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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT**

**PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEFISCAL YEAR ENDED JUNE 30, 2010**

**COMMISSIONFILE NUMBER 0-9355**

 

**CUBICENERGY, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

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

 

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

(Address of Principal Executive Offices)

 

**972-686-0369**

(Registrant’s Telephone 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.  Yes o  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 that theregistrant 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.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions 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, 2009 aggregate market value held bynon-affiliates was $41,423,927.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date: As of September 8, 2010, therewere 75,394,579 shares of Common Stock outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE: None.

 

 

 

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**Special note regarding forward-looking statements**

 

Thisannual report on Form 10-K contains forward-looking statements, as definedin Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements, other thanstatements of historical 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-lookingstatements are 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 in the“Risk Factors” section of this report and other sections of this report, whichdescribe factors that could cause our actual results to differ from those setforth in the forward-looking statements, including, but not limited to, thefollowing factors:

 

·                  our ability to generate sufficient cash flowfrom operations, borrowings or other sources to enable us to service our debtand fully develop our undeveloped acreage positions;

 

·                  the volatility in commodity prices for oiland natural gas;

 

·                  the possibility that the industry may besubject to future regulatory or legislative actions (including additionaltaxes);

 

·                  the presence or recoverability of estimatedoil and natural gas reserves and the actual future production rates andassociated costs;

 

·                  the ability to replace oil and natural gasreserves;

 

·                  lease or title issues or defects to our oiland gas properties;

 

·                  environmental risks;

 

·                  drilling and operating risks;

 

·                  exploration and development risks;

 

·                  competition, including competition for acreagein natural gas producing areas;

 

·                  management’s ability to execute our plans tomeet our goals;

 

·                  our ability to retain key members of seniormanagement;

 

·                  our ability to obtain goods and services,such as drilling rigs and other oilfield equipment, and access to adequategathering systems and pipeline take-away capacity, to execute our drillingprogram;

 

·                  general economic conditions, whetherinternationally, nationally or in the regional and local market areas in whichwe do business, may be less favorable than expected, including that the UnitedStates economic slow-down might continue to negatively affect the demand fornatural gas, oil and natural gas liquids;

 

·                  continued hostilities in the Middle East andother sustained military campaigns or acts of terrorism or sabotage; and

 

·                  other economic, competitive, governmental,legislative, regulatory, geopolitical and technological factors that maynegatively impact our business, operations or pricing.

 

Allforward-looking statements are expressly qualified in their entirety by thecautionary statements in this paragraph and elsewhere in this document. Otherthan as required under the securities laws, we do not assume a duty to updatethese forward-looking statements, whether as a result of new information,subsequent events or circumstances, changes in expectations or otherwise.

 

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**CUBICENERGY, INC.**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                           | ** ** | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |                                                                                                                 |       |     |
| Item 1.      | Business                                                                                                             |       | 1        |
| Item 1A.     | Risk  Factors                                                                                                        |       | 19       |
| Item 1B.     | Unresolved  Staff Comments                                                                                           |       | 28       |
| Item 2.      | Properties                                                                                                           |       | 28       |
| Item 3.      | Legal  Proceedings                                                                                                   |       | 28       |
| Item 4.      | (  Removed and Reserved )                                                                                            |       | 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                                                                                                   |       | 45       |
| ** **        |                                                                                                                 |       |     |
| **PART III** |                                                                                                                 |       |     |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                              |       | 46       |
| 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                                                                              |       | 59       |
| ** **        |                                                                                                                 |       |     |
| **PART IV**  |                                                                                                                 |       |     |
| Item 15.     | Exhibits  and Financial Statement Schedules                                                                          |       | 61       |

 

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**PART I**

 

**Item 1.    Business.**

 

**GENERAL**

 

CubicEnergy, Inc. (referred to as “Cubic”, “we”, “our”, “us” or the “Company”)is an independent energy company engaged in the development and production of,and exploration for, crude oil, natural gas and natural gas liquids. Our oiland gas assets are concentrated in Texas and Louisiana. At June 30, 2010,our total proved reserves were 29,209,160 Mcfe.

 

TheCompany’s future results of operations and growth are substantially dependentupon (i) its ability to acquire or find new oil and gas properties, orsuccessfully develop existing oil and gas properties and (ii) theprevailing prices for oil and gas. Numerous locations have been identified byus and by third-party operators for additional drilling. If we are unable toeconomically complete additional producing wells, the Company’s oil and gasproduction, and thus its revenues, would likely decline rapidly as its reservesare depleted. In addition, oil and gas prices are dependent upon numerousfactors beyond the Company’s control, such as economic, political,governmental, environmental and regulatory developments, as well as competitionfrom other sources of energy. The oil and gas markets have historically beenvery volatile, and any further significant or extended decline in the price ofoil or gas would have a material adverse effect on the Company’s financialcondition and results of operations, and could result in a further reduction inthe carrying value of the Company’s proved reserves and adversely affect itsaccess to capital.

 

**LouisianaAcreage**

 

Ourcorporate strategy with respect to our asset acquisition and developmentefforts was to position the Company in a low risk opportunity while buildingmainstream high yield reserves.  The acquisition of our acreage in DeSotoand Caddo Parishes, Louisiana, puts us in a reservoir rich environments in theHosston, Cotton Valley and Bossier/Haynesville Shale formations, withadditional shallow formations to exploit as well. We have had success on ouracreage with wells completed in the Hosston, Cotton Valley andBossier/Haynesville Shale formations. We also own an interest in theright-of-ways, infrastructure and pipelines for our Caddo and DeSoto Parish,Louisiana acreage.

 

Weshare our Bossier/Haynesville formation acreage with Goodrich PetroleumCorporation (“Goodrich”), Chesapeake Energy Corporation (“Chesapeake”), El PasoCorporation (“El Paso”), British Gas Group (“BG”) and EXCO Operating Company,LP (“EXCO”), and all of these companies are third-party operators activelyworking on our shared acreage. As a result of this activity, we expect to seeimproving production volumes in the quarter ending September 30, 2010.

 

Ourfinancial results depend upon our third-party Hosston, Cotton Valley andBossier/Haynesville Shale operators along with many factors, which are largelydriven by the volume of our natural gas production and the price that wereceive for that production. Our natural gas production volumes will decline asreserves are depleted unless we obtain and expend capital in successfuldevelopment and exploration activities or acquire properties with existingproduction. The amount we realize for our production depends predominantly uponcommodity prices, which are affected by changes in market demand and supply, asimpacted by overall economic activity, weather, pipeline capacity constraints,inventory storage levels, basis differentials and other factors. Accordingly,finding and developing oil and natural gas reserves at economical costs iscritical to our long-term success.

 

Aspart of our strategic plan to restructure our debt and raise additionaloperating capital, during the second quarter of fiscal 2010, Wells Fargoexpanded our credit facility to $45 million, which includes a $40,000,000revolving credit facility and a $5,000,000 convertible term note. The revolvingcredit facility is subject to

 

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borrowingbase limits, and as of June 30, 2010, the revolver had $25 millionoutstanding with a maturity date of July 1, 2012. Subsequent to June 30,2010, our borrowing base and borrowings under the revolving credit facilitywere increased to $30 million. We also acquired $30.9 million in drillingcredits, dedicated for the future drilling and completion of horizontalHaynesville Shale formation wells. For additional information, see below under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources”.

 

Managementbelieves in the value of our assets, which are being drilled by third-partyoperators, and will continue to explore strategic alternatives that allow us toleverage those assets to gain full shareholder value.

 

**TexasAcreage**

 

OurTexas properties are situated in Eastland and Callahan Counties. The Texasproperties consist primarily of wells acquired in several transactions between1991 and 2002 and through overriding royalty interests reserved in farm-outagreements in 1998 and 1999. These wells produce limited amounts of natural gasand oil condensate.

 

**HISTORY**

 

Ourpredecessor was incorporated in October 1978. Cubic was incorporated in1999 in the State of Texas. Our principal executive office is located at 9870Plano Road, Dallas, Texas 75238, and our telephone number is (972) 686-0369.

 

InDecember 1997, we entered into a Stock Purchase Agreement (the “Agreement”)pursuant to which the Company issued 12,500,000 shares of our common stock inexchange for the conveyance to the Company of certain oil and gas properties byCalvin A. Wallen, III and his affiliates. In connection with theAgreement, three of the five members of the Board of Directors resigned and newdirectors were appointed, including Mr. Wallen, who also became Presidentand CEO of the Company.

 

Priorto the Agreement, we focused primarily on the acquisition of non-operatedworking interests and overriding royalty interests in oil and gas properties.Subsequent to entering into the Agreement, we moved our headquarters fromTulsa, Oklahoma to Garland, Texas in order to utilize an affiliate’s assembledteam of experienced management whose substantial expertise lay in acquisition,exploitation and development and the ability to manage both operated andnon-operated oil and gas properties. In addition, after reviewing our existingproperty portfolio and refining our new business strategy, the management teaminitiated a divestment strategy to dispose of our non-strategic assets in non-coreareas in order to concentrate on building core reserves. Pursuant to thisstrategy, we have acquired additional properties in our core areas, primarilyin Louisiana, as well as pursuing an operated and a non-operated drillingprogram for the drilling of exploratory, development and infill wells, astrategy previously unavailable to us due to the technical expertise andexperience required and the lack of available resources. We have madesubstantial progress in redirecting our strategic business efforts and believethat attractive opportunities remain for development of our remaining assetsand acquisition of future assets.

 

OnFebruary 6, 2006, the Company entered into a Purchase Agreement withTauren Exploration, Inc. (“Tauren”), an entity wholly owned by Mr. Wallen,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 shares of Company common stock, (c) anunsecured 12.5% short-term promissory note in the amount of $1,300,000, whichnote

 

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isconvertible 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.

 

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, subject toborrowing base limits, and a convertible term loan of $5,000,000 (the “CreditFacility”). In connection with entering into the Credit Facility, the Companyissued to Wells Fargo warrants, with five-year expirations, for the purchase ofup to 2,500,000 shares of Company common stock at an original exercise price of$1.00 per share. The revolving note is subject to a borrowing base(the “Borrowing Base”), initially set at $4,000,000. On July 27, 2007,Wells Fargo increased the Borrowing Base to $6,600,000 in order to fund thedrilling and casing costs of two new wells in the Company’s Johnson Branchacreage in Caddo Parish, Louisiana. On September 7, 2007, Wells Fargoincreased the Borrowing Base to $8,600,000 in order to fund the remainingdrilling and casing costs of five wells drilled since the beginning of fiscal2008, the drilling and casing costs of two new wells, and the costs ofinstalling a gathering/sales line and associated equipment in the Company’sJohnson Branch acreage. On November 19, 2007, Wells Fargo increased theborrowing base to $14,500,000 in order to fund the completion costs and casingof eight wells already successfully drilled and the drilling of four additionalwells located in the Company’s Johnson Branch acreage. On May 8, 2008,Wells Fargo increased the borrowing base to $20,000,000 in order to fund thecompletion costs and casing of the four recently-drilled wells located in theCompany’s Johnson Branch acreage (including two vertical wells drilled into theBossier/Haynesville shales) and the drilling of two additional wells located inthe Company’s Bethany Longstreet acreage in Caddo and DeSoto Parishes. On December 18,2009, the Company entered into a Second Amendment to Credit Agreement withWells Fargo, providing for a revolving credit facility of up to $40 million anda convertible term loan of $5 million (the “Amended Credit Agreement”). Theborrowing base under the revolving credit facility was initially established at$25 million. The indebtedness bears interest at a fluctuating rate equal to thesum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matureson July 1, 2012 and is secured by substantially all of the assets of theCompany. In connection with entering into the Amended Credit Agreement, theCompany issued to Wells Fargo additional warrants, expiring on December 1,2014, for the purchase of up to 5,000,000 shares of Company common stock at anexercise price of $1.00 per share, and extended the expiration date of thewarrants to purchase 2,500,000 shares of Company common stock that werepreviously issued to Wells Fargo to December 1, 2014.

 

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.

 

OnMay 6, 2008, the Company issued a subordinated promissory note in theamount of $2,000,000 (the “Subordinated Note”) to Diversified DynamicsCorporation (the “Lender”), an entity controlled by William L. Bruggeman, Jr.,who beneficially owns more than 5% of the common stock of the Company, and whosubsequently became a director of the Company. The Subordinated Note boreinterest at a fluctuating rate equal to the sum of the prime rate plus twopercent (2%) per annum, and was scheduled to mature on April 30, 2010. Asconsideration 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.

 

OnNovember 24, 2009, the Company entered into transactions with Tauren andLangtry Mineral & Development, LLC (“Langtry”), both of which areentities controlled by Mr. Wallen, under which the

 

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Companyacquired $30,952,810 in pre-paid drilling credits (the “Drilling Credits”)applicable towards the development of its Haynesville Shale rights in NorthwestLouisiana. The Company will use the Drilling Credits to fund $30,952,810 of itsshare of the drilling and completion costs for those horizontal HaynesvilleShale wells drilled in sections previously operated by an affiliate of theCompany which are now operated by a third party.

 

Asconsideration for the Drilling Credits, the Company (a) conveyed to Taurena net overriding royalty interest of approximately 2% in its leasehold rightsbelow the Taylor Sand formation of the Cotton Valley and (b) issued toLangtry 10,350,000 Company common shares and preferred stock in the amount of$10,350,000, convertible at any time prior to the fifth anniversary of issuanceinto Company common shares at $1.20 per common share. The preferred stock isentitled to cumulative dividends equal to 8% per annum, payable quarterly,which dividends may be paid in cash or in additional shares of preferred stock,in the Company’s discretion. The preferred stock may be redeemed by the Companyat any time, at a redemption price equal to 20% over the original issue price.

 

OnDecember 18, 2009, the Company issued a subordinated promissory notepayable to Mr. Wallen, in the principal amount of $2,000,000 (the “WallenNote”). This note bears interest at the prime rate plus one percent (1%), withinterest payable monthly. The Wallen Note was entered into with the consent ofWells Fargo. The outstanding principal balance is due and payable on September 30,2012 and is subordinated to the indebtedness under the Amended CreditAgreement. The proceeds of the Wallen Note were used to repay the SubordinatedNote. The net profits interest described above was conveyed to the Lender inconnection with the repayment.

 

**STRATEGY**

 

Ourstrategy with respect to our domestic exploration program seeks to maintain abalanced portfolio of drilling opportunities that range from lower risk, fieldextension wells to the smaller scale pursuit of Company appropriate higherrisk, 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 developprospects in-house with an affiliate and through strategic alliances withexploration companies that have expertise in specific target areas. Inaddition, we evaluate some externally generated prospects and look toparticipate in some of these opportunities to enhance our portfolio.

 

Weare currently focusing our domestic exploration activities to develop ourundeveloped leasehold opportunities in Louisiana. Currently we have explorationopportunities and seek to acquire additional leasehold interests in Caddo andDeSoto Parishes in Louisiana.  These areas are a part of geologic studiesutilizing regional trend surface analysis, 2-D and 3-D seismic data and/or vastsub-surface control. Prospects have been developed from approximately 4,000 to12,000 feet in depth in the following reservoirs: Bossier/Haynesville shales;Cotton Valley; Hosston; Gloyd; Pettet; Glen Rose and Paluxy.

 

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**PRINCIPAL OIL AND GAS PROPERTIES**

 

Thefollowing table summarizes certain information with respect to our principalareas of operation at June 30, 2010:

 
| ** ** | ** ** | **Proved Reserves**        | ** ** | ** ** | ** ** | ** **         | ** ** |
|------------|------------|---------------------------------|------------|------------|------------|--------------------|------------|
| ** ** | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas** | ** ** | **Percent** | ** ** | **Present Value** | ** ** |
| ** ** | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent**     | ** ** | **of Proved** | ** ** | **(Discounted** | ** ** |
| **Area**   | ** ** | **(Bbls)**                      | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**         | ** ** | **Reserves** | ** ** | **@ 10%)** | ** ** |
| Louisiana  |       | 8,647                           |       | 29,157,280 |       | 29,209,160         |       | 100.0 | % | $ | 64,757,290 |   |
| Texas      |       | —                          |       | —     |       | —             |       | 0.0 | % | — |   |
| Total      |       | 8,647                           |       | 29,157,280 |       | 29,209,160         |       | 100.0 | % | $ | 64,757,290 |   |

 

OurTexas properties are situated in Eastland and Callahan Counties. Our Louisianaproperties are situated in Caddo Parish and in DeSoto Parish. At June 30,2010, the Louisiana properties contained all of our proved reserves, asituation that is expected to continue. The Texas properties consist primarilyof wells acquired by the Company in several transactions between 1991 and 2002and through overriding royalty interests reserved in farm-out agreements in1998 and 1999. The vast majority of the Louisiana properties were acquired onor about October 1, 2004, January 11, 2005 and February 6, 2006.

 

Ournet production for the fiscal year ended June 30, 2010 for all of theCompany’s wells averaged approximately 2171 Mcf of natural gas per day, 4barrels of oil per day and 105 gallons of natural gas liquids per day ascompared to approximately 766 Mcf of natural gas per day, 5 barrels of oil perday and 213 gallons of natural gas liquids per day in the fiscal year ended June 30,2009.

 

**RECENTDEVELOPMENTS**

 

IndigoMinerals, LLC (“Indigo Minerals”) has plans to re-work or re-enter certainwells in the Cotton Valley formation in which the Company has such interests.Indigo Minerals now operates the Cotton Valley wells previously operated byChesapeake in which the Company has an interest.

 

Chesapeakehas drilled and completed eleven horizontal Haynesville Shale wells on ouracreage, the Western 18-H1, Saddler 9-H1, the Mitchell 12-H1 and the Woolworth15-H1 in Sections 18, 9, 12 and 15-T15N-R16W, respectively; the Soaring Ridge15H-1, the Clingman 12-H1, the Clingman 11-H1, Clingman 2-H1, Slaughter 6-H1and the Muslow 5-H1 in Sections 15, 12, 11, 2, 6 and 5-T15N-R15W, respectively;and the SRLT 33-H1 in Section 33-T16N-R15W.

 

Goodrichhas drilled and completed the following horizontal Haynesville Shale wells: theGarland 25 in Section 25-T14N-R16W; the Plants 26 in Section 26-T14N-R16W;and the Garland 24 in Section 24-T14N-R16W. Within the first 90 days ofproduction, both the Garland 25 and the Plants 26 horizontal wells haveproduced over one Bcf of natural gas.

 

EXCOhas completed two wells, the Red Oak Timber 6 H-1 in Section 6-T14N-R15Win the Bethany Longstreet field and the Thomas 36 H-1 in Section 36-T16N-R15Win the Johnson Branch field. Recently EXCO spud two new wells, the Crow 8 H-1in Section 8-T14N-R15W and the Red Oak Timber 7 H-1 in Section 7-T14N-R15W;both are located in the Bethany Longstreet field.

 

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**GAS GATHERING**

 

Cubichas developed its infrastructure in Johnson Branch with approximately 16 milesof gathering lines and pipeline constructed for its currently producing wellsand any further completions. In addition, a Johnson Branch tap, common pointand compression facility were completed in November 2007 and are currentlyoperational. The Company has also developed its infrastructure withapproximately 7.8 miles of gathering lines and owns three taps in its BethanyLongstreet acreage.

 

**MARKETING OF PRODUCTION**

 

**Crude Oil andNatural Gas**

 

Ourproduction consists mainly of natural gas. We market our operated production ofnatural gas to three purchasers (i) in Texas, Enbridge G & P, LP,and (ii) in Louisiana, EROC Gathering Company, LP and NGTS, LP. We sellour affiliate-operated crude oil and condensate production at or near thewell-site; although in some cases it is gathered by us or others and deliveredto a central point of sale. Our crude oil and condensate production istransported by truck or by pipeline and is typically committed to arrangementshaving a term of one year or less. We have not engaged in crude oil hedging ortrading activities. We utilize short-term gas contracts with prices that arerelated to market conditions in varying degrees and have not engaged in naturalgas hedging or futures trading. The majority of our production and our revenueis now generated by wells drilled and operated by non-affiliated third-partyoperators.

 

Webelieve we would be able to locate alternate purchasers in the event of theloss of any of these purchasers, and that any such loss would not have amaterial adverse effect on our financial condition or results of operations.Revenue from the sale of natural gas totaled $3,337,543 for fiscal 2010 andrepresented 96% of our total oil and gas revenues for that fiscal year.

 

**PriceConsiderations**

 

Naturalgas and natural gas liquids prices in the geographical areas in which weoperate are closely tied to established price indices which are heavilyinfluenced by national and regional supply and demand factors and the futuresprice per MMbtu for natural gas delivered at Henry Hub, Louisiana established onthe NYMEX (“NYMEX-Henry Hub”). At times, these indices correlate closely withthe NYMEX-Henry Hub price, but often there are significant variances betweenthe NYMEX-Henry Hub price and the indices used to price our natural gas.Average natural gas prices received by us in each of our operating areasgenerally fluctuate with changes in these established indices. The averagenatural gas price per Mcf received by us in fiscal 2010 was $4.21 as comparedto $5.98 in fiscal 2009. The average natural gas liquids price per gallonreceived by us in fiscal 2010 was $1.27 compared to $1.12 in fiscal 2009. Crudeoil prices are established in a highly liquid, international market, withaverage crude oil prices that we receive generally fluctuating with changes inthe futures price established on the NYMEX for West Texas Intermediate CrudeOil (“NYMEX-WTI”). The average crude oil price per barrel received by us infiscal 2010 was $73.18 as compared to $60.00 in fiscal 2009.

 

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**OIL AND GAS RESERVES**

 

Thefollowing tables set forth the proved developed and proved undeveloped reservesat June 30, 2010, the estimated future net cash flows from such provedreserves and the Standardized Measure of Discounted Future Net Cash Flowsattributable to our reserves at June 30, 2010, 2009 and 2008: 

 
| ** **                                           | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas** | ** ** | **Estimated**       | ** ** | ** **   | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------|------------|
| ** **                                           | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent**     | ** ** | **Future Net** | ** ** | **10%**      | ** ** |
| **Category**                                         | ** ** | **(Bbls)**                      | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**         | ** ** | **Cash Flows** | ** ** | **Discount** | ** ** |
| Proved Producing                                     |       | 624                             |       | 1,352,220  |       | 1,355,962          |       | $                   | 4,096,600  |         | $          | 3,407,410 |   |
| Proved Non-Producing                                 |       | 542                             |       | 1,314,390  |       | 1,317,642          |       | 5,535,670           |       | 4,517,210    |       |
| Proved Developed Reserves                            |       | 1,166                           |       | 2,666,610  |       | 2,673,604          |       | $                   | 9,632,270  |         | $          | 7,924,620 |   |
| Proved Undeveloped                                   |       | 7,481                           |       | 26,490,670 |       | 26,535,556         |       | 81,104,850          |       | $            | 56,832,670 |   |
| Total Proved Reserves                                |       | 8,647                           |       | 29,157,280 |       | 29,209,160         |       | $                   | 90,737,120 |         | $          | 64,757,290 |   |
|                                                 |       |                            |       |       |       |               |       |
| ** **                                           | ** ** | **At June 30,**       | ** ** |
| ** **                                           | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **2008**           | ** ** |
| **Proved Developed Reserves:**                       |       |                            |       |       |       |               |       |
| Oil & Natural Gas Liquids (Bbls)            |       | 1,166                           |       | 2,968      |       | 23,645             |       |
| Gas (Mcf)                                            |       | 2,666,610                       |       | 337,993    |       | 1,019,276          |       |
| Mcfe                                                 |       | 2,673,604                       |       | 355,801    |       | 1,161,146          |       |
| Estimated future net cash flows (before income  tax) |       | $                               | 9,632,270  |       | $          | 956,021            |       | $                   | 9,410,338  |         |
| Standardized Measure (1)                             |       | $                               | 7,924,620  |       | $          | 781,820            |       | $                   | 7,911,561  |         |
|                                                 |       |                            |       |       |       |               |       |
| **Proved Undeveloped Reserves:**                     |       |                            |       |       |       |               |       |
| Oil & Natural Gas Liquids (Bbls)            |       | 7,481                           |       | 123,241    |       | 65,303             |       |
| Gas (Mcf)                                            |       | 26,490,670                      |       | 19,981,634 |       | 5,070,453          |       |
| Mcfe                                                 |       | 26,535,556                      |       | 20,721,079 |       | 5,462,271          |       |
| Estimated future net cash flows (before income  tax) |       | $                               | 81,104,850 |       | $          | 25,860,200         |       | $                   | 37,656,434 |         |
| Standardized Measure (1)                             |       | $                               | 56,832,670 |       | $          | 10,020,570         |       | $                   | 25,199,095 |         |
|                                                 |       |                            |       |       |       |               |       |
| **Total Proved Reserves:**                           |       |                            |       |       |       |               |       |
| Oil & Natural Gas Liquids (Bbls)            |       | 8,647                           |       | 126,209    |       | 88,948             |       |
| Gas (Mcf)                                            |       | 29,157,280                      |       | 20,319,627 |       | 6,089,729          |       |
| Mcfe                                                 |       | 29,209,160                      |       | 21,076,880 |       | 6,623,417          |       |
| Estimated future net cash flows (before income  tax) |       | $                               | 90,737,120 |       | $          | 26,816,221         |       | $                   | 47,066,772 |         |
| Standardized Measure (1)                             |       | $                               | 64,757,290 |       | $          | 10,802,390         |       | $                   | 33,110,656 |         |
|                                                 |       |                            |       |       |       |               |       |
| **Average price used to calculate  reserves:**       |       |                            |       |       |       |               |       |
| Oil (per Bbl)                                        |       | $                               | 70.08      |       | $          | 66.52              |       | $                   | 138.80     |         |
| Natural Gas Liquids (per Bbl)                        |       | $                               | 1.25       |       | $          | 1.02               |       | $                   | 93.86      |         |
| Gas (per Mcf)                                        |       | $                               | 5.08       |       | $          | 3.72               |       | $                   | 14.10      |         |

 

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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 ofFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 932. Extractive Activities — Oil and Gas.

 

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Theinformation set forth in this Annual Report relating to our proved reserves,estimated future net cash flows and present values is taken from reportsprepared by Cambrian Consultants America, Inc., d/b/a RPS (“RPS”), anindependent petroleum engineering firm, for fiscal years 2010, 2009 and 2008.The estimates of this independent petroleum engineering firm were based uponreview of production histories and other geological, economic, ownership andengineering data provided by the Company. Information with respect to ourreserves in Texas as of June 30, 2010, was prepared in-house and was notreviewed by an independent engineering firm. In accordance with guidelines ofthe SEC, our estimates of proved reserves and the future net revenues fromwhich present values are derived are made using an average price mechanismbased on the first day of each of the last twelve months and a differentialbased on amount received per Mcf, by the Company. Operating costs, developmentcosts and certain production-related taxes were deducted in arriving atestimated future net cash flows, but such costs do not include debt service orgeneral and administrative expenses.

 

Thereare numerous uncertainties inherent in estimating oil and gas reserves andtheir values, including many factors beyond our control. The reserve data setforth in this Annual Report represents estimates only. Reservoir engineering isa subjective process of estimating the sizes of underground accumulations ofoil and gas that cannot be measured in an exact manner. The accuracy of anyreserve estimate is a function of the quality of available data, engineeringand geological interpretation, and judgment. As a result, estimates ofdifferent engineers, including those used by us, may vary. In addition, estimatesof reserves are subject to revision based upon actual production, results offuture development, exploitation and exploration activities, prevailing oil andgas prices, operating costs and other factors, which revisions may be material.Accordingly, reserve estimates are often different from the quantities of oiland gas that are ultimately recovered and are highly dependent upon theaccuracy of the assumptions upon which they are based. There can be noassurance that these estimates are accurate predictions of our oil and gasreserves or their values. Estimates with respect to proved reserves that may bedeveloped and produced in the future are often based upon volumetriccalculations and upon analogy to similar types of reserves rather than actualproduction history. Estimates based on these methods are generally lessreliable than those based on actual production history. Subsequent evaluationof the same reserves based upon production history will result in variations,which may be substantial, in the estimated reserves.

 

Theestimates of proved reserves at June 30, 2010, 2009, and 2008 wereprepared by our independent petroleum consultant, RPS, in accordance withgenerally accepted petroleum engineering and evaluation principles anddefinitions and guidelines established by the SEC. The technical personsresponsible for preparing the reserve estimates presented herein meet therequirements regarding qualifications, independence, objectivity andconfidentiality set forth in the Standards Pertaining to the Estimating andAuditing of Oil and Gas Reserves Information promulgated by the Society ofPetroleum Engineers.

 

Ourpolicies and practices regarding internal control over the estimating ofreserves are structured to objectively and accurately estimate our oil andnatural gas reserves quantities and present values in compliance with the SEC’sregulations and U.S. Generally Accepted Accounting Principles. We maintain aninternal staff of petroleum engineers and geosciences professionals who workclosely with our independent petroleum consultant to ensure the integrity,accuracy and timeliness of data furnished to RPS in its reserves estimationprocess. Inputs to our reserves estimation process are based on historicalresults for production history, oil and natural gas prices, lease operatingexpenses, development costs, ownership interest and other required data. Ourtechnical team meets regularly with representatives of RPS to review propertiesand discuss methods and assumptions used in RPS’s preparation of the year-endreserves estimates. While we have no formal committee specifically designatedto review reserves reporting and the reserves estimation process, our seniormanagement reviews and approves the RPS reserve report and any internallyestimated significant changes to our proved reserves on a timely basis.

 

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**Costs Incurred**

 

Thefollowing table shows certain information regarding the costs incurred by us inour property acquisition, development and exploratory activities during theperiods indicated.

 
| ** **                 | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Property acquisition costs |       | $                                      | 1,777,848  |   | $ | 72,385 |   | $ | 394,675 |   |
| Exploratory costs          |       | —                                 |       | 5,928,825 |   | 14,030,615 |   |
| Development costs          |       | 6,988,115                              |       | — |   | 916,613 |   |
| Total                      |       | $                                      | 8,765,963  |   | $ | 6,001,210 |   | $ | 15,341,903 |   |

 

**Drilling Results**

 

Wedrilled or participated in the drilling of wells as set out in the table belowfor the periods indicated. The table was completed based upon the date drillingcompleted. We did not acquire any wells during these periods. You should notconsider the results of prior drilling activities as necessarily indicative offuture performance, nor should you assume that there is necessarily anycorrelation between the number of productive wells drilled and the oil andnatural gas reserves generated by those wells.

 
| ** **             | ** ** | **Year Ended June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **             | ** ** | **Gross**                              | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **Development wells:** |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 10                                     |       | 1.07 |   | — |   | — |   | — |   | — |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total development      |       | 10                                     |       | 1.07 |   | — |   | — |   | — |   | — |   |
| **Exploratory wells:** |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | —                                 |       | — |   | 6 |   | 0.82 |   | 12 |   | 5.88 |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total exploratory      |       | —                                 |       | — |   | 6 |   | 0.82 |   | 12 |   | 5.88 |   |
| **Total wells:**       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 10                                     |       | 1.07 |   | 6 |   | 0.82 |   | 12 |   | 5.88 |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total wells            |       | 10                                     |       | 1.07 |   | 6 |   | 0.82 |   | 12 |   | 5.88 |   |

 

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**NET PRODUCTION, SALES PRICES AND COSTS**

 

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, 2010,2009 and 2008:

 
| ** **                                              | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Production Volumes:**                                 |       |                                   |       |   |   |   |   |
| Oil (Bbl)                                               |       | 1,364                                  |       | 1,681 |   | 1,682 |   |
| Natural gas liquids (gallons)                           |       | 38,411                                 |       | 77,772 |   | 44,476 |   |
| Natural gas (Mcf)                                       |       | 792,433                                |       | 279,516 |   | 228,219 |   |
| Total oil, natural gas liquids, and natural gas  (Mcfe) |       | 806,102                                |       | 300,712 |   | 244,665 |   |
| ** **                                              |       |                                   |       |   |   |   |   |
| **Weighted Average Sales Prices:**                      |       |                                   |       |   |   |   |   |
| Oil (per Bbl)                                           |       | $                                      | 73.18      |   | $ | 60.00 |   | $ | 102.17 |   |
| Natural gas liquids (per gallon)                        |       | $                                      | 1.27       |   | $ | 1.12 |   | $ | 1.66 |   |
| Natural gas (per Mcf)                                   |       | $                                      | 4.21       |   | $ | 5.98 |   | $ | 9.01 |   |
| ** **                                              |       |                                   |       |   |   |   |   |
| **Selected Expenses per Mcfe:**                         |       |                                   |       |   |   |   |   |
| Production costs                                        |       | $                                      | 1.27       |   | $ | 3.98 |   | $ | 3.60 |   |
| Workover expenses (non-recurring)                       |       | $                                      | 0.05       |   | $ | 0.12 |   | $ | 0.11 |   |
| Severance taxes                                         |       | $                                      | 0.15       |   | $ | 0.20 |   | $ | 0.29 |   |
| Other revenue deductions                                |       | $                                      | 0.65       |   | $ | 0.27 |   | $ | 0.75 |   |
| Total lease operating expenses                          |       | $                                      | 2.13       |   | $ | 4.57 |   | $ | 4.75 |   |
| General and administrative expenses                     |       | $                                      | 2.95       |   | $ | 6.45 |   | $ | 10.17 |   |
| Depreciation, depletion and amortization                |       | $                                      | 1.41       |   | $ | 2.55 |   | $ | 8.79 |   |

 

**PRODUCTIVE WELLS AND ACREAGE**

 

**ProductiveWells**

 

The following table sets forth our productive wells at June 30,2010:

 
| **Oil**   | ** ** | **Gas** | ** ** | **Total** | ** ** |
|-----------|------------|---------|------------|-----------|------------|
| **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| —    |       | —  |       | 40        |       | 11.81 |   | 40 |   | 11.81 |   |

 

**Acreage**

 

Thefollowing table sets forth our undeveloped and developed gross and netleasehold acreage at June 30, 2010. Undeveloped acreage includes leasedacres on which wells have not been drilled or completed to a point that wouldpermit the production of commercial quantities of oil and gas, regardless ofwhether or not such acreage contains proved reserves.

 
| **Undeveloped** | ** ** | **Developed** | ** ** | **TOTAL** | ** ** |
|-----------------|------------|---------------|------------|-----------|------------|
| **Gross**       | ** ** | **Net**       | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| 373             |       | 183           |       | 13,221    |       | 5,141 |   | 13,594 |   | 5,324 |   |

 

Asis customary in the industry, we generally acquire oil and gas acreage withoutany warranty of title except as to claims made by, through or under thetransferor. Although we have title to developed acreage examined 

 

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priorto acquisition in those cases in which the economic significance of the acreagejustifies the cost, there can be no assurance that losses will not result fromtitle defects or from defects in the assignment of leasehold 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. The majority ofour production is operated by non-affiliated third-party operators. The balanceof our production is operated by Fossil Operating, Inc. (“Fossil”), anentity wholly owned by Mr. Wallen.

 

Wehave contract relationships with petroleum engineers, geologists and otheroperations and production specialists who believe the production rates andreserves will increase, and lower the cost of operating our affiliated andnon-affiliated third-party oil and gas properties.

 

**EMPLOYEES**

 

AtSeptember 8, 2010, the Company had eleven (11) employees, four (4) full-timeand seven (7) part-time. We regularly use independent consultants andcontractors to perform various professional services, including well-sitesupervision, design, construction, permitting and environmental assessment. Weuse independent contractors to perform field and on-site production operationservices.

 

**FACILITIES**

 

TheCompany’s principal executive and administrative offices are located at 9870Plano Road, Dallas, Texas. The offices are leased on a month-to-month basisfrom an affiliate controlled by Mr. Wallen and the offices are owned bythis affiliate. The average monthly amount charged to the Company during theyear ended June 30, 2010, was $2,229. The Company believes that there isother appropriate space available in the event the Company should terminate itscurrent leasing arrangement.

 

**COMPETITION**

 

Currently our acreage is beingoperated by affiliated and non-affiliated third-party operators. There is verylittle competition in this non-operated position, but our focus is on reducingcosts and expenses where possible. We have in the past operated and developedoil and natural gas plays and possibly will again in the future. In thatenvironment, we compete with major integrated oil and natural gas companies andindependent oil and natural gas companies in all areas of operation. Inparticular, we compete for property acquisitions and for the equipment andlabor required to operate and develop these properties. Most of our competitorshave substantially greater financial and other resources than we have. Inaddition, larger competitors may be able to absorb the burden of any changes infederal, state and local laws and regulations more easily than we can, whichcould adversely affect our competitive position. These competitors may be ableto pay more for exploratory prospects and may be able to define, evaluate, bidfor and purchase a greater number of properties and prospects than we can.Further, our competitors may have technological advantages and may be able toimplement new technologies more rapidly than we can. Our ability to explore fornatural gas and oil prospects and to acquire additional properties in thefuture will depend on our ability to conduct operations, to evaluate and selectsuitable properties and to consummate transactions in this highly competitiveenvironment. In addition, most of our competitors have operated for a muchlonger time than we have and have demonstrated the ability to operate throughindustry cycles.

 

Recent increased oil andnatural gas drilling activity in East Texas and Northwest Louisiana hasresulted in increased demand for drilling rigs and other oilfield equipment andservices. At various times, we have and 

 

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may continue to experiencedtemporary or prolonged shortages or unavailability of drilling rigs, drill pipeand other material used in oil and gas drilling and completing. Suchunavailability could result in increased costs, delays in timing of anticipateddevelopment or cause interests in undeveloped oil and natural gas leases tolapse.

 

**Regulation**

 

*Exploration and Production.*Theexploration, production and sale of oil and natural gas are subject to varioustypes of local, state and federal laws and regulations. These laws andregulations govern a wide range of matters, including the drilling and spacingof wells, allowable rates of production, restoration of surface areas, pluggingand abandonment of wells and requirements for the operation of wells. Ouroperations are also subject to various conservation requirements. These includethe regulation of the size and shape of drilling and spacing units or prorationunits and the density of wells which may be drilled and the unitization orpooling of oil and natural gas properties. In this regard, some states allowforced pooling or integration of tracts to facilitate exploration, while otherstates rely on voluntary pooling of lands and leases. In addition, stateconservation laws establish maximum rates of production from oil and naturalgas wells, generally prohibit the venting or flaring of natural gas and imposecertain requirements regarding the ratability of production. All of theseregulations 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.

 

*Environmental Matters.*The discharge of oil, gas orother pollutants into the air, soil or water may give rise to liabilities to thegovernment and third parties and may require us to incur costs to remedy orcontrol such discharges. Natural gas, oil or other pollutants, including saltwater brine, may be discharged in many ways, including from a well or drillingequipment at a drill site, leakage from pipelines or other gathering andtransportation facilities, leakage from storage tanks and sudden dischargesfrom damage or explosion at natural gas facilities or oil and natural gaswells. Discharged hydrocarbons may migrate through soil to water supplies oradjoining 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, whichcould be subject to classification as hazardous substances under CERCLA.

 

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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 various times in the past,proposals have been made to amend RCRA to rescind the exemption that excludesoil and natural gas exploration and production wastes from regulation ashazardous waste. Repeal or modification of the exemption by administrative,legislative or judicial process, or modification of similar exemptions inapplicable state statutes, would increase the volume of hazardous waste we arerequired to manage and dispose of and would cause us to incur increasedoperating expenses.

 

Thereis an increased focus by local, state and national regulatory bodies ongreenhouse gas (“GHG”) emissions and climate change. Various regulatory bodieshave announced their intent to regulate GHG emissions, including the UnitedStates Environmental Protection Agency, which promulgated several GHGregulations in 2010 and late 2009. As these regulations are under developmentor are being challenged in the courts, we are unable to predict the totalimpact of these potential regulations upon our business, and it is possiblethat we could face increases in operating costs in order to comply with GHGemission legislation.

 

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 environmental laws will not result in a curtailment of production ormaterial increase in the cost of production, development or exploration orotherwise adversely affect our financial condition and results of operations.Although we maintain liability insurance coverage for liabilities frompollution, environmental risks 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 

 

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therehave been indications that future regulatory efforts might become morevigorous, possibly resulting in 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.

 

**GLOSSARY OFCERTAIN OIL AND GAS TERMS**

 

Thefollowing are abbreviations and definitions of terms commonly used in the oiland gas industry, many of which are used in this Report.

 

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

 

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

 

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

 

“**Btu**” means British thermal unit, whichmeans the quantity of heat required to raise the temperature of one pound ofwater by one degree Fahrenheit.

 

**“Casing”** means a type of pipe that is used for encasing asmaller 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 ofpermanent equipment for the production of oil or gas.

 

**“Compressor Station”** means a facility in whichthe pressure of natural gas is raised to facilitate its transmission throughpipelines.

 

**“Condensate”** means hydrocarbons naturally occurring in thegaseous phase in a reservoir that condense to become a liquid at the surfacedue to the change in pressure and temperature.

 

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

 

“**Developed Acreage**” means the number ofacres that are allocated or assignable to producing wells or wells capable ofproduction.

 

“**Development Drilling**” or “**Development Well**” means a well drilledwithin the proved area of an oil or gas reservoir to the depth of a stratigraphichorizon known to be productive.

 

“**Dry****Hole**”or “**Dry****Well**” means a well found to be incapable of producinghydrocarbons in sufficient quantities to justify completion as an oil and gaswell.

 

**“Estimated Future Net Cash Flows”** means estimated futuregross cash flows to be generated from the production of proved reserves, net ofestimated production, future development costs, and future abandonment costs,using prices and costs in effect as of the date of the report or estimate,without giving effect to non-property related expenses such as general andadministrative expenses, debt service and future income tax expense or todeprecation, depletion and amortization.

 

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“**Exploration**” is the act of searching forpotential sub-surface reservoirs of gas or oil. Methods include the use of magnetometers, gravity meters, seismicexploration, surface mapping, and the drilling of exploratory test wells (knownas “wildcats”).

 

“**Exploratory Drilling**” or “**Exploratory Well**” means a well drilled tofind and produce oil or gas reserves not classified as proved, to find a newproduction reservoir in a field previously found to be productive of oil or gasin another reservoir or to extend a known reservoir.

 

**“Fracture Stimulation” ** means a stimulation treatment routinelyperformed involving the injection of water, sand and chemicals under pressureto stimulate hydrocarbon production in low-permeability reservoirs.

 

“**Farm-In**” or “**Farm-Out**” means an agreement pursuant to which the owner of aworking interest in an oil and gas lease assigns the working interest or aportion thereof to another party who desires to drill on the leased acreage.Generally, the assignee is required to drill one or more wells in order to earnits interest in the acreage. The assignor usually retains a royalty orreversionary interest in the lease. The interest received by an assignee is a “farm-in”and the assignor issues a “farm-out.”

 

**“Finding and Development Costs”** means thetotal costs incurred for exploration and development activities (excludingexploratory drilling in progress and drilling inventories), divided by totalproved reserve additions. To the extent any portion of the proved reserveadditions consist of proved undeveloped reserves; additional costs would haveto be incurred in order for such proved undeveloped reserves to be produced.This measure may differ from the measure used by other oil and natural gascompanies.

 

“**Gas**” means natural gas.

 

**“Full Cost Pool**”    The full cost pool consists of all costs associatedwith property acquisition, exploration, and development activities for acompany using the full cost method of accounting. Additionally, any internalcosts that can be directly identified with acquisition, exploration anddevelopment activities are included. Any costs related to production, generalcorporate overhead or similar activities are not included.

 

“**Gathering System**” means a system ofpipelines, compressor stations and any other related facilities that gathersnatural gas from a supply region and transports it to the major transmissionsystems.

 

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

 

**“Held-by-production”**     Aprovision in an oil, gas and mineral lease that perpetuates a company’s rightto operate a property or concession as long as the property or concessionproduces a minimum paying quantity of oil or gas.

 

“**Horizontal Drilling**” means drilling a well that deviatesfrom the vertical and travels horizontally through a prospective reservoir.

 

**“HorizontalWells”******    Wellswhich are drilled at angles greater than 70 degrees from vertical.

 

“**Hydrocarbons**” means an organic chemicalcompound of hydrogen and carbon. Hydrocarbons are a large class of liquid, solid or gaseous organiccompounds, which are the basis of almost all petroleum products.

 

**“Infill drilling**” means drilling of a wellbetween known producing wells to better exploit the reservoir.

 

**“Initial production rate”**means generally, themaximum 24 hour production volume from a well.

 

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“**Lease**” means a formal agreement between twoor more parties where the owner of the land grants another party the right todrill and produce hydrocarbons in exchange for payment.

 

“**Mcf**”means thousand cubic feet.

 

**“Mmcf/d”**means onemillion cubic feet of natural gas per day.

 

**“Mcfe”**means Mcf of natural gas equivalent; determinedusing the ratio of one Bbl of oil or condensate to six Mcf of natural 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 hydrocarbonswhich have been extracted from natural gas (e.g., ethane, propane, butane andnatural gasoline).

 

“**Net**” when used with respect to acres orwells, refers to gross acres or wells multiplied, in each case, by thepercentage working interest owned by the Company.

 

“**Net Production**” means production that isowned by the Company less royalties and production due others.

 

**“NYMEX”** means the New YorkMercantile Exchange.

 

**“Overriding royalty interest”******    means an interest in an oil and/or natural gasproperty entitling the owner to a share of oil and natural gas production freeof costs of production.

 

“**Operator**” means the individual or companyresponsible for the exploration, development and production of an oil or gaswell or lease.

 

**“Play” **means****a portion of the explorationand production cycle following the identification by geologists andgeophysicists of areas with potential oil and gas reserves.

 

“**Pipeline**” means all partsof a physical facility through which gas is transported, including pipe, valvesand other appendages attached to the pipe, compressor units, metering stations,regulator stations, delivery stations, holders, and fabricated assemblies.

 

“**Present Value**”**,** “**PV-10**” or “**Standardized Measure**” when used with respect to oil and gasreserves, is the pre-tax present value, discounted at an annual rate of 10%, ofthe estimated future gross revenues to be generated from the production ofproved reserves calculated in accordance with the guidelines of the SEC, net ofestimated production and future development costs, using prices and costs as ofthe date of estimation without future escalation (except to the extent acontract specifically provides otherwise), without giving effect tonon-property related expenses such as general and administrative expenses, debtservice, future income tax expense and depreciation, depletion and amortization.

 

“**Productive Wells**” or “**Producing Wells**” consist of producing wellsand wells capable of production, including natural gas wells waiting onpipeline connections.

 

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**“Proved Reserves”**  means thosequantities of oil and gas, which, by analysis of geoscience and engineeringdata, can be estimated with reasonable certainty to be economically producible,from a given date forward, from known reservoirs, and under existing economicconditions, operating methods, and government regulations, prior to the time atwhich contracts providing the right to operate expire, unless evidenceindicates that renewal is reasonably certain, regardless of whetherdeterministic or probabilistic methods are used for the estimation. The projectto extract the hydrocarbons must have commenced or the operator must bereasonably certain that it will commence the project within a reasonable time.

 

**“Recompletion****”** means an operationwithin an existing well bore to make the well produce oil and/or gas from adifferent, separately producible zone other than the zone from which the wellhad been producing.

 

“**Reserves**”means proved reserves.

 

“**Reservoir**” means a porous and permeableunderground formation containing a natural accumulation of producible oiland/or gas that is confined by impermeable rock or water barriers and isindividual and separate from other reservoirs.

 

“**Royalty**” means an interest in an oil andgas lease that gives the owner of the interest the right to receive a portionof the production from the leased acreage (or of the proceeds of the salethereof), but generally does not require the owner to pay any portion of thecosts of drilling or operating the wells on the leased acreage. Royalties maybe either landowner’s royalties, which are reserved by the owner of the leasedacreage at the time the lease is granted, or overriding royalties, which areusually reserved by an owner of the leasehold in connection with a transfer toa subsequent owner.

 

**“Sandstone”** means rock composed mainly of sand-sized particlesor fragments of the mineral quartz, which, because these grains are rigid, willwithstand tremendous pressures without being compacted.

 

“**Shale**” means a type of rock composed ofcommon clay or mud.  When clay iscompacted under great pressure and temperature deep in the earth, watercontained in the clay is expelled, and clay turns into shale.

 

“**2-D Seismic**” means an advanced technologymethod by which a cross-section of the earth’s subsurface is created throughthe interpretation of reflecting seismic data collected along a single sourceprofile.

 

“**3-D Seismic**” means an advanced technologymethod by which a three dimensional image of the earth’s subsurface is createdthrough the interpretation of reflection seismic data collected over a surfacegrid. 3-D seismic surveys allow for a more detailed understanding of thesubsurface than do conventional surveys and contribute significantly to fieldappraisal, development and production.

 

**“Undeveloped Acreage”** means lease acreage onwhich wells have not been drilled or completed to a point that would permit theproduction of commercial quantities of oil and natural gas regardless of whethersuch acreage contains proved reserves.

 

**“Undeveloped Reserves”******means reservesof any category that are expected to be recovered from new wells on undrilledacreage, or from existing wells where a relatively major expenditure isrequired for recompletion.

 

“**Working Interest**” means an interest in anoil and gas lease that gives the owner of the interest the right to drill forand produce oil and gas on the leased acreage and requires the owner to pay ashare of the costs of drilling and production operations. The share ofproduction to which a working interest owner is entitled will always be smallerthan the share of costs that the working interest owner is required to bear,with the balance of the production accruing to the owners of royalties.

 

**“Workovers”**means operations on aproducing well to restore or increase production.

 

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**AVAILABILITY OF INFORMATION**

 

Wefile annual, quarterly and current 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**that contains reports, proxy and information statements, and other informationregarding Cubic Energy, Inc. and other companies that file electronicallywith the SEC.

 

Ourwebsite address is **www.cubicenergyinc.com**.We make available on our website free of charge copies of our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) ofthe Exchange Act as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, 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, in connection with any investmentdecision regarding shares of our common stock. Each of these risk factors couldadversely affect our business, operating results and financial condition, aswell as adversely affect the value of an investment in our common stock. Someinformation in this Report may contain “forward-looking” statements thatdiscuss future expectations of our financial condition and results ofoperation. The risk factors noted in this section and other factors could causeour actual results to differ materially from those contained in anyforward-looking statements.

 

***Fluctuations in oil and natural gas prices,which have been volatile at times, may adversely affect our revenues as well asour ability to maintain or increase our borrowing capacity, repay current orfuture indebtedness and obtain additional capital.***

 

Ourfuture financial condition, access to capital, cash flow and results ofoperations depend upon the prices we receive for our oil and natural gas. Weare particularly dependent on prices for natural gas. Historically, oil andnatural gas prices have been volatile and are subject to fluctuations inresponse to changes in supply and demand, market uncertainty and a variety ofadditional factors that are beyond our control. Factors that affect the priceswe receive for our oil and natural gas include:

 

·                  the level of domestic production;

 

·                  the availability of imported oil and naturalgas;

 

·                  political and economic conditions and eventsin foreign oil and natural gas producing nations, including embargoes,continued hostilities in the Middle East and other sustained militarycampaigns, and acts of terrorism or sabotage;

 

·                  the ability of members of the Organization ofPetroleum Exporting Countries to agree to and maintain oil price and productioncontrols;

 

·                  the cost and availability of transportationand pipeline systems with adequate capacity;

 

·                  the cost and availability of othercompetitive fuels;

 

·                  fluctuating and seasonal demand for oil,natural gas and refined products;

 

·                  concerns about global warming or otherconservation initiatives and the extent of governmental price controls andregulation of production;

 

·                  weather;

 

·                  foreign and domestic government relations;and

 

·                  overall economic conditions, particularly therecent worldwide economic slowdown which has put downward pressure on oil andnatural gas prices and demand.

 

Inthe past, prices of oil and natural gas have been extremely volatile, and weexpect this volatility to continue. During fiscal 2010, the Henry Hub spotprice for natural gas fluctuated from a high of $6.00 per Mcf to a low of $3.06per Mcf, while the NYMEX West Texas Intermediate crude oil price ranged from ahigh of $84.29 per Bbl to a low of $64.15 per Bbl.

 

Ourrevenues, cash flow and profitability and our ability to maintain or increaseour borrowing capacity, to repay current or future indebtedness and to obtainadditional capital depend substantially upon oil and natural gas prices.

 

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

 

Theoil and gas industry is highly competitive. We encounter competition from otheroil and gas companies in all areas of our operations, including the acquisitionof producing properties and exploratory prospects and sale of crude oil,natural gas and natural gas liquids. Our competitors include major integratedoil and gas companies and numerous independent oil and gas companies,individuals and drilling and income programs. Many of our competitors arelarge, well established companies with substantially larger operating staffsand greater capital resources than us. Such companies may be able to pay morefor productive oil and gas properties and exploratory prospects and to define,evaluate, bid for and purchase a greater number of properties and prospectsthan our financial or human resources permit. Our ability to acquire additionalproperties and to discover reserves in the future will depend upon our abilityto evaluate and select suitable properties and to consummate transactions inthis highly competitive environment.

 

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

 

Drillingactivities are subject to many risks, including the risk that no commerciallyproductive oil or gas reservoirs will be encountered. There can be no assurancethat new wells drilled by us or in which we have an interest will be productiveor that we will recover all or any portion of our investment. Drilling for oiland gas may involve unprofitable efforts, not only from dry wells, but also fromwells that are productive but do not produce sufficient net revenues to returna profit after drilling, operating and other costs. The cost of drilling,completing and operating wells is often uncertain. Our drilling operations maybe curtailed, delayed or canceled as a result of a variety of factors, many ofwhich are beyond our control, including economic conditions, mechanicalproblems, pressure or irregularities in formations, title problems, weatherconditions, compliance with governmental requirements and shortages in ordelays in the delivery of equipment and services. Such equipment shortages anddelays sometimes involve drilling rigs where inclement weather prohibits themovement of land rigs causing a high demand for rigs by a large number of companiesduring a relatively short period of time. Our future drilling activities maynot be successful. Lack of drilling success could have a material adverseeffect on our financial condition and results of operations.

 

Ouroperations are also subject to all the hazards and risks normally incident tothe development, exploitation, production and transportation of, and theexploration for, oil and gas, including unusual or unexpected geologicformations, pressures, down hole fires, mechanical failures, blowouts,explosions, uncontrollable flows of oil, gas or well fluids and pollution andother environmental risks. These hazards could result in substantial losses tous due to injury and loss of life, severe damage to and destruction of propertyand equipment, pollution and other environmental damage and suspension ofoperations. We participate in insurance coverage maintained by the operators ofour wells, although there can be no assurances that such coverage will besufficient to prevent a material adverse effect to us if any of the foregoingevents occur.

 

***We may not identify all risks associatedwith the acquisition of oil and natural gas properties, and anyindemnifications we receive from sellers may be insufficient to protect us fromsuch risks, which may result in unexpected liabilities and costs to us.***

 

Generally,it is not feasible for us to review in detail every individual propertyinvolved in an acquisition. Our business strategy focuses on acquisitions ofoil and natural gas properties capable of production. Any future acquisitionswill require an assessment of recoverable reserves, title, future oil andnatural gas prices, operating costs, potential environmental hazards, potentialtax and other liabilities and other factors. Ordinarily, our review efforts arefocused on the higher-valued properties. Even a detailed review of propertiesand records may not reveal existing or potential problems, nor will it permitus to become sufficiently familiar with the properties to assess fully theirdeficiencies and capabilities. We do not inspect 

 

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everywell that we acquire. Potential problems, such as deficiencies in themechanical integrity of equipment or environmental conditions that may requiresignificant remedial expenditures, are not necessarily observable even when weinspect a well. Any unidentified problems could result in material liabilitiesand costs that negatively impact our financial condition and results ofoperations.

 

Evenif we are able to identify problems with an acquisition, the seller may beunwilling or unable to provide effective contractual protection or indemnityagainst all or part of these problems. Even if a seller agrees to provideindemnity, the indemnity may not be fully enforceable, may be limited by floorsand caps on such indemnity, and the financial wherewithal of such seller mayconstrain the protection provided by such indemnity.

 

***We have a history of operating losses and may notbe profitable. If we are not able to achieve and maintain profitability in thefuture, we might not be able to access funds through debt or equity financings.***

 

Weincurred losses of $(4,936,625) and $(24,762,516) for the fiscal years ended June 30,2010 and 2009, respectively. Our accumulated deficit as of June 30, 2010was $(54,390,686). Historically, we have funded our operating losses,acquisitions and drilling costs primarily through a combination of privateofferings of convertible debt, senior secured debt, and equity securities.  We have no assurance that we will be able toobtain an increase in our borrowing base to permit us to access any of theremaining $10,000,000 capacity, under our current Wells Fargo Credit Agreementfacility.  In the summer of 2012, we mustrepay or refinance all amounts payable to Wells Fargo under the CreditAgreement. Our success in obtaining the necessary capital resources to fund therepayment to Wells Fargo as well as future costs associated with our operationsand drilling plans is dependent upon our ability to: (i) increase revenuesthrough acquisitions and recovery of our proved producing and proved developednon-producing oil and gas reserves; (ii) maintain effective cost controlsat the corporate administrative office and in field operations; and (iii) obtainadditional financing. However, even if we achieve some success with our plans,there can be no assurance that we will be able to generate sufficient revenuesto achieve significant profitable operations or to fund our drilling plans.

 

***We have substantial capital requirements necessaryfor undeveloped properties for which we may not be able to obtain adequatefinancing.***

 

Themajority of our oil and gas reserves are undeveloped. At June 30, 2010, wehad proved undeveloped reserves of 26,490,670 Mcfe, which representapproximately 91% of our total proved reserves of 29,157,280 Mcfe. Recovery ofthe Company’s future undeveloped reserves will require significant capitalexpenditures to further develop these reserves during fiscal 2011 and for theforeseeable future. No assurance can be given that our financing sources willbe sufficient to fund our costs for third-party operators’ developmentactivities or that development activities will be either successful or inaccordance with our schedule. Additionally, any failure to see increases innatural gas prices or any significant increase in the cost of development couldresult 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.

 

Asof June 30, 2010, we had a Drilling Credit balance of $27,219,160 withEXCO to fund the drilling and completion of Company acreage being operated byEXCO.  Once this Drilling Credit isexhausted, the Company will be obligated to pay its share of the drilling andcompletion costs for wells operated by EXCO on our acreage.  Further, the Company maintains materialleaseholds in units operated by Goodrich, Chesapeake, El Paso and IndigoMinerals and it is expected that the Company will be required to expendedsignificant monies in the near term in order to participate in the drilling andcompletion of wells operated by these other companies.

 

Developmentof our properties will require additional capital resources. There can be noassurance that sufficient cash on hand or additional financing (on eitherfavorable or unfavorable terms) will be available, 

 

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whenrequired, to fund the development. Any inability to obtain additional financingcould have a material adverse effect on us, including requiring us to cease ouroil and gas development plans or not being able to maintain our workinginterest due to failure to pay our share of expenses. Any additional financingmay involve substantial dilution to the interests of our shareholders at thattime.

 

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

 

ThisReport contains estimates of our oil and gas reserves and the expected futurenet cash flows from those reserves, most of which have been prepared by anindependent petroleum consultant. 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 current marketvalue of the estimated proved reserves of oil and gas attributable to ourproperties. In accordance with applicable requirements of the SEC, theestimated discounted future net cash flows from proved reserves are based on anaverage price of the first day of each month of the last 12 months and adifferential of the price per Mcf received by the Company, and costs as of thedate of the estimate, whereas actual future prices and costs may be materiallyhigher or lower. Actual future net cash flows also will be affected by: (i) thetiming of both production and related expenses; (ii) changes inconsumption levels; and (iii) governmental regulations or taxation. Inaddition, the calculation of the present value of the future net cash flowsusing a 10% discount as required by the SEC is not necessarily the mostappropriate discount factor based on interest rates in effect from time to timeand risks associated with our reserves or the oil and gas industry in general.Furthermore, our reserves may be subject to downward or upward revision basedupon actual production, results of future development, supply and demand foroil and gas, prevailing oil and gas prices and other factors. See “Item 1.Business — Oil and Gas Reserves.”

 

***We are subject to various operating and othercasualty risks that could result in liability exposure or the loss ofproduction 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 interruption insurance. Losses and liabilities arising from uninsuredor under-insured events could have a material adverse effect on our financialcondition and operations.

 

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.

 

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***We cannot control the development of theproperties we own but do not operate, which may adversely affect ourproduction, revenues and results of operations.***

 

Asof June 30, 2010, third parties operate wells that represent almost all ofour proved reserves. As a result, the success and timing of our drilling anddevelopment activities on those properties depend upon a number of factorsoutside of our control, including:

 

·                  the timing and amount of capitalexpenditures;

 

·                  the operators’ expertise and financialresources;

 

·                  the approval of other participants indrilling wells; and

 

·                  the selection of suitable technology.

 

Ifdrilling and development activities are not conducted on these properties orare not conducted on a timely basis, we may be unable to increase ourproduction or offset normal production declines, which may adversely affect ourproduction, revenues and results of operations.

 

***New SEC and GAAP reserve reportingrequirements may affect the results of our reserve estimates and could changeour relative positioning in the industry with regard to reserve estimates.***

 

OnDecember 31, 2008, the SEC issued Release No. 33-8995, “Modernizationof Oil and Gas Reporting” amending and expanding its disclosure requirementsfor oil and natural gas producing companies. The new rules and disclosurerequirements are effective as of December 31, 2009. On January 16,2010, the Financial Accounting Standards Board adopted rules conformingGAAP to the new SEC definitions and rules. These changes are the first majormodifications to the accounting-based reserve reporting requirements since1982. Among other things, the new SEC rules modify various definitionsimpacting categories of oil and natural gas reserves and replace the previouspricing mechanism of using the last day of our fiscal year by using an averageprice mechanism based on the first day of each of the last twelve months forpurposes of computing reserve quantities as of December 31, 2009 andsubsequent periods. In addition, these new requirements not only require oiland gas companies to report proved reserves, but also permit voluntarydisclosure of ‘probable’ and ‘possible’ reserves. While the new rules areintended to provide investors with a more complete picture of the reserves ofreporting companies, and were made with an eye towards continuing to recognizenew technologies and knowledge about the geology and extent of oil and naturalgas fields, these changes will potentially affect the results of our reserveestimates and application of these new reserve reporting rules bycompetitors may change our relative positioning in the industry as a whole withregards to reserve estimates.

 

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

 

Wedepend to a large extent on the services of Calvin A. Wallen, III, ourPresident, Chairman of the Board, and Chief Executive Officer. The loss of theservices of Mr. Wallen would have a material adverse effect on ouroperations. We have not obtained key personnel life insurance on Mr. Wallen.

 

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

 

Asof September 8, 2010, our executive officers, directors and theiraffiliates and certain 5% shareholders hold approximately 57.6% 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.

 

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***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 NYSE Amex, LLC (the “AMEX”). The liquidity of ourcommon stock may be adversely affected, and purchasers of our common stock mayhave difficulty selling our common stock, if our common stock does not continueto trade in that or another suitable trading market.

 

Asof September 8, 2010, the trading price of our common stock was below$1.00 per share. The trading price of our common stock could be subject to widefluctuations in response to quarter-to-quarter variations in our operatingresults, announcements of our drilling results and other events or factors. Inaddition, the U.S. stock market has from time to time experienced extreme priceand volume fluctuations that have affected the market price for many companiesand which 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.***

 

Provisionsof our Certificate of Formation 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 provisionsmay discourage a change in control.***

 

Provisionsof Texas law and our Certificate of Formation and Bylaws may have the effect ofdelaying or preventing a change in control or acquisition of the Company. OurCertificate of Formation and Bylaws include “blank check” preferred stock (theterms of which may be fixed by our Board of Directors without shareholderapproval), 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 cash dividends on Common Stock in the foreseeable future.***

 

OurBoard of Directors presently intends to retain all of our earnings for therepayment of debt and the expansion of our business. We therefore do notanticipate the distribution of cash dividends in the foreseeable future. Anyfuture decision of our Board of Directors to pay cash dividends will depend,among other factors, upon our earnings, financial position and cashrequirements.

 

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***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 theSEC, which we collectively refer to as Section 404, require us to evaluateour internal controls over financial reporting to allow management to report onthose internal controls as of the end of each year. Effective internal controlsare necessary for us to produce reliable financial reports and are important inour effort to prevent financial fraud. In the course of our Section 404evaluations, we may identify conditions that may result in significantdeficiencies or material weaknesses and we may conclude that enhancements,modifications or changes to our internal controls are necessary or desirable.Implementing any such matters would divert the attention of our management,could involve significant costs, and may negatively impact our results ofoperations.

 

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 materialweaknesses in our internal controls, we may be unable to produce reliablefinancial reports or prevent fraud, and it could harm our financial conditionand results of operations, result in a loss of investor confidence andnegatively impact our share price.

 

***We may not havesatisfactory title or rights to our properties.***

 

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 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, 2010,our leaseholds for some of our net acreage were being kept in force by virtueof production.  The majority of ouracreage is in Northwest Louisiana and the climate in Northwest Louisiana hasbecome increasingly hostile and litigious towards oil and gas companies.  Mineral owners are looking for opportunitiesto make additional money from their minerals and/or cause leases to expire. Inthe normal course of our business, title defects and lease issues of varyingdegrees will arise, and, if practicable, reasonable efforts will be made tocure any such defects and issues.

 

TheCompany may make acquisitions of oil and gas properties from time to timesubject to available resources. In making an acquisition, we generally focusmost of our title and valuation efforts on the more significant properties. Itis generally not feasible for us to perform an in-depth review of every propertywe purchase and all records with respect to such properties. However, even anin-depth review of properties and records may not necessarily reveal existingor potential problems, nor will it permit us to become familiar enough with theproperties to assess fully their deficiencies and capabilities. To the extentthe seller does not operate the properties, obtaining access to properties andrecords may be more difficult. Even when problems are identified, the sellermay not be willing or financially able to give contractual protection againstsuch problems, and we may decide to assume environmental and other liabilitiesin connection with acquired properties.

 

***Governmentalregulations could adversely affect our business.***

 

Our business is subject tocertain federal, state and local laws and regulations on taxation, theexploration for and development, production and marketing of oil andnatural gas, and environmental and safety matters. Many laws and regulationsrequire drilling permits and govern the spacing of wells, rates of production,prevention of waste and other matters. These laws and regulations haveincreased the costs of our operations. 

 

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In addition, these laws and regulations, and anyothers that are passed by the jurisdictions where we have production, couldlimit the total number of wells drilled or the allowable production fromsuccessful wells, which could limit our revenues.

 

Lawsand regulations relating to our business frequently change, and future laws andregulations, including changes to existing laws and regulations, couldadversely affect our business.

 

Inparticular and without limiting the foregoing, various tax proposals currentlyunder consideration could result in an increase and acceleration of the paymentof federal income taxes assessed against independent oil and natural gasproducers, for example by eliminating the ability to expense intangibledrilling costs, removing the percentage depletion allowance and increasing theamortization period for geological and geophysical expenses. Any of thesechanges would increase our tax burden.

 

TheStates of Texas and Louisiana and many other states require permits fordrilling operations, drilling bonds and reports concerning operations andimpose other requirements relating to the exploration for and production of oiland gas. Such states also have statutes or regulations addressing conservationmatters, including provisions for the unitization or pooling of oil and gasproperties, the establishment of maximum rates of production from wells and theregulation of spacing, plugging and abandonment of such wells. The statutes andregulations of these states limit the rate at which oil and gas can be producedfrom our properties. However, we do not believe we will be affected materiallydifferently by these statutes and regulations than any other similarly situatedoil and gas company.

 

***Environmental liabilities could adverselyaffect our business.***

 

Inthe event of a release of oil, natural gas or other pollutants from ouroperations into the environment, we could incur liability for any and allconsequences of such release, including personal injuries, property damage,cleanup costs and governmental fines. We could potentially discharge thesematerials into the environment in several ways, including:

 

·                  from a well or drilling equipment at a drillsite;

·                  leakage from gathering systems, pipelines,transportation facilities and storage tanks;

·                  damage to oil and natural gas wells resultingfrom accidents during normal operations; and

·                  blowouts, cratering and explosions.

 

Inaddition, because we may acquire interests in properties that have beenoperated in the past by others, we may be liable for environmental damage,including historical contamination, caused by such former operators. Additionalliabilities could also arise from continuing violations or contamination thatwe have not yet discovered relating to the acquired properties or any of ourother properties.

 

Tothe extent we incur any environmental liabilities, it could adversely affectour results of operations or financial condition.

 

***Climate change legislation, regulation andlitigation could materially adversely affect us.***

 

Thereis an increased focus by local, state and national regulatory bodies ongreenhouse gas (“GHG”) emissions and climate change. Various regulatory bodieshave announced their intent to regulate GHG emissions, including the UnitedStates Environmental Protection Agency, which promulgated several GHGregulations in 2010 and late 2009. As these regulations are under developmentor are being challenged in the courts, we are unable to predict the totalimpact of these potential regulations upon our business, and it is possiblethat we could face increases in operating costs in order to comply with GHGemission legislation.

 

Passageof legislation or regulations that regulate or restrict emissions of GHG, orGHG-related litigation instituted against us or our customers, could result indirect costs to us and could also result in changes to the 

 

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consumptionand demand for natural gas and carbon dioxide produced from our oil and naturalgas properties, any of which could have a material adverse effect on ourbusiness, financial position, results of operations and prospects.

 

***Horizontal drilling activities could besubject to increased regulation and could expose us to environmental risks thatcould adversely affect us.***

 

Legislationrelating to horizontal drilling activities that could impose new permittingdisclosure or other environmental restrictions or obligations on our operationsis currently being considered at the federal level, and may in the future beconsidered at the state or local level. In particular, the U.S. Congressrecently signaled a renewed interest in certain downhole injection activities,some of which we utilize in our operations. The focus may lead to newlegislation or regulations that could affect our operations. Any additionalrequirements or restrictions on our operations could result in delays,increased operating costs or a requirement to change or eliminate certaindrilling and injection activities in a manner that may materially adverselyaffect us. In addition, because horizontal drilling involves the injectionof water, sand and chemicals under pressure into rock formations to stimulatenatural gas production, it is also possible that our drilling and injectionoperations could adversely affect the environment, which could result in arequirement to perform investigations or clean-ups or in the incurrence ofother unexpected material costs or liabilities.

 

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

 

Weare responsible for payment of plugging and abandonment costs on our oil andgas properties 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 inavoiding additional 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.

 

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**Item 1B. Unresolved StaffComments.**

 

None.

 

**Item 2. Properties.**

 

A description of our properties is included in “Part I.Item 1. Business” and is incorporated herein by reference.

 

**Item 3. Legal Proceedings.**

 

Weare party to lawsuits arising in the normal course of business. We intend todefend these actions vigorously and believe, based on currently availableinformation, that adverse results or judgments from such actions, if any, willnot be material to our financial position or results of operations. Themajority of our acreage is in Northwest Louisiana and the climate in NorthwestLouisiana has become increasingly hostile and litigious towards oil and gascompanies. Mineral owners are seeking opportunities to make additional moneyfrom their minerals and/or to cause leases to expire. In the normal course ofour business, title defects and lease issues of varying degrees will arise,and, if practicable, reasonable efforts will be made to cure any such defectsand issues.

 

Alawsuit was filed on or about June 15, 2010, styled, “Gloria’s Ranch, LLCv. Tauren Exploration, Inc., Cubic Energy, Inc., Wells Fargo EnergyCapital, Inc. & EXCO USA Asset, LLC”, filed in the 1st JudicialDistrict Court, Caddo Parish, Louisiana, Cause No. 541-768, A.  Thislawsuit alleges that all or part of the Gloria’s Ranch mineral lease has lapsed,and seeks a finding that the mineral lease has lapsed, damages, attorney fees,and other equitable relief. This lawsuit would have a material effect, of amaximum of 17%, on the acreage position of the Company if ultimatelyadjudicated entirely in favor of the mineral owner. The Company intends tovigorously defend its position and believes it will prevail regarding amajority, if not all, of the acreage at issue in this lawsuit.

 

**Item 4.  (Removed and Reserved).**

 

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**PART II**

 

**Item 5. Market for Registrant’sCommon Equity, Related Stockholder Matters, and Issuer Purchases of EquitySecurities**

 

**Common Stock and Market**

 

Thecommon stock of the Company is traded on the NYSE Amex, LLC (the “AMEX”) underthe trading symbol “QBC”. Prior to August 4, 2008, the common stock of theCompany was traded on the Over-The-Counter Bulletin Board (the “OTCBB”) underthe trading symbol “QBIK”.

 

AtSeptember 8, 2010, there were 75,394,579 shares of common stockoutstanding held by approximately 802 shareholders of record.

 

Underits Amended and Restated Certificate of Formation, the Company is authorized toissue one class of up to 120,000,000 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 8, 2010, there were 105,904 preferred shares of theCompany 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 AMEX. Anymarket for our common stock should be considered sporadic, illiquid and highlyvolatile. 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 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 |   |

 
| **Fiscal Year 2010** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| 1st Quarter                    |       | $        | 1.18       |    | $          | 0.94 |   |
| 2nd Quarter                    |       | $        | 1.70       |    | $          | 0.89 |   |
| 3rd Quarter                    |       | $        | 1.40       |    | $          | 1.02 |   |
| 4th Quarter                    |       | $        | 1.15       |    | $          | 0.81 |   |

 

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

 

Inconnection with the following common stock issuances, the Company entered intoSubscription and Registration Rights Agreements (“Subscription Agreements”)with certain investors. Pursuant to the Subscription Agreements, the Companyissued an aggregate of 2,104,001 shares of common stock and warrantsexercisable into 1,052,000 shares of common stock. On August 18, 2009,four investors acquired 804,000 shares of common stock and warrants exercisableinto 402,000 shares of common stock, through the payment of $683,400. On August 26,2009, six investors acquired 1,300,001 shares of common stock and warrantsexercisable into 650,000 shares of common stock, through the payment of$1,105,001. The warrants

 

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areexercisable through July 31, 2014, at $0.85 per share. With respect tocertain of such issuances, the Company paid broker-dealer commissions in theaggregate amount of $59,500 to Avalon Group, Ltd. The aggregateconsideration, net of commissions, from such issuances has been used forworking capital purposes.

 

Theaforementioned issuances were made in reliance upon an exemption fromregistration set forth in Section 4(2) of the Securities Act of 1993,as amended, which exempts transactions by an issuer not involving a publicoffering.

 

Wedid not purchase any of our equity securities during the fourth quarter offiscal 2010.

 

**ShareholderReturn Performance Graph**

 

Thefollowing graph compares the cumulative total shareholder return on our commonstock during the five years ended June 30, 2010 with the cumulative totalshareholder return of the Russell 2000 Index and a peer group of 14 oil and gasexploration and production companies comprised of Abraxas PetroleumCorporation, GMX Resources Inc., Petrohawk Energy Corporation, ChesapeakeEnergy Corporation, Goodrich Petroleum Corporation, Northern Oil & GasInc., Comstock Resources Inc., EXCO Resources Inc., Penn Virginia Corporation,Quicksilver Resources Inc., Range Resources Corporation, Southwestern EnergyCompany, Delta Petroleum Corporation, and SM Energy Company (collectively referred to as the “Peer Group Index”).The comparison assumes an investment of $100 on June 30, 2005 in each ofour common stock, the Russell 2000 Index and the Peer Group Index.

 

****

 
| ** **              | ** ** | **6/30/2005** | ** ** | **6/30/2006** | ** ** | **6/30/2007** | ** ** | **6/30/2008** | ** ** | **6/30/2009** | ** ** | **6/30/20010** | ** ** |
|-------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|
| Cubic Energy, Inc. |       | $             | 100.00     |          | $          | 79.21         |       | $             | 131.68     |          | $          | 414.85         |       | $ | 106.93 |   | $ | 89.11 |   |
| Russell 2000 Index      |       | $             | 100.00     |          | $          | 113.29        |       | $             | 130.33     |          | $          | 107.82         |       | $ | 79.46 |   | $ | 94.50 |   |
| Peer Group Index        |       | $             | 100.00     |          | $          | 120.21        |       | $             | 153.64     |          | $          | 284.14         |       | $ | 105.48 |   | $ | 107.85 |   |

 

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**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, generalbusiness conditions and other pertinent facts. Moreover, the terms of theCredit Facility prohibit the payment of dividends.

 

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

Thefollowing table provides information as of June 30, 2010 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         |       | —                         |       | $                       | —     |                              | 2,736,486  |   |
| Equity compensation plans not approved by  shareholders |       | —                         |       | $                       | —     |                              | —     |   |
| Total                                                   |       | —                         |       |                    |       | 2,736,486                         |       |

 

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**Item 6. Selected Financial Data.**

 

Thefollowing table presents a summary of our financial information for the periodsindicated. It should be read in conjunction with our Financial Statements andrelated notes (beginning on page F-1 at the end of this report) and otherfinancial information included herein. 

 
| ** **                                                         | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statements of Operations Data:**                                 | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total oil and gas sales revenues                                   |       | $                                      | 3,486      |   | $ | 1,858 |   | $ | 2,302 |   | $ | 583 |   | $ | 509 |   |
| Costs and expenses:                                                |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil and gas production, operating and development  costs           |       | 1,845                                  |       | 1,372 |   | 1,163 |   | 481 |   | 338 |   |
| General and administrative expenses                                |       | 2,389                                  |       | 1,940 |   | 2,488 |   | 1,325 |   | 1,401 |   |
| Depreciation, depletion and amortization                           |       | 1,153                                  |       | 772 |   | 2,152 |   | 362 |   | 179 |   |
| Impairment loss on oil and gas properties                          |       | —                                 |       | 20,391 |   | — |   | 1,791 |   | — |   |
| Total costs and expenses                                           |       | 5,387                                  |       | 24,475 |   | 5,803 |   | 3,958 |   | 1,918 |   |
| Operating income (loss)                                            |       | (1,901                                 | )          | (22,617 | ) | (3,501 | ) | (3,376 | ) | (1,409 | ) |
| Non-operating income (expense):                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Other income, net                                                  |       | 5                                      |       | 34 |   | 46 |   | 38 |   | 6 |   |
| Interest expense, net                                              |       | (4,714                                 | )          | (2,045 | ) | (1,580 | ) | (1,279 | ) | (639 | ) |
| Amortization of loan costs                                         |       | (73                                    | )          | (135 | ) | (94 | ) | (101 | ) | (67 | ) |
| Total non-operating income (expense)                               |       | (4,783                                 | )          | (2,146 | ) | (1,628 | ) | (1,342 | ) | (700 | ) |
| Loss on extinguishment of debt, net                                |       | 1,748                                  |       | — |   | — |   | (1,083 | ) | (660 | ) |
| Loss from operations before income taxes                           |       | (4,937                                 | )          | (24,763 | ) | (5,129 | ) | (5,801 | ) | (2,769 | ) |
| Income tax expense (benefit)                                       |       | —                                 |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                                  |       | $                                      | (4,937     | ) | $ | (24,763 | ) | $ | (5,129 | ) | $ | (5,801 | ) | $ | (2,769 | ) |
| Net loss per common share - basic and diluted                      |       | $                                      | (0.07      | ) | $ | (0.40 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.07 | ) |
| Weighted average common shares outstanding                         |       | 67,584                                 |       | 61,150 |   | 56,974 |   | 50,338 |   | 38,477 |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Statements of Cash Flow Data:**                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating activities                    |       | $                                      | (682       | ) | $ | (2,152 | ) | $ | (1,234 | ) | $ | (1,802 | ) | $ | (964 | ) |
| Cash provided by (used in) investing activities                    |       | $                                      | (5,736     | ) | $ | (5,589 | ) | $ | (15,513 | ) | $ | (4,052 | ) | $ | (4,800 | ) |
| Cash provided by (used in) financing activities                    |       | $                                      | 6,738      |   | $ | 5,668 |   | $ | 15,768 |   | $ | 8,717 |   | $ | 5,765 |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at end of  period):**                        |       |                                   |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)                                          |       | $                                      | (1,436     | ) | $ | (27,823 | ) | $ | 1,747 |   | $ | 2,607 |   | $ | (1,357 | ) |
| Oil and gas properties, and equipment, net                         |       | $                                      | 8,923      |   | $ | 11,710 |   | $ | 26,858 |   | $ | 13,666 |   | $ | 11,820 |   |
| Total assets                                                       |       | $                                      | 38,196     |   | $ | 12,127 |   | $ | 29,491 |   | $ | 18,108 |   | $ | 13,373 |   |
| Long-term liabilities, net of discounts                            |       | $                                      | 20,984     |   | $ | — |   | $ | 22,971 |   | $ | 7,627 |   | $ | 5,155 |   |
| Total liabilities                                                  |       | $                                      | 24,434     |   | $ | 28,150 |   | $ | 23,632 |   | $ | 9,313 |   | $ | 7,320 |   |
| Shareholders’ equity                                          |       | $                                      | 13,762     |   | $ | (16,023 | ) | $ | 5,858 |   | $ | 8,795 |   | $ | 6,053 |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                                          |       |                                   | ** ** | ** ** |   |   |   |   |   |   |   |
| Non-cash stock-based compensation                                  |       | $                                      | 396        |   | $ | 385 |   | $ | 1,255 |   | $ | 490 |   | $ | 727 |   |

 

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

 

*The following discussion and analysis of our financial conditionand results of operations should be read in conjunction with our financialstatements and the related notes to those statements included elsewhere in thisAnnual Report on Form 10-K. In addition to historical financialinformation, the following discussion and analysis contains forward-lookingstatements that involve risks, uncertainties and assumptions. Our results andthe timing of selected events may differ materially from those anticipated inthese forward-looking statements as a result of many factors, including thosediscussed under “risk factors” and elsewhere in this Annual Report onForm 10-K.*

 

**Overview**

 

CubicEnergy, Inc. is an independent upstream energy company engaged in thedevelopment and production of, and exploration for, crude oil and natural gas.Our oil and gas assets and activities are concentrated exclusively in Louisianaand Texas.

 

Ourcorporate strategy with respect to our asset acquisition and developmentefforts was to position the Company in a low risk opportunity while buildingmain stream high yield reserves.  The acquisition of our Cotton Valleyacreage in DeSoto and Caddo Parishes, Louisiana, put us in a reservoir richenvironment both in the Cotton Valley and Bossier/Haynesville Shale formations,and gives us the potential to discover additional commercial horizons that canadd value to the bottom line. We have had success on our acreage with wellsdrilled by achieving production from not only the Cotton Valley andBossier/Haynesville Shale formations, but also the Hosston formations.

 

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**Summary Operating, Reserve and Other Data**

 

The following table presents an unaudited summary ofcertain operating and oil and natural gas reserve data, and non-GAAP financialdata for the periods indicated:

 
| ** **                               | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating Data:**                      |       |                                   | ** ** | ** ** |   |   |   |   |   |   |   |
| Proved Reserves (Bcfe)                   |       | 29.2                                   |       | 21.1 |   | 6.6 |   | 4.3 |   | 2.9 |   |
| Production (Mcfe)                        |       | 806,102                                |       | 300,712 |   | 244,665 |   | 76,214 |   | 59,798 |   |
| Producing wells at end of period, gross  |       | 40                                     |       | 43 |   | 32 |   | 22 |   | 17 |   |
| Producing wells at end of period, net    |       | 11.81                                  |       | 21.44 |   | 18.42 |   | 14.42 |   | 13.07 |   |
| Acreage, gross                           |       | 13,594                                 |       | 14,466 |   | 14,711 |   | 17,542 |   | 16,913 |   |
| Acreage, net                             |       | 5,324                                  |       | 6,077 |   | 6,151 |   | 7,364 |   | 7,073 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Production:**                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil (Bbl)                                |       | 1,364                                  |       | 1,681 |   | 1,682 |   | 967 |   | 1,047 |   |
| Natural gas (Mcf)                        |       | 792,433                                |       | 279,516 |   | 228,219 |   | 70,412 |   | 53,516 |   |
| Natural gas liquids (gallons)            |       | 38,411                                 |       | 77,772 |   | 44,476 |   | — |   | — |   |
| Total oil, gas and liquids (Mcfe)        |       | 806,100                                |       | 300,712 |   | 244,665 |   | 76,214 |   | 59,798 |   |
| Average daily (Mcfe)                     |       | 2,208                                  |       | 824 |   | 668 |   | 209 |   | 164 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Weighted Average Sales Prices:**       |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil (per Bbl)                            |       | $                                      | 70.08      |   | $ | 66.52 |   | $ | 102.15 |   | $ | 61.68 |   | $ | 59.90 |   |
| Natural gas (per Mcf)                    |       | $                                      | 5.08       |   | $ | 3.72 |   | $ | 9.01 |   | $ | 7.44 |   | $ | 8.34 |   |
| Natural gas liquids (per gallon)         |       | $                                      | 1.25       |   | $ | 1.02 |   | $ | 1.66 |   | n/a |   | n/a |   |
| Natural gas equivalent (per Mcfe)        |       | $                                      | 4.32       |   | $ | 6.18 |   | $ | 9.41 |   | $ | 7.65 |   | $ | 8.51 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Selected Expenses per Mcfe:**          |       |                                   |       |   |   |   |   |   |   |   |   |
| Production costs                         |       | $                                      | 1.27       |   | $ | 3.98 |   | $ | 3.60 |   | $ | 4.18 |   | $ | 5.05 |   |
| Workover expenses (non-recurring)        |       | $                                      | 0.05       |   | $ | 0.12 |   | $ | 0.11 |   | $ | 1.40 |   | $ | — |   |
| Severance taxes                          |       | $                                      | 0.15       |   | $ | 0.20 |   | $ | 0.29 |   | $ | 0.39 |   | $ | 0.39 |   |
| Other revenue deductions                 |       | $                                      | 0.65       |   | $ | 0.27 |   | $ | 0.75 |   | $ | 0.35 |   | $ | 0.22 |   |
| Total lease operating expenses           |       | $                                      | 2.13       |   | $ | 4.57 |   | $ | 4.75 |   | $ | 6.32 |   | $ | 5.66 |   |
| General and administrative expenses:     |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-cash stock-based compensation        |       | $                                      | 0.49       |   | $ | 1.28 |   | $ | 5.13 |   | $ | 6.43 |   | $ | 12.15 |   |
| Other general and administrative         |       | $                                      | 2.47       |   | $ | 5.17 |   | $ | 5.04 |   | $ | 10.96 |   | 11.27 |   |
| Total general and administrative         |       | $                                      | 2.96       |   | $ | 6.45 |   | $ | 10.17 |   | $ | 17.39 |   | $ | 23.42 |   |
| Depreciation, depletion and amortization |       | $                                      | 1.43       |   | $ | 2.55 |   | $ | 8.80 |   | $ | 4.76 |   | $ | 3.00 |   |

 

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**RESULTS OFOPERATIONS**

 

**Comparison of Fiscal 2010 to Fiscal 2009**

 

**Revenues**

 

OILAND GAS SALES increased 88% to $3,486,171 for fiscal 2010 from $1,858,139 forfiscal 2009 primarily due to increased gas volumes resulting from 14 newHaynesville Shale wells, of which nine are operated by Chesapeake EnergyCorporation, three are operated by Goodrich Petroleum Corporation and two areoperated by EXCO Resources, Inc. This increase was mitigated by theaverage price of natural gas being $4.32 per Mcf for fiscal 2010 and $6.18 perMcf for fiscal 2009.

 

**Costs andExpenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS (also referred to as “LEASEOPERATING EXPENSES” elsewhere herein) increased 34% to $1,845,153 (53% of oiland gas sales) for fiscal 2010 from $1,372,041 (74% of oil and gas sales) forfiscal 2009 primarily due to more wells being on-line in Louisiana, whichresulted in: a $439,379 increase in costs passed-through to the Company by thepurchaser of the Company’s gas, a $65,000 increase in production taxes and a$53,660 increase in non-operated property expenses. These increases weresomewhat offset by a $151,724 decrease in common facility costs and $128,098decrease in salt water hauling.

 

GENERALAND ADMINISTRATIVE EXPENSES (“G&A”) increased 23% to $2,389,073 for fiscal2010 from $1,940,025 in fiscal 2009 as a result of: a $128,965 increase inmarketing expense, a $165,597 increase in legal fees due in part to the supportneeded to address the NYSE Amex non-compliance issue, related expenses inconnection with the November 2009 transaction between the Company, Taurenand Langtry and costs of amending the Wells Fargo Credit Facility. There wasalso a $63,054 increase in contracted professional services; $20,000 of whichwent to NYSE Amex non-compliance support and $23,000 went to Sarbanes-Oxley 404compliance.

 

DEPRECIATION, DEPLETION AND AMORTIZATION (“DD&A”)increased 49% to $1,153,065 in fiscal 2010 from $771,861 in fiscal 2009primarily due to an increase in capital expenditures in fiscal 2010 related tothe non-operated development of oil and gas properties.

 

IMPAIRMENTOF OIL AND GAS PROPERTIES decreased to $0 in fiscal 2010 from $20,390,819 infiscal 2009. 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 in formulating the reserve estimates.

 

GAINON DEBT EXTINGUISHMENT was realized in December 2009 as a result of therefinancing of the debt with Wells Fargo. The existing loan balance of$1,877,494 was decreased (written off) as a term of the amendment of the WellsFargo credit facility that was extinguished, which was partially offset by debtextinguishment costs of $129,871. This created an overall gain on debtextinguishment of $1,747,623 for fiscal 2010.

 

INTEREST EXPENSE, INCLUDING AMORTIZATION OFLOAN DISCOUNT increased 131% to $4,714,386 in fiscal 2010 from $2,044,718 infiscal 2009 primarily due to an increase in debt (before discounts) to$32,000,000 at June 30, 2010 from $27,000,000 at June 30, 2009. Thisincrease resulted from the drawing down of our revolving credit line of$5,000,000 (before discounts) of our Amended Wells Fargo 

 

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Credit Facility. The weighted average debt balance(before discounts) for fiscal 2010 was $29,616,438 as compared to $26,565,452in fiscal 2009. The Credit Facility with Wells Fargo also resulted in a loandiscount being recorded. The discount is being amortized over the originalthree-year term of the debt as additional interest expense with $3,178,416being recorded in fiscal 2010 as compared to $514,620 in fiscal 2009. There wasa decrease in the capitalization of interest expense to the full cost pool for oil and gas properties of $12,737 infiscal 2010 as compared to $30,682 in fiscal 2009.

 

**Comparison of Fiscal 2009 to Fiscal 2008**

 

**Revenues**

 

OILAND GAS SALES decreased 19% to $1,858,139 for fiscal 2009 from $2,302,310 forfiscal 2008 primarily due to lower gas volumes resulting from a steepproduction decline-curve and lack of funds to workover existing wells and a 34%decrease in the weighted average sales price for gas (per Mcf). This declinewas mitigated by the Company having an average of approximately 22 (gross)wells being on-line in Louisiana in fiscal 2009 versus approximately 13 (gross)wells in fiscal 2008.

 

**Costs andExpenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS (also referred to as “LEASEOPERATING EXPENSES” elsewhere herein) increased 18% to $1,372,041 (74% of oiland gas sales) for fiscal 2009 from $1,162,489 (50% of oil and gas sales) forfiscal 2008 primarily due to more wells being on-line in Louisiana, whichresulted in: a $104,002 increase in common facility expenses, a $101,272increase in chemical cost and a $64,892 increase in salt water hauling costs.These increases were somewhat offset by a $102,366 decrease in costspassed-through to the Company by the purchaser of the Company’s gas. Such costsare deducted from the Company’s gross revenue by the purchaser.

 

GENERALAND ADMINISTRATIVE EXPENSES (“G&A”) decreased 22% to $1,940,025 for fiscal 2009from $2,488,133 in fiscal 2008 as a result of: a $857,099 decrease in non-cashstock compensation expense, due to a 68% decrease in the number of shares ofcommon stock granted versus the prior year period. This decrease was somewhatoffset by a $135,536 increase in corporate fees paid, which includes $115,042in AMEX listing fees and a $4,000 increase due to adding two more outsidedirectors, a $48,563 increase in legal fees due in part to the support neededto address the NYSE Amex non-compliance issue; and $116,870 in contractservices fees related to management’s transition to a new chief financialofficer, which occurred in fiscal 2009, but did not occur in the prior yearperiod.

 

DEPRECIATION, DEPLETION AND AMORTIZATION (“DD&A”)decreased 64% to $771,861in fiscal 2009 from $2,152,096 in fiscal 2008primarily due to a decrease in capital expenditures in fiscal 2009 related tothe acquisition and development of oil and gas properties.

 

IMPAIRMENTOF OIL 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 

 

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

 

**Liquidity and Capital Resources**

 

**Overview**

 

TheCompany’s primary resource is its oil and gas reserves.

 

On November 24, 2009, the Company entered intotransactions with Tauren Exploration, Inc. (“Tauren”) and Langtry Mineral &Development, LLC (“Langtry”), both of which are entities controlled by CalvinWallen III, the Chief Executive Officer of the Company, under which the Companyacquired $30,952,810 in pre-paid drilling credits (the “Drilling Credits”)applicable towards the development of its Haynesville Shale rights in NorthwestLouisiana. The Company expects to use the Drilling Credits to fund $30,952,810of its share of the drilling and completion costs for those horizontalHaynesville Shale wells drilled in sections previously operated by an affiliateof the Company which are now operated by a third party. As of June 30,2010, $27,219,160 was the remaining balance of the Drilling Credits.

 

Productprices, over which we have no control, have a significant impact on revenuesfrom production and the value of such reserves and thereby on the Company’sborrowing capacity in the event the Company determines to borrow additionalfunds. Within the confines of product pricing, the Company needs to be able tofind and develop or acquire oil and gas reserves in a cost effective manner inorder to generate sufficient financial resources through internal means tocomplete the financing of its capital expenditure program.

 

Duringthe twelve months ended June 30, 2010, the Company used cash flows fromoperating activities of $681,713 as compared to $2,152,187 in fiscal 2009. Cashflow from operations is dependent on our ability to increase production throughour development and exploratory activities and the price received for oil andnatural gas.

 

**Working Capital and Cash Flow**

 

TheCompany’s working capital increased to ($1,435,908) at June 30, 2010 from($27,822,536) at June 30, 2009. This increase was primarily due to$27,000,000 of debt scheduled to mature on March and April 2010,becoming a part of current liabilities at June 30, 2009. This debt wassubsequently refinanced to a maturity date of July 1, 2012.

 

TheCompany anticipates the following capital expenditures in the remainder offiscal 2011: completions of up to four wells in its Johnson Branch acreage andup to four wells in its Bethany Longstreet acreage; drilling of these wells bya third party operator will use most of the $27,219,160 Drilling Creditsbalance remaining and these new non-operated wells could produce enough revenueto continue to permit us to pay our expenses and service current debt as theycome due. As a result, our projected capital expenditures are expected to be ina range of approximately $20,000,000 to $30,000,000 for fiscal 2011.

 

Dueto the significant downturn in the price of natural gas, continued prudencewill be exercised in the undertaking of any new operations during the nearterm. No assurance can be given that all or any of these anticipated projectswill be completed as currently anticipated. While we have re-negotiated withWells Fargo our revolving note to $40 million, which was subject to a borrowingbase limitation of $25 million at 

 

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June 30,2010 (currently $30 million), and extended the maturity date to July 1,2012, we believe that we currently have cash on hand to continue to meet ourobligations and fund our projected capital expenditures for fiscal 2011.

 

Additionally,because future cash flows and the availability of borrowings are subject to anumber of variables, such as prevailing prices of oil and gas, actualproduction from existing and newly-completed wells, the Company’s success indeveloping and producing new reserves, and the uncertainty with respect to theamount of funds which may ultimately be required to finance the Company’sdevelopment and exploration program, there can be no assurance that the Company’scapital resources will be sufficient to sustain the Company’s development andexploration activities.

 

**CapitalExpenditures**

 

Themajority of our oil and gas reserves are undeveloped. As such, recovery of theCompany’s future undeveloped proved reserves will require significant capitalexpenditures. Our management estimates that aggregate capital expendituresranging from a minimum of approximately $20,000,000 (from currently availablefunds, Drilling Credits and projected cash from operating activities) to amaximum of approximately $30,000,000 will be made to further develop thesereserves during fiscal 2011. Moreover, additional capital expenditures may berequired for exploratory drilling on our undeveloped acreage. The Company mayincrease its planned activities for fiscal 2011, if product prices improve. Ifproduct prices remain flat or go lower such activities and our capitalexpenditures, will be restricted.

 

**Capital Resources**

 

TheCompany plans to fund its development and exploratory activities through cashon hand (which was approximately $1,750,000 as of the date of this filing), theDrilling Credits, cash provided from operations; and one of, or a combinationof, the following potential transactions: a private placement of common stock;a public offering of common stock; a joint venture with an industry partner inwhich we would or could farm-out a to-be-determined percentage of our workinginterests in certain properties; a disposition of assets; or othertransactions.

 

Whilewe expect production from the wells drilled and completed in fiscal 2008, 2009,2010 and subsequent to the end of fiscal 2010 to provide cash flow to supportadditional drilling in fiscal 2011, the Company cannot be certain that adequatefunds will be available from cash on hand, operating cash flow, and theaforementioned potential transactions to fully fund the projected capitalexpenditures for fiscal 2011. Additionally, because future cash flows, theavailability of borrowings, and the ability to consummate any of 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.

 

Althoughthe Company believes it will be able to obtain funds pursuant to theabove-mentioned alternatives, management cannot be assured that such capitalresources will be available to the Company. If we are unable to obtain suchcapital resources on a timely basis, the Company may curtail its planneddevelopment and exploratory activities. If a well is proposed by a third-partyoperator and the Company does not have a drilling credit or the capitalresources to participate in that well the Company might not receive any revenuegenerated by that well while still being required to fulfill the relevantroyalty payment obligations to the mineral owner and other royalty holders.

 

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**Critical Accounting Policies**

 

Inresponse to the SEC’s Release No. 33-8040, “Cautionary Advice RegardingDisclosure About Critical Accounting Policies,” we have identified the mostcritical accounting policies used in the preparation of our consolidatedfinancial statements. We determined the critical policies by consideringaccounting policies that involve our most complex or subjective decisions orassessments. We identified our most critical accounting policies to be thoserelated to our proved reserves, accounts receivables, share-based payments, ourchoice of accounting method for oil and natural gas properties, goodwill, assetretirement obligations and income taxes.

 

Weprepared our consolidated financial statements for inclusion in this report inaccordance with GAAP. GAAP represents a comprehensive set of accounting anddisclosure rules and requirements, and applying these rules andrequirements requires management judgments and estimates including, in certaincircumstances, choices between acceptable GAAP alternatives. The following is adiscussion of our most critical accounting policies, judgments anduncertainties that are inherent in our application of GAAP.

 

**Estimates of Proved Reserves**

 

Theproved reserves data included in this Annual Report on Form 10-K wasprepared in accordance with SEC guidelines. The accuracy of a reserve estimateis a function of:

 

·                  the quality and quantity of available data;

 

·                  the interpretation of that data;

 

·                  the accuracy of various mandated economicassumptions; and

 

·                  the technical qualifications, experience andjudgment of the persons preparing the estimates.

 

Becausethese estimates depend on many assumptions, all of which may substantiallydiffer from actual results, reserve estimates may be different from thequantities of oil and natural gas that are ultimately recovered. In addition,results of drilling, testing and production after the date of an estimate mayjustify material revisions to the estimate. The assumptions used for ourBossier/Haynesville, Cotton Valley and Hosston well and reservoircharacteristics and performance are subject to further refinement as more productionhistory is accumulated.

 

Youshould not assume that the present value of future net cash flows representsthe current market value of our estimated proved reserves. In accordance withSEC requirements, we based the estimated discounted future net cash flows fromproved reserves according to the requirements in the SEC’s ReleaseNo. 33-8995 Modernization of Oil and Gas Reporting, or ReleaseNo. 33-8995. Actual future prices and costs may be materially higher orlower than the prices and costs used in the preparation of the estimate.Further, the mandated discount rate of 10% may not be an accurate assumption offuture interest rates.

 

Provedreserves quantities directly and materially impact depletion expense. If theproved reserves decline, then the rate at which we record depletion expenseincreases, reducing net income. A decline in the estimate of provedreserves may result from lower market prices, making it uneconomical to drillor produce from higher cost fields. In addition, a decline in proved reservesmay impact the outcome of our assessment of our oil and natural gas propertiesand require an impairment of the carrying value of our oil and natural gasproperties.

 

Provedreserves are defined as those quantities of oil and gas, which, by analysis ofgeoscience and engineering data, can be estimated with reasonable certainty tobe economically producible from a given date forward, from known reservoirs,and under existing economic conditions, operating methods, and governmentregulations before the time at which contracts providing the right to operateexpire, unless evidence indicates that renewal is reasonably certain,regardless of whether the estimates is a deterministic 

 

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estimateor probabilistic estimate. The project to extract the hydrocarbons must havecommenced, or the operator must be reasonably certain that it will commence theproject, within a reasonable time.

 

Thearea of the reservoir considered as proved includes both the area identified bydrilling and limited by fluid contacts, if any, and adjacent undrilled portionsof the reservoir that can, with reasonable certainty, be judged to be continuouswith it and to contain economically producible oil and gas on the basis ofavailable geoscience and engineering data. In the absence of data on fluidcontacts, proved quantities in a reservoir are limited by the lowest knownhydrocarbons as seen in a well penetration unless geoscience, engineering, orperformance data and reliable technology establish a lower contact withreasonable certainty.

 

Wheredirect observation from well penetrations has defined a highest known oilelevation and the potential exists for an associated gas cap, proved oilreserves may be assigned in the structurally higher portions of the reservoironly if geoscience, engineering, or performance data and reliable technologyestablish the higher contact with reasonable certainty.

 

Reservesthat can be produced economically through application of improved recoverytechniques (including, but not limited to, fluid injection) are included in theproved classification when successful testing by a pilot project in an area ofthe reservoir with properties no more favorable than in the reservoir as awhole, the operation of an installed program in the reservoir or an analogousreservoir, or other evidence using reliable technology establishes thereasonable certainty of the engineering analysis on which the project orprogram was based, and the project has been approved for development by allnecessary parties and entities, including governmental entities.

 

Undrilledlocations can be classified as having undeveloped reserves only if a developmentplan has been adopted indicating that they are scheduled to be drilled withinfive years, unless the specific circumstances justify a longer time.

 

Existingeconomic conditions include prices and costs at which economic producibilityfrom a reservoir is to be determined. The price shall be the average priceduring the 12-month period before the ending date of the period covered by thereport, determined as an unweighted arithmetic average of thefirst-day-of-the-month price for each month within such period, unless pricesare defined by contractual arrangements, excluding escalations based uponfuture conditions.

 

**Accounting for oil and natural gasproperties**

 

Theaccounting for and disclosure of oil and natural gas producing activitiesrequires that we choose between two GAAP alternatives; the full cost method orthe successful efforts method.

 

Weuse the full cost method of accounting, which involves capitalizing allacquisition, exploration, exploitation and development costs of oil and naturalgas properties. Once we incur costs, they are recorded in the depletable poolof proved properties or in unproved properties, collectively, the full costpool. Unproved property costs are not subject to depletion. We review ourunproved oil and natural gas property costs on a quarterly basis to assesspossible impairment or the need to transfer unproved costs to proved propertiesas a result of extension or discoveries from drilling operations. We expectthese costs to be evaluated in one to seven years and transferred to thedepletable portion of the full cost pool during that time. The full cost poolis comprised of intangible drilling costs, lease and well equipment andexploration and development costs incurred plus costs of acquired proved andunproved leaseholds.

 

DuringApril 2004 we initiated leasing projects to acquire shale drilling rightsin both the Johnson Branch and Bethany Longstreet fields in our NortheastLouisiana operating areas. In accordance with our policy and FASB ASCSubtopic 835-20 for Capitalization of Interest, we began capitalizing intereston unproved properties.

 

Wecalculate depletion using the unit-of-production method. Under this method, thesum of the full cost pool and all estimated future development costs aredivided by the total quantity of proved reserves. This rate is applied to ourtotal production for the period, and the appropriate expense is recorded. Wecapitalize the portion of general and administrative costs, includingshare-based compensation that is attributable to our acquisition, exploration,exploitation and development activities.

 

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Underthe full cost method of accounting, sales, dispositions and other oil andnatural gas property retirements are generally accounted for as adjustments tothe full cost pool, with no recognition of gain or loss unless the dispositionwould significantly alter the relationship between capitalized costs and provedreserves. Gain or loss recognition on divestiture or abandonment of oil andnatural gas properties where disposition would result in a significantalteration of the depletion rate requires allocation of a portion of the amortizablefull cost pool based on the relative estimated fair value of the disposed oiland natural gas properties to the estimated fair value of total provedreserves. As discussed under “Estimates of Proved Reserves,” estimating oil andnatural gas reserves involves numerous assumptions.

 

Priorto our December 31, 2009 adoption of Release No. 33-8995, at the endof each quarterly period the unamortized cost of oil and natural gasproperties, net of related deferred income taxes, was limited to the full costceiling, computed as the sum of the estimated future net revenues from ourproved reserves using period-end prices, discounted at 10%, and adjusted forrelated income tax effects (ceiling test). In the event our capitalized costsexceeded the ceiling limitation at the end of the reporting period, wesubsequently evaluated the limitation for price changes occurring after thebalance sheet date to assess impairment. Beginning December 31, 2009,Release No. 33-8995 requires that the full cost ceiling be computed as thesum of the estimated future net revenues from proved reserves using theaverage, first-day-of-the-month price during the previous 12-month period,discounted at 10% and adjusted for related income tax effects. The new rule nolonger allows a company to subsequently evaluate the limitation for subsequentprices changes. Under full cost accounting rules, any ceiling test write-downsof oil and natural gas properties may not be reversed in subsequent periods.

 

Thequarterly calculation of the ceiling test is based upon estimates of provedreserves. There are numerous uncertainties inherent in estimating quantities ofproved reserves, in projecting the future rates of production and in the timingof development activities. The accuracy of any reserve estimate is a functionof the quality of available data and of engineering and geologicalinterpretation and judgment. Results of drilling, testing and productionsubsequent to the date of the estimate may justify revision of such estimate.Accordingly, reserve estimates are often different from the quantities of oiland natural gas that are ultimately recovered.

 

**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.

 

**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, engineeringand geological 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.

 

**Asset retirement obligations**

 

Wefollow FASB ASC Subtopic 410-20 for Asset Retirement Obligations to account forlegal obligations associated with the retirement of long-lived assets. ASC410-20 requires these obligations be recognized at their estimated fair valueat the time that the obligations are incurred. Upon initial recognition of aliability, that cost should be capitalized as part of the related long-livedasset and allocated to expense over the useful 

 

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lifeof the asset. The costs of plugging and abandoning oil and natural gasproperties fluctuate with costs associated with the industry. We periodicallyassess the estimated costs of our asset retirement obligations and adjust theliability according to these estimates.

 

**Accounting for income taxes**

 

Incometaxes are accounted for using the liability method of accounting in accordancewith FASB ASC Topic 740 for Income Taxes. We must make certain estimatesrelated to the reversal of temporary differences, and actual results could varyfrom those estimates. Deferred taxes are recorded to reflect the tax benefitsand consequences of future years’ differences between the tax basis of assetsand liabilities and their financial reporting basis. We record a valuationallowance to reduce deferred tax assets if it is more likely than not that someportion or all of the deferred tax assets will not be realized.

 

**Stock-based compensation**

 

Weaccount for share-based payments to employees using the methodology prescribedin FASB ASC Topic 718 for Stock Compensation. ASC Topic 718 requiresshare-based compensation to be recorded with cost classifications consistentwith cash compensation.

 

**Subsequent Events**

 

InMay 2009, the FASB issued new authoritative guidance for subsequentevents. Such authoritative guidance establishes general standards of accountingfor, and disclosure of, events that occur after the balance sheet date butbefore financial statements are issued or are available to beissued.  In particular, this statement sets forth: (1) the periodafter the balance sheet date during which management of a reporting entityshould evaluate events or transactions that may occur for potential recognitionor disclosure in the financial statements, (2) the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements and (3) the disclosuresthat an entity should make about events or transactions that occurred after thebalance sheet date.  Adoption of this authoritative position did nothave a material impact on the Company’s condensed consolidated financialstatements.

 

**Other Accounting Policies and Recent Accounting Pronouncements**

 

OnJanuary 21, 2010, the FASB issued Accounting Standards UpdateNo. 2010-06—Fair Value Measurement and Disclosures (Topic 820): ImprovingDisclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 requirestransfers, and the reasons for the transfers, between Levels 1 and 2 bedisclosed, Level 3 reconciliations for fair value measurements using significantunobservable inputs should be presented on a gross basis, the fair valuemeasurement disclosure should be reported for each class of asset andliability, and disclosures about the valuation techniques and inputs used tomeasure fair value for both recurring and nonrecurring will be required forfair value measurements that fall in either Level 2 or 3. The update will beeffective for interim and annual reporting periods beginning afterDecember 15, 2009. This update currently will have no impact to ourfinancial position.

 

OnDecember 31, 2008, the SEC issued Release No. 33-8995, amending itsoil and natural gas reporting requirements for oil and natural gas producingcompanies. On January 16, 2010, the FASB, issued UpdateNo. 2010-03—Extractive Activities—Oil and Gas (Topic 932): Oil and GasReserve Estimation and Disclosures, or Update No. 2010-03, to align theoil and gas reserve estimation and disclosure requirements of the Codificationwith Release No. 33-8995.

 

Theeffective date of the new accounting and disclosure requirements is for annualreports filed for fiscal years ending on or after December 31, 2009.

 

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Amongother things, Release No. 33-8995 and Update No. 2010-03:

 

·                  Revises a number of definitions relating tooil and natural gas reserves to make them consistent with the PetroleumResource Management System, which includes certain non-traditional resources inproved reserves;

 

·                  Permits the use of new technologies fordetermining oil and natural gas reserves;

 

·                  Requires the use of the simple average spotprices for the trailing twelve month period using the first day of each monthin the estimation of oil and natural gas reserve quantities and, for companiesusing the full cost method of accounting, in computing the ceiling limitationtest, in place of a single day price as of the end of the fiscal year;

 

·                  Permits the disclosure in filings with theSEC of probable and possible reserves and sensitivity of our proved oil andnatural gas reserves to changes in prices;

 

·                  Requires additional disclosures (outside ofthe financial statements) regarding the status of undeveloped reserves andchanges in status of these from period to period; and

 

·                  Requires a discussion of the internalcontrols in place in the reserve estimation process and disclosure of thetechnical qualifications of the technical person having primary responsibilityfor preparing the reserve estimates.

 

***Other Accounting Policies and Recent AccountingPronouncements***

 

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

 

***Inflation***

 

Althoughthe level of inflation affects certain of the Company’s costs and expenses,inflation did not have a significant effect on the Company’s results ofoperations during fiscal 2010.

 

***Related Party Transactions***

 

Adescription of our related party transactions is included in “Note F — Relatedparty transactions” in the Notes to the Financial Statements of the Companyincluded elsewhere in this Report, and is incorporated herein by reference.

 

***Off-Balance Sheet Arrangements***

 

Wedo not currently use any off-balance sheet arrangements to enhance ourliquidity and capital resource positions, or for any other purpose.

 

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

 

***Commodity Price Risk***

 

Weare subject to price fluctuations for natural gas and crude oil. Pricesreceived for natural gas sold on the spot market are volatile due primarily toseasonality of demand and other factors beyond our control. Reductions in crudeoil, natural gas and natural gas liquids prices could have a material adverseeffect on our financial position, results of operations and quantities ofreserves recoverable on an economic basis. Any reduction in reserves, includingreductions due to price fluctuations, can adversely affect our liquidity andour ability to obtain capital for our acquisition and development activities.To date, we have not entered into futures contracts or other hedging agreementsto manage the commodity price risk for a portion of our production.

 

***Interest Rate Risk***

 

Asof June 30, 2010, we had $32,000,000 of long-term debt outstanding underour Credit Facility, which matures on July 1, 2012, and the Wallen Note,which matures on September 30, 2012. This debt bears interest at the primerate plus 2.0% for the Credit Facility and prime rate plus 1% for the WallenNote. As a result, our interest costs fluctuate based on short-term interestrates. Based on the aforementioned borrowings outstanding at June 30,2010, a 100 basis point change in interest rates would change our annualinterest expense by approximately $320,000. We had no interest rate derivativesduring fiscal 2010.

 

**Item 8.    Financial Statements and Supplementary Data.**

 

TheReport of Independent Accountants, Financial Statements and any supplementaryfinancial data required by this Item are set forth on pages F-1 throughF-35 of this Report and are incorporated herein by reference.

 

**Item 9.    Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

None.

 

**Item 9A. Controls and Procedures.**

 

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

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as ofthe end of the period covered by this report. Based on this evaluation, ourprincipal executive officer and our principal financial officer concluded thatour disclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed by us in reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosures.

 

**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) and15d—15(f) of the Securities Exchange Act of 1934, as amended. Under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anassessment, including testing, of the effectiveness of our internal controlover financial reporting as of June 30, 2010 based on the criteria setforth in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of the

 

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TreadwayCommission. Our system of internal control over financial reporting is designedto 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, 2010. 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**

 

Subsequentto our evaluation, there were no changes in internal controls or other factorsthat could materially affect, or are reasonably likely to materially affect,these internal controls. We maintain a system of internal control overfinancial reporting. There were no changes in our internal control overfinancial reporting during the fourth quarter of fiscal 2010 that havematerially affected, or are reasonably likely to materially affect, our internalcontrol over 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.

 

**Certifications**

 

Ourchief executive officer and chief financial officer have completed thecertifications required to be filed as an exhibit 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, ExecutiveOfficers and Corporate Governance**.

 

**Directors**

 

Thefollowing table provides information concerning each of our directors as of September 8,2010:

 
| ** **                      | ** ** | ** ** | ** ** | ** **                                                    | ** ** | **Director** |
|---------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|--------------|
| **Name**                        | ** ** | **Age**    | ** ** | **Position(s) Held with Cubic**                | ** ** | **Since**    |
| Calvin  A. Wallen, III     |       | 55         |       | Chairman  of the Board, President and Chief Executive Officer |       | 1997         |
|                            |       |       |       |                                                          |       |         |
| Jon  S. Ross                    |       | 46         |       | Corporate  Secretary and Director                             |       | 1998         |
|                            |       |       |       |                                                          |       |         |
| Gene  C. Howard                 |       | 83         |       | Director                                                      |       | 1991         |
|                            |       |       |       |                                                          |       |         |
| Herbert  A. Bayer               |       | 61         |       | Director                                                      |       | 2003         |
|                            |       |       |       |                                                          |       |         |
| Bob  L. Clements                |       | 67         |       | Director                                                      |       | 2004         |
|                            |       |       |       |                                                          |       |         |
| Phyllis  K. Harding             |       | 64         |       | Director                                                      |       | 2009         |
|                            |       |       |       |                                                          |       |         |
| William  L. Bruggeman, Jr. |       | 83         |       | Director                                                      |       | 2009         |

 

CALVINA. WALLEN, III has served as the President and Chief Executive Officer ofthe Company 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 at CollegeStation, Texas.

 

JONS. ROSS has served as a director of the Company since April 1998 and asSecretary since November 1998. Since 1989, Mr. Ross has been apracticing attorney in Dallas, Texas representing over 80 business entities. Hehas served on several community and not-for-profit committees and boards andhas been asked to speak to corporate and civic leaders on a variety ofcorporate law topics. Mr. Ross graduated from St. Mark’s School of Texaswith honors in 1982 and graduated from the University of Texas at Austin in1986 with a B.B.A. in Accounting. He then graduated from the University ofTexas School of Law in 1989 attaining a Juris Doctorate degree.

 

GENEC. HOWARD is the Senior Partner of the law firm of Howard, Widdows, andBufogle, P.C. of Tulsa, Oklahoma and has been engaged primarily in the privatepractice of law over the past thirty-five years. Mr. Howard served in theOklahoma State Senate from 1964 through 1982 and was President Pro Tem from1975 through 1981. In addition, he served as the Chairman of the Board ofFarmers and Exchange Bank from 1972 through 1991 and on the Board of Directorsof Local Federal Bank of Oklahoma. Mr. Howard is a Director of theOklahoma State Education and Employment Group Insurance Board and presentlyacts as Chairman. Mr. Howard served as Director of EntreCap FinancialCorporation and Hinderliter Construction, Inc. from 1991 to August of1992.

 

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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 Cubic’s Board of Directors in April 2009.  She hasworked as an executive advisor for Diversified Dynamics Corporation, aprivately held corporation controlled by William L. Bruggeman, Jr. since1990.  From 2001 through 2008, she served on the Board of Directors ofDayport, a leader in video publishing, content, workflow and syndicationsolutions.  Dayport was acquired by EntriQ in 2008.  Ms. Hardinghas also served as Director since 2009 for Geospan Corporation andGeospan.com.  Geospan Corporation is a privately held industry leader inspatial imaging and visual mapping solutions.  She has worked withnumerous corporations in various industries as the head of the consultingdivision for Grant Thornton LLP in Minneapolis from 1987 through 1988 and as aco-owner of Camelot Consultants, Inc. from 1989 through 1999.  Ms. Hardinghas three decades of operational, manufacturing, turn-around and strategicleadership experience with various clients and direct employment at The ValsparCorporation (1986 through 1987) and Procter & Gamble (1975 through1986).  Ms. Harding is a graduate of the University of Wisconsin -Green Bay.

 

WILLIAML. BRUGGEMAN, JR. joined the Company’s board in April 2009. He is thefounder and controlling shareholder of Diversified Dynamics Corporation(founded in 1968) and its business divisions: Cat Pumps, a manufacturer ofquality, industrial, positive displacement, triplex piston and plunger pumpsand custom engineered pumping systems with over 40 years of experience inindustrial high pressure systems; and HomeRight, as manufacturer of homeimprovement products.  Mr. Bruggeman has served as Director since2009 for Geospan Corporation and Geospan.com.  Geospan Corporation is aprivately held industry leader in spatial imaging and visual mappingsolutions.  He is an entrepreneur and “angel investor” who has beeninvolved in many successful start-up businesses.  He has been asignificant investor in the oil and gas industries since the early 1990’s. Mr. Bruggeman continues to be a major shareholder of Cubic Energy, Inc. Mr. Bruggeman’s former employers include: McCullough Corporation, JohnDeere, L & A Products, and Minneapolis Moline.  Mr. Bruggemanis a veteran who served thirty months in the U.S. Navy in World War II and oneyear in the U.S. Marine Corp in Korea.  He has been a pilot for smallengine planes and jets for 62 years.  Mr. Bruggeman graduated fromHamline University in St. Paul, Minnesota with a degree in Engineering.

 

Thereare no family relationships among any of the directors or executive officers ofthe Company. See “Certain Relationships and Related Transactions” for adescription of transactions between the Company and its directors, executiveofficers or their affiliates.

 

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**Executive Officers**

** **
| **Name**                     | ** ** | **Age** | ** ** | **Position(s) Held with Cubic**                | ** ** | **Since** |
|------------------------------|------------|---------|------------|---------------------------------------------------------------|------------|-----------|
| Calvin  A. Wallen, III* |       | 55      |       | Chairman  of the Board, President and Chief Executive Officer |       | 1997      |
|                         |       |    |       |                                                          |       |      |
| Larry  G. Badgley            |       | 53      |       | Chief  Financial Officer                                      |       | 2008      |
|                         |       |    |       |                                                          |       |      |
| Jon  S. Ross*                |       | 46      |       | Corporate  Secretary and Director                             |       | 1998      |

 

*See Mr. Wallen’s and Mr. Ross’s biographies above.*

 

LARRYG. 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.

 

**Audit Committee; Financial Expert**

 

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

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Exchange Act requires the Company’s directors, executive officers, andholders of more than 10% of the common stock to file with the SEC reports ofownership and changes in ownership of common stock. SEC regulations requirethose directors, executive officers, and greater than 10% shareholders tofurnish the Company with copies of all Section 16(a) forms they file.Based on the Company’s review of reports, the Company believes that thedirectors, executive officers, and greater than 10% shareholders complied withall applicable Section 16(a) filing requirements during fiscal 2010.

 

**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 AMEX, Messrs. Howard, Clements and Bayer also meet the independencestandards for independent directors applicable to serving on the AuditCommittee, under the rules of the SEC and the rules of the AMEX.

 

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**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 person 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 2010, 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 2008,included data from a survey of the following comparable companies: AbraxasPetroleum Corporation, Arena Resources, Inc., ATP Oil & Gas,Berry Petroleum Company, Canadian Superior Energy, Edge Petroleum and GoodrichPetroleum Corporation.

 

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 stock awards.

 

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***Executive Compensation Components.***Our total compensation for the named executiveofficers consisted of:

 

·                  base salary,

·                  bonuses and

·                  long-termincentives in the form of common stock awards.

 

The Compensation committeebelieves that each of these components is necessary to achieve Cubic’sobjective of retaining highly qualified executives and motivating the namedexecutive officers to maximize shareholder return.

 

In setting fiscal 2010compensation, the Compensation Committee considered the specific factorsdiscussed 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 stock), base salaries are targeted to approximate the low endof the range of base salaries paid to executives of similar companies for eachposition. To ensure that each executive is paid appropriately, the CompensationCommittee considers the executive’s level of responsibility, prior experience,overall knowledge, contribution to business results, existing equity holdings,executive pay for similar positions in other companies, and executive pay withinour company.

 

The base salaries paid toour named executive officers during fiscal 2010 are set forth below in theSummary Compensation Table. There were no increases in executive officers basesalaries during fiscal 2010

 

*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 internal policies andpractices, including an overall review of both individual and corporateperformance. No bonuses were paid to our named executive officers during fiscal2010. For fiscal years 2008 and 2009, bonuses to executives were primarilybased upon the achievement of certain business objectives including progress inmeeting our expected drilling and completion schedule, and obtaining additionalfinancing. The President and Chief Executive Officer has the discretion torecommend to the Compensation Committee to increase or decrease bonuses for allother executive officers, but any bonus amounts must be approved by the CompensationCommittee.

 

*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 shares of our common stock and/or grants of options to purchase shares ofcommon 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;

 

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·                  Job responsibilities and past performance;

 

·                  Futureanticipated contributions;

 

·                  Corporateperformance; and

 

·                  Existing equityholdings.

 

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**

 

*StockOwnership Requirements.* The Compensation Committee does not maintaina policy relating to stock ownership guidelines or requirements for our executiveofficers because the Compensation Committee does not feel that it is necessaryto impose such a policy on our executive officers. If circumstances change, theCompensation Committee will review whether such a policy is appropriate forexecutive 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 is subjectto early termination by the Company in the event that the employee dies,becomes totally disabled or commits an act constituting “Just Cause” under theagreement. The agreements provide that Just Cause includes, among other things,the conviction of certain crimes, habitual neglect of his duties to the Companyor other material breaches by the employee of the agreement. Each agreementalso provides that the employee shall be permitted to terminate his employmentupon the occurrence of “Good Reason,” as defined in the agreement. Theagreements provide that Good Reason includes, among other things, a materialdiminution in the employee’s authority, duties, responsibilities or salary, orthe relocation of the Company’s principal offices by more than 50 miles. If theemployee’s employment is terminated by (a) the Company other than due tothe employee’s death, disability or Just Cause, or (b) the employee forGood Reason, then the Company is required to pay all remaining salary throughthe end of the then-current term. The foregoing severance payment is subject toreduction 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, 2010. There can be noassurance that these scenarios would produce the same or similar results asthose disclosed if a termination occurs in the future.

 

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

 

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*(1)**        *Represents 36 months of base salary.

 

**TaxConsiderations**

 

*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 2010 base salary, annual bonus and stock grants paid to theindividual executive officers covered by Section 162(m) did notexceed the Section 162(m) limit and will be fully deductible under Section 162(m).

 

**ChiefExecutive Officer Compensation**

 

Mr. Wallen received$200,000 in base salary for fiscal 2010. His annual base salary was notincreased from fiscal year 2009. Mr. Wallen received no common stockawards during fiscal 2010.

 

**ChiefFinancial Officer Compensation**

 

Mr. Badgley’s salaryhas been established at $145,000 per year, plus a $300 per month healthinsurance subsidy. In February 2010, the health insurance subsidyincreased to $500 per month. In the event that Mr. Badgley is terminatedwithout cause, as determined by the Board of Directors of the Company, he willbe entitled to three months salary. The Company and Mr. Badgley did notenter into a written employment agreement.

 

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**Summary Compensation Table**

 

Thefollowing table shows information regarding the compensation earned during thefiscal years ended June 30, 2010, 2009 and 2008 by our Chief ExecutiveOfficer, our Chief Financial Officer, and our other most highly compensatedexecutive officer who was employed by us as of June 30, 2010 and whosetotal compensation exceeded $100,000 during the most recent fiscal year (the “NamedExecutive Officers”):

 
| **Name and  Principal Position**                                               | ** ** | **Fiscal  Year** | ** ** | **Salary** | ** **                | **Bonus** | ** ** | **Stock  Awards (1)** | ** ** | **Option  Awards** | ** **              | **Non-Equity  Incentive Plan  Compensation** | ** ** | **All Other  Compensation  (2)** | ** ** | **Total** | ** **             |
|------------------------------------------------------------------------------------------|------------|------------------|------------|------------|---------------------------|-----------|------------|----------------------------|------------|--------------------|-------------------------|---------------------------------------------------|------------|---------------------------------------|------------|-----------|------------------------|
| Calvin A. Wallen, III Chairman of the Board, President  and Chief Executive Officer |       | 2010  2009  2008 |       | $  $  $    | 200,000  200,000  170,833 |      | $  $  $    | —  —  —     |       | $  $  $            | —  —  241,500 |                                              | $  $  $    | —  —  —                |       | $  $  $   | —  —  — |   | $  $  $ | 4,800  3,600  3,600 |   | $  $  $ | 204,800  203,600  415,933 |   |
|                                                                                     |       |             |       |       |                      |      |       |                       |       |               |                    |                                              |       |                                  |       |      |                   |
| Larry G. Badgley                                                                         |       | 2010             |       | $          | 145,000                   |      | $          | —                     |       | $                  | —                  |                                              | $          | —                                |       | $         | —                 |   | $ | 4,800 |   | $ | 149,800 |   |
| Chief Financial Officer (3)                                                              |       | 2009             |       | $          | 103,293                   |      | $          | 750                        |       | $                  | —                  |                                              | $          | —                                |       | $         | —                 |   | $ | 2,700 |   | $ | 106,743 |   |
|                                                                                     |       | 2008             |       | $          | —                    |      | $          | —                     |       | $                  | —                  |                                              | $          | —                                |       | $         | —                 |   | $ | — |   | $ | — |   |
|                                                                                     |       |             |       |       |                      |      |       |                       |       |               |                    |                                              |       |                                  |       |      |                   |
| Jon S. Ross                                                                              |       | 2010             |       | $          | 150,000                   |      | $          | —                     |       | $                  | —                  |                                              | $          | —                                |       | $         | —                 |   | $ | 4,800 |   | $ | 154,800 |   |
| Secretary and Director                                                                   |       | 2009             |       | $          | 150,000                   |      | $          | 2,625                      |       | $                  | —                  |                                              | $          | —                                |       | $         | —                 |   | $ | 3,600 |   | $ | 156,225 |   |
|                                                                                     |       | 2008             |       | $          | 120,833                   |      | $          | 2,000                      |       | $                  | 161,000                 |                                              | $          | —                                |       | $         | —                 |   | $ | 3,600 |   | $ | 287,433 |   |

 

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(1)                                 This column represents the dollar amount recognized for financialstatement reporting purposes with respect to the 2010, 2009 and 2008 fiscalyears for the fair value of stock grants for each of the named executiveofficers in accordance with FASB ASC Topic 718 (formerly SFAS No. 123R).On January 31, 2008 we granted our Named Executive Officers a total of250,000 shares of common stock as follows: Mr. Wallen, 150,000 shares; andMr. Ross, 100,000 shares. These shares vested immediately on the grantdate.

(2)                                 All Other Compensation consists solely of a $500 per month (increased in February 2010from $300) reimbursement towards each officer’s medical insurance premiums. TheCompany does not provide group health insurance coverage to its employees.

(3)                                 Mr. Badgley was appointed Cubic’s Chief Financial Officer effective October 13,2008.

 

**Fiscal 2010 Grants of Plan-BasedAwards**

 

No stock options weregranted to executive officers for the periods presented.

 

**Stock Grants**

 

OnJanuary 31 and February 4, 2008, the Company issued 555,000 and52,500 shares, respectively, to the officers and directors, and key employeesof the Company pursuant to the Plan. As of such dates, the aggregate marketvalue of the common stock granted was $893,550 and $84,525 (a total of$978,075), respectively, based on the then-market price on the OTCBB of theCompany’s common stock. Recent SEC guidance requires that immediately-vestingcommon stock grants with no forfeiture provisions be expensed at the time ofgrant rather than amortized over the four quarters of the service period.Accordingly, the full $978,075 was recorded as compensation expense andincluded in general and administrative expenses for the fiscal year ended June 30,2008. The Named Executive Officers received the following grants: (i) 150,000shares to Calvin A. Wallen, III, and (ii) 100,000 shares to Jon S.Ross.

 

OnJanuary 12, 2009, the Company issued 235,000 shares to three directors ofthe Company pursuant to the Plan.  As ofsuch dates, the aggregate market value of the common stock granted was $385,400based on the

 

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lastsale price ($1.64 per share) on the aforementioned date, on the AMEX, of theCompany’s common stock. Such amounts were expensed upon issuance tocompensation expense.

 

OnFebruary 3, 2010, the Company issued 370,014 shares to five non-employeedirectors of the Company pursuant to the Plan. As of such dates, the aggregate market value of the common stock grantedwas $395,915 based on the last sale price ($1.07 per share) on theaforementioned date, on the AMEX of the Company’s common stock. Such amountswere recorded as compensation expense upon issuance.

 

Allof the foregoing issuances and grants were made 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.

 

**Outstanding Equity Awards at Fiscal Year-End**

 

The Company had nooutstanding stock options at June 30, 2010. The Company had no unvestedstock awards at the end of fiscal 2010.

 

**Option Exercises and Stock Vesting**

 

No stock options wereoutstanding at any time during fiscal 2010 and thus any reference to optionexercises has been omitted.

 

**Information Related to Stock-Based Compensation**

 

The Company accounts for its stock-based employeecompensation plans pursuant to FASB ASC Topic 718-Stock Compensation. ASC Topic718 requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in our consolidated statements ofoperations based on their estimated fair values. We recognize expense on astraight-line basis over the vesting period of the option.

 

**Pension Benefits and Non-Qualified Defined Contribution Plans**

 

The Company does not sponsor any qualified or non-qualifieddefined benefit plans or non-qualified defined contribution plans. TheCompensation Committee, which is comprised solely of “outside directors” asdefined for purposes of Section 162(m) of the Code, may elect toadopt qualified or non-qualified defined benefit or non-qualified contributionplans if the Compensation Committee determines that doing so is in our bestinterests.

 

**Non-Employee Director Compensation for Fiscal 2010**

 

Our philosophy in determining director compensationis to align compensation with the long-term interests of the stockholders,adequately compensate the directors for their time and effort, and establish anoverall compensation package that will attract and retain qualified directors.In determining overall director compensation, we seek to strike the rightbalance between the cash and stock components of director compensation. TheBoard’s policy is that the directors should hold equity ownership in theCompany and that a portion of the director fees should consist of Company equityin the form of stock grants.

 

Our retainer and meeting fee schedule remained thesame for fiscal 2010 as it was in 2009 and 2008. Each non-employee director ofthe Company received cash compensation as follows:

 

·                  A meeting fee of $1,000 for each board or committee meeting attended(whether in person or via teleconference);

·                  Each non-employee director as of January 2010 received: 40,000shares of common stock for service on the Board of Directors; 20,000 shares ofcommon stock for service on the Audit Committee; and, 15,000 shares of commonstock for service on the Compensation Committee. Mr. Howard received

 

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an additional 10,000 shares of common stock forserving as the financial expert and Chairman of the Audit Committee.

 

The following table sets forth the cash and othercompensation paid to the non-employee members of our Board of Directors in2010.

** **
| ** **                     | ** ** | ** **               | ** ** | ** **                               | ** ** | ** **                      | ** ** | ** **              | ** ** | **Change in Pension** | ** ** | ** **         | ** ** | ** **               | ** ** |
|--------------------------------|------------|--------------------------|------------|------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                     | ** ** | ** **               | ** ** | ** **                               | ** ** | ** **                      | ** ** | ** **              | ** ** | **Value and**              | ** ** | ** **         | ** ** | ** **               | ** ** |
| ** **                     | ** ** | ** **               | ** ** | ** **                               | ** ** | ** **                      | ** ** | **Non-Equity**          | ** ** | **Nonqualified**                | ** ** | ** **         | ** ** | ** **               | ** ** |
| ** **                     | ** ** | **Fees Earned**     | ** ** | ** **                               | ** ** | ** **                      | ** ** | **Incentive Plan** | ** ** | **Deferred**                    | ** ** | **All Other** | ** ** | ** **               | ** ** |
| ** **                     | ** ** | **or Paid in** | ** ** | ** Stock **                    | ** ** | **Option**                      | ** ** | **Compensation**        | ** ** | **Compenstion**                 | ** ** | **Compensation**   | ** ** | ** **               | ** ** |
| **Name**                       | ** ** | **Cash ($) **  | ** ** | ** Awards ($) (1) ** | ** ** | ** Awards ($) ** | ** ** | **($)**                 | ** ** | **Earnings**                    | ** ** | **($)**            | ** ** | ** Total ($)** | ** ** |
| Gene C. Howard                 |       | $                        | 19,000     |                                     | $          | 90,950                          |       | $                       | —     |                            | $          | —             |       | (N/A                     | )          | $ | — |   | $ | 109,950 |   |
| Herbert A. Bayer               |       | 19,000                   |       | 80,250                                   |       | —                          |       | —                  |       | (N/A                            | )          | —             |       | 99,250                   |       |
| Bob L. Clements                |       | 19,000                   |       | 80,250                                   |       | —                          |       | —                  |       | (N/A                            | )          | —             |       | 99,250                   |       |
| Phyllis K. Harding             |       | 15,000                   |       | 72,232                                   |       | —                          |       | —                  |       | (N/A                            | )          | —             |       | 87,232                   |       |
| William L. Bruggeman, Jr. |       | 13,000                   |       | 72,232                                   |       | —                          |       | —                  |       | (N/A                            | )          | —             |       | 85,232                   |       |
|                                |            |                          |            |                                          |            |                                 |            |                         |            |                                 |            |                    |            |                          |            |  |  |  |  |  |  |

 

----

(1)                            *Themarket value of these stock awards is based on the closing price of the date ofthe grant, which was $1.07 on January 26, 2010.*

 

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**Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

Thefollowing table sets forth the number of shares of the Company’s common stockbeneficially owned, as of September 8, 2010 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 8, 2010 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 percentage ownershipof any other person. Each owner’s percentage is calculated by dividing thenumber of shares beneficially held by that owner by the sum of 75,394,579, plusthe number of shares that owner has the right to acquire within 60 days.

 
| ** **                                        | ** ** | ** **         | ** ** | **Approximate**     | ** ** |
|---------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Number**         | ** ** | **Percent of** | ** ** |
| **Name and Address**                    | ** ** | **of Shares** | ** ** | **Class (1)**  | ** ** |
| **5% Stockholders**                               |       |               |       |                |       |
| ** **                                        |       |               |       |                |       |
| Wells Fargo Energy Capital, Inc.             |       | 13,544,900         | (2)        | 15.2                | %          |
| 1000 Louisiana 9th Floor, Houston, TX 77002       |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Steven S. Bruggeman                               |       | 3,930,495          | (3)        | 5.1                 | %          |
| 5609 St. Albans Circle, Shoreview, MN 55126       |       |               |       |                |       |
|                                              |       |               |       |                |       |
| **Named Executive Officers and  Directors**       |       |               |       |                |       |
| ** **                                        |       |               |       |                |       |
| Calvin A. Wallen, III                        |       | 28,746,881         | (4)        | 34.1                | %          |
| 9870 Plano Road, Dallas, TX 75238                 |       |               |       |                |       |
|                                              |       |               |       |                |       |
| William L. Bruggeman, Jr.                    |       | 17,733,978         | (5)        | 23.3                | %          |
| 20 Anemone Circle, North Oaks, MN 55127           |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Bob L. Clements                                   |       | 982,527            | (6)        | 1.3                 | %          |
| 9870 Plano Road, Dallas, TX 75238                 |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Gene C. Howard                                    |       | 800,180            | (7)        | 1.1                 | %          |
| 2402 East 29th St., Tulsa, OK 74114               |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Jon S. Ross                                       |       | 433,000            | (8)        | *                   |       |
| 9870 Plano Road, Dallas, TX 75238                 |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Herbert A. Bayer                                  |       | 405,287            | (9)        | *                   |       |
| 9870 Plano Road, Dallas, TX 75238                 |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Phyllis K. Harding                                |       | 858,970            |       | 1.1                 | %          |
| 1681 94th Lane N.E., Minneapolis, MN 55449        |       |               |       |                |       |
|                                              |       |               |       |                |       |
| Larry G. Badgley                                  |       | —             |       | *                   |       |
| 9870 Plano Road, Dallas, TX 75238                 |       |               |       |                |       |
|                                              |       |               |       |                |       |
| All officers and directors as a group (8 persons) |       | 49,960,823         |       | 58.9                | %          |

 

----

*Denotes less than one percent

 

(1)                                 Based on atotal of 75,394,579 shares of Common Stock issued and outstanding on June 30,2010.

(2)                                 Includeswarrants to purchase 8,500,000 shares and a promissory note convertible into5,044,900 shares.

 

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(3)                                 Includes831,745 shares held jointly by Steven S. Bruggeman and his spouse as jointtenants with rights of survivorship; 65,250 shares held by Mr. Bruggeman’sspouse, of which Mr. Bruggeman disclaims beneficial ownership and,2,033,500 shares and warrants to purchase 1,000,000 shares individually held bySteven S. Bruggeman.

(4)                                 Includes10,350,000 shares plus 8,825,333 shares issuable upon conversion of preferredshares held by Langtry Mineral and Development, LLC, an entity controlled by Mr. Wallen;700,000 shares held by Tauren Exploration, Inc., an entity controlled by Mr. Wallen;500,000 shares held by Mr. Wallen’s spouse; 386,000 shares held by minorchildren; and 7,985,548 held by Mr. Wallen.

(5)                                 Includes2,034,000 shares and warrants to purchase 600,000 shares held by DiversifiedDynamics Corporation, a company controlled by William Bruggeman; 40,000 sharesowned by Mr. Bruggeman; 120,000 shares owned by Consumer Products Corp.,in which Mr. Bruggeman’s spouse is a joint owner; and, 14,939,978 sharesowned by Mr. and Mrs. Bruggeman, as joint tenants with rights ofsurvivorship.

(6)                                 Includes109,527 shares held with Mr. Clements’ spouse as joint tenants with rightsof survivorship; and, warrants to purchase 50,000 shares.

(7)                                 Includes 322,245shares are held by Mr. Howard’s spouse, of which Mr. Howard disclaimsbeneficial ownership.

(8)                                 Includes 6,000shares held by minor children.

(9)                                 Includes365,287 shares held with Mr. Bayer’s spouse as joint tenants with rightsof survivorship.

 

**Item 13. Certain Relationshipsand Related Transactions, and Director Independence.**

 

**CertainRelationships and Related Transactions**

 

EffectiveJanuary 1, 2002, the Company entered into a lease agreement with respectto the Company’s principle offices with Tauren Exploration, Inc. (“Tauren”),an entity wholly owned by Calvin A. Wallen, III, the Company’s Chairman ofthe Board and Chief Executive Officer. The lease agreement required payments toTauren of $2,229 per month, and requires the Company to pay a pro rata share ofthe costs, without markup, of the expenses and personnel of Tauren used by theCompany. During fiscal 2010, the Company paid an aggregate of $ 26,748 toTauren pursuant to this agreement.

 

Taurenowns a working interest in the wells in which the Company owns a workinginterest. As of June 30, 2010, the Company owed $78,679 to Tauren formiscellaneous general and administrative expenses paid by Tauren on the Company’sbehalf; as of June 30, 2009, the Company owed $649,205 to Tauren formiscellaneous general and administrative expenses paid by Tauren on the Company’sbehalf.

 

Inaddition, during fiscal 2010, 2009 and 2008, certain wells in which the Companyowns a working interest were operated by an affiliated company, FossilOperating, Inc. (“Fossil”), an entity wholly owned by Mr. Wallen.  In consideration for Fossil serving asoperator and to satisfy the Company’s working interest obligations related todrilling costs and lease operating expenses, Cubic paid to Fossil an aggregateof $1,384,308, $4,244,397 and $14,288,122 during fiscal 2010, 2009 and 2008,respectively; and Fossil paid Cubic an aggregate of $ 643,688, $151,680 and$310,407 during fiscal 2010, 2009 and 2008, respectively for oil and gas sales.As of June 30, 2010, 2009 and 2008, the Company owed Fossil $755,683,$815,239 and $862,895, respectively, for drilling costs and lease operatingexpenses, and was owed by Fossil $415,282, $271,615 and $450,669, respectively,for oil and gas sales.  The Company andFossil have operating agreements with respect to all wells for which Fossilserves as operator.

 

OnMay 6, 2008, the Company issued a subordinated promissory note in theamount of $2,000,000 (the “Subordinated Note”) to Diversified DynamicsCorporation (the “Lender”), an entity controlled by William Bruggeman, whobeneficially owns more than 5% of the common stock of the Company. TheSubordinated Note bore interest at a fluctuating rate equal to the sum of theprime rate plus two percent (2%) per annum, and was scheduled to mature 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

 

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evidencedby the Credit Facility with Wells Fargo, an undivided 0.375% net profitsinterest in the future production of hydrocarbons from or attributable to Cubic’snet interest in its Louisiana properties. The proceeds of the Subordinated Notewere being used for general corporate and working capital purposes.

 

OnNovember 24, 2009, the Company entered into transactions with Tauren andLangtry Mineral & Development, LLC (“Langtry”), both of which areentities controlled by Calvin Wallen III, the Chief Executive Officer of theCompany, under which the Company has acquired $30,952,810 in pre-paid drillingcredits (the “Drilling Credits”) applicable towards the development of itsHaynesville Shale rights in Northwest Louisiana. The Company expects to use theDrilling Credits to fund $30,952,810 of its share of the drilling andcompletion costs for those horizontal Haynesville Shale wells drilled insections previously operated by an affiliate of the Company, which are nowoperated by a third party.

 

Asconsideration for the Drilling Credits, the Company, (a) has conveyed toTauren a net overriding royalty interest of approximately 2% in its leaseholdrights below the Taylor Sand formation of the Cotton Valley and (b) hasissued to Langtry 10,350,000 Company common shares and preferred stock in theamount of $10,350,000, convertible into Company common shares at $1.20 percommon share, five year conversion term. The preferred stock is entitled tocumulative dividends equal to 8% per annum, payable quarterly, which dividendsmay be paid in cash or in additional shares of preferred stock, in the Company’sdiscretion. The preferred stock may be redeemed by the Company at any time, ata redemption price equal to 20% over the original issue price.

 

Theconsideration described above was determined based upon negotiations betweenTauren and a Special Committee of the Company’s directors, excluding Mr. Wallen.The Special Committee obtained an “fairness opinion” from its independentfinancial advisor with respect to the fairness, from a financial point of view,to the public stockholders of the Company, of such transactions.

 

OnDecember 18, 2009, the Company issued a subordinated promissory notepayable to Mr. Wallen, in the principal amount of $2,000,000 (the “WallenNote”). This note bears interest at the prime rate plus one percent (1%), withinterest payable monthly. The Wallen Note was entered into with the consent ofWells Fargo and the outstanding principal balance is due and payable on September 30,2012 and is subordinated to the indebtedness under the Amended CreditAgreement. The proceeds of this note were used to repay the Subordinated Noteand the net profits interests were conveyed.

 

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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**Item 14. Principal AccountantFees and Services.**

 
| ** **         | ** ** | **July 1, 2009 -** | ** ** | **July 1, 2008 -** | ** ** |
|--------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **June 30, 2010**       | ** ** | **June 30, 2009**       | ** ** |
| Audit fees         |       | $                                 | 35,700     |                              | $          | 35,500 |   |
| Audit-related fees |       | 15,000                            |       | 12,300                            |       |
| Tax fees           |       | 3,800                             |       | 5,000                             |       |
| All other fees     |       | 13,060                            |       | 2,280                             |       |
| Total              |       | $                                 | 67,560     |                              | $          | 55,080 |   |

 

**Audit Fees**

 

Aggregateaudit fees billed for professional services rendered by Philip Vogel &Co., PC were $35,700 for the year ended June 30, 2010 and $35,500 for theyear ended June 30, 2009. Such fees were primarily for professionalservices rendered for the audits of our consolidated financial statementsduring the fiscal years ended June 30, 2010 and 2009.

 

**Audit-Related Fees**

 

Aggregateaudit-related fees billed for professional services rendered by Philip Vogel &Co., PC were $15,000 for the year ended June 30, 2010 and $12,300 for theyear ended June 30, 2009. Such fees were for limited reviews of ourunaudited condensed consolidated interim financial statements.

 

**Tax Fees**

 

Aggregateincome tax compliance and related services fees billed for professionalservices rendered by Philip Vogel & Co., PC were $3,800 for the yearended June 30, 2010 and $5,000 for the year ended June 30, 2009.

 

**All Other Fees**

 

Inaddition to the fees described above, aggregate fees of: $13,060 were billed byPhilip Vogel & Co., PC during the year ended June 30, 2010,primarily for the review of various SEC filings, attendance at our annualshareholders’ meeting; and $2,280 were billed by Philip Vogel & Co.,PC during the year ended June 30, 2009, primarily for the review ofvarious SEC filings, attendance at our annual shareholders’ meeting, and forresearch regarding our compliance with Section 404 of the Sarbanes-OxleyAct of 2002.

 

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

 

Inaccordance with Company policy, any additional audit or non-audit services mustbe approved in advance. All of the foregoing professional services provided byPhilip Vogel & Co., PC during the years ended June 30, 2010 and June 30,2009 were pre-approved in accordance with the policies of our Audit Committee.

 

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**SIGNATURES**

 

Pursuantto requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned; thereunto duly authorized, on September 28, 2010.

 
|   | 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 |

 

Pursuantto requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**                      | ** ** | **Title**                                       | ** ** | **Date**                |
|------------------------------------|------------|-------------------------------------------------|------------|-------------------------|
| ** **                         | ** ** | ** **                                      | ** ** | ** **              |
| /s/ Calvin A. Wallen, III     |       | Chairman, President and Chief Executive Officer |       | September 28, 2010 |
| Calvin A. Wallen, III         |       | (principal executive officer)                   |       |                    |
|                               |       |                                            |       |                    |
| /s/ Larry G. Badgley               |       | Chief Financial Officer                         |       | September 28, 2010 |
| Larry G. Badgley                   |       | (principal financial and accounting officer)    |       |                    |
|                               |       |                                            |       |                    |
| /s/ Jon S. Ross                    |       | Secretary and Director                          |       | September 28, 2010 |
| Jon S. Ross                        |       |                                            |       |                    |
|                               |       |                                            |       |                    |
| /s/ Gene C. Howard                 |       | Director                                        |       | September 28, 2010 |
| Gene C. Howard                     |       |                                            |       |                    |
|                               |       |                                            |       |                    |
| /s/ Herbert A. Bayer               |       | Director                                        |       | September 28, 2010 |
| Herbert A. Bayer                   |       |                                            |       |                    |
|                               |       |                                            |       |                    |
| /s/ Robert L. Clements             |       | Director                                        |       | September 28, 2010 |
| Robert L. Clements                 |       |                                            |       |                    |
|                               |       |                                            |       |                    |
| /s/ Phyllis K. Harding             |       | Director                                        |       | September 28, 2010 |
| Phyllis K. Harding                 |       |                                            |       |                    |
|                               |       |                                            |       |                    |
| /s/ William L. Bruggeman, Jr. |       | Director                                        |       | September 28, 2010 |
| 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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**CUBIC ENERGY, INC.**

 

**INDEX TO FINANCIAL STATEMENTS**

 

**JUNE 30, 2010**

 
| ** **                                                  | **Page** |
|-------------------------------------------------------------|----------|
|                                                        |     |
| Independent  Auditors’ Report                          | F-1      |
|                                                        |     |
| Financial  Statements:                                      |     |
|                                                        |     |
| Balance Sheets                                              | F-2      |
|                                                        |     |
| Statements  of Operations                                   | F-3      |
|                                                        |     |
| Statements of Changes in Shareholders’ Equity          | F-4      |
|                                                        |     |
| Statements  of Cash Flows                                   | F-5      |
|                                                        |     |
| Notes to Financial Statements                               | F-6      |
| Note A — Background and general                        | F-6      |
| Note B — Significant accounting policies               | F-6      |
| Note  C — Shareholders’ equity                    | F-15     |
| Note  D — Loss per common share                        | F-20     |
| Note  E — Long-term debt                               | F-20     |
| Note F — Related party transactions                    | F-23     |
| Note G — Income taxes                                  | F-26     |
| Note H — Commitments and contingencies                 | F-28     |
| Note I — Cost of oil and gas properties                | F-29     |
| Note J — Oil and gas reserves information (unaudited)  | F-30     |
| Note K — Selected quarterly financial data (unaudited) | F-34     |
| Note  L — Subsequent events                            | F-34     |

 

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**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, 2010 and 2009, and the related statements ofoperations, of changes in stockholders’ equity and of cash flows for each ofthe three years in the period ended June 30, 2010. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour 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, 2010 and 2009, and the results of its operations and itscash flows for each of the three years in the period ended June 30, 2010,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
|                         | **PHILIP  VOGEL & CO. PC** |
|------------------------------|-------------------------------------|
|                         |                                |
|                         |                                |
|                         | **Certified  Public Accountants**   |
|                         |                                |
| **Dallas,  Texas**           |                                |
|                         |                                |
| **September 28,  2010** |                                |

 

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**CUBIC ENERGY, INC.**

 

**BALANCE SHEETS**

**JUNE30, 2010 AND 2009**

 
| ** **                                                                                                                                                                                                                                                                                                                     | ** ** | **2010**    | ** ** | **2009**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                                                                                                                                                                                                                                     |       |        |       |        |       |
| Current assets:                                                                                                                                                                                                                                                                                                                |       |        |       |        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                      |       | $           | 391,898    |        | $          | 71,050 |   |
| Accounts receivable - trade                                                                                                                                                                                                                                                                                                    |       | 1,580,049   |       | 200,950     |       |
| Other prepaid expenses                                                                                                                                                                                                                                                                                                         |       | 42,525      |       | 55,063      |       |
| Total current assets                                                                                                                                                                                                                                                                                                           |       | 2,014,472   |       | 327,063     |       |
| Property and equipment (at cost):                                                                                                                                                                                                                                                                                              |       |        |       |        |       |
| Oil and gas properties, full cost method:                                                                                                                                                                                                                                                                                      |       |        |       |        |       |
| Proved properties (including wells and related equipment  and facilities)                                                                                                                                                                                                                                                      |       | 14,852,010  |       | 15,725,709  |       |
| Unproved properties                                                                                                                                                                                                                                                                                                            |       | 130,446     |       | 890,715     |       |
| Office and other equipment                                                                                                                                                                                                                                                                                                     |       | 28,420      |       | 28,420      |       |
| Oil and gas properties, and equipment, at cost                                                                                                                                                                                                                                                                                 |       | 15,010,876  |       | 16,644,844  |       |
| Less accumulated depreciation, depletion and  amortization                                                                                                                                                                                                                                                                     |       | 6,088,038   |       | 4,934,973   |       |
| Oil and gas properties, and equipment, net                                                                                                                                                                                                                                                                                     |       | 8,922,838   |       | 11,709,871  |       |
| Other assets:                                                                                                                                                                                                                                                                                                                  |       |        |       |        |       |
| Deferred loan costs - net                                                                                                                                                                                                                                                                                                      |       | 39,471      |       | 89,700      |       |
| Drilling credit                                                                                                                                                                                                                                                                                                                |       | 27,219,160  |       | —      |       |
| Total other assets                                                                                                                                                                                                                                                                                                             |       | 27,258,631  |       | 89,700      |       |
|                                                                                                                                                                                                                                                                                                                           |       | $           | 38,195,941 |        | $          | 12,126,634 |   |
| **Liabilities and shareholders’  equity**                                                                                                                                                                                                                                                                                 |       |        |       |        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                           |       |        |       |        |       |
| Current portion of long term debt                                                                                                                                                                                                                                                                                              |       | $           | —     |        | $          | 26,657,390 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                          |       | 3,031,300   |       | 299,381     |       |
| Due to affiliates                                                                                                                                                                                                                                                                                                              |       | 419,080     |       | 1,192,828   |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                      |       | 3,450,380   |       | 28,149,599  |       |
| Long-term liabilities:                                                                                                                                                                                                                                                                                                         |       |        |       |        |       |
| Long-term debt, net of discounts                                                                                                                                                                                                                                                                                               |       | 18,983,532  |       | —      |       |
| Note payable to affiliate                                                                                                                                                                                                                                                                                                      |       | 2,000,000   |       | —      |       |
| Total long-term liabilities                                                                                                                                                                                                                                                                                                    |       | 20,983,532  |       | —      |       |
| Commitments and contingencies (Notes H)                                                                                                                                                                                                                                                                                        |       | —      |       | —      |       |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                                     |       |        |       |        |       |
| Preferred stock - $.01 par value, authorized  10,000,000 shares; Series A - 8% preferred stock,$100 stated value,  redeemable at $120 covertible at $1.20 per common share, authorized 165,000  shares, 103,500 shares issued and outstanding at June 30,2010, and none  issued or outstanding at June 30, 2009 |       | $           | 1,035      |        | $          | — |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                     |       | 10,348,965  |       | —      |       |
| Common stock - $.05 par value, authorized  120,000,000 shares, issued 75,394,579 shares at June 30, 2010 and 62,570,564  shares at June 30, 2009                                                                                                                                                                     |       | 3,769,730   |       | 3,128,529   |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                     |       | 54,032,985  |       | 30,062,167  |       |
| Retained earnings’ (deficit)                                                                                                                                                                                                                                                                                              |       | (54,390,686 | )          | (49,213,661 | )          |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                                |       | 13,762,029  |       | (16,022,965 | )          |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                                                                |       | $           | 38,195,941 |        | $          | 12,126,634 |   |

 

*The accompanying notes are an integral part of thesestatements.*

 

F-2

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED JUNE 30, 2010, 2009, AND 2008**

** **
| ** **                                                 | ** ** | **2010**   | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Revenues:                                                  |       |       |       |        |       |        |       |
| Oil and gas sales                                          |       | $          | 3,486,171  |        | $          | 1,858,139   |       | $ | 2,302,310 |   |
| Total revenues                                             |       | $          | 3,486,171  |        | $          | 1,858,139   |       | $ | 2,302,310 |   |
| Operating costs and expenses:                              |       |       |       |        |       |        |       |
| Oil and gas production, operating and development  costs   |       | 1,845,153  |       | 1,372,041   |       | 1,162,489   |       |
| General and administrative expenses                        |       | 2,389,073  |       | 1,940,025   |       | 2,488,133   |       |
| Depreciation, depletion and non-loan-related  amortization |       | 1,153,065  |       | 771,861     |       | 2,152,096   |       |
| Impairment loss on oil and gas properties                  |       | —     |       | 20,390,819  |       | —      |       |
| Total operating costs and expenses                         |       | 5,387,291  |       | 24,474,746  |       | 5,802,718   |       |
| Operating income (loss)                                    |       | (1,901,120 | )          | (22,616,607 | )          | (3,500,408  | )          |
| Non-operating income (expense):                            |       |       |       |        |       |        |       |
| Other income                                               |       | 4,540      |       | 33,544      |       | 45,697      |       |
| Interest expense, including amortization of loan  discount |       | (4,714,386 | )          | (2,044,718  | )          | (1,579,452  | )          |
| Amortization of loan costs                                 |       | (73,282    | )          | (134,735    | )          | (94,290     | )          |
| Total non-operating income (expense)                       |       | (4,783,128 | )          | (2,145,909  | )          | (1,628,045  | )          |
| Loss on debt extinguishment                                |       | 1,747,623  |       | —      |       | —      |       |
| Loss before income taxes                                   |       | (4,936,625 | )          | (24,762,516 | )          | (5,128,453  | )          |
| Provision for income taxes                                 |       | —     |       | —      |       | —      |       |
| Net loss                                                   |       | $          | (4,936,625 | )           | $          | (24,762,516 | )          | $ | (5,128,453 | ) |
| Net loss per common share - basic and diluted              |       | $          | (0.07      | )           | $          | (0.40       | )          | $ | (0.09 | ) |
| Weighted average common shares outstanding                 |       | 67,583,793 |       | 61,150,400  |       | 56,974,407  |       |

 

*The accompanying notes are an integral part of thesestatements.*

 

F-3

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Table of Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED JUNE 30, 2010, 2009, AND 2008**

 
| ** **                                 | ** ** | **Cumulative**           | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** **  |
|--------------------------------------------|------------|--------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|-------------|
| ** **                                 | ** ** | **Preferred Stock** | ** ** | **Shares**            | ** ** | **Par**    | ** ** | **paid-in**    | ** ** | **Accumulated** | ** ** | **stockholders’** | ** **  |
| ** **                                 | ** ** | **outstanding**          | ** ** | **outstanding**       | ** ** | **value**  | ** ** | **capital**    | ** ** | **deficit**     | ** ** | **equity**             | ** **  |
| **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 | ) |
|                                       |       |                     |       |                  |       |       |       |           |       |            |       |                   |        |
| Stock issued for working capital           |       | —                   |       | 2,104,001             |       | 105,200    |       | 1,683,200      |       | —          |       | 1,788,400              |        |
| Common Stock sold for property purchase    |       | —                   |       | 10,350,000            |       | 517,500    |       | 9,832,500      |       | —          |       | 10,350,000             |        |
| Preferred Stock sold for property purchase |       | 103,500                  |       | —                |       | 1,035      |       | 10,348,965     |       | —          |       | 10,350,000             |        |
| Warrant valuations for loan extension      |       | —                   |       | —                |       | —     |       | 12,077,704     |       | —          |       | 12,077,704             |        |
| Stock issued under compensation plan       |       | —                   |       | 370,014               |       | 18,501     |       | 377,414        |       | —          |       | 395,915                |        |
| Preferred stock dividends                  |       | —                   |       | —                |       | —     |       | —         |       | (240,400        | )          | (240,400               | )           |
| Net loss, year ended June 30, 2010    |       | —                   |       | —                |       | —     |       | —         |       | (4,936,625      | )          | (4,936,625             | )           |
| **Balance at June 30, 2010**          |       | 103,500                  |       | 75,394,579            |       | $          | 3,769,730  |           | $          | 54,032,985      |       | $                      | (54,390,686 | ) | $ | 13,762,029 |   |

 

*The accompanying notes are an integral part of thesestatements.*

 

F-4

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Table of Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2010, 2009, AND 2008**

 
| ** **                                                                            | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2008**    | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| **Cash flows from operating  activities:**                                            |       |       |       |       |       |        |       |
| Net (loss)                                                                            |       | $          | (4,936,625 | )          | $          | (24,762,516 | )          | $ | (5,128,453 | ) |
| Adjustments to reconcile net (loss) to cash  provided (used) by operating activities: |       |       |       |       |       |        |       |
| Depreciation, depletion and amortization                                              |       | 4,404,763  |       | 1,421,216  |       | 2,762,417   |       |
| Impairment loss                                                                       |       | —     |       | 20,390,819 |       | —      |       |
| Gain on Extinguishment of Debt                                                        |       | (1,747,623 | )          | —     |       | —      |       |
| Stock issued for compensation                                                         |       | 395,915    |       | 385,400    |       | 1,255,437   |       |
| Change in assets and liabilities:                                                     |       |       |       |       |       |        |       |
| (Increase) decrease in accounts receivable - trade                                    |       | (1,379,099 | )          | (35,040    | )          | 52,964      |       |
| (Increase) decrease in other prepaid expenses                                         |       | 12,538     |       | 10,280     |       | (7,974      | )          |
| Increase (decrease) in accounts payable and  accrued liabilities                      |       | 2,491,519  |       | 48,751     |       | 198,966     |       |
| Increase (decrease) in due to affiliates                                              |       | 76,899     |       | 388,903    |       | (367,186    | )          |
| Net cash (used) by operating activities                                               |       | (681,713   | )          | (2,152,187 | )          | (1,233,829  | )          |
| **Cash flows from investing  activities:**                                            |       |       |       |       |       |        |       |
| Acquisition and development of oil and gas  properties                                |       | (5,032,312 | )          | (6,001,210 | )          | (15,341,903 | )          |
| Increase (decrease) in capital portion of due to  affiliates                          |       | (850,647   | )          | 392,642    |       | (856,585    | )          |
| Purchase of office equipment                                                          |       | —     |       | (13,748    | )          | (1,786      | )          |
| (Increase) decrease in advances on development  costs                                 |       | —     |       | 33,399     |       | 687,737     |       |
| (Increase) decrease in other assets                                                   |       | 147,120    |       | —     |       | —      |       |
| Net cash (used) by investing activities                                               |       | (5,735,839 | )          | (5,588,917 | )          | (15,512,537 | )          |
| **Cash flows from financing  activities:**                                            |       |       |       |       |       |        |       |
| Issuance of common stock, net                                                         |       | 1,788,400  |       | 2,495,952  |       | 1,110,295   |       |
| Proceeds from credit facility                                                         |       | 5,000,000  |       | 3,172,200  |       | 12,827,800  |       |
| Issuance of subordinated debt                                                         |       | —     |       | —     |       | 2,000,000   |       |
| Loan costs incurred and other                                                         |       | (50,000    | )          | —     |       | (170,000    | )          |
| Net cash provided by financing activities                                             |       | 6,738,400  |       | 5,668,152  |       | 15,768,095  |       |
| **Net increase (decrease) in cash  and cash equivalents**                             |       | $          | 320,848    |       | $          | (2,072,952  | )          | $ | (978,271 | ) |
| **Cash and cash equivalents:**                                                        |       |       |       |       |       |        |       |
| Beginning of year                                                                     |       | 71,050     |       | 2,144,002  |       | 3,122,273   |       |
| End of year                                                                           |       | $          | 391,898    |       | $          | 71,050      |       | $ | 2,144,002 |   |
| Other information:                                                                    |       |       |       |       |       |        |       |
| Cash interest paid on debt                                                            |       | $          | 1,548,685  |       | $          | 1,560,759   |       | $ | 1,394,009 |   |
| Non-cash investing and financing activities:                                          |       |       |       |       |       |        |       |
| Common and preferred stock for drilling credits                                       |       | $          | 20,700,000 |       | $          | —      |       | $ | — |   |
| Property interest assigned for drilling credits                                       |       | $          | 10,252,810 |       | $          | —      |       | $ | — |   |
| Equity interest issued creating a deferred  interest from debt modification           |       | $          | 12,077,704 |       | $          | —      |       | $ | — |   |
| Preferred stock dividends accrued                                                     |       | $          | 240,400    |       | $          | —      |       | $ | — |   |

 

*The accompanying notes are an integral part of thesestatements.*

 

F-5

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Table of Contents

 

**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.

 

**Accounts Receivable**

 

The Company has receivables from affiliated and non-affiliatedthird-party operators and oil and gas purchasers that are generallyuncollateralized. The Company reviews these parties for creditworthiness andgeneral financial condition. Accounts receivable are generally due within 30days and accounts outstanding longer than 60 days are considered past due. Ifnecessary, the Company would determine an allowance by considering the lengthof time past due, previous loss history, future net revenues of the debtor’sownership interest in oil and gas properties operated by the Company and theowners ability to pay its obligation, among other things. The Company writesoff accounts receivable when they are determined to be uncollectible.

 

The Company establishes provisions for losses on accounts receivable ifit determines that it will not collect all or part of the outstanding balance.The Company regularly reviews collectability and establishes or adjusts theallowance as necessary using the specific identification method. There was noallowance for doubtful accounts at June 30, 2010, 2009 and 2008.

 

**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, $5,193 and $2,526 forthe years ended June 30, 2010, 2009 and 2008, respectively.

 

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

 

TheCompany follows the provisions of Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) Topic 360-10, Property, Plant andEquipment — Impairment or Disposal of Long-Lived Assets which provides guidancefor the financial accounting and reporting of impairment or disposal oflong-lived assets.  In addition, the Company is subject to the rules ofthe Securities and Exchange Commission with respect to impairment of oil andgas properties accounted for under the full cost method of accounting, asdescribed below.

 

F-6

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**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 with acquisition,exploration and development of oil and gas reserves, including such costs asleasehold acquisition costs, interest costs related to exploratory anddevelopment activities, and directly related overhead costs, are capitalizedinto 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.

 

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, noimpairment of oil and gas properties charge was recorded for 2010, animpairment charge of $20,390,819 was recorded in fiscal 2009 and no impairmentcharge was recorded for fiscal 2008.

 

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 $1,147,872,$766,668 and $2,149,570 for the years ended June 30, 2010, 2009 and 2008,respectively.

 

F-7

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**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.

 

Under ASC No. 740, IncomeTax Consequences of Issuing Convertible Debt with a Beneficial ConversionFeature, or ASC No. 740, the issuance of convertible debt with abeneficial conversion feature results in a temporary difference for purposes ofapplying ASC No. 740. The deferred taxes recognized for the temporarydifference should be recorded as an adjustment to paid-in capital. ASC No. 740requires that the non-detachable conversion feature of a convertible debtsecurity be accounted for separately if it is a “beneficial conversion feature.”A beneficial conversion feature is recognized and measured by allocating toadditional paid-in capital a portion of the proceeds equal to the conversionfeature’s intrinsic value. A discount on the convertible debt is recognized forthe amount that is allocated to additional paid-in capital. The debt discountis accreted 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 tax basisof the convertible debt security. ASC No. 740 requires that the Companyrecognize in the financial statements the impact of a tax position if thatposition is more likely than not of being sustained upon audit, based on thetechnical merits of the position. The adoption of ASC No. 740 has had noimpact on the Company’s financial statements.

 

The****Companyis no longer subject to income tax examinations by the Internal Revenue Servicefor years prior to 2007.

 

**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 interest 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, 2010 and 2009 increased 184% primarily due to increasednumber of third-party operated Haynesville Shale wells, while the differencebetween 2009 and 2008 were not significant.

 

F-8

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Earnings (loss) per common share**

 

The Company has adopted the provisions of ASC No. 260, Earningsper Share. ASC No. 260 requires the presentation of basic earnings (loss)per share (EPS) and diluted EPS. Basic EPS is calculated by dividing net incomeor loss (available to common shareholders) by the weighted average number ofcommon shares outstanding for the period. Diluted EPS reflects the potentialdilution that could occur if securities or other contracts to issue commonstock, such as stock options, warrants, convertible preferred stock andconvertible debentures, were exercised or converted into common stock.

 

As discussed in Note D, there were no dilutive securities outstandingduring the years ended June 30, 2010, 2009 and 2008. The weighted averagenumber of common and common equivalent shares outstanding was 67,583,793,61,150,400 and 56,974,407 for the years ended June 30, 2010, 2009 and2008, 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.

 

As noted earlier, the Company has receivables from non-affiliated operatorsfor oil and gas sales.  It also hasaccounts payable to such operators for its share of development, production,and operating costs.  As of June 30,2010, a single operator owed the Company approximately $811,000, which isincluded in accounts receivable, and the Company owed this same operatorapproximately $827,000, which is included in accounts payable.  Receipt and payment of these obligations willbe made upon resolution of matters relating to the exact division of ownershipinterests among the Company and its affiliates. Revenues attributed to this operator amounted to approximately$1,011,000 for the year ended June 30, 2010.

 

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

 

The Company has adopted the provisions of ASC No. 220, ComprehensiveIncome, and ASC No. 280, Segment Reporting. ASC No. 220 requires thatan enterprise report, by major components and as a single total, the change inits net assets during the period from non-owner sources. ASC No. 280establishes annual and interim reporting standards for an enterprise’soperating segments and related disclosures about its products, services,geographic areas and major customers. Adoption of ASC No. 220 and ASC No. 280has had no impact on the Company’s financial position, results of operations,cash flows, or related disclosures because the Company’s operations areconsidered to be a single segment.

 

**Use of estimates**

 

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.

 

F-9

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Tableof Contents

** **

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Certain significant 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.

 

**Fair value of financial instruments**

 

TheCompany has adopted the provisions of ASC 825 — Financial Instruments. ASC 825allows entities to choose, at specified election dates, to measure eligiblefinancial assets and liabilities at fair value that are not otherwise requiredto be measured at fair value. If a company elects the fair value option for aneligible item, changes in that item’s fair value in subsequent reportingperiods must be recognized in current earnings. ASC 825 also establishespresentation and disclosure requirements designed to draw comparison betweenentities that elect different measurement attributes for similar assets andliabilities.

 

TheCompany defines the fair value of a financial instrument as the amount at whichthe instrument could be exchanged in a current transaction between willingparties. Financial instruments included in the Company’s financial statementsinclude cash and cash equivalents, short-term investments, accounts receivable,other receivables, other assets, accounts payable, notes payable and due toaffiliates. Unless otherwise disclosed in the notes to the financialstatements, the carrying value of financial instruments is considered to approximatefair value due to the short maturity and characteristics of those instruments.The carrying value of debt approximates fair value as terms approximate thosecurrently available for similar debt instruments.

 

**Asset retirement obligations**

 

We have asset retirementobligations primarily for the future abandonment of oil and gas wells, and wemaintain reserve accounts for part of these obligations under our operatingagreements with sponsored drilling partnerships. We account for theseobligations under ASC 410-20, Asset Retirement and Environmental Obligations,which requires the fair value of an asset retirement obligation to berecognized in the period when it is incurred if a reasonable estimate of fairvalue can be made. The present value of the estimated asset retirement cost iscapitalized as part of the carrying amount of the underlying long-lived asset.ASC 410-20 also requires depreciation of the capitalized asset retirement costand accretion of the asset retirement obligation over time. The depreciation isgenerally determined on a units-of-production basis over the life of the asset,while the accretion escalates over the life of the asset, typically asproduction declines. The amounts recognized are based on numerous estimates andassumptions, including recoverable quantities of oil and gas, future retirementand site reclamation costs, inflation rates and credit-adjusted risk-freeinterest rates.

 

F-10

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Stock-based compensation**

 

The Company accounts for its stock-basedemployee compensation plans pursuant to ASC 718 Compensation — StockCompensation. ASC 718 requires the Company to recognize compensation costsrelated to stock-based payment transactions (i.e., the granting of stockoptions and warrants, and awards of shares of common stock) in the financialstatements. With limited exceptions, the amount of compensation is measuredbased on the grant-date fair value of the equity issued. Compensation cost isrecognized over the period that an employee provides services in exchange forthe award.

 

**Exit or disposal activities**

 

The Company has adopted the provisions of ASC 420, Exit or DisposalCost Obligations. ASC 420 requires companies to recognize costs associated withexit or disposal 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. No exit or disposal activities have been enteredinto by the Company.

 

**Financial instruments with characteristics of both liabilities andequity**

 

The Company has adopted the provisions of ASC 480 — DistinguishingLiabilities from Equity. ASC 480 established standards for how a companyclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. The statement requires that a company classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances) if certain criteria are met. Freestanding financialinstruments that obligate the issuer to redeem the holder’s shares, or areindexed to such an obligation, and are settled in cash or settled with sharesmeeting certain conditions would be treated as liabilities. Many of thoseinstruments were previously classified as equity.

 

ASC 480-10-05 clarifies that freestanding warrants and similarinstruments on shares that are redeemable should be accounted for asliabilities under ASC 480 regardless of the timing of the redemption feature orprice, even though the underlying shares may be classified as equity. Althoughthe Company had outstanding warrants as of June 30, 2010, the sharesissuable upon exercise of the warrants are not redeemable; consequently,adoption of ASC 480 has not had an impact on the Company’s financial position,results of operations or cash flows.

 

**Guarantee of debt**

 

The Company has adopted the provisions of ASC 460 — Guarantees. ASC 460clarifies that a guarantor is required to recognize, at the inception ofcertain types of guarantees, a liability for the fair value of the obligationundertaken in issuing the guarantee, and requires additional disclosures onexisting guarantees even if the likelihood of future liability under theguarantees is deemed remote. The Company has not issued any guarantees and,therefore, the adoption of ASC 460 has not had any impact on the Company’sfinancial statements.

 

F-11

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Accounting changes and errorcorrections**

 

The Company has adopted the provisions of ASC 250 — Accounting Changesand Error Corrections. ASC 250 applies to all voluntary changes in accountingprinciples and changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions. Under previous guidance, changes in accounting principle wererecognized as a cumulative effect in the net income of the period of thechange. ASC 250 requires retrospective application of changes in accountingprinciple, limited to the direct effects of the change, to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change in accountingprinciple. The adoption of ASC 250 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Debt modifications**

 

The Company has adopted the provisions of ASC 470 — Debt Modificationsand Extinguishment. ASC 470 requires an issuer that modifies a debt instrumentto compare the present value of the original debt instrument’s cash flows tothe present value of the cash flows of the modified debt. If the present valueof those cash flows varies by more than 10 percent (10%), the modification isconsidered significant and extinguishments accounting is applied to theoriginal debt. If the change in the present value of the cash flows is lessthan 10 percent (10%), the debt is considered to be modified and is subject toASC 470 modification accounting. ASC 470 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. ASC 470 also requiresthat, if a modification does not result in an extinguishment, the change infair value of the conversion option be accounted for as an adjustment tointerest 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. The adoption of ASC 470did not have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

F-12

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Certain hybrid financialinstruments**

 

The Company has adopted theprovisions of ASC 815 — Derivatives and Hedging. ASC 815 improves the financialreporting of certain hybrid financial instruments by requiring more consistentaccounting that eliminates exemptions and provides a means to simplify theaccounting for these instruments. Specifically, ASC 815 allows financialinstruments that have embedded derivatives to be accounted for as a whole(eliminating the need to bifurcate the derivative from its host) if the holderelects to account for the whole instrument on a fair value basis. The adoptionof ASC 815 did not have a material impact on the Company’s financial position,results of operations or cash flows.

 

**Reporting taxes collected**

 

The Company has adopted theprovisions of ASC 605 —**TaxesCollected from Customers and Remitted to Governmental Authorities. Taxescollected**should be presented in the incomestatement (gross versus net presentation). ASC 605 addresses income statementclassification and disclosure requirements of externally-imposed taxes onrevenue-producing transactions. The adoption of ASC 605 did not have a materialimpact on the Company’s financial position, results of operations or cashflows.

 

**Subsequent Events**

 

The Company has adopted theprovisions of ASC 855 — Subsequent Events. ASC 855 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. ASC 855 sets forth (1) the period after the balance sheetdate during which management of a reporting entity should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements, (2) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements and (3) the disclosures that an entity should makeabout events or transactions that occurred after the balance sheet date. Theadoption of ASC 855 did not have a material effect on the Company’s financialposition, results of operations or cash flows.

 

F-13

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Other recent accountingpronouncements**

 

InFebruary 2010, the FASB issued Accounting Standards Update (ASU) 2010-09,Amendments to Certain Recognition and Disclosure Requirements, amending itsguidance on subsequent events under ASC 855 to remove the requirement for SECfilers to disclose the date through which events or transactions occurringafter the balance sheet date have been evaluated for potential recognition ordisclosure. The ASU will be effective for the first reporting period after itsissuance. ASC 855 became effective in June 2009, and its adoption did notaffect our practices for evaluating, recording or disclosing subsequent events.

 

InJanuary 2010, the FASB issued ASU — 2010-03, Extractive Industries—Oil andGas (Topic 932) — Oil and Gas Reserve Estimation and Disclosures. This ASUaligns industry-specific accounting standards for oil and gas producingactivities with revised oil and gas reserve estimation and disclosure rules adoptedby the SEC at the end of 2008 and subsequently consolidated in Subpart 1200 ofRegulation S-K and amendments to Rule 4-10 of Regulation S-Xunder the Exchange Act. We adopted the revised standards and reserve reporting rules onDecember 31, 2009.

 

InAugust 2009, the FASB issued ASU 2009-05, Fair Value Measurements andDisclosures — Measuring Liabilities at Fair Value, which provides clarificationfor the fair value measurement of liabilities, effective for the firstreporting period after issuance. Our adoption of this update did not have asignificant impact on our financial position, results of operations, cash flowsor disclosures.

 

ASC105, Generally Accepted Accounting Principles was issued by the FASB in July 2009to establish the Codification as the single source of authoritativenongovernmental GAAP, except for SEC rules and interpretive releases.Under ASC 105, the Codification became effective for reporting periods endedafter September 15, 2009. The Codification did not change existing GAAP,and adoption of ASC 105 did not have any impact on our consolidated financialstatements.

 

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** **

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note C —Stockholders’ equity:**

 

The Company’s authorized capital is 120,000,000 shares of $0.05 parvalue common stock and 10,000,000 shares of $0.01 par value preferred stock. 103,500shares of preferred stock were issued and outstanding at June 30, 2010 andno shares of preferred stock were issued or outstanding at June 30, 2009.

 

**Stock and warrants**

 

OnDecember 16, 2005, the Company entered into a Securities PurchaseAgreement and issued 2,500,000 common shares at a price of $0.80 per share andissued warrants, with five year expirations, for the purchase of up to1,000,000 shares of Company common stock at an exercise price of $1.00 pershare. The proceeds of the offering were used for exploratory drilling andworking capital. 897,500 of the above-referenced warrants had been exercisedand 385,834 remain outstanding at June 30, 2010.

 

On February 6,2006, Cubic entered into a Credit Agreement with Petro Capital V, L.P. (“Petro Capital”)pursuant to which Petro Capital advanced to the Company $5,500,000. Inconnection with the funding under the Credit Agreement, the Company issued toPetro 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 30,2010. 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, Cubic entered into and consummated transactionspursuant to Subscription and Registration Rights Agreements (the “July 2006Subscription Agreements”) with certain investors that are unaffiliated with theCompany. 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, 2010.

 

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. The above-referenced warrants expired on November 10,2009.

 

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**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

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 of4,288,000 shares of common stock at a purchase price of $0.50 per share, or anaggregate of $2,144,000. Mr. Bruggeman (and entities affiliated with him)received warrants to purchase 2,144,000 shares of common stock with an exerciseprice of $0.70 per share. Another investor, Bob Clements, a director of theCompany, purchased 100,000 shares of common stock at a purchase price of $0.50per share, 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. Pursuant to the anti-dilution provisions applicable to such warrants, theexercise price applicable to all such unexercised warrants is currently $0.6963per share. 2,240,000 of the above-referenced warrants have been exercised and 1,700,000remained outstanding at June 30, 2010.

 

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 a convertibleterm loan of $5,000,000 (the “Credit Facility”). In connection with enteringinto the Credit Facility, the Company issued to Wells Fargo warrants, withfive-year expirations, for the purchase of up to 2,500,000 shares of Companycommon stock at an exercise price of $0.9911 per share. The term loan is alsoconvertible into 5,044,900 shares of Company common stock at a conversion priceof $0.9911 per share. None of the above-referenced warrants had been exercisedand all remained outstanding at June 30, 2010. The Company allocated theproceeds from the issuance of the debt to the warrants, the debt and netprofits interest (see “Note E — Long-term debt”) 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.

 

During the fiscal year ended June 30, 2008, the Company receivedan aggregate total of $1,110,295 relating to the exercise of 2,730,000 warrantsrepresenting 2,314,665 shares of common stock.

 

Throughthe following exercises of warrants, we issued an aggregate of 3,482,500 sharesof common stock, which were not registered under the Securities Act of 1933, asamended, during fiscal 2009:

 

OnJuly 3, 2008, two warrant holders of the Company exercised warrants for anaggregate of 1,127,500 shares of Company common stock, through the payment of$777,002 to the Company.

 

OnJuly 7, 2008, one warrant holder of the Company exercised warrants for250,000 shares of Company common stock, through the payment of $243,950 to theCompany.

 

OnJuly 8, 2008, one warrant holder of the Company exercised warrants for 100,000shares of Company common stock, through the payment of $70,000 to the Company.

 

OnJuly 17, 2008, one warrant holder of the Company exercised warrants for5,000 shares of Company common stock, through the payment of $5,000 to theCompany.

 

OnFebruary 23, 2009, twenty-two warrant holders of the Company exercisedwarrants for 2,000,000 shares of Company common stock, through the payment of$1,400,000 to the Company. Included among these warrant holders were thefollowing 5% beneficial owners: William L. Bruggeman, Jr. and Ruth J.Bruggeman JWROS exercised warrants for 1,544,000 shares and Steven S. Bruggemanexercised warrants for 24,000 shares.

 

Aggregate proceeds to the Company of the aforementioned stock issuanceswere $2,495,952, all of which have been used for working capital purposes.

 

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**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

In connection with the following common stock issuances, the Companyentered into Subscription and Registration Rights Agreements (“SubscriptionAgreements”) with certain investors. Pursuant to the Subscription Agreements,the Company issued an aggregate of 2,104,001 shares of common stock andwarrants exercisable into 1,052,000 shares of common stock. On August 18,2009, four investors acquired 804,000 shares of common stock and warrantsexercisable into 402,000 shares of common stock, through the payment of$683,400. On August 26, 2009, six investors acquired 1,300,001 shares ofcommon stock and warrants exercisable into 650,000 shares of common stock,through the payment of $1,105,001. The warrants are exercisable through July 31,2014, at $0.85 per share. With respect to certain of such issuances, theCompany paid broker-dealer commissions in the aggregate amount of $59,500 toAvalon Group, Ltd. The aggregate consideration, net of commissions, fromsuch issuances has been used for working capital purposes.

 

Asconsideration for the Drilling Credits, the Company (a) conveyed to Taurena net overriding royalty interest of approximately 2% in its leasehold rightsbelow the Taylor Sand formation of the Cotton Valley and (b) on March 16,2010 issued to Langtry 10,350,000 Company common shares and preferred stockwith a stated value of $10,350,000, convertible into Company common shares at$1.20 per common share, with a five year conversion term. The preferred stockis entitled to cumulative dividends equal to 8% per annum, payable quarterly,which dividends may be paid in cash or in additional shares of preferred stock,in the Company’s discretion. The preferred stock may be redeemed by the Companyat any time, at a redemption price equal to 20% over the original issue price,plus accrued and unpaid dividends.

 

The aforementioned issuances were made in reliance upon an exemptionfrom registration set forth in Section 4(2) of the Securities Act of1993, as amended, which exempts transactions by an issuer not involving apublic offering.

 

**Stock-based compensation**

 

OnDecember 29, 2005, the shareholders of the Company approved the 2005 StockOption Plan (the“Plan”) and 3,750,000 shares of common stock were reserved, of which 3,013,514shares had been issued through June 30, 2010. At the 2010 AnnualShareholder Meeting shareholders approved an increase in the number if sharesunder the Plan by 2,000,000 shares. Total shares available under the Plan are2,736,486 as of June 30, 2010.

 

OnJanuary 10 and January 18, 2007, the Company issued 489,500 and52,500 shares, respectively, to the officers, directors, and key employees ofthe Company pursuant to the Plan. As of such dates, the aggregate market valueof the common stock granted was $391,600 and $42,000, respectively, based onthe last sale price on the OTCBB of the Company’s common stock. Such amountswere amortized to compensation expense on a quarterly basis during calendaryear 2007. Accordingly, $186,800 was recorded as compensation expense andincluded in general and administrative expense for the fiscal years ended June 30,2008. The following executive officers received the following grants: (i) 150,000shares to Calvin A. Wallen, III, and (ii) 47,500 shares to Jon S.Ross.

 

OnAugust 20, 2007, the Company issued 90,000 shares to the former ChiefFinancial Officer of the Company pursuant to the Plan, with such grant subjectto vesting in quarterly installments over the following four quarters. As ofsuch date, the aggregate market value of the common stock

 

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**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

grantedwas $103,500 based on the then market price on the OTCBB of the Company’scommon stock. Such amount is being amortized to compensation expense on aquarterly basis during fiscal years 2008 and 2009. Accordingly, $90,563 wasrecorded as compensation expense and included in general and administrativeexpenses for fiscal 2008. The remaining $12,938 was amortized to compensationexpense in the first quarter of fiscal 2009, which ends September 30,2008.

 

OnJanuary 31 and February 4, 2008, the Company issued 555,000 and52,500 shares, respectively, to the officers and directors, and key employeesof the Company pursuant to the Plan. As of such dates, the aggregate marketvalue of the common stock granted was $893,550 and $84,525, respectively (atotal of $978,075), based on the then-market price on the OTCBB of the Company’scommon stock. Recent SEC guidance requires that immediately-vesting commonstock grants with no forfeiture provisions be expensed at the time of grantrather than amortized over four quarters. Accordingly, the full $978,075 wasrecorded as compensation expense and included in general and administrativeexpenses for the fiscal year ended June 30, 2008.

 

OnJanuary 12, 2009, the Company issued 235,000 shares to three directors ofthe Company pursuant to the Plan.  As ofsuch dates, the aggregate market value of the common stock granted was $385,400based on the last sale price ($1.64 per share) on the aforementioned date, onthe NYSE — Amex of the Company’s common stock. Such amounts were expensed uponissuance to compensation expense.

 

OnFebruary 3, 2010, the Company issued 370,014 shares to five directors ofthe Company pursuant to the Plan.  As ofsuch dates, the aggregate market value of the common stock granted was $395,915based on the last sale price ($1.07 per share) on the aforementioned date, onthe NYSE — Amex of the Company’s common stock. Such amounts were expensed uponissuance to compensation expense.

 

Allof the foregoing issuances and grants were made 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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**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

The following table provides information related to stock-basedcompensation for the years ended June 30, 2010, 2009 and 2008:

 
| ** **                                         | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Officer and employee restricted  stock grants:** |       |                                               |       |   |   |   |   |
| Pretax compensation expense                        |       | $                                                  | —     |   | $ | 12,938 |   | $ | 818,287 |   |
| Tax benefit                                        |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Restricted stock expense, net of tax               |       | $                                                  | —     |   | $ | 12,938 |   | $ | 818,287 |   |
|                                               |       |                                               |       |   |   |   |   |
| **Director restricted stock grants:**              |       |                                               |       |   |   |   |   |
| Pretax compensation expense                        |       | $                                                  | 395,915    |   | $ | 385,400 |   | $ | 437,150 |   |
| Tax benefit                                        |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Director stock grants expense, net of tax          |       | $                                                  | 395,915    |   | $ | 385,400 |   | $ | 437,150 |   |
|                                               |       |                                               |       |   |   |   |   |
| **Stock options:**                                 |       |                                               |       |   |   |   |   |
| Pretax compensation expense                        |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Tax benefit                                        |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Stock option expense, net of tax                   |       | $                                                  | —     |   | $ | — |   | $ | — |   |
|                                               |       |                                               |       |   |   |   |   |
| **Total stock-based compensation:**                |       |                                               |       |   |   |   |   |
| Pretax compensation expense                        |       | $                                                  | 395,915    |   | $ | 398,338 |   | $ | 1,255,437 |   |
| Tax benefit                                        |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Total share based compensation expense, net of tax |       | $                                                  | 395,915    |   | $ | 398,338 |   | $ | 1,255,437 |   |

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note D —Loss per common share:**

 
| ** **                                        | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2008**    | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| Net loss attributable to stockholders             |       | $          | (4,936,625 | )          | $          | (24,762,516 | )          | $ | (5,128,453 | ) |
| Weighted average number of shares of common stock |       | 67,583,793 |       | 61,150,400 |       | 56,974,407  |       |
| Income (loss) per common share                    |       | $          | (0.07      | )          | $          | (0.40       | )          | $ | (0.09 | ) |

 

Potential dilutive securities (e.g., stock warrants and convertibledebt) have not been considered because the Company reported a net loss and,accordingly, their effects would be anti-dilutive.

 

**Note E —Long-term debt:**

 

**March 2007 debt issue**

 

On March 5, 2007, Cubic entered into a Credit Agreement with WellsFargo Energy Capital, Inc. (“Wells Fargo”) providing for a revolvingcredit facility of $20,000,000 (the “Revolving Note”) and a convertible termloan of $5,000,000 (the “Term Loan”; and together with the Revolving Note, the “CreditFacility”). The indebtedness bore interest at a fluctuating rate equal to thesum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, wasoriginally scheduled to mature on March 1, 2010, and was secured bysubstantially all of the assets of the Company.

 

The Term Loan of $5,000,000 is convertible into 5,000,000 shares ofCubic common stock, currently at a conversion price of $0.9911 per share.Approximately $5,000,000 of the funded amount was used, together with cash onhand, to retire the Company’s previously outstanding senior debt that was due February 6,2009.

 

In connection with entering into the Credit Facility, the Companyissued to Wells Fargo warrants, with five-year expirations, for the purchase ofup to 2,500,000 shares of Company common stock at an exercise price of $1.00per share.

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and net profits interest in the future production ofhydrocarbons from or attributable to Cubic’s net interest in its Louisianaproperties, which net profits interest was granted to Wells Fargo, based ontheir relative fair market values at the date of issuance. The value assignedto the warrants 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. Theassignment of a value to the warrants and net profits interest resulted in aloan discount being recorded. The discount amortization is over the originalthree-year term of the debt as additional interest expense.  Amortization for the years ended June 30,2010, 2009 and 2008 was $239,686, $514,620 and $516,030, respectively.

 

Cubic incurred loan costs of $240,613 on the issuance of the debt andwarrants. The amount allocable to the debt of $166,590 has been capitalized andis being amortized over the term of the debt. Amortization for the years ended June 30,2010, 2009 and 2008 was $25,958, $55,733 and $55,886 respectively. Cubic alsoincurred commitment fees of $170,000 related to subsequent

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

increases in the Credit Facility’s borrowing base; such amount wascapitalized in fiscal 2008 and is being amortized over the remaining term ofthe loan.  Amortization for the yearsended June 30, 2010, 2009 and 2008 was $36,795, $79,001 and $38,404respectively.

 

On December 18, 2009, the Company entered into a Second Amendmentto Credit Agreement with Wells Fargo, providing for a revolving credit facilityof up to $40 million and a convertible term loan of $5 million (the “AmendedCredit Agreement”). The borrowing base under the revolving credit facility wasinitially established at $25 million. The indebtedness bears interest at afluctuating rate equal to the sum of the Wells Fargo Bank prime rate plus twopercent (2%) per annum, matures on July 1, 2012 and is secured bysubstantially all of the assets of the Company. In connection with enteringinto the Amended Credit Agreement, the Company issued to Wells Fargo additionalwarrants, expiring on December 1, 2014, for the purchase of up to5,000,000 shares of Company common stock currently at an exercise price of$0.9911 per share, and extended the expiration date of the warrants to purchase2,500,000 shares of Company common stock that were previously issued to WellsFargo to December 1, 2014.

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and the beneficial conversion feature based on their fairmarket values at the date of issuance. The fair market value assigned to theextension of warrants to purchase 2,500,000 shares of Company common stock was$923,302 and the value assigned to the issuance of the warrant to purchase theadditional 5,000,000 shares of Company common stock was $8,031,896, which wasrecorded as an increase in additional paid-in capital. The difference in thefair value of the term loan and the face amount of $1,877,494 was recorded asan extinguishment of debt, offset by the amount of unamortized deferred loancost and discounts associated with the original debt of $129,871.  The beneficial conversion feature equaled$5,027,494, which was reduced to $3,122,506 based on the limitation to the fairvalue to debt. The assignment of a value to the warrants and beneficialconversion feature as well as the write-down of the term loan to the fair valueresulted in a total loan discount in the amount of $13,955,198 being recorded.The discount is being amortized over the three-year term of the debt asadditional interest expense. Amortization was $2,938,730 for the year ended June 30,2010.  Amortization for the fiscal yearsending June 30, 2011 and 2012 is expected to be approximately $5,500,699and $5,515,769, respectively.

 

In connection with the modification of the indebtedness, the Companyrecorded a gain on extinguishment of debt of $1,747,623.  Such amount includes the write-off of theunamortized deferred loan cost ($26,947), and the write-off of the remainingloan discount ($102,924).

 

Cubic incurred loan costs of $50,000 on the issuance of the debt andwarrants. The amount was capitalized and allocated to the debt and is beingamortized over the term of the debt. Amortization was $10,529 for the yearended June 30, 2010. Amortization for the fiscal years ending June 30,2011 and 2012 is expected to be approximately $19,708 and $19,762,respectively.

 

**May 2008 subordinated 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, a director who beneficially owns more than 5% of thecommon stock of the Company. The Subordinated Note bore interest at afluctuating rate equal to the sum of the prime rate plus two percent (2%) perannum, and was scheduled to mature on April 30, 2010. As consideration forthe loan made by the Lender pursuant to the Subordinated Note, the Companyagreed to convey to the

 

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**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Lender, upon therepayment in full of the indebtedness evidenced by the Subordinated Note andthe repayment in full of the senior indebtedness evidenced by the CreditFacility with Wells Fargo, an undivided 0.375% net profits interest in thefuture production of hydrocarbons from or attributable to Cubic’s net interestin its Louisiana properties. The proceeds of the Subordinated Note were usedfor general corporate and working capital purposes.

 

Issuing the SubordinatedNote required the consent of 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 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 July 1, 2012 without the consent ofWells Fargo; and (ii) the amount of the borrowing base was increased to$20,000,000, which amount was fully drawn upon subsequent to the end of fiscal2008, on August 20, 2008.

 

On December 18,2009, the Company issued a subordinated promissory note payable to Calvin A.Wallen, III, the Company’s Chairman of the Board and Chief ExecutiveOfficer, in the principal amount of $2,000,000 (the “Wallen Note”). This notebears interest at the prime rate plus one percent (1%), with interest payablemonthly. The Wallen Note was entered into with the consent of Wells Fargo. Theoutstanding principal balance is due and payable on September 30, 2012 andis subordinated to the indebtedness under the Amended Credit Agreement. Theproceeds of the Wallen Note were used to repay the Subordinated Note. The netprofits interest described above was conveyed to the Lender in connection withthe repayment.

 
| ** **                                       | ** ** | **as of June 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| **Principal Amount Outstanding**       | ** ** | **2010**                          | ** ** | **2009** | ** ** |
|                                             |       |                              |       |   |   |
| Total long-term debt (including current portion) |       | $                                 | 32,000,000 |   | $ | 27,000,000 |   |
| Less current portion                             |       | 0                                 |       | 27,000,000 |   |
|                                             |       |                              |       |   |   |
| Total long-term debt                             |       | $                                 | 32,000,000 |   | $ | 0 |   |

 
| **Maturities of Debt** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| 2010                             |       | $          | 0          |       |       |   |
| 2011                             |       | 0          |       |       |       |
| 2012                             |       | 0          |       |       |       |
| 2013                             |       | 32,000,000 |       |       |       |
| 2014 and thereafter              |       | 0          |       |       |       |
|                                  |            |            |            |            |            |  |

 

F-22

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note F —Related party transactions:**

 

Effective January 1, 2002, the Company entered into an agreementwith Tauren Exploration, Inc., an entity controlled by Cubic’s Chairman ofthe Board, President and CEO, that provides for the following:

 

1) As of January 1, 2002, the Company owed Tauren $856,712,primarily comprised of non-interest bearing advances the Company had receivedover the course of several years. In exchange for the amounts owed to it,Tauren accepted the transfer of 856,712 newly issued and shares of common stockin the Company that had a market price of $0.70 per share.

 

2) The Company received the rights to participate in prospective oiland gas projects in which Tauren owns a working interest.

 

3) The Company shall, as requested, have the future privilege of usingthe general and administrative services of Tauren based on an agreed pro ratacost.

 

4) The Company issued three series of warrants to Tauren as describedin Note C.

 

On December 1, 1997, as renewed and revised on January 1,2002, the Company entered into a contract with Tauren to provide the necessarytechnical, administrative and management expertise needed to conduct itsbusiness. Tauren also paid various organization costs and consulting fees on behalfof the Company. The monthly amount charged to the Company was based on actualcosts of materials and labor hours of Tauren that were used pursuant to theterms of the agreement. The agreement was terminated effective January 1,2006, except as to the office sharing provisions, which were extended to June 30,2007 and since continue on a month to month basis. The Company now has 11employees and its offices are leased from Tauren. During fiscal 2010, theCompany’s only expense under the office sharing arrangement was the rent lease.Charges to the Company under the contracts and subsequent arrangements were$26,748, $26,748 and $26,748 for the years ended June 30, 2010, 2009 and2008, respectively.

 

Taurenowns a working interest in the wells in which the Company owns a workinginterest. As of June 30, 2010, the Company owed $78,679 to Tauren formiscellaneous general and administrative expenses paid by Tauren on the Company’sbehalf; as of June 30, 2009 and 2008 the Company was owed $649,205 and$942 respectively, to Tauren for miscellaneous general and administrativeexpenses paid by the Company on Tauren’s behalf.

 

In addition, 22 wells in which the Company owns a working interest areoperated by an affiliated 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, 2010, 2009 and 2008, the Company owedFossil $755,683, $815,239 and $862,895, respectively, for drilling costs andlease and operating expenses, and was owed by Fossil $415,282, $271,615 and$450,669, respectively, for oil and gas sales.

 

On February 6, 2006, the Company entered into a Purchase Agreementwith Tauren with respect to the purchase by the Company of certain CottonValley leasehold interests (approximately 11,000 gross acres; 5,000 net acres)held by Tauren. Pursuant to the Purchase Agreement, the Company acquired fromTauren a 35% working interest in approximately 2,400 acres and a 49% workinginterest in approximately 8,500 acres located in DeSoto and Caddo Parishes,Louisiana, along with an associated Area of Mutual Interest (“AMI”) and theright

 

F-23

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

to acquire at “cost” (as defined in the Purchase Agreement) a seventypercent (70%) working interest in all additional mineral leases obtained byTauren in the AMI, in exchange for (a) $3,500,000 in cash, (b) 2,500,000shares of Company common stock, (c) an unsecured 12.5% promissory note inthe amount of $1,300,000, which note was convertible into Company common stockat a conversion price of $0.80 per share (the “Tauren Note”), and (d) adrilling credit of $2,100,000. The Tauren Note was repaid on February 2,2007.

 

The consideration described above was determined based uponnegotiations between Tauren and a Special Committee of the Company’s directors,excluding Mr. Wallen. The Special Committee obtained an opinion from itsindependent financial advisor with respect to the fairness, from a financialpoint of view, to the public stockholders of the Company, of such transactions.

 

On November 10, 2006, the maturity of the Tauren Note was extendedto October 5, 2007. In connection with the extension of the Tauren 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.

 

On February 2, 2007, the Tauren Note was retired pursuant to aprovision in the note that required payment from the proceeds of an equityoffering. The equity offering that occurred in December 2006 (see “Note C —Stockholders’ Equity”) was sufficient to facilitate such repayment.

 

On May 6, 2008, the Company issued a subordinated promissory notein the amount of $2,000,000 to Diversified Dynamics Corporation, an entitycontrolled by William Bruggeman who, at the time of such transaction, was thebeneficial owner of approximately 28.9% of the common stock of the Company. See“May 2008 subordinated debt issue” in “Note E — Long-term debt” elsewhereherein.

 

OnNovember 24, 2009, the Company entered into transactions with Tauren andLangtry Mineral & Development, LLC (“Langtry”), both of which areentities controlled by Calvin Wallen III, the Chief Executive Officer of theCompany, under which the Company acquired $30,952,810 in pre-paid drillingcredits (the “Drilling Credits”) applicable towards the development of its HaynesvilleShale rights in Northwest Louisiana. The Company expects to use the DrillingCredits to fund $30,952,810 of its share of the drilling and completion costsfor those horizontal Haynesville Shale wells drilled in sections previouslyoperated by an affiliate of the Company, which are now operated by a thirdparty. Any Drilling Credits not utilized by 2013 will be paid to Cubic, on adollar for dollar basis.

 

Asconsideration for the Drilling Credits, the Company (a) conveyed to Taurena net overriding royalty interest of approximately 2% in its leasehold rightsbelow the Taylor Sand formation of the Cotton Valley and (b) on March 16,2010 issued to Langtry 10,350,000 Company common shares and preferred stockwith a stated value of $10,350,000, convertible into Company common shares at$1.20 per common share, with a five year conversion term. The preferred stockis entitled to cumulative dividends equal to 8% per annum, payable quarterly,which dividends may be paid in cash or in additional shares of preferred stock,in the Company’s discretion. The preferred stock may be redeemed by the Companyat any time, at a redemption price equal to 20% over the original issue price,plus accrued and unpaid dividends.

 

Thistransaction resulted in a reduction in the Company’s oil and gas propertiesrecorded cost in the amount of $10,252,810.

 

F-24

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTES TOFINANCIAL STATEMENTS**

 

The consideration described above was determined based uponnegotiations between Tauren and a Special Committee of the Company’s directors,excluding Mr. Wallen. The Special Committee obtained an opinion from itsindependent financial advisor with respect to the fairness, from a financialpoint of view, to the public stockholders of the Company, of such transactions.

 

On December 18,2009, the Company issued a subordinated promissory note payable to Mr. Wallen,in the principal amount of $2,000,000 (the “Wallen Note”). This note bearsinterest at the prime rate plus one percent (1%), with interest payablemonthly. The Wallen Note was entered into with the consent of Wells Fargo. Theoutstanding principal balance is due and payable on August 31, 2012 and issubordinated to the indebtedness under the Amended Credit Agreement. Theproceeds of the Wallen Note were used to repay the Subordinated Note. The netprofits interest described above was conveyed to the Lender in connection withthe repayment.

 

F-25

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note G —Income taxes:**

 

Deferred tax assets and liabilities are computed by applying theeffective U.S. federal income tax rate to the gross amounts of temporarydifferences and other tax attributes. Deferred tax assets and liabilitiesrelating to state income taxes are not material. In assessing the realizabilityof deferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment. As of June 30, 2010, 2009 and 2008, the Companybelieved it was more likely than not that future tax benefits from netoperating loss carryforwards and other deferred tax assets would not berealizable through generation of future taxable income; therefore, they werefully reserved.

 

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

 
| ** **                                                        | ** ** | **2010**   | ** ** | **2009**    | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| Deferred tax assets:                                              |       |       |       |        |       |       |       |
| Net operating loss carryforwards                                  |       | $          | 5,309,100  |        | $          | 10,579,700 |       | $ | 7,914,000 |   |
| Depletion basis of assets and related accounts                    |       | 1,842,900  |       | 2,309,800   |       | 311,000    |       |
| Depreciation basis of assets                                      |       | 1,300      |       | 0           |       | 0          |       |
|                                                              |       | $          | 7,153,300  |        | $          | 12,889,500 |       | $ | 8,225,000 |   |
| Deferred tax liabilities:                                         |       |       |       |        |       |       |       |
| Depreciation basis of assets                                      |       | $          | 0          |        | $          | (1,200     | )          | $ | 0 |   |
|                                                              |       | $          | 0          |        | $          | (1,200     | )          | $ | 0 |   |
| Net deferred tax (liabilities) assets before  valuation allowance |       | $          | 7,153,300  |        | $          | 12,888,300 |       | $ | 8,225,000 |   |
| Valuation allowance                                               |       | (7,153,300 | )          | (12,888,300 | )          | (8,225,000 | )          |
| Net deferred tax (liabilities) assets                             |       | $          | 0          |        | $          | 0          |       | $ | 0 |   |

 

F-26

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

The following table summarizes the difference between the actual taxprovision and the amounts obtained by applying the statutory tax rates to theincome or loss before income taxes for the years ended June 30, 2010, 2009and 2008:

 
| ** **                                     | ** ** | **2010**  | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Tax (benefit) calculated at statutory rate     |       | $         | (1,234,000 | )         | $          | (6,191,000 | )          | $ | (1,282,000 | ) |
| Losses not providing tax benefits              |       | 1,234,000 |       | 6,191,000 |       | 1,282,000  |       |
| Current federal income tax provision (benefit) |       | $         | —     |      | $          | —     |       | $ | — |   |
| Change in valuation allowance                  |       | $         | 5,735,000  |      | $          | (4,663,300 | )          | $ | (4,120,200 | ) |

 

As of June 30, 2010, the Company had net operating losscarryforwards of approximately $21,236,400, which are available to reducefuture taxable income. These carryforwards expire as follows:

 

| ** ** | ** ** | **Net operating** | ** ** |
|------------|------------|------------------------|------------|
| **Year**   | ** ** | **losses**             | ** ** |
|       |       |                   |       |
| 2028       |       | 10,170,500             |       |
| 2029       |       | 11,065,900             |       |
|       |       | $                      | 21,236,400 |   |
|            |            |                        |            |  |

 

F-27

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note H —Commitments and contingencies:**

 

**Key personnel**

 

The Company depends to a large extent on the services of Calvin A.Wallen III, the Company’s President, Chairman of the Board, and Chief ExecutiveOfficer. The loss of the services of Mr. Wallen would have a materialadverse effect on the Company’s operations.

 

On February 29, 2008,the Company entered into employment agreements with Mr. Wallen and itsSecretary, Jon S. Ross. The agreement with Mr. Wallen provides for a basesalary of $200,000 per year, while the agreement with Mr. Ross providesfor a base salary of $150,000 per year. The other terms and conditions of theagreements 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 the agreement.The agreements provide that Good Reason includes, among other things, amaterial diminution in the employee’s authority, duties, responsibilities orsalary, or the relocation of the Company’s principal offices by more than 50miles. If the employee’s employment is terminated by (a) the Company otherthan 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.

 

**Environmental matters**

 

The Company’s operations and properties are subject to extensive andchanging federal, state and local laws and regulations relating toenvironmental protection, including the generation, storage, handling andtransportation of oil and gas and the discharge of materials into theenvironment. The Company generates typical oil and gas field wastes, includinghazardous wastes that are subject to the federal Resources Conservation andRecovery Act and comparable state statutes. Furthermore, certain wastesgenerated by the Company’s oil and gas operations that are currently exemptfrom regulation as “hazardous wastes” may in the future be designated as “hazardouswastes” and therefore be subject to more rigorous and costly operating anddisposal requirements. All of the Company’s properties are operated by thirdparties over whom the Company has limited control. In addition to the Company’slack of control over properties operated by others, the failure of previousowners or operators to comply with applicable environmental regulations may, incertain circumstances, adversely impact the Company.

 

**Legal proceedings**

 

TheCompany is facing a lawsuit from one mineral owner, Gloria’s Ranch, LLC thatwould have a material effect on the acreage position of the Company ifultimately adjudicated entirely in favor of the mineral owner. The Companybelieves it will prevail regarding a majority, if not all, of the acreage atissue in the Gloria’s Ranch lawsuit.

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note I- Cost of oil and gas properties:**

 

**Costs incurred**

 

Costs (capitalized and expensed) incurred in oil and gas propertyacquisition, exploration, and development activities for the years ended June 30,2010, 2009 and 2008 were as follows:

 
| ** **            | ** ** | **2010**  | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|-----------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Property acquisitions |       | $         | 1,777,848  |      | $          | 72,385     |       | $ | 394,675 |   |
| Exploration           |       | —    |       | 5,928,825 |       | 14,030,615 |       |
| Development           |       | 6,988,114 |       | —    |       | 916,613    |       |
|                  |       | $         | 8,765,962  |      | $          | 6,001,210  |       | $ | 15,341,903 |   |

 

**Capitalized costs**

 

The aggregate amounts of capitalized costs relating to oil and gasproducing activities and the aggregate amounts of the related accumulateddepreciation, depletion, and amortization at June 30, 2010, 2009 and 2008were as follows:

 
| ** **                                                                            | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**   | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Proved properties                                                                     |       | $           | 37,033,711 |        | $          | 37,907,410 |       | $ | 29,542,015 |   |
| Unproved properties                                                                   |       | 130,446     |       | 890,715     |       | 3,254,901  |       |
|                                                                                  |       | 37,164,157  |       | 38,798,125  |       | 32,796,916 |       |
| Less: accumulated depreciation, depletion and  amortization of oil and gas properties |       | 6,071,190   |       | 4,923,318   |       | 4,156,650  |       |
| Total properties                                                                      |       | 31,092,967  |       | 33,874,807  |       | 28,640,266 |       |
| Less: accumulated impairment of oil and gas  properties due to full cost ceiling test |       | (22,181,701 | )          | (22,181,701 | )          | (1,790,882 | )          |
| Net properties                                                                        |       | $           | 8,911,266  |        | $          | 11,693,106 |       | $ | 26,849,384 |   |

 

F-29

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Results of operations**

 

The results of operations from oil and gas producing activities for theyears ended June 30, 2010, 2009 and 2008 were as follows:

 
| ** **                                                                 | ** ** | **2010**  | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|----------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
| Revenues:                                                                  |       |      |       |        |       |        |       |
| Revenues                                                                   |       | $         | 3,486,171  |        | $          | 1,858,139   |       | $ | 2,302,310 |   |
| Preferred return                                                           |       | —    |       | —      |       | —      |       |
|                                                                       |       | 3,486,171 |       | 1,858,139   |       | 2,302,310   |       |
| Expenses (excluding G&A and interest expense):                         |       |      |       |        |       |        |       |
| Production, operating and development costs                                |       | 1,845,153 |       | 1,372,041   |       | 1,162,489   |       |
| Depreciation, depletion and amortization                                   |       | 1,147,872 |       | 766,669     |       | 2,149,570   |       |
| Impairment loss on oil and gas properties                                  |       | —    |       | 20,390,819  |       | —      |       |
|                                                                       |       | 2,993,025 |       | 22,529,529  |       | 3,312,059   |       |
| Results before income taxes                                                |       | 493,146   |       | (20,671,390 | )          | (1,009,749  | )          |
| Provision for income taxes                                                 |       | —    |       | —      |       | —      |       |
| Results of operations (excluding corporate overhead  and interest expense) |       | $         | 493,146    |        | $          | (20,671,390 | )          | $ | (1,009,749 | ) |

 

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

 

The estimates of proved oil and gas reserves utilized in thepreparation of the financial statements are estimated in accordance withguidelines established by the SEC 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.

 

The Company 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.

 

If reduced, the carrying amount of capitalized oil and gas propertiesmay be reduced materially in the near term.

 

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**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

The following unaudited table sets forth proved oil and gas reserves,all within the United States, at June 30, 2010, 2009 and 2008 togetherwith the changes therein:

 
| ** **                                 | ** ** | **Natural Gas (Mcf)** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proved developed and undeveloped reserves: |       |                            |       |   |   |   |   |
| Beginning of year                          |       | 20,319,627                      |       | 6,089,729 |   | 4,242,051 |   |
| Revisions of previous estimates            |       | 1,399,599                       |       | 5,233,858 |   | (1,969,397 | ) |
| Purchases of reserves in place             |       | —                          |       | — |   | — |   |
| Extensions and discoveries                 |       | 8,838,950                       |       | 9,275,556 |   | 4,045,294 |   |
| Less: Production                           |       | (792,433                        | )          | (279,516 | ) | (228,219 | ) |
| Disposals of reserves in place             |       | (608,463                        | )          | — |   | — |   |
| End of year                                |       | 29,157,280                      |       | 20,319,627 |   | 6,089,729 |   |

 
| ** **                                 | ** ** | **Oil, condensate and natural gas liquids (Bbls)** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Proved developed and undeveloped reserves: |       |                                                                             |       |   |   |   |   |
| Beginning of year                          |       | 126,209                                                                          |       | 88,948 |   | 12,830 |   |
| Revisions of previous estimates            |       | (112,547                                                                         | )          | (8,917 | ) | (1,002 | ) |
| Purchases of reserves in place             |       | —                                                                           |       | — |   | — |   |
| Extensions and discoveries                 |       | 1,038                                                                            |       | 49,711 |   | 79,861 |   |
| Less: Production                           |       | (2,279                                                                           | )          | (3,533 | ) | (2,741 | ) |
| Disposals of reserves in place             |       | (3,774                                                                           | )          | — |   | — |   |
| End of year                                |       | 8,647                                                                            |       | 126,209 |   | 88,948 |   |

 

The majority of the Company’s Louisiana acreage lies atop the center ofwhat is known in our industry as the “Haynesville Shale Play” (which we referto as the “Bossier/Haynesville shale” elsewhere herein), one of the mostprolific field discoveries in the United States. The discovery of the existenceof the Bossier/Haynesville shale formations in the Company’s acreage in fiscal2008 led to a shift in strategy away from concentrating solely on thedevelopment of the Cotton Valley and other shallow formations in our BethanyLongstreet and Johnson Branch fields, and to commencement of the development ofthe Bossier/Haynesville shale acreage. Development slowed in fiscal 2009, due to deteriorated economicconditions, a harsh debt and equity environment, stubbornly high fieldoperation costs, and collapse in the pricing of natural gas.

 

The strategic transactions consummated by the Company in the first halfof fiscal, 2010 repositioned the Company for increased development of itsacreage.  And, development activity didgain momentum by the second half of fiscal 2010, with increased activityundertaken by EXCO as well as other third party Operators.

 

F-31

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**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

The “Revisions of previous estimates” amount of 1,399,599 Mcf in fiscal2010 was primarily a result of more performance information being available forthe fiscal 2010 reserve report. Based on updated performance rates andsignificantly lower natural gas prices, downward revisions of an aggregate of3,834,259 Mcf were made to the proved developed reserves of ourBossier/Haynesville shale horizontal wells and our Cotton Valley verticalwells.  Despite depressed natural gasprices, an upward revision of an aggregate of 821,346 Mcf was recognized forcertain sections in which the Company maintains a working interest stemmingfrom pre-existing proved undeveloped offset locations, resulting from theproximity to a competitor’s productive horizontally-drilled Haynesville Shalewells.

 

The “Extensions and discoveries” amount of 8,838,950 Mcf in fiscal 2010was primarily due to new proved undeveloped offset locations in which theCompany maintains a working interest based upon the proximity to a competitor’sproductive horizontally-drilled Haynesville Shale wells. This amount was alsodue to a much lesser extent as a result of exploratory and developmental, or “stepout”, drilling in our Johnson Branch acreage in fiscal 2010. The reserveestimates attributable to these new proved undeveloped locations are listedunder “Extensions and discoveries.”

 

F-32

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Standardized measure of discounted future net cash flows relating toproved reserves:**

 

The standardized measure of discounted future net cash flows wascalculated by applying current year-end prices, considering fixed anddeterminable price changes only to the extent provided by contractualarrangements or law, to estimated future production, less future expenditures(based on fiscal year-end costs) to be incurred in developing provedundeveloped and proved producing oil and gas reserves, and future income taxes.The resulting future net cash flows were discounted using a rate of 10% perannum (Table 1). The standardized measure of discounted net cash flow amountscontained in the following tabulation does not purport to represent the fairmarket value of the Company’s oil and gas proved by drilling or productionhistory. There are significant uncertainties inherent in estimating timing andamount of future costs. In addition, the method of valuation utilized is basedon current prices and costs and the use of a 10% discount rate, and is notnecessarily appropriate for determining fair value (Table 2).

 

The following is the estimated standardized measure relating to provedoil and gas reserves at June 30, 2010, 2009 and 2008:

 
| **Table 1**                                                    | ** ** | **2010**    | ** **  | **2009**    | ** ** | **2008**    | ** ** |
|---------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Future cash flows                                                   |       | $           | 148,560,880 |        | $          | 80,937,110  |       | $ | 95,132,248 |   |
| Future production costs                                             |       | (22,826,320 | )           | (9,382,262  | )          | (11,759,214 | )          |
| Future development costs                                            |       | (32,813,060 | )           | (38,888,060 | )          | (34,598,145 | )          |
| Future severance tax expense                                        |       | (2,184,380  | )           | (5,850,567  | )          | (1,708,116  | )          |
| Future income taxes                                                 |       | —      |        | —      |       | —      |       |
| Future net cash flows                                               |       | $           | 90,737,120  |        | $          | 26,816,221  |       | $ | 47,066,773 |   |
| Ten percent annual discount for estimated timing  of net cash flows |       | (25,979,830 | )           | (16,013,831 | )          | (13,956,117 | )          |
| Standardized measure of discounted future net cash  flows           |       | $           | 64,757,290  |        | $          | 10,802,390  |       | $ | 33,110,656 |   |

 

The following is an analysis of changes in the estimated standardizedmeasure of proved reserves during the years ended June 30, 2010, 2009 and2008:

 
| **Table 2**                           | ** ** | **2010**   | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|--------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Changes from:                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sale of oil and gas produced               |       | $          | (1,641,018 | )           | $          | (486,098    | )          | $ | (1,139,821 | ) |
| Net changes in prices and production costs |       | 8,664,461  |       | (46,382,115 | )          | 13,650,638  |       |
| Extensions and discoveries                 |       | 16,205,860 |       | 4,501,970   |       | 23,748,732  |       |
| Revision of previous quantity estimates    |       | 1,236,952  |       | 15,167,786  |       | (13,379,733 | )          |
| Accretion of discounts                     |       | 1,080,239  |       | 3,311,066   |       | 682,971     |       |
| Net change in income taxes                 |       | (324,157   | )          | —      |       | —      |       |
| Purchases of reserves in place             |       | —     |       | —      |       | —      |       |
| Disposals of reserves in place             |       | (906,387   | )          | —      |       | —      |       |
| Development costs incurred that reduced    |       | —     |       | —      |       | —      |       |
| future development costs                   |       | (1,597,267 | )          | —      |       | (302,200    | )          |
| Changes in future development costs        |       | (330,545   | )          | 7,536,184   |       | (1,786,129  | )          |
| Changes in timing of production and other  |       | 31,566,762 |       | (5,957,059  | )          | 4,806,488   |       |
| Change in standardized measure             |       | $          | 53,954,900 |        | $          | (22,308,266 | )          | $ | 26,280,946 |   |

 

F-33

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Note K — Selected quarterlyfinancial data (unaudited):**

 

Summarizedunaudited quarterly financial data for fiscal 2010 and 2009 are as follows:

 
| ** **                                        | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                        | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| **Fiscal 2010**                                   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                          |       | $           | 359,901    |        | $          | 599,117     |       | $           | 898,075    |       | $          | 1,629,078 |   | $ | 3,486,171 |   |
| Loss before income taxes                          |       | $           | (1,129,853 | )           | $          | 454,486     |       | $           | (2,624,315 | )          | $          | (1,636,943 | ) | $ | (4,936,625 | ) |
| Net loss                                          |       | $           | (1,129,853 | )           | $          | 454,486     |       | $           | (2,624,315 | )          | $          | (1,636,943 | ) | $ | (4,936,625 | ) |
| Net loss per common share - basic and diluted (1) |       | $           | (0.02      | )           | $          | 0.01        |       | $           | (0.04      | )          | $          | (0.02 | ) | $ | (0.07 | ) |
| Weighted average common shares outstanding        |       | 63,551,697  |       | 64,674,565  |       | 66,781,797  |       | 75,394,579  |       | 67,583,793 |       |
|                                              |       |        |       |        |       |        |       |        |       |       |       |
| **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 |       |

 

----

(1) Thesum of the per share amounts per quarter does not equal the total year amountdue to changes in the weighted average number of common shares outstanding ineach quarter.

 

**Note L — Subsequent Events**

 

On July 26, 2010 the Board of Directors for the Companyunanimously agreed to the issuance of 2,404 Series A preferred shares toLangtry Mineral & Development, LLC (“Langtry”), an affiliate of CalvinWallen III, officer and director for the Company, as the payment of dividendsdue Langtry with respect to the Series A preferred stock held by Langtry.This brings the total preferred shares outstanding to 105,904.

 

On August 30, 2010, the Company entered into a Third Amendment toCredit Agreement (the “Third Amendment”) with Wells Fargo Energy Capital, Inc.(the “Lender”) providing for an increase in the borrowing base for the Company’srevolving credit facility from $25 million to $30 million. The Company borrowedthe full amount of the increase in the borrowing base. The indebtedness underthe credit facility, which includes the revolving credit facility and a $5million convertible term loan, bears interest at a fluctuating rate equal tothe sum of the Wells Fargo Bank prime rate plus two percent (2%) per annum,matures on July 1, 2012 and is secured by substantially all of the assetsof the Company. In connection with entering into the Third Amendment, theCompany issued to the Lender additional

 

F-34

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Table ofContents

 

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

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

 

warrants, expiring on December 1, 2014, for the purchase of up to1,000,000 shares of Company common stock at an exercise price of $1.00 pershare, with the availability of the underlying common shares for the warrantssubject to NYSE Amex listing of additional shares approval.

 

During August 2010, the Company borrowed short-term funds from Mr. Wallenand his affiliated companies for working interest payments and lease renewalpayments. This was necessary due to the timing of the funding of the ThirdAmendment with our Lender. These funds were repaid in full on August 30,2010.

 

F-35

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Table ofContents

 

**EXHIBIT INDEX**

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                         |
|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                    |
| 3.1     |       | Amended  and Restated Certificate of Formation (incorporated by reference to  Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on  March 10, 2010).                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 3.2     |       | Certificate of  Designation Establishing a series of Preferred Stock of Cubic Energy, Inc.  (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed  with the SEC on March 10, 2010)                                                                                             |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 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    |       | 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 the Company’s Current Report  on Form 8-K, filed with the SEC on December 16, 2005). |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.2    |       | 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).         |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.3    |       | 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).                                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.4    |       | 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).                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.5    |       | 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).                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.6    |       | 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).    |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.7    |       | 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).                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.8    |       | 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).                                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.9    |       | 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).                                                                                                                                               |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.10   |       | 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).                                      |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.11   |       | Form of  Subscription and Registration Rights Agreement (filed as Exhibit 10.1 to  the Company’s Form 8-K filed December 21, 2006).                                                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.12   |       | Form of  Warrant (filed as Exhibit 10.2 to the Company’s Form 8-K filed  December 21, 2006).                                                                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                                                                                    |
| 10.13   |       | 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).                                                                                       |

 

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Table of Contents

 
| 10.14  |   | 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). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                       |
| 10.15  |   | Form of  Assignment of Net Profits Interest (filed as Exhibit 10.6 to the  Company’s Form 8-K on March 9, 2007).                                                                                                  |
|   |   |                                                                                                                                                                                                                                       |
| 10.16  |   | 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) **.                                                           |
|   |   |                                                                                                                                                                                                                                       |
| 10.17  |   | 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) **.                                                                            |
|   |   |                                                                                                                                                                                                                                       |
| 10.18  |   | 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).                                                                       |
|   |   |                                                                                                                                                                                                                                       |
| 10.19  |   | 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).                               |
|   |   |                                                                                                                                                                                                                                       |
| 10.20  |   | Form of  Subscription and Registration Rights Agreement (filed as Exhibit 10.1 to  the Company’s Form 8-K filed September 1, 2009).                                                                               |
|   |   |                                                                                                                                                                                                                                       |
| 10.21  |   | Form of  Warrant (filed as Exhibit 10.2 to the Company’s Form 8-K filed  September 1, 2009).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                       |

 
| 10.22  |   | Purchase and Sale Agreement (Cubic Override) dated November 24,  2009 between the Company and Tauren Exploration, Inc. (filed as  Exhibit 10.1 to the Company’s Form 8-K filed December 1, 2009)                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                 |   |
| 10.23  |   | Purchase and Sale Agreement (Langtry Override) dated November 24,  2009 between the Company and Langtry Mineral & Development, LLC (filed as  Exhibit 10.2 to the Company’s Form 8-K filed December 1, 2009)       |
|   |   |                                                                                                                                                                                                                                                 |   |
| 10.24  |   | Subscription and Common Stock Purchase Agreement dated  November 24, 2009 between the Company and Langtry Mineral &  Development, LLC (filed as Exhibit 10.3 to the Company’s  Form 8-K filed December 1, 2009)    |
|   |   |                                                                                                                                                                                                                                                 |   |
| 10.25  |   | Subscription and Preferred Stock Purchase Agreement dated  November 24, 2009 between the Company and Langtry Mineral &  Development, LLC (filed as Exhibit 10.4 to the Company’s  Form 8-K filed December 1, 2009) |
|   |   |                                                                                                                                                                                                                                                 |

 
| 10.26  |   |  Second Amendment to Credit  Agreement, dated December 18, 2009, by and between Cubic  Energy, Inc. and Wells Fargo Energy Capital, Inc. (filed as  Exhibit 10.1 to the Company’s Form 8-K filed December 23,  2009)                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.27  |   | Promissory Note, dated as of December 18, 2009, by Cubic  Energy, Inc., payable to Wells Fargo Energy Capital, Inc. in the  maximum principal amount of $40,000,000 (filed as Exhibit 10.2  to the Company’s Form 8-K filed December 23, 2009)    |
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.28  |   | Convertible Promissory Note, dated as of December 18, 2009, by  Cubic Energy, Inc., payable to Wells Fargo Energy Capital, Inc. in  the principal amount of $5,000,000 (filed as Exhibit 10.3  to the Company’s Form 8-K filed December 23, 2009) |
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.29  |   | Amended and Restated Warrant to Purchase Shares of Common Stock of  Cubic Energy, Inc., dated December 18, 2009, issued to Wells Fargo  Energy Capital, Inc. (filed as Exhibit 10.4 to the  Company’s Form 8-K filed December 23, 2009)           |
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.30  |   | Warrant to Purchase Shares of Common Stock of Cubic Energy, Inc.,  dated December 18, 2009, issued to Wells Fargo Energy Capital, Inc.  (filed as Exhibit 10.5 to the Company’s Form 8-K filed December 23,  2009)                                |
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.31  |   | Amended and Restated Registration Rights Agreement, dated as of  December 18, 2009, by and between Cubic Energy, Inc. and Wells  Fargo Energy Capital, Inc. (filed as Exhibit 10.6  to the Company’s Form 8-K filed December 23, 2009)            |
|   |   |                                                                                                                                                                                                                                                                                 |   |
| 10.32  |   | Subordinated Promissory Note, dated as of December 18, 2009, by  Cubic Energy, Inc., payable to Calvin A. Wallen, III (filed as  Exhibit 10.7 to the Company’s Form 8-K filed December 23,  2009)                                                 |
|   |   |                                                                                                                                                                                                                                                                                 |

 
| 10.33  |   |  Third Amendment to Credit Agreement, dated  August 30, 2010, by and between Cubic Energy, Inc. and Wells Fargo  Energy Capital, Inc. (filed as Exhibit 10.1 to the  Company’s Form 8-K filed September 1, 2010)                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                            |   |
| 10.34  |   | Warrant to Purchase Shares  of Common Stock of Cubic Energy, Inc., dated August 30, 2010,  issued to Wells Fargo Energy Capital, Inc. (filed as Exhibit 10.2  to the Company’s Form 8-K filed September 1, 2010)                             |
|   |   |                                                                                                                                                                                                                                                                            |   |
| 10.35  |   | Second Amended and  Restated Registration Rights Agreement, dated as of August 30, 2010, by  and between Cubic Energy, Inc. and Wells Fargo Energy Capital, Inc.  (filed as Exhibit 10.3 to the Company’s Form 8-K filed September 1,  2010) |
|   |   |                                                                                                                                                                                                                                                                            |

 
| 10.36  |   | Cubic  Energy, Inc. 2005 Stock Option Plan (filed as Exhibit D to file Company’s  Definitive Schedule 14A filed with the SEC on December 12, 2005) ** |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| 10.37* |   | Amendment  to Cubic Energy, Inc. 2005 Stock Option Agreement effective as of May 7,  2010 **                                                          |
|   |   |                                                                                                                                                       |
| 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                                                                                                       |
|   |   |                                                                                                                                                       |
| 99.1*  |   | RPS  Reserve Report summary letter                                                                                                                         |

 

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  *           Filed herewith

**          Management CompensationContracts

 

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