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**UNITED STATES**

# **SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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

##### ** **

| **x** | **Quarterly  Report Pursuant to Section 13 or 15(d) of The Securities Exchange  Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

###### **For theQuarterly Period Ended March 31, 2009**

######  

**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 xNo 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

 

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 13, 2009,the registrant had 62,570,564 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 underthe “Risk Factors” section of this report and other sections of this report, aswell as those described in our annual report on Form 10-K for the yearended June 30, 2008, which describe factors that could cause our actualresults to differ from those set forth in the forward-looking statements,including, but not limited to, the following factors:

 

·                  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;

 

·                  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 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 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 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;

 

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

 

·                  our ability to market oiland natural gas due to pipeline capacity; and

 

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

 

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 All forward-looking statements are expressly qualified in theirentirety by the cautionary statements in this paragraph and elsewhere in thisdocument. Other than as required under the securities laws, we do not assume aduty to update these forward-looking statements, whether as a result of newinformation, subsequent events or circumstances, changes in expectations orotherwise.

 

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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 March 31, 2009  (unaudited) and June 30, 2008     | 2          |
|                                                                                                |                                                              |       |
|                                                                                                | Condensed  Statements of Operations (unaudited)                   |       |
|                                                                                                | For the three  and nine months ended March 31, 2009 and 2008 | 3          |
|                                                                                                |                                                              |       |
|                                                                                                | Condensed  Statements of Cash Flows (unaudited)                   |       |
|                                                                                                | For the nine  months ended March 31, 2009 and 2008           | 4          |
|                                                                                                |                                                              |       |
|                                                                                                | Notes to Condensed Financial Statements                           | 5 - 9      |
|                                                                                                |                                                              |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 10 - 16                                                           |
|                                                                                                |                                                              |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 | 17                                                                |
|                                                                                                |                                                              |       |
| Item 4. Controls and Procedures                                                                     | 17                                                                |
|                                                                                                |                                                              |       |
| **PART II  — OTHER INFORMATION**                                                          | ** **                                                        |
| ** **                                                                                          | ** **                                                        | ** ** |
| Item  1. Legal Proceedings                                                                          |                                                              | 18         |
|                                                                                                |                                                              |       |
| Item  1A. Risk Factors                                                                              |                                                              | 18         |
|                                                                                                |                                                              |       |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                | 19                                                                |
|                                                                                                |                                                              |       |
| Item 3. Defaults  Upon Senior Securities                                                            | 19                                                                |
|                                                                                                |                                                              |       |
| Item 4. Submission  of Matters to a Vote of Security Holders                                        | 19                                                                |
|                                                                                                |                                                              |       |
| Item  5. Other Information                                                                          | 20                                                                |
|                                                                                                |                                                              |       |
| Item 6.  Exhibits                                                                                   | 20                                                                |
|                                                                                                |                                                              |       |
| Signatures                                                                                          | 21                                                                |
|                                                                                                     |                                                                   |            |  |

 

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# **PART I - FINANCIAL INFORMATION**

# ** **

**Item 1. Financial Statements**

 

**INDEPENDENT ACCOUNTANT’S REPORT**

 

TheStockholders and Board of Directors

CubicEnergy, Inc.

 

Wehave reviewed the accompanying condensed balance sheet as of March 31,2009, and the related condensed statements of operations for the three and ninemonth periods ended March 31, 2009 and 2008, and the cash flows of CubicEnergy, Inc. for the nine month period ended March 31, 2009 and 2008.These financial statements are the responsibility of the Company’s management.

 

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

 

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

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheet of Cubic Energy, Inc.as of June 30, 2008, and the related statements of operations,stockholders’ equity and cash flows for the year then ended; and in our reportdated September 24, 2008, we expressed an unqualified opinion on thosestatements.

 

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

# ** **

Dallas,Texas

May 13,2009

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                                  | ** ** | **March 31,**   | ** **       | ** **             | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------------|------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2009 (unaudited)** | ** **       | **June 30, 2008** | ** ** |
| **Assets**                                                                                                                                                  |       |                 |             |                   |       |
| Current assets:                                                                                                                                             |       |                 |             |                   |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                    | 654,187          |                   | $          | 2,144,002 |   |
| Accounts  receivable - trade                                                                                                                                |       | 60,428               |             | 165,910                |       |
| Prepaid drilling  costs                                                                                                                                     |       | 169,619              |             | 33,399                 |       |
| Other prepaid  expenses                                                                                                                                     |       | 6,599                |             | 65,344                 |       |
| Total current  assets                                                                                                                                       |       | 890,833              |             | 2,408,655              |       |
| Property and  equipment:                                                                                                                                    |       |                 |             |                   |       |
| Oil and gas  properties, full cost method:                                                                                                                  |       |                 |             |                   |       |
| Proved  properties (including wells and related equipment and facilities)                                                                                   |       | 18,240,336           |             | 27,751,133             |       |
| Unproven  properties                                                                                                                                        |       | 1,431,206            |             | 3,254,901              |       |
| Office and other  equipment                                                                                                                                 |       | 28,420               |             | 14,672                 |       |
| Property and  equipment, at cost                                                                                                                            |       | 19,699,962           |             | 31,020,706             |       |
| Less accumulated  depreciation, depletion and amortization                                                                                                  |       | 4,934,743            |             | 4,163,112              |       |
| Property and  equipment, net                                                                                                                                |       | 14,765,219           |             | 26,857,594             |       |
| Other assets:                                                                                                                                               |       |                 |             |                   |       |
| Deferred loan  costs, net                                                                                                                                   |       | 123,291              |             | 224,434                |       |
| Total other  assets                                                                                                                                         |       | 123,291              |             | 224,434                |       |
|                                                                                                                                                        |       | $                    |  15,779,343 |                   | $          | 29,490,683 |   |
| **Liabilities  and stockholders’ equity**                                                                                                              |       |                 |             |                   |       |
| Current  liabilities:                                                                                                                                       |       |                 |             |                   |       |
| Current portion  of long-term debt                                                                                                                          |       | $                    | 24,529,087       |                   | $          | — |   |
| Accounts payable  and accrued expenses                                                                                                                      |       | 252,089              |             | 250,630                |       |
| Due to  affiliates                                                                                                                                          |       | 226,619              |             | 411,284                |       |
| Total current  liabilities                                                                                                                                  |       | 25,007,795           |             | 661,914                |       |
| Long-term  liabilities:                                                                                                                                     |       |                 |             |                   |       |
| Long-term debt,  net of discounts                                                                                                                           |       | 2,000,000            |             | 22,970,570             |       |
| Total long-term  liabilities                                                                                                                                |       | 2,000,000            |             | 22,970,570             |       |
| Commitments and  contingencies                                                                                                                              |       | —               |             | —                 |       |
| Stockholders’  equity:                                                                                                                                 |       |                 |             |                   |       |
| Preferred stock  - $.01 par value, authorized 10,000,000 shares, issued none                                                                                |       | —               |             |                   |       |
| Common stock -  $.05 par value, authorized 100,000,000 shares, issued 62,570,564 shares at  March 31, 2009 and 58,853,064 shares at June 30, 2008 |       | 3,128,528            |             | 2,942,654              |       |
| Additional paid-in  capital                                                                                                                                 |       | 30,062,168           |             | 27,366,690             |       |
| Accumulated  deficit                                                                                                                                        |       | (44,419,148          | )                | (24,451,145            | )          |
| Stockholders’  equity                                                                                                                                  |       | (11,228,452          | )                | 5,858,199              |       |
|                                                                                                                                                        |       | $                    |  15,779,343 |                   | $          | 29,490,683 |   |

 

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

 

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**CUBICENERGY, INC.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                  |       |                   |       |                  |       |   |   |   |   |
| Oil and gas  sales                                         |       | $                      | 293,371    |                  | $          | 778,360 |   | $ | 1,460,308 |   | $ | 1,602,173 |   |
| Total revenues                                             |       | $                      | 293,371    |                  | $          | 778,360 |   | $ | 1,460,308 |   | $ | 1,602,173 |   |
| Costs and  expenses:                                       |       |                   |       |                  |       |   |   |   |   |
| Oil and gas  production, operating and development costs   |       | 285,819                |       | 390,361               |       | 1,049,918 |   | 811,973 |   |
| General and  administrative expenses                       |       | 728,805                |       | 607,423               |       | 1,629,198 |   | 1,434,727 |   |
| Depreciation,  depletion and non-loan-related amortization |       | 211,648                |       | 331,181               |       | 771,632 |   | 817,434 |   |
| Impairment loss  on oil and gas properties                 |       | 7,746,908              |       | —                |       | 16,346,779 |   | — |   |
| Total operating  costs and expenses                        |       | 8,973,180              |       | 1,328,965             |       | 19,797,527 |   | 3,064,134 |   |
| Operating loss                                             |       | (8,679,809             | )          | (550,605              | )          | (18,337,219 | ) | (1,461,961 | ) |
| Non-operating  income (expense):                           |       |                   |       |                  |       |   |   |   |   |
| Other income                                               |       | 2,611                  |       | 6,906                 |       | 33,006 |   | 36,062 |   |
| Interest  expense, including amortization of loan discount |       | (476,773               | )          | (526,739              | )          | (1,562,648 | ) | (1,404,461 | ) |
| Amortization of  loan costs                                |       | (33,222                | )          | (13,895               | )          | (101,143 | ) | (41,991 | ) |
| Total  non-operating expense                               |       | (507,384               | )          | (533,728              | )          | (1,630,785 | ) | (1,410,390 | ) |
| Loss from  operations before income taxes                  |       | (9,187,193             | )          | (1,084,333            | )          | (19,968,004 | ) | (2,872,351 | ) |
| Provision for  income taxes                                |       | —                 |       | —                |       | — |   | — |   |
| Net loss                                                   |       | $                      | (9,187,193 | )                     | $          | (1,084,333 | ) | $ | (19,968,004 | ) | $ | (2,872,351 | ) |
| Net loss per  common share - basic and diluted             |       | $                      | (0.15      | )                     | $          | (0.02 | ) | $ | (0.33 | ) | $ | (0.05 | ) |
| Weighted average  common shares outstanding                |       | 61,430,731             |       | 57,095,686            |       | 60,678,739 |   | 56,469,645 |   |

 

*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,**    | ** **  |
| ** **                                                                            | ** ** | **2009**              | ** **  | **2008** | ** ** |
| **Cash  flows from operating activities:**                                            |       |                  |        |   |   |
| Net (loss)                                                                            |       | $                     | (19,968,004 | ) | $ | (2,872,351 | ) |
| Adjustments to  reconcile net (loss) to cash provided (used) by operating activities: |       |                  |        |   |   |
| Depreciation,  depletion and amortization                                             |       | 1,259,092             |        | 1,247,152 |   |
| Impairment loss  on oil and gas properties                                            |       | 16,346,779            |        |   |   |
| Stock issued for  compensation                                                        |       | 385,400               |        | 496,006 |   |
| Change in assets  and liabilities:                                                    |       |                  |        |   |   |
| (Increase)  decrease in accounts receivable - trade                                   |       | 105,482               |        | (54,047 | ) |
| (Increase)  decrease in other prepaid expenses                                        |       | 58,745                |        | 38,088 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | 1,459                 |        | 203,694 |   |
| Increase  (decrease) in due to affiliates                                             |       | 241,739               |        | (326,572 | ) |
| Net cash  provided (used) by operating activities                                     |       | (1,569,308            | )           | (1,268,030 | ) |
| **Cash  flows from investing activities:**                                            |       |                  |        |   |   |
| Acquisition and  development of oil and gas properties                                |       | (5,012,287            | )           | (12,825,515 | ) |
| Increase  (decrease) in capital portion of due to affiliates                          |       | (426,404              | )           | (96,473 | ) |
| Purchase of  office equipment                                                         |       | (13,748               | )           | (1,786 | ) |
| (Increase)  decrease in advances on development costs                                 |       | (136,220              | )           | 721,136 |   |
| Net cash  provided (used) by investing activities                                     |       | (5,588,659            | )           | (12,202,638 | ) |
| **Cash  flows from financing activities:**                                            |       |                  |        |   |   |
| Proceeds from  credit facility                                                        |       | 3,172,200             |        | 10,500,000 |   |
| Issuance of  common stock, net                                                        |       | 2,495,952             |        | 503,000 |   |
| Net cash  provided (used) by financing activities                                     |       | 5,668,152             |        | 11,003,000 |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | $                     | (1,489,815  | ) | $ | (2,467,668 | ) |
| **Cash  and cash equivalents:**                                                       |       |                  |        |   |   |
| Beginning of  period                                                                  |       | 2,144,002             |        | 3,122,273 |   |
| End of period                                                                         |       | $                     | 654,187     |   | $ | 654,605 |   |
| Other  information:                                                                   |       |                  |        |   |   |
| Cash interest  paid on debt                                                           |       | $                     | 1,206,991   |   | $ | 1,016,712 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**AS OF MARCH 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, 2008 and should be read in conjunction withthe financial statements contained herein.

 

The financial information included herein asof March 31, 2009, and for the three and nine month periods ended March 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 ofStatement of Financial Accounting Standards (SFAS) No. 128, “*Earnings per Share”*. SFAS No. 128reporting requirements replace primary and fully-diluted earnings per share (“EPS”)with basic and diluted EPS. Basic EPS is calculated by dividing net income(available to common stockholders) by the weighted average number of commonshares outstanding for the period. Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock.

 

Potential dilutive securities (e.g., stock warrants and convertibledebt) have not been considered because the Company reported net losses in thethree and nine month periods ended March 31, 2009, and 2008, and,accordingly, their effects would be anti-dilutive. The weighted average numberof common and common equivalent shares outstanding was 61,430,731 and57,095,686 for the quarters ended March 31, 2009 and 2008, respectively,and 60,678,739 and 56,469,645 for the nine month periods ended March 31,2009 and 2008, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2009**

**(Unaudited)**

 

**NoteB — Stockholders’ Equity:**

** **

**Stock issuances**

 

Through the following exercises of warrants, weissued an aggregate of 3,482,500 shares of common stock, which were notregistered under the Securities Act of 1933, as amended, during the first ninemonths of fiscal 2009.

 

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

 

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

 

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

 

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

 

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.

 

Aggregate proceeds to the Company of theaforementioned stock issuances were $2,495,952, all of which have been or isexpected to be used for working capital purposes.  The aforementioned issuances were made inreliance upon an exemption from registration set forth in Section 4(2) ofthe Securities Act of 1993, as amended, which exempts transactions by an issuernot involving a public offering.

 

**Stock grants**

 

On August 20, 2007, the Company issued90,000 unregistered shares to a former Chief Financial Officer of the Company,pursuant to the Company’s stock incentive plan (the “Plan”), with such grantsubject to vesting in quarterly installments over the following four quarters.On August 20, 2008, the remaining 33,750 shares of the August 20,2007 restricted stock grant vested. As of the date of the grant, the aggregatemarket value of the common stock granted was $103,500 based on the then marketprice on the OTC Bulletin Board (the “OTCBB”) of the Company’s common stock.Such amount was amortized to compensation expense on a quarterly basis duringfiscal years 2008 and 2009. Accordingly, $12,937, $25,875, $25,875, $25,875 and$12,938 was recorded as compensation expense and included in general andadministrative expenses for the quarters ended September 30, 2007, December 31,2007, March 31, 2008, June 30, 2008 and September 30, 2008,respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2009**

**(Unaudited)**

 

On January 10 and January 18, 2007,the Company issued 489,500 and 52,500 unregistered shares, respectively, to theofficers, directors, and key employees of the Company pursuant to the Plan. Asof such dates, the aggregate market value of the common stock granted was$391,600 and $42,000, respectively, based on the last sale price on the OTCBBof the Company’s common stock. Such amounts were amortized to compensationexpense on a quarterly basis during calendar year 2007. An additional $30,000was accelerated into the quarter ended June 30, 2007 when one of ourformer Chief Financial Officers resigned in May 2007. Accordingly, $93,400was recorded as compensation expense and included in general and administrativeexpense for the quarter ended September 30, 2007.

 

On January 31 and February 4, 2008,the Company issued 555,000 and 52,500 unregistered shares respectively, to theofficers, directors, and key employees of the Company pursuant to the Plan. Asof such dates, the aggregate market value of the common stock granted was$893,550 and $84,525, (a total of $978,075) respectively, based on the lastsale price on the OTCBB of theCompany’s common stock. SEC guidance now requires that immediately-vestingcommon stock grants with no forfeiture provisions be expensed at the time ofgrant rather than amortized over the four quarters of the service period.Accordingly, the full $978,075 was recorded as compensation expense andincluded in general and administrative expenses for the fiscal year ended June 30,2008.

 

On January 12, 2009, the Company issued 235,000unregistered shares to three directors of the Company pursuant to thePlan.  As of such dates, the aggregatemarket value of the common stock granted was $385,400 based on the last saleprice ($1.64/share) on the aforementioned date, on the NYSE — Amex of theCompany’s common stock. Such amounts were expensed upon issuance tocompensation expense.

 

On January 28, 2009, the Company authorizedthe issuance of 250,000 and 122,500 unregistered shares, respectively, to theofficers and key employees of the Company pursuant to the Plan, which sharesare subject to forfeiture in the event that such recipient’s service with theCompany terminates prior to a specified date. These shares are authorized, butnot issued as of May 15, 2009.

 

**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 an impairment loss on oiland gas properties in the amount of $7,746,908 for the three months and$16,346,779 for the nine months ended March 31, 2009 as a result of thefull cost ceiling test. The weighted average natural gas price utilized for theMarch 31, 2009 ceiling impairment evaluation was $3.96 per Mcf.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 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 bearsinterest at a fluctuating rate equal to the sum of the Wells Fargo Bank primerate plus two percent (2%) per annum, matures on March 1, 2010, and issecured by substantially all of the assets of the Company. Approximately$5,000,000 of the funded amount was used, together with cash on hand, to retirethe Company’s previously outstanding senior debt that was due February 6,2009.

 

TheRevolving Note is subject to a borrowing base, initially set at $4,000,000, andis subject to periodic review. The Term Loan of $5,000,000 is convertible into5,000,000 shares of Cubic common stock.

 

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

 

TheCompany allocated the proceeds from the issuance of the debt to the warrants,the debt and net profits interest (see below) based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties. The assignment of a value tothe warrants and net profits interest resulted in a loan discount beingrecorded. The discount is being amortized over the original three-year term ofthe debt as additional interest expense. Amortization was $126,893 and $128,303for the quarters ended March 31, 2009 and 2008, and was $386,318 and$387,728 for the nine month periods ended March 31, 2009 and 2008.Amortization for the fiscal years ending June 30, 2009 and 2010 isexpected to be approximately $514,620 and $342,610, respectively.

 

Cubic incurred loan costsof $240,613 on the issuance of the debt and warrants. The amount allocable tothe debt of $166,590 has been capitalized and is being amortized over the termof the debt. Amortization of loan cost for the quarters ended March 31,2009 and 2008 was $13,743 and $13,895 respectively, and for the nine monthperiods ended March 31, 2009 and 2008 was $101,143 and $41,991 respectively.Amortization for the fiscal years ending June 30, 2009 and 2010 isexpected to be approximately $55,733 and $37,105, respectively. Cubic alsoincurred commitment fees of $170,000 related to subsequent increases in theCredit Facility’s borrowing base; such amount was capitalized in fiscal 2008and is being amortized over the remaining term of the loan. Amortization feesfor the quarters ended March 31, 2009 and 2008 was $19,480 and $11,732,respectively; and amortization for the nine month periods ended March 31,2009 and 2008 was $59,305 and $41,991, respectively. Amortization for thefiscal years ending June 30, 2009 and 2010 is expected to beapproximately $79,001 and $52,595, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF MARCH 31, 2009**

**(Unaudited)**

 

**May 2008subordinated debt issue**

 

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

 

Issuing the Subordinated Note required the consentof the holder of the Company’s senior indebtedness, Wells Fargo, which consentit granted on May 5, 2008. Subsequently, on May 8, 2008, the CreditFacility with Wells Fargo was amended by the First Amendment to the 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; and (ii) the amount of the borrowing base was increased to$20,000,000, which amount was fully drawn upon, subsequent to the end of fiscal2008, on August 20, 2008.

 

**Note E — Related partytransactions**

 

An affiliated company,Tauren Exploration, Inc. (“Tauren”), which is owned 100% by the Company’s Presidentand Chief Executive Officer, Calvin Wallen III, owns a working interest in thewells in which the Company owns a working interest. As of March 31, 2009and June 30, 2008, the Company owed Tauren $24,666 and was owed $942 byTauren, respectively for miscellaneous capital expenditures and general andadministrative expenses paid by the Company on Tauren’s behalf.

 

 In addition, all but three wells in which the Company owns a workinginterest are operated by an affiliated company, Fossil Operating, Inc. (“Fossil”),which is owned 100% by the Company’s President and Chief Executive Officer,Calvin Wallen III. As of March 31, 2009 and June 30, 2008, theCompany owed Fossil $402,550 and $862,895, respectively, for drilling costs andlease and operating expenses, and was owed by Fossil $200,596 and $450,699,respectively, for oil and gas sales.

 

**Note F — Subsequent Events**

 

On April 30, 2009, additional long-term debt became short-term asthe Subordinated Note with Diversified Dynamics Corporation matures on April 30,2010. This creates an increase in our current liabilities, and it reduces ourlong-term liabilities and it significantly reduces our working capital. We areworking to restructure the terms of the Subordinated Note during fiscal 2009.See “Management Discussion and Analysis of Financial Condition and Results ofOperations — Capital Resources and Liquidity — Cash Flow”, for furtherdiscussion.

 

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

 

Thefollowing discussion of our financial condition as of March 31, 2009 and June 30,2008 and our operations for the three and nine month periods ended March 31,2009 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 30,2008.

 

**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 development efforts was toposition the Company in a low risk opportunity while building main stream highyield reserves.  The acquisition of our Cotton Valley acreage in DeSotoand Caddo Parishes, Louisiana, puts us in a reservoir rich environment both inthe Cotton Valley and Bossier/Haynesville Shale formations, which we believegives us the potential to discover additional commercial horizons that can addvalue to the bottom line. We have had success on our acreage with wells drilledby achieving production from not only the Cotton Valley and Haynesville, butalso the Upper and Lower Hosston, Pettet and Rodessa formations.

 

As of March 31, 2009, the Company hassuccessfully drilled 22 wells in its northwest Louisiana properties (12 in itsJohnson Branch acreage in Caddo Parish, and 10 in its Bethany Longstreetacreage in Caddo and DeSoto Parishes). In its Johnson Branch acreage, Cubic hasdrilled 12 wells through the Cotton Valley sandstones, with three of thesewells penetrating deeper into the Bossier/Haynesville shales. Two of suchBossier/Haynesville wells have been completed and are producing from the Haynesvilleformation; the third such well was completed and is producing from the CottonValley formation. To date, 10 Johnson Branch wells have been completed ashydrocarbon producers in the Cotton Valley sandstones. Additionally, in itsBethany Longstreet acreage, Cubic has eight producing wells in the CottonValley and Hosston formations and two producing wells in the Haynesville Shale.

 

During the first quarter of 2009, the Companyelected to participate in the horizontal drilling of Chesapeake’s S Mitchell12-15-16H1 and Clingman 11-15-15H1 wells. These wells are located in theJohnson Branch and Caspiana Fields of Caddo Parish, Louisiana, and are expectedto be horizontally drilled to an approximate measured depth of 16,500 feet,followed by a Haynesville Shale completion. Cubic has an estimated 2.5% workinginterest in the wells. Cubic has a working interest with Chesapeake Energy inthree Johnson Branch Cotton Valley wells: the Copeland 12-1, the Soaring Ridge15-1, and the Fiest 21-1. We are also participating in a Haynesville horizontalwell, the Clingman 11 H-1. Cubic’s future plans include participation in theBeauregard 21-1, the Clingman 2 H-1, the Woolworth 15 H-1 and other wells insections controlled by Chesapeake, in which Cubic has a working interest in theHaynesville Shale.

 

Participating in these wells is expected to giveCubic’s technical personnel valuable insights in the methods and technologiesto help the Company in developing and enhancing the development of the balanceof our acreage.

 

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**Capital Resources andLiquidity**

 

**Working Capital**

 

TheCompany’s working capital decreased to ($24,116,962) at March 31, 2009from $1,746,741 at June 30, 2008. This decrease was primarily due to$25,000,000 of debt that matures March 1, 2010, and becoming a part ofcurrent liabilities during the nine months ended March 31, 2009. Thisreclassification was partially offset by cash flows provided by financingactivities of $5,668,152 resulting from $2,495,952 of proceeds from theissuance of common stock (as a result of the exercise of warrants), and theborrowing of $3,172,200 on the aforementioned revolving line of credit withWells Fargo in the nine months ended March 31, 2009.

 

TheCompany has reduced its planned capital expenditures for the remainder offiscal 2009. The Company anticipates the following capital expenditures in theremainder of fiscal 2009: re-completions of up to four wells in its JohnsonBranch acreage; the acquisition of additional leaseholds in and around its coreacreage position; final payments that may be outstanding as a result of theacquisition of rights-of-way in certain of our leases; and the election toparticipate in certain horizontal Haynesville Shale wells operated by anunrelated third-party, which are expected to begin production during thequarter ending June 30, 2009. As a result, our projected capitalexpenditures for fiscal 2009 are expected to be approximately $4,000,000, whichis below the minimum amount that we projected in both our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2008 and our Annual Report on Form 10-Kfor the year ended June 30, 2008.

 

Dueto the significant downturn in the price of natural gas, continued prudencewill be exercised in the undertaking of any new operations during the nearterm. No assurance can be given that all or any of these anticipated projectswill be completed as currently anticipated. The Company plans to fund thesecapital expenditures among other ways, through cash on hand and cash providedfrom operations, although the Company cannot be certain that adequate fundswill be available from operating cash flow or other sources to fully fund theprojected capital expenditures for fiscal 2009.

 

Additionally,because future cash flows and the availability of borrowings are subject to anumber of variables, such as prevailing prices of oil and gas, actualproduction from existing and newly-completed wells, the Company’s success indeveloping and producing new reserves, and the uncertainty with respect to theamount of funds which may ultimately be required to finance the Company’sdevelopment and exploration program, there can be no assurance that the Company’scapital resources 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:

 
| ** **                                            | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **March 31,**    | ** ** |
| ** **                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Net cash  provided (used) by operating activities     |       | $                     | (1,569,308 | ) | $ | (1,268,030 | ) |
| Net cash  provided (used) by investing activities     |       | (5,588,659            | )          | (12,202,638 | ) |
| Net cash  provided (used) by financing activities     |       | 5,668,152             |       | 11,003,000 |   |
| Net increase  (decrease) in cash and cash equivalents |       | $                     | (1,489,814 | ) | $ | (2,467,668 | ) |

 

***OperatingActivities*****—**Duringthe nine months ended March 31, 2009, the Company used cash flows fromoperating activities of $1,569,308 as compared to $1,268,030 in the prior yearperiod. Cash flow in 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 thecompletion of new wells and the acquisition and development of additional oiland gas properties. In the nine months ended March 31, 2009, we hadcapital spending related to the acquisition and development of oil and gasproperties of $5,012,287 and used net cash of $5,588,660 in investingactivities. In the nine months ended March 31, 2008, we had capitalspending related to the acquisition and development of oil and gas propertiesof $12,815,515 and used net cash of $12,202,638 in investing activities.

 

***Financing Activities*********—**Net cash flows provided by financing activitieswere $5,668,152 and $11,003,000 in the nine month periods ended March 31,2009 and 2008, respectively.

 

During thefiscal 2009 period, we received an aggregate of $2,495,952 in proceeds from theissuance of stock (resulting from the exercise of warrants), and, on August 20,2008, we drew upon an additional $3,172,200 from Wells Fargo under therevolving line of credit component of our Credit Facility in order to fund thecompletion of four wells drilled in our Johnson Branch acreage in fiscal 2009and the drilling of two additional wells located in the Company’s BethanyLongstreet acreage in Caddo and DeSoto Parishes. As a result, the Company hasborrowed the full $20,000,000 available under the Credit Facility’s RevolvingNote (and an aggregate of $25,000,000 under the Credit Facility). During thefiscal 2008 period, we received an aggregate of $303,000 in proceeds from theissuance of stock (resulting from the exercise of warrants) and drew upon$8,658,410 from the Revolving Note of our Credit Facility.

 

Cubic iscurrently evaluating its strategic alternatives; part of the evaluationincludes reviewing our Credit Facility and capital structure. As of March 1,2010, $25,000,000 of our long-term debt matures. We are working onrestructuring or replacing this piece of our capital structure.

 

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**ContractualObligations**

 

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.

 

**Results of Operations**

 

*For the Three Months ended March 31, 2009 and 2008*

 
| ** **                                | ** ** | **Three months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                | ** ** | **March 31,**     | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production  Volumes:**                  |       |                   |       |       |       |   |   |   |   |
| Oil (Bbl)                                 |       | 456                    |       | 637        |       | (181 | ) | -28 | % |
| Natural gas  liquids (gallons)            |       | 18,403                 |       | 28,799     |       | (10,396 | ) | -36 | % |
| Natural gas  (Mcf)                        |       | 55,953                 |       | 71,778     |       | (15,824 | ) | -22 | % |
| Total (Mcfe)                              |       | 61,319                 |       | 79,712     |       | (18,394 | ) | -23 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| **Weighted  Average Sales Prices:**       |       |                   |       |       |       |   |   |   |   |
| Oil (per Bbl)                             |       | $                      | 48.46      |       | $          | 91.49 |   | $ | (43.03 | ) | -47 | % |
| Natural gas  liquids (per gallon)         |       | $                      | 0.81       |       | $          | 1.52 |   | $ | (0.71 | ) | -47 | % |
| Natural gas (per  Mcf)                    |       | $                      | 4.66       |       | $          | 9.38 |   | $ | (4.72 | ) | -50 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| **Selected  Expenses per Mcfe:**          |       |                   |       |       |       |   |   |   |   |
| Production costs                          |       | $                      | 4.19       |       | $          | 4.15 |   | $ | 0.05 |   | 1 | % |
| Workover  expenses (non-recurring)        |       | $                      | —     |       | $          | — |   | $ | — |   | - |   |
| Severance taxes                           |       | $                      | 0.15       |       | $          | 0.27 |   | $ | (0.12 | ) | -46 | % |
| Other revenue  deductions                 |       | $                      | 0.32       |       | $          | 0.48 |   | $ | (0.16 | ) | -33 | % |
| Total lease  operating expenses           |       | $                      | 4.66       |       | $          | 4.90 |   | $ | (0.24 | ) | -5 | % |
| General and  administrative expenses      |       | $                      | 11.89      |       | $          | 7.62 |   | $ | 4.27 |   | 56 | % |
| Depreciation,  depletion and amortization |       | $                      | 3.45       |       | $          | 4.15 |   | $ | (0.70 | ) | -17 | % |

 

**Revenues**

 

OILAND GAS SALES decreased 62% to $293,371 for the quarter ended March 31,2009 from $778,360 for the quarter ended March 31, 2008, primarily due tothe natural decline curves of production that level off and then produce moreconsistently for the life of the well and the reduction in the market place ofnatural gas

 

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pricesduring the 2009 quarter versus the 2008 quarter. The weighted average naturalgas price we received in the 2009 quarter was $4.66 per Mcf versus $9.38 in the2008 quarter.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS decreased 27% to $285,819(97% of oil and gas sales) for 2009 from $390,361 (50% of oiland gas sales) for 2008 primarily due to more wells being on-line in Louisiana,which resulted in: a $11,662 decrease in the cost of chemicals; a $53,075decrease in salt water hauling and disposal costs; and $5,856 in commonfacility expenses for production from the Company’s Johnson Branch wells, whichdid not occur in the prior year period. Such decreases were partially offset by$22,220 of 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 $728,805 for 2009 from $607,423 in2008 primarily as a result of a $385,400 increase in non-cash stockcompensation expense and a $43,497 increase in salaries, a $20,337 increase incorporate fees related to our NYSE — Amex listing and a $19,400 increase inlegal fees related to investment banking activities. These amounts werepartially offset by a $21,392 decrease in contracted professional servicesrelated to a decrease in “division order” accounting work and a $34,668decrease in marketing expenses, which occurred in the three months ended March 31,2009.

 

DEPRECIATION,DEPLETION AND NON-LOAN RELATED AMORTIZATION decreased 15% to $211,648 in 2009from $331,181 in 2008. The decrease was primarily due to a reduction in thedepletion rate to .36% at March 31, 2009 from 1.71% at March 31,2008, prior to the Impairment Loss on Oil and Gas Properties described in thenext paragraph, at March 31, 2009 as compared to March 31, 2008.

 

IMPAIRMENTLOSS ON OIL AND GAS PROPERTIES increased in the amount of $7,746,908 for thethree months ended March 31, 2009 as a result of the full cost ceilingtest. The weighted average natural gas price utilized for the March 31,2009 ceiling impairment evaluation was $3.96 per Mcf, held constant, ascompared to $7.30 for the September 30, 2008 ceiling impairmentevaluation, at which time there was no impairment. There was no impairmentrecorded during the three-month period ended March 31, 2008.

 

INTERESTEXPENSE decreased 9% to $476,773 in 2009 from $526,739 in 2008 primarily due toa decrease in the interest rate of 5.75% at March 31, 2009 from 7.25% at March 31,2008. This year over year increase resulted from draws of approximately$7,341,590 on the revolving line of credit with Wells Fargo, and the borrowingof $2,000,000 under the terms of the May 6, 2008 Subordinated Note. Theweighted average debt balance (before discounts) for the 2009 quarter was$27,000,000 as compared to $19,500,000 in the 2008 quarter. The Credit Facilitywith Wells Fargo also resulted in a loan discount being recorded. The discountis being amortized over the original three-year term of the debt as additionalinterest expense with $126,893 and $128,303 being recorded in each of the 2009and 2008 quarters.

 

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*For theNine months ended March 31, 2009 and 2008*

 
| ** **                                | ** ** | **Nine months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **March 31,**    | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2009**              | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production  Volumes:**                  |       |                  |       |       |       |       |       |   |   |
| Oil (Bbl)                                 |       | 1,245                 |       | 1,065      |       | 180        |       | 17 | % |
| Natural gas  liquids (gallons)            |       | 63,690                |       | 28,799     |       | 34,891     |       | 121 | % |
| Natural gas  (Mcf)                        |       | 188,894               |       | 179,914    |       | 8,979      |       | 5 | % |
| Total (Mcfe)                              |       | 205,464               |       | 190,419    |       | 15,045     |       | 8 | % |
|                                      |       |                  |       |       |       |       |       |   |   |
| **Weighted  Average Sales Prices:**       |       |                  |       |       |       |       |       |   |   |
| Oil (per Bbl)                             |       | $                     | 61.42      |       | $          | 92.52      |       | $ | (31.10 | ) | -34 | % |
| Natural gas  liquids (per gallon)         |       | $                     | 1.18       |       | $          | —     |       | $ | 1.18 |   | — |   |
| Natural gas (per  Mcf)                    |       | $                     | 6.93       |       | $          | 8.11       |       | $ | (1.18 | ) | -15 | % |
|                                      |       |                  |       |       |       |       |       |   |   |
| **Selected  Expenses per Mcfe:**          |       |                  |       |       |       |       |       |   |   |
| Production costs                          |       | $                     | 4.52       |       | $          | 3.13       |       | $ | 1.38 |   | 44 | % |
| Workover expenses  (non-recurring)        |       | $                     | 0.08       |       | $          | 0.04       |       | $ | 0.03 |   | 79 | % |
| Severance taxes                           |       | $                     | 0.20       |       | $          | 0.29       |       | $ | (0.09 | ) | -32 | % |
| Other revenue  deductions                 |       | $                     | 0.32       |       | $          | 0.80       |       | $ | (0.48 | ) | -60 | % |
| Total lease  operating expenses           |       | $                     | 5.11       |       | $          | 4.26       |       | $ | 0.85 |   | 20 | % |
| General and  administrative expenses      |       | $                     | 7.93       |       | $          | 7.53       |       | $ | 0.39 |   | 5 | % |
| Depreciation,  depletion and amortization |       | $                     | 3.76       |       | $          | 4.29       |       | $ | (0.54 | ) | -13 | % |

 

**Revenues**

 

OILAND GAS SALES decreased 9% to $1,460,308 for the nine months ended March 31,2009 from $1,602,173 for the nine months ended March 31, primarily due tothe natural decline curves of production that level off and then produce moreconsistently for the life of the well and the reduction in the market place ofnatural gas prices during the 2009 quarter versus the 2008 quarter.  The weighted average natural gas price wereceived in the 2009 period was $6.93per Mcf versus $8.11in the 2008 period.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased 29% to $1,049,919(72% of oil and gas sales) for 2009 from $811,973 (51% of oil and gas sales)for 2008 primarily due to more wells being on-line in Louisiana, which resultedin: a $98,019 increase in the cost of chemicals; a $97,797 increase in saltwater hauling and disposal costs; and $102,190 in common facility expenses forproduction from the Company’s Johnson Branch wells, which did not occur in theprior year period. Such increases were partially offset by a $86,759 decreasein costs passed-through to the Company by the purchaser of the Company’s gas.Such costs are deducted from the Company’s gross revenue by the purchaser andinclude, but are not limited to: costs to market the Company’s gas, compressionfees, and the cost of fuel used by the purchaser to convey the Company’s gas.

 

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GENERALAND ADMINISTRATIVE EXPENSES increased 14% to $1,629,198 for 2009 from$1,434,727in 2008 primarily as a result of: a $121,083 increase in cashcompensation expense resulting from an increase in the number of our employees;a $116,870 increase in contract services related to accounting consulting feesand $117,177 increase in corporate fees related to our NYSE — Amex listing.These amounts were partially offset by a $97,667 decrease in non-cash stockcompensation and a $119,327 decrease in contracted professional servicesrelated to a decrease in “division order” accounting work.

 

DEPRECIATION,DEPLETION AND AMORTIZATION decreased 6% to $771,632 in 2009 from $817,434 in2008. The decrease was primarily due to a reduction in the depletion rate to3.10% at March 31, 2009 from 3.75% at March 31, 2008, prior to theImpairment Loss on Oil and Gas Properties described in the next paragraph, at March 31,2009 as compared to March 31, 2008.

 

IMPAIRMENTLOSS ON OIL AND GAS PROPERTIES increased to the amount of $16,346,779 for thenine months ended March 31, 2009 as a result of the full cost ceilingtest. The weighted average natural gas price utilized for the March 31,2009 ceiling impairment evaluation was $3.96 per Mcf, held constant, ascompared to $7.30 for the September 30, 2008 ceiling impairmentevaluation, at which time there was no impairment. There was no impairmentrecorded during the nine-month period ended March 31, 2008.

 

INTERESTEXPENSE increased 211% to $1,562,648 in 2009 from $1,404,461in 2008 primarilydue to an increase in debt to $27,000,000 at March 31, 2009 from$19,500,000 at March 31, 2008. This year over year increase resulted fromdraws of approximately $7,341,590 on the revolving line of credit with WellsFargo, and the borrowing of $2,000,000 under the terms of the May 6, 2008Subordinated Note. The weighted average debt balance (before discounts) for thenine months ended March 31, 2009 was $26,421,131 as compared to$14,745,776 in the nine months ended March 31, 2008. The Credit Facilitywith Wells Fargo also resulted in a loan discount being recorded. The discountis being amortized over the original three-year term of the debt as additionalinterest expense with $386,318 being recorded in the nine months ended March 31,2009.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financialcondition and results of operation are based upon the condensed financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. Preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses. There havebeen no changes to our critical accounting policies from those described in ourAnnual Report on Form 10-K for the year ended June 30, 2008.

 

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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, 2009, we had $27,000,000 of long-term debtoutstanding under our Credit Facility and the Subordinated Note, each of whichmatures in fiscal 2010 and bears interest at the prime rate plus 2.0%. As aresult, our interest costs fluctuate based on short-term interest rates. Based onthe aforementioned borrowings outstanding at March 31, 2009, a 100 basispoint change in interest rates would change our annual interest expense byapproximately $270,000. We had no interest rate derivatives during the thirdquarter of fiscal 2009.

 

**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 2008 Annual Report on Form 10-K, except asfollows:

 

***A majority of our production,revenue and cash flow from operating activities is derived from assetsthat are concentrated in a geographic area.***

 

Mostof our estimated proved reserves at March 31, 2009 and a similar amount ofour production during 2008 were associated with our Northwest Louisiana wells.Accordingly, if the level of production from these properties substantiallydeclines, it could have a material adverse effect on our overall productionlevel and our revenue. Our estimated proved reserves relate almost entirely towells in the Haynesville formation. We plan to devote a smaller portion of ourcapital expenditure budget to the Cotton Valley formation, in favor of wells todevelop the Bossier /Haynesville Shale formation. This may affect the production,revenue and cash flow we derive from further development of the Cotton Valleyformation.

 

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

 

All of the Company’s Louisiana acreage lies atop thecenter of what is known in our industry as the “Haynesville Shale Play” (whichwe also refer to as the “Bossier/Haynesville shales” elsewhere herein). The fewHaynesville Shale wells drilled to date in and around our core area havereported very high initial production rates, implying large reserves. If theHaynesville Shale continues to be successful, the amount of natural gas beingproduced in and around our core area from these new wells, as well as otherexisting wells, may exceed the capacity of the various gathering and intrastateor interstate transportation pipelines currently available, which could resultin our wells being shut-in awaiting a pipeline to deliver such gas. Any suchshutting-in of our wells could adversely affect our results of operations.

 

***Difficult conditions in the capitalmarkets and the economy may materially and adversely affect our business andresults of operations and we do not expect these conditions to improve in thenear future******.***

 

Ourbusiness and results of operations are affected by conditions in the capitalmarkets and the economy generally. The stress experienced by capital marketsthat began in the second half of fiscal 2008 continued and substantiallyincreased during the third quarter of fiscal 2009. Recently, concerns overinflation, energy costs, geopolitical issues, the availability and cost ofcredit, the U.S. mortgage market and a declining real estate market in the U.S.have contributed to increased volatility and diminished expectations for theeconomy and the markets going forward. These factors, combined with volatileoil and gas prices, declining business and consumer confidence and increasedunemployment, have precipitated an economic slowdown. Many economists are nowpredicting that the U.S. economy, and possibly the global economy, may enterinto a prolonged recession or depression as a result of the deterioration inthe credit markets and the related financial crisis, as well as a variety ofother factors. Both expected and, to a greater extent, actual downturns in theU.S. or global economy could hurt our business in a number of ways, includingby decreasing the prices we receive for our oil and natural gas production,increasing the likelihood of non-cash asset write-downs and reducing ourability to comply with financial and restrictive covenants related to our 

 

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indebtedness.Furthermore, a prolonged tightening of the credit markets could adverselyimpact our access to capital, which would reduce our ability to refinance ourexisting indebtedness, whether or not on acceptable terms, our ability toexecute our development and acquisition plans, our ability to replace ourreserves, and, eventually, our production levels. Any of these effects couldhave a material adverse effect on our revenues, financial condition and resultsof operations.

 

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

 

Adescription of our stock issuances during the nine months ended March 31,2009 is included in “Item 1. Notesto Condensed Financial Statements — “Note B — Stockholders’ Equity.”

 

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

 

None.

 

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

 

TheCompany held its Annual Meeting of Shareholders on April 24, 2009. As of March 6,2009, the record date for the meeting, 62,570,654 shares of common stock wereissued and outstanding. A quorum of 50,638,054 shares of common stock waspresent or represented at the meeting.

 

Thefollowing individuals were nominated and elected to serve as directors untilthe Company’s Annual Meeting of Shareholders in 2010:

 

CalvinA. Wallen, III (Chairman), Gene C. Howard, Herbert A. Bayer, Bob L.Clements, Jon S. Ross, Phyllis K. Harding, and William L. Bruggeman, Jr.

 

TheShareholders voted as follows on the following matters:

 

1)     Election of Directors. Thevoting results for each of the nominees were as follows:

 
| ** **                      | ** ** | **For**    | ** ** | ** ** | ** ** | **Withheld** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|
| Calvin A.  Wallen, III     |       | 50,511,318 |       | 99.7       | %          | 126,736      |       | 0.3        | %          |
| Gene C. Howard                  |       | 50,459,067 |       | 99.6       | %          | 178,987      |       | 0.4        | %          |
| Herbert A. Bayer                |       | 50,511,318 |       | 99.7       | %          | 126,736      |       | 0.3        | %          |
| Bob L. Clements                 |       | 50,526,858 |       | 99.8       | %          | 111,196      |       | 0.2        | %          |
| Jon S. Ross                     |       | 50,472,537 |       | 99.7       | %          | 165,517      |       | 0.3        | %          |
| Phyllis K.  Harding             |       | 50,234,834 |       | 99.2       | %          | 403,220      |       | 0.8        | %          |
| William L.  Bruggeman, Jr. |       | 50,245,269 |       | 99.2       | %          | 392,785      |       | 0.8        | %          |

 

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2)     Ratification of the Boardof Directors’ selection of Philip Vogel as the Company’s independent registeredpublic accountants for the fiscal year ending June 30, 2009. The votingresults were as follows:

 
| For                 |   | 50,327,414 |   | 99.4  | % |
|---------------------|--------|------------|--------|-------|---|
| Against             |   | 1,351      |   | 0.0   | % |
| Abstain             |   | 309,288    |   | 0.6   | % |
| Total Shares  Voted |   | 50,638,053 |   | 100.0 | % |

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

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

 

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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 15, 2009  | By:                    | /s/ Calvin A. Wallen, III |
|                     |                   | Calvin A. Wallen, III, President and  Chief Executive Officer |
|                     |                   |   |
|                     |                   |   |
| Date: May 15,  2009 | By:                    | /s/ Larry Badgley |
|                     |                   | Larry Badgley, Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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