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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 the quarterly periodended December 31, 2009**

 

**OR**

 

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

 

###### **for thetransition 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 PlanoRoad**

**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) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles).  Yes o  No o

 

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

 

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

 

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

 

As of February 15, 2010, the registrant had65,044,579 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; marketprices; 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 this report and our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2009, as well as other sections of 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 ordefects to 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 to executeour 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 and pipeline take-away capacity, to execute ourdrilling 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, oil 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 OFCONTENTS**

 
| ** **                                                                                                          | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                |       |     |
| **PART I — FINANCIAL INFORMATION**                                                                        |       |     |
|                                                                                                                |       |     |
| Item 1.  Financial Statements                                                                                       |       |     |
|                                                                                                                |       |     |
| Independent Accountant’s Report                                                                                |       | 1        |
|                                                                                                                |       |     |
| Condensed  Balance Sheets   As of December 31, 2009 (unaudited) and June 30, 2009                         |       | 2        |
|                                                                                                                |       |     |
| Condensed Statements of Operations (unaudited)   For the three and six months ended December 31, 2009 and 2008 |       | 3        |
|                                                                                                                |       |     |
| Condensed Statements of Cash Flows (unaudited)   For the six months ended December 31, 2009 and 2008           |       | 4        |
|                                                                                                                |       |     |
| Notes to Condensed Financial Statements                                                                             |       | 5-11     |
|                                                                                                                |       |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                 |       | 12-18    |
|                                                                                                                |       |     |
| 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. Submission  of Matters to a Vote of Security Holders                                                        |       | 20       |
|                                                                                                                |       |     |
| Item  5. Other Information                                                                                          |       | 20       |
|                                                                                                                |       |     |
| Item 6.  Exhibits                                                                                                   |       | 21       |
|                                                                                                                |       |     |
| Signatures                                                                                                          |       | 22       |
|                                                                                                                |       |     |
| Certifications                                                                                                      |       |     |

 

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**PART I - FINANCIALINFORMATION**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheStockholders and Board of Directors

CubicEnergy, Inc.

 

Wehave reviewed the accompanying condensed balance sheet as of December 31,2009, and the related condensed statements of operations for the three and sixmonth periods ended December 31, 2009 and 2008, and the cash flows ofCubic Energy, Inc. for the six month periods ended December 31, 2009and 2008. 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         |                                |
| February 15, 2010 |                                |

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

 

**Item 1. Financial Statements**

 
| ** **                                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **2009 (unaudited)**  | ** ** | **June 30, 2009** | ** ** |
| **Assets**                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Current  assets:                                                                                                                                                                                                                |       |                  |       |                   |       |
| Cash  and cash equivalents                                                                                                                                                                                                      |       | $                     | 2,179,901  |                   | $          | 71,050 |   |
| Accounts  receivable - trade                                                                                                                                                                                                    |       | 755,673               |       | 200,950                |       |
| Other  prepaid expenses                                                                                                                                                                                                         |       | 23,599                |       | 55,063                 |       |
| Total  current assets                                                                                                                                                                                                           |       | 2,959,173             |       | 327,063                |       |
| Property  and equipment:                                                                                                                                                                                                        |       |                  |       |                   |       |
| Oil  and gas properties, full cost method:                                                                                                                                                                                      |       |                  |       |                   |       |
| Proved  properties (including wells and related equipment and facilities)                                                                                                                                                       |       | 7,857,618             |       | 15,725,709             |       |
| Unproven  properties                                                                                                                                                                                                            |       | 855,750               |       | 890,715                |       |
| Office  and other equipment                                                                                                                                                                                                     |       | 28,420                |       | 28,420                 |       |
| Property  and equipment, at cost                                                                                                                                                                                                |       | 8,741,788             |       | 16,644,844             |       |
| Less  accumulated depreciation, depletion and amortization                                                                                                                                                                      |       | 5,457,552             |       | 4,934,973              |       |
| Property  and equipment, net                                                                                                                                                                                                    |       | 3,284,236             |       | 11,709,871             |       |
| Other  assets:                                                                                                                                                                                                                  |       |                  |       |                   |       |
| Deferred  loan costs, net                                                                                                                                                                                                       |       | 49,244                |       | 89,700                 |       |
| Other  - Long term drilling credit                                                                                                                                                                                              |       | 30,958,368            |       | —                 |       |
| Total  other assets                                                                                                                                                                                                             |       | 31,007,612            |       | 89,700                 |       |
|                                                                                                                                                                                                                            |       | $                     | 37,251,021 |                   | $          | 12,126,634 |   |
|                                                                                                                                                                                                                            |       |                  |       |                   |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                   |       |                  |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                           |       |                  |       |                   |       |
| Current  portion of long term debt                                                                                                                                                                                              |       | $                     | —     |                   | $          | 26,657,390 |   |
| Accounts  payable and accrued expenses                                                                                                                                                                                          |       | 581,594               |       | 299,381                |       |
| Due  to affiliates                                                                                                                                                                                                              |       | 545,867               |       | 1,192,828              |       |
| Total  current liabilities                                                                                                                                                                                                      |       | 1,127,461             |       | 28,149,599             |       |
| Long-term  liabilities:                                                                                                                                                                                                         |       |                  |       |                   |       |
| Long-term  debt, net of discounts                                                                                                                                                                                               |       | $                     | 18,255,788 |                   | $          | — |   |
| Total  long-term liabilities                                                                                                                                                                                                    |       | $                     | 18,255,788 |                   | $          | — |   |
| Stockholders’  equity:                                                                                                                                                                                                     |       |                  |       |                   |       |
| Preferred  stock - 8% preferred stock, $.01 par value, redeemable at $120,covertible at $1.20 per  common share; Authorized 10,000,000 shares none issued; * 103, 500  shares @ $100 per share (*unissued 12/31/09; see Note B) |       | $                     | 1,035      |                   | $          | — |   |
| Additional  paid-in capital - Preferred stock                                                                                                                                                                                   |       | 10,348,965            |       | —                 |       |
|                                                                                                                                                                                                                            |       |                  |       |                   |       |
| Common  stock - $.05 par value, authorized 100,000,000 shares,issued 64,674,565 + * 10,350,000  (*shares unissued 12/31/09; see Note B) shares at December 31,  2009 and 62,570,564 shares at June 30, 2009           |       | 3,751,228             |       | 3,128,528              |       |
| Additional  paid-in capital - Common stock and warrants                                                                                                                                                                         |       | 53,655,572            |       | 30,062,168             |       |
| Accumulated  deficit                                                                                                                                                                                                            |       | (49,889,028           | )          | (49,213,661            | )          |
| Stockholders’  equity                                                                                                                                                                                                      |       | 17,867,772            |       | (16,022,965            | )          |
|                                                                                                                                                                                                                            |       | $                     | 37,251,021 |                   | $          | 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** | ** ** | **Six months ended**  | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                  |       |                   |       |                  |       |   |   |   |   |
| Oil  and gas sales                                         |       | $                      | 599,117    |                  | $          | 491,966 |   | $ | 959,018 |   | $ | 1,166,937 |   |
| Total  revenues                                            |       | $                      | 599,117    |                  | $          | 491,966 |   | $ | 959,018 |   | $ | 1,166,937 |   |
| Costs  and expenses:                                       |       |                   |       |                  |       |   |   |   |   |
| Oil  and gas production, operating and development costs   |       | 354,810                |       | 399,743               |       | 646,147 |   | 764,099 |   |
| General  and administrative expenses                       |       | 538,489                |       | 449,094               |       | 983,412 |   | 900,393 |   |
| Depreciation,  depletion and non-loan-related amortization |       | 289,983                |       | 296,227               |       | 522,580 |   | 559,984 |   |
| Impairment  loss on oil and gas properties                 |       | —                 |       | 8,599,871             |       | — |   | 8,599,871 |   |
| Total  operating costs and expenses                        |       | 1,183,282              |       | 9,744,935             |       | 2,152,139 |   | 10,824,347 |   |
| Operating  loss                                            |       | (584,165               | )          | (9,252,969            | )          | (1,193,121 | ) | (9,657,410 | ) |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Non-operating  income (expense):                           |       |                   |       |                  |       |   |   |   |   |
| Other  income                                              |       | 644                    |       | 12,290                |       | 1,097 |   | 30,395 |   |
| Interest  expense, including amortization of loan discount |       | (680,068               | )          | (540,600              | )          | (1,167,457 | ) | (1,085,875 | ) |
| Amortization  of loan costs                                |       | (29,548                | )          | (33,960               | )          | (63,509 | ) | (67,921 | ) |
| Total  non-operating expense                               |       | (708,972               | )          | (562,270              | )          | (1,229,869 | ) | (1,123,401 | ) |
| Gain  on debt extinguishment                               |       | 1,747,623              |       | —                |       | 1,747,623 |   | — |   |
| Income  from operations before income taxes                |       | 454,486                |       | (9,815,239            | )          | (675,367 | ) | (10,780,811 | ) |
| Provision  for income taxes (Louisiana state taxes)        |       | —                 |       | —                |       | — |   | — |   |
| Net  income (loss)                                         |       | $                      | 454,486    |                  | $          | (9,815,239 | ) | $ | (675,367 | ) | $ | (10,780,811 | ) |
| Net  income (loss) per common share - basic and diluted    |       | $                      | .01        |                  | $          | (0.16 | ) | $ | (.01 | ) | $ | (0.18 | ) |
| Weighted  average common shares outstanding                |       | 64,674,565             |       | 60,335,564            |       | 64,113,131 |   | 60,310,917 |   |

 

*The accompanying notes are anintegral part of these statements.*

 

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**CUBIC ENERGY, INC.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Six months ended**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                             |       |                  |       |   |   |
| Net  (loss)                                                                           |       | $                     | (675,367   | ) | $ | (10,780,811 | ) |
| Adjustments  to reconcile net (loss) to cash provided (used) by operating activities: |       |                  |       |   |   |
| Depreciation,  depletion and amortization                                             |       | 1,036,760             |       | 887,329 |   |
| Impairment  Loss on Oil and Gas properties                                            |       | —                |       | 8,599,871 |   |
| Gain  on debt extinguishment                                                          |       | (1,747,623            | )          | — |   |
| Stock  issued for compensation                                                        |       |                  |       |   |   |
| (Increase)  decrease in accounts receivable - trade                                   |       | (554,723              | )          | 42,305 |   |
| (Increase)  decrease in other prepaid expenses                                        |       | 31,464                |       | 45,551 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | 282,213               |       | (38,805 | ) |
| Increase  (decrease) in due to affiliates                                             |       | 103,509               |       | 175,727 |   |
| Net  cash provided (used) by operating activities                                     |       | $                     | (1,523,767 | ) | $ | (1,068,834 | ) |
| **Cash flows from investing activities:**                                             |       |                  |       |   |   |
| Acquisition  and development of oil and gas properties                                |       | (2,349,754            | )          | (4,175,529 | ) |
| Increase  (decrease) in capital portion of due to affiliates                          |       | (750,470              | )          | (51,171 | ) |
| Purchase  of office equipment                                                         |       | —                |       | (13,748 | ) |
| (Increase)  decrease in advances on development costs                                 |       | (5,558                | )          | 33,399 |   |
| Net  cash provided (used) by investing activities                                     |       | $                     | (3,105,782 | ) | $ | (4,207,049 | ) |
| **Cash flows from financing activities:**                                             |       |                  |       |   |   |
| Proceeds  from credit facility                                                        |       | 5,000,000             |       | 3,172,200 |   |
| Issuance  of common stock, net                                                        |       | 1,788,400             |       | 1,095,952 |   |
| Loan  costs incurred and other                                                        |       | (50,000               | )          | — |   |
| Net  cash provided (used) by financing activities                                     |       | $                     | 6,738,400  |   | $ | 4,268,152 |   |
| **Net increase (decrease) in cash and cash equivalents**                              |       | $                     | 2,108,851  |   | $ | (1,007,731 | ) |
| **Cash and cash equivalents:**                                                        |       |                  |       |   |   |
| Beginning  of period                                                                  |       | 71,050                |       | 2,144,002 |   |
| End  of period                                                                        |       | $                     | 2,179,901  |   | $ | 1,136,271 |   |
| Other  information:                                                                   |       |                  |       |   |   |
| Cash  interest paid on debt                                                           |       | $                     | 716,764    |   | $ | 857,111 |   |
| 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            |       | — |   |

 

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| ** shares pending NYSE Amex approval for issuance* |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|

 

*The accompanying notes are anintegral part of these statements.*

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**AS OF DECEMBER 31, 2009**

**(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 December 31, 2009, and for the three and six month periods ended December 31,2009, and 2008, 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., stockwarrants and convertible debt) have been considered, but the dilutive effect ofthe potential dilutive securities is not believed to be material. The Companydid report net income for the three months ended December 31, 2009. The Companyreported net losses in the six month period ended December 31, 2009 and in thethree and six month periods ended December 31, 2008, and accordingly, theireffects would be anti-dilutive.  Theweighted average number of common and common equivalent shares outstanding was64,674,565 and 60,335,634 for the quarters ended December 31, 2009 and2008, respectively, 64,113,131 and 60,310,917 for the six month periods ended December 31,2009 and 2008, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

**NoteB — Stockholders’ Equity:**

** **

**Stock issuances**

 

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.

 

On August 18, 2009, four investors acquired804,000 shares of common stock and warrants exercisable into 402,000 shares ofcommon stock, through the payment of $683,400. The warrants are exercisablethrough July 31, 2014, at $0.85 per share.

 

On August 26, 2009, six investors acquired1,300,001 shares of common stock and warrants exercisable into 650,000 sharesof common stock, through the payment of $1,105,001. The warrants areexercisable 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.

 

Pursuant to the Subscription Agreements, theinvestors paid aggregate consideration of approximately $1,788,400, all ofwhich has been or will be used for working capital purposes.  The aforementioned issuances were made inreliance upon an exemption from registration set forth in Regulation D and / orSection 4(2) of the Securities Act of 1993, as amended, which exemptstransactions by an issuer not involving a public offering.

 

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 Haynesville Shalerights in Northwest Louisiana. The Company will use the Drilling Credits tofund $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) has conveyed to Tauren a net overriding royalty interest ofapproximately 2% in its leasehold rights below the Taylor Sand formation of theCotton Valley and (b) has agreed to issue to Langtry 10,350,000 Companycommon shares and preferred stock in the amount of $10,350,000, convertibleinto Company common shares at $1.20 per common share, five year conversionterm, with such issuance of the common shares and the preferred stock dependentupon the approval of the Company’s additional listing application with the NYSEAmex. The preferred stock will be entitled to cumulative dividends equal to 8%per annum, payable quarterly, which dividends may be paid in cash or inadditional 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.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

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.

 

The shares will be issued by the Company inreliance upon an exemption from registration set forth in Regulation D and/or Section 4(2) ofthe Securities Act of 1933, as amended, which exempts transactions by an issuernot involving a public offering.

 

**Stock grants**

 

There were no stock grants made to directors,officers or key employees during the six months ended December 31, 2009 orDecember 31, 2008.

 

**Note C — Oil and GasProperties**

 

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 oiland gas properties for the three or six months ended December 31, 2009compared to an impairment loss on oil and gas properties in the amount of$8,599,871 for the three and six months ended December 31, 2008 as aresult of the full cost ceiling test. The weighted average natural gas priceutilized for the December 31, 2008 ceiling impairment evaluation was$5.907 per Mcf.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

**NoteD — Long-term debt:**

 

**March 2007 debt issue**

 

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

 

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

 

The warrants were issued bythe Company in reliance upon an exemption from registration set forth inRegulation D and/or Section 4(2) of the Securities Act of 1933, asamended, which exempts transactions by an issuer not involving a publicoffering.

 

The Company allocated theproceeds from the issuance of the debt to the warrants, the debt and a 3% netprofits interest, in the future production of hydrocarbons from or attributableto Cubic’s net interest in its Louisiana properties, which was granted to WellsFargo, based on their relative fair market values at the date of issuance. Thevalue assigned to the warrants of $1,314,289 was recorded as an increase inadditional paid-in capital and the value assigned to the net profits interestof $213,148 was recorded as a credit to the full cost pool for oil and gasproperties. The assignment of a value to the warrants and net profits interestresulted in a loan discount being recorded. The discount is being amortizedover the original three-year term of the debt as additional interestexpense.  Amortization for the quartersended December 31, 2009 and 2008 was $109,974 and $129,713, respectivelyand was $239,686 and $259,425 for the six month periods ended December 31,2009 and 2008, respectively.

 

Cubic incurred loan costs of$240,613 on the issuance of the debt and warrants. The amount allocable to thedebt of $166,590 has been capitalized and is being amortized over the term ofthe debt. Amortization for the fiscal year ended June 30, 2009 was $55,733and is expected to be approximately $37,105 for fiscal 2010. Amortization forthe quarters ended December 31, 2009 and 2008 was $11,910 and $14,048respectively and was $25,958 and $28,096 for the six month periods ended December 31,2009 and 2008. Cubic also incurred commitment fees of $170,000 related tosubsequent increases in the Credit Facility’s borrowing base; such amount wascapitalized in fiscal 2008 and is being amortized over the remaining term ofthe loan.  Amortization for the quartersended December 31, 2009 and 2008 was $16,882 and $19,913 respectively andwas $36,795 and $39,826 for the six month periods ended December 31, 2009and 2008.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

On December 18, 2009,the senior debt was modified as set forth below.  In connection with the modification, theCompany recorded a gain on extinguishment of debt of $1,748,719.  Such amount includes the write-off of theunamortized deferred loan cost ($26,947), and the write-off of the remainingloan discount ($102,924).

 

The convertible term loan of$5,000,000 is convertible into 5,000,000 shares of Cubic common stock, at aconversion price of $1.00 per share.

 

On December 18, 2009,the Company entered into a Second Amendment to Credit Agreement with WellsFargo, providing for a revolving credit facility of up to $40 million and aconvertible term loan of $5 million (the “Amended Credit Agreement”). Theborrowing base under the revolving credit facility is initially established at$25 million. The indebtedness bears interest at a fluctuating rate equal to thesum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matureson July 1, 2012 and is secured by substantially all of the assets of theCompany. In connection with entering into the Amended Credit Agreement, theCompany issued to Wells Fargo additional warrants, expiring on December 1,2014, for the purchase of up to 5,000,000 shares of Company common stock at anexercise price of $1.00 per share, and extended the expiration date of thewarrants to purchase 2,500,000 shares of Company common stock that werepreviously issued to Wells Fargo to December 1, 2014.

 

The Company allocated theproceeds from the issuance of the debt to the warrants, the debt and thebeneficial conversion feature based on their fair market values at the date ofissuance. The fair value assigned to the extension of 2.5 million warrants, atmodification date of $923,302 and an additional 5 million warrants at$8,031,896, was recorded as an increase in additional paid-in capital. Thedifference in the fair value of the term loan and the face amount of $1,877,494was recorded as an extinguishment of debt, offset by the amount of unamortizeddeferred loan cost 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 $210,986 for the quarter ended December 31,2009, and was $210,986 for the six month period ended December 31,2009.  Amortization for the fiscal yearsending June 30, 2010, 2011 and 2012 is expected to be approximately$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 $756 for the quarter ended December 31, 2009 and $756 forthe six month period ended December 31, 2009. Amortization forthe fiscal years ending June 30, 2010, 2011, and 2012 is expected to beapproximately $10,529, $19,708 and $19,762, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

**May 2008subordinated debt issue and refinancing**

 

On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 (the “SubordinatedNote”) to Diversified Dynamics Corporation (the “Lender”), an entity controlledby William Bruggeman, who beneficially owns more than 5% of the common stock ofthe Company. The Subordinated Note bore interest at a fluctuating rate equal tothe sum of the prime rate plus two percent (2%) per annum, and was scheduled tomature on April 30, 2010. As consideration for the loan made by Lenderpursuant to the Subordinated Note, the Company agreed to convey to Lender, uponthe repayment in full of the indebtedness evidenced by the Subordinated Noteand the repayment in full of the senior indebtedness evidenced by the CreditFacility with Wells Fargo, an undivided 0.375% net profits interest in thefuture production of hydrocarbons from or attributable to Cubic’s net interestin its Louisiana properties. The proceeds of the Subordinated Note were beingused for general 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 theCredit Agreement (the “First Amendment”). Material provisions of the FirstAmendment included the following: (i) the Company may not prepay all orany part of the principal balance outstanding on the Term Loan prior to itsmaturity on March 1, 2010 without the consent of Wells Fargo; and (ii) theamount of the borrowing base was increased to $20,000,000, which amount wasfully drawn upon, subsequent to the end of fiscal 2008, on August 20,2008.

 

On December 18, 2009,the Company issued a subordinated promissory note payable to Calvin A. Wallen, III,the Company’s Chairman of the Board and Chief Executive Officer, in theprincipal amount of $2,000,000 (the “Wallen Note”). This note bears interest atthe prime rate plus one percent (1%), with interest payable monthly. ThisWallen Note was entered into with the consent of Wells Fargo and theoutstanding principal balance is due and payable on August 31, 2012 and issubordinated to the indebtedness under the Amended Credit Agreement. Theproceeds of this note were used to repay the Subordinated Note and the netprofits interests were conveyed.

 

**Note E —Related party transactions**

 

An affiliated company,Tauren Exploration, Inc. (“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 December 31,2009 and June 30, 2009, the Company owed Tauren $288,870 and $649,205,respectively for miscellaneous capital expenditures and general andadministrative expenses paid by Tauren on the Company’s behalf.

 

In addition, certain wellsin which the Company owns a working interest were operated by an affiliatedcompany, Fossil Operating, Inc. (“Fossil”), which is owned 100% by theCompany’s President and Chief Executive Officer, Calvin Wallen III. As of December 31,2009 and June 30, 2009, the Company owed Fossil $629,069 and $815,238,respectively, and was owed by Fossil $372,073 and $271,615, respectively, foroil and gas sales.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2009**

**(Unaudited)**

 

**Note F — Subsequent Events**

 

In May 2009, the FASBissued new authoritative guidance for subsequent events. Such authoritativeguidance establishes general standards of accounting for, and disclosure of,events that occur after the balance sheet date but before financial statementsare issued or are available to be issued.  In particular, thisstatement sets forth: (1) the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements, (2) the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements and (3) the disclosures that an entity should make about eventsor transactions that occurred after the balance sheet date.  Adoptionof this authoritative position did not have a material impact on the Company’scondensed consolidated financial statements.  The Company evaluatedsubsequent events through the date the accompanying financial statements wereissued, which was February 15, 2010.

 

On January 8, 2010,Cubic received notice from the NYSE Amex LLC (the “Exchange”) that the Exchangehas granted the Company a further extension of time, through March 31,2010, to evidence full compliance with the Exchange’s continued listingstandards.

 

As previously disclosed on June 29,2009 and September 17, 2009, the Exchange previously notified Cubic thatit believed the Company was not in compliance with Section 1003(a)(iv) ofthe Exchange’s Company Guide in that it has sustained losses which are sosubstantial in relation to its overall operations or its existing financialresources, or its financial condition has become so impaired that is appearsquestionable, in the opinion of the Exchange, as to whether the Company will beable to continue operations and/or meet its obligations as they mature. TheCompany thereafter submitted its plan to strengthen its financial condition andevidence compliance with Section 1003(a)(iv) for the Exchange’sreview. Based on this plan, Cubic was granted an extension by the Exchange,originally through December 28, 2009.

 

In granting the extensionfrom December 28, 2009 to March 31, 2010, the Exchange indicated thatthe Company has made a reasonable demonstration of its ability to regain compliancewith Section 1003(a)(iv) by March 31, 2010. In that regard, andas previously disclosed within the last 60 days, the Company entered intocertain transactions, pursuant to which the Company acquired $30,952,810 inpre-paid drilling credits applicable towards the development of its HaynesvilleShale rights in Northwest Louisiana, and also entered into the Amended CreditAgreement with Wells Fargo, which served to increase the Company’s revolvingcredit line to $40,000,000 from $20,000,000 and borrowing base to $25,000,000from $20,000,000 and extended the maturity date to July 1, 2012 from March 7,2010.

 

The Company continues toexecute the Exchange’s accepted plan that advances the Company towards fullcompliance, and continues to work in conjunction with the Exchange in thisregard.

 

The Company will continue tobe subject to periodic reviews by the Exchange during the extension period.Failure to make progress consistent with the plan or to regain compliance withthe continued listing standards by the end of the extension period could resultin the Company being delisted from the Exchange.

 

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

 

Thefollowing discussion of operations for the six months ended December 30,2009 and 2008 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.

 

Ourcorporate strategy with respect to our asset acquisition and development effortswas to position the Company in a low risk opportunity while building mainstream high yield reserves.  The acquisition of our acreage in DeSoto andCaddo Parishes, Louisiana, puts us in a reservoir rich environment both in theCotton Valley and Bossier/Haynesville Shale formations, with additional shallowformations to exploit as well. We have had success on our acreage with wellscompleted in the Cotton Valley and Bossier/Haynesville Shale formations.  The Company also owns an interest in theright-of-ways, infrastructure and pipelines for its Caddo and DeSoto Parish,Louisiana acreage.

 

Weshare our Bossier/Haynesville formation acreage with Goodrich PetroleumCorporation, Chesapeake and EXCO Operating Company, LP, and all three companiesare third-party operators actively drilling on our shared acreage. As a resultof this drilling activity, we expect to see improving production volumes inthis next quarter.

 

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 the Company’s strategic plan to restructure our debt and raiseadditional operating capital, during the second quarter of fiscal 2010. WellsFargo expanded the Company’s credit facility to $45 million from $25 millionand extended the maturity date to July 1, 2012 from March 6, 2010.The Company also acquired $30.9 million in drilling credit, dedicated for thefuture drilling and completion of horizontal Haynesville Shale formation wells.For additional discussion, see below under “Capital Resources and Liquidity”.

 

Managementbelieves in the value of its assets, being drilled by third-party operators,and will continue to explore strategic ways that allow the Company to leveragethose assets to gain full shareholder value.

 

**Capital Resources and Liquidity**

 

**Working Capital**

 

TheCompany’s working capital increased to ($1,831,712) at December 31, 2009from ($27,822,536) at June 30, 2009. This increase was primarily due theamendment of the Wells Fargo credit facility. The cash used by investingactivities of $3,105,782 and operating activities of $1,523,767, consistsmainly of costs related 

 

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tonon-operated wells and for daily operations, in the six months ended December 31,2009. These cash outflows were partially offset by cash flows provided byfinancing activities of $6,738,400 resulting from $1,788,400 of proceeds fromthe issuance of common stock (as a result of the exercise of warrants), and theborrowing of $5,000,000 on the aforementioned revolving line of credit withWells Fargo in the six months ended December 31, 2009.

 

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 Haynesville Shalewells drilled in sections previously operated by an affiliate of the Companywhich are now operated by a third party.

 

Asconsideration for the Drilling Credits, the Company, (a) 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) hasagreed to issue to Langtry 10,350,000 Company common shares and preferred stockin the amount of $10,350,000, convertible into Company common shares at $1.20per common share, five year conversion term, with such issuance of the commonshares and the preferred stock dependent upon the approval of the Company’sadditional listing application with the NYSE Amex. The preferred stock will beentitled to cumulative dividends equal to 8% per annum, payable quarterly,which dividends may be paid in cash or in additional shares of preferred stock,in the Company’s discretion. The preferred stock may be redeemed by the Companyat any time, at a redemption price equal to 20% over the original issue price.

 

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

 

Theshares will be issued by the Company in reliance upon an exemption fromregistration set forth in Regulation D and/or Section 4(2) of the SecuritiesAct of 1933, as amended, which exempts transactions by an issuer not involvinga public offering.

 

TheCompany has increased its planned capital expenditures for the remainder offiscal 2010. The acquisition of the Drilling Credits along with the increasedWells Fargo credit facility, mentioned in Note D, will allow the Company tocontinue to participate in the horizontal drilling and completion ofHaynesville Shale wells on its acreage position. It also provides capital forthe following projects in the remainder of fiscal 2010: re-completions andworkovers of current wells; the acquisition of additional leaseholds in andaround our core acreage position; and final payments that may be outstanding inthe acquisition of rights-of-way in certain of our leases. As a result, ourprojected capital expenditures for fiscal 2010 are expected to be approximately$21,000,000, which is above the minimum amount that we projected in both ourQuarterly Report on Form 10-Q for the quarter ended September 30,2009 and our Annual Report on Form 10-K for the year ended June 30,2009.

 

TheCompany plans to fund these capital expenditures, among other ways, throughcash on hand and cash provided from operations. Additionally, because futurecash flows and the availability of borrowings are subject to a number ofvariables, such as prevailing prices of oil and natural gas, actual productionfrom existing and newly-completed wells, the Company’s success in developingand producing new reserves, and the uncertainty with respect to the amount offunds which may ultimately be required to finance the Company’s development andexploration program, there can be no assurance that the Company’s capitalresources will be sufficient to sustain the Company’s development andexploration activities.

 

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**Cash Flow**

 

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

 
| ** **                                            | ** ** | **Six months ended**  | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **December 31,** | ** ** |
| ** **                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                  |       |                  |       |   |   |   |   |
| Net  cash provided (used) by operating activities     |       | $                     | (1,523,767 | ) | $ | (1,068,834 | ) |
|                                                  |       |                  |       |   |   |   |   |
| Net  cash provided (used) by investing activities     |       | (3,105,782            | )          | (4,207,049 | ) |
|                                                  |       |                  |       |   |   |
| Net  cash provided (used) by financing activities     |       | 6,738,400             |       | 4,268,152 |   |
|                                                  |       |                  |       |   |   |
| Net  increase (decrease) in cash and cash equivalents |       | $                     | 2,108,851  |   | $ | (1,007,731 | ) |

 

***OperatingActivities*****—**Duringthe six months ended December 31, 2009, the Company used cash flows fromoperating activities of ($1,523,767) as compared to ($1,068,834) in the prioryear period. Cash flow from operations is dependent on our ability to increaseproduction through our development and exploratory activities and the pricereceived for oil and natural gas.

 

***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 six months ended December 31,2009, we had capital spending related to the acquisition and development of oiland gas properties of $2,349,754 and used net cash of $3,105,782 in investingactivities. In the six months ended December 31, 2008, we had capitalspending related to the acquisition and development of oil and gas propertiesof $4,175,529 and used net cash of $4,207,049 in investing activities.

 

***Financing Activities*********—**Net cash flows provided by financing activitieswere $6,738,400 and $4,268,152 in the six month periods ended December 31,2009 and 2008, respectively.

 

During the 2009period, we received an aggregate of $1,788,400 in proceeds from the issuance ofstock (resulting from the exercise of warrants), and, on December 18,2009, Cubic drew upon an additional $5,000,000 from Wells Fargo under therevolving line of credit component of our Credit Facility in order to pay pastdue invoices and working interest expenses on our non-operated acreage. As aresult, the Company has borrowed $25,000,000 of the $40,000,000 potentiallyavailable under the Credit Facility’s Revolving Note (and an aggregate of$45,000,000 under the Credit Facility). During the 2008 period, we received anaggregate of $1,095,952 in proceeds from the issuance of stock (resulting fromthe exercise of warrants) and drew upon $3,172,200 from the Revolving Note ofour 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 ouracquisition, developmental and exploration activities; oil and natural gasprice conditions; and other related economic factors. Currently, no sources ofliquidity or financing are provided by off-balance sheet arrangements ortransactions with unconsolidated, limited-purpose entities. We have nocontractual commitments pertaining to exploration, development and productionactivities.

 

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**Results of Operations**

 

*For the Three Months ended December31, 2009 and 2008*

** **
| ** **                                | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                | ** ** | **December 31,**  | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production Volumes:**                   |       |                   |       |       |       |   |   |   |   |
| Oil  (Bbl)                                |       | 387                    |       | 524        |       | (137 | ) | -26 | % |
| Natural  gas liquids (gallons)            |       | 13,490                 |       | 25,967     |       | (12,477 | ) | -48 | % |
| Natural  gas (Mcf)                        |       | 141,123                |       | 68,913     |       | 72,210 |   | 105 | % |
| Total  (Mcfe)                             |       | 145,373                |       | 75,764     |       | 69,608 |   | 92 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| **Weighted Average Sales Prices:**        |       |                   |       |       |       |   |   |   |   |
| Oil  (per Bbl)                            |       | $                      | 73.62      |       | $          | 48.46 |   | $ | 25.16 |   | 52 | % |
| Natural  gas liquids (per gallon)         |       | $                      | 1.28       |       | $          | 0.79 |   | $ | 0.49 |   | 62 | % |
| Natural  gas (per Mcf)                    |       | $                      | 3.92       |       | $          | 6.47 |   | $ | (2.55 | ) | -39 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| **Selected Expenses per Mcfe:**           |       |                   |       |       |       |   |   |   |   |
| Production  costs                         |       | $                      | 2.31       |       | $          | 4.80 |   | $ | (2.49 | ) | -52 | % |
| Workover  expenses (non-recurring)        |       | $                      | 0.17       |       | $          | 0.14 |   | $ | 0.03 |   | 18 | % |
| Severance  taxes                          |       | $                      | (0.12      | )          | $          | 0.17 |   | $ | (0.29 | ) | -172 | % |
| Other  revenue deductions                 |       | $                      | 0.08       |       | $          | 0.31 |   | $ | (0.22 | ) | -73 | % |
| Total  lease operating expenses           |       | $                      | 2.44       |       | $          | 5.42 |   | $ | (2.98 | ) | -55 | % |
| General  and administrative expenses      |       | $                      | 3.70       |       | $          | 5.93 |   | $ | (2.22 | ) | -38 | % |
| Depreciation,  depletion and amortization |       | $                      | 1.99       |       | $          | 3.91 |   | $ | (1.92 | ) | -49 | % |

 

**Revenues**

 

OILAND GAS SALES increased 22% to $599,117for the quarter ended December 31,2009 from $491,966 for the quarter ended December 31, 2008 primarily dueto higher gas volumes resulting from non-operated new wells coming online inthe 2009 quarter versus the 2008 quarter. The average natural gas price wereceived in the 2009 quarter was $3.92 per Mcf versus $6.47 in the 2008quarter.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS decreased 11% to$354,810(59% of oil and gas sales) for 2009 from $399,743(81% of oil andgas sales) for 2008 primarily due to lower natural gas prices and no new wellsbeing brought on-line in Louisiana, which resulted in: a $17,875 decrease inthe cost of chemicals; a $59,421 decrease in salt water hauling and disposalcosts; and $21,856 in common facility expenses for production from the Company’sJohnson Branch wells. Such decreases were partially offset by a $13,730increase in costs passed-through to the Company by the purchaser of the Company’sgas. Such costs are deducted from the Company’s gross revenue by the purchaserand include, but are not limited to: costs to market the Company’s gas,compression fees, and the cost of fuel used by the purchaser to convey theCompany’s gas.

 

GENERALAND ADMINISTRATIVE EXPENSES increased 20% to $538,489 for 2009 from $449,094 in2008 primarily as a result of increases of $64,089 in consulting fees relatedto the fairness opinion obtained by the Special Committee of the Board ofDirectors and a $106,290 increase in legal fees for tax issues related to the acquisitionof the Drilling Credits and related matters. These amounts were offset by a$38,100 decrease in contracted professional services related to a decrease in “divisionorder” accounting work during the three months ended December 31, 2009 ascompared to the 2008 period.

 

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DEPRECIATION,DEPLETION AND NON-LOAN RELATED AMORTIZATION decreased 3% to $289,983 in 2009from $296,227 in 2008. The decrease was primarily due to the steep declinecurve related to the shale, at December 31, 2009 as compared to December 31,2008.

 

GAINON DEBT EXTINGUISHMENT was realized in 2009 as a result of the refinancing ofthe debt with Wells Fargo. The existing loan balance of $1,877,494 wasdecreased (written off) as a term of the amendment of the Wells Fargo creditfacility that was extinguished and offset by debt extinguishment costs of$129,871. This created an overall gain on debt extinguishment of $1,747,623.

 

INTERESTEXPENSE increased 26% to $680,068 in 2009 from $540,600 in 2008 primarily dueto an increase in debt to $32,000,000 at December 31, 2009 from $27,000,000 atDecember 31, 2008. This year over year increase resulted from the AmendedCredit Agreement, which increased the revolving line of credit with WellsFargo, and the draw of $5,000,000 under the terms of the new agreement. Theweighted average debt balance (before discounts) for the 2009 quarter was$27,271,739 as compared to $27,000,000 in the 2008 quarter. The original andamended Credit Facilities with Wells Fargo resulted in loan discounts beingrecorded. These discounts are being amortized over the three-year terms of thedebt as additional interest expense with $320,959 being recorded in the 2009quarter and was $129,713 for the 2008 quarter.

 

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*For the Six Months ended December 31, 2009 and 2008*

 
| ** **                                | ** ** | **Six months ended**  | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                | ** ** | **December 31,** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2009**              | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production Volumes:**                   |       |                  |       |       |       |   |   |   |   |
| Oil  (Bbl)                                |       | 588                   |       | 789        |       | (201 | ) | -25 | % |
| Natural  gas liquids (gallons)            |       | 22,417                |       | 45,287     |       | (22,870 | ) | -50 | % |
| Natural  gas (Mcf)                        |       | 236,676               |       | 132,940    |       | 103,736 |   | 78 | % |
| Total  (Mcfe)                             |       | 243,407               |       | 144,145    |       | 99,263 |   | 69 | % |
|                                      |       |                  |       |       |       |   |   |   |   |
| **Weighted Average Sales Prices:**        |       |                  |       |       |       |   |   |   |   |
| Oil  (per Bbl)                            |       | $                     | 71.68      |       | $          | 74.12 |   | $ | (2.44 | ) | -3 | % |
| Natural  gas liquids (per gallon)         |       | $                     | 1.20       |       | $          | 1.33 |   | $ | (0.13 | ) | -10 | % |
| Natural  gas (per Mcf)                    |       | $                     | 3.76       |       | $          | 7.89 |   | $ | (4.13 | ) | -52 | % |
|                                      |       |                  |       |       |       |   |   |   |   |
| **Selected Expenses per Mcfe:**           |       |                  |       |       |       |   |   |   |   |
| Production  costs                         |       | $                     | 2.42       |       | $          | 4.65 |   | $ | (2.23 | ) | -48 | % |
| Workover  expenses (non-recurring)        |       | $                     | 0.10       |       | $          | 0.11 |   | $ | (0.01 | ) | -10 | % |
| Severance  taxes                          |       | $                     | 0.02       |       | $          | 0.22 |   | $ | (0.20 | ) | -93 | % |
| Other  revenue deductions                 |       | $                     | 0.11       |       | $          | 0.32 |   | $ | (0.20 | ) | -64 | % |
| Total  lease operating expenses           |       | $                     | 2.65       |       | $          | 5.30 |   | $ | (2.65 | ) | -50 | % |
| General  and administrative expenses      |       | $                     | 2.65       |       | $          | 5.30 |   | $ | (2.65 | ) | -50 | % |
| Depreciation,  depletion and amortization |       | $                     | 2.15       |       | $          | 3.88 |   | $ | (1.74 | ) | -45 | % |

 

**Revenues**

 

OILAND GAS SALES decreased 18% to $959,018 for the six months ended December 31,2009 from $1,166,937 for the six months ended December 31, 2008 primarilydue to lower gas prices created by over-supply and a down turn in the economyin the 2009 period versus the 2008 period. The weighted average natural gasprice we received in the 2009 period was $3.76per Mcf versus $7.89 in the 2008period.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS decreased 15% to $646,147(67% of oil and gas sales) for 2008 from $764,099(66% of oil and gas sales) for2008 primarily due to lower natural gas prices and no new wells being broughton-line in Louisiana, which resulted in: a $49,105 decrease in the cost ofchemicals; a $97,450 decrease in salt water hauling and disposal costs; and$43,638 in common facility expenses for production from the Company’s JohnsonBranch wells. There was also a $18,199 decrease in costs passed-through to theCompany by the purchaser of the Company’s gas. Such costs are deducted from theCompany’s gross revenue by the purchaser and include, but are not limited to:costs to market the Company’s gas, compression fees, and the cost of fuel usedby the purchaser to convey the Company’s gas.

 

GENERALAND ADMINISTRATIVE EXPENSES increased 9% to $983,412 for 2009 from $900,393 in2008 primarily as a result of $84,089 in consulting fees incurred in the sixmonths ended on December 31, 2009 related to certain expenses incurred inconnection with the acquisition of the Drilling Credits and related matters.

 

DEPRECIATION,DEPLETION AND AMORTIZATION decreased 7% to $522,580 in 2009 from $559,984 in2008. The decrease was primarily due to the steep decline curve related to theshale, at December 31, 2009 as compared to December 31, 2008.

 

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GAINON DEBT EXTINGUISHMENT was realized in 2009 as a result of the refinancing ofthe debt with Wells Fargo. The existing loan balance of $1,877,494 wasdecreased (written off) as a term of the amendment of the Wells Fargo creditfacility that was extinguished and offset by debt extinguishment costs of$129,871. This created an overall gain on debt extinguishment of $1,747,623 forthe six months ended December 31, 2009.

 

INTERESTEXPENSE increased 8% to $1,167,457 in 2009 from $1,085,875 in 2008 primarilydue to an increase in the weighted average debt balance (before discounts) of$1,133,750 related to an increase in total debt to $32,000,000 at December 31,2009 from $27,000,000 at December 31, 2008. 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 average debtbalance (before discounts) for the six months ended December 31, 2008 was$27,271,739 as compared to $26,137,989 in the six months ended December 31,2008. The original and amended Credit Agreements with Wells Fargo resulted inloan discounts being recorded. These discounts are being amortized over thethree-year terms of the debt as additional interest expense with $450,672 beingrecorded in the six months ended December 31, 2009 and $259,425 for the sixmonths ended December 31, 2008.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financialcondition and results of operation are based upon the condensed financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. Preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses. There havebeen no changes to our critical accounting policies from those described in ourAnnual Report on Form 10-K for the year ended June 30, 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 December 31, 2009, 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 primeplus 1.0%, respectively. As a result, our interest costs fluctuate based onshort-term interest rates. Based on the aforementioned borrowings outstandingat December 31, 2009, a 100 basis point change in interest rates wouldchange our annual interest expense by approximately $320,000. We had nointerest rate derivatives during the second quarter of fiscal 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 under Exchange Act Rules 13a-15(e) and15d-15(e) are effective to ensure thatinformation we are required to disclose in the reports we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Our disclosurecontrols and procedures include controls and procedures designed to ensure thatinformation we are required to disclose in such reports is accumulated andcommunicated to management, including our principal executive and financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.

 

*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**

 

Adescription of our stock issuances during the six months ended December 31,2009 included in “Item 1. Notesto Condensed Financial Statements — Note B — Stockholders’ Equity”,and in “Note F — Subsequent Events” is incorporated herein by reference.

 

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

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

None.

 

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**Item 6. Exhibits**

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

 

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* Filed herewith.

 

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**SIGNATURES**

 

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

 

 
|                          | **CUBIC ENERGY, INC.** |
|-------------------------------|------------------------|
|                          | (Registrant)           |
|                          |                   |
|                          |                   |
| Date: February 16, 2010  | By:                    | /s/  Calvin A. Wallen, III |
|                          |                   | Calvin  A. Wallen, III, President and Chief Executive Officer |
|                          |                   |   |
|                          |                   |   |
| Date:  February 16, 2010 | By:                    | /s/  Larry Badgley |
|                          |                   | Larry  Badgley, Chief Financial Officer (Principal Financial and Accounting Officer) |

 

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