved properties and major development projects are not amortized untilproved reserves associated with the projects can be determined or untilimpairment occurs. If the results of an assessment indicate that the propertiesare impaired, the amount of the impairment is added to the capitalized costs tobe amortized.

 

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

Inaddition, the capitalized costs are subject to a “full cost ceiling test,”which generally limits such costs to the aggregate of the “estimated presentvalue” (discounted at a 10 percent (10%) interest rate) of future net revenuesfrom proved reserves, based on current economic and operating conditions, plusthe lower of cost or fair market value of unproved properties. Accordingly, animpairment of oil and gas properties charge of $20,390,819 was recorded infiscal 2009, no impairment charge was recorded for 2008 and $1,790,882 wasrecorded for fiscal 2007.

 

Sales of proved and unproved properties are accounted for asadjustments of capitalized costs with no gain or loss recognized, unless suchadjustments would significantly alter the relationship between capitalizedcosts and proved reserves of oil and gas, in which case the gain or loss isrecognized in income.

 

Depletion of producing oil and gas properties amounted to $766,668,$2,149,570 and $360,910 for the years ended June 30, 2009, 2008 and 2007,respectively.

 

**Income taxes**

 

Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis. Deferred tax assets and liabilities are measured using enacted tax ratesthat will apply in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.

 

In September 2005, theEmerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-08,*Income Tax Consequences of Issuing Convertible Debtwith a Beneficial Conversion Feature* (“EITF 05-08”). Under EITF05-08, the issuance of convertible debt with a beneficial conversion featureresults in a temporary difference for purposes of applying FAS No. 109, *Accounting for Income Taxes*. The deferred taxes recognized forthe temporary difference should be recorded as an adjustment to paid-incapital. EITF 98-05, *Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios*, and EITF 00-27, *Applicationof Issue No. 98-05 to Certain Convertible Instruments*, requirethat the non-detachable conversion feature of a convertible debt security beaccounted for separately if it is a beneficial conversion feature. A beneficialconversion feature is recognized and measured by allocating to additionalpaid-in capital a portion of the proceeds equal to the conversion feature’sintrinsic value. A discount on the convertible debt is recognized for theamount that is allocated to additional paid-in capital. The debt discount isaccreted from the date of issuance to the stated redemption date of theconvertible instrument or through the earliest conversion date if theinstrument does not have a stated redemption date. The U.S. Internal RevenueCode includes the entire amount of proceeds received at issuance as the taxbasis of the convertible debt security. The adoption of EITF 05-08 has had noimpact on the Company’s financial statements because none of the conversionfeatures embedded in the Company’s notes payable is considered beneficial.

 

In July 2006, the FASBissued Interpretation No. 48 (“FIN No. 48”), *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109*,which clarifies the accounting for uncertainty in tax positions. FIN No. 48requires that the Company recognize in the financial statements the impact of atax position if that position is more likely than not of being sustained uponaudit, based on the technical merits of the position. FIN No. 48 becameeffective for fiscal years beginning after December 15, 2006. The adoptionof FIN No. 48 has had no impact on the Company’s financial statements.

 

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Oil and gas revenues**

 

The Company recognizes oil and gas revenues when oil and gas productionis sold to a purchaser at a fixed or determinable price, when delivery hasoccurred and title has transferred, and if collectability of the revenue isprobable. Delivery occurs and title is transferred when production has beendelivered to a purchaser’s pipeline or truck. As a result of the numerousrequirements necessary to gather information from purchasers or variousmeasurement locations, calculate volumes produced, perform field and wellheadallocations and distribute and disburse funds to various working interestpartners and royalty owners, the collection of revenues from oil and gasproduction may take up to 60 days following the month of production. Therefore,we make accruals for revenues and accounts receivable based on estimates of ourshare of production. Since the settlement process may take 30 to 60 daysfollowing the month of actual production, our financial results includeestimates of production and revenues for the related time period. We record anydifferences, which historically have not been significant, between the actualamounts ultimately received and the original estimates in the period they becomefinalized. Differences between sales and production volumes during the yearsended June 30, 2009, 2008 and 2007 were not significant.

 

**Earnings (loss) per common share**

 

The Company has adopted the provisions of FAS No. 128, *Earnings per Share*. FAS No. 128 requires thepresentation of basic earnings (loss) per share (EPS) and diluted EPS. BasicEPS is calculated by dividing net income or loss (available to commonstockholders) by the weighted average number of common shares outstanding forthe period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock, such as stock options,warrants, convertible preferred stock and convertible debentures, wereexercised or converted into common stock.

 

As discussed in Note D, there were no dilutive securities outstandingduring the years ended June 30, 2009, 2008 and 2007. The weighted averagenumber of common and common equivalent shares outstanding was 61,150,400,56,974,407 and 50,338,450 for the years ended June 30, 2009, 2008 and2007, respectively.

 

**Concentration of credit risk**

 

Financial instruments which potentially subject the Company to aconcentration of credit risk consist primarily of trade accounts receivablewith a variety of local, national, and international oil and natural gascompanies. Such credit risks are considered by management to be limited due tothe financial resources of the oil and natural gas companies.

 

The Company had cash balances of approximately $73,242, at June 30,2009, in one banking institution; such amount is not in excess of the federallyinsured amount of $250,000 for each institution. This balance is beforeconsidering outstanding items.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Reporting comprehensive income (loss) and operating segments**

 

The Company has adopted the provisions of FAS No. 130, *Reporting Comprehensive Income*, and FAS No. 131, *Disclosure about Segments of an Enterprise and Related Information*.FAS No. 130 requires that an enterprise report, by major components and asa single total, the change in its net assets during the period from non-ownersources. FAS No. 131 establishes annual and interim reporting standardsfor an enterprise’s operating segments and related disclosures about itsproducts, services, geographic areas and major customers. Adoption of FAS No. 130and FAS No. 131 has had no impact on the Company’s financial position,results of operations, cash flows, or related disclosures because the Company’soperations are considered to be a single segment.

 

**Use ofestimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

**Certainsignificant estimates**

 

Management’s estimates of oil and gas reserves are based on variousassumptions, including constant oil and gas prices. It is reasonably possiblethat a future event in the near term could cause the estimates to change andsuch changes could have a severe impact. Actual future production, cash flows,taxes, operating expenses, development expenditures and quantities ofrecoverable oil and gas reserves may vary substantially from those assumed inthe estimate. The accuracy of any reserve estimate is a function of the qualityof available data, engineering and geological interpretation, and judgment.Subsequent evaluation of the same reserves based upon production history willresult in variations, which may be substantial, in the estimated reserves.While it is at least reasonably possible that the estimates above will changematerially in the near term, no estimate can be made of the range of possiblechanges that might occur.

 

**Fairvalue of financial instruments**

 

The Company defines the fair value of a financial instrument as theamount at which the instrument could be exchanged in a current transactionbetween willing parties. Financial instruments included in the Company’sfinancial statements include cash and cash equivalents, short-term investments,accounts receivable, other receivables, other assets, accounts payable, notespayable and due to affiliates. Unless otherwise disclosed in the notes to thefinancial statements, the carrying value of financial instruments is consideredto approximate fair value due to the short maturity and characteristics ofthose instruments. The carrying value of debt approximates fair value as termsapproximate those currently available for similar debt instruments.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Assetretirement obligations**

 

The Company has adopted the provisions of FAS No. 143, *Accounting for Asset Retirement Obligations*, effective July 1,2002. FAS No. 143 amended FAS No. 19, *FinancialAccounting and Reporting by Oil and Gas Producing Companies*, and,among other matters, addresses financial accounting and reporting for legalobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. FAS No. 143 requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred, with the associated asset retirement costcapitalized as part of the related asset and allocated to expense over theasset’s useful life.

 

This is a change from the approach taken under FAS No. 19, wherebyan amount for an asset retirement obligation was recognized using acost-accumulation measurement approach. Under that approach, the obligation wasreported as a contra-asset recognized as part of depletion and depreciationover the life of the asset without discounting. Management has determined thatadopting FAS No. 143 has had no significant effect on the Company’sfinancial statements since abandonment costs for which it is responsible arenot material.

 

In March 2005, the FASBissued FASB Interpretation No. 47 (“FIN No. 47”), *Accounting for Conditional Asset Retirement Obligations*. FINNo. 47 clarifies that a conditional asset retirement obligation, as usedin FAS No. 143, refers to a legal obligation to perform an assetretirement activity in which the timing or method of the settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value canbe reasonably estimated. FIN No. 47 became effective for fiscal years endingafter December 15, 2005. The adoption of FIN No. 47 has had no impacton the financial statements of the Company.

 

**Stock-basedcompensation**

 

The Company accounts for its stock-basedemployee compensation plans pursuant to FAS No. 123R, *Share-BasedPayment*, which is a revision of FAS No. 123, *Accounting for Stock-Based Compensation,*and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees (“APB No. 25”)*. This FAS requires the Company to recognizecompensation costs related to stock-based payment transactions (i.e., thegranting of stock options and warrants, and awards of unregistered shares ofcommon stock) in the financial statements. With limited exceptions, the amountof compensation is measured based on the grant-date fair value of the equityissued. Compensation cost is recognized over the period that an employeeprovides services in exchange for the award. This new standard became effectivefor awards that are granted, modified or settled in cash in interim and annualfinancial periods beginning after June 30, 2006.

 

Prior to adopting FAS No. 123R, the Company applied APB No. 25and related interpretations, which required that compensation expense berecorded on the date of the grant of stock options and warrants only if thecurrent market price of the underlying stock exceeded the exercise price.Alternatively, FAS No. 123R permits entities to recognize, as expense overthe vesting period, the fair value of all stock-based awards on the date ofgrant. No retroactive or cumulative effect adjustments were required upon theCompany’s adoption of FAS No. 123R.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

In December 2002, the FASB issued FAS No. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure*,which amends FAS No. 123. FAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based compensation. In addition, FAS No. 148 amends thedisclosure requirements of FAS No. 123 to require more prominent and morefrequent disclosures in financial statements about the effects of stock-basedcompensation. The transition guidance and annual disclosure provisions areeffective for fiscal years ending after December 15, 2002. The interimdisclosure provisions became effective for financial reports containingfinancial statements for interim periods beginning after December 15,2002. The other requirements of this standard have been adopted by the Companyfor periods beginning January 1, 2003.

 

Additionally,in August 2005, the FASB issued FASB Staff Position (“FSP”) No. 123R-1(“FSP1”), *Classification and Measurement of FreestandingFinancial Instruments Originally Issued in Exchange for Employee Services underFASB Statement No. 123(R)*. In FSP1, the FASB decided to deferthe requirements in FAS No. 123 that make a freestanding financialinstrument subject to the recognition and measurement requirements of otherGAAP when the rights conveyed by the instrument are no longer dependent on theholder being an employee. In October 2005, the FASB issued FSP No. 123R-2(“FSP2”), *Practical Accommodation to the Application of GrantDate as Defined in FASB Statement No. 123(R)*. In FSP2, the FASBis providing companies with a “practical accommodation” when determining thegrant date of an award that is subject to the accounting provisions in FAS No. 123R.In November 2005, the FASB issued FSP No. 123R-3 (“FSP3”), *Transition Election Related to Accounting for the Tax Effects ofShare-Based Payment Awards*. FSP3 provides an elective alternativemethod that establishes a computational component to arrive at the beginningbalance of the accumulated paid-in capital pool related to employeecompensation and a simplified method to determine the subsequent impact on theaccumulated paid-in capital pool of employee awards that are fully vested and outstandingupon the adoption of FAS No. 123R.

 

InFebruary 2006, the FASB issued FSP No. 123R-4 (“FSP4”), *Classification of Options and Similar Instruments Issued as EmployeeCompensation That Allow for Cash Settlement upon the Occurrence of a ContingentEvent*, which concludes that a cash settlement feature that can beexercised only upon the occurrence of a contingent event that is outside theemployee’s control does not become a liability until it becomes probable thatthe event will occur. An option or similar instrument that is classified asequity, but subsequently becomes a liability because the contingent cashsettlement event is probable of occurring, shall be accounted for similar tomodification from an equity to liability award. To the extent that theliability exceeds the amount previously recognized in equity, the excess isrecognized as compensation cost. The total recognized compensation cost for anaward with a contingent cash settlement feature shall at least equal the fairvalue of the award at the grant date. FSP4 is applicable only for options orsimilar instruments issued as part of employee compensation arrangements. Theguidance in FSP1, FSP2, FSP3 and FSP4 has been applied concurrent with ouradoption of FAS No. 123R.

 

F-12

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

InMarch 2005, the SEC published Staff Accounting Bulletin No. 107 (“SABNo. 107”). The interpretations in this staff accounting bulletin expressthe views of the staff regarding the interaction between FAS No. 123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies. Inparticular, SAB No. 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from non-public to publicentity status, valuation methods (including assumptions such as expectedvolatility and expected term), the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, the classificationof compensation expense, non-GAAP financial measures, first-time adoption ofFAS No. 123R in an interim period, capitalization of compensation costrelated to share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements upon adoption of FAS No. 123R,the modification of employee share options prior to adoption of FAS No. 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof FAS No. 123R. The provisions of SAB No. 107 became effective withour adoption of FAS No. 123R.

 

**Exit ordisposal activities**

 

In July 2002, the FASB issued FAS No. 146, *Accounting for Cost Associated with Exit or Disposal Activities*.FAS No. 146 requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. Examples of costs covered by thestandard include lease termination costs and certain employee severance coststhat are associated with a restructuring, discontinued operations, or otherexit or disposal activities. FAS No. 146 is effective prospectively forexit or disposal activities initiated after December 31, 2002. No exit ordisposal activities have been entered into by the Company.

 

**Financialinstruments with characteristics of both liabilities and equity**

 

In May 2003, the FASB issued FAS No. 150 (“FAS No. 150”),*Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity*. FAS No. 150established standards for how a company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Thestatement requires that a company classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances) if certaincriteria are met. Freestanding financial instruments that obligate the issuerto redeem the holder’s shares, or are indexed to such an obligation, and aresettled in cash or settled with shares meeting certain conditions would betreated as liabilities. Many of those instruments were previously classified asequity.

 

In June 2005, the FASB issued FSP FAS No. 150-5 (“FAS No. 150-5”),*Issuers Accounting under FASB Statement No. 150for Freestanding Warrants and Other Similar Instruments on Shares that areRedeemable*. FAS No. 150-5 clarifies that freestanding warrantsand similar instruments on shares that are redeemable should be accounted foras liabilities under FAS No. 150 regardless of the timing of theredemption feature or price, even though the underlying shares may beclassified as equity. FAS No. 150-5 became effective for the firstreporting period beginning after June 30, 2006. Although the Company hadoutstanding warrants as of June 30, 2009, the shares issued upon exerciseof the warrants are not redeemable; consequently, adoption of FAS No. 150-5has not had an impact on the Company’s financial position, results ofoperations or cash flows.

 

F-13

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIALSTATEMENTS**

 

**Guaranteeof debt**

 

In November 2002, the FASB issued Interpretation No. 45 (“FINNo. 45”), *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, an Interpretation of FASB Statements No. 5, 57, and 107 andRescission of FASB Interpretation No. 34*. FIN No. 45clarifies the requirements of FAS No. 5, relating to the guarantor’saccounting for, and disclosure of, the issuance of certain types of guarantees.This Interpretation clarifies that a guarantor is required to recognize, at theinception of certain types of guarantees, a liability for the fair value of theobligation undertaken in issuing the guarantee, and requires additionaldisclosures on existing guarantees even if the likelihood of future liabilityunder the guarantees is deemed remote. The Company has not issued anyguarantees and, therefore, the adoption of FIN No. 45 has not had a anyimpact on the Company’s financial statements.

 

**Variableinterest entities**

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”),*Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51*. FIN No. 46 states that if abusiness enterprise has a controlling financial interest in a variable interestentity as the primary beneficiary, the assets, liabilities and results of theactivities of the variable interest entity should be included in theconsolidated financial statements of the business enterprise. ThisInterpretation explains how to identify variable interest entities and how anenterprise assesses its interests in a variable interest entity to decidewhether to consolidate that entity. The primary beneficiary of a variableinterest entity would be required to consolidate if the other equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN No. 46 applies immediately to variable interest entitiescreated after January 31, 2003, and to variable interest entities in whichan enterprise obtains an interest after that date. It applies in the firstfiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003. The Company has no current contractualrelationships or other business relationships with variable interest entities.

 

F-14

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Accounting changes and errorcorrections**

 

In May 2005, the FASB issued FAS No. 154 (“FAS No. 154”),*Accounting Changes and Error Corrections — AReplacement of APB Opinion No. 20 and FASB Statement No. 3*.FAS No. 154 replaces APB Opinion No. 20 (“APB No. 20”), *Accounting Changes*, and FAS No. 3 (“FAS No. 3”), *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting for, and reporting of, a changein accounting principles. FAS No. 154 applies to all voluntary changes inaccounting principles and changes required by an accounting pronouncement inthe unusual instance that the pronouncement does not include specifictransition provisions. Under previous guidance, changes in accounting principlewere recognized as a cumulative effect in the net income of the period of thechange. FAS No. 154 requires retrospective application of changes inaccounting principle, limited to the direct effects of the change, to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change inaccounting principle.

 

Additionally, FAS No. 154requires that a change in depreciation, amortization or depletion method forlong-lived, non-financial assets be accounted for as a change in accountingestimate affected by a change in accounting principle and that correction oferrors in previously issued financial statements should be termed a “restatement.”The provisions in FAS No. 154 became effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15,2005. The adoption of FAS No. 154 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Debt modifications**

 

In September 2005, theEITF reached a consensus on Issue No. 05-07 (“EITF No. 05-07”), *Accounting for Modifications to Conversion Options Embedded in DebtInstruments and Related Issues*. EITF No. 05-07 requires that achange in the fair value of a conversion option brought about by modifying thedebt agreement be included in analyzing in accordance with EITF consensus onIssue No. 96-19 (“EITF No. 96-19”), *Debtor’sAccounting for a Modification or Exchange of Debt Instruments*,whether a debt instrument is considered extinguished. Under EITF No. 96-19’srequirements, an issuer who modifies a debt instrument must compare the presentvalue of the original debt instrument’s cash flows to the present value of thecash flows of the modified debt. If the present value of those cash flowsvaries by more than 10 percent (10%), the modification is consideredsignificant and extinguishments accounting is applied to the original debt. Ifthe change in the present value of the cash flows is less than 10 percent(10%), the debt is considered to be modified and is subject to EITF No. 96-19’smodification accounting. EITF No. 05-07 requires that in applying the 10percent (10%) test the change in the fair value of the conversion option betreated in the same manner as a current period cash flow. EITF No. 05-07also requires that, if a modification does not result in an extinguishment, thechange in fair value of the conversion option be accounted for as an adjustmentto interest expense over the remaining term of the debt. The issuer should notrecognize a beneficial conversion feature or reassess an existing beneficialconversion feature upon modification of the conversion option of a debtinstrument that does not result in an extinguishment. EITF No. 05-07became effective for modifications of debt instruments beginning in the firstinterim or annual reporting period beginning after December 15, 2005. Theadoption of EITF No. 05-07 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

F-15

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Certain hybrid financialinstruments**

 

In February 2006, theFASB issued FAS No. 155 (“FAS No. 155”), *Accountingfor Certain Hybrid Financial Instruments*, which amends FAS No. 133(“FAS No. 133”), *Accounting for DerivativeInstruments and Hedging Activities*and FAS No. 140 (“FAS No. 140”),*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*, and improves thefinancial reporting of certain hybrid financial instruments by requiring moreconsistent accounting that eliminates exemptions and provides a means tosimplify the accounting for these instruments. Specifically, FAS No. 155allows financial instruments that have embedded derivatives to be accounted foras a whole (eliminating the need to bifurcate the derivative from its host) ifthe holder elects to account for the whole instrument on a fair value basis.FAS No. 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins after September 15,2006. The adoption of FAS No. 155 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Reporting taxes collected**

 

In March 2006, the EITFreached a tentative consensus on Issue No. 06-03 (“EITF No. 06-03”), *How Sales Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation)*. EITF No. 06-03 addresses income statementclassification and disclosure requirements of externally-imposed taxes onrevenue-producing transactions. EITF No. 06-03 is effective for periodsbeginning after December 15, 2006. The adoption of EITF No. 06-03 didnot have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

**Subsequent Events**

 

InMay 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”).SFAS 165 establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. SFAS 165 sets forth (1) Theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (2) Thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and (3) Thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS 165 is effective for interim orannual financial periods ending after June 15, 2009. The adoption of thisstatement did not have a material effect on the Company’s financial statements.

 

**Other recent accountingpronouncements**

 

In September 2006, the Securities and Exchange Commission issuedStaff Accounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB No. 108was issued to address diversity in practice in quantifying financial statementmisstatements. Current practice allows for the evaluation of materiality on thebasis of either (1) the error quantified as the amount by which thecurrent year income statement was misstated (“rollover method”) or (2) thecumulative error quantified as the cumulative amount by which the current yearbalance sheet was misstated (“iron curtain method”). The guidance provided inSAB No. 108 requires both methods to be used in evaluatingmateriality (“dual approach”). SAB No. 108 permits companies toinitially apply its provisions either by (1) restating prior financialstatements as if the dual approach had always been used or (2) recordingthe cumulative effect of initially applying the “dual approach” as adjustmentsto the carrying values of assets and liabilities as of January 1, 2006with an offsetting adjustment recorded to the opening balance of retained

 

F-16

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

earnings. The adoption of SAB No. 108 did not have a materialimpact on the Company’s financial position, results of operations or cashflows.

 

In September 2006, theFASB issued FAS No. 157 (“FAS No. 157”), *Fair ValueMeasurements*. FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. FAS No. 157 doesnot require any new fair value measurements in financial statements, butstandardizes its definition and guidance in GAAP. Thus, for some entities, theapplication of this statement may change current practice. FAS No. 157 waseffective for us beginning on January 1, 2008. The adoption of FAS No. 157did not have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

F-17

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

InFebruary 2007, the FASB issued Statement of FAS No. 159 (“FAS No. 159”),*The Fair Value Option for Financial Assets andFinancial Liabilities*. FAS No. 159 allows entities to choose,at specified election dates, to measure eligible financial assets andliabilities at fair value that are not otherwise required to be measured atfair value. If a company elects the fair value option for an eligible item,changes in that item’s fair value in subsequent reporting periods must berecognized in current earnings. FAS No. 159 also establishes presentationand disclosure requirements designed to draw comparison between entities thatelect different measurement attributes for similar assets and liabilities. FAS No. 159is effective for fiscal years beginning after November 15, 2007.Management is still currently evaluating the effect of this pronouncement onits financial statements.

 

**In December 2007, theFASB issued FAS No. 141 (revised 2007) (“FAS No. 141(R)”), *Business Combinations*. FAS No. 141(R) providescompanies with principles and requirements on how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired,liabilities assumed, and any non-controlling interest in the acquiree as wellas the recognition and measurement of goodwill acquired or a gain from abargain purchase in a business combination. FAS No. 141(R) alsorequires certain disclosures to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Acquisition costs associated with the business combination will generally beexpensed as incurred. In addition, changes in an acquired entity’s valuationallowance for deferred tax assets and uncertain tax positions after themeasurement period will impact income tax expense. FAS No. 141(R) iseffective for business combinations occurring in fiscal years beginning after December 15,2008. We have not yet assessed the impact FAS No. 141(R) will have ifwe engage in future business combinations.**

** **

**In December 2007, theFASB issued FAS No. 160 (“FAS No. 160), *Non-controllingInterests in Consolidated Financial Statements, an amendment of ARB No. 51*,which mandates that a non-controlling (minority) interest shall be reported inthe consolidated statement of financial position within equity, separately fromthe parent company’s equity. This statement amends ARB No. 51 andclarifies that a non-controlling interest in a subsidiary is an ownershipinterest in the consolidated entity. FAS No. 160 also requiresconsolidated net income to include amounts to both parent and non-controllinginterest and requires disclosure, on the face of the consolidated statement ofincome, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. FAS No. 160 is effective for fiscalyears and interim periods beginning after December 15, 2008. We currentlydo not have any minority interests that would be subject to FAS No. 160,and we do not expect it to be material to our consolidated financial statementsfor fiscal 2009. Adoption of FAS No. 160 became effective January 1,2009.**

 

F-18

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

** **

**NoteC — Stockholders’ equity:**

** **

TheCompany’s authorized capital is 100,000,000 shares of $0.05 par value commonstock and 10,000,000 shares of $0.01 par value preferred stock. No shares ofpreferred stock were issued or outstanding at June 30, 2009 and 2008. Noneof theabove-referenced warrants had been exercised and all remained outstanding at June 30,2009.

 

**Stockand warrants**

 

On December 16, 2005, theCompany entered into a Securities Purchase Agreement and issued 2,500,000common shares at a price of $0.80 per share and issued warrants, with five yearexpirations, for the purchase of up to 1,000,000 shares of Company common stockat an exercise price of $1.00 per share. The proceeds of the offering were usedfor exploratory drilling and working capital. 897,500 of the above-referencedwarrants had been exercised and 102,500 remained outstanding at June 30, 2009.

 

On February 6,2006, Cubic entered into a Credit Agreement with Petro Capital V, L.P. (“PetroCapital”) pursuant to which Petro Capital advanced to the Company $5,500,000.In connection with the funding under the Credit Agreement, the Company issuedto Petro Capital and Petro Capital Securities, LLC, warrants, with five-yearexpirations, for the purchase of up to 1,833,334 and 250,000 shares,respectively, of Company common stock at an exercise price of $1.00 per share.Pursuant to the anti-dilution adjustment provisions applicable to suchwarrants, the exercise price applicable to all such warrants stilloutstanding is currently $0.9651 per share. 1,550,000 of the above-referenced warrantsissued to Petro Capital had been exercised and 283,334 remained outstanding at June 30,2009. None of the 250,000 warrants issued to Petro Capital Securities, LLC hadbeen exercised and all remained outstanding at June 30, 2009. The Companyallocated the proceeds from the issuance of the senior debt to the warrants andthe senior debt based on their relative fair market values at the date ofissuance. The value assigned to the warrants of $1,203,752 was recorded as anincrease in additional paid-in capital.

 

On July 28, 2006, Cubicentered into and consummated transactions pursuant to Subscription andRegistration Rights Agreements (the “July 2006 Subscription Agreements”)with certain investors that are unaffiliated with the Company (the “Investors”).Pursuant to the Subscription Agreements, the Investors paid aggregateconsideration of $2,100,000 to the Company for 3,000,000 shares of the Company’scommon stock and warrants exercisable, through July 31, 2011, into1,500,000 shares of common stock at $0.70 per share. Pursuant to the anti-dilution adjustmentprovisions applicable to such warrants, the exercise price applicable toall such warrants is currently $0.6849 per share. 1,125,000 of the above-referenced warrants hadbeen exercised and 375,000 remain outstanding at June 30, 2009.

 

OnNovember 10, 2006, in connection with the extension of a promissory note,the Company issued to Tauren warrants, with three-year expirations, for thepurchase of up to 50,000 shares of Company common stock at an exercise price of$0.70 per share.

 

OnDecember 15, 2006, the Company entered into Subscription and RegistrationRights Agreements (the “December 2006 Subscription Agreements”) withcertain investors. One of the investors, William Bruggeman (and entitiesaffiliated with him) was the beneficial owner, prior to this transaction, ofapproximately 23.0% of the common stock of the Company. In this transaction, Mr. Bruggeman(and entities affiliated with him) purchased an aggregate of 4,288,000 sharesof common stock at a purchase price of $0.50 per share, or an aggregate of$2,144,000. Mr. Bruggeman (and entities affiliated with him) receivedwarrants to purchase 2,144,000 shares of common stock with an exercise price of$0.70 per share. Another investor, Bob Clements, a director of the Company,purchased 100,000 shares of common stock at a purchase price of $0.50 pershare, or an aggregate of $50,000. Mr. Clements received warrants topurchase 50,000 shares of common stock with an exercise price of $0.70 pershare. Pursuant to the December 2006 Subscription Agreements, theinvestors paid aggregate consideration of $3,940,000 to the Company for7,880,000 shares of the Company’s common stock and warrants exercisable into3,940,000 shares of common stock. The warrants are exercisable through November 30,2011, at $0.6963 per share. 2,240,000 of the above-referenced warrants havebeen exercised and 1,700,000 remained outstanding at June 30, 2009.

 

F-19

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

On March 5, 2007,Cubic entered into a Credit Agreement with Wells Fargo Energy Capital (“WellsFargo”) providing for a revolving credit facility of $20,000,000 and aconvertible term loan of $5,000,000 (the “Credit Facility”). In connection withentering into the Credit Facility, the Company issued to Wells Fargo warrants,with five-year expirations, for the purchase of up to 2,500,000 shares ofCompany common stock at an exercise price of $.9911 per share. The term loan isalso convertible into 5,044,900 shares of Company common stock at a conversionprice of $.9911 per share. None of the above-referenced warrants had beenexercised and all remained outstanding at June 30, 2008. The Companyallocated the proceeds from the issuance of the debt to the warrants, the debtand net profits interest (see “Note E — Long-term debt”) based on theirrelative fair market values at the date of issuance. The value assigned to thewarrants of $1,314,289 was recorded as an increase in additional paid-incapital and the value assigned to the net profits interest of $213,148 wasrecorded as a credit to the full cost pool for oil and gas properties.

 

Duringthe fiscal year ended June 30, 2008, the Company received an aggregatetotal of $1,110,295 relating to the exercise of 2,730,000 warrants representing2,314,665 shares of common stock.

 

Through the following exercises of warrants, weissued an aggregate of 3,482,500 shares of common stock, which were notregistered under the Securities Act of 1933, as amended, during fiscal 2009.

 

On July 3, 2008, two warrant holders of theCompany exercised warrants for an aggregate of 1,127,500 shares of Companycommon stock, through the payment of $777,002 to the Company.

 

On July 7, 2008, one warrant holder of theCompany exercised warrants for 250,000 shares of Company common stock, throughthe payment of $243,950 to the Company.

 

On July 8, 2008, one warrant holder of theCompany exercised warrants for 100,000 shares of Company common stock, throughthe payment of $70,000 to the Company.

 

On July 17, 2008, one warrant holder of theCompany exercised warrants for 5,000 shares of Company common stock, throughthe payment of $5,000 to the Company.

 

On February 23, 2009, twenty-two warrantholders of the Company exercised warrants for 2,000,000 shares of Companycommon stock, through the payment of $1,400,000 to the Company. Included amongthese warrant holders were the following 5% beneficial owners: William L. Bruggeman, Jr.and Ruth J. Bruggeman JWROS exercised warrants for 1,544,000 shares and StevenS. Bruggeman exercised warrants for 24,000 shares.

 

Aggregate proceeds to the Company of theaforementioned stock issuances were $2,495,952, all of which have been or isexpected to be used for working capital purposes.  The aforementioned issuances were made inreliance upon an exemption from registration set forth in Section 4(2) ofthe Securities Act of 1993, as amended, which exempts transactions by an issuernot involving a public offering.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Stock-basedcompensation**

 

On December 29, 2005, the shareholders ofthe Company approved the 2005 Stock Option Plan (the “Plan”) and 3,750,000 shares of commonstock were reserved, of which 2,643,500 shares had been issued through June 30,2009.

 

On January 10 and January 18, 2007, theCompany issued 489,500 and 52,500 unregistered shares, respectively, to theofficers, directors, and key employees of the Company pursuant to the Plan. Asof such dates, the aggregate market value of the common stock granted was$391,600 and $42,000, respectively, based on the last sale price on the OTCBBof the Company’s common stock. Such amounts were amortized to compensationexpense on a quarterly basis during calendar year 2007. An additional $30,000was recorded when our former Chief Financial Officer resigned during fiscal2007. Accordingly, $186,800 and $246,800 was recorded as compensation expenseand included in general and administrative expense for the fiscal years ended June 30,2008 and 2007, respectively. The Named Executive Officers received thefollowing grants: (i) 150,000 unregistered shares to Calvin A. Wallen, III,(ii) 75,000 unregistered shares to James L. Busby, and (iii) 47,500unregistered shares to Jon S. Ross.

 

On August 20, 2007, the Company issued90,000 unregistered shares to the current Chief Financial Officer of theCompany pursuant to the Plan, with such grant subject to vesting in quarterlyinstallments over the following four quarters. As of such date, the aggregatemarket value of the common stock granted was $103,500 based on the then marketprice on the OTCBB of the Company’s common stock. Such amount is beingamortized to compensation expense on a quarterly basis during fiscal years 2008and 2009. Accordingly, $90,563 was recorded as compensation expense andincluded in general and administrative expenses for fiscal 2008. The remaining$12,938 was amortized to compensation expense in the first quarter of fiscal2009, which ends September 30, 2008.

 

On January 31 and February 4, 2008,the Company issued 555,000 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$893,550 and $84,525, respectively (a total of $978,075), based on thethen-market price on the OTCBB of the Company’s common stock. Recent SECguidance requires that immediately-vesting common stock grants with noforfeiture provisions be expensed at the time of grant rather than amortizedover four quarters. Accordingly, the full $978,075 was recorded as compensationexpense and included in general and administrative expenses for the fiscal yearended June 30, 2008.

 

On January 12, 2009, the Company issued235,000 unregistered shares to three directors of the Company pursuant to thePlan.  As of such dates, the aggregatemarket value of the common stock granted was $385,400 based on the last saleprice ($1.64/share) on the aforementioned date, on the NYSE — Amex of theCompany’s common stock. Such amounts were expensed upon issuance tocompensation expense.

 

On January 28, 2009, the Company authorizedthe issuance of 250,000 and 122,500 unregistered shares, respectively, to theofficers and key employees of the Company pursuant to the Plan, which sharesare subject to forfeiture in the event that such recipient’s service with theCompany terminates prior to a specified date. These shares are authorized, butnot issued as of September 25, 2009.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The following table providesinformation related to stock-based compensation for the years ended June 30,2009, 2008 and 2007:

 
| ** **                                          | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Officer and employee restricted stock grants:**   |       |                                |       |   |   |   |   |
| Pretax  compensation expense                        |       | $                                   | 12,938     |   | $ | 818,287 |   | $ | 368,625 |   |
| Tax  benefit                                        |       | $                                   | —     |   | $ | — |   | $ | — |   |
| Restricted  stock expense, net of tax               |       | $                                   | 12,938     |   | $ | 818,287 |   | $ | 368,625 |   |
|                                                |       |                                |       |   |   |   |   |
| **Director restricted stock grants:**               |       |                                |       |   |   |   |   |
| Pretax  compensation expense                        |       | $                                   | 385,400    |   | $ | 437,150 |   | $ | 121,275 |   |
| Tax  benefit                                        |       | $                                   | —     |   | $ | — |   | $ | — |   |
| Director  stock grants expense, net of tax          |       | $                                   | 385,400    |   | $ | 437,150 |   | $ | 121,275 |   |
|                                                |       |                                |       |   |   |   |   |
| **Stock options:**                                  |       |                                |       |   |   |   |   |
| Pretax  compensation expense                        |       | $                                   | —     |   | $ | — |   | $ | — |   |
| Tax  benefit                                        |       | $                                   | —     |   | $ | — |   | $ | — |   |
| Stock  option expense, net of tax                   |       | $                                   | —     |   | $ | — |   | $ | — |   |
|                                                |       |                                |       |   |   |   |   |
| **Total stock-based compensation:**                 |       |                                |       |   |   |   |   |
| Pretax  compensation expense                        |       | $                                   | 398,338    |   | $ | 1,255,437 |   | $ | 489,900 |   |
| Tax  benefit                                        |       | $                                   | —     |   | $ | — |   | $ | — |   |
| Total  share based compensation expense, net of tax |       | $                                   | 398,338    |   | $ | 1,255,437 |   | $ | 489,900 |   |

 

**Note D —Loss per common share:**

** **
| ** **                                         | ** ** | **2009**   | ** **  | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| Net  loss attributable to stockholders             |       | $          | (24,762,516 | )          | $          | (5,128,453 | )          | $ | (5,800,774 | ) |
| Weighted  average number of shares of common stock |       | 61,150,400 |        | 56,974,407 |       | 50,338,450 |       |
| Income  (loss) per common share                    |       | $          | (0.40       | )          | $          | (0.09      | )          | $ | (0.12 | ) |

 

Potential dilutivesecurities (e.g., stock warrants and convertible debt) have not been consideredbecause the Company reported a net loss and, accordingly, their effects wouldbe anti-dilutive.

 

F-22

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note E —Long-term debt:**

 

**February 2006debt issue**

 

On February 6, 2006,Cubic entered into a Credit Agreement with Petro Capital V, L.P. (“PetroCapital”) pursuant to which Petro Capital advanced to the Company $5,500,000.The indebtedness bore interest at a rate of 12.5% per annum, was scheduled tomature on February 6, 2009, and was secured by substantially all of theassets of the Company. $1,800,000 of the funded amount was used to retire the7% Senior Secured Convertible Debentures that were due September 30, 2009,described above. In connection with the funding under the Credit Agreement, theCompany issued to Petro Capital and Petro Capital Securities, LLC, warrants,with five-year expirations, for the purchase of up to 1,833,334 and 250,000shares, respectively, of Company common stock at an exercise price of $1.00 pershare.

 

The Company allocated theproceeds from the issuance of the senior debt to the warrants and the seniordebt based on their relative fair market values at the date of issuance. Thevalue assigned to the warrants of $1,203,752 was recorded as an increase inadditional paid-in capital. The assignment of a value to the warrants resultedin a loan discount being recorded. The discount was being amortized over theoriginal three-year term of the senior debt as additional interest expense.Amortization for the year ended June 30, 2007 was $298,371 and for theyear ended June 30, 2006 was $174,451.

 

Cubic incurred loan costs of$483,643 on the issuance of the senior debt and warrants. The amount allocableto the senior debt of $367,586 was capitalized and was being amortized over theterm of the senior debt. Amortization of loan costs for the senior debt was$83,101 for the year ended June 30, 2007 and was $48,587 for the yearended June 30, 2006.

 

The senior debt was retiredon March 5, 2007, with proceeds from a new senior debt issue, as set forthbelow. In connection with this retirement, the Company recorded a loss onextinguishment of debt in the amount of $(1,082,887). Such amount includes thewrite-off of deferred loan costs, ($235,898), and the write-off of theremaining loan discount, ($846,989).

 

**March 2007 debt issue**

 

On March 5, 2007, Cubicentered into a Credit Agreement with Wells Fargo Energy Capital, Inc. (“WellsFargo”) providing for a revolving credit facility of $20,000,000 and aconvertible term loan of $5,000,000 (the “Credit Facility”). The indebtednessbears interest at a fluctuating rate equal to the sum of the Wells Fargo Bankprime rate plus two percent (2%) per annum, matures on March 1, 2010, andis secured by substantially all of the assets of the Company. Approximately$5,000,000 of the funded amount was used, together with cash on hand, to retirethe Company’s aforementioned previously outstanding senior debt that was due February 6,2009.

 

Therevolving credit facility is subject to a borrowing base, initially set at$4,000,000, and is subject to periodic review. The convertible term loan of$5,000,000 is convertible into 5,000,000 shares of Cubic common stock at aconversion price of $1.00 per share.

 

Inconnection with entering into the Credit Facility, the Company issued to WellsFargo warrants, with five-year expirations, for the purchase of up to 2,500,000shares of Company common stock at an exercise price of $1.00 per share.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

TheCompany allocated the proceeds from the issuance of the debt to the warrants,the debt and net profits interest (see below) based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties. The assignment of a value tothe warrants and net profits interest resulted in a loan discount beingrecorded. The discount is being amortized over the original three-year term ofthe debt as additional interest expense. Amortization for the years ended June 30,2009, 2008 and 2007 was 514,620, $516,030 and $164,961, respectively. Amortizationfor the fiscal year ending June 30, 2010 is expected to be approximately$342,610.

 

Cubic incurred loan costsof $240,613 on the issuance of the debt and warrants. The amount allocable tothe debt of $166,590 has been capitalized and is being amortized over the termof the debt. Amortization for the years ended June 30, 2009, 2008 and 2007was $55,733, $55,886 and $17,865, respectively. Amortization for the fiscal yearending June 30, 2010 is expected to be approximately $37,105. Cubic incurredcommitment fees of $170,000 related to subsequent increases in the CreditFacility’s borrowing base; such amount was capitalized in fiscal 2008 and isbeing amortized over the remaining term of the loan. Amortization for the yearended June 30, 2009 and 2008 was $79,001 and $38,404, respectively.Amortization for the fiscal year ending 2010 is expected to beapproximately and $52,595.

 

**May 2008subordinated debt issue**

 

On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 (the “SubordinatedNote”) to Diversified Dynamics Corporation (the “Lender”), an entity controlledby William Bruggeman, who beneficially owns more than 5% of the common stock ofthe Company. The Subordinated Note bears interest at a fluctuating rate equalto the sum of the prime rate plus two percent (2%) per annum, and matures on April 30,2010. As consideration for the loan made by Lender pursuant to the SubordinatedNote, the Company agreed to convey to Lender, upon the repayment in full of theindebtedness evidenced by the Subordinated Note and the repayment in full ofthe senior indebtedness evidenced by the Credit Facility with Wells Fargo, anundivided 0.375% net profits interest in the future production of hydrocarbonsfrom or attributable to Cubic’s net interest in its Louisiana properties. Theproceeds of the Subordinated Note are being used for general corporate andworking capital purposes.

 

Issuing theSubordinated Note required the consent of the holder of the Company’s seniorindebtedness, Wells Fargo, which consent it granted on May 5, 2008.Subsequently, on May 8, 2008, the Credit Facility with Wells Fargo wasamended by the First Amendment to the Credit Agreement (the “First Amendment”).Material provisions of the First Amendment included the following: (i) theCompany may not prepay all or any part of the principal balance outstanding onthe Term Loan prior to its maturity on March 1, 2010; and (ii) theamount of the Borrowing Base was decreased to $7,500,000, which amount wasfully drawn upon, at the end of fiscal 2009.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note F —Related party transactions:**

 

Effective January 1,2002, the Company entered into an agreement with Tauren Exploration, Inc.,an entity controlled by Cubic’s Chairman of the Board, President and CEO (“Tauren”)that provides for the following:

 

1) As of January 1,2002, the Company owed Tauren $856,712, primarily comprised of non-interestbearing advances the Company had received over the course of several years. Inexchange for the amounts owed to it, Tauren accepted the transfer of 856,712newly issued and unregistered shares of common stock in the Company that had amarket price of $0.70 per share.

 

2) The Company received therights to participate in prospective oil and gas projects in which Tauren ownsa working interest.

 

3) The Company shall, asrequested, have the future privilege of using the general and administrativeservices of Tauren based on an agreed pro rata cost.

 

4) The Company issued threeseries of warrants to Tauren as described in Note C.

 

On December 1, 1997, asrenewed and revised on January 1, 2002, the Company entered into acontract with Tauren to provide the necessary technical, administrative andmanagement expertise needed to conduct its business. Tauren also paid variousorganization costs and consulting fees on behalf of the Company. The monthly amountcharged to the Company was based on actual costs of materials and labor hoursof Tauren that were used pursuant to the terms of the agreement. The agreementwas terminated effective January 1, 2006, except as to the office sharingprovisions, which were extended to June 30, 2007 and since continue on amonth to month basis. The Company now has 10 employees and its offices aresubleased from Tauren. During fiscal 2008, the Company’s only expense under theoffice sharing arrangement was the rent sublease. Charges to the Company underthe contracts and subsequent arrangements were $26,748, $26,748 and $29,285 forthe years ended June 30, 2009, 2008 and 2007, respectively.

 

Tauren owns a workinginterest in the wells in which the Company owns a working interest. As of June 30,2009, the Company owes $649,205 to Tauren for miscellaneous general andadministrative expenses and lease operating expenses paid by Tauren on theCompany; as of June 30, 2008, the Company owed Tauren $942 formiscellaneous general and administrative expenses paid by Tauren on the Company’sbehalf; and, as of June 30, 2007, the Company owed Tauren $3,715, formiscellaneous general and administrative expenses paid by the Company on Tauren’sbehalf.

 

In addition, all but threewells in which the Company owns a working interest are operated by anaffiliated company, Fossil Operating, Inc. (“Fossil”), which is owned 100%by the Company’s President and Chief Executive Officer, Calvin A. Wallen III.As of June 30, 2009, 2008 and 2007, the Company owed Fossil $815,239,$862,895, and $1,659,786, respectively, for drilling costs and lease andoperating expenses, and was owed by Fossil $271,615, $450,669, and $28,446,respectively, for oil and gas sales.

 

On February 6, 2006,the Company entered into a Purchase Agreement with Tauren with respect to thepurchase by the Company of certain Cotton Valley leasehold interests(approximately 11,000 gross acres; 5,000 net acres) held by Tauren. Pursuant tothe Purchase Agreement, the Company acquired from Tauren a 35% working interestin approximately 2,400 acres and a 49% working interest in approximately 8,500acres located in DeSoto and Caddo Parishes, Louisiana, along with an associatedArea of Mutual Interest (“AMI”) and the right

 

F-25

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

to acquire at “cost” (asdefined in the Purchase Agreement) a seventy percent (70%) working interest inall additional mineral leases obtained by Tauren in the AMI, in exchange for (a) $3,500,000in cash, (b) 2,500,000 unregistered shares of Company common stock, (c) anunsecured 12.5% promissory note in the amount of $1,300,000, which note wasconvertible into Company common stock at a conversion price of $0.80 per share(the “Tauren Note”), and (d) a drilling credit of $2,100,000. Totalinterest paid to Tauren under terms of the Tauren Note was$0 in fiscal 2009, $0in fiscal 2008 and $96,610 in fiscal 2007.

 

The consideration describedabove was determined based upon negotiations between Tauren and a SpecialCommittee of the Company’s directors, excluding Mr. Wallen. The SpecialCommittee obtained an opinion from its independent financial advisor withrespect to the fairness, from a financial point of view, to the publicstockholders of the Company, of such transactions.

 

On November 10, 2006,the maturity of the Tauren Note was extended to October 5, 2007. Inconnection with the extension of the Tauren Note, the Company issued to Taurenwarrants, with three-year expirations, for the purchase of up to 50,000 sharesof Company common stock at an exercise price of $0.70 per share.

 

On February 2, 2007,the Tauren Note was retired pursuant to a provision in the note that requiredpayment from the proceeds of an equity offering. The equity offering thatoccurred in December 2006 (see “Note C — Stockholders’ Equity”) wassufficient to facilitate such repayment.

 

**On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 toDiversified Dynamics Corporation, an entity controlled by William Bruggemanwho, at the time of such transaction, was the beneficial owner of approximately28.9% of the common stock of the Company. See “May 2008 subordinated debtissue” in “Note E — Long-term debt” elsewhere herein.**

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**NoteG — Income taxes:**

** **

Deferred tax assets andliabilities are computed by applying the effective U.S. federal income tax rateto the gross amounts of temporary differences and other tax attributes.Deferred tax assets and liabilities relating to state income taxes are notmaterial. In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment. As of June 30,2009, 2008 and 2007, the Company believed it was more likely than not thatfuture tax benefits from net operating loss carryforwards and other deferredtax assets would not be realizable through generation of future taxable income;therefore, they were fully reserved.

 

Thecomponents of the net deferred federal income tax assets (liabilities) at June 30were as follows:

 
| ** **                                                        | ** ** | **2009**    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| Deferred  tax assets:                                             |       |        |       |       |       |       |       |
| Net  operating loss carryforwards                                 |       | $           | 10,579,700 |       | $          | 7,914,000  |       | $ | 4,013,000 |   |
| Depletion  basis of assets and related accounts                   |       | 2,309,800   |       | 311,000    |       | 93,300     |       |
|                                                              |       | $           | 12,889,500 |       | $          | 8,225,000  |       | $ | 4,106,300 |   |
| Deferred  tax liabilities:                                        |       |        |       |       |       |       |       |
| Depletion  basis of assets and related accounts                   |       | $           | (1,200     | )          | $          | —     |       | $ | (1,500 | ) |
|                                                              |       | $           | (1,200     | )          | $          | —     |       | $ | (1,500 | ) |
| Net  deferred tax (liabilities) assets before valuation allowance |       | $           | 12,888,300 |       | $          | 8,225,000  |       | $ | 4,104,800 |   |
| Valuation  allowance                                              |       | (12,888,300 | )          | (8,225,000 | )          | (4,104,800 | )          |
| Net  deferred tax (liabilities) assets                            |       | $           | —     |       | $          | —     |       | $ | — |   |

 

F-27

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Table of Contents

 

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Thefollowing table summarizes the difference between the actual tax provision andthe amounts obtained by applying the statutory tax rates to the income or lossbefore income taxes for the years ended June 30, 2009, 2008 and 2007:

 
| ** **                                      | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Tax  (benefit) calculated at statutory rate     |       | $         | (6,191,000 | )         | $          | (1,282,000 | )          | $ | (1,450,000 | ) |
| Losses  not providing tax benefits              |       | 6,191,000 |       | 1,282,000 |       | 1,450,000  |       |
| Current  federal income tax provision (benefit) |       | $         | —     |      | $          | —     |       | $ | — |   |
| Change  in valuation allowance                  |       | $         | (4,663,300 | )         | $          | (4,120,200 | )          | $ | (2,156,800 | ) |

 

Asof June 30, 2009, the Company had net operating loss carryforwards ofapproximately $42,317,519, which are available to reduce future taxable income.These carryforwards expire as follows:

 
| ** ** | ** ** | **Net operating** | ** ** |
|------------|------------|-------------------|------------|
| **Year**   | ** ** | **losses**        | ** ** |
| 2011       |       | 431,100           |       |
| 2012       |       | 205,100           |       |
| 2013       |       | 639,800           |       |
| 2019       |       | 845,600           |       |
| 2020       |       | 297,100           |       |
| 2021       |       | 172,100           |       |
| 2022       |       | 15,400            |       |
| 2023       |       | 571,900           |       |
| 2024       |       | 37,000            |       |
| 2025       |       | 1,321,800         |       |
| 2026       |       | 5,095,600         |       |
| 2027       |       | 6,413,700         |       |
| 2028       |       | 15,604,535        |       |
| 2029       |       | 10,666,784        |       |
|       |       | $                 | 42,317,519 |   |
|            |            |                   |            |  |

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note H — Commitments and contingencies:**

 

**Key personnel**

 

The Company depends to alarge extent on the services of Calvin A. Wallen III, the Company’s President,Chairman of the Board, and Chief Executive Officer. The loss of the services ofMr. Wallen would have a material adverse effect on the Company’soperations.

 

On February 29, 2008, the Company entered intoemployment agreements with its President and Chief Executive Officer, Calvin A.Wallen, III, and Secretary, Jon S. Ross. The agreement with Mr. Wallenprovides for a base salary of $200,000 per year, while the agreement with Mr. Rossprovides for a base salary of $150,000 per year. The other terms and conditionsof the agreements are substantially consistent.

 

Both agreements provide for a term of employment of36 months from the effective date of February 1, 2008, which term shall beautomatically extended by one additional month upon the expiration of eachmonth during the term; provided, that the Company may terminate subsequentone-month extensions at any time. Each agreement is subject to earlytermination by the Company in the event that the employee dies, becomes totallydisabled or commits an act constituting “Just Cause” under the agreement. Theagreements provide that Just Cause includes, among other things, the convictionof certain crimes, habitual neglect of his duties to the Company or othermaterial breaches by the employee of the agreement. Each agreement alsoprovides that the employee shall be permitted to terminate his employment uponthe occurrence of “Good Reason,” as defined in the agreement. The agreementsprovide that Good Reason includes, among other things, a material diminution inthe employee’s authority, duties, responsibilities or salary, or the relocationof the Company’s principal offices by more than 50 miles. If the employee’semployment is terminated by (a) the Company other than due to the employee’sdeath, disability or Just Cause, or (b) the employee for Good Reason, thenthe Company is required to pay all remaining salary through the end of thethen-current term. The foregoing severance payment is subject to reductionunder certain conditions.

 

**Environmentalmatters**

 

The Company’s operations andproperties are subject to extensive and changing federal, state, provincial andlocal laws and regulations relating to environmental protection, including thegeneration, storage, handling and transportation of oil and gas and thedischarge of materials into the environment. The Company generates typical oiland gas field wastes, including hazardous wastes that are subject to thefederal Resources Conservation and Recovery Act and comparable state statutes.Furthermore, certain wastes generated by the Company’s oil and gas operationsthat are currently exempt from regulation as “hazardous wastes” may in thefuture be designated as “hazardous wastes” and therefore be subject to morerigorous and costly operating and disposal requirements. All of the Company’sproperties are operated by third parties over whom the Company has limitedcontrol. In addition to the Company’s lack of control over properties operatedby others, the failure of previous owners or operators to comply with applicableenvironmental regulations may, in certain circumstances, adversely impact theCompany.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**NoteI - Cost of oil and gas properties:**

** **

**Costsincurred**

 

Costs (capitalized andexpensed) incurred in oil and gas property acquisition, exploration, anddevelopment activities for the years ended June 30, 2009, 2008 and 2007were as follows:

 
| ** **             | ** ** | **2009**  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------|------------|-----------|------------|------------|------------|------------|------------|
| Property  acquisitions |       | $         | 72,385     |       | $          | 394,675    |       | $ | 481,229 |   |
|                   |       |      |       |       |       |       |       |
| Exploration            |       | 5,928,825 |       | 14,030,615 |       | 2,759,794  |       |
|                   |       |      |       |       |       |       |       |
| Development            |       | —    |       | 916,613    |       | 966,879    |       |
|                   |       | $         | 6,001,210  |       | $          | 15,341,903 |       | $ | 4,207,902 |   |

 

**Capitalizedcosts**

 

Theaggregate amounts of capitalized costs relating to oil and gas producingactivities and the aggregate amounts of the related accumulated depreciation,depletion, and amortization at June 30, 2009, 2008 and 2007 were asfollows:

 
| ** **                                                                             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Proved  properties                                                                     |       | $          | 37,907,410 |       | $          | 29,542,015 |       | $ | 10,627,672 |   |
| Unproved  properties                                                                   |       | 890,715    |       | 3,254,901  |       | 6,827,341  |       |
|                                                                                   |       | 38,798,125 |       | 32,796,916 |       | 17,455,013 |       |
| Less:  accumulated depreciation, depletion and amortization of oil and gas  properties |       | 4,923,318  |       | 4,156,650  |       | 2,007,080  |       |
| Total  properties                                                                      |       | 33,874,807 |       | 28,640,266 |       | 15,447,933 |       |
| Less:  accumulated impairment of oil and gas properties due to full cost ceiling  test |       | 22,181,701 |       | 1,790,882  |       | 1,790,882  |       |
| Net  properties                                                                        |       | $          | 11,693,106 |       | $          | 26,849,384 |       | $ | 13,657,051 |   |

 

F-30

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Resultsof operations**

 

Theresults of operations from oil and gas producing activities for the years endedJune 30, 2009, 2008 and 2007 were as follows:

 
| ** **                                                                 | ** ** | **2009**    | ** **  | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| Revenues:                                                                  |       |        |        |       |       |       |       |
| Revenues                                                                   |       | $           | 1,858,139   |       | $          | 2,302,310  |       | $ | 583,416 |   |
| Preferred  return                                                          |       | —      |        | —     |       | —     |       |
|                                                                       |       | 1,858,139   |        | 2,302,310  |       | 583,416    |       |
| Expenses  (excluding G&A and interest expense):                        |       |        |        |       |       |       |       |
| Production,  operating and development costs                               |       | 1,372,041   |        | 1,162,489  |       | 481,145    |       |
| Depreciation,  depletion and amortization                                  |       | 766,669     |        | 2,149,570  |       | 360,910    |       |
| Impairment  loss on oil and gas properties                                 |       | 20,390,819  |        | —     |       | —     |       |
|                                                                       |       | 22,529,529  |        | 3,312,059  |       | 842,055    |       |
| Results  before income taxes                                               |       | (20,671,389 | )           | (1,009,749 | )          | (258,639   | )          |
| Provision  for income taxes                                                |       | —      |        | —     |       | —     |       |
| Results  of operations (excluding corporate overhead and interest expense) |       | $           | (20,671,389 | )          | $          | (1,009,749 | )          | $ | (258,639 | ) |

 

**Note J - Oil and gas reserves information (unaudited):**

 

Theestimates of proved oil and gas reserves utilized in the preparation of thefinancial statements are estimated in accordance with guidelines established bythe Securities and Exchange Commission and the FASB, which require that reserveestimates be prepared under existing economic and operating conditions with noprovision for price and cost escalations over prices and costs existing atyear-end except by contractual arrangements.

 

TheCompany emphasizes that reserve estimates are inherently imprecise.Accordingly, the estimates are expected to change as more current informationbecomes available. The Company’s policy is to amortize capitalized oil and gascosts on the unit of production method, based upon these reserve estimates. Itis reasonably possible that, because of changes in market conditions or theinherent imprecision of these reserve estimates, that the estimates of futurecash inflows, future gross revenues, the amount of oil and gas reserves, theremaining estimated lives of the oil and gas properties, or any combination ofthe above may be increased or reduced in the near term.

 

Ifreduced, the carrying amount of capitalized oil and gas properties may bereduced materially in the near term.

 

F-31

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Thefollowing unaudited table sets forth proved oil and gas reserves, all withinthe United States, at June 30, 2009, 2008 and 2007 together with thechanges therein:

 
| ** **                                  | ** ** | **Natural Gas (Mcf)**                               | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Proved  developed and undeveloped reserves: |       |                                                |       |   |   |   |   |
| Beginning  of year                          |       | 6,089,729                                           |       | 4,242,051 |   | 2,796,900 |   |
| Revisions  of previous estimates            |       | 5,233,858                                           |       | (1,969,397 | ) | (1,188,985 | ) |
| Purchases  of reserves in place             |       | —                                              |       | — |   | — |   |
| Extensions  and discoveries                 |       | 9,275,556                                           |       | 4,045,294 |   | 2,704,548 |   |
| Less:  Production                           |       | (279,516                                            | )          | (228,219 | ) | (70,412 | ) |
| Disposals  of reserves in place             |       | —                                              |       | — |   | — |   |
| End  of year                                |       | 20,319,627                                          |       | 6,089,729 |   | 4,242,051 |   |
|                                        |       |                                                |       |   |   |   |   |
| ** **                                  | ** ** | **Oil,  condensate and natural gas liquids (Bbls)** | ** ** |
| ** **                                  | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Proved  developed and undeveloped reserves: |       |                                                |       |   |   |   |   |
| Beginning  of year                          |       | 88,948                                              |       | 12,830 |   | 8,863 |   |
| Revisions  of previous estimates            |       | (8,917                                              | )          | (1,002 | ) | (2,437 | ) |
| Purchases  of reserves in place             |       | —                                              |       | — |   | — |   |
| Extensions  and discoveries                 |       | 49,711                                              |       | 79,861 |   | 7,371 |   |
| Less:  Production                           |       | (3,533                                              | )          | (2,741 | ) | (967 | ) |
| Disposals  of reserves in place             |       | —                                              |       | — |   | — |   |
| End  of year                                |       | 126,209                                             |       | 88,948 |   | 12,830 |   |

 

The majority of the Company’sLouisiana acreage lies atop the center of what is known in our industry as the “HaynesvilleShale Play” (which we refer to as the “Bossier/Haynesville shale” elsewhereherein), one of the most prolific field discoveries in the United States. Thediscovery of the existence of the Bossier/Haynesville shale formations in theCompany’s acreage in fiscal 2008 mandated a redirection in capital away from astrategy of maximizing the development of the Cotton Valley and other shallowformations in our Bethany Longstreet and Johnson Branch fields, and to thestrategy of acquiring and retaining as much Bossier/Haynesville shale acreageas possible.  This necessitated more costefficient completion techniques on wells drilled and did and does impair ourproduction.  It is in the Company’sfuture development plans to re-complete many of our producing wells at a laterdate, as Cotton Valley wells completed in late fiscal 2008 and early fiscal2009 with more extensive completion techniques showed and still show muchgreater levels of production.

 

Fiscal 2009 was a period oflimited field activity by the Company. Deteriorating economic conditions, the harsh debt and equityenvironment, stubbornly high field operation costs, and collapse in the pricingof natural gas as a commodity forced the Company to conserve cash.  Field activity was limited as to what wasnecessary to preserve the asset base of the Company.  Production volumes from Company wellsdecreased and only four new wells were brought online in fiscal 2009.  The goal of the Company evolved intopositioning itself in the best way possible to take advantage of the time whennatural gas pricing and general economic conditions became more favorable.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The “Revisions of previousestimates” amount of 5,233,858 Mcf in fiscal 2009

 

The “Extensions anddiscoveries” amount of 9,275,556 Mcf in fiscal 2009

 

The “Revisions of previousestimates” amount of 5,233,858 Mcf in fiscal 2009 was primarily a result ofmore performance information being available for the fiscal 2009 reservereport. Based on updated performance rates and significantly lower natural gasprices, downward revisions of an aggregate of 979,273 Mcf were made to theProved Developed reserves of the 22 Cotton Valley vertical wells.  Despite depressed natural gas prices, anupward revision of an aggregate of 5,933,615 Mcf was recognized for certainSections in which the Company maintains a working interest stemming frompre-existing PUD offset locations, resulting from the proximity to a competitor’sproductive horizontally-drilled Haynesville Shale wells.

 

The “Extensions anddiscoveries” amount of 9,275,556 Mcf in fiscal 2009 was primarily due to newPUD offset locations in which the Company maintains a working interest basedupon the proximity to a competitor’s productive horizontally-drilledHaynesville Shale wells. This amount was also due to a much lesser extent as aresult of exploratory and developmental, or “step out”, drilling in our JohnsonBranch acreage in fiscal 2009. The reserve estimates attributable to these newPUD locations are listed under “Extensions and discoveries.”

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Standardizedmeasure of discounted future net cash flows relating to proved reserves:**

 

Thestandardized measure of discounted future net cash flows was calculated byapplying current year-end prices, considering fixed and determinable price changesonly to the extent provided by contractual arrangements or law, to estimatedfuture production, less future expenditures (based on fiscal year-end costs) tobe incurred in developing proved undeveloped and proved producing oil and gasreserves, and future income taxes. The resulting future net cash flows werediscounted using a rate of 10% per annum (Table 1). The standardized measure ofdiscounted net cash flow amounts contained in the following tabulation does notpurport to represent the fair market value of the Company’s oil and gas provedby drilling or production history. There are significant uncertainties inherentin estimating timing and amount of future costs. In addition, the method ofvaluation utilized, is based on current prices and costs and the use of a 10%discount rate, and is not necessarily appropriate for determining fair value(Table 2).

 

Thefollowing is the estimated standardized measure relating to proved oil and gasreserves at June 30, 2009, 2008 and 2007:

 

**Table 1**

 
| ** **                                                          | ** ** | **2009**    | ** **  | **2008**    | ** **  | **2007**   | ** **  |
|---------------------------------------------------------------------|------------|-------------|-------------|-------------|-------------|------------|-------------|
| Future  cash flows                                                  |       | $           | 80,937,110  |        | $           | 95,132,248 |        | $ | 30,768,518 |   |
| Future  production costs                                            |       | $           | (9,382,262  | )           | (11,759,214 | )          | (5,601,924  | ) |
| Future  development costs                                           |       | $           | (38,888,060 | )           | (34,598,145 | )          | (11,832,100 | ) |
| Future  severance tax expense                                       |       | $           | (5,850,567  | )           | (1,708,116  | )          | (1,713,562  | ) |
| Future  income taxes                                                |       | $           | —      |        | —      |       | —      |   |
| Future  net cash flows                                              |       | $           | 26,816,221  |        | $           | 47,066,773 |        | $ | 11,620,932 |   |
| Ten  percent annual discount for estimated timing of net cash flows |       | (16,013,831 | )           | (13,956,117 | )           | (4,791,222 | )           |
| Standardized  measure of discounted future net cash flows           |       | $           | 10,802,390  |        | $           | 33,110,656 |        | $ | 6,829,710 |   |

 

Thefollowing is an analysis of changes in the estimated standardized measure ofproved reserves during the years ended June 30, 2009, 2008 and 2007:

 

**Table 2**

 
| ** **                                                        | ** ** | **2009**   | ** **  | **2008**   | ** **  | **2007**   | ** ** |
|-------------------------------------------------------------------|------------|------------|-------------|------------|-------------|------------|------------|
| Changes  from:                                                    | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** |
| Sale  of oil and gas produced                                     |       | $          | (486,098    | )          | $           | (1,139,821 | )          | $ | (102,271 | ) |
| Net  changes in prices and production costs                       |       | $          | (46,382,115 | )          | 13,650,638  |       | 1,474,742  |   |
| Extensions  and discoveries                                       |       | $          | 4,501,970   |       | 23,748,732  |       | 4,073,195  |   |
| Revision  of previous quantity estimates                          |       | $          | 15,167,786  |       | (13,379,733 | )          | (4,559,850 | ) |
| Accretion  of discounts                                           |       | $          | 3,311,066   |       | 682,971     |       | 644,739    |   |
| Net  change in income taxes                                       |       | $          | —      |       | —      |       | —     |   |
| Purchases  of reserves in place                                   |       | $          | —      |       | —      |       | —     |   |
| Disposals  of reserves in place                                   |       | $          | —      |       | —      |       | —     |   |
| Development  costs incurred that reduced future development costs |       | $          | —      |       | (302,200    | )          | (339,500   | ) |
| Changes  in future development costs                              |       | $          | 7,536,184   |       | (1,786,129  | )          | 324,717    |   |
| Changes  in timing of production and other                        |       | $          | (5,957,059  | )          | 4,806,488   |       | (1,133,447 | ) |
| Change  in standardized measure                                   |       | $          | (22,308,266 | )          | $           | 26,280,946 |       | $ | 382,325 |   |

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note K —Selected quarterly financial data (unaudited):**

 

Summarizedunaudited quarterly financial data for fiscal 2009 and 2008 are as follows:

 
| ** **                                         | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                         | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| **Fiscal 2009**                                    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                           |       | $           | 674,971    |        | $          | 491,966     |       | $           | 293,371    |       | $          | 397,831 |   | $ | 1,858,139 |   |
| Loss  before income taxes                          |       | $           | (965,572   | )           | $          | (9,815,239  | )          | $           | (9,187,193 | )          | $          | (4,794,512 | ) | $ | (24,762,516 | ) |
| Net  loss                                          |       | $           | (965,572   | )           | $          | (9,815,239  | )          | $           | (9,187,193 | )          | $          | (4,794,512 | ) | $ | (24,762,516 | ) |
| Net  loss per common share - basic and diluted (1) |       | $           | (0.02      | )           | $          | (0.16       | )          | $           | (0.15      | )          | $          | (0.07 | ) | $ | (0.40 | ) |
| Weighted  average common shares outstanding        |       | 60,286,271  |       | 60,335,564  |       | 61,430,731  |       | 62,570,564  |       | 61,150,400 |       |
|                                               |       |        |       |        |       |        |       |        |       |       |       |
| **Fiscal 2008**                                    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                           |       | $           | 447,988    |        | $          | 375,825     |       | $           | 778,360    |       | $          | 700,137 |   | $ | 2,302,310 |   |
| Loss  before income taxes                          |       | $           | (841,044   | )           | $          | (946,974    | )          | $           | (1,084,333 | )          | $          | (2,256,102 | ) | $ | (5,128,453 | ) |
| Net  loss                                          |       | $           | (841,044   | )           | $          | (946,974    | )          | $           | (1,084,333 | )          | $          | (2,256,102 | ) | $ | (5,128,453 | ) |
| Net  loss per common share - basic and diluted (1) |       | $           | (0.02      | )           | $          | (0.02       | )          | $           | (0.02      | )          | $          | (0.04 | ) | $ | (0.09 | ) |
| Weighted  average common shares outstanding        |       | 55,957,472  |       | 56,362,581  |       | 57,095,686  |       | 58,449,786  |       | 56,974,407 |       |

 

----

(1) The sum of theper share amounts per quarter does not equal the total year amount due tochanges in the weighted average number of common shares outstanding in eachquarter.

 

**Note L — Subsequent Events**

 

Subsequentevents have been evaluated through September 25, 2009, which is the datethe financial statements were issued.

 

OnAugust 18 and August 26, 2009, Cubic Energy, Inc. (the “Company”)entered into Subscription and Registration Rights Agreements (the “SubscriptionAgreements”) with certain investors (the “Investors”).  Pursuant to the Subscription Agreements, theCompany issued 804,000 shares of common stock on August 18, 2009, and1,300,001 shares of common stock on August 26, 2009, for an aggregate of2,104,001 shares.

 

Pursuantto the Subscription Agreements, the Investors paid aggregate consideration ofapproximately $1,788,400 to the Company for 2,104,001 shares of the Company’scommon stock and warrants exercisable into 1,052,000 shares of commonstock.  The warrants are exercisablethrough July 31, 2014, at $0.85 per share. With respect to certain of such issuances, the Company paidbroker-dealer commissions in the aggregate amount of $59,500 to AvalonSecurities, Ltd.

 

Theshares and warrants were issued by the Company in reliance upon an exemptionfrom registration set forth in Regulation D and/or Section 4(2) ofthe Securities Act of 1933, as amended, which exempts transactions by an issuernot involving a public offering.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note L —Subsequent Events (continued)**

 

The Company has received an extensions of time untilNovember 1, 2009 from Wells Fargo Energy Capital, Inc. (the “Lender”)to comply with the terms of that letter dated June 30, 2009. That June 30,2009 letter previously informed the Company that the Lender made a borrowingbase redetermination and waived any failure of the Company to comply with itsobligations under the Credit Agreement as a result of such redeterminationuntil September 1, 2009.

 

On September 15, 2009, the Company receivednotice from the NYSE Amex LLC (the “Exchange”) that the Exchange has acceptedthe Company’s previously submitted plan of compliance and, pursuant to suchplan, has granted the Company an extension to regain compliance with theExchange’s continued listing standards.

 

As previously disclosed on June 29, 2009, theCompany received a letter from the Exchange indicating that the Exchangebelieves the Company is not in compliance with Section 1003(a)(iv), of theExchange’s company guide based upon the Company’s financial condition. TheCompany was afforded the opportunity to submit a plan detailing how it intendsto regain compliance with Section 1003(a)(iv) by December 28,2009 and, on July 27, 2009, submitted such a plan to the Exchange. As aresult, the Exchange has granted the Company an extension through December 28,2009 to strengthen its financial condition and thereby evidence compliance withSection 1003(a)(iv).

 

The Company will be subject to periodic reviews bythe Exchange during the extension period. Failure to make progress consistentwith the plan or to regain compliance with the continued listing standards bythe end of the extension period could result in the Company being delisted fromthe Exchange.

 

**Note M —Going Concern**

 

Asshown in the accompanying financial statements, the Company incurred a net lossof $24,762,516 during the year ended June 30, 2009, and as of that date,the Company’s current liabilities exceeded its current assets by $27,822,536and its total liabilities exceeded its total assets by $16,022,965. Thosefactors, as well as the uncertain conditions that the Company faces regardingits loan agreements, create an uncertainty about the Company’s ability tocontinue as a going concern. Management of the Company is developing a plan toreduce its liabilities through, among other alternatives, an expanded creditfacility and issuance of additional stock to shareholders. The ability of theCompany to continue as a going concern is dependent on acceptance of the planby the Company’s bank creditors and the plan’s success. The financialstatements do not include any adjustments that might be necessary if theCompany is unable to continue as a going concern.

 

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**EXHIBIT INDEX**

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                               |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 3.1     |       | Articles  of Incorporation (incorporated by reference to Exhibit 3.1 to the  Registrant’s Form 10-QSB for the period ended September 30, 1999).                                                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 3.2     |       | Articles  of Amendment to the Articles of Incorporation of the Company dated  December 30, 2005 (incorporated by reference to Exhibit 3.1 of the  Company’s Form 10-QSB for the period ended December 31, 2005).                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 3.3     |       | Bylaws  (incorporated by reference to Exhibit 3.2 of the Company’s  Form 10-KSB for the period ended June 30, 2000).                                                                                                                                                                                      |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.1    |       | Registration  Rights Agreement, effective as of September 30, 2004, among Cubic  Energy, Inc. and the purchasers signatory thereto (incorporated by  reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K, filed with the SEC on October 12, 2004).                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.2    |       | Securities  Purchase Agreement, dated as of December 12, 2005, among Cubic  Energy, Inc. and each purchaser identified on the signature  pages thereto (incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K, filed with the SEC on  December 16, 2005). |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.3    |       | Registration  Rights Agreement, dated as of December 12, 2005, among Cubic  Energy, Inc. and the purchasers signatory thereto (incorporated by  reference to Exhibit 10.2 of the Company’s Current Report on  Form 8-K, filed with the SEC on December 16, 2005).                               |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.4    |       | Form of  Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3  of the Company’s Current Report on Form 8-K, filed with the SEC on  December 16, 2005).                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.5    |       | Credit  Agreement, dated February 6, 2006, by and among Cubic Energy, Inc.  and Petro Capital V, L.P. (filed as exhibit 10.1 to the Company’s  Form 8-K dated February 8, 2006, and incorporated herein by  reference).                                                                              |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.6    |       | Common  Stock Purchase Warrant, dated February 6, 2006, issued to Petro Capital  Securities, LLC (filed as exhibit 10.3 to the Company’s Form 8-K dated  February 8, 2006, and incorporated herein by reference).                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.7    |       | Common  Stock Purchase Warrant, dated February 6, 2006, issued to Petro Capital  V, L.P. (filed as exhibit 10.4 to the Company’s Form 8-K dated  February 8, 2006, and incorporated herein by reference).                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.8    |       | Registration  Rights Agreement, dated as of February 6, 2006, by and between Cubic  Energy, Inc., Petro Capital V, L.P. and Petro Capital Securities, LLC  (filed as exhibit 10.5 to the Company’s Form 8-K dated February 8,  2006, and incorporated herein by reference).                          |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.9    |       | Purchase  Agreement, dated as of February 6, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III, and Tauren Exploration, Inc.  (filed as exhibit 10.6 to the Company’s Form 8-K dated February 8,  2006, and incorporated herein by reference).                                       |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.10   |       | Promissory  Note, dated as of February 6, 2006, by Cubic Energy, Inc., payable  to Tauren Exploration, Inc. in the principal amount of $1,300,000 (filed  as exhibit 10.7 to the Company’s Form 8-K dated February 8, 2006,  and incorporated herein by reference).                             |

 

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| 10.11  |   | Amendment  to Promissory Note, dated March 30, 2006, by and between, Cubic  Energy, Inc. and Tauren Exploration, Inc. (incorporated by  reference to Exhibit 10.8 of the Company’s Form 10-QSB for the  quarter ended March 31, 2006).                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.12  |   | Amendment  to Purchase Agreement, dated April 3, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III and Tauren Exploration, Inc.  (incorporated by reference to Exhibit 10.9 of the Company’s  Form 10-QSB for the quarter ended March 31, 2006). |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Amendment  to Purchase Agreement, dated May 5, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III and Tauren Exploration, Inc.  (incorporated by reference to Exhibit 10.10 of the Company’s  Form 10-QSB for the quarter ended March 31, 2006).  |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.14  |   | Subscription  and Registration Rights Agreement with George Karfunkel, dated July 26,  2006 (filed as Exhibit 10.1 to the Company’s Form 8-K dated  July 28, 2006).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.15  |   | Subscription  and Registration Rights Agreement with Yehuda Neuberger and Anne Neuberger  JTWROS dated July 26, 2006 (filed as Exhibit 10.2 to the Company’s  Form 8-K dated July 28, 2006).                                                                          |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.16  |   | Warrant  issued to George Karfunkel (filed as Exhibit 10.3 to the Company’s  Form 8-K dated July 28, 2006).                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.17  |   | Warrant  issued to Yehuda Neuberger and Anne Neuberger JTWROS (filed as  Exhibit 10.4 to the Company’s Form 8-K dated July 28, 2006).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.18  |   | Third  Amendment to Promissory Note, dated November 10, 2006, by and between,  Cubic Energy, Inc. and Tauren Exploration, Inc. (filed as  Exhibit 10.1 to the Company’s Form 10-QSB for the quarter ended  September 30, 2006).                             |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.19  |   | Warrant  issued to Tauren Exploration, Inc. dated November 10, 2006 (filed  as Exhibit 10.2 to the Company’s Form 10-QSB for the quarter ended  September 30, 2006).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.20  |   | Form of  Subscription and Registration Rights Agreement (filed as Exhibit 10.1 to  the Company’s Form 8-K filed December 21, 2006).                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.21  |   | Form of  Warrant (filed as Exhibit 10.2 to the Company’s Form 8-K filed  December 21, 2006).                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.22  |   | Credit  Agreement dated March 5, 2007 by and between Cubic Energy, Inc. and  Wells Fargo Capital, Inc. (filed as Exhibit 10.1 to the Company’s  Form 8-K filed March 9, 2007).                                                                              |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.23  |   | Convertible  Promissory Note dated as of March 5, 2007 by Cubic Energy, Inc.  payable to Wells Fargo Energy Capital, Inc. in the principal amount of  $5,000,000 (filed as Exhibit 10.2 to the Company’s Form 8-K filed  March 9, 2007).                    |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.24  |   | Promissory  Note dated as of March 5, 2007 by Cubic Energy payable to Wells Fargo  Energy Capital, Inc. in the maximum principal amount of $20,000,000  (filed as Exhibit 10.3 to the Company’s Form 8-K on March 9,  2007).                                     |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.25  |   | Warrant  to Purchase Shares of Common Stock of Cubic Energy, Inc. dated  March 5, 2007, issued to Wells Fargo Energy Capital, Inc. (filed as  Exhibit 10.4 to the Company’s Form 8-K on March 9, 2007).                                                     |

 

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| 10.26  |   | Registration  Rights Agreement dated as of March 5, 2007 by and between Cubic  Energy, Inc. and Wells Fargo Energy Capital, Inc. (filed as  Exhibit 10.5 to the Company’s Form 8-K on March 9, 2007). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                     |
| 10.27  |   | Form of  Assignment of Net Profits Interest (filed as Exhibit 10.6 to the  Company’s Form 8-K on March 9, 2007).                                                                                                |
|   |   |                                                                                                                                                                                                                                     |
| 10.28  |   | Employment  Agreement with Calvin A. Wallen, III, dated February 29, 2008  (filed as Exhibit 10.1 to the Company’s Form 8-K on March 5,  2008).                                                            |
|   |   |                                                                                                                                                                                                                                     |
| 10.29  |   | Employment  Agreement with Jon S. Ross dated February 29, 2008 (filed as  Exhibit 10.1 to the Company’s Form 8-K on March 5, 2008).                                                                             |
|   |   |                                                                                                                                                                                                                                     |
| 10.30  |   | Subordinated  Promissory Note dated May 6, 2008 (filed as Exhibit 10.1 to the  Company’s Form 10-QSB for the quarter ended March 31, 2008).                                                                     |
|   |   |                                                                                                                                                                                                                                     |
| 10.31  |   | First  Amendment to Credit Agreement with Wells Fargo Energy Capital dated  May 8, 2008 (filed as Exhibit 10.2 to the Company’s  Form 10-QSB for the quarter ended March 31, 2008).                             |
|   |   |                                                                                                                                                                                                                                     |
| 10.32  |   | Form of  Subscription and Registration Rights Agreement (filed as Exhibit 10.1 to  the Company’s Form 8-K filed September 1, 2009).                                                                             |
|   |   |                                                                                                                                                                                                                                     |
| 10.33  |   | Form of  Warrant (filed as Exhibit 10.2 to the Company’s Form 8-K filed  September 1, 2009).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                     |
| 23.1*  |   | Consent  of Philip Vogel & Co., PC                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                     |
| 31.1*  |   | Rule 13a-14(a)/15d-14(a) Certification  of Calvin A. Wallen, III                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                     |
| 31.2*  |   | Rule 13a-14(a)/15d-14(a) Certification  of Larry G. Badgley                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                     |
| 32.1*  |   | Section 1350  Certification of Calvin A. Wallen, III                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                     |
| 32.2*  |   | Section 1350  Certification of Larry G. Badgley                                                                                                                                                                                     |

 

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* Filed herewith.

 

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