Document:

Exhibit
10.1

 

SUBORDINATED
PROMISSORY NOTE

 

	
  $2,000,000.00

  	
   

  	
  May 6, 2008

  

 

FOR VALUE RECEIVED, CUBIC ENERGY, INC., a Texas corporation (“Debtor”) unconditionally promises to
pay to the order of DIVERSIFIED DYNAMICS
CORPORATION (together with its successors and assigns, “Lender”), without setoff, at its
offices                                                                                   
, or at such other place as may be designated by Lender, the principal amount
of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00),
or so much thereof as may be advanced from time to time in immediately
available funds, together with interest computed daily on the outstanding
principal balance hereunder, at an annual interest rate (the “Rate”), and in accordance with the
payment schedule, indicated below.

 

1.             Rate.  The
Rate shall be the lesser of (a) the MAXIMUM
RATE, or (b): the PRIME RATE
plus  TWO PERCENT (2.00%) per
annum.  The term “Prime
Rate” means a variable rate of interest per annum equal to the
prime rate as published from time to time in the “Bonds, Rates &
Yields” table of The Wall Street Journal.  If the prime rate is no longer published in
the “Bonds, Rates & Yields” table of The Wall
Street Journal, then Lender will choose and notify Debtor of a
substitute index that is based upon comparable information.  Notwithstanding any provision of this Note or
any other agreement or commitment between Debtor and Lender, whether written or
oral, express or implied, Lender shall never be entitled to charge, receive, or
collect, nor shall amounts received hereunder be credited so that Lender shall
be paid, as interest a sum greater than interest at the Maximum Rate. It is the
intention of the parties that this Note, and all instruments securing the
payment of this Note or executed or delivered in connection therewith, shall
comply with applicable law.  If Lender
ever contracts for, charges, receives or collects anything of value which is
deemed to be interest under applicable law, and if the occurrence of any
circumstance or contingency, whether acceleration of maturity of this Note,
prepayment of this Note, delay in advancing proceeds of this Note, or any other
event, should cause such interest to exceed the maximum lawful amount, any
amount which exceeds interest at the Maximum Rate shall be applied to the
reduction of the unpaid principal balance of this Note or any other
indebtedness owed to Lender by Debtor, and if this Note and such other
indebtedness are paid in full, any remaining excess shall be paid to Debtor.  In determining whether the interest exceeds
interest at the Maximum Rate, the total amount of interest shall be spread,
prorated and amortized throughout the entire term of this Note until its
payment in full. The term “Maximum Rate” as used in this Note
means the maximum nonusurious rate of interest per annum permitted by whichever
of applicable United States federal law or Texas law permits the higher
interest rate, including to the extent permitted by applicable law, any
amendments thereof hereafter or any new law hereafter coming into effect to the
extent a higher Maximum Rate is permitted thereby.   If at any time the Rate shall exceed
the Maximum Rate, the Rate shall be automatically limited to the Maximum Rate
until the total amount of interest accrued hereunder equals the amount of
interest which would have accrued if there had been no limitation to the
Maximum Rate.   To the extent, if any, that Chapter
303 of the Texas Finance Code, as amended, (the “Act”)
is relevant to Lender for purposes of determining the Maximum Rate, the parties
elect to determine the Maximum Rate under the Act pursuant to the “weekly
ceiling” from time to time in effect, as referred to and defined in
§303.001-303.016 of the Act; subject, however, to any right Lender subsequently
may have under applicable law to change the method of determining the Maximum
Rate.

 

2.             Accrual
Method.   Interest on the indebtedness evidenced by this
Note shall be computed on the basis of a THREE
HUNDRED SIXTY (360) day year and shall accrue on the actual number
of days elapsed for any whole or partial month in which interest is being
calculated.  In computing the number of
days during which interest accrues, the day on which funds are initially
advanced shall be included regardless of the time of day such advance is made,
and the day on which funds are repaid shall be included unless repayment is
credited prior to the close of business on the business day received as
provided herein.

 

3.             Rate
Change Date.  The Rate will change each time and
as of the date that the Prime Rate changes.

 

4.             Payment
Schedule. 
The outstanding principal balance of this Note, plus accrued and
unpaid interest thereon shall be due and payable on the earlier of (i) the
acceleration of the indebtedness hereunder; (ii) April 30, 2010, or (iii) such
other date as may be established by a written instrument between Debtor and
Lender, from time to time (the “Maturity Date”).  Accrued and unpaid interest on the
outstanding principal balance of this 

 

1

 

Note shall be due and payable monthly commencing on June 1, 2008 and continuing on the SAME day of each calendar month thereafter
(or if no such corresponding date, on the LAST
date of such calendar month).

 

5.             Net
Profits Interest.

 

As consideration for the
loans made by Lender pursuant to this Note, Debtor agrees to convey to Lender
upon the repayment in full of the indebtedness evidenced by this Note and the
repayment in full of the Senior Indebtedness, an undivided 0.375% (0.375 OF ONE
PERCENT) net profits interest (the “Net Profits Interest”) in the future
production of hydrocarbons from or attributable to Debtor’s interest in the
Subject Properties (as that term is defined in the Assignment of Net Profits
Interest by and between Debtor and Lender in the form attached hereto as Exhibit A)
which conveyance shall be effective as of the date the indebtedness evidenced
by this Note and the Senior Indebtedness is repaid in full and evidenced by an
instrument substantially in the form attached hereto as Exhibit A.

 

Should Debtor elect, at
any time subsequent to the conveyance of the Net Profits Interests, to sell its
interest in any of the Subject Properties, then Debtor agrees to extend to
Lender, by way of prompt written notice setting forth the terms of any such
transaction, the right to sell the Net Profits Interests burdening the relevant
Subject Properties to be sold by Debtor on the same terms (including, without
limitation, price based on per unit of production) as those for the sale by
Debtor.  Such right may be exercised at
the sole discretion of Lender and, should Lender elect not to exercise such
right, the Subject Properties so sold shall be conveyed by way of instrument(s) of
conveyance made expressly subject to the Net Profits Interests and the
provisions of this Note applicable thereto and shall remain subject to the Net
Profits Interests.

 

6.             Prepayments.  Prepayments may be made in whole or in part
at any time in whole or in part without premium or penalty.

 

7.             Event
of Default.  Upon
the commencement of any bankruptcy, reorganization, arrangement, adjustment of
debt, relief of debtors, dissolution, insolvency or liquidation or similar
proceeding of any jurisdiction relating to Debtor, the unpaid principal amount
hereof shall become immediately due and payable without presentment, demand,
protest or notice of any kind in connection with this Note.

 

8.             Waiver.  The failure at any time of Lender to exercise
any of its options or any other rights hereunder shall not constitute a waiver
thereof, nor shall it be a bar to the exercise of any of its options or rights
at a later date.  All rights and remedies
of Lender shall be cumulative and may be pursued singly, successively or
together, at the option of Lender.  The
acceptance by Lender of any partial payment shall not constitute a waiver of
any default or of any of Lender’s rights under this Note.  No waiver of any of its rights hereunder, and
no modification or amendment of this Note, shall be deemed to be made by Lender
unless the same shall be in writing, duly signed on behalf of Lender; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Lender or the obligations of Debtor to
Lender in any other respect at any other time.

 

9.             Applicable
Law, Venue and Jurisdiction.  Debtor agrees that this Note shall be deemed
to have been made in the State of Texas at Lender’s address indicated at the
beginning of this Note and shall be governed by, and construed in accordance
with, the laws of the State of Texas and is performable in the City and County
of Texas indicated at the beginning of this Note.  In any litigation in connection with or to
enforce this Note or any indorsement or guaranty of this Note, Debtor
irrevocably consents to and confers personal jurisdiction on the courts of the
State of Texas or the United States courts located within the State of
Texas.  Nothing contained herein shall,
however, prevent Lender from bringing any action or exercising any rights
within any other state or jurisdiction or from obtaining personal jurisdiction
by any other means available under applicable law.

 

10.          Partial
Invalidity. 
The unenforceability or invalidity of any provision of this Note shall
not affect the enforceability or validity of any other provision herein and the
invalidity or unenforceability of any provision of this Note to any person or
circumstance shall not affect the enforceability or validity of such provision
as it may apply to other persons or circumstances.

 

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11.          Binding
Effect. 
This Note shall be binding upon and inure to the benefit of Debtor and
Lender and their respective successors, assigns, heirs and personal
representatives, provided, however, that no obligations of Debtor hereunder can
be assigned without prior written consent of Lender.

 

12.          Controlling
Document. 
To the extent that this Note conflicts with or is in any way
incompatible with any other document related specifically to the loan evidenced
by this Note, this Note shall control over any other such document, and if this
Note does not address an issue, then each other such document shall control to
the extent that it deals most specifically with an issue.

 

13.          COMMERCIAL
PURPOSE.  DEBTOR REPRESENTS TO LENDER THAT THE PROCEEDS OF THIS
LOAN ARE TO BE USED PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL
PURPOSES.  DEBTOR ACKNOWLEDGES HAVING
READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS AND CONDITIONS OF THIS
NOTE.

 

14.          Collection.  If
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Debtor agrees to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys’
fees.

 

15.          Notice of Balloon Payment.  At
maturity (whether by acceleration or otherwise), Debtor must repay the entire
principal balance of this Note and unpaid interest then due.

 

16.          WAIVER
OF JURY TRIAL. 
DEBTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, OR
COUNTERCLAIM THAT RELATES TO OR ARISES OUT OF THIS NOTE OR THE ACTS OR FAILURE
TO ACT OF OR BY LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OF
THIS NOTE OR THE OTHER LOAN DOCUMENTS.

 

17.          Subordination.

 

This
Note shall, to the extent and in the manner provided herein, be subordinated
and junior in right of payment to the prior payment in full of all Senior
Indebtedness, as hereinafter defined. 
Senior Indebtedness of any type or from any lender shall not be deemed
to have been paid in full until the termination of all commitments or other
obligations for such Senior Indebtedness, including under hedge agreements, and
the payment in full in cash thereof (and for all purposes hereof the term “paid
in full” or any variation thereof with respect to Senior Indebtedness shall
mean that payment in full has been made in cash and that all commitments of the
holders of the Senior Indebtedness shall have been terminated).

 

By accepting this Note, Lender
hereof covenants and agrees that this Note shall be subject to the provisions
of this section 17; and each person holding this Note, whether upon original
issue or upon transfer or assignment hereof, accepts and agrees to be bound by
such provisions.  This Note may not be
transferred or assigned unless the transferee or assignee has acknowledged in a
writing its acceptance of the provisions set forth in this section 17.  The provisions of this section 17 shall
constitute a continuing offer to all persons who, in reliance upon such
provisions, become holders of, or continue to hold, Senior Indebtedness, and
such provisions are made for the benefit of the holders of Senior Indebtedness,
and such holders are hereby made obligees under such provisions and the same as
if their names were written herein as such, and they and/or each of them may
proceed to enforce such provisions.

 

The term “Senior  Indebtedness”
shall mean (a) the principal of, the premium, if any, and interest
(including, without limitation, interest that accrues after the filing of a
petition initiating any action or proceeding under the U.S. Bankruptcy Code or
any other bankruptcy, insolvency or similar law or statute protecting creditors
in effect in any jurisdiction, whether or not such interest accrues after the
filing of such petition for purposes of the U.S. Bankruptcy Code or such other
law or statute or is an allowed claim in any such action or proceeding (“Post-Petition
Interest”)) on, and all other obligations, liabilities, fees, premiums,
indemnifications, costs, expenses (whether for enforcement, protection of
collateral or otherwise) or otherwise, whether secured or unsecured, in whole
or in part, and whether outstanding on the date of this Note or hereafter
created, incurred or assumed, with respect to, or created, governed or
evidenced by the Credit Agreement dated as of March 5, 2007, by and among 

 

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Wells Fargo Energy Capital, Inc.
(the “Senior Lender”) and Debtor (the “Senior Credit Agreement”)
or any other related documents or any prior, concurrent, or subsequent notes,
instruments or agreements or indebtedness, liability or obligations of any type
or form whatsoever relating thereto, and (b) all deferrals, renewals,
extensions, refinancings and refundings of any such indebtedness or any
amendments, restatements, supplements or other modifications thereof.  Debtor and the holders of the Senior
Indebtedness may amend or modify the Senior Credit Agreement or any related
documents without the consent of Lender without impairing or releasing the
subordination of the debt evidenced by this Note to the repayment of the Senior
Indebtedness as set forth herein.

 

Until the prior payment in full of the Senior Indebtedness, Lender
shall not receive or accept any payment from Debtor including, without
limitation, payment of principal, interest, default interest or other fees or
expenses; provided, however, so long as no Event of Default or Unmatured Event
of Default (as such terms are defined in the Senior Credit Agreement) exists at
the time of making such payment or immediately after giving effect Debtor can
make regularly scheduled payments of interest to Lender.

 

Until the Senior Indebtedness has
finally been paid in full, the holder of this Note will not take or omit to
take any action or assert any claim with respect to the indebtedness evidenced
by this Note or otherwise which is inconsistent with the provisions of section
17.  Until the Senior Indebtedness has
been finally paid in full, the holder of this Note will not assert, collect or
enforce the indebtedness evidenced by this Note or any part thereof or take any
action to foreclose or realize upon such indebtedness or any part thereof.  Until the Senior Indebtedness has been
finally paid in full in, the holder of this Note shall not have any right of
subrogation, reimbursement, restitution, contribution or indemnity whatsoever
from any assets of Debtor or any guarantor of or provider of collateral
security for the Senior Indebtedness.  In
no event shall this Note be accelerated while there is outstanding Senior
Indebtedness.  Any payment collected or
received by the holder of this Note in violation of this Section 17 shall
be held in trust for the benefit of, and shall be paid over or delivered to,
the holders of Senior Indebtedness.

 

Interest shall
continue to accrue on the principal balance of this Note at any time during
which there exists an Event of Default or Unmatured Event of Default (as such
terms are defined in the Senior Credit Agreement).

 

REMAINDER OF PAGE LEFT
INTENTIONALLY BLANK

 

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EXECUTED as of the date first written above.

 

	
  DEBTOR:

  	
   

  	
  ADDRESS:

  
	
   

  	
   

  	
   

  
	
  CUBIC ENERGY, INC.

  	
   

  	
  9870 Plano Road

  
	
   

  	
   

  	
   

  	
  Dallas, Texas 75238

  
	
  By:

  	
  /s/ Calvin A.
  Wallen, III

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  

 

5

 

EXHIBIT A

 

ASSIGNMENT
OF NET PROFITS INTEREST

 

SEE
ATTACHED.

 

6

 

EXHIBIT A

 

All of Assignor’s working interests in oil and gas leaseholds in Caddo
Parish and Desoto Parish, Louisiana located in T15N, R16W; T14N, R16W; T16N,
R15W; T15N, R15W; T14N, R15W; and T17N, R16W.

 

 

ASSIGNMENT OF NET PROFITS
INTEREST

 

THIS
ASSIGNMENT OF NET PROFITS INTEREST (“Assignment”) is dated and effective
as of 7:00 a.m. Central Standard or Daylight Savings Time, as the case may
be                          ,
           (the “Effective
Date”), and is from CUBIC ENERGY, INC.,
a corporation formed under the laws of the State of Texas (“Assignor”),
with principal offices at 9870 Plano Road, Dallas, Texas 75238, to DIVERSIFIED DYNAMICS CORPORATION (“Assignee”), with
principal offices at                                            .

 

1.

 

GRANTING PROVISION

 

For
and in consideration of One Hundred and No/100 Dollars ($100.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Assignor does, subject to the terms and provisions of this
Assignment, hereby SELL, ASSIGN, TRANSFER and SET OVER to Assignee, as a net
profits interest (the “Net Profits Interest”), an undivided 0.375%
(0.375 OF ONE PERCENT) interest in and to Assignor’s “Net Profits”, as that
term is defined in Section 3.2 hereinbelow, attributable to all of
Assignor’s right, title and interest in and to:

 

(a)                                  the oil, gas,
and mineral leases and the leasehold estates created thereby and/or the lands
covered thereby; the oil, gas and other minerals (regardless of the manner of
extraction) in, on and under the lands; and all overriding royalty interests,
net profits interests, production payment interests and other payments out of
or measured by production in the lands; all as described more particularly on Exhibit A
attached hereto and made a part hereof for all purposes; and in any lands
pooled or unitized with any of the foregoing (collectively, the “Leases”,
regardless of the actual character of any of the foregoing);

 

(b)                                 all oil, gas,
other hydrocarbons, including casinghead gas, other liquid or gaseous
substances produced in conjunction therewith or derived or manufactured
therefrom and any other minerals (collectively, “Hydrocarbons”)
produced, mined, otherwise extracted, saved, and marketed from or attributable
to the Leases;

 

(c)                                  any agreements
extending the term of any of the Leases or any renewal leases taken with
respect to any of the Leases by Assignor or Assignor’s successors and assigns
either while the relevant Lease or 

 

 

Leases remain in force and effect or within six (6) months after
the lapse of the relevant Lease or Leases; and

 

(d)                                 any and all
other rights, titles, and interests in or with respect to all voluntary or
compulsory pooling and unitization agreements or orders, farmout agreements,
farmin agreements, operating agreements, Hydrocarbon purchase and sale
agreements, and all other contracts of any kind whatsoever covering or
affecting the production, extraction or marketing of Hydrocarbons from or
attributable to the Leases (collectively, the “Property Agreements”),

 

such
undivided interest in and to the preceding items (a), (b), (c), and (d) being
referred to hereinafter as the “Subject Properties”.

 

TO
HAVE AND TO HOLD the Net Profits Interest, together with all rights and
appurtenances thereto, unto Assignee and its successors and assigns forever,
subject, however, to the further provisions of this Assignment.

 

This
Assignment is made without warranty of title, either express or implied, except
as to claims arising by, through or under Assignor, and is made with full
transfer and subrogation of all rights and actions against all former owners of
all or any part of the Subject Properties or any interest therein, and is made
expressly subject to the following terms and provisions.

 

2.

 

GOVERNING DOCUMENTS

 

This
Assignment is expressly made and accepted by Assignee subject to:  (a) all applicable local, state, and
federal statutes, ordinances, rules, and regulations; (b) the terms and
provisions of the Leases; and (c) the Property Agreements, if any.

 

3.

 

CALCULATION, CHARACTERISTICS,
AND DISBURSEMENT

OF NET PROFITS INTEREST

 

3.1           For purposes of calculating the Net
Profits Interest, Assignor shall maintain an account for the Subject Properties
(the “Net Profits Account”) in accordance with the terms of this
Assignment and good accounting practices that sets forth the charges and
credits made thereto pursuant to this Assignment on a calendar month
basis.  Assignor 

 

 

shall
furnish to Assignee, within thirty (30) days after the end of each calendar
month, commencing with that calendar month in which the Effective Date falls, a
report, in form and substance reasonably satisfactory to Assignee, that sets
forth the charges and credits made to the Net Profits Account through the end
of the relevant calendar month.

 

3.2           The term “Net Profits” shall
mean an amount (not less than zero) determined for each calendar month,
commencing with that in which the Effective Date falls, by (a) deducting
the aggregate of any negative balance existing in the Net Profits Account at
the first of such month, plus the total charges properly made thereto during
such month, from (b) the total credits properly made thereto during
such month.  To the extent that the
aggregate charges exceed aggregate credits at the end of any such month, such
excess charges shall be carried forward to the succeeding month.  All Payments made to Assignee on account of
the Net Profits Interest shall be made entirely and exclusively out of the sums
credited to the Net Profits Account pursuant to Section 3.3 hereof.

 

3.3           Each calendar month commencing with
that in which the Effective Date falls, the Net Profits Account shall be
credited with an amount equal to the sum of:

 

(a)                                 the proceeds
(or the market value of any proceeds not received in the form of cash or cash
equivalents) actually received during such calendar month by Assignor from the
sale or other disposition of all Hydrocarbons produced from or attributable to
the Subject Properties after the Effective Date, after deducting therefrom
those proceeds attributable to all royalties, overriding royalties, production
payments, net profits interests, and other burdens upon, measured by, or
payable out of production from or attributable to the Subject Properties that
are outstanding in third parties immediately prior to the Effective Date;

 

(b)                                 monies received by Assignor
attributable to any future contracts, forward contracts, swap, cap or collar
contracts, option contracts, hedging contracts or other derivative contracts or
similar agreements covering oil and gas commodities or prices with respect to
Hydrocarbons produced from the Subject Properties;

 

(c)                                  monies received
by Assignor under any “take-or-pay” or similar provision of any Property
Agreement pertaining to the Subject Properties;

 

(d)                                 monies received
by Assignor pursuant to any gas balancing agreement pertaining to the Subject
Properties;

 

 

(e)                                the proceeds
from the sale or rental of fixtures and equipment used with respect to the
Subject Properties;

 

(f)                                  monies received
by Assignor pursuant to a farmout of all or a portion of the Subject
Properties;

 

(g)                               bottom hole
contributions or payments made in connection with the Subject Properties;

 

(h)                               amounts
received by Assignor as an adjustment of any or leasehold equipment upon the
pooling or unitization of the Subject Properties;

 

(i)                                   amounts
received by Assignor as a result of an expense audit of all or a portion of the
Subject Properties;

 

(j)                                   the proceeds of
all insurance collected by or on behalf of Assignor on account of its ownership
of the Subject Properties as a consequence of the loss of or damage to the
Subject Properties, the personal property or equipment located thereon or
Hydrocarbons therefrom;

 

(k)                                amounts
received by Assignor as a result of a refund of taxes previously paid on the
Subject Properties;

 

(l)                                   the proceeds of
all judgments and claims collected by Assignor as the result of damage or loss
of the Subject Properties;

 

(m)                             rentals
received by Assignor pursuant to subsurface Hydrocarbon storage or other
reservoir use arrangements concerning the Subject Properties;

 

(n)                                any payments
made to Assignor in connection with the drilling or deferral of drilling of any
on the Subject Properties;

 

(o)                                any payments
received by Assignor for processing or transporting third party Hydrocarbons;

 

(p)                                all delay
rentals, shut-in payments, minimum royalties, and other payments made to
Assignor in connection with the maintenance of any Hydrocarbon lease granted by
Assignor and relating to the Subject Properties; and

 

 

(q)                                 any bonus or
other consideration received by Assignor in connection with the grant by
Assignor of any Hydrocarbon lease relating to the Subject Properties.

 

3.4           Each calendar month commencing with
that in which the Effective Date falls, there shall be charged against the Net
Profits Account an amount equal to the sum of the following items of cost and
expense actually paid by Assignor during such calendar month from and after the
Effective Date, insofar only as such items of cost and expense are attributable
to the interest of Assignor in the Subject Properties, are properly allocable
to the Subject Properties and the production and marketing of Hydrocarbons
therefrom, have not previously been deducted in any remittance to Assignor and
do not arise from or relate to gross negligence, willful misconduct or bad
faith of Assignor:

 

(a)                                  All costs and
expenses incurred in drilling, deepening, sidetracking, plugging-back, coring,
testing, logging, completing, recompleting and equipping for production
(including, without limitation, the cost of wellhead facilities, storage tanks,
separators, pumping equipment, flow lines, salt water disposal equipment, and
other similar production facilities) of the Subject Properties;

 

(b)                                 all costs and
expenses incurred in the operation and maintenance of the Subject Properties
and the production and marketing of Hydrocarbons therefrom, such items of cost
to include, without limitation:  (i) all
costs of complying with applicable local, state, and federal statutes,
ordinances, rules, and regulations; (ii) all costs of lifting and
producing Hydrocarbons from the Subject Properties, including all costs of labor,
fuel, equipment (rental and purchase), repairs, hauling, materials, supplies,
utility charges, and other costs incident thereto; (iii) all costs of
gathering, compressing, dehydrating, separating, treating, processing,
transporting, and marketing Hydrocarbons produced from the Subject Properties,
including the costs of constructing and maintaining flow lines and gathering
lines necessary in connection with gathering, processing and marketing
production for the Subject Properties; (iv) all direct and indirect
overhead charges and operating charges paid, pursuant to Property Agreements,
to Fossil Operating, Inc. and any non-affiliated third party operator or
operators of the Subject Properties or to others for services rendered in
conducting operations thereon (provided, however, it being explicitly agreed
that there shall not be charged against the Net Profits Account interest, fees,
costs or charges for borrowed funds), (v) all delay rentals, shut-in
payments, minimum royalties, and other payments made in connection 

 

 

with the maintenance of the Leases; (vi) the costs of all workover
and other remedial servicing operations, to the extent not within the scope of
the costs and expenses addressed in (a) above; (vii) the cost of all
fluid injection, pressure maintenance, secondary recovery, recycling, and other
enhanced recovery operations; (viii) the costs of plugging and abandoning
any wells now or hereafter located on the Subject Properties that have once
produced Hydrocarbons in paying quantities; and (ix) amounts paid under
gas balancing agreements, farm-in agreements, bottom hole agreements and
expense audits;

 

(c)                                  monies paid by Assignor
attributable to any future contracts, forward contracts, swap, cap or collar
contracts, option contracts, hedging contracts or other derivative contracts or
similar agreements covering oil and gas commodities or prices with respect to
Hydrocarbons produced from the Subject Properties;

 

(d)                                 the expenses of
litigation, collections, liens, judgments, liquidated liabilities, and claims
incurred and paid by Assignor on account of its ownership of the Subject
Properties, or directly incident to the operation or maintenance thereof;

 

(e)                                  all taxes
(except income taxes) paid by Assignor for the benefit of the parties hereto, including,
without limitation, ad  valorem, property, production, severance,
gathering, windfall profit, occupation, and any other similar taxes assessed
against or attributable to the Subject Properties or Hydrocarbons produced
therefrom; provided, however, that if Assignee bears taxes individually which
are not assessed against or attributable to the Subject Properties, the taxes
which Assignee bears individually shall not be charged to the Net Profits
Account;

 

(f)                                  insurance
premiums paid by Assignor on account of its ownership of the Subject Properties
for insurance directly relating to the Subject Properties or any part thereof,
together with all expenditures incurred and paid in settlement of any and all
losses, claims, damages, judgments and other expense, including legal services
directly relating to the Subject Properties or operations thereon;

 

(g)                                 proceeds
reclaimed from or returned by the Assignor as the result of the insolvency,
bankruptcy, or reorganization of a purchaser of production which proceeds have
been previously paid to Assignee; and

 

 

(h)                                 amounts payable
by Assignor as an adjustment of any leasehold equipment upon the pooling or
unitization of the Subject Properties.

 

3.5           Assignee shall never be personally
responsible for the payment of any part of the costs and expenses charged
against the Net Profits Account nor for any liabilities incurred in connection
with the development, exploration, equipping, and operation of the Subject
Properties.  Assignor hereby covenants
and agrees to indemnify and to hold harmless Assignee, its agents, employees,
successors and assigns from and against any and all such responsibility and
liability, except to the extent such responsibility and liability arises out of
the gross negligence or willful misconduct of Assignee.

 

3.6           As between Assignor and Assignee,
Assignor shall have exclusive charge and control of the marketing of all
Hydrocarbons allocable to the Net Profits Interest.  Assignor shall market the production
allocable to the Net Profits Interest with and on the same terms as Assignor’s
share of production from the Subject Properties and shall collect and receive
the proceeds from the sale of all such production.

 

3.7           To the extent that, at the end of any
calendar month after the Effective Date, there exists a credit balance in the
Net Profits Account, Assignor shall disburse to Assignee, within thirty (30)
days after the end of the relevant calendar month, all Net Profits that have
accrued to the Net Profits Interest as of the end of such calendar month.

 

4.

 

GENERAL COVENANTS AND
PROVISIONS

 

4.1           Assignor agrees, to the extent that
Assignor controls such matters:  (a) to
comply with the terms and provisions of the Leases; (b) to conduct, or to
use reasonable efforts to cause to be conducted, all operations with respect to
the Subject Properties with reasonable and prudent business judgment and in
accordance with good oilfield practices, the provisions of the Leases, and all
applicable federal, state, and local statutes, ordinances, rules, and regulations;
(c) to cause all wells located on the Subject Properties to be operated in
a good, prudent, and workmanlike manner and to cause all improvements and
equipment necessary or useful to the operation thereof to be provided; and (d) otherwise
to cause to be done all that a prudent operator would do with respect to the
Subject Properties to the end that the Leases are maintained in full force and
effect and each well located on the Subject Properties that is capable of
producing Hydrocarbons in paying quantities shall be produced to maximize the
return both to Assignor and Assignee. 
Nothing herein contained shall obligate Assignor, however, to continue
to operate any well when the well ceases to produce, or is not capable of
producing, Hydrocarbons in paying quantities, but with the term “paying
quantities” being determined without consideration of the Net Profits
Interest.  Assignee and 

 

 

its
representatives shall at the risk and expense of Assignee and to the extent
permitted by Property Agreements, have access at all reasonable times to the
Subject Properties and to all operations of Assignor related to the Subject
Properties, and the right to observe all operations conducted thereon.  Assignor shall on reasonable request promptly
furnish Assignee with any and all information in Assignor’s possession and
pertaining to the Subject Properties.

 

4.2           Assignor agrees to at all times
maintain true and correct books and records sufficient to determine the amounts
payable to Assignee hereunder and such books and records shall be open to
Assignee for inspection and audit upon reasonable notice during normal business
hours.

 

4.3           Assignee hereby agrees that the owner
of the Subject Properties shall have the right, without further approval by
Assignee, to pool and unitize the Subject Properties and the lands affected
thereby, or portions thereof, with other lands or leases to form one or more
pooled units in accordance with the pooling authority granted in the Leases,
any agreement subsequently obtained by the owner of the Subject Properties from
any lessor with reference to pooling, and applicable rules and regulations
of any State or Federal governmental authority having jurisdiction over the
Leases (collectively, the “Jurisdictional Agencies”).  As to each unit so created, Assignee shall be
entitled to receive, in lieu of the Net Profits Interest created herein with
respect to the relevant Lease, either (a) that proportion of the Net
Profits Interest that the amount of surface acreage affected thereby and placed
in the relevant unit bears to the entire surface area of such unit, or (b) if
participation in the relevant unit is determined by reference to factors other
than the number of surface areas covered by each lease included therein, the
portion of the Net Profits Interest attributable to the participation of the
Subject Properties in the relevant unit. 
In addition, if a Jurisdictional Agency orders the revision of any unit
created subject hereto, Assignor and Assignee agrees to execute such additional
documents as may be necessary to vest Assignee with title of record to an
interest in and to the Leases or production therefrom, insofar as the Leases
cover and relate to the relevant unit as so revised, consistent with the
intents and purposes of this Assignment.

 

4.4           If any of the Leases covers an
interest in the lands covered thereby less than the entire mineral estate
therein (regardless of whether the relevant Lease purports to cover only the
lessor’s interest therein), then, as to such Lease, the Net Profits Interest,
insofar only as it affects and applies to Hydrocarbons produced from or
attributable to such portion of the lands covered by such Lease, shall be
payable to Assignee in the proportion that the mineral interest in such lands
actually covered by the relevant Lease bears to the entire, undivided mineral
estate in such lands.  Similarly, if
Assignor owns less than the full leasehold estate in and to any of the Leases,
then, as to such Lease, the Net Profits Interest, insofar only as it affects
and applies to Hydrocarbons produced from or attributable to such 

 

 

Lease,
shall be payable to Assignee in the proportion that the aggregate leasehold
interest in the relevant Lease actually owned by Assignor bears to the entire
leasehold interest in and to such Lease.

 

4.5           All of the covenants of Assignor and
Assignee herein contained shall be covenants running with the land, and this
Assignment and the covenants herein contained shall inure to the benefit of and
be binding upon the successors and assigns of Assignor and Assignee.

 

4.6           This Assignment may be executed in
any number of counterparts, and each counterpart hereof shall be deemed to be
an original instrument, but all counterparts shall constitute but one
Assignment.

 

4.7           Should Assignor elect, at any time to
sell its interest in any of the Subject Properties, then Assignor agrees to
extend to Assignee, by way of prompt written notice setting forth the terms of
any such transaction, the right to sell the Net Profits Interests burdening the
relevant Subject Properties to be sold by Assignor on the same terms
(including, without limitation, price based on per unit of production) as those
for the sale by Assignor.  Such right may
be exercised at the sole discretion of Assignee and, should Assignee elect not
to exercise such right, the Subject Properties so sold shall be conveyed by way
of instrument(s) of conveyance made expressly subject to the Net Profits
Interests and the provisions of this Assignment applicable thereto and shall
remain subject to the Net Profits Interests.

 

EXECUTED on the         day of               ,
        , but effective as of the
Effective Date.

 

	
   

  	
   

  	
  ASSIGNOR:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CUBIC
  ENERGY, INC.

  	
   

  
	
  WITNESSES:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Printed
  Name:

  	
   

  
	
   

  	
   

  	
  Title:
  

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ASSIGNEE:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  WITNESSES:

  	
   

  	
  DIVERSIFIED
  DYNAMICS CORPORATION

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Printed
  Name:

  	
   

  
	
   

  	
   

  	
  Title:
  

  	
   

  
	
   

  	
   

  	
   

  	
   

  
								

 

 

	
  STATE
  OF TEXAS

  	
   

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF 

  	
   

  	
  §

  
				

 

 

On
this          day of                 ,
         , before me appeared                                          ,
to me personally known, who, being by me duly sworn did say that he is the                           
of Cubic Energy, Inc., a Texas corporation, and that said instrument was
signed before me and in the presence of the two witnesses whose names are
thereto subscribed as such, being competent witnesses, and who acknowledged in
my presence and in the presence of said witnesses that he signed the said
instrument on behalf of said corporation by authority of its board of directors
and said                              
acknowledged said instrument to be the free act and deed of said Cubic Energy, Inc.

 

Given
under witness my hand and seal of office this           
day of                         ,
                .

 

 

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Notary
  Public in and for the

  
	
   

  	
   

  	
  State
  of Texas

  
	
  My
  Commission Expires:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Printed
  Name of Notary Public)

  

 

 

	
  STATE
  OF 

  	
   

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF 

  	
   

  	
  §

  
				

 

On
this          day of                         ,
             ,
before me appeared                                       ,
to me personally known, who, being by me duly sworn did say that he is the                                          of
Diversified Dynamics Corporation, and that said instrument was signed before me
and in the presence of the two witnesses whose names are thereto subscribed as
such, being competent witnesses, and who acknowledged in my presence and in the
presence of said witnesses that he signed the said instrument on behalf of said
corporation by authority of its board of directors and said                                          
acknowledged said instrument to be the free act and deed of said Diversified
Dynamics Corporation.

 

Given
under witness my hand and seal of office this        
day of                           ,
           .

 

 

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Notary
  Public in and for the

  
	
   

  	
   

  	
  State
  of Texas

  
	
  My
  Commission Expires:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Printed
  Name of Notary Public

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Printed
  Name of Notary Public)Exhibit 10.2

 

FIRST AMENDMENT TO

CREDIT AGREEMENT

 

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the
“First Amendment”) made and entered into the 8th day of May, 2008, by
and between CUBIC ENERGY, INC., a
Texas corporation, and WELLS FARGO ENERGY
CAPITAL, INC., a Texas corporation.

 

W  I  T  N  E  S
S  E  T  H:

 

WHEREAS, the above named parties did execute and exchange counterparts
of that certain Credit Agreement dated as of March 5, 2007 (the “Agreement”)
to which reference is here made for all purposes;

 

WHEREAS, the above named parties are desirous of amending the Agreement
in the particulars hereinafter set forth;

 

NOW THEREFORE, in consideration of the mutual covenants and agreements
of the parties to the Agreement and agreements of the parties hereto as set
forth in this First Amendment, the parties hereto agree as follows:

 

ARTICLE I

DEFINITIONS

 

As used herein, each term defined in the Agreement shall have the
meaning assigned thereto in the Agreement and terms defined herein shall be
incorporated into the Agreement unless expressly provided to the contrary.

 

1

 

ARTICLE II

AMENDMENTS

 

2.01                          The Agreement is hereby
amended to add the following defined terms to Section 1.1 of the
Agreement:

 

“Bethany Longstreet Wells” means two
oil and gas wells to be drilled vertically by the Borrower and its industry
partners to test the Haynesville Shale and which are located in Sections 5 and
7, T14N, R15W, Caddo Parish, Louisiana.

 

“Diversified Dynamics Note” means that
certain Subordinated Promissory Note dated May 6, 2008 executed by the
Borrower to the order of Diversified Dynamics Corporation in the principal
amount of $2,000,000.00, a photocopy of which is attached hereto as Exhibit XVI.

 

“Johnson Branch Wells” means the following
four oil and gas wells all located in Caddo Parish, Louisiana:

 

	
  (a)

  	
   

  	
  Hudson 10-1, Section 10, T15N, R16W; 

  
	
   

  	
   

  	
   

  
	
  (b)

  	
   

  	
  Daniels 3-1, Section 3, T15N, R15W;

  
	
   

  	
   

  	
   

  
	
  (c)

  	
   

  	
  Bonomo 35-1, Section 35, T16N, R15W; and 

  
	
   

  	
   

  	
   

  
	
  (d)

  	
   

  	
  Wilbanks 36-1, Section 36, T16N, R15W.

  

 

2.02                          The
Agreement is hereby amended to substitute for the definition of “Subject Areas”
the following:

 

“Subject Areas” means all of Caddo
Parish, Louisiana and DeSoto Parish, Louisiana.

 

2.03                          The
Agreement is hereby amended to substitute for the definition of “Subject Properties” the following:

 

“Subject Properties” means any Oil and
Gas Properties of the Borrower in the Subject Areas. Any Oil and Gas Property
hereafter acquired by the Borrower in the Subject Areas shall be a Subject Property at the time of
such acquisition; provided that no Oil and Gas Properties acquired by Borrower
in the Subject Areas following the date all of the

 

2

 

Debt evidenced by the Note is repaid in full and Lender has no further
obligations to make Advances hereunder shall be considered Subject Properties
under this Agreement.

 

2.04                          The
Agreement is hereby amended to add the following subsections to the end of Section 2.4
of the Agreement, to wit:

 

(c)                                 On
and after May 8, 2008 proceeds from Revolving Advances shall be used to
pay or reimburse the Borrower
for:

 

(i)                                    Completion
Costs associated with the completion of the Johnson Branch Wells, provided,
however, proceeds from Revolving Advances will not be used to pay or reimburse
the Borrower for more than $2,700,000.00 of such Completion Costs; and

 

(ii)                                 Dry
Hole Costs and Completion Costs associated with the drilling and completion of
the Bethany Longstreet Wells, provided, however, proceeds from Revolving
Advances will not be used to pay or reimburse
the Borrower for more than $2,800,000.00 of such Dry Hole Costs and Completion
Costs.

 

2.05                          The
Agreement is hereby amended to substitute for Subsection 2.6(a) of the
Agreement the following:

 

(a)                                 During
the period from and after May 8, 2008 until the next scheduled
redetermination of the Borrowing Base (scheduled to be September 1, 2008)
in accordance with this Section 2.6, the amount of the Borrowing Base
shall he $20,000,000.00.

 

2.06                          The
Agreement is hereby amended to substitute for Subsection 2.12(a) of the
Agreement the following:

 

(a)  The Borrower shall not have the right and option
to prepay all or any part of the principal
balance outstanding on the Term Note.

 

2.07                          The Agreement is hereby amended to
substitute for Section 2.14 of the Agreement the following:

 

3

 

2.14                       Net
Profits Interests.   As consideration for the Loans
governed by this Agreement and in addition to interest accruing on principal
evidenced by the Note, the Borrower agrees to convey to the Lender, as an
additional charge, upon the repayment in full of the Debt evidenced by the
Revolving Note and the repayment in full or
conversion of the Debt evidenced by the Term Note and confirmation of
the title of the Lender to such interest upon conveyance by the Borrower, an
undivided five percent (5%) net profits interest in the future production of
hydrocarbons from or attributable to the Subject Properties, which conveyance
shall be effective as of the date the Debt evidenced by the Revolving Note is
repaid in full and the Debt
evidenced by the Term Note is repaid in full or converted and evidenced by an
instrument substantially in the form attached hereto as Exhibit X.

 

Should the Borrower elect, at any time
subsequent to the conveyance of the Net Profits Interests, to sell its interest
in any of the Subject Properties, then the Borrower agrees to extend to the Lender, by way of
prompt written notice setting forth the terms of any such transaction, the
right to sell the Net Profits Interests burdening the relevant Subject
Properties to be sold by the Borrower on the same terms (including, without
limitation, price based on per unit of production) as those for the sale by the
Borrower. Such right may be exercised at the sole discretion of the Lender and,
should the Lender elect not to exercise such right, the Subject Properties so
sold shall be conveyed by way of instrument(s) of conveyance made
expressly subject to the Net Profits Interests and the provisions of this Agreement
applicable thereto and shall remain subject to the Net Profits Interests.

 

2.08                          The
Agreement is hereby amended to substitute for Section 6.1 of the Agreement
the following:

 

6.1                              Other
Debt of Borrower.   The Borrower will not incur, create,
assume or suffer to exist any Debt except: (a) Loans hereunder, (b) unsecured
current accounts payable incurred in the ordinary course of business, provided
such accounts are paid timely or within ninety (90) days of the due date or are
being Contested in Good Faith, (c) pursuant to Derivative Contracts
required or allowed under this Agreement,
(d) evidenced by the Diversified Dynamics
Note or (c) other Debt not exceeding $250,000.00 in the aggregate at any
one time.

 

The Borrower shall not repay any Debt,
principal or interest, evidenced by the Diversified Dynamics Note; provided,
however, so long as no Event of Default or Unmatured Event of Default exists or
would

 

4

 

exist as a result thereof, the Borrower may make regularly scheduled
interest payments accruing on the principal outstanding under the Diversified
Dynamics Note.

 

2.09                          The
Agreement is hereby amended to substitute for Section 6.7 of the Agreement
the following:

 

6.7                              Sales of
Property.  Except for the obligation of the Borrower
to convey a net profits interest to Diversified
Dynamics Corporation pursuant to the Diversified Dynamics Note after the Debt
evidenced by the Notes is repaid in full and the Lender is no longer obligated
to make Advances, the Borrower will not sell, transfer or otherwise dispose of,
in one or any series of transactions, any of the Subject Properties.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

The Borrower hereby expressly remakes in favor of the Lender all of the
representations and warranties set forth in ARTICLE 4 of the
Agreement, as amended hereby, and represents and warrants that all such
representations and warranties remain true and unbreached, except as affected
by the transactions contemplated in the Agreement.

 

ARTICLE IV

RATIFICATION

 

Each of the parties hereto does hereby adopt, ratify and confirm the
Agreement, in all things in accordance with the terms and provisions thereof,
as modified or amended by this First Amendment.

 

5

 

ARTICLE V

MISCELLANEOUS

 

5.01                          All references to the
Agreement in any document heretofore or hereafter executed in connection with
the transactions contemplated in the Agreement shall be deemed to refer to the
Agreement as amended by this First Amendment.

 

5.02                          This First Amendment may be
executed in two or more counterparts and multiple originals of such
counterparts, and it shall not be necessary that the signatures of all parties
hereto be contained on any one counterpart hereof. Any executed First Amendment
or any counterpart thereof shall be deemed an original, but all of which
together shall constitute one and the same instrument.

 

5.03                          THE CREDIT AGREEMENT (AS AMENDED BY THIS FIRST AMENDMENT) AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.

 

5.04                          THIS FIRST AMENDMENT SHALL BE DEEMED TO BE A CONTRACT
MADE UNDER, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TEXAS.

 

[remainder of page intentionally left blank]

 

6

 

IN WITNESS WHEREOF, this First Amendment to Credit Agreement is executed
as of the date first above written.

 

 

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  CUBIC ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Calvin A. Wallen III

  
	
   

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LENDER:

  
	
   

  	
   

  
	
   

  	
  WELLS FARGO ENERGY CAPITAL, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Gary Milavec

  
	
   

  	
  Senior Vice President

  

 

7

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