Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

##### **FORM 10-Q**

 

**x****     QuarterlyReport under Section 13 or 15(d) of The Securities Exchange Act of1934**

######  

###### **For theQuarterly Period Ended September 30, 2008**

 

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

 

**CUBICENERGY, 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)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

As of October 31,2008, the registrant had 60,335,564 shares of common stock, $0.05 par value,outstanding.

 

 

 

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**SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995:**

 

Thisquarterly report contains forward-looking statements, as defined in Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statementsrelate to, among other things, the following: our future financial andoperating performance and results; our business strategy; market prices; andour plans and forecasts.

 

Wehave based these forward-looking statements on our current assumptions,expectations and projections about future events. We may use the words “may,” “expect,”“anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget,” “project,”“will,” “continue,” “potential,” and other similar words to identifyforward-looking statements. You should read statements that contain these wordscarefully because they: discuss future expectations; contain projections ofresults of operations or of our financial condition; and/or state other “forward-looking”information.

 

Theforward looking statements in this report are subject to all the risks anduncertainties which are described in our most recent Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008 and in this quarterly report. Wemay also make material acquisitions or divestitures or enter into financingtransactions. None of these events can be predicted with certainty and are nottaken into consideration in the forward-looking statements.

 

Wedo not undertake any obligation to update or revise publicly anyforward-looking statements, except as required by law. These statements alsoinvolve risks and uncertainties that could cause our actual results orfinancial condition to materially differ from our expectations in thisquarterly report, including, but not limited to: industry conditions andcompetition; the cyclical nature of the industry; domestic and worldwidesupplies and demand for oil and gas; operational risks and insurance;environmental liabilities which may arise in the future which are not coveredby insurance or indemnity; the impact of current and future laws and governmentregulations, as well as repeal or modification of same, affecting the oil andgas industry and the Company’s operations in particular; production levels andother activities of OPEC and other oil and gas producers, and the impact thatthe above factors and other events have on the current and expected futurepricing of oil and natural gas; fluctuations in prices of oil and natural gas;imports of foreign oil and natural gas, including liquefied natural gas; futurecapital requirements and availability of financing; management’s ability toexecute our plans; geological concentration of our reserves; risks associatedwith drilling and operating wells; exploratory risks in the Haynesville ShalePlay in northwest Louisiana; cash flow and liquidity; timing and amount offuture production of oil and natural gas; availability of drilling andproduction equipment; marketing of oil and natural gas; and the risks describedfrom time to time in the Company’s reports filed with the Securities andExchange Commission, including the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008.

 

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**CUBIC ENERGY, INC.**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                               | ** **                                                                                                    | **Page**   |
|----------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                     |                                                                                                          |       |
| **PART I – FINANCIAL INFORMATION**                                                             | ** **                                                                                                    |
|                                                                                                     |                                                                                                          |       |
| Item 1. Financial Statements                                                                        |                                                                                                          |
|                                                                                                     |                                                                                                          |       |
|                                                                                                     | Independent Accountant’s Report                                                                          | 1          |
|                                                                                                     |                                                                                                          |       |
|                                                                                                     | Condensed Balance Sheets  As of September 30, 2008 (unaudited) and June 30, 2007                    | 2          |
|                                                                                                     |                                                                                                          |       |
|                                                                                                     | Condensed Statements of  Operations, (unaudited)  For the three months ended September 30, 2008 and 2007 | 3          |
|                                                                                                     |                                                                                                          |       |
|                                                                                                     | Condensed Statements of Cash  Flows, (unaudited)  For the three months ended September 30, 2008 and 2007 | 4          |
|                                                                                                     |                                                                                                          |       |
|                                                                                                     | Notes to  Condensed Financial Statements                                                                      | 5          |
|                                                                                                     |                                                                                                          |       |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9                                                                                                             |
|                                                                                                     |                                                                                                          |       |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                 | 13                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 4. Controls  and Procedures                                                                    | 13                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| **PART II – OTHER  INFORMATION**                                                               | ** **                                                                                                    |
| ** **                                                                                               | ** **                                                                                                    | ** ** |
| Item 1. Legal  Proceedings                                                                          | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item  1A. Risk Factors                                                                              | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 3. Defaults  Upon Senior Securities                                                            | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 4. Submission  of Matters to a Vote of Security Holders                                        | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 5. Other  Information                                                                          | 14                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Item 6. Exhibits                                                                               | 15                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Signatures                                                                                               | 16                                                                                                            |
|                                                                                                     |                                                                                                          |       |
| Certifications                                                                                           |                                                                                                          |

 

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# **PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**INDEPENDENT ACCOUNTANT’S REPORT**

** **

TheStockholders and Board of Directors

CubicEnergy, Inc.

 

Wehave reviewed the accompanying condensed balance sheets as of September 30,2008, and the related condensed statements of operations and of cash flows ofCubic Energy, Inc. for the three-month periods ended September 30,2008 and 2007. These financial statements are the responsibility of the Company’smanagement.

 

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 an opinion.

 

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, 2008, and the related statements of operations,stockholders’ equity and cash flows for the year then ended; and in our reportdated September 24, 2008, we expressed an unqualified opinion on thosestatements.

 

 
|                    | PHILIP  VOGEL & CO., PC    |
|-------------------------|-------------------------------------|
|                    |                                |
|                    | /s/ Philip Vogel & Co., PC |
|                    |                                |
|                    |                                |
| ** **              | **Certified Public Accountants**    |
| ** **              | ** **                          |
| ** **              | ** **                          |
| Dallas,  Texas          |                                |
| November 12,  2008 |                                |

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

** **
| ** **                                                                                                                                                      | ** ** | **September 30,**    | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2008 (unaudited)** | ** ** | **June 30, 2008** | ** ** |
| **Assets**                                                                                                                                                      |       |                      |       |                        |       |
| Current assets:                                                                                                                                                 |       |                      |       |                        |       |
| Cash and cash  equivalents                                                                                                                                      |       | $                         | 4,984,601  |                        | $          | 2,144,002 |   |
| Accounts  receivable - trade                                                                                                                                    |       | 207,376                   |       | 165,910                     |       |
| Prepaid drilling  costs                                                                                                                                         |       | —                    |       | 33,399                      |       |
| Other prepaid  expenses                                                                                                                                         |       | 42,617                    |       | 65,344                      |       |
| Total current  assets                                                                                                                                           |       | 5,234,594                 |       | 2,408,655                   |       |
| Property and  equipment:                                                                                                                                        |       |                      |       |                        |       |
| Oil and gas  properties, full cost method:                                                                                                                      |       |                      |       |                        |       |
| Proved  properties (including wells and related equipment and facilities)                                                                                       |       | 32,773,696                |       | 27,751,133                  |       |
| Unproven  properties                                                                                                                                            |       | 1,192,417                 |       | 3,254,901                   |       |
| Office and other  equipment                                                                                                                                     |       | 28,420                    |       | 14,672                      |       |
| Property and  equipment, at cost                                                                                                                                |       | 33,994,533                |       | 31,020,706                  |       |
| Less accumulated  depreciation, depletion and amortization                                                                                                      |       | 4,426,869                 |       | 4,163,112                   |       |
| Property and  equipment, net                                                                                                                                    |       | 29,567,664                |       | 26,857,594                  |       |
| Other assets:                                                                                                                                                   |       |                      |       |                        |       |
| Deferred loan  costs, net                                                                                                                                       |       | 190,473                   |       | 224,434                     |       |
| Total other  assets                                                                                                                                             |       | 190,473                   |       | 224,434                     |       |
|                                                                                                                                                            |       | $                         | 34,992,731 |                        | $          | 29,490,683 |   |
| ** **                                                                                                                                                      |       |                      |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                  |       |                      |       |                        |       |
| Current  liabilities:                                                                                                                                           |       |                      |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                                          |       | $                         | 336,863    |                        | $          | 250,630 |   |
| Due to  affiliates                                                                                                                                              |       | 2,394,807                 |       | 411,284                     |       |
| Total current  liabilities                                                                                                                                      |       | 2,731,670                 |       | 661,914                     |       |
| Long-term  liabilities:                                                                                                                                         |       |                      |       |                        |       |
| Long-term debt,  net of discounts                                                                                                                               |       | 26,272,482                |       | 22,970,570                  |       |
| Total long-term  liabilities                                                                                                                                    |       | 26,272,482                |       | 22,970,570                  |       |
| Commitments and  contingencies                                                                                                                                  |       | —                    |       | —                      |       |
| Stockholders’  equity:                                                                                                                                     |       |                      |       | —                      |       |
| Preferred stock  - $.01 par value, authorized 10,000,000 shares, issued none                                                                                    |       | —                    |       |                        |       |
| Common stock -  $.05 par value, authorized 100,000,000 shares, issued 60,335,564 shares at  September 30, 2008 and 58,853,064 shares at June 30, 2008 |       |  

3,016,778         |       |  

2,942,654           |       |
| Additional paid-in  capital                                                                                                                                     |       | 28,388,518                |       | 27,366,690                  |       |
| Accumulated  deficit                                                                                                                                            |       | (25,416,717               | )          | (24,451,145                 | )          |
| Stockholders’  equity                                                                                                                                      |       | 5,988,579                 |       | 5,858,199                   |       |
|                                                                                                                                                            |       | $                         | 34,992,731 |                        | $          | 29,490,683 |   |

 

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

 

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**CUBICENERGY, INC.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

** **
| ** **                                                 | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Revenues:                                                  |       |                                                 |       |   |   |
| Oil and gas  sales                                         |       | $                                                    | 674,971    |   | $ | 447,988 |   |
| Total revenues                                             |       | $                                                    | 674,971    |   | $ | 447,988 |   |
|                                                       |       |                                                 |       |   |   |
| Costs and  expenses:                                       |       |                                                 |       |   |   |
| Oil and gas  production, operating and development costs   |       | 364,356                                              |       | 240,190 |   |
| General and  administrative expenses                       |       | 451,299                                              |       | 373,493 |   |
| Depreciation,  depletion and non-loan-related amortization |       | 263,757                                              |       | 282,005 |   |
| Total costs and  expenses                                  |       | 1,079,412                                            |       | 895,688 |   |
| Operating income  (loss)                                   |       | (404,441                                             | )          | (447,700 | ) |
|                                                       |       |                                                 |       |   |   |
| Non-operating  income (expense):                           |       |                                                 |       |   |   |
| Other income                                               |       | 18,105                                               |       | 17,870 |   |
| Interest  expense, including amortization of loan discount |       | (545,275                                             | )          | (397,166 | ) |
| Amortization of  loan costs                                |       | (33,961                                              | )          | (14,048 | ) |
| Total  non-operating income (expense)                      |       | (561,131                                             | )          | (393,344 | ) |
| Loss from  operations before income taxes                  |       | (965,572                                             | )          | (841,044 | ) |
| Provision for  income taxes                                |       | —                                               |       | — |   |
|                                                       |       |                                                 |       |   |   |
| Net loss                                                   |       | $                                                    | (965,572   | ) | $ | (841,044 | ) |
|                                                       |       |                                                 |       |   |   |
| Net loss per  common share - basic and diluted             |       | $                                                    | (0.02      | ) | $ | (0.02 | ) |
|                                                       |       |                                                 |       |   |   |
| Weighted average  common shares outstanding                |       | 60,286,271                                           |       | 55,957,472 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Three months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                            |       |                                                 |       |   |   |
| Net (loss)                                                                            |       | $                                                    | (965,572   | ) | $ | (841,044 | ) |
| Adjustments to  reconcile net (loss) to cash provided (used) by operating activities: |       |                                                 |       |   |   |
| Depreciation,  depletion and amortization                                             |       | 427,431                                              |       | 425,765 |   |
| Stock issued for  compensation                                                        |       | 3,308                                                |       | 106,337 |   |
| Change in assets  and liabilities:                                                    |       |                                                 |       |   |   |
| (Increase)  decrease in accounts receivable - trade                                   |       | (41,466                                              | )          | (183,849 | ) |
| (Increase)  decrease in other prepaid expenses                                        |       | 19,419                                               |       | 12,696 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | 86,233                                               |       | 28,120 |   |
| Increase  (decrease) in due to affiliates                                             |       | 45,990                                               |       | (50,467 | ) |
| Net cash  provided (used) by operating activities                                     |       | (424,657                                             | )          | (502,442 | ) |
| ** **                                                                            |       |                                                 |       |   |   |
| **Cash  flows from investing activities:**                                            |       |                                                 |       |   |   |
| Acquisition and  development of oil and gas properties                                |       | (2,960,079                                           | )          | (4,396,750 | ) |
| Increase  (decrease) in capital portion of due to affiliates                          |       | 1,937,533                                            |       | (281,601 | ) |
| Purchase of  office equipment                                                         |       | (13,748                                              | )          | (1,786 | ) |
| (Increase)  decrease in advances on development costs                                 |       | 33,399                                               |       | (233,707 | ) |
| Net cash  provided (used) by investing activities                                     |       | (1,002,895                                           | )          | (4,913,844 | ) |
| ** **                                                                            |       |                                                 |       |   |   |
| **Cash  flows from financing activities:**                                            |       |                                                 |       |   |   |
| Proceeds from  credit facility                                                        |       | 3,172,200                                            |       | 4,037,400 |   |
| Issuance of  common stock, net                                                        |       | 1,095,952                                            |       | 117,500 |   |
| Loan costs  incurred and other                                                        |       | —                                               |       | — |   |
| Net cash  provided (used) by financing activities                                     |       | 4,268,152                                            |       | 4,154,900 |   |
| ** **                                                                            |       |                                                 |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | $                                                    | 2,840,599  |   | $ | (1,261,386 | ) |
| ** **                                                                            |       |                                                 |       |   |   |
| **Cash  and cash equivalents:**                                                       |       |                                                 |       |   |   |
| Beginning of  period                                                                  |       | 2,144,002                                            |       | 3,122,273 |   |
| End of period                                                                         |       | $                                                    | 4,984,601  |   | $ | 1,860,887 |   |
| Other  information:                                                                   |       |                                                 |       |   |   |
| Cash interest  paid on debt                                                           |       | $                                                    | 445,333    |   | $ | 267,433 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**AS OF SEPTEMBER 30, 2008**

**(Unaudited)**

 

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

 

**Basis of presentation**

 

The accounting policies followed by Cubic Energy, Inc.,a Texas corporation (the “Company” or “Cubic”), are set forth in the Company’sfinancial statements that are a part of its Annual Report on Form 10-K forthe fiscal year ended June 30, 2008 and should be read in conjunction withthe financial statements contained herein.

 

The financial information included herein asof September 30, 2008, and for the three-month periods ended September 30,2008, and 2007, have been presented without an audit, pursuant to accountingprinciples for interim financial information generally accepted in the UnitedStates of America, and the rules of the Securities and ExchangeCommission.

 

The Company believes that the disclosures areadequate to make the information presented not misleading. The informationpresented reflects all adjustments (consisting solely of normal recurringadjustments), which are, in the opinion of management, necessary for a fairstatement of results for the periods.

 

**Earnings per share**

 

The Company has adopted the provisions ofStatement of Financial Accounting Standards (SFAS) No. 128, “*Earnings per Share”*. SFAS No. 128reporting requirements replace primary and fully-diluted earnings per share (“EPS”)with basic and diluted EPS. Basic EPS is calculated by dividing net income(available to common stockholders) by the weighted average number of commonshares outstanding for the period. Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock.

 

Potential dilutive securities (e.g., stock warrants and convertibledebt) have not been considered because the Company reported net losses in thethree-month periods ended September 30, 2008, and 2007, and, accordingly,their effects would be anti-dilutive. The weighted average number of common andcommon equivalent shares outstanding was 60,286,271 and 55,957,472 for thequarters ended September 30, 2008 and 2007, respectively.

 

**NoteB – Stockholders’ Equity:**

 

**Stock issuance**

 

Through the following exercises of warrants, weissued an aggregate of 1,482,500 shares of common stock, which were notregistered under the Securities Act of 1933, as amended, during the firstquarter of fiscal 2009.

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF SEPTEMBER 30, 2008**

**(Unaudited)**

 

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

 

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

 

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

 

Aggregate proceeds to the Company of theaforementioned stock issuances were $1,095,952, all of which have been or willbe used for working capital purposes. The aforementioned issuances were made in reliance upon an exemptionfrom registration set forth in Section 4(2) of the Securities Act of1993, as amended, which exempts transactions by an issuer not involving apublic offering.

 

**Stock grants**

 

On January 10 and January 18, 2007,the Company issued 489,500 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to theCompany’s stock incentive plan (the “Plan”). As of such dates, the aggregatemarket value of the common stock granted was $391,600 and $42,000,respectively, based on the last sale price on the OTC Bulletin Board of theCompany’s common stock. Such amounts were amortized to compensation expense on aquarterly basis during calendar year 2007. An additional $30,000 wasaccelerated into the quarter ended June 30, 2007 when one of our formerChief Financial Officers resigned in May 2007. Accordingly, $93,400 wasrecorded as compensation expense and included in general and administrativeexpense for the quarter ended September 30, 2007.

 

On August 20, 2007, the Company issued90,000 unregistered shares to Scott D. Guffey, a former Chief Financial Officerof the Company, pursuant to the Plan, with such grant subject to vesting inquarterly installments over the following four quarters. On August 20,2008, the remaining 33,750 shares of Mr. Guffey’s August 20, 2007restricted stock grant vested. As of the date of the grant, the aggregatemarket value of the common stock granted was $103,500 based on the then marketprice on the OTCBB of the Company’s common stock. Such amount was amortized tocompensation expense on a quarterly basis during fiscal years 2008 and 2009.Accordingly, $12,937, $25,875, $25,875, $25,875 and $12,938 was recorded ascompensation expense and included in general and administrative expenses forthe quarters ended September 30, 2007, December 31, 2007, March 31,2008, June 30, 2008 and September 30, 2008, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF SEPTEMBER 30, 2008**

**(Unaudited)**

 

**NoteC – Long-term debt:**

 

**March 2007 debt issue**

 

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

 

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

 

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

 

TheCompany allocated the proceeds from the issuance of the debt to the warrants,the debt and net profits interest (see below) based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties. The assignment of a value tothe warrants and net profits interest resulted in a loan discount beingrecorded. The discount is being amortized over the original three-year term ofthe debt as additional interest expense. Amortization for the quarters ended September 30,2008 and 2007 was $129,713. Amortization for the fiscal years ending June 30,2009 and 2010 is expected to be approximately $514,620 and $342,610,respectively.

 

Cubic incurred loan costsof $240,613 on the issuance of the debt and warrants. The amount allocable tothe debt of $166,590 has been capitalized and is being amortized over the termof the debt. Amortization for the quarters ended September 30, 2008 and2007 was $14,048. Amortization for the fiscal years ending June 30, 2009and 2010 is expected tobe approximately $55,733 and $37,105, respectively. Cubic also incurred commitment fees of$170,000 related to subsequent increases in the Credit Facility’s borrowingbase; such amount was capitalized in fiscal 2008 and is being amortized overthe remaining term of the loan. Amortization for the quarters ended September 30,2008 and 2007 was $19,913 and $0, respectively. Amortization for the fiscalyears ending June 30, 2009 and 2010 is expected to be approximately$79,001 and $52,595, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF SEPTEMBER 30, 2008**

**(Unaudited)**

 

**May 2008subordinated debt issue**

 

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

 

Issuing the Subordinated Note required theconsent of the holder of the Company’s senior indebtedness, Wells Fargo, whichconsent it granted on May 5, 2008. Subsequently, on May 8, 2008, theCredit Facility with Wells Fargo was amended by the First Amendment to theCredit Agreement (the “First Amendment”). Material provisions of the FirstAmendment included the following: (i) the Company may not prepay all orany part of the principal balance outstanding on the Term Loan prior to itsmaturity on March 1, 2010; and (ii) the amount of the Borrowing Basewas increased to $20,000,000, which amount was fully drawn upon, subsequent tothe end of fiscal 2008, on August 20, 2008.

 

**Note D – Related partytransactions:**

 

An affiliated company,Tauren Exploration, Inc. (“Tauren”), which is owned 100% by the Company’sPresident and Chief Executive Officer, Calvin Wallen III, owns a workinginterest in the wells in which the Company owns a working interest. As of September 30,2008 and June 30, 2008, the Company was owed by Tauren $14,235 and $942,respectively for miscellaneous capital expenditures and general andadministrative expenses paid by the Company on Tauren’s behalf.

 

 In addition, all but three wells in which the Company owns a workinginterest are operated by an affiliated company, Fossil Operating, Inc. (“Fossil”),which is owned 100% by the Company’s President and Chief Executive Officer,Calvin Wallen III. As of September 30, 2008 and June 30, 2008, theCompany owed Fossil $2,833,781 and $862,895, respectively, for drilling costsand lease and operating expenses, and was owed by Fossil $424,740 and $450,699,respectively, for oil and gas sales.

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

Thefollowing discussion of operations for the three months ended September 30,2008 and 2007 should be read in conjunction with our condensed financialstatements and the notes thereto included in this Form 10-Q and with thefinancial statements, notes and management’s discussion and analysis includedin our Annual Report on Form 10-K for the year ended June 30, 2008.

 

**Revenues**

 

OILAND GAS SALES increased 51% to $674,971 for the quarter ended September 30,2008 from $447,988 for the quarter ended September 30, 2007 primarily dueto higher natural gas prices and 13 new wells being online in the 2008 quarter.The weighted average natural gas price we received in the 2008 quarter was$9.41 per mcf versus $6.90 in the 2007 quarter.

 

**Costs and Expenses**

 

OIL AND GAS PRODUCTION, OPERATING ANDDEVELOPMENT COSTS (also referred to as “LEASE OPERATING EXPENSES” elsewhereherein) increased 52% to $364,356 (54% of oil and gas sales) for the 2008quarter from $240,190 (54% of oil and gas sales) for the 2007 quarter primarilydue to more wells being on-line in Louisiana, which resulted in: a $50,502increase in the cost of chemicals; a $47,785 increase in salt water hauling anddisposal costs; and $64,276 in common facility expenses for production from theCompany’s Johnson Branch wells, which did not occur in the prior year period.Such increases were partially offset by a $51,335 decrease in costspassed-through to the Company by the purchaser of the Company’s gas. Such costsare deducted from the Company’s gross revenue by the purchaser and include, butare not limited to: costs to market the Company’s gas, compression fees, andthe cost of fuel used by the purchaser to convey the Company’s gas.

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)increased 21% to $451,299 for the 2008 quarter from $373,493 in the 2007quarter as a result of: a $49,038 increase in cash compensation expenseresulting from an increase in the number of our employees; and the followingexpenses, which occurred in the 2008 quarter but did not occur in the prioryear quarter: $83,542 in stock exchange application and listing fees; $40,215in contracted professional services expenses related to an increase in “divisionorder” accounting work resulting from our increased drilling activity; and,$10,032 in marketing expenses. These amounts were partially offset by a $93,399decrease in non-cash stock compensation.

 

DEPRECIATION,DEPLETION AND AMORTIZATION (“DD&A”) decreased 6% to $263,757 in the 2008quarter from $282,005 in the 2007 quarter primarily due to an increase in ourtotal proved reserves to approximately 17.4 Bcfe at September 30, 2008 ascompared to approximately 6.6 Bcfe at June 30, 2008 and approximately 4.3Bcfe at September 30, 2007. This increase in proved reserves was primarilythe result of an increase in our Proved Undeveloped (“PUD”) reserves associatedwith our Haynesville shale assets. Development of the Haynesville Shale Playcommenced approximately only one year ago. While the majority of allHaynesville Shale wells drilled as of September 30, 2008, including wellsdrilled by our competitors, were in or around the Company’s leaseholds,publicly-available production data for the play had been scarce until veryrecently. As horizontal drilling through this formation has begun to beoptimized over the last few months and more initial production data has becomeavailable, the expected recovery of hydrocarbons from the Haynesville ShalePlay has significantly risen. These recent developments resulted in asubstantial increase in our PUD reserves associated with our Haynesville shaleassets as estimated by an independent, petroleum engineering firm, as of September 30,2008, as compared to both June 30, 2008 and September 30, 2007. Theestimates of this independent petroleum engineering firm were based upon reviewof production histories and other geological, economic, ownership andengineering data provided by the Company. Such increase in reserves, coupledwith relatively flat gas production versus the prior year quarter, 

 

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resulted in asignificantly lower depletion percentage being applied to our capitalized costsin the current year quarter; the depletion percentage in the 2008 quarter wasapproximately 0.3939% as compared to approximately 1.4899% in the prior yearquarter. The lower depletion percentage was partially offset by a $13,918,980,or 69%, increase in “Property and equipment, at cost” at September 30,2008 as compared to September 30, 2007, which was primarily the result ofcapital expenditures for the drilling and completion of newhydrocarbon-producing wells.

 

INTEREST EXPENSE increased 37% to $545,275 inthe 2008 quarter from $397,166 in the 2007 quarter primarily due to an increasein debt (before discounts) to $27,000,000 at September 30, 2008 from$13,037,400 at September 30, 2007. This increase resulted from draws of approximately $11,962,600 on therevolving line of credit with Wells Fargo, and the borrowing of $2,000,000under the terms of the May 6, 2008 Subordinated Note. The weighted averagedebt balance (before discounts) for the 2008 quarter was $25,275,978 as comparedto $10,522,220 in the 2007 quarter. The Credit Facility with Wells Fargoalso resulted in a loan discount being recorded. The discount is beingamortized over the original three-year term of the debt as additional interestexpense with $129,713 being recorded in each of the 2008 and 2007 quarters.

 

**Capital Resources andLiquidity**

 

**Working Capital**

 

TheCompany’s working capital increased to $2,502,924 at September 30, 2008from $1,746,741 at June 30, 2008, primarily due to cash flows provided byfinancing activities of $4,268,152 resulting from $1,095,952 of proceeds fromthe issuance of common stock (as a result of the exercise of warrants), and theborrowing of $3,172,200 on the aforementioned revolving line of credit withWells Fargo. These cash inflows were partially offset by the aforementionedcapital expenditures of $2,960,079 related to the drilling and completion ofnew wells and the $424,657 use of cash from operating activities in the quarterended September 30, 2008.

 

**Cash Flow**

 

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

 
| ** **                                            | ** ** | **Three months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net cash  provided (used) by operating activities     |       | $                                                    | (424,657   | ) | $ | (502,442 | ) |
| Net cash  provided (used) by investing activities     |       | (1,002,895                                           | )          | (4,913,844 | ) |
| Net cash  provided (used) by financing activities     |       | 4,268,152                                            |       | 4,154,900 |   |
| Net increase  (decrease) in cash and cash equivalents |       | $                                                    | 2,840,599  |   | $ | (1,261,386 | ) |

 

***OperatingActivities*****–**Duringthe quarter ended September 30, 2008, the Company used cash flows fromoperating activities of $424,657 as compared to $502,442 in the prior yearperiod. Cash flow from operations is dependent on our ability to increaseproduction through our development and exploratory activities and the price receivedfor oil and natural gas.

 

***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 gas

 

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properties. Inthe quarter ended September 30, 2008, we had capital spending of$2,960,079 and used net cash of $1,002,895 in investing activities. In thequarter ended September 30, 2007, we had capital spending of $4,396,750and used net cash of $4,913,844 in investing activities.

 

As of November 11, 2008, the Company hassuccessfully drilled 22 wells in its northwest Louisiana properties (12 in itsJohnson Branch acreage in Caddo Parish, and 10 in its Bethany Longstreetacreage in Caddo and DeSoto Parishes). In its Johnson Branch acreage, Cubic hasdrilled 12 wells through the Cotton Valley sandstones, with three of thesewells penetrating deeper into the Bossier/Haynesville shales. Two of such Bossier/Haynesvillewells have been completed and are producing from the Haynesville formation; thethird such well was completed and is producing from the Cotton Valley formation.To date, 10 Johnson Branch wells have been completed as hydrocarbon producersin the Cotton Valley sandstones. Additionally, in its Bethany Longstreetacreage, Cubic has eight producing wells in the Cotton Valley and Hosstonformations and two producing wells in the Haynesville Shale.

 

OnOctober 14, 2008, the Company engaged RBC Richardson Barr Securities, Inc.,an affiliate of Royal Bank of Canada Capital Markets, to explore all strategicalternatives on behalf of the Company and its shareholders, including apotential sale of the Company or its assets. Concurrent with this engagement,the Company reduced its planned capital expenditures for the remainder offiscal 2009. In addition to the completion of the Red Oak Timber 5 No.1 andEstes 7 No. 1 wells into the Haynesville Shale subsequent to the end ofthe fiscal first quarter (on October 16, 2008 and November 11, 2008,respectively), the Company anticipates the following capital projects in theremainder of fiscal 2009: re-completions of four wells in our Johnson Branchacreage; the acquisition of rights-of-way in certain of our leases; and theacquisition of a minor working interest in a horizontal Haynesville Shale well(operated by an unrelated third-party), which is expected to begin productionin the second half of fiscal 2009. As a result, our projected capitalexpenditures for fiscal 2009 are expected to be approximately $4,300,000, whichis below the minimum amount that we projected in our most recent Annual Reporton Form 10-K. No assurance can be given that all or any of theseanticipated projects will be completed as currently anticipated. The Companyplans to fund these capital expenditures through cash on hand and cash providedfrom operations, although the Company cannot be certain that adequate fundswill be available from operating cash flow to fully fund the projected capitalexpenditures for fiscal 2009. Additionally, because future cash flows and theavailability of borrowings are subject to a number of variables, such asprevailing prices of oil and gas, actual production from existing andnewly-completed wells, the Company’s success in developing and producing newreserves, and the uncertainty with respect to the amount of funds which mayultimately be required to finance the Company’s development and explorationprogram, there can be no assurance that the Company’s capital resources will besufficient to sustain the Company’s future development and exploratoryactivities.

 

***Financing Activities*********–**Net cash flows provided by financing activitieswere $4,268,152 and $4,154,900 in the quarters ended September 30, 2008and 2007, respectively.

 

During the 2008quarter, we received an aggregate of $1,095,952 in proceeds from the issuanceof stock (resulting from the exercise of warrants), and, on August 20,2008, Cubic drew upon an additional $3,172,200 from Wells Fargo under therevolving line of credit component of our Credit Facility in order to fund thecompletion of four wells drilled in our Johnson Branch acreage in fiscal 2008and the drilling of two additional wells located in the Company’s BethanyLongstreet acreage in Caddo and DeSoto parishes. As a result, the Company hasborrowed the full $20,000,000 available under the Credit Facility’s RevolvingNote (and an aggregate of $25,000,000 under the Credit Facility). During the2007 quarter, we received an aggregate of $117,500 in proceeds from theissuance of stock (resulting from the exercise of warrants) and drew upon$4,037,400 from the Revolving Note of our Credit Facility.

 

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**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 operation 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, 2008.

 

**SubsequentEvents**

 

OnOctober 3, 2008, Scott D. Guffey, Chief Financial Officer of the Company,resigned from such position. During an unspecified transition period, Mr. Guffeyhas agreed to provide consulting services to the Company, as the Company mayreasonably request.

 

OnOctober 8, 2008, the Company appointed Larry Badgley, age 52, as its ChiefFinancial Officer, effective October 13, 2008. Mr. Badgley joined theCompany in August 2008, as a consultant. Prior to joining the Company,from October 2005 through September 2006, Mr. Badgley served asManaging Director of BridgePoint Consulting, a provider of CFO services toventure capital-backed and early stage companies. In that capacity, Mr. Badgleywas primarily responsible for strategic planning for growth companies. From July 1998through October 2005, Mr. Badgley served as Director of Accountingand Finance for Jefferson Wells International, an international professionalservices firm. Prior to that time, Mr. Badgley served as Chief OperatingOfficer and Chief Financial Officer of a privately held national signmanufacturer until its sale in July 1998. In his 11 years providing CFOservices to venture capital-backed and early stage companies, Mr. Badgleywas responsible for financial planning and analysis, SEC reporting, SOXtechnical training and practice development, and served as a national practiceleader for mergers and acquisitions with a heavy focus on due diligence andpost-acquisition integration. While at BridgePoint Consulting, Mr. Badgleywas also instrumental in National Energy Group’s initial public offering in2006. Mr. Badgley received a BBA in Finance from Hardin-Simmons Universityand is a certified public accountant.

 

Mr. Badgley’ssalary has been established at $145,000 per year, plus a $300 per month healthinsurance subsidy. In the event that Mr. Badgley is terminated withoutcause, as determined by the Board of Directors of the Company, he will beentitled to three months salary. The Company and Mr. Badgley did not enterinto a written employment agreement.

 

On October 14, 2008, the Company issued apress release announcing that it has retained RBC Richardson Barr Securities, Inc.,an affiliate of Royal Bank of Canada Capital Markets, to explore all strategicalternatives on behalf of the Company and its shareholders.

 

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**Item 3. Quantitative andQualitative Disclosures About Market Risk.**

 

**Commodity Price Risk**

 

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

** **

**Interest Rate Risk**

** **

**As of September 30, 2008, we had $27,000,000 oflong-term debt outstanding under our Credit Facility and the Subordinated Note,each of which matures in fiscal 2010 and bears interest at the prime rate plus2.0%. As a result, our interest costs fluctuate based on short-term interestrates. Based on the aforementioned borrowings outstanding at September 30,2008, a 100 basis point change in interest rates would change our annualinterest expense by approximately $270,000. We had no interest rate derivativesduring the first quarter of fiscal 2009.**

 

**Item 4. Controls andProcedures**

 

Ourprincipal executive and financial officers have concluded, based on theirevaluation 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 thatinformation we are required to disclose in the reports we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Our disclosurecontrols and procedures include controls and procedures designed to ensure thatinformation we are required to disclose in such reports is accumulated andcommunicated to management, including our principal executive and financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.

 

Therewere no changes in the Company’s internal controls over financial reportingduring the most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, these internal controls.

 

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**PART ****II – OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

There are no legal proceedings to which the Company is a party or towhich its properties are subject, which are, in the opinion of management,likely to have a material adverse effect on the Company’s results of operationsor financial condition.

 

**Item 1A. Risk Factors**

 

Therehave been no material changes in the risk factors applicable to us from thosedisclosed in our Fiscal 2008 Form 10-K, except as follows:

 

***Increased drilling in the Haynesville Shale in and around our core areamay cause pipeline capacity problems that may limit our ability to sell naturalgas.***

 

All of the Company’s Louisiana acreage lies atop thecenter of what is known in our industry as the “Haynesville Shale Play” (whichwe also refer to as the “Bossier/Haynesville shales” elsewhere herein). The few Haynesville Shale wells drilled todate in and around our core area have reported very high initial productionrates, implying large reserves. If the Haynesville Shale continues to besuccessful, the amount of natural gas being produced in and around our corearea from these new wells, as well as other existing wells, may exceed thecapacity of the various gathering and intrastate or interstate transportationpipelines currently available, which could result in wells being shut-inawaiting a pipeline to deliver such gas. Any such shutting-in of our wellscould adversely affect our results of operations.

 

**Item 2.****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

Adescription of our stock issuances during the quarter ended September 30,2008 is included in “Item 1. Notesto Condensed Financial Statements — Note B — Stockholders’ Equity” elsewhere herein and isincorporated herein by reference.

 

**Item 3. Defaults Upon SeniorSecuritie****s**

 

None.

 

**Item 4. Submission of Matters toa Vote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

None.

 

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**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   |

 

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* Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
| ** **                   | **CUBIC ENERGY, INC.** |
|------------------------------|------------------------|
|                         | (Registrant)           |
|                         |                   |   |
|                         |                   |   |
| Date: November 14, 2008 | By:                    | /s/ Calvin A. Wallen, III |
|                         |                   | Calvin A. Wallen, III, President and Chief  Executive  Officer |
|                         |                   |   |
|                         |                   |   |
| Date: November 14, 2008 | By:                    | /s/ Larry Badgley |
|                         |                   | Larry Badgley, Chief Financial Officer  (Principal  Financial and Accounting Officer) |

 

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