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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**for thequarterly period ended September 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**for thetransition period from                to                **

 

**Commission File Number****0-9355**

 

**CUBIC ENERGY, INC.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                      | ** ** | **87-0352095**                    |
|------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation) |       | (IRS Employer Identification No.) |

 

**9870 PlanoRoad**

**Dallas, TX 75238**

(Address of principal executive offices)

 

**(972) 686-0369**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x No o

 

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

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).   Yes o No x

 

Asof October 31, 2010, the registrant had 75,394,579 shares of common stock,$0.05 par value, outstanding.

 

 

 

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**Special note regarding forward-looking statements**

 

Thisquarterly report on Form 10-Q contains forward-looking statements, as definedin Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended. All statements, other thanstatements of historical facts, are forward-looking statements. Theseforward-looking statements relate to, among other things, the following: ourfuture financial and operating performance and results; our business strategy;market prices; and our plans and forecasts.

 

Forward-lookingstatements are identified by use of terms and phrases such as “may,” “expect,” “estimate,”“project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,”“potential,” “should,” “could” and similar words and phrases. Although webelieve that the expectations reflected in these forward-looking statements arereasonable, they do involve certain assumptions, risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements. You should consider carefully the statements in the“Risk Factors” section of our Annual Report on Form 10-K for the fiscal yearended June 30, 2010, as well as other sections of this report, which describefactors that could cause our actual results to differ from those set forth inthe forward-looking statements, including, but not limited to, the followingfactors:

 

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

 

·                  the volatility in commodity prices for oiland natural gas;

 

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

 

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

 

·                  the ability to replace oil and natural gasreserves;

 

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

 

·                  environmental risks;

 

·                  drilling and operating risks;

 

·                  exploration and development risks;

 

·                  competition, including competition foracreage in natural gas producing areas;

 

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

 

·                  our ability to retain key members of seniormanagement;

 

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

 

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

 

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

 

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

 

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

 

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**CUBIC ENERGY, INC.**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                          | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                |       |     |
| **PART I — FINANCIAL INFORMATION**                                                             |
|                                                                                                |       |     |
| Item 1.  Financial Statements                                                                       |       |     |
|                                                                                                |       |     |
| Report of Independent Registered Public Accounting  Firm                                            |       | 1        |
|                                                                                                |       |     |
| Condensed  Balance Sheets                                                                           |       |     |
| As of  September 30, 2010 (unaudited) and June 30, 2010                                             |       | 2        |
|                                                                                                |       |     |
| Condensed  Statements of Operations (unaudited)                                                     |       |     |
| For  the three months ended September 30, 2010 and 2009                                             |       | 3        |
|                                                                                                |       |     |
| Condensed  Statements of Cash Flows (unaudited)                                                     |       |     |
| For  the three months ended September 30, 2010 and 2009                                             |       | 4        |
|                                                                                                |       |     |
| Notes to Condensed Financial Statements                                                             |       | 5        |
|                                                                                                |       |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 11       |
|                                                                                                |       |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |       | 16       |
|                                                                                                |       |     |
| Item 4. Controls and Procedures                                                                     |       | 16       |
|                                                                                                |       |     |
| **PART II — OTHER INFORMATION**                                                                |
|                                                                                                |       |     |
| Item  1. Legal Proceedings                                                                          |       | 17       |
|                                                                                                |       |     |
| Item  1A. Risk Factors                                                                              |       | 17       |
|                                                                                                |       |     |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 17       |
|                                                                                                |       |     |
| Item 3. Defaults  Upon Senior Securities                                                            |       | 17       |
|                                                                                                |       |     |
| Item 4. (Removed  and Reserved)                                                                     |       | 17       |
|                                                                                                |       |     |
| Item  5. Other Information                                                                          |       | 17       |
|                                                                                                |       |     |
| Item 6.  Exhibits                                                                                   |       | 17       |
|                                                                                                |       |     |
| Signatures                                                                                          |       | 18       |

 

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**PART I - FINANCIAL INFORMATION**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheStockholders and Board of Directors

CubicEnergy, Inc.

 

Wehave reviewed the accompanying condensed balance sheet as of September 30,2010, and the related condensed statements of operations and of cash flows ofCubic Energy, Inc. (Company) for the three-month periods ended September 30,2010 and 2009.  These financial statements are the responsibility of theCompany’s management.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  A review of interim financialinformation consists principally of applying analytical procedures to financialdata and making inquiries of persons responsible for financial and accountingmatters.  It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board,the objective of which is the expression of an opinion regarding the financialstatements taken as a whole.  Accordingly, we do not express such anopinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to the accompanying financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheet of Cubic Energy,Inc. as of June 30, 2010, and the related statements of operations,stockholders’ equity and cash flows for the year then ended; and in our reportdated September 28, 2010, we expressed an unqualified opinion on thosestatements.

 

 
|               | PHILIP  VOGEL & CO., PC    |
|--------------------|--------------------------------|
|               |                           |
|               | /s/ Philip Vogel & Co., PC |
|               | Certified Public Accountants   |
|               |                           |
|               |                           |
| Dallas,  Texas     |                           |
| November  12, 2010 |                           |

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

**Item 1. Financial Statements**

** **
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | **September 30,**    | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | **2010 (unaudited)** | ** ** | **June 30, 2010** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                  |       |                      |       |                        |       |
| Current assets:                                                                                                                                                                                                                                                                                                             |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                   |       | $                         | 2,586,312  |                        | $          | 391,898 |   |
| Accounts receivable - trade                                                                                                                                                                                                                                                                                                 |       | 1,263,298                 |       | 1,580,049                   |       |
| Other prepaid expenses                                                                                                                                                                                                                                                                                                      |       | 358,410                   |       | 42,525                      |       |
| Total current assets                                                                                                                                                                                                                                                                                                        |       | 4,208,020                 |       | 2,014,472                   |       |
| Property and equipment:                                                                                                                                                                                                                                                                                                     |       |                      |       |                        |       |
| Oil and gas properties, full cost method:                                                                                                                                                                                                                                                                                   |       |                      |       |                        |       |
| Proved properties (including wells and related  equipment and facilities)                                                                                                                                                                                                                                                   |       | 18,903,826                |       | 14,852,010                  |       |
| Unproven properties                                                                                                                                                                                                                                                                                                         |       | 130,446                   |       | 130,446                     |       |
| Office and other equipment                                                                                                                                                                                                                                                                                                  |       | 28,420                    |       | 28,420                      |       |
| Property and equipment, at cost                                                                                                                                                                                                                                                                                             |       | 19,062,692                |       | 15,010,876                  |       |
| Less accumulated depreciation, depletion and  amortization                                                                                                                                                                                                                                                                  |       | 6,379,521                 |       | 6,088,038                   |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                                 |       | 12,683,171                |       | 8,922,838                   |       |
| Other assets:                                                                                                                                                                                                                                                                                                               |       |                      |       |                        |       |
| Deferred loan costs, net                                                                                                                                                                                                                                                                                                    |       | 119,688                   |       | 39,471                      |       |
| Other - Long term drilling credit                                                                                                                                                                                                                                                                                           |       | 23,292,058                |       | 27,219,160                  |       |
| Total other assets                                                                                                                                                                                                                                                                                                          |       | 23,411,746                |       | 27,258,631                  |       |
|                                                                                                                                                                                                                                                                                                                        |       | $                         | 40,302,937 |                        | $          | 38,195,941 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                                                                                                                              |       |                      |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                        |       |                      |       |                        |       |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                       |       | $                         | 980,738    |                        | $          | 3,031,300 |   |
| Due to affiliates                                                                                                                                                                                                                                                                                                           |       | 213,023                   |       | 419,080                     |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                   |       | 1,193,761                 |       | 3,450,380                   |       |
| Long-term liabilities:                                                                                                                                                                                                                                                                                                      |       |                      |       |                        |       |
| Long-term debt, net of discounts                                                                                                                                                                                                                                                                                            |       | $                         | 24,867,732 |                        | $          | 18,983,532 |   |
| Note payable to affiliate                                                                                                                                                                                                                                                                                                   |       | 2,000,000                 |       | 2,000,000                   |       |
| Total long-term liabilities                                                                                                                                                                                                                                                                                                 |       | 26,867,732                |       | 20,983,532                  |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                               |       | —                    |       | —                      |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                  |       |                      |       |                        |       |
| Preferred stock - $.01 par value; authorized  10,000,000 shares; Series A - 8% preferred stock,$100 stated value,  redeemable at $120 and covertible at $1.20 per common share; authorized  165,000 shares; 105,904 shares issued and outstanding at September 30,2010,  and 103,500 issued or outstanding at June 30, 2010 |       | $                         | 1,059      |                        | $          | 1,035 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                  |       | 10,589,341                |       | 10,348,965                  |       |
| Common stock - $.05 par value; authorized  120,000,000 shares; issued 75,394,579 shares at September 30, 2010 and  75,394,579 shares at June 30, 2010                                                                                                                                                                       |       | 3,769,730                 |       | 3,769,730                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                  |       | 54,549,867                |       | 54,032,985                  |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                         |       | (56,668,553               | )          | (54,390,686                 | )          |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                   |       | 12,241,444                |       | 13,762,029                  |       |
|                                                                                                                                                                                                                                                                                                                        |       | $                         | 40,302,937 |                        | $          | 38,195,941 |   |

 

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

 

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**CUBICENERGY, INC.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

** **
| ** **                                                 | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**           | ** ** |
| ** **                                                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Revenues:                                                  |       |                             |       |   |   |
| Oil and gas sales                                          |       | $                                | 839,824    |   | $ | 359,901 |   |
| Total revenues                                             |       | $                                | 839,824    |   | $ | 359,901 |   |
| Costs and expenses:                                        |       |                             |       |   |   |
| Oil and gas production, operating and development  costs   |       | 285,053                          |       | 291,337 |   |
| General and administrative expenses                        |       | 473,169                          |       | 444,923 |   |
| Depreciation, depletion and non-loan-related  amortization |       | 291,483                          |       | 232,597 |   |
| Total costs and expenses                                   |       | 1,049,705                        |       | 968,857 |   |
| Operating income (loss)                                    |       | (209,881                         | )          | (608,956 | ) |
|                                                       |       |                             |       |   |   |
| Non-operating income (expense):                            |       |                             |       |   |   |
| Other income                                               |       | 1,719                            |       | 452 |   |
| Interest expense, including amortization of loan  discount |       | (1,851,772                       | )          | (487,389 | ) |
| Amortization of loan costs                                 |       | (9,233                           | )          | (33,960 | ) |
| Total non-operating income (expense)                       |       | (1,859,286                       | )          | (520,897 | ) |
| Loss from operations before income taxes                   |       | (2,069,167                       | )          | (1,129,853 | ) |
| Provision for income taxes                                 |       | —                           |       | — |   |
| Net loss                                                   |       | $                                | (2,069,167 | ) | $ | (1,129,853 | ) |
| Net loss per common share - basic and diluted              |       | $                                | (0.03      | ) | $ | (0.02 | ) |
| Weighted average common shares outstanding                 |       | 75,394,579                       |       | 63,551,697 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **September 30,**           | ** ** |
| ** **                                                                                | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                                |       |                             |       |   |   |
| Net (loss)                                                                                |       | $                                | (2,069,167 | ) | $ | (1,129,853 | ) |
| Adjustments to reconcile net (loss) to cash  provided (used) by operating activities:     |       |                             |       |   |   |
| Depreciation, depletion and amortization                                                  |       | 1,712,347                        |       | 396,270 |   |
| Change in assets and liabilities:                                                         |       |                             |       |   |   |
| (Increase) decrease in accounts receivable - trade                                        |       | 316,751                          |       | (118,460 | ) |
| (Increase) decrease in other prepaid expenses                                             |       | (315,884                         | )          | 7,286 |   |
| Increase (decrease) in accounts payable and  accrued liabilities                          |       | (2,018,862                       | )          | 702,278 |   |
| Increase (decrease) in due to affiliates                                                  |       | (23,112                          | )          | 121,649 |   |
| Net cash provided (used) by operating activities                                          |       | (2,397,927                       | )          | (20,830 | ) |
| **Cash flows from investing  activities:**                                                |       |                             |       |   |   |
| Acquisition and development of oil and gas  properties                                    |       | (124,714                         | )          | (89,361 | ) |
| Increase (decrease) in capital portion of due to  affiliates                              |       | (182,945                         | )          | (392,957 | ) |
| (Increase) decrease in advances on development  costs                                     |       | —                           |       | (978,890 | ) |
| Net cash provided (used) by investing activities                                          |       | (307,659                         | )          | (1,461,208 | ) |
| **Cash flows from financing  activities:**                                                |       |                             |       |   |   |
| Proceeds from credit facility                                                             |       | 5,000,000                        |       | — |   |
| Issuance of common stock, net                                                             |       | —                           |       | 1,788,400 |   |
| Loan costs incurred and other                                                             |       | (100,000                         | )          | — |   |
| Net cash provided (used) by financing activities                                          |       | 4,900,000                        |       | 1,788,400 |   |
| **Net increase (decrease) in cash  and cash equivalents**                                 |       | $                                | 2,194,414  |   | $ | 306,362 |   |
| **Cash and cash equivalents:**                                                            |       |                             |       |   |   |
| Beginning of period                                                                       |       | 391,898                          |       | 71,050 |   |
| End of period                                                                             |       | $                                | 2,586,312  |   | $ | 377,412 |   |
| Other information:                                                                        |       |                             |       |   |   |
| Cash interest paid on debt                                                                |       | $                                | 411,625    |   | $ | 474,282 |   |
| Non-cash investing and financing activities:                                              |       |                             |       |   |   |
| Use of prepaid drilling credit for acquisition and  development of oil and gas properties |       | $                                | 3,927,102  |   | $ | — |   |
| Warrants issued for loan costs                                                            |       | $                                | 516,882    |   | $ | — |   |
| Preferred stock dividends accrued                                                         |       | $                                | 208,700    |   | $ | — |   |
| Conversion of accrued dividend to Preferred Stock                                         |       | $                                | 204,400    |   | $ | — |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

 

**Note A —Summary of Significant Account Policies:**

 

**Basisof presentation**

 

Theaccounting policies followed by Cubic Energy, Inc., a Texas corporation(the “Company” or “Cubic”), are set forth in the Company’s financial statementsthat are a part of its Annual Report on Form 10-K for the fiscal yearended June 30, 2010 and should be read in conjunction with the financialstatements contained herein.

 

The financial informationincluded herein as of September 30, 2010, and for the three-month periodsended September 30, 2010, and 2009, have been presented without an audit,pursuant to accounting principles for interim financial information generallyaccepted in the United States of America, and the rules of the Securitiesand Exchange Commission.

 

TheCompany believes that the disclosures are adequate to make the informationpresented not misleading. The information presented reflects all adjustments(consisting solely of normal recurring adjustments), which are, in the opinionof management, necessary for a fair statement of results for the periods.

 

**Earningsper share**

 

TheCompany has adopted the provisions of Financial Accounting Standards Board,Accounting Standards Codification (“FASB ASC”) 260, “*Earnings per Share”*. FASB ASC 260 reporting requirementsreplace primary and fully-diluted earnings per share (“EPS”) with basic anddiluted EPS. Basic EPS is calculated by dividing net income (available tocommon stockholders) by the weighted average number of common sharesoutstanding for the period. Diluted EPS reflects the potential dilution thatcould occur if securities or other contracts to issue common stock wereexercised or converted into common stock.

 

Potential dilutive securities (e.g., stock warrants, convertiblepreferred stock and convertible debt) have not been considered because theCompany reported net losses in the three-month periods ended September 30,2010 and 2009, and, accordingly, their effects would be anti-dilutive. Theweighted average number of common and common equivalent shares outstanding was75,394,579 and 63,551,697 for the quarters ended September 30, 2010 and2009, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

**Note B — Stockholders’ Equity:**

 

**Stockissuance**

 

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

 

Inconnection with the following common stock issuances, the Company entered intoSubscription and Registration Rights Agreements (“Subscription Agreements”)with certain investors. Pursuant to the Subscription Agreements, the Companyissued an aggregate of 2,104,001 shares of common stock and warrantsexercisable into 1,052,000 shares of common stock. On August 18, 2009,four investors acquired 804,000 shares of common stock and warrants exercisableinto 402,000 shares of common stock, through the payment of $683,400. On August 26,2009, six investors acquired 1,300,001 shares of common stock and warrantsexercisable into 650,000 shares of common stock, through the payment of$1,105,001. The warrants are exercisable through July 31, 2014, at $0.85per share. With respect to certain of such issuances, the Company paidbroker-dealer commissions in the aggregate amount of $59,500. Pursuant to theSubscription Agreements, the investors paid aggregate consideration ofapproximately $1,788,400, net of commissions, which has been used for workingcapital purposes.

 

OnNovember 24, 2009, the Company entered into transactions with TaurenExploration, Inc. (“Tauren”) and Langtry Mineral & Development,LLC (“Langtry”), both of which are entities controlled by Calvin A. Wallen, III,the Chairman of the Board, President and Chief Executive Officer of the Company(“Mr. Wallen”), under which the Company has acquired $30,952,810 inpre-paid drilling credits (the “Drilling Credits”) applicable towards thedevelopment of its Haynesville Shale rights in Northwest Louisiana. The Companywill use the Drilling Credits to fund $30,952,810 of its share of the drillingand completion costs for those horizontal Haynesville Shale wells drilled insections previously operated by an affiliate of the Company, which are nowoperated by a third party. As consideration for the Drilling Credits, theCompany (a) conveyed to Tauren a net overriding royalty interest ofapproximately 2% in its leasehold rights below the Taylor Sand formation of theCotton Valley and (b) on March 16, 2010 issued to Langtry 10,350,000shares of common stock and preferred stock with a stated value of $10,350,000,convertible into Company common shares at $1.20 per common share, with a fiveyear conversion term. The preferred stock is entitled to cumulative dividendsequal to 8% per annum, payable quarterly, which dividends may be paid in cashor in additional shares of preferred stock, in the Company’s discretion. Thepreferred stock may be redeemed by the Company at any time, at a redemption priceequal to 20% over the original issue price, plus accrued and unpaid dividends.The consideration with respect to these transactions was determined pursuant tonegotiations between the Company, Tauren and Langtry, and not pursuant to anyformula. The foregoing transactions were approved by a special committee of theboard of directors of the Company comprised exclusively of the Company’snon-employee directors.

 

Theaforementioned issuances were made in reliance upon exemptions fromregistration set forth in Regulation D and/or Section 4(2) of theSecurities Act of 1993, as amended, which exempts transactions by an issuer notinvolving a public offering.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

**Stock grants**

 

On February 3, 2010, the Company issued 370,014unregistered shares of common stock to five directors of the Company pursuantto the Company’s 2005 Stock Option Plan (the “Plan”).  Asof such date, the aggregate market value of the common stock granted was$395,915 based on the last sale price ($1.07 per share) on the aforementioneddate, on the NYSE — Amex of the Company’s common stock. Such amount wasexpensed upon issuance to compensation expense.

 

OnJanuary 12, 2009, the Company issued 235,000 unregistered shares to threedirectors of the Company pursuant to the Plan. As of such date, the aggregatemarket value of the common stock granted was $385,400 based on the last saleprice ($1.64 per share) on the aforementioned date, on the NYSE — Amex of theCompany’s common stock. Such amount was expensed upon issuance to compensationexpense.

 

Theforegoing grants were made in reliance upon an exemption from registration setforth in Section 4(2) of the Securities Act of 1933, as amended,which exempts transactions by an issuer not involving a public offering.

 

**Note C — Long-term debt:**

 

**March 2007 debt issue**

 

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

 

The Term Loan of $5,000,000 is convertible into  shares of Cubic common stock, currently at aconversion price of $0.9911 per share. Approximately $5,000,000 of the fundedamount was used, together with cash on hand, to retire the Company’s previouslyoutstanding senior debt that was due February 6, 2009.

 

In connection with entering into the Credit Facility, the Companyissued to Wells Fargo warrants, with five-year expirations, for the purchase ofup to 2,500,000 shares of Company common stock, currently at an exercise priceof $0.9911 per share.

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and a net profits interest in the future production of hydrocarbonsfrom or attributable to Cubic’s net interest in its Louisiana properties, whichnet profits interest was granted to Wells Fargo, based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties. The assignment of a value tothe warrants and net profits interest resulted in a loan discount beingrecorded. The discount amortization was over the original three-year term ofthe debt as additional interest expense. Amortization for the quarters ended September 30, 2010 and 2009 was$0 and $129,713, respectively.

 

Cubic incurred loan costs of $240,613 on the issuance of the debt andwarrants. The amount allocable to the debt of $166,590 has been capitalized andwas amortized over the original term of the debt. Amortization for the quartersended September 30, 2010 and 2009 was $0 and $55,733, respectively. Cubicalso incurred commitment fees of $170,000 related to subsequent increases inthe Credit Facility’s borrowing base; such amount was capitalized in fiscal2008 and was amortized over the remaining term of the loan.  Amortization for the quarters ended September 30,2010 and 2009 was $0 and $19,913, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

On December 18, 2009, the Company entered into a Second Amendmentto Credit Agreement with Wells Fargo,

providing for a revolving credit facility of up to $40 million and aconvertible term loan of $5 million (the “Amended Credit Agreement”). Theborrowing base under the revolving credit facility was initially established at$25 million. The indebtedness bears interest at a fluctuating rate equal to thesum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matureson July 1, 2012 and is secured by substantially all of the assets of theCompany. In connection with entering into the Amended Credit Agreement, theCompany issued to Wells Fargo additional warrants, expiring on December 1,2014, for the purchase of up to 5,000,000 shares of Company common stock,currently at an exercise price of $0.9911 per share, and extended theexpiration date of the warrants to purchase 2,500,000 shares of Company commonstock that were previously issued to Wells Fargo to December 1, 2014.

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and the beneficial conversion feature based on their fairmarket values at the date of issuance. The fair market value assigned to theextension of warrants to purchase 2,500,000 shares of Company common stock was$923,302 and the value assigned to the issuance of the warrant to purchase theadditional 5,000,000 shares of Company common stock was $8,031,896, which wasrecorded as an increase in additional paid-in capital. The difference in thefair value of the term loan and the face amount of $1,877,494 was recorded asan extinguishment of debt, offset by the amount of unamortized deferred loancost and discounts associated with the original debt of $129,871.  The beneficial conversion feature equaled$5,027,494, which was reduced to $3,122,506 based on the limitation to the fairvalue to debt. The assignment of a value to the warrants and beneficialconversion feature as well as the write-down of the term loan to the fair valueresulted in a total loan discount in the amount of $13,955,198 being recorded.The discount is being amortized over the term of the debt as additionalinterest expense. Amortization was $1,386,478 for the quarter ended September 30,2010. Amortization for the fiscal years ending June 30, 2011 and 2012 isexpected to be approximately $5,500,699 and $5,515,769, respectively.

 

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

 

Cubic incurred loan costs of $50,000 on the issuance of the debt andwarrants. The amount was capitalized and allocated to the debt and is beingamortized over the term of the debt. Amortization was $4,968 for the quarterended September 30, 2010. Amortization for the fiscal years ending June 30,2011 and 2012 is expected to be approximately $19,708 and $19,762,respectively.

 

On August 30, 2010, the Company entered into a Third Amendment toCredit Agreement (the “Third Amendment”) with Wells Fargo providing for anincrease in the borrowing base for the Company’s revolving credit facility from$25 million to $30 million. The Company borrowed the full amount of theincrease in the borrowing base. The indebtedness under the credit facility,which includes the revolving credit facility and a $5 million convertible termloan, bears interest at a fluctuating rate equal to the sum of the Wells FargoBank prime rate plus two percent (2%) per annum, matures on July 1, 2012and is secured by substantially all of the assets of the Company. In connectionwith entering into the Third Amendment, the Company issued to Wells Fargoadditional warrants, expiring on December 1, 2014, for the purchase of upto 1,000,000 shares of the Company’s common stock at an exercise price of $1.00per share. Loan costs of $89,000 and warrant discounts of $527,430 wererecognized.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

The Company allocated theproceeds from the issuance of the debt to the warrants and the debt. The valueassigned to the warrants of $516,882 was recorded as an increase in additionalpaid-in-capital. The assignment of a value to the warrants resulted in a loandiscount being recorded. The discount amortization is over the two-year term ofthe debt as additional interest expense. Amortization for the quarter ended September 30,2010 was $25,153. Amortization for the fiscal years ending June 30, 2011and 2012 is expected to be approximately $239,741 and $287,689, respectively.

 

Cubic incurred loan costsof $100,000 on the issuance of the debt and warrants. The amount allocable tothe debt of $89,451 has been capitalized and is being amortized over the termof the debt. Amortization for the quarter ended September 30, 2010 was$4,266. Amortization for the fiscal years ending June 30, 2011 and 2012 isexpected to be approximately $40,660 and $48,791, respectively.

 

**May 2008 subordinated debt issue and refinancing**

 

On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 (the “SubordinatedNote”) to Diversified Dynamics Corporation (the “Lender”), an entity controlledby William Bruggeman, a director who beneficially owns more than 5% of thecommon stock of the Company. The Subordinated Note bore interest at afluctuating rate equal to the sum of the prime rate plus two percent (2%) perannum, and was scheduled to mature on April 30, 2010. As consideration forthe loan made by the Lender pursuant to the Subordinated Note, the Companyagreed to convey to the Lender, upon the repayment in full of the indebtednessevidenced by the Subordinated Note and the repayment in full of the seniorindebtedness evidenced by the Credit Facility with Wells Fargo, an undivided0.375% net profits interest in the future production of hydrocarbons from orattributable to Cubic’s net interest in its Louisiana properties. The proceedsof the Subordinated Note were used for general corporate and working capitalpurposes.

 

Issuing the SubordinatedNote required the consent of Wells Fargo, which consent it granted on May 5,2008. Subsequently, on May 8, 2008, the Credit Facility with Wells Fargowas amended by the First Amendment to Credit Agreement (the “First Amendment”).Material provisions of the First Amendment included the following: (i) theCompany may not prepay all or any part of the principal balance outstanding onthe Term Loan prior to its maturity on July 1, 2012 without the consent ofWells Fargo; and (ii) the amount of the borrowing base was increased to$20,000,000, which amount was fully drawn upon subsequent to the end of fiscal2008, on August 20, 2008.

 

On December 18,2009, the Company issued a subordinated promissory note payable to Mr. Wallenin the principal amount of $2,000,000 (the “Wallen Note”). This note bearsinterest at the prime rate plus one percent (1%), with interest payablemonthly. The Wallen Note was entered into with the consent of Wells Fargo. Theoutstanding principal balance is due and payable on September 30, 2012 andis subordinated to the indebtedness under the Amended Credit Agreement, asamended by the Third Agreement. The proceeds of the Wallen Note were used torepay the Subordinated Note. The net profits interest described above wasconveyed to the Lender in connection with the repayment.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2010**

**(Unaudited)**

 

**Note D — Related party transactions:**

 

An affiliated company, Tauren, which is owned 100% by Mr. Wallen,owns a working interest in the wells in which the Company owns a workinginterest. As of September 30, 2010 and June 30, 2010, the Companyowed Tauren $41,692 and $78,679, respectively, for miscellaneous capitalexpenditures and general and administrative expenses paid by Tauren on theCompany’s behalf.

 

In addition, there are twenty-three wells in which the Company owns aworking interest that are operated by an affiliated company, Fossil Operating, Inc.(“Fossil”), which is owned 100% by Mr. Wallen. As of September 30,2010 and June 30, 2010, the Company owed Fossil $455,469 and $755,683,respectively, for drilling costs and lease and operating expenses, and was owedby Fossil $284,138 and $415,282 respectively, for oil and gas sales.

 

**Note E — Subsequent Events**

 

On October 21, 2010 the Board of Directors of the Company agreedto issue 2,087 Series A preferred shares to Langtry, an affiliate of Mr. Wallen,as the payment of dividends due to Langtry with respect to the Series Apreferred stock held by Langtry.  These shareshave yet to be issued.  Following thisissuance, the total number of preferred shares outstanding will be 107,991.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

Thefollowing discussion of operations for the three months ended September 30,2010 and 2009 should be read in conjunction with our condensed financialstatements and the notes thereto included in this Quarterly Report on Form 10-Qand with the financial statements, notes and management’s discussion andanalysis included in our Annual Report on Form 10-K for the year ended June 30,2010.

 

Statementsin this discussion may be forward-looking. These forward-looking statementsinvolve risks and uncertainties, including those discussed below, which couldcause actual results to differ from those expressed.

 

**Overview**

 

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

 

**LouisianaAcreage**

 

Ourcorporate strategy with respect to our asset acquisition and developmentefforts was to position the Company in a low risk opportunity while buildingmainstream high yield reserves.  The acquisition of our acreage in DeSotoand Caddo Parishes, Louisiana, puts us in a reservoir rich environment both inthe Cotton Valley and Bossier/Haynesville Shale formations, with additionalshallow formations to exploit as well. We have had success on our acreage withwells completed in the Cotton Valley and Bossier/Haynesville Shaleformations.  We also own an interest inthe right-of-ways, infrastructure and pipelines for our Caddo and DeSotoParish, Louisiana acreage.

 

Weshare our Bossier/Haynesville formation acreage with Goodrich PetroleumCorporation (“Goodrich”), Chesapeake Energy Corporation (“Chesapeake”), El PasoCorporation (“El Paso”) and EXCO Operating Company, LP (“EXCO”), and all fourcompanies are third-party operators actively working on our shared acreage.

 

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

 

Aspart of our strategic plan to restructure our debt and raise additionaloperating capital, during the second quarter of fiscal 2010, Wells Fargoexpanded our credit facility to $45 million, which includes a $40,000,000revolving credit facility and a $5,000,000 convertible term note. The revolvingcredit facility is subject to borrowing base limits, and as of September 30,2010, the revolver had $30 million outstanding with a maturity date of July 1,2012. We also acquired $30.9 million in drilling credits, which has a balanceof approximately $23 million, dedicated for the future drilling and completionof horizontal Haynesville Shale formation wells. For additional information,see below under “Capital Resources and Liquidity”.

 

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

 

**TexasAcreage**

 

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

 

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**Results of Operations**

 
| ** **                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** |
| ** **                               | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Production Volumes:**                  |       |                             |       |   |   |
| Oil (Bbl)                                |       | 420                              |       | 201 |   |
| Natural gas liquids (gallons)            |       | 11,626                           |       | 8,927 |   |
| Natural gas (Mcf)                        |       | 181,982                          |       | 95,553 |   |
| Total (Mcfe)                             |       | 186,162                          |       | 98,035 |   |
|                                     |       |                             |       |   |   |
| **Weighted Average Sales Prices:**       |       |                             |       |   |   |
| Oil (per Bbl)                            |       | $                                | 72.99      |   | $ | 67.95 |   |
| Natural gas liquids (per gallon)         |       | $                                | 1.38       |   | $ | 1.09 |   |
| Natural gas (per Mcf)                    |       | $                                | 4.36       |   | $ | 3.52 |   |
|                                     |       |                             |       |   |   |
| **Selected Expenses per Mcfe:**          |       |                             |       |   |   |
| Production costs                         |       | $                                | 0.89       |   | $ | 2.59 |   |
| Workover expenses (non-recurring)        |       | $                                | —     |   | $ | — |   |
| Severance taxes                          |       | $                                | 0.12       |   | $ | 0.22 |   |
| Other revenue deductions                 |       | $                                | 0.53       |   | $ | 0.16 |   |
| Total lease operating expenses           |       | $                                | 1.53       |   | $ | 2.97 |   |
| General and administrative expenses      |       | $                                | 2.54       |   | $ | 4.54 |   |
| Depreciation, depletion and amortization |       | $                                | 1.57       |   | $ | 2.37 |   |

 

**Revenues**

 

OILAND GAS SALES increased 133% to $839,824 for the quarter ended September 30,2010 from $359,901for the quarter ended September 30, 2009 primarily dueto increased production from third-party operated horizontal Haynesville Shalewells during the 2010 quarter. The weighted average natural gas price wereceived in the 2010 quarter was $4.36 per Mcf versus $3.52 per Mcf in the 2009quarter.

 

**Costs andExpenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS (also referred to as “LEASEOPERATING EXPENSES” elsewhere herein) decreased 2% to $285,053 (34% of oil andgas sales) for the 2010 quarter from $291,337 (81% of oil and gas sales) for the2009 quarter. These expenses showed minimal change for the 2010 quarter versusthe 2009 quarter.

 

GENERALAND ADMINISTRATIVE EXPENSES (“G&A”) increased 6% to $473,169 for the 2010quarter from $444,923 in the 2009 quarter as a result of an increase in contractstaff needed to support accounting for division orders and joint interestbilling created by the new wells.

 

DEPRECIATION,DEPLETION AND NON-LOAN RELATED AMORTIZATION (“DD&A”) increased 25% to$291,483 in the 2010 quarter from $232,597 in the 2009 quarter primarily due tobringing new wells on line. No impairment loss was recognized during thequarter ended September 30, 2010. An excess of capitalized costs over thefull costs ceiling test limitation at September 30, 2009, was not chargedagainst earnings because of an increase in oil and gas prices subsequent toquarter end, as prescribed in Rule 4-10(c) (4) of RegulationS-X.

 

INTERESTEXPENSE increased 280% to $1,851,772 in the 2010 quarter from $487,389 in the2009 quarter primarily due to an increase in debt (before discounts) to$37,000,000 at September 30, 2010, which includes a $10,000,000increase to the revolving line of credit to$30,000,000 from $20,000,000, the $5,000,000 term loan with Wells Fargo and$2,000,000 under the terms of the subordinated note with Mr. Wallen. Theweighted average debt balance (before discounts) for the 2010 quarter was$33,684,783 as compared to $27,000,000 in the 2009

 

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quarter. The Credit Facility withWells Fargo also resulted in loan discounts being recorded. The discounts were amortizedover the original three-year term of the debt, which ended December 18,2009. At that time the debt was extended to July 1,2012, with a total of $1,411,631, of additional interest expense, beingrecorded in the 2010 quarter and $129,713 in the 2009 quarter.

 

**Capital Resources and Liquidity**

 

**Working Capital**

 

TheCompany’s working capital increased to$3,014,258 at September 30, 2010from ($1,435,908) at June 30, 2010, primarily due to cash flows providedby financing activities of $4,900,000 resulting from the increase in our CreditFacility borrowing base.  These cashinflows were partially offset by the $307,659 use of cash from investingactivities related to non-operated well expense and the $2,397,927 use of cashfrom operating activities related to the payment of past due accounts payable inthe quarter ended September 30, 2010.

 

OnNovember 24, 2009, the Company entered into transactions with TaurenExploration, Inc. (“Tauren”) and Langtry Mineral & Development,LLC (“Langtry”), both of which are entities controlled by Mr. Wallen,under which the Company has acquired $30,952,810 in pre-paid drilling credits(the “Drilling Credits”) applicable towards the development of its HaynesvilleShale rights in Northwest Louisiana. The Company still has Drilling Creditstotaling $23,292,058 to fund  its shareof the drilling and completion costs for those horizontal Haynesville Shalewells drilled in sections previously operated by an affiliate of the Companywhich are now operated by a third party.

 

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

 

Theconsideration with respect to these transactions was determined pursuant tonegotiations between the Company, Tauren and Langtry, and not pursuant to anyformula. The foregoing transactions were approved by a special committee of theboard of directors of the Company comprised exclusively of the Company’snon-employee directors.

 

Cubicis participating in an aggregate of 45 natural gas wells in Louisiana.Currently, we are participating in 20 vertical Cotton Valley wells, 4 verticalHaynesville Shale wells, and 21 horizontal Haynesville Shale wells. Of those 45wells, 18 vertical Cotton Valley wells and 4 vertical Haynesville Shale wellsare operated by an affiliate company, Fossil Operating, an entity controlled byMr. Wallen; 3 horizontal Haynesville Shale wells are operated by Goodrich;5 horizontal Haynesville Shale wells are operated by EXCO; 2 vertical CottonValley wells are operated by Indigo Minerals, LLC (“Indigo”); 12 horizontalHaynesville Shale wells are operated by Chesapeake; and 1 horizontalHaynesville Shale well is operated by El Paso.

 

SinceCubic is not the operator, our first revenue lags behind the spud date by asmuch as six to twelve months. Being a non-operating entity significantly limitsour ability to forecast drilling plans, capital expenditures, cash flows andearnings.

 

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

 

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EXCOrecently completed its first horizontal Haynesville Shale well on Cubic’sacreage, the Red Oak Timbers 6-1 in Section 6-T14N-R15W. EXCO experienceda breach in the casing at approximately 11,000’, which limited the completiontechnique on this well.  When consideringthe limited completion technique, the Red Oak 6-1 has produced according toexpectation.  Recently, EXCO spud theThomas 36-1in Section36-T16N-R15W. EXCO currently has plans to drill andcomplete 8-10 horizontal wells on our acreage by the end of fiscal 2011.

 

Chesapeakedrilled and completed two vertical Cotton Valley wells on our acreage, theCopeland 12-1 and the Soaring Ridge 15-1, located in Sections 12 and15-T15N-R16W. Indigo now operates these two wells, which are producing smallquantities of natural gas.

 

Chesapeakehas drilled and completed nine horizontal Haynesville Shale wells on ouracreage, the SRLT 33-H1 in Section 33-T16N-R15W; the Mitchell 12-H1, theSaddler 9-H1 and the Woolworth 15-H1 in Sections 12, 9 and 15-T15N-R16W,respectively; and the Clingman 12-H1, the Clingman 11-H1, the Clingman 2-H1,the Soaring Ridge 15-H1 and the Muslow 5-H1 in Sections 15, 12, 11, 2 and5-T15N-R15W, respectively. Chesapeake has three more locations waiting oncompletion: the Western 18-H1 in Section 18-T15N-R16W, the Slaughter 6-H1in Section 6-T15N-R15W and the Burford 21-H1 in Section 21-14N-15W.

 

ElPaso has spud and drilled one horizontal Haynesville Shale well on our acreage,the E.T. Fisher 20-H1 in Section 20-14N-15W. This well is currentlywaiting on completion.

 

TheCompany has revised its planned capital expenditures for the remainder offiscal 2011. We have postponed the re-completions and workovers of currentCotton Valley vertical wells planned for fiscal 2011 due to commodityprices.  Further, EXCO has shifted someof its operations, originally anticipated for late fiscal 2010, to fiscal 2011.As a result, our projected capital expenditures for fiscal 2011 for our workinginterest portion of third party operator horizontal drilling will beapproximately $20,000,000 to $30,000,000 as stated  in our Annual Report on Form 10-K forthe year ended June 30, 2010.

 

TheCompany plans to fund these capital expenditures, among other ways, throughexisting drilling credits, the additional capacity under our revolving creditfacility with Wells Fargo, subject to borrowing base increases, cash on handand cash provided from operations. Future cash flows and the availability ofborrowings are subject to a number of variables, such as prevailing prices ofoil and natural gas, and actual production from existing and newly-completedwells. The Company’s success in developing and producing new reserves, and theamount of funds which may ultimately be required to finance the Company’s developmentand exploration program, all have a certain level of uncertainty.  Thus, there can be no assurance that theCompany’s capital resources will be sufficient to sustain the Company’sdevelopment and exploration activities.

 

**Cash Flow**

 

Ournet (decrease) increase in cash and cash equivalents is summarized as follows:

 
| ** **                                            | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** |
| ** **                                            | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Net cash provided (used) by operating activities      |       | $                                | (2,397,927 | ) | $ | (20,830 | ) |
| Net cash provided (used) by investing activities      |       | (307,659                         | )          | (1,461,208 | ) |
| Net cash provided (used) by financing activities      |       | 4,900,000                        |       | 1,788,400 |   |
| Net increase (decrease) in cash and cash  equivalents |       | $                                | 2,194,414  |   | $ | 306,362 |   |

 

***Operating Activities*****—**During thequarter ended September 30, 2010, the Company used cash flows fromoperating activities of $2,397,927 as compared to $20,830 in the prior yearperiod. Cash flow from operations is dependent on our ability to increaseproduction through our development and exploratory activities and the pricereceived for oil and natural gas.

 

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***Investing Activities*********—**The primary driver of cash used in investingactivities is capital expenditures related to the drilling and completion ofnew wells and the acquisition and development of additional oil and gasproperties. In the quarter ended September 30, 2010, we used net cash of$307,659 in investing activities. For the quarter ended September 30,2009, we had capital spending of $392,957 for non-operated well expense andused net cash of $1,461,208 in investing activities.

 

***Financing Activities*********—**Net cash flows provided by financing activities were$4,900,000 and $1,788,400 in the quarters ended September 30, 2010 and2009, respectively. During the 2010 quarter, we received an aggregate of$5,000,000 in proceeds from the third amendment to our Wells Fargo CreditAgreement and the issuance of warrants to Wells Fargo. We paid $100,000 in loancosts. During the 2009 quarter, we received an aggregate of $1,788,400 inproceeds from the issuance of stock and warrants.

 

**Contractual Obligations**

 

We have no material changes in our long-termcommitments associated with our capital expenditure plans or operatingagreements other than those described above. Our level of capital expenditureswill vary in future periods depending on: the success we experience in ouracquisition, developmental and exploration activities; oil and natural gasprice conditions; and other related economic factors. Currently, no sources ofliquidity or financing are provided by off-balance sheet arrangements ortransactions with unconsolidated, limited-purpose entities. We have nocontractual commitments pertaining to exploration, development and productionactivities.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financialcondition and results of operations are based upon the condensed financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. Preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses. There havebeen no changes to our critical accounting policies from those described in ourAnnual Report on Form 10-K for the year ended June 30, 2010.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

**Commodity Price Risk**

 

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

 

**Interest Rate Risk**

 

Asof September 30, 2010, we had $37,000,000 of long-term debt outstandingunder our Credit Facility and the Wallen Note, each of which matures on July 1,2012 and bears interest at the prime rate plus 2.0% and prime rate plus 1%,respectively. As a result, our interest costs fluctuate based on short-terminterest rates. Based on the aforementioned borrowings outstanding at September 30,2010, a 100 basis point change in interest rates would change our annualinterest expense by approximately $370,000. We had no interest rate derivativesduring the first quarter of fiscal 2011.

 

**Item 4. Controls and Procedures**

 

*Evaluation of disclosure controls and procedures.*Our principal executive and financial officers have concluded, based ontheir evaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures under Exchange Act Rules 13a -15(e) and15d-15(e) are effective to ensure that information we are required to disclose inthe reports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Our disclosure controls and procedures include controls and proceduresdesigned to ensure that information we are required to disclose in such reportsis accumulated and communicated to management, including our principalexecutive and financial officers, as appropriate to allow timely decisionsregarding required disclosure.

 

*Changes in internal controls over financial reporting.*There were no changes in the Company’s internal controls over financialreporting during the most recent fiscal quarter that have materially affected,or are reasonably likely to materially affect, these internal controls.

 

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**P****ART**** ****II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Therehave been no material changes regarding the legal proceedings disclosed in ourFiscal 2010 Form 10-K filed on September 28, 2010.

 

**Item 1A. Risk Factors**

 

Therehave been no material changes in the risk factors applicable to us from thosedisclosed in our Fiscal 2010 Form 10-K filed on September 28, 2010.

 

**Item 2.****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securitie****s**

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 
| **No.** | ** ** | **Description**                                                              |
|---------|------------|------------------------------------------------------------------------------|
|    |       |                                                                         |
| 31.1*   |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer |
|    |       |                                                                         |
| 31.2*   |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer |
|    |       |                                                                         |
| 32.1*   |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. § 1350  |
|    |       |                                                                         |
| 32.2*   |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. § 1350  |

 

----

*Filed herewith.

 

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Table ofContents

 

**SIGNATURES**

 

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

 

 
|                          | **CUBIC ENERGY, INC.** |
|-------------------------------|-----------------------------|
|                          | (Registrant)                |
|                          |                        |
|                          |                        |
| Date: November 15, 2010  | By:                         | /s/  Calvin A. Wallen, III |
|                          |                        | Calvin  A. Wallen, III, President and Chief Executive Officer |
|                          |                        |   |
|                          |                        |   |
| Date:  November 15, 2010 | By:                         | /s/  Larry G. Badgley |
|                          |                        | Larry  G. Badgley, Chief Financial Officer (Principal Financial and Accounting  Officer) |

 

18

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