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**UNITED STATES**

# **SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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

##### ** **

**x**** ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

###### **for thequarterly period ended March 31, 2010**

######  

**OR**

 

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

 

###### **for the transition period from              to              **

######  

**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 Plano Road**

**Dallas, TX 75238**

(Address of principal executive offices)

 

**(972) 686-0369**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch 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 |

 

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 May 14,2010, the registrant had 75,394,579 shares of common stock, $0.05 par value,outstanding.

 

 

 

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**Specialnote regarding forward-looking statements**

 

Thisquarterly report on Form 10-Q contains forward-looking statements, asdefined in Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements, other thanstatements of historical facts, are forward-looking statements. 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 fiscalyear ended June 30, 2009, as well as the disclosure contained in thisreport, which describe factors that could cause our actual results to differfrom those set forth in the forward-looking statements, including, but notlimited to, the following factors:

 

·      our ability to generatesufficient cash flow from operations, borrowings or other sources to enable usto service our debt and fully develop our undeveloped acreage positions;

 

·      the volatility in commodityprices for oil and natural gas;

 

·      the possibility that theindustry may be subject to future regulatory or legislative actions (includingany additional taxes);

 

·      the presence orrecoverability of estimated oil and natural gas reserves and the actual futureproduction rates and associated costs;

 

·      the ability to replace oiland natural gas reserves;

 

·      lease or title issues or defectsto our oil and gas properties;

 

·      environmental risks;

 

·      drilling and operatingrisks;

 

·      exploration and developmentrisks;

 

·      competition, includingcompetition for acreage in natural gas producing areas;

 

·      management’s ability toexecute our plans to meet our goals;

 

·      our ability to retain keymembers of senior management;

 

·      our ability to obtain goodsand services, such as drilling rigs and other oilfield equipment, and access toadequate gathering systems to execute our drilling program;

 

·      general economic conditions,whether internationally, nationally or in the regional and local market areasin which we do business, may be less favorable than expected, including thatthe United States economic slow-down might continue to negatively affect thedemand for natural gas and natural gas liquids;

 

·      dependence on third-partyoperators for the production and completion of wells on our acreage;

 

·      the ability to market ournatural gas and pipeline capacity through which to sell our natural gas;

 

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·      continued hostilities in theMiddle East and other sustained military campaigns or acts of terrorism orsabotage; and

 

·      other economic, competitive,governmental, legislative, regulatory, geopolitical and technological factorsthat may negatively impact our business, operations or pricing.

 

All forward-looking statements are expresslyqualified in their entirety by the cautionary statements in this paragraph andelsewhere in this document. Other than as required under the securities laws,we do not assume a duty to update these forward-looking statements, whether asa result of new information, subsequent events or circumstances, changes inexpectations 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 March 31, 2010 (unaudited) and June 30, 2009                            |     | 2 |
|                                                                                                |                                                                                                              |     |   |
|                                                                                                | Condensed  Statements of Operations (unaudited) For the three and nine months ended  March 31, 2010 and 2009 |     | 3 |
|                                                                                                |                                                                                                              |     |   |
|                                                                                                | Condensed  Statements of Cash Flows (unaudited) For the nine months ended March 31,  2010 and 2009           |     | 4 |
|                                                                                                |                                                                                                              |     |   |
|                                                                                                | Notes to Condensed Financial Statements                                                                           |     | 5-10 |
|                                                                                                |                                                                                                              |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                              | 11-18    |
|                                                                                                |                                                                                                              |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |                                                                                                              | 19       |
|                                                                                                |                                                                                                              |     |
| Item  4. Controls and Procedures                                                                    |                                                                                                              | 19       |
|                                                                                                |                                                                                                              |     |
| **PART II — OTHER INFORMATION**                                                           |
|                                                                                                |                                                                                                              |     |
| Item  1. Legal Proceedings                                                                          |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item 1A. Risk Factors                                                                               |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item 3. Defaults  Upon Senior Securities                                                            |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item  4. (Removed and Reserved)                                                                     |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item  5. Other Information                                                                          |                                                                                                              | 20       |
|                                                                                                |                                                                                                              |     |
| Item 6. Exhibits                                                                                    |                                                                                                              | 21       |
|                                                                                                |                                                                                                              |     |
| Signatures                                                                                          |                                                                                                              | 22       |
|                                                                                                |                                                                                                              |     |
| Certifications                                                                                      |                                                                                                              |     |

 

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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 March 31,2010, and the related condensed statements of operations for the three andnine-month periods ended March 31, 2010 and 2009, and the cash flows ofCubic Energy, Inc. for the nine-month periods ended March 31, 2010and 2009. 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, 2009, and the related statements of operations,stockholders’ equity and cash flows for the year then ended (not presentedherein); and in our report dated September 28, 2009, we expressed anunqualified opinion on those statements and included an explanatory paragraphregarding the Company’s ability to continue as a going concern.  In ouropinion, the information set forth in the accompanying condensed balance sheetas of June 30, 2009, is fairly stated, in all material respects, inrelation to the balance sheet from which it has been derived.

 
|       | PHILIP  VOGEL & CO., PC    |
|------------|-------------------------------------|
|       |                                |
|       | /s/ Philip Vogel & Co., PC |
| ** ** | **Certified Public Accountants**    |

# ** **

Dallas,Texas

May 14, 2010

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

 

**Item 1. Financial Statements**

 
| ** **                                                                                                                                                                                                                          | ** ** | **March 31,**   | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2010 (unaudited)** | ** ** | **June 30, 2009** | ** ** |
| **Assets**                                                                                                                                                                                                                          |       |                 |       |                   |       |
| Current  assets:                                                                                                                                                                                                                    |       |                 |       |                   |       |
| Cash  and cash equivalents                                                                                                                                                                                                          |       | $                    | 1,062,859  |                   | $          | 71,050 |   |
| Accounts  receivable - trade                                                                                                                                                                                                        |       | 884,623              |       | 200,950                |       |
| Other  prepaid expenses                                                                                                                                                                                                             |       | 35,202               |       | 55,063                 |       |
| Total  current assets                                                                                                                                                                                                               |       | 1,982,684            |       | 327,063                |       |
| Property  and equipment:                                                                                                                                                                                                            |       |                 |       |                   |       |
| Oil  and gas properties, full cost method:                                                                                                                                                                                          |       |                 |       |                   |       |
| Proved  properties (including wells and related equipment and facilities)                                                                                                                                                           |       | 8,186,561            |       | 15,725,709             |       |
| Unproven  properties                                                                                                                                                                                                                |       | 2,556,922            |       | 890,715                |       |
| Office  and other equipment                                                                                                                                                                                                         |       | 28,420               |       | 28,420                 |       |
| Property  and equipment, at cost                                                                                                                                                                                                    |       | 10,771,903           |       | 16,644,844             |       |
| Less  accumulated depreciation, depletion and amortization                                                                                                                                                                          |       | 5,859,718            |       | 4,934,973              |       |
| Property  and equipment, net                                                                                                                                                                                                        |       | 4,912,185            |       | 11,709,871             |       |
| Other  assets:                                                                                                                                                                                                                      |       |                 |       |                   |       |
| Deferred  loan costs, net                                                                                                                                                                                                           |       | 44,384               |       | 89,700                 |       |
| Other  - Long-term Drilling Credit                                                                                                                                                                                                  |       | 29,677,877           |       | —                 |       |
| Total  other assets                                                                                                                                                                                                                 |       | 29,722,261           |       | 89,700                 |       |
|                                                                                                                                                                                                                                |       | $                    | 36,617,130 |                   | $          | 12,126,634 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                       |       |                 |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                               |       |                 |       |                   |       |
| Current  portion of long-term debt                                                                                                                                                                                                  |       | $                    | —     |                   | $          | 26,657,390 |   |
| Accounts  payable and accrued expenses                                                                                                                                                                                              |       | 1,045,118            |       | 299,381                |       |
| Due  to affiliates                                                                                                                                                                                                                  |       | 354,516              |       | 1,192,828              |       |
| Total  current liabilities                                                                                                                                                                                                          |       | 1,399,634            |       | 28,149,599             |       |
| Long-term  liabilities:                                                                                                                                                                                                             |       |                 |       |                   |       |
| Long-term  debt, net of discounts                                                                                                                                                                                                   |       | 17,612,124           |       | —                 |       |
| Note  payable to affiliate                                                                                                                                                                                                          |       | 2,000,000            |       | —                 |       |
| Total  long-term liabilities                                                                                                                                                                                                        |       | 19,612,124           |       | —                 |       |
| Stockholders’  equity:                                                                                                                                                                                                         |       |                 |       |                   |       |
| Preferred  stock - $.01 par value, total authorized 10,000,000 shares; 165,000 shares of  Series A Convertible Preferred Stock authorized; 103,500 outstanding at  March 31, 2010; none outstanding at June 30, 2009 |       | $                    | 1,035      |                   | $          | — |   |
| Additional  paid-in-capital                                                                                                                                                                                                         |       | 10,348,965           |       | —                 |       |
| Common  stock - $.05 par value, authorized 120,000,000 shares, issued 75,394,579  shares at March 31, 2010 and 62,570,564 shares at June 30, 2009                                                                         |       | 3,769,729            |       | 3,128,528              |       |
| Additional  paid-in capital                                                                                                                                                                                                         |       | 54,032,986           |       | 30,062,168             |       |
| Accumulated  deficit                                                                                                                                                                                                                |       | (52,547,343          | )          | (49,213,661            | )          |
| Stockholders’  equity                                                                                                                                                                                                          |       | 15,605,372           |       | (16,022,965            | )          |
|                                                                                                                                                                                                                                |       | $                    | 36,617,130 |                   | $          | 12,126,634 |   |

 

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

 

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**CUBICENERGY, INC.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

** **
| ** **                                                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                                  |       |                   |       |                  |       |   |   |   |   |
| Oil  and gas sales                                         |       | $                      | 898,075    |                  | $          | 293,371 |   | $ | 1,857,093 |   | $ | 1,460,308 |   |
| Total  revenues                                            |       | $                      | 898,075    |                  | $          | 293,371 |   | $ | 1,857,093 |   | $ | 1,460,308 |   |
| Costs  and expenses:                                       |       |                   |       |                  |       |   |   |   |   |
| Oil  and gas production, operating and development costs   |       | 403,794                |       | 285,819               |       | 1,049,941 |   | 1,049,918 |   |
| General  and administrative expenses                       |       | 952,694                |       | 728,805               |       | 1,936,106 |   | 1,629,198 |   |
| Depreciation,  depletion and non-loan-related amortization |       | 402,166                |       | 211,648               |       | 924,746 |   | 771,632 |   |
| Impairment  loss on oil and gas properties                 |       | —                 |       | 7,746,908             |       | — |   | 16,346,779 |   |
| Total  operating costs and expenses                        |       | 1,758,654              |       | 8,973,180             |       | 3,910,793 |   | 19,797,527 |   |
| Operating  loss                                            |       | (860,579               | )          | (8,679,809            | )          | (2,053,700 | ) | (18,337,219 | ) |
| Non-operating  income (expense):                           |       |                   |       |                  |       |   |   |   |   |
| Other  income                                              |       | 2,902                  |       | 2,611                 |       | 3,999 |   | 33,006 |   |
| Interest  expense, including amortization of loan discount |       | (1,761,779             | )          | (476,773              | )          | (2,929,236 | ) | (1,562,648 | ) |
| Amortization  of loan costs                                |       | (4,859                 | )          | (33,222               | )          | (68,368 | ) | (101,143 | ) |
| Total  non-operating expense                               |       | (1,763,736             | )          | (507,384              | )          | (2,993,605 | ) | (1,630,785 | ) |
| Gain  on debt extinguishment                               |       | —                 |       | —                |       | 1,747,623 |   | — |   |
| Loss  from operations before income taxes                  |       | (2,624,315             | )          | (9,187,193            | )          | (3,299,682 | ) | (19,968,004 | ) |
| Provision  for income taxes                                |       | —                 |       | —                |       | — |   | — |   |
| Net  loss                                                  |       | $                      | (2,624,315 | )                     | $          | (9,187,193 | ) | $ | (3,299,682 | ) | $ | (19,968,004 | ) |
| Net  loss per common share - basic and diluted             |       | $                      | (0.04      | )                     | $          | (0.15 | ) | $ | (0.05 | ) | $ | (0.33 | ) |
| Weighted  average common shares outstanding                |       | 66,781,797             |       | 61,430,731            |       | 64,989,700 |   | 60,678,739 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **March 31,**    | ** ** |
| ** **                                                                            | ** ** | **2010**              | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                             |       |                  |       |   |   |
| Net  (loss)                                                                           |       | $                     | (3,299,682 | ) | $ | (19,968,004 | ) |
| Adjustments  to reconcile net (loss) to cash provided (used) by operating activities: |       |                  |       |   |   |
| Depreciation,  depletion and amortization                                             |       | 2,800,123             |       | 1,259,092 |   |
| Impairment  loss on oil and gas properties                                            |       | —                |       | 16,346,779 |   |
| Gain  on extinguishment of debt                                                       |       | (1,747,623            | )          | — |   |
| Stock  issued for compensation                                                        |       | 395,915               |       | 385,400 |   |
| Change  in assets and liabilities:                                                    |       |                  |       |   |   |
| (Increase)  decrease in accounts receivable - trade                                   |       | (683,673              | )          | 105,482 |   |
| (Increase)  decrease in other prepaid expenses                                        |       | 19,861                |       | 58,745 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | 711,737               |       | 1,459 |   |
| Increase  (decrease) in due to affiliates                                             |       | 24,391                |       | 241,739 |   |
| Net  cash provided (used) by operating activities                                     |       | (1,778,951            | )          | (1,569,308 | ) |
| **Cash flows from investing activities:**                                             |       |                  |       |   |   |
| Acquisition  and development of oil and gas properties                                |       | (3,104,937            | )          | (5,012,287 | ) |
| Increase  (decrease) in capital portion of due to affiliates                          |       | (862,703              | )          | (426,404 | ) |
| Purchase  of office equipment                                                         |       | —                |       | (13,748 | ) |
| (Increase)  decrease in advances on development costs                                 |       | —                |       | (136,220 | ) |
| Net  cash provided (used) by investing activities                                     |       | (3,967,640            | )          | (5,588,659 | ) |
| **Cash flows from financing activities:**                                             |       |                  |       |   |   |
| Proceeds  from credit facility                                                        |       | 5,000,000             |       | 3,172,200 |   |
| Issuance  of common stock, net                                                        |       | 1,788,400             |       | 2,495,952 |   |
| Loan  costs incurred and other                                                        |       | (50,000               | )          | — |   |
| Net  cash provided (used) by financing activities                                     |       | 6,738,400             |       | 5,668,152 |   |
| **Net increase (decrease) in cash and cash equivalents**                              |       | $                     | 991,809    |   | $ | (1,489,815 | ) |
| **Cash and cash equivalents:**                                                        |       |                  |       |   |   |
| Beginning  of period                                                                  |       | 71,050                |       | 2,144,002 |   |
| End  of period                                                                        |       | $                     | 1,062,859  |   | $ | 654,187 |   |
| Other  information:                                                                   |       |                  |       |   |   |
| Cash  interest paid on debt                                                           |       | $                     | 1,134,528  |   | $ | 1,206,991 |   |
| Non-cash  investing and financing activities:                                         |       |                  |       |   |   |
| Common  and preferred stock for drilling credits                                      |       | $                     | 20,700,000 |   | $ | — |   |
| Property  interest assigned for drilling credits                                      |       | $                     | 10,252,810 |   | $ | — |   |
| Equity  interest issued creating a deferred interest from debt modification           |       | $                     | 12,077,704 |   | $ | — |   |
| Dividends  accrued                                                                    |       | $                     | 34,000     |   | $ | — |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**AS OF MARCH 31, 2010**

**(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, 2009 and should be read in conjunction withthe financial statements contained herein.

 

The financial information included herein asof March 31, 2010, and for the three and nine month periods ended March 31,2010, and 2009, 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, except for the adjustment described in Note C), which are, in theopinion of management, necessary for a fair statement of results for theperiods.

 

**Earnings per share**

 

The Company has adopted the provisions ofFinancial Accounting Standards Board, Accounting Standards Codification (“FASBASC”) 260, “*Earnings per Share”*.FASB ASC 260 reporting requirements replace primary and fully-diluted earningsper share (“EPS”) with basic and diluted EPS. Basic EPS is calculated bydividing net income (available to common stockholders) by the weighted averagenumber of common shares outstanding for the period. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock.

 

Potential dilutive securities (e.g., preferred stock, stock warrantsand convertible debt) have been considered, but the dilutive effect of thepotential dilutive securities is not believed to be material. The Companyreported  a net loss in the three monthperiod and nine month period ended March 31, 2010 and in the three andnine month periods ended March 31, 2009, and, accordingly, their effectswould be anti-dilutive. The weighted average number of common and commonequivalent shares outstanding was 66,781,797 and 61,430,731 for the quartersended March 31, 2010 and 2009, respectively, and 64,989,700 and 60,678,739for the nine month periods ended March 31, 2010 and 2009, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2010**

**(Unaudited)**

 

**NoteB — Stockholders’ Equity:**

** **

**Stock issuances**

 

On February 23, 2009, twenty-two warrantholders of the Company exercised warrants for 2,000,000 shares of Companycommon stock, through the payment of $1,400,000 to the Company. Included amongthese warrant holders were the following 5% beneficial owners: William L.Bruggeman, Jr. and Ruth J. Bruggeman JWROS exercised warrants for1,544,000 shares and Steven S. Bruggeman exercised warrants for 24,000 shares.

 

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

 

On November 24, 2009, the Company enteredinto transactions with Tauren Exploration, Inc. (“Tauren”) and LangtryMineral & Development, LLC (“Langtry”), both of which are entitiescontrolled by Calvin Wallen III, the Chief Executive Officer of the Company,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 will use the Drilling Creditsto fund $30,952,810 of its share of the drilling and completion costs for thosehorizontal Haynesville Shale wells drilled in sections previously operated byan affiliate of the Company, which are now operated 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 10,350,000Company common shares 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 redemptionprice equal to 20% over the original issue price, plus accrued and unpaiddividends.

 

The consideration with respect to thesetransactions was determined pursuant to negotiations between the Company,Tauren and Langtry, and not pursuant to any formula. The foregoing transactionswere approved by a special committee of the board of directors of the Companycomprised exclusively of the Company’s non-employee directors.

 

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**CUBICENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2010**

**(Unaudited)**

 

**Stock grants**

 

On January 12, 2009, the Company issued 235,000unregistered shares to three directors of the Company pursuant to the 2005Stock Option Plan (the “Plan”).  As ofsuch dates, the aggregate market value of the common stock granted was $385,400based on the last sale price ($1.64 per share) on the aforementioned date, onthe NYSE — Amex of the Company’s common stock. Such amounts were expensedupon issuance to compensation expense.

 

On February 3, 2010, the Company issued 370,014unregistered shares to five directors of the Company pursuant to the Plan.  As of such dates, the aggregate market valueof the common stock granted was $395,915 based on the last sale price ($1.07per share) on the aforementioned date, on the NYSE — Amex of the Company’scommon stock. Such amounts were expensed upon issuance tocompensation expense.

 

All of the foregoing issuances and grants weremade in reliance upon an exemption from registration set forth in Regulation Dand/or Section 4(2) of the Securities Act of 1933, as amended, whichexempts transactions by an issuer not involving a public offering.

 

**Note C — Oil and Gas Properties**

 

The capitalized costs included in the full costpool are subject to a “ceiling test”, which limits such costs to the aggregateof the estimated present value, using a ten percent discount rate, of thefuture net revenues from proved reserves, based on current economic andoperating conditions plus the lower of cost and estimated net realizable valueof unproven properties.

 

The Company recorded no impairment loss on oil andgas properties for the three or nine months ended March 31, 2010 comparedto an impairment loss on oil and gas properties in the amount of $7,746,908 forthe three months and $16,346,779 for the nine months ended March 31, 2009as a result of the full cost ceiling test. The weighted average natural gasprice utilized for the March 31, 2009 ceiling impairment evaluation was$3.96 per Mcf.

 

**NoteD — Long-term debt:**

 

**March 2007 debt issue**

 

On March 5, 2007, Cubic entered into aCredit Agreement with Wells Fargo Energy Capital, Inc. (“Wells Fargo”)providing for a revolving credit facility of $20,000,000 (the “Revolving Note”)and a convertible term loan of $5,000,000 (the “Term Loan”; and together withthe Revolving Note, the “Credit Facility”). The indebtedness bore interest at afluctuating rate equal to the sum of the Wells Fargo Bank prime rate plus twopercent (2%) per annum, was originally scheduled to mature on March 1,2010, and was secured by substantially all of the assets of the Company. The Term Loanof $5,000,000 is convertible into 5,000,000 shares of Cubic common stock, at aconversion price of $1.00 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.

 

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 **CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2010**

**(Unaudited)**

 

In connection with entering into the CreditFacility, the Company issued to Wells Fargo warrants, with five-yearexpirations, for the purchase of up to 2,500,000 shares of Company common stockat an exercise price of $1.00 per share.

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and net profits interest in the future production ofhydrocarbons from or attributable to Cubic’s net interest in its Louisianaproperties, which net profits interest was granted to Wells Fargo, based ontheir relative fair market values at the date of issuance. The value assignedto the warrants of $1,314,289 was recorded as an increase in additional paid-incapital and the value assigned to the net profits interest of $213,148 wasrecorded as a credit to the full cost pool for oil and gas properties. Theassignment of a value to the warrants and net profits interest resulted in aloan discount being recorded. The discount amortization is over the originalthree-year term of the debt as additional interest expense.  Amortization for the quarters ended March 31,2010 and 2009 was $0 and $126,893, respectively and was $239,686 and $386,318for the nine month periods ended March 31, 2010 and 2009, respectively.

 

Cubic incurred loan costs of $240,613 on the issuance of the debt andwarrants. The amount allocable to the debt of $166,590 has been capitalized andis being amortized over the term of the debt. Amortization for the fiscal yearended June 30, 2009 was $55,733. Amortization for the quarters ended March 31,2010 and 2009 was $ 0 and $13,743 respectively and was $25,958 and $41,838 forthe nine month periods ended March 31, 2010 and 2009. Cubic also incurredcommitment fees of $170,000 related to subsequent increases in the CreditFacility’s borrowing base; such amount was capitalized in fiscal 2008 and isbeing amortized over the remaining term of the loan.  Amortization for the quarters ended March 31,2010 and 2009 was $0 and $19,480 respectively and was $36,795 and $59,305 forthe nine month periods ended March 31, 2010 and 2009.

 

On December 18, 2009, the senior debt was modified as set forthbelow.  In connection with themodification, the Company recorded a gain on extinguishment of debt of$1,748,719.  Such amount includes thewrite-off of the unamortized deferred loan cost ($26,947), and the write-off ofthe remaining loan discount ($102,924).

 

On December 18, 2009, the Company entered into a Second Amendmentto Credit Agreement with Wells Fargo, providing for a revolving credit facilityof up to $40 million and a convertible term loan of $5 million (the “AmendedCredit Agreement”). The borrowing base under the revolving credit facility wasinitially established at $25 million. The indebtedness bears interest at afluctuating rate equal to the sum of the Wells Fargo Bank prime rate plus twopercent (2%) per annum, matures on July 1, 2012 and is secured bysubstantially all of the assets of the Company. In connection with enteringinto the Amended Credit Agreement, the Company issued to Wells Fargo additionalwarrants, expiring on December 1, 2014, for the purchase of up to5,000,000 shares of Company common stock at an exercise price of $1.00 pershare, and extended the expiration date of the warrants to purchase 2,500,000shares of Company common stock that were previously issued to Wells Fargo to December 1,2014.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2010**

**(Unaudited)**

 

The Company allocated the proceeds from the issuance of the debt to thewarrants, the debt and the beneficial conversion feature based on their fairmarket values at the date of issuance. The fair market value assigned to theextension of warrants to purchase 2,500,000 shares of Company common stock was$923,302 and the value assigned to the issuance of the warrant to purchase theadditional 5,000,000 shares of Company common stock was $8,031,896, which wasrecorded as an increase in additional paid-in capital. The difference in thefair value of the term loan and the face amount of $1,877,494 was recorded asan extinguishment of debt, offset by the amount of unamortized deferred loancost and discounts associated with the original debt of $129,871.  The beneficial conversion feature equaled$5,027,494, which was reduced to $3,122,506 based on the limitation to the fairvalue to debt. The assignment of a value to the warrants and beneficialconversion feature as well as the write-down of the term loan to the fair valueresulted in a total loan discount in the amount of $13,955,198 being recorded.The discount is being amortized over the three-year term of the debt asadditional interest expense. Amortization was $1,356,337 for the three monthperiod ended March 31, 2010, and was $1,567,322 for the nine month periodended March 31, 2010.  Amortizationfor the fiscal years ending June 30, 2010, 2011 and 2012 is expected to beapproximately $2,938,730, $5,500,699 and $5,515,769, respectively.

 

Cubic incurred loan costsof $50,000 on the issuance of the debt and warrants. The amount was capitalizedand allocated to the debt and is being amortized over the term of the debt.Amortization was $4,860 for the quarter ended March 31, 2010 and $5,616for the nine month period ended March 31, 2010. Amortization forthe fiscal years ending June 30, 2010, 2011 and 2012 is expected to beapproximately $10,529, $19,708 and $19,762, respectively.

 

**May 2008 subordinated debt issue and refinancing**

 

On May 6, 2008, the Company issued a subordinated promissory notein the amount of $2,000,000 (the “Subordinated Note”) to Diversified DynamicsCorporation (the “Lender”), an entity controlled by William Bruggeman, adirector who beneficially owns more than 5% of the common stock of the Company.The Subordinated Note bore interest at a fluctuating rate equal to the sum ofthe prime rate plus two percent (2%) per annum, and was scheduled to mature on April 30,2010. As consideration for the loan made by the Lender pursuant to theSubordinated Note, the Company agreed to convey to the Lender, upon the repaymentin full of the indebtedness evidenced by the Subordinated Note and therepayment in full of the senior indebtedness evidenced by the Credit Facilitywith Wells Fargo, an undivided 0.375% net profits interest in the futureproduction of hydrocarbons from or attributable to Cubic’s net interest in itsLouisiana properties. The proceeds of the Subordinated Note were being used forgeneral corporate 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 CreditAgreement (the “First Amendment”). Material provisions of the First Amendmentincluded the following: (i) the Company may not prepay all or any part ofthe principal balance outstanding on the Term Loan prior to its maturity on March 1,2010 without the consent of Wells Fargo; and (ii) the amount of theborrowing base was increased to $20,000,000, which amount was fully drawn uponsubsequent to the end of fiscal 2008, on August 20, 2008.

 

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**CUBICENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2010**

**(Unaudited)**

 

On December 18, 2009, the Company issued a subordinated promissorynote payable to Calvin A. Wallen, III, the Company’s Chairman of the Boardand Chief Executive Officer, in the principal amount of $2,000,000 (the “WallenNote”). This note bears interest at the prime rate plus one percent (1%), withinterest payable monthly. The Wallen Note was entered into with the consent ofWells Fargo. The outstanding principal balance is due and payable on August 31,2012 and is subordinated to the indebtedness under the Amended CreditAgreement. The proceeds of the Wallen Note were used to repay the SubordinatedNote. The net profits interest described above was conveyed to the Lender inconnection with the repayment.

 

**Note E — Related party transactions**

 

An affiliated company, Tauren, which is owned 100% by the Company’sPresident and Chief Executive Officer, Calvin Wallen III, owned workinginterests in wells in which the Company owns working interests. As of March 31,2010 and June 30, 2009, the Company owed Tauren $57,263 and $649,205,respectively for miscellaneous capital expenditures and general andadministrative expenses paid by Tauren on the Company’s behalf.

 

In addition, certain wells in which the Company owns a working interestwere 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 March 31, 2010 and June 30, 2009, theCompany owed Fossil $577,027 and $815,238, respectively, and was owed by Fossil$279,774 and $271,615, 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 nine months ended March 31,2010 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 30,2009.

 

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.

 

**Louisiana Acreage**

 

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 Petroleum Corporation(“Goodrich”), Chesapeake Energy Corporation (“Chesapeake”), El Paso Corporation(“El Paso”) and EXCO Operating Company, LP (“EXCO”), and all four companies arethird-party operators actively working on our shared acreage. As a result ofthis activity, we expect to see improving production volumes in this nextquarter.

 

Ourfinancial results depend upon our third-party Haynesville Shale operators alongwith many factors, which are largely driven by the volume of our natural gasproduction and the price that we receive for that production. Our Cotton Valleyproduction volumes will decline as reserves are depleted unless we obtain andexpend capital in successful development and exploration activities or acquireproperties with existing production. The amount we realize for our productiondepends predominantly upon commodity prices, which are affected by changes inmarket demand and supply, as impacted by overall economic activity, weather,pipeline capacity constraints, inventory storage levels, basis differentialsand other factors. Accordingly, finding and developing oil and natural gasreserves at economical costs is critical 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 from $25 million and extended thematurity date to July 1, 2012 from March 1, 2010. We also acquired$30.9 million in drilling credits, dedicated for the future drilling andcompletion of horizontal Haynesville Shale formation wells. For additionalinformation, 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.

 

**Texas Acreage**

 

OurTexas properties are situated in Palo Pinto, Eastland and Callahan Counties.The Texas properties consist primarily of wells acquired in severaltransactions between 1991 and 2002 and through overriding royalty interestsreserved in farm-out agreements in 1998 and 1999. These wells produce limitedamounts of natural gas and oil condensate.

 

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**Capital Resources and Liquidity**

 

**Working Capital**

 

TheCompany’s working capital increased to $583,050 at March 31, 2010 from($27,822,536) at June 30, 2009. This increase was primarily due theamendment of the Wells Fargo credit facility that extended the term, therebyre-classifying the debt to long-term. The cash used by investing activities of$3,967,640 and operating activities of $1,778,951, consists mainly of costsrelated to non-operated wells and for daily operations, in the nine monthsended March 31, 2010. These cash outflows were partially offset by cashflows provided by financing activities of $6,738,400 resulting from $1,788,400of proceeds from the issuance of common stock, and the borrowing of $5,000,000on the aforementioned revolving line of credit with Wells Fargo in the ninemonths ended March 31, 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 Calvin Wallen III,the Chief Executive Officer of the Company, under which the Company hasacquired $30,952,810 in pre-paid drilling credits (the “Drilling Credits”)applicable towards the development of its Haynesville Shale rights in NorthwestLouisiana. The Company will use the Drilling Credits to fund $30,952,810 of itsshare of the drilling and completion costs for those horizontal HaynesvilleShale wells drilled in sections previously operated by an affiliate of theCompany which are now operated by a third party.

 

Asconsideration for the Drilling Credits, the Company (a) has conveyed toTauren a net overriding royalty interest of approximately 2% in its leaseholdrights below the Taylor Sand formation of the Cotton Valley and (b) issuedto Langtry 10,350,000 Company common shares and preferred stock in the amountof $10,350,000, convertible at any time prior to the fifth anniversary ofissuance into 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’s discretion.The preferred stock may be redeemed by the Company at any time, at a redemptionprice 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.

 

Cubicin aggregate has 38 natural gas wells in Louisiana. Currently, we have 20vertical Cotton Valley wells, 4 vertical Haynesville Shale wells, and 14horizontal Haynesville Shale wells. They include 18 vertical Cotton Valleywells  and 4 vertical Haynesville Shalewells operated by an affiliate company, Fossil Operating; 3 horizontalHaynesville Shale wells operated by Goodrich; 2 horizontal Haynesville Shalewells operated by EXCO Operating; 2 vertical Cotton Valley wells operated byIndigo Minerals, LLC (“Indigo”); and 9 horizontal Haynesville Shale wellsoperated by Chesapeake.

 

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, both the Garland 25 and the Plants 26 horizontal wells haveproduced over one Bcf of natural gas. The Garland 24 has not begun productionat the time of this report.

 

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’, 

 

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whichlimited the completion technique on this well. When considering the limited completion technique, the Red Oak 6-1 hasproduced according to expectation. Recently, EXCO spud the Thomas 36-1in Section36-T16N-R15W. EXCO currentlyhas plans to drill approximately 10 horizontal wells on our acreage by the endof calendar 2010.

 

Chesapeakedrilled and completed two Cotton Valley vertical 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 five horizontal Haynesville Shale wells on ouracreage, the Mitchell 12-H1 and the Woolworth 15-H1 in Sections 12 and15-T15N-R16W, respectively; and the Clingman 11-H1, Clingman 2-H1 and theMuslow 5-H1 in Sections 11, 2, and 5-T15N-R15W, respectively. Chesapeake hasthree more locations waiting on completion: the Western 18-H1 in Section 18-T15N-R16W;the SRLT 33-H1 in Section 33-T16N-R15W; and the Saddler 9-H1 in Section 9-T15N-R16W.The Slaughter 6-H1 in Section 6-T15N-R15W is being drilled.

 

TheCompany has revised its planned capital expenditures for the remainder offiscal 2010. We have postponed some of the re-completions and workovers ofcurrent Cotton Valley vertical wells planned for fiscal 2010 due to commodityprices.  Further, EXCO has shifted someof its operations, originally anticipated for late fiscal 2010, to early fiscal2011. As a result, our projected capital expenditures for fiscal 2010 for ourworking interest portion of third party operator horizontal drilling will beapproximately $15,000,000. This is lower than expected at the end of ourquarter ended December 31, 2009. However, this is higher than the amountthat we projected in both our Quarterly Report on Form 10-Q for thequarter ended September 30, 2009 and our Annual Report on Form 10-Kfor the year ended June 30, 2009.

 

TheCompany plans to fund these capital expenditures, among other ways, throughexisting drilling credits, the increased Wells Fargo credit facility, cash onhand and cash provided from operations. Future cash flows and the availabilityof borrowings are subject to a number of variables, such as prevailing pricesof oil 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’sdevelopment and exploration program, all have a certain level ofuncertainty.  Thus, there can be noassurance that the Company’s capital resources will be sufficient to sustainthe Company’s development and exploration activities.

 

**Cash Flow**

 

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

 
| ** **                                            | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **March 31,**    | ** ** |
| ** **                                            | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Net  cash provided (used) by operating activities     |       | $                     | (1,778,951 | ) | $ | (1,569,308 | ) |
| Net  cash provided (used) by investing activities     |       | (3,967,640            | )          | (5,588,659 | ) |
| Net  cash provided (used) by financing activities     |       | 6,738,400             |       | 5,668,152 |   |
| Net  increase (decrease) in cash and cash equivalents |       | $                     | 991,809    |   | $ | (1,489,815 | ) |

 

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***Operating Activities*****—**During the nine months ended March 31,2010, the Company used cash flows from operating activities of $1,778,951 ascompared to $1,569,308 in the prior year period. Cash flow from operations isdependent on our ability to increase production through our development andexploratory activities and the price received for oil and natural gas.

 

***Investing Activities*********—**The cash usedin investing activities consists of capital expenditures related to thedrilling and completion of new wells and the acquisition and development ofadditional oil and gas properties. In the nine months ended March 31,2010, we had capital spending related to the acquisition and development of oiland gas properties of $3,104,937 and used net cash of $3,967,640 in investingactivities. In the nine months ended March 31, 2009, we had capitalspending related to the acquisition and development of oil and gas propertiesof $5,012,287 and used net cash of $5,588,659 in investing activities.

 

***FinancingActivities*********—**Netcash flows provided by financing activities were $6,738,400 and $5,668,152 inthe nine month periods ended March 31, 2010 and 2009, respectively.

 

During fiscal 2010, we received an aggregate of$1,788,400 in proceeds from the issuance of stock (resulting from the exerciseof warrants), and, on December 18, 2009, Cubic drew upon an additional$5,000,000 from Wells Fargo under the revolving line of credit component of ourCredit Facility in order to pay past due invoices and working interest expenseson our non-operated acreage. As a result, the Company has borrowed $25,000,000of the $40,000,000 potentially available under the Credit Facility’s RevolvingNote (and an aggregate of $45,000,000 under the Credit Facility). During fiscal2009, we received an aggregate of $2,495,952 in proceeds from the issuance ofstock (resulting from the exercise of warrants) and drew upon $3,172,200 fromthe Revolving Note of our Credit Facility.

 

**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 our acquisition,developmental and exploration activities; oil and natural gas price conditions;and other related economic factors. Currently, no sources of liquidity orfinancing are provided by off-balance sheet arrangements or transactions withunconsolidated, limited-purpose entities. We have no contractual commitmentspertaining to exploration, development and production activities.

 

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**Results of Operations**

 

*For the Three Months ended March 31, 2010 and 2009*

** **
| ** **                                | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **March 31,**     | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production Volumes:**                   |       |                   |       |       |       |       |       |   |   |
| Oil  (Bbl)                                |       | 254                    |       | 456        |       | (202       | )          | -44 | % |
| Natural  gas liquids (gallons)            |       | 9,924                  |       | 18,403     |       | (8,479     | )          | -46 | % |
| Natural  gas (Mcf)                        |       | 197,418                |       | 55,953     |       | 141,465    |       | 253 | % |
| Total  (Mcfe)                             |       | 200,360                |       | 61,319     |       | 139,041    |       | 227 | % |
|                                      |       |                   |       |       |       |       |       |   |   |
| **Weighted Average Sales Prices:**        |       |                   |       |       |       |       |       |   |   |
| Oil  (per Bbl)                            |       | $                      | 75.67      |       | $          | 48.46      |       | $ | 27.21 |   | 56 | % |
| Natural  gas liquids (per gallon)         |       | $                      | 1.38       |       | $          | 0.81       |       | $ | 0.57 |   | 70 | % |
| Natural  gas (per Mcf)                    |       | $                      | 4.38       |       | $          | 4.66       |       | $ | (0.28 | ) | -6 | % |
|                                      |       |                   |       |       |       |       |       |   |   |
| **Selected Expenses per Mcfe:**           |       |                   |       |       |       |       |       |   |   |
| Production  costs                         |       | $                      | 0.72       |       | $          | 4.19       |       | $ | (3.47 | ) | -83 | % |
| Workover  expenses (non-recurring)        |       | $                      | 0.34       |       | $          | —     |       | $ | 0.34 |   | — |   |
| Severance  taxes                          |       | $                      | 0.32       |       | $          | 0.15       |       | $ | 0.17 |   | 115 | % |
| Other  revenue deductions                 |       | $                      | 0.63       |       | $          | 0.32       |       | $ | 0.31 |   | 98 | % |
| Total  lease operating expenses           |       | $                      | 2.02       |       | $          | 4.66       |       | $ | (2.65 | ) | -57 | % |
| General  and administrative expenses      |       | $                      | 4.75       |       | $          | 11.89      |       | $ | (7.13 | ) | -60 | % |
| Depreciation,  depletion and amortization |       | $                      | 2.01       |       | $          | 3.45       |       | $ | (1.44 | ) | -42 | % |

 

**Revenues**

 

OILAND GAS SALES increased 206% to $898,075 for the quarter ended March 31,2010 from $293,371 for the quarter ended March 31, 2009, primarily due tothe non-operated horizontal wells coming on line during the 2010 quarter versusthe 2009 quarter. The weighted average natural gas price we received in the2010 quarter was $4.38 per Mcf versus $4.66 in the 2009 quarter.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased 41% to $403,794(45% of oil and gas sales) for 2010 from $285,819 (97% of oil and gas sales)for 2009 primarily due to more wells being on-line in Louisiana, which resultedin an increase of $30,489 in common facility expenses for production from theCompany’s Johnson Branch wells, which did not occur in the prior year period.There was a $105,539 increase of costs passed-through to the Company by thepurchaser of the Company’s gas. Such costs are deducted from the Company’sgross revenue by the purchaser and include, but are not limited to: costs tomarket the Company’s gas, compression fees, and the cost of fuel used by thepurchaser to convey the Company’s gas.

 

GENERALAND ADMINISTRATIVE EXPENSES increased 31% to $952,694 for 2010 from $728,805 in2009 primarily as a result of a $64,380 increase in marketing expense, a$43,497 increase in salaries and a $35,744 increase in corporate fees relatedto our NYSE — Amex listing. There was also a $19,613 increase in contractedprofessional services related to an increase in “division order” accountingwork, which occurred in the three months ended March 31, 2010.

 

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DEPRECIATION,DEPLETION AND NON-LOAN RELATED AMORTIZATION increased 90% to $402,116 in 2010from $211,648 in 2009. The increase was primarily due to an increase in thedepletion rate to .96% at March 31, 2010 from .36% at March 31, 2009.There was no Impairment Loss on Oil and Gas Properties for the three monthsended March 31, 2010 as compared to $7,746,908 for the same period ended March 31,2009.

 

INTERESTEXPENSE increased 270% to $1,761,779 in 2010 from $476,773 in 2009 primarilydue to an increase in debt to $32,000,000 at March 31, 2010 from$27,000,000 at March 31, 2009. This year over year increase resulted fromthe Second Amendment to the Credit Agreement, which increased the revolvingline of credit with Wells Fargo, and the draw of $5,000,000 under the terms ofthe new agreement. The weighted average debt balance (before discounts) for the2010 quarter was $32,000,000 as compared to $27,000,000 in the 2009 quarter.The amendment of the Credit Facility with Wells Fargo also resulted in a loandiscount being recorded. The discount is being amortized over the amendedthree-year term of the debt as additional interest expense with $1,356,337being recorded in the 2010 quarter.

 

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*For the nine months ended March 31, 2010 and 2009*

* *
| ** **                                | ** ** | **Nine months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                | ** ** | **March 31,**    | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2010**              | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production Volumes:**                   |       |                  |       |       |       |   |   |   |   |
| Oil  (Bbl)                                |       | 842                   |       | 1,245      |       | (403 | ) | -32 | % |
| Natural  gas liquids (gallons)            |       | 32,341                |       | 63,690     |       | (31,349 | ) | -49 | % |
| Natural  gas (Mcf)                        |       | 434,095               |       | 188,894    |       | 245,201 |   | 130 | % |
| Total  (Mcfe)                             |       | 443,767               |       | 205,464    |       | 238,303 |   | 116 | % |
|                                      |       |                  |       |       |       |   |   |   |   |
| **Weighted Average Sales Prices:**        |       |                  |       |       |       |   |   |   |   |
| Oil  (per Bbl)                            |       | $                     | 72.88      |       | $          | 61.42 |   | $ | 11.46 |   | 19 | % |
| Natural  gas liquids (per gallon)         |       | $                     | 1.26       |       | $          | 1.18 |   | $ | 0.08 |   | 7 | % |
| Natural  gas (per Mcf)                    |       | $                     | 4.04       |       | $          | 6.93 |   | $ | (2.89 | ) | -42 | % |
|                                      |       |                  |       |       |       |   |   |   |   |
| **Selected Expenses per Mcfe:**           |       |                  |       |       |       |   |   |   |   |
| Production  costs                         |       | $                     | 1.66       |       | $          | 4.52 |   | $ | (2.86 | ) | -63 | % |
| Workover  expenses (non-recurring)        |       | $                     | 0.21       |       | $          | 0.08 |   | $ | 0.13 |   | 167 | % |
| Severance  taxes                          |       | $                     | 0.15       |       | $          | 0.20 |   | $ | (0.04 | ) | -22 | % |
| Other  revenue deductions                 |       | $                     | 0.35       |       | $          | 0.32 |   | $ | 0.03 |   | 9 | % |
| Total  lease operating expenses           |       | $                     | 2.37       |       | $          | 5.11 |   | $ | (2.74 | ) | -54 | % |
| General  and administrative expenses      |       | $                     | 4.36       |       | $          | 7.93 |   | $ | (3.57 | ) | -45 | % |
| Depreciation,  depletion and amortization |       | $                     | 2.08       |       | $          | 3.76 |   | $ | (1.67 | ) | -45 | % |

 

**Revenues**

 

OILAND GAS SALES increased 27% to $1,857,093 for the nine months ended March 31,2010 from $1,460,308 for the nine months ended March 31, 2009 primarilydue to the non-operated horizontal wells coming on line during the 2010 periodversus the 2009 period.  The weightedaverage natural gas price we received in the 2010 period was $4.04 per Mcfversus $6.93 in the 2009 period.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased a nominal amountto $1,049,941 (57% of oil and gas sales) for 2010 from $1,049,918 (72% of oiland gas sales) for 2009. There was no significant change for the nine monthsended March 31, 2010 versus March 31, 2009. The decrease inpercentage of costs to oil and gas sales in primarily due to the increase inoil and gas sales for the nine months ended March 31, 2010 versus the sameperiod ended March 31, 2009.

 

GENERALAND ADMINISTRATIVE EXPENSES increased 19% to $1,936,106 for 2010 from$1,629,198 in 2009 primarily as a result of: a $106,726 increase in marketingfees and $157,004 increase in legal fees related to work done for the specialcommittee in regards to the transaction among Cubic, Langtry and Taurenresulting in the acquisition of the Drilling Credit by Cubic. In addition, theCompany experienced a $52,488 increase in contracted professional servicesrelated to an increase in “division order” accounting work, due to new wellscoming on line.

 

DEPRECIATION,DEPLETION AND AMORTIZATION increased 20% to $924,746 in 2010 from $771,632 in2009. The increase was primarily due to an addition of $244,388 to the fullcost pool during the nine months ended March 31, 2010 and no full costpool additions for the same period ended March 31, 2009. There was noImpairment Loss on Oil and Gas Properties for the nine months ended March 31,2010 as compared to $16,346,779 for the same period ended March 31, 2009.

 

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GAINON DEBT EXTINGUISHMENT was realized in December 2009 as a result of therefinancing of the debt with Wells Fargo. The existing loan balance of$1,877,494 was decreased (written off) as a term of the amendment of the WellsFargo credit facility that was extinguished, which was partially offset by debtextinguishment costs of $129,871. This created an overall gain on debtextinguishment of $1,747,623 for the nine months ended March 31, 2010.

 

INTERESTEXPENSE increased 87% to $2,929,236 in 2010 from $1,562,648 in 2009 primarilydue to an increase of $2,403,687 in the weighted average debt balance (beforediscounts) related to an increase in total debt to $32,000,000 at March 31,2010 from $27,000,000 at March 31, 2009. This year the revolving line ofcredit with Wells Fargo was amended and increased to $25,000,000 from$20,000,000, the $5,000,000 term note was left in place by Wells Fargo, andboth maturity dates were extended to July 1, 2012. The weighted averagedebt balance (before discounts) for the nine months ended March 31, 2010was $28,824,818 as compared to $26,421,131 in the nine months ended March 31,2009. The Credit Facility with Wells Fargo also resulted in a loan discountbeing recorded. The discount is being amortized over the original three-yearterm of the debt as additional interest expense with $1,807,009 being recordedin the nine months ended March 31, 2010.

 

**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, 2009.

 

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

 

**Commodity Price Risk**

 

We are subject to price fluctuations for natural gas and crude oil.Prices received for natural gas sold on the spot market are volatile dueprimarily 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 anddevelopment activities. To date, we have not entered into futures contracts orother hedging agreements to manage the commodity price risk for a portion ofour production.

 

**Interest Rate Risk**

 

As of March 31, 2010, we had $32,000,000 of long-term debtoutstanding under our Credit Facility and the Wallen Note, each of whichmatures in fiscal 2013 and bears interest at the prime rate plus 2.0% and theprime rate plus 1.0%, respectively. As a result, our interest costs fluctuatebased on changes in short-term interest rates. Based on the aforementionedborrowings outstanding at March 31, 2010, a 100 basis point change ininterest rates would change our annual interest expense by approximately$320,000. We had no interest rate derivatives during the third quarter offiscal 2010.

 

**Item 4. Controls andProcedures**

 

*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 as defined in 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 the timeperiods specified in the SEC’s rules and forms. Our disclosure controlsand 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.

 

*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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**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 2009 Annual Report on Form 10-K.

 

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

 

None.

 

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

 

None.

 

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

 

**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: May 17, 2010  | By:                    | /s/  Calvin A. Wallen, III |
|                     |                   | Calvin  A. Wallen, III, President and Chief Executive Officer |
|                     |                   |   |
|                     |                   |   |
| Date:  May 17, 2010 | By:                    | /s/  Larry G. Badgley |
|                     |                   | Larry G. Badgley, Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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