Arkanova Energy (AKVA) 10-Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period endedJune 30, 2009

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

For the transition period from __________ to ____________

Commission File Number:000-51612

 
(Exact name of registrant as specified in its charter)

Nevada	68-0542002
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

2441 High Timbers Drive, Suite 120, The Woodlands, Texas 77380
(Address of principal executive offices) (Zip Code)

281.298.9555
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [   ]    No [X]

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).

Yes [   ]    No  [   ]

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

Large accelerated filer [   ]	Accelerated filer                    [   ]
Non-accelerated filer   [   ]	Smaller reporting company  [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]    No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.

37,100,250 shares of common stock issued and outstanding as at August 12, 2009.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Our unaudited consolidated interim financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

It is the opinion of management that the unaudited consolidated interim financial statements for the nine months ended June 30, 2009 include all adjustments necessary in order to ensure that the unaudited consolidated interim financial statements are not misleading.

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Arkanova Energy Corporation
Consolidated Balance Sheets
(unaudited)

		June 30,			September 30,
		2009			2008
ASSETS
Cash and cash equivalents	$	80,495		$	464
Oil and gas receivables		60,442			–
Prepaid expenses and other		744,818			187,018
Other receivables		162,949			–
Total current assets		1,048,704			187,482
Deposit (Note 11(b))		20,000			–
Restricted cash		–			9,000,000
Property and equipment		94,021			1,945
Oil and gas properties, unproven, full cost method (Note 4)		14,029,698			13,977,441
Pipeline		27,009			–
Total assets	$	15,219,432		$	23,166,868
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	281,282		$	357,347
Accrued liabilities		663,738			161,680
Due to related party		1,693			9,140
Debenture payable (Note 6)		–			500,000
Notes payable (Note 7)		11,005,784			10,010,257
Total current liabilities and liabilities		11,952,497			11,038,424
Contingencies and commitments (Note 9)
Stockholders’ Equity
Common Stock, $0.001 par value, 1,000,000,000 shares authorized,
36,450,250 shares issued and outstanding		36,450			36,450
Additional paid-in capital		15,459,133			15,377,173
Deficit accumulated during the exploration stage		(12,228,648	)		(3,285,179	)
Total stockholders’ equity		3,266,935			12,128,444
Total liabilities and stockholders’ equity	$	15,219,432		$	23,166,868

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation
Consolidated Statements of Operations
(unaudited)

		Three months			Three months			Nine months			Nine months
		Ended			Ended			Ended			Ended
		June 30,			June 30,			June 30,			June 30,
		2009			2008			2009			2008
Revenue
Oil and gas sales	$	155,569		$	–		$	384,379		$	–
Total revenue		155,569			–			384,379			–
Expenses
General and administrative expenses		639,861			554,932			2,116,511			1,093,213
Oil and gas production costs		160,808			–			811,531			–
Depletion		–			–			65,551			–
Impairment of oil and gas properties		–			–			5,533,043			–
Operating loss		(645,100	)		(554,932	)		(8,142,257	)		(1,093,213	)
Other income (expenses)
Interest expense		(333,827	)		(55,348	)		(963,703	)		(59,939	)
Interest income		–			64			2,123			16,514
Rental income		–			–			368			–
Gain on write-off of account payable		–			–			150,000			–
Gain on forgiveness of debt		–			–			10,000			–
Net loss	$	(978,927	)	$	(610,216	)	$	(8,943,469	)	$	(1,136,638	)
Loss per share – basic and diluted	$	(0.03	)	$	(0.02	)	$	(0.25	)	$	(0.03	)
Weighted average common shares outstanding		36,450,000			36,450,000			36,450,000			36,056,000

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation
Consolidated Statements of Cash Flows
(unaudited)

		Nine months			Nine months
		Ended			Ended
		June 30,			June 30,
		2009			2008
Operating Activities
Net loss	$	(8,943,469	)	$	(1,136,638	)
Adjustment to reconcile net loss to net cash used in operating activities:
Amortization of discount on debenture		335,527			24,117
Amortization of deferred financing costs		–			12,699
Depreciation		8,804			447
Depletion		65,551			–
Gain on write-off of account payable		(150,000	)		–
Gain on forgiveness of debt		(10,000	)		–
Impairment of oil and gas properties		5,533,043			–
Loss on write-off of equipment		–			1,613
Stock-based compensation		81,960			527,728
Changes in operating assets and liabilities:
Prepaid expenses		(557,800	)		(18,376	)
Accounts receivable		(60,442	)		–
Other receivables		(84,957	)		–
Accounts payable and accrued liabilities		204,005			11,587
Accrued interest		440,781			–
Due to related parties		(7,447	)		(14,458	)
Net Cash Used in Operating Activities		(3,144,444	)		(591,281	)
Investing Activities
Deposit		(20,000	)		–
From restricted cash		9,000,000			–
Net cash paid on acquisition of Prism		(5,676,586	)		–
Purchase of equipment		(127,889	)		(2,758	)
Oil and gas property expenditures		(51,050	)		(3,265,598	)
Net Cash Provided by (Used in) Investing Activities		3,124,475			(3,268,356	)
Financing Activities
Proceeds from issuance of promissory notes		600,000			600,000
Proceeds from issuance of common stock, net		–			145,768
Proceeds from issuance of debenture		–			500,000
Repayment of debenture		(500,000	)		–
Deferred financing costs		–			(45,000	)
Net Cash (Used in) Provided by Financing Activities		100,000			1,200,768
Net Change in Cash		80,031			(2,658,869	)
Cash and cash equivalents – beginning of period		464			2,658,869
Cash and cash equivalents – end of period	$	80,495		$	–

Supplemental Cash Flow and Other Disclosures (Note 10)

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation
Notes to Consolidated Financial Statements
(unaudited)

NOTE 1: BASIS OF PRESENTATION

Arkanova Energy Corporation (formerly Alton Ventures, Inc.) (“Arkanova”) was incorporated in the state of Nevada on September 6, 2001 to engage in the acquisition, exploration and development of mineral properties. Effective on November 1, 2006, the Company changed its name from Alton Ventures, Inc. to Arkanova Energy Corporation.

On October 3, 2008, Arkanova acquired all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests (Note 3).

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K/A for the year ended September 30, 2008. The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2008 Annual Report on Form 10-K/A and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the nine months ended June 30, 2009 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Effective this quarter, the Company implemented SFAS No. 165, “Subsequent Events” (“SFAS 165”). This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after June 30, 2009 up through August 19, 2009, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events, other than as disclosed in Note 11.

NOTE 2: GOING CONCERN

Arkanova is primarily engaged in the acquisition, exploration and development of oil and gas resource properties. Arkanova has incurred losses of $12,228,648 since inception and has a negative working capital of $10,903,793 at June 30, 2009. Management plans to raise additional capital through equity and/or debt financings. These factors raise substantial doubt regarding Arkanova’s ability to continue as a going concern.

NOTE 3: ACQUISITION AND DISPOSITION OF PRISM CORPORATION

On August 21, 2008, Acquisition Corp. entered into a Stock Purchase Agreement to acquire all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests. The purchase prices was $6,000,000 plus the amount of the expenditures that Provident had made pursuant to its agreement with the Blackfoot Tribal Council with respect to the wells in the Two Medicine Cut Bank Sand Unit in Pondera and Glacier counties, Montana (the “Unit”) from August 1, 2008 to October 3, 2008. In addition, Arkanova will deliver the gross proceeds received from the sale of the mineral inventory of Provident or Prism, produced by the Unit and held in storage tanks or in transit, as of October 3, 2008. The former owner of Prism was responsible for any expenditures relating to the clean up of an oil spill that occurred in September 2008. The amount paid by the former owner was accounted for as a reduction to the purchase price of $6,000,000. The closing of the purchase and sale occurred on October 3, 2008. Arkanova paid finder’s fee of $100,000 and legal fees of $20,058 related to the acquisition.

The purchase price was allocated to the following assets and liabilities:

Cash	$	107,027
Other accounts receivable		77,992
Oil and gas properties		5,598,594
Paid by $6,000,000 and transaction costs of $120,058 less a
reimbursement of $336,445 oil spill clean up costs	$	5,783,613

On May 26, 2009, Acquisition Corp. entered into a Purchase and Sale agreement to acquire a 2.5% overriding royalty interest (the “ORRI Interest”) in the Unit located in Montana. As part of the consideration for the ORRI Interest, Arkanova will deliver 1,000 shares of capital stock of Prism, which represent 100% of the shares owned by Acquisition Corp. Pursuant to the agreement, Acquisition Corp. will retain all the assets of Prism and will not assume any of the liabilities of Prism. The agreement closed on July 28, 2009. Refer to Note 11(b).

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NOTE 3: ACQUISITION AND DISPOSITION OF PRISM CORPORATION (continued)

The following table reflects pro forma revenues, net income and net income as if the acquisition of Prism completed on October 3, 2008 had taken place at the beginning of the period presented. These unaudited pro forma amounts do not purport to be indicative of the results that would have actually been obtained during the periods presented or that may be obtained in the future.

		Nine months			Nine months
		Ended			Ended
		June 30,			June 30,
		2009			2008
Revenues	$	384,379		$	755,745
Net (loss) income		(8,943,469	)		(998,937	)
(Loss) earnings per share:
Basic and diluted		(0.25	)		(0.03	)

NOTE 4: OIL AND GAS INTERESTS

Arkanova is currently participating in oil and gas exploration activities in Arkansas, Colorado and Montana. Arkanova’s oil and gas properties in Arkansas and Colorado are unproven. Arkanova’s oil and gas properties in Montana are proven. All of Arkanova’s oil and gas properties are located in the United States.

Unproven Properties, Arkansas and Colorado

The total costs incurred and excluded from amortization are summarized as follows:

						Total
						Net Carrying
		Acquisition		Exploration		Value
June 30, 2009	$	9,958,520	$	4,071,178	$	14,029,698
September 30, 2008	$	9,921,020	$	4,056,421	$	13,977,441

Proven and Developed Properties, Montana

(a) On October 3, 2008, Arkanova Acquisition Corporation, a subsidiary of Arkanova Energy Corporation, acquired all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests. Provident holds all of the leasehold interests comprising the Two Medicine Cut Bank Sand Unit (the “Unit’) in Pondera and Glacier Counties, Montana, and the equipment, parts, machinery, fixtures and improvements located on, or used in connection with the Unit, which covers approximately 9,900 acres. There are currently 15 wells producing oil from the Unit. Ownership of these leasehold interests gives Arkanova the right to develop and produce all of the oil and gas reserves under the Unit. At December 31, 2008, the carrying value of Arkanova’s proven oil and gas properties that were subject to impairment was $5,533,043 ($5,598,594 less accumulated depletion of $65,551). The present value of the estimated future net revenue of the oil and gas properties is $nil. Therefore, on December 31 2008, Arkanova recognized an impairment charge of $5,533,043 related to these properties.

NOTE 5: RELATED PARTY TRANSACTIONS

(a) On October 20, 2008, Arkanova entered into an Executive Employment Agreement with its Chief Operations Officer. Pursuant to the agreement, Arkanova agreed to pay an annual salary of $120,000 and the executive may be eligible to receive an annual bonus determined by the Board of Directors based on the performance of the Company. In addition, Arkanova has agreed to grant options to purchase 100,000 shares of common stock with an exercise price equal to the lower of (i) $1.25 or (ii) the minimum price per share allowable pursuant to Arkanova’s stock option plan. An additional incentive stock option to acquire up to an additional 100,000 shares of common stock under the same terms will be granted upon the six month anniversary of the agreement. On April 20, 2009, Arkanova granted the additional 100,000 stock options to its Chief Operations Officer.

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NOTE 5: RELATED PARTY TRANSACTIONS (continued)

(b)

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.35 per share to $0.10 per share. These stock options were granted to a Director of the Company on April 23, 2007 and expire on April 23, 2012. In accordance with SFAS No. 123R, modifications to the terms of an award are treated as an exchange of the original award for a new award. Incremental interest expense is measured as the excess, if any, of the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. Arkanova recognized an incremental compensation cost of $8,917 for these modified stock options.

(c)

On November 19, 2008, Arkanova entered into a Stock Option and Subscription Agreement with its Chief Financial Officer. Pursuant to the terms of the agreement, Arkanova agreed to grant 100,000 stock options in consideration for continued services as Chief Financial Officer. Each option vests immediately and is exercisable at a price of $0.12 per share until expiry on November 19, 2013.

NOTE 6: DEBENTURE PAYABLE

The Company repaid the $500,000 debenture and accrued interest in October 2008.

NOTE 7: NOTES PAYABLE

(a)

On April 17, 2008, Arkanova received $300,000 and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on April 16, 2009. At April 16, 2009, accrued interest of $30,000 was recorded. On April 17, 2009, this note was modified whereby the maturity date was extended to April 17, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. Arkanova evaluated the application of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment. The promissory note bears interest at 10% per annum, is due on demand at any time after April 17, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to April 17, 2010 without penalty. In the event that Arkanova completes a subsequent debt or equity financing of $5,000,000 or more prior to April 17, 2010, Arkanova is obligated to repay the promissory note, plus accrued interest, from the proceeds of the financing. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

(b)

On May 29, 2008, Arkanova received $300,000 and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on May 28, 2009. At May 28, 2009, accrued interest of $30,000 was recorded. On May 29, 2009, this note was modified whereby the maturity date was extended to May 29, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. Arkanova evaluated the application of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment. The promissory note bears interest at 10% per annum, is due on demand at any time after May 29, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to May 29, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

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NOTE 7: NOTES PAYABLE (continued)

(c)	On July 14, 2008, Arkanova received $375,000 and issued a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 10% per annum, and is due on July 13, 2009. At June 30, 2009, accrued interest of $36,062 has been recorded. On July 14, 2009, this note was modified whereby the maturity date was extended to July 14, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $412,500. Refer to Note 11.
(d)	On September 3, 2008, Acquisition Corp. entered into a Note Purchase Agreement for $9,000,000. Under the terms of the agreement, the amount is secured, accrues interest at 8% per annum and is due on September 3, 2009. At June 30, 2009, accrued interest of $591,781 has been recorded. The promissory note is secured by a pledge of 1,000 shares of the outstanding shares of the common stock of Prism Corporation, an Oklahoma corporation acquired by Acquisition Corp. on October 3, 2008. See Note 3. As further security for payment of the indebtedness evidenced by the promissory note, Arkanova agreed to guarantee the payment of the promissory note and the performance of obligations of Acquisition Corp under the agreement. In addition, the Company will deliver at the time of payment in full of the outstanding principal and interest on the promissory note and at the election of the investor, either (i) cash in an amount equal to five percent (5%) of then principal balance of the promissory note; or (ii) such number of shares of the common stock of Acquisition Corp. as will be determined by dividing an amount equal to five percent (5%) of the then principal balance of the promissory note by $0.50. Arkanova recorded a debt discount of $450,000 associated with the 5% inducement on the $9,000,000 note payable. This debt discount will be amortized over the maturity term of 1 year using the effective interest method. During the nine months ended June 30, 2009, Arkanova recognized $335,527 of interest expense associated with this debt discount.
(e)	On April 29, 2009, Arkanova entered into a Note Purchase Agreement pursuant to which Arkanova issued a $600,000 promissory note. The promissory note bears interest at 10% per annum, is due on demand at any time after April 29, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to April 29, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

NOTE 8: COMMON STOCK

Stock Options

On April 25, 2007, Arkanova adopted a stock option plan named the 2007 Stock Option Plan (the “Plan”), the purpose of which is to attract and retain the best available personnel and to provide incentives to employees, officers, directors and consultants, all in an effort to promote the success of Arkanova. Prior to the grant of options under the 2007 Stock Option Plan, there were 2,500,000 shares of Arkanova’s common stock available for issuance under the plan.

During the nine months ended June 30, 2009, Arkanova granted 300,000 stock options, of which 100,000 stock options are exercisable at $0.13 per share between October 20, 2008 and October 20, 2013, 100,000 stock options are exercisable at $0.12 per share between November 19, 2008 and November 19, 2013 and 100,000 stock options are exercisable at $0.17 per share between April 20, 2009 and April 20, 2014. The weighted average grant date fair value of stock options granted during the nine months ended June 30, 2009 was $0.12. No stock options were exercised during the nine months ended June 30, 2009. During the nine months ended June 30, 2009, Arkanova recorded stock-based compensation on these stock options of $23,114, as general and administrative expense.

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.30 per share to $0.10 per share. These stock options were granted to the Chief Executive Officer on April 23, 2007 and expire on April 23, 2012. In accordance with SFAS No. 123R, modifications to the terms of an award are treated as an exchange of the original award for a new award. Incremental compensation expense is measured as the excess, if any, of the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. Arkanova recognized an incremental compensation cost of $8,764 for these modified stock options.

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.35 per share to $0.10 per share. These stock options were granted to a Director of the Company on April 23, 2007 and expire on April 23, 2012. Arkanova recognized an incremental compensation cost of $8,917 for these modified stock options.

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NOTE 8: COMMON STOCK (continued)

Stock Options (continued)

On November 14, 2008, Arkanova entered into an Amended and Restated Stock Option Agreement with its Chief Financial Officer to alter the vesting provisions of the 200,000 stock options previously granted to its chief financial officer on October 18, 2007. The Amended and Restated Stock Option Agreement altered the vesting of the stock options such that all remaining options vest immediately and Arkanova recorded stock-based compensation of $30,123, as general and administrative expense. Arkanova also re-priced the exercise price of 200,000 stock options with an exercise price of $1.70 per share to $0.10 per share. These stock options were granted to the Chief Financial Officer on October 18, 2007 and expire on October 18, 2012. Arkanova recognized an incremental compensation cost of $5,785 for these modified stock options.

On November 14, 2008, Arkanova re-priced the exercise price of 80,000 stock options with an exercise price of $1.55 per share to $0.10 per share. These stock options were granted to an employee of the Company on November 6, 2007 and expire on November 6, 2012. On November 14, 2008, Arkanova recognized an incremental compensation cost of $1,099 for these modified stock options. The employee was terminated on November 30, 2008 and Arkanova recognized stock-based compensation of $4,157 for the period from October 1, 2008 to November 30, 2008. Upon termination of the employee, 26,667 unvested stock options were forfeited.

A summary of Arkanova’s stock option activity is as follows:

			Weighted Average	Weighted Average	Aggregate
	Number of		Exercise Price	Remaining	Intrinsic Value
	Options		$	Contractual Term	$
Outstanding, September 30, 2008	2,380,000		0.90
Granted	300,000		0.14
Forfeited/Cancelled	(26,667	)	0.10
Outstanding, June 30, 2009	2,653,333		0.38	3.58	–
Exercisable, June 30, 2009	2,519,999		0.39	3.53	–

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Nine months
	ended
	June 30,
	2009
Expected dividend yield	0.00%
Expected volatility	168%
Expected life (in years)	2.75
Risk-free interest rate	1.50%

A summary of the status of the Company’s non-vested stock options as of June 30, 2009, and changes during the nine month period ended June 30, 2009, is presented below:

			Weighted Average
	Number of		Grant Date
Non-vested options	options		Fair Value
			$
Non-vested at September 30, 2008	186,667		0.70
Granted	300,000		0.12
Forfeited/Cancelled	(26,667	)	0.64
Vested	(326,666	)	0.42
Non-vested at June 30, 2009	133,334		0.13

At June 30, 2009, there was $12,489 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan, which is expected to be recognized over a weighted average period of 1.06 years. There was $nil intrinsic value associated with the outstanding options at June 30, 2009.

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NOTE 9: COMMITMENTS

(a)	See Note 7.
(b)	On October 20, 2008, Arkanova entered into an Executive Employment Agreement with its Chief Operations Officer. Pursuant to the agreement, Arkanova agreed to pay an annual salary of $120,000 and the executive may be eligible to receive an annual bonus determined by the Board of Directors based on the performance of the Company. In addition, Arkanova has agreed to grant options to purchase 100,000 shares of common stock with an exercise price equal to the lower of (i) $1.25 or (ii) the minimum price per share allowable pursuant to Arkanova’s stock option plan. An additional incentive stock option to acquire up to an additional 100,000 shares of common stock under the same terms was granted on April 20, 2009.
(c)	On October 3, 2008, Arkanova entered into a consulting agreement with the former owner of Prism Corporation to provide consulting services for a period of 15 months. Pursuant to the agreement, Arkanova agreed to pay $1,500,000 of which $600,000 is included in prepaid expenses at June 30, 2009.

NOTE 10: SUPPLEMENTAL CASH FLOW AND OTHER DISCLOSURES

		Nine months		Nine months
		Ended		Ended
		June 30,		June 30,
		2009		2008
Supplemental Disclosures:
Interest paid	$	–	$	–
Income taxes paid	$	–	$	–
Noncash Financing and Investing Activities
Discount on debenture	$	–	$	85,461
Accounts payable related to capital expenditures	$	1,207	$	184,326

NOTE 11: SUBSEQUENT EVENTS

(a)	On July 14, 2009, Arkanova modified the promissory note described in Note 7(c) whereby the maturity date was extended to July 14, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $412,500. The promissory note bears interest at 10% per annum, is due on demand at any time after July 14, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any.
	The promissory note may be prepaid in whole or in part at any time prior to July 14, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.
(b)	On May 26, 2009, Arkanova Acquisition Corporation entered into a Purchase and Sale Agreement to purchase a 2.5% overriding royalty interest (the “ORRI interest”) in the Unit located in Pondera and Glacier Counties, Montana. Pursuant to the agreement, as consideration of the 2.5% ORRI interest, Arkanova will pay (a) cash of $20,000 (paid and recorded as deposit at June 30, 2009) (b) 1,000 shares of Prism Corporation (refer to Note 3), and (c) 650,000 shares of common stock of Arkanova. Acquisition was also granted an exclusive option to acquire an additional 0.5% ORRI interest, for a term of 6 months from the date the existing lien against the ORRI interest is released, for consideration of $20,000. The agreement closed on July 28, 2009 and Arkanova Acquisition Corporation assigned the 2.5% ORRI interest to its subsidiary, Provident.

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

Forward-Looking Statements

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, that may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our unaudited consolidated interim financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear elsewhere in this quarterly report.

In this quarterly report, unless otherwise specified, all references to “common shares” refer to the shares of our common stock and the terms “we”, “us”, “our” and “Arkanova” mean Arkanova Energy Corporation.

Corporate Summary

We operate as a junior producing oil and gas company indirectly through our wholly-owned limited liability company Provident Energy Associates of Montana, LLC, which holds all of the leasehold interests comprising the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties. The Unit, which covers approximately 9,900 acres, is located at the far southern end of the Cut Bank Field and is part of the Blackfeet Indian Reservation. Since the establishment of the Unit in 1959, there have been 82 wells drilled on the Unit and there are currently 17 wells producing oil from the Unit. Those 17 wells produced 3,797 barrels of oil (3,039 net bbls to our company) during the quarter ended June 30, 2009. Ownership of these leasehold interests provides us with the right to develop and produce all of the oil and gas reserves under the Unit.

The Bureau of Land Management (BLM) in its report dated May 8, 1996 estimated that the Two Medicine Cut Bank Sand Unit, (TMCBSU), had 105,390,000 barrels of original oil in place within the TMCBSU. Cumulative production through June 30, 2009 is estimated at 10,811,687 barrels of oil leaving an estimated reserve balance of 94,578,313 barrels of oil. The BLM also reported that an additional 16-17 million barrels of oil could be recovered. For information related to TMCBSU reserves, please see the reserve report attached to our annual report on Form 10-K/A filed on January 8, 2009. We intend to pursue drilling on the TMCBSU and are currently seeking funds through partnerships and/or divesting some working interest to target the Three Forks, Bakken and Lodge Pole formations.

Following the acquisition of Provident Energy Associates of Montana, LLC on October 3, 2008, we became a junior producing oil and gas company. Prior to this date, we were an exploration stage company that did not generate any revenues on our oil and gas property interests. As a result, comparison of our financial information from the three and nine months ended June 30, 2009 with prior periods will not provide meaningful analysis.

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Results of Operations for the Three Months Ended June 30, 2009 and for the Nine Months Ended June 30, 2009

The following summary of our results of operations should be read in conjunction with our unaudited consolidated interim financial statements for the three and nine months ended June 30, 2009 and 2008 which are included herein:

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Revenue	$	155,569		$	-		$	384,379		$	-
Expenses	$	645,100		$	554,932		$	8,142,257		$	1,093,213
Interest Expense	$	(333,827	)	$	(55,348	)	$	(963,703	)	$	(59,939	)
Interest Income	$	-		$	64		$	2,123		$	16,514
Rental Income	$	-		$	-		$	368		$	-
Gain on write-off of	$	-		$	-		$	150,000		$	-
account payable
Gain on forgiveness of	$	-		$	-		$	10,000		$	-
debt
Net Loss	$	(978,927	)	$	(610,216	)	$	(8,943,469	)	$	(1,136,638	)

Revenues

On October 3, 2008, we became a junior producing oil and gas company following the closing of the stock purchase agreement. Prior to that date, we were an exploration stage company that had not earned any revenues from our oil and gas property interests. During the three months ended June 30, 2009, we generated $155,569 in revenue as compared to revenues of $nil during the three months ended June 30, 2008. During the nine months ended June 30, 2009, we generated $384,379 in revenue as compared to revenues of $nil during the nine months ended June 30, 2008.

The significant reduction in the price of oil following the global economic crises has materially affected our anticipated revenue stream from our property interests in Montana. Management anticipates that our company will need to receive approximately $75 per barrel of oil to cover existing operating expenses. As a result of the current low price of oil, our company will continue to incur expenses in excess of the revenues generated from our properties. We anticipate that we will have to address the cash shortfall through additional equity financings in the future. We can offer no assurance, however, that such financings will be available on terms acceptable to our company. We also intend to generate additional funds in the future through increased output following our company’s plan to increase the number of wells on our producing properties.

Expenses

Expenses increased during the three months ended June 30, 2009 to $645,100 as compared to $554,932 during the three months ended June 30, 2008. The increase is largely the result of costs incurred following the acquisition of our producing properties in Montana. Specifically, general and administrative expenses increased from $554,932 during the three months ended June 30, 2008 to $639,861 during the three months ended June 30, 2009, largely the result of increased legal fees and other costs necessary to close the transaction. The three months ended June 30, 2009 also resulted in oil and gas production costs of $160,808 which were inapplicable during the three months ended June 30, 2008.

Expenses increased during the nine months ended June 30, 2009 to $8,142,257 as compared to $1,093,213 during the nine months ended June 30, 2008. The increase is largely the result of costs incurred following the acquisition of our producing properties in Montana. Specifically, general and administrative expenses increased from $1,093,213 during the nine months ended June 30, 2008 to $2,116,511 during the nine months ended June 30, 2009, largely the result of increased legal fees, a consulting contract and other costs necessary to close the transaction. The nine months ended June 30, 2009 also resulted in oil and gas production costs of $811,531, depletion expenses of $65,551 and impairment of oil and gas properties of $5,533,043, all of which were inapplicable during the nine months ended June 30, 2008.

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Liquidity and Capital Resources

Working Capital

		At June 30,		At September 30,
		2009		2008
Current assets	$	1,048,704	$	187,482
Current liabilities		11,952,497		11,038,424
Working capital deficiency	$	10,903,793	$	10,850,942

We had cash and cash equivalents of $80,495 and a working capital deficiency of $10,903,793 as at June 30, 2009 compared to cash and cash equivalents of $464 and a working capital deficiency of $10,850,942 as at September 30, 2008. On April 29, 2009, our company issued two promissory notes in the principal amount of $330,000 and $600,000, respectively. We issued the notes to replace a prior $300,000 note that was issued April 17, 2008 and matured April 16, 2009 and a new note of $600,000 issued April 29, 2009. The issuance of the $600,000 provided our company with additional funds that we intend to utilize for upgrading the production on the Montana lease property and general corporate purposes. Subsequent to the three month period ended June 30, 2009, we entered into a note purchase agreement pursuant to which we issued a $412,500 promissory note renewing the $375,000 note This promissory note bears interest at 10% per annum, is due on demand at any time after July 14, 2010 and may be secured against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by our company, right-of-ways and easements and our company’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to July 14, 2010 without penalty. In the event that we default on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

For more information in regards to the terms of the notes, please refer to the disclosure under the heading “Debt Obligations” below. In addition to funds required to eliminate our working capital deficiency, we anticipate that we will require approximately $14,250,000 for operating expenses during the next twelve months as set out below. Timing is the key as the price of natural gas is low at present and development will be based upon market indexes.

Estimated Expenses for the Next Twelve Month Period
Lease Acquisition Costs	$	5,600,000
Exploration & Operating Costs
Drilling and Remediation Costs	$	6,000,000
Seismic Costs	$	1,200,000
Employee and Consultant Compensation	$	900,000
Professional Fees	$	250,000
General and Administrative Expenses	$	300,000
Total	$	14,250,000

Our company’s principal cash requirements are for remediation of our Montana oil and gas leases and for exploration expenses as we proceed to determine the feasibility of developing our current exploration stage property interests.

Our company’s cash and cash equivalents will not be sufficient to meet our working capital requirements for the next twelve months. Our company plans to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the private placement of our equity securities. There is no assurance that our company will be able to generate sufficient funds from operations or obtain further funds required for our continued working capital requirements.

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The ability of our company to meet our financial liabilities and commitments is primarily dependent upon the continued financial support of our directors and shareholders, the continued issuance of equity to new shareholders, and our ability to achieve and maintain profitable operations.

Debt Obligations

On July 14, 2008, we received $375,000 through the issuance of a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 10% per annum, and is due on July 13, 2009. At June 30, 2009, we recorded accumulated accrued interest of $36,062 on the note. On July 14, 2009, this note modified whereby the maturity date was extended to July 14, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $412,500. The promissory note bears interest at 10% per annum, is due on demand at any time after July 14, 2010 and may be secured against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by our company, right-of-ways and easements and our share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to July 14, 2010 without penalty. In the event that we default on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

On May 29, 2008, we received $300,000 through the issuance of a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 10% per annum, and is due on May 28, 2009. At June 30, 2009, we recorded accumulated accrued interest of $30,000 on the note. On May 29, 2009, this note was modified whereby the maturity date was extended to May 29, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. The promissory note bears interest at 10% per annum, is due on demand at any time after May 29, 2010 and may be secured against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by our company, right-of-ways and easements and our share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to May 29, 2010 without penalty. In the event that our company defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

On September 3, 2008, our wholly-owned subsidiary, Arkanova Acquisition Corporation, entered into a note purchase agreement for $9,000,000. Under the terms of the agreement, the amount is secured, accrues interest at 8% per annum and is due on September 3, 2009. At June 30, 2009, we recorded accrued interest of $591,781. The promissory note is secured by a pledge of 1,000 shares of the outstanding shares of the common stock of Prism Corporation, an Oklahoma corporation acquired by Arkanova Acquisition Corporation on October 3, 2008. As further security for payment of the indebtedness evidenced by the promissory note, we agreed to guarantee the payment of the promissory note and the performance of obligations of Arkanova Acquisition Corporation under the agreement. In addition, we agreed to deliver at the time of payment in full of the outstanding principal and interest on the promissory note and at the election of the investor, either (i) cash in an amount equal to five percent (5%) of then principal balance of the promissory note; or (ii) such number of shares of the common stock of Arkanova Acquisition Corporation as will be determined by dividing an amount equal to five percent (5%) of the then principal balance of the promissory note by $0.50. We recorded a debt discount of $450,000 associated with the 5% inducement on the $9,000,000 note payable. This debt discount will be amortized over the maturity term of 1 year using the effective interest method. During the nine months ended June 30, 2009, we recognized $335,527 of interest expense associated with this debt discount.

On April 17, 2008, we received $300,000 from Global Project Finance AG and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on April 16, 2009. At April 16, 2009, accrued interest of $30,000 was recorded. On April 17, 2009, this note was modified whereby the maturity date was extended to April 17, 2010 and the accrued interest on the note at the date of

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modification was added to the principal balance for a modified principal amount outstanding of $330,000. The promissory note bears interest at 10% per annum, is due on demand at any time after April 17, 2010 and may be secured by Global Project Finance against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas and any wells located on those leases that are owned and operated by us, right-of-ways and easements and our share of production obtained from such wells. We may prepay the promissory note in whole or in part at any time prior to April 17, 2010 without penalty. In the event that we default on the promissory note, and unless such default is waived in writing by Global Project Finance, Global Project Finance may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the total amount due on the date that we default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower, from the date that we default until the date payment is made.

On April 29, 2009, we entered into a note purchase agreement with Aton Select Fund Limited pursuant to which we issued a $600,000 promissory note. We issued the note to upgrade the Montana lease property and for general corporate purposes. The promissory note bears interest at 10% per annum, is due on demand at any time after April 29, 2010 and may be secured by Aton Select Fund Limited against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas, Glacier and Pondera Counties, Montana as well as wells located on those leases that are owned and operated by us, right-of-ways and easements and our share of production obtained from such wells. We may prepay the promissory note in whole or in part at any time prior to April 29, 2010 without penalty. In the event that we default on the promissory note, and unless such default is waived in writing by Aton Select Fund Limited, Aton Select Fund Limited may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the total amount due on the date that we default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower, from the date that we default until the date payment is made.

Lease Acquisition Costs

We have recorded 31,258 oil and gas lease acreage of the approximately 50,000 acres in the Phillips, Monroe and Desha counties in Arkansas that we intend to acquire. We anticipate approximately $5,600,000 to be the amount to acquire the balance of this acreage during the next twelve month period.

Drilling, Remediation and Seismic Costs

We estimate that our exploration and development costs on our property interests will be approximately $7,200,000 during the next twelve months, which will include drilling and, if warranted, completion costs for two vertical or horizontal exploratory wells, as well as acquiring 2D and, if necessary, 3D seismic on our property interests. Under the terms of our Acquisition and Development Agreement, as modified by an agreement dated May 21, 2007, we are required to commence drilling of our first well within six months of the date of acceptance by us of the last of the oil and gas leases and are required to drill five additional wells within twenty-four months of the date on which we make the last of the lease bonus payments under the agreement. We expect that the total cost of the additional wells that we plan to drill in the future, to be governed by market conditions, will be $6,000,000 exclusive of completion and hook-up costs. The increased per well cost reflects a horizontal component. We may require additional capital in the event we complete some or all of these wells. We will need to obtain additional equity funding, and possibly additional debt funding as well, in order to be able to obtain these funds. Alternatively, we may be required to farmout a working interest in some of our acreage to a third party. There is no guarantee that we will be able to raise sufficient additional capital or alternatively that we will be able to negotiate a farmout arrangement on terms acceptable to us.

Estimated Timeline of Exploration Activity on Property

Date	Objective
August, 2009	Reactivate 20thwell on TMCBSU
October, 2009	Complete re-activation of 3 more cut bank wells.
November, 2009	Commence drilling of first vertical test well to test the lower formations on the
	TMCBSU, Three Rivers, Bakken, Lodge Pole.

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Employee and Consultant Compensation

Given the early stage of our development and exploration properties, we intend to continue to outsource our professional and personnel requirements by retaining consultants on an as needed basis. We estimate that our consultant and related professional compensation expenses for the next twelve months will be approximately $900,000. As of June 30, 2009, Pierre Mulacek, Reginald Denny and Garrett Cook were our employees. Following the acquisition of the Montana oil & gas property, we pay Mr. Mulacek an annual salary of $240,000 and Mr. Denny an annual salary of $170,000. We also pay Mr. Cook an annual salary of $120,000 plus a discretionary performance based bonus as determined by our board of directors.

Professional Fees

We expect to incur on-going legal, accounting and audit expenses to comply with our reporting responsibilities as a public company under the United States Securities Exchange Act of 1934, as amended, in addition to general legal fees for oil and gas and general corporate matters. We estimate our legal and accounting expenses for the next twelve months to be approximately $250,000.

General and Administrative Expenses

We anticipate spending $300,000 on general and administrative costs in the next twelve months. These costs primarily consist of expenses such as lease payments, office supplies, insurance, travel, office expenses, etc.

Cash Used In Operating Activities

Cash was used in operating activities in the amount of $3,144,444 and $591,281 during the nine months ended June 30, 2009 and 2008, respectively..

Cash From Investing Activities

We received net cash from investing activities in the amount of $3,124,475 during the nine months ended June 30, 2009. We used cash of $3,268,356 during the nine months ended June 30, 2008.

Cash from Financing Activities

Cash was used in financing activities in the amount of $100,000 and $1,200,768 during the nine months ended June 30, 2009 and 2008, respectively.

Capital Expenditures

Other than as set out below, and as of June 30, 2009, our company did not have any material commitments for capital expenditures.

On May 21, 2007, our company entered into an agreement with David Griffin with respect to the Option to Purchase and Royalty Agreement. Under the agreement dated May 21, 2007, we modified the method of the payment to exercise the option. Under the Option to Purchase and Royalty Agreement, to exercise the option, we are required to pay the option payment, which is a cash fee of $275 per net mineral acre for total consideration of $3,897,467.75. Under the agreement dated May 21, 2007, to exercise the option, we can elect to pay the option payment with shares of our common stock at a price of $1.25 per share for a total of 3,117,974 shares.

On May 21, 2007, our company entered into another agreement with David Griffin with respect to the Acquisition and Development Agreement. Under the agreement dated May 21, 2007, we modified the method of the payment due under the Acquisition and Development Agreement. Under the agreement dated May 21, 2007, following the payment by our company to David Griffin of a sum of $1,000,000 on account of monies due to David Griffin and his affiliates and related parties, we can elect to pay any further payments due under the Acquisition and Development Agreement with shares of our common stock at a price of $1.25 per share.

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Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Application of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Going Concern

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the annual financial statements for the year ended September 30, 2008, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further financing. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There are no assurances that we will be able to obtain further funds required for our continued operations in the petroleum exploration and development industry. We are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due.

Oil and Gas Properties

We utilize the full-cost method of accounting for petroleum and natural gas properties. Under this method, we capitalize all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of June 30, 2009, we had properties with proven reserves. The proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Our company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment we consider factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. As of June 30, 2009, the proved property was fully impaired.

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Recent Accounting Pronouncements

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flows.

Risk Factors

Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements. Such forward-looking statements include any projections and estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements.

Risks Relating To Our Business And The Oil And Gas Industry

We have a history of losses and this trend may continue and may negatively impact our ability to achieve our business objectives.

We have experienced net losses since inception, and expect to continue to incur substantial losses for the foreseeable future. Our accumulated deficit was $12,228,648 as at June 30, 2009. We may not be able to generate significant revenues in the future and our management expects operating expenses to increase substantially over the next 12 months following the commencement of production and increased exploration activities. As a result, our management expects our business to continue to experience negative cash flow for the foreseeable future and cannot predict when, if ever, our business might become profitable. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations.

We have a limited operating history, which may hinder our ability to successfully meet our objectives.

We have a limited operating history upon which to base an evaluation of our current business and future prospects. We have only recently commenced production and we do not have an established history of operating producing properties or locating and developing properties that have oil and gas reserves. As a result, the revenue and income potential of our business is unproven. In addition, because of our limited operating history, we have limited insight into trends that may emerge and affect our business. Errors may be made in predicting and reacting to relevant business trends and we will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets. We may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.

Our operations and proposed exploration activities will require significant capital expenditures for which we may not have sufficient funding and if we do obtain additional financing, our existing shareholders may suffer substantial dilution.

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We intend to make capital expenditures far in excess of our existing capital resources to develop, acquire and explore oil and gas properties. We intend to rely on funds from operations and external sources of financing to meet our capital requirements to continue acquiring, exploring and developing oil and gas properties and to otherwise implement our business plan. We plan to obtain additional funding through the debt and equity markets, but we can offer no assurance that we will be able to obtain additional funding when it is required or that it will be available to us on commercially acceptable terms, if at all. In addition, any additional equity financing may involve substantial dilution to our then existing shareholders.

The successful implementation of our business plan is subject to risks inherent in the oil and gas business, which if not adequately managed could result in additional losses.

Our oil and gas operations are subject to the economic risks typically associated with exploration and development activities, including the necessity of making significant expenditures to locate and acquire properties and to drill exploratory wells. In addition, the availability of drilling rigs and the cost and timing of drilling, completing and, if warranted, operating wells is often uncertain. In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, development and, if warranted, production activities to be unsuccessful. This could result in a total loss of our investment in a particular well. If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs will be charged against earnings as impairments.

In addition, market conditions or the unavailability of satisfactory oil and gas transportation arrangements may hinder our access to oil and gas markets and delay our production. The availability of a ready market for our prospective oil and gas production depends on a number of factors, including the demand for and supply of oil and gas and the proximity of reserves to pipelines and other facilities. Our ability to market such production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, in most cases owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells for lack of a market or a significant reduction in the price of oil or gas or because of inadequacy or unavailability of pipelines or gathering system capacity. If that occurs, we would be unable to realize revenue from those wells until arrangements are made to deliver such production to market.

Our future performance is dependent upon our ability to identify, acquire and develop oil and gas properties, the failure of which could result in under use of capital and losses.

Our future performance depends upon our ability to identify, acquire and develop additional oil and gas reserves that are economically recoverable. Our success will depend upon our ability to acquire working and revenue interests in properties upon which oil and gas reserves are ultimately discovered in commercial quantities, and our ability to develop prospects that contain proven oil and gas reserves to the point of production. Without successful acquisition and exploration activities, we will not be able to develop additional oil and gas reserves or generate revenues. We cannot provide you with any assurance that we will be able to identify and acquire additional oil and gas reserves on acceptable terms, or that oil and gas deposits will be discovered in sufficient quantities to enable us to recover our exploration and development costs or sustain our business.

The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities, and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In addition, no assurance can be given that our exploration and development activities will result in the discovery of additional reserves. Our operations may be curtailed, delayed or canceled as a result of lack of adequate capital and other factors, such as lack of availability of rigs and other equipment, title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties, or unusual or unexpected formations, pressures and or work interruptions. In addition, the costs of exploitation and development may materially exceed our initial estimates.

We have a very small management team and the loss of any member of our team may prevent us from implementing our business plan in a timely manner.

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We have three executive officers and a limited number of additional consultants upon whom our success largely depends. We do not maintain key person life insurance policies on our executive officers or consultants, the loss of which could seriously harm our business, financial condition and results of operations. In such an event, we may not be able to recruit personnel to replace our executive officers or consultants in a timely manner, or at all, on acceptable terms.

Future growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

We expect to experience rapid growth in our operations, which will place a significant strain on our management, administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we must continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute upon our business plan.

Market conditions or operation impediments may hinder our access to natural gas and oil markets or delay our production.

The marketability of production from our properties depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing facilities. This dependence is heightened where this infrastructure is less developed. Therefore, if drilling results are positive in certain areas of our oil and gas properties, a new gathering system would need to be built to handle the potential volume of gas produced. We might be required to shut in wells, at least temporarily, for lack of a market or because of the inadequacy or unavailability of transportation facilities. If that were to occur, we would be unable to realize revenue from those wells until arrangements were made to deliver production to market.

Our ability to produce and market natural gas and oil is affected and also may be harmed by:

• the lack of pipeline transmission facilities or carrying capacity;

• government regulation of natural gas and oil production;

• government transportation, tax and energy policies;

• changes in supply and demand; and

• general economic conditions.

We might incur additional debt in order to fund our exploration and development activities, which would continue to reduce our financial flexibility and could have a material adverse effect on our business, financial condition or results of operations.

If we incur indebtedness, the ability to meet our debt obligations and reduce our level of indebtedness depends on future performance. General economic conditions, oil and gas prices and financial, business and other factors affect our operations and future performance. Many of these factors are beyond our control. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our current or future debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and performance at the time we need capital. We cannot assure you that we will have sufficient funds to make such payments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we might have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.

We will have substantial capital requirements that, if not met, may hinder our growth and operations.

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Our future growth depends on our ability to make large capital expenditures for the exploration and development of our natural gas and oil properties. Future cash flows and the availability of financing will be subject to a number of variables, such as:

• the success of our Arkansas, Colorado and Montana projects;

• success in locating and producing reserves; and

• prices of natural gas and oil.

Additional financing sources will be required in the future to fund developmental and exploratory drilling. Issuing equity securities to satisfy our financing requirements could cause substantial dilution to our existing stockholders. Additional debt financing could lead to:

• a substantial portion of operating cash flow being dedicated to the payment of principal and interest;

• being more vulnerable to competitive pressures and economic downturns; and

• restrictions on our operations.

Financing might not be available in the future, or we might not be able to obtain necessary financing on acceptable terms, if at all. If sufficient capital resources are not available, we might be forced to curtail our drilling and other activities or be forced to sell some assets on an untimely or unfavorable basis, which would have an adverse affect on our business, financial condition and results of operations.

Our properties in Arkansas and Colorado and/or future properties might not produce, and we might not be able to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.

Although we have reviewed and evaluated our properties in Arkansas, Colorado and Montana in a manner consistent with industry practices, such review and evaluation might not necessarily reveal all existing or potential problems. This is also true for any future acquisitions made by us. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or part of those problems, and we may assume environmental and other risks and liabilities in connection with the acquired properties.

We are subject to ongoing obligations under our Acquisition and Development Agreement.

Under the terms of our Acquisition and Development Agreement, as modified by an agreement dated May 21, 2007, we will have to pay approximately an additional $5,600,000 to acquire the remainder of the acreage which we have committed to acquire, unless we elect to pay a majority of the costs with shares of our common stock at $1.25 per share. In addition, we are required to drill five additional wells within 24 months, from the date upon which Arkanova Delaware makes the last of the lease bonus payments as required in the agreement. We expect that the total cost of these wells, together with a seismic program, will require approximately $10,000,000 in additional capital. We will need to obtain additional equity funding, and possibly additional debt funding as well, in order to be able to obtain these funds. Alternatively, we may be required to farmout a working interest in some of our acreage to a third party. There is no guarantee that we will be able to raise sufficient additional capital or alternatively that we will be able to negotiate a farmout arrangement on terms acceptable to us. In addition, while we anticipate that David Griffin will be able to deliver the mineral rights for all 50,000 acres which we have contracted for, we have no guarantee that he will be able to do so.

If we or our operators fail to maintain adequate insurance, our business could be materially and adversely affected.

Our operations are subject to risks inherent in the oil and gas industry, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, earthquakes and other environmental risks. These risks could result in substantial losses due to injury and loss of life, severe damage to and destruction of property and

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equipment, pollution and other environmental damage, and suspension of operations. We could be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition and results of operations.

Any prospective drilling contractor or operator which we hire will be required to maintain insurance of various types to cover our operations with policy limits and retention liability customary in the industry. We will also plan to acquire our own insurance coverage for such prospects. The occurrence of a significant adverse event on such prospects that is not fully covered by insurance could result in the loss of all or part of our investment in a particular prospect which could have a material adverse effect on our financial condition and results of operations.

The oil and gas industry is highly competitive, and we may not have sufficient resources to compete effectively.

The oil and gas industry is highly competitive. We compete with oil and natural gas companies and other individual producers and operators, many of which have longer operating histories and substantially greater financial and other resources than we do, as well as companies in other industries supplying energy, fuel and other needs to consumers. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulation in the jurisdictions in which we do business and handle longer periods of reduced prices for oil and gas more easily than we can. Our competitors may be able to pay more for oil and gas leases and properties and may be able to define, evaluate, bid for and purchase a greater number of leases and properties than we can. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.

Complying with environmental and other government regulations could be costly and could negatively impact our production.

Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues. Such laws and regulations may, among other potential consequences, require that we acquire permits before commencing drilling and restrict the substances that can be released into the environment with drilling and production activities.

Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. Prior to commencement of drilling operations, we may secure limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost. Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs.

The costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

Shortages of rigs, equipment, supplies and personnel could delay or otherwise adversely affect our cost of operations or our ability to operate according to our business plans.

If drilling activity increases in eastern Arkansas, Colorado, Montana or the southern United States generally, a shortage of drilling and completion rigs, field equipment and qualified personnel could develop. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increasing number of active rigs in service and could increase sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail our exploration and development operations, which could in turn harm our operating results.

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We will be required to replace, maintain or expand our reserves in order to prevent our reserves and production from declining, which would adversely affect cash flows and income.

In general, production from natural gas and oil properties declines over time as reserves are depleted, with the rate of decline depending on reservoir characteristics. If we are not successful in our exploration and development activities, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is highly dependent upon our ability to economically find, develop or acquire reserves in commercial quantities.

To the extent cash flow from operations is reduced, either by a decrease in prevailing prices for natural gas and oil or an increase in exploration and development costs, and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired. Even with sufficient available capital, our future exploration and development activities may not result in additional proved reserves, and we might not be able to drill productive wells at acceptable costs.

The geographic concentration of all of our other properties in eastern Arkansas, Colorado and Montana subjects us to an increased risk of loss of revenue or curtailment of production from factors affecting those areas.

The geographic concentration of all of our leasehold interests in Phillips, Monroe and Deshea Counties, Arkansas, Lone Mesa State Park, Colorado and Pondera and Glacier Counties, Montana means that our properties could be affected by the same event should the region experience:

• severe weather;

• delays or decreases in production, the availability of equipment, facilities or services;

• delays or decreases in the availability of capacity to transport, gather or process production; or

• changes in the regulatory environment.

The oil and gas exploration and production industry historically is a cyclical industry and market fluctuations in the prices of oil and gas could adversely affect our business.

Prices for oil and gas tend to fluctuate significantly in response to factors beyond our control. These factors include:

• weather conditions in the United States and wherever our property interests are located;

• economic conditions, including demand for petroleum-based products, in the United States wherever our property interests are located;

• actions by OPEC, the Organization of Petroleum Exporting Countries;

• political instability in the Middle East and other major oil and gas producing regions;

• governmental regulations, both domestic and foreign;

• domestic and foreign tax policy;

• the pace adopted by foreign governments for the exploration, development, and production of their national reserves;

• the price of foreign imports of oil and gas;

• the cost of exploring for, producing and delivering oil and gas;

• the discovery rate of new oil and gas reserves;

• the rate of decline of existing and new oil and gas reserves;

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• available pipeline and other oil and gas transportation capacity;

• the ability of oil and gas companies to raise capital;

• the overall supply and demand for oil and gas; and

• the availability of alternate fuel sources.

Changes in commodity prices may significantly affect our capital resources, liquidity and expected operating results. Price changes will directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.

Changes in commodity prices may also significantly affect our ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and the exploration and development of projects. We expect that commodity prices will continue to fluctuate significantly in the future.

Our ability to produce oil and gas from our properties may be adversely affected by a number of factors outside of our control which may result in a material adverse effect on our business, financial condition or results of operations.

The business of exploring for and producing oil and gas involves a substantial risk of investment loss. Drilling oil and gas wells involves the risk that the wells may be unproductive or that, although productive, the wells may not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic if water or other deleterious substances are encountered that impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. There can be no assurance that oil and gas will be produced from the properties in which we have interests. In addition, the marketability of oil and gas that may be acquired or discovered may be influenced by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas, gathering systems, pipelines and processing equipment, market fluctuations in oil and gas prices, taxes, royalties, land tenure, allowable production and environmental protection. We cannot predict how these factors may affect our business.

We may be unable to retain our leases and working interests in our leases, which would result in significant financial losses to our company.

Our properties are held under oil and gas leases. If we fail to meet the specific requirements of each lease, such lease may terminate or expire. We cannot assure you that any of the obligations required to maintain each lease will be met. The termination or expiration of our leases may harm our business. Our property interests will terminate unless we fulfill certain obligations under the terms of our leases and other agreements related to such properties. If we are unable to satisfy these conditions on a timely basis, we may lose our rights in these properties. The termination of our interests in these properties may harm our business. In addition, we will need significant funds to meet capital requirements for the exploration activities that we intend to conduct on our properties.

Title deficiencies could render our leases worthless which could have adverse effects on our financial condition or results of operations.

The existence of a material title deficiency can render a lease worthless and can result in a large expense to our business. It is our practice in acquiring oil and gas leases or undivided interests in oil and gas leases to forego the expense of retaining lawyers to examine the title to the oil or gas interest to be placed under lease or already placed under lease. Instead, we rely upon the judgment of oil and gas landmen who perform the field work in examining records in the appropriate governmental office before attempting to place under lease a specific oil or gas interest.

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This is customary practice in the oil and gas industry. However, we do not anticipate that we, or the person or company acting as operator of the wells located on the properties that we currently lease or may lease in the future, will obtain counsel to examine title to the lease until the well is about to be drilled. As a result, we may be unaware of deficiencies in the marketability of the title to the lease. Such deficiencies may render the lease worthless.

Risks Relating To Our Common Stock

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a significant portion of our operations have been and will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new properties and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.

If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

Our articles of incorporation, as amended, authorizes the issuance of up to 1,000,000,000 shares of common stock with a par value of $0.001. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.

Trading of our stock may be restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

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The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.

Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4T. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer) to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2009, the end of the three month period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president and chief executive officer (who is acting as our chief executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 6, 2009, we issued 650,000 shares of common stock in the capital of our company to one person under Regulation D promulgated under the Securities Act of 1933 as an accredited investor and/or Section 4(2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

(3)	Articles of Incorporation and Bylaws
3.1	Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on August 19, 2004)
3.2	Bylaws (incorporated by reference from our Registration Statement on Form SB-2 filed on August 19, 2004)
3.3	Articles of Merger filed with the Secretary of State of Nevada on October 17, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 1, 2006)
3.4	Certificate of Change filed with the Secretary of State of Nevada on October 17, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 1, 2006)
(4)	Instrument Defining the Rights of Holders
4.1	Debenture with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
(10)	Material Contracts
10.1	Executive Employment Agreement dated April 23, 2007 between our company and Pierre Mulacek (incorporated by reference from our Quarterly Report on Form 10-QSB filed on May 21, 2007)
10.2	Executive Employment Agreement dated October 18, 2007 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed October 19, 2007)

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10.3	Purchase Agreement dated March 19, 2008 with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
10.4	Warrant Certificate with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
10.5	10% Promissory Note dated July 14, 2008 issued by our company to Aton Select Fund Limited in the principal amount of $375,000 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on August 14, 2008)
10.6	Stock Purchase Agreement dated August 21, 2008, by and between Billie J. Eustice and the Gary L. Little Trust, as Sellers, and Arkanova Acquisition Corporation (incorporated by reference from our Current Report on Form 8-K filed on August 25, 2008)
10.7	Form of Note Purchase Agreement dated September 3, 2008 between our company and an unaffiliated lender (incorporated by reference from our Current Report on Form 8-K/A filed on December 10, 2008)
10.8	First Amendment to Stock Purchase Agreement dated October 3, 2008, by and between Billie J. Eustice and the Gary L. Little Trust, as Sellers, and Arkanova Acquisition Corporation (incorporated by reference from our Current Report on Form 8-K filed on October 6, 2008)
10.9	Executive Employment Agreement dated October 28, 2008 between our company and Garrett Cook (incorporated by reference from our Current Report on Form 8-K filed on October 23, 2008)
10.10	Amended and Restated Stock Option Agreement dated November 14, 2008 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on November 20, 2008)
10.11	Stock Option and Subscription Agreement dated November 19, 2008 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on November 20, 2008)
10.12	Employment Agreement dated October 18, 2008 between our company and Reginald Denny (incorporated by reference from our Quarterly Report on Form 10-Q filed on February 23, 2009)
10.13	Employment Agreement dated October 18, 2008 between our company and Pierre Mulacek (incorporated by reference from our Quarterly Report on Form 10-Q filed on February 23, 2009)
10.14	Stock Option and Subscription Agreement dated April 20, 2009 with Garrett Cook
10.15	Note Purchase Agreement dated April 17, 2009 between our company and Global Project Finance AG (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.16	Promissory Note dated April 17, 2009 issued by our company to Global Project Finance AG (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.17	Note Purchase Agreement dated April 29, 2009 between our company and Aton Select Fund Limited (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.18	Promissory Note dated April 29, 2009 issued by our company to Aton Select Fund Limited (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
(31)	Section 302 Certification
31.1*	Section 302 Certification under Sarbanes-Oxley Act of 2002 of Pierre Mulacek
31.2*	Section 302 Certification under Sarbanes-Oxley Act of 2002 of Reginald Denny
(32)	Section 906 Certification
32.1*	Section 906 Certification under Sarbanes-Oxley Act of 2002
(99)	Additional Exhibits
99.1	Reserve Estimate and Financial Forecast for Proposed Arkanova Energy Corporation Interests in Two Medicine Cut Bank Sand Unit, Cut Bank Field, Glacier and Pondera Counties, Montana dated August 26, 2008 prepared by Gustavson Associates, LLC (incorporated by reference from our annual report on Form 10-K/A filed on January 8, 2009)

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*filed herewith

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SIGNATURES

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

ARKANOVA ENERGY CORPORATION

/s/ Pierre Mulacek                                          
By: Pierre Mulacek
President, Chief Executive Officer,
Secretary, Treasurer and Director
(Principal Executive Officer)
Dated: August 19, 2009

/s/ Reginald Denny                                         
By: Reginald Denny
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: August 19, 2009