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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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

 

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

 

**For the Quarterly Period Ended December 31,2008**

** **

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

** **

**CUBICENERGY, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**9870 Plano Road**

**Dallas, TX 75238**

(Address of principal executive offices)

 

**(972) 686-0369**

(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes xNo 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 oNo x

 

As of February 17,2009, the registrant had 60,570,564 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 these forward-lookingstatements. You should consider carefully the statements under the “RiskFactors” section of this report and other sections of this report, as well asthose described in our annual report on Form 10-K for the year ended June 30,2008, which describe factors that could cause our actual results to differ fromthose set forth in the forward-looking statements, including, but not limitedto, the following factors:

 

·                  the volatility in commodity prices for oiland natural gas;

 

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

 

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

 

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

 

·                  the ability to replace oil and natural gasreserves;

 

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

 

·                  environmental risks;

 

·                  drilling and operating risks;

 

·                  exploration and development risks;

 

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

 

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

 

·                  our ability to retain key members of seniormanagement;

 

·                  our ability to obtain goods and services,such as drilling rigs and other oilfield equipment, and access to adequategathering systems and pipeline take-away capacity, to execute our drillingprogram;

 

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

 

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**CUBIC ENERGY, INC.**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                        | **Page**   |
|-------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                              |       |
| **PART I –  FINANCIAL INFORMATION**                                                                     | ** ** |
| ** **                                                                                                        | ** ** |
| Item 1. Financial Statements                                                                                      |       |
|                                                                                                              |       |
| Independent Accountant’s Report                                                                              | 1          |
|                                                                                                              |       |
| Condensed Balance Sheets As of December 31, 2008 (unaudited) and June 30, 2008                          | 2          |
|                                                                                                              |       |
| Condensed Statements of Operations (unaudited) For the three and six months ended December 31, 2008 and 2007 | 3          |
|                                                                                                              |       |
| Condensed Statements of Cash Flows (unaudited) For the six months ended December 31, 2008 and 2007           | 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                                                                                         | 19         |
|                                                                                                              |       |
| Item 6.Exhibits                                                                                                   | 20         |
|                                                                                                              |       |
| Signatures                                                                                                        | 21         |
|                                                                                                              |       |
| Certifications                                                                                                    |       |

 

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# **PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**INDEPENDENT ACCOUNTANT’S REPORT**

 

TheStockholders and Board of DirectorsCubic Energy, Inc.

 

We have reviewed theaccompanying condensed balance sheet as of December 31, 2008, and the relatedcondensed statements of operations for the three and six month periods endedDecember 31, 2008 and 2007, and the cash flows of Cubic Energy, Inc. for thesix month period ended December 31, 2008 and 2007. These financial statementsare 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

February 06,2009

 

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**CUBIC ENERGY, INC.**

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                                     | ** ** | **December 31,**     | ** ** | ** **                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2008 (unaudited)** | ** ** | **June 30, 2008** | ** ** |
| **Assets**                                                                                                                                                     |       |                      |       |                        |       |
| Current assets:                                                                                                                                                |       |                      |       |                        |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                         | 1,136,271  |                        | $          | 2,144,002 |   |
| Accounts  receivable - trade                                                                                                                                   |       | 123,605                   |       | 165,910                     |       |
| Prepaid drilling  costs                                                                                                                                        |       | —                    |       | 33,399                      |       |
| Other prepaid  expenses                                                                                                                                        |       | 19,793                    |       | 65,344                      |       |
| Total current  assets                                                                                                                                          |       | 1,279,669                 |       | 2,408,655                   |       |
| Property and  equipment:                                                                                                                                       |       |                      |       |                        |       |
| Oil and gas properties,  full cost method:                                                                                                                     |       |                      |       |                        |       |
| Proved  properties (including wells and related equipment and facilities)                                                                                      |       | 25,387,537                |       | 27,751,133                  |       |
| Unproven  properties                                                                                                                                           |       | 1,194,155                 |       | 3,254,901                   |       |
| Office and other  equipment                                                                                                                                    |       | 28,420                    |       | 14,672                      |       |
| Property and  equipment, at cost                                                                                                                               |       | 26,610,112                |       | 31,020,706                  |       |
| Less accumulated  depreciation, depletion and amortization                                                                                                     |       | 4,723,095                 |       | 4,163,112                   |       |
| Property and  equipment, net                                                                                                                                   |       | 21,887,017                |       | 26,857,594                  |       |
| Other assets:                                                                                                                                                  |       |                      |       |                        |       |
| Deferred loan  costs, net                                                                                                                                      |       | 156,513                   |       | 224,434                     |       |
| Total other assets                                                                                                                                             |       | 156,513                   |       | 224,434                     |       |
|                                                                                                                                                           |       | $                         | 23,323,199 |                        | $          | 29,490,683 |   |
| ** **                                                                                                                                                     |       |                      |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                 |       |                      |       |                        |       |
| Current  liabilities:                                                                                                                                          |       |                      |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                                         |       | $                         | 211,825    |                        | $          | 250,630 |   |
| Due to  affiliates                                                                                                                                             |       | 535,840                   |       | 411,284                     |       |
| Total current  liabilities                                                                                                                                     |       | 747,665                   |       | 661,914                     |       |
| Long-term  liabilities:                                                                                                                                        |       |                      |       |                        |       |
| Long-term debt,  net of discounts                                                                                                                              |       | 26,402,194                |       | 22,970,570                  |       |
| Total long-term  liabilities                                                                                                                                   |       | 26,402,194                |       | 22,970,570                  |       |
| Commitments and  contingencies                                                                                                                                 |       | —                    |       | —                      |       |
| Stockholders’  equity:                                                                                                                                    |       |                      |       |                        |       |
| Preferred stock  - $.01 par value, authorized 10,000,000 shares, issued none                                                                                   |       | —                    |       | —                      |       |
| Common stock -  $.05 par value, authorized 100,000,000 shares, issued 60,335,564 shares at  December 31, 2008 and 58,853,064 shares at June 30, 2008 |       | 3,016,778                 |       | 2,942,654                   |       |
| Additional  paid-in capital                                                                                                                                    |       | 28,388,518                |       | 27,366,690                  |       |
| Accumulated  deficit                                                                                                                                           |       | (35,231,956               | )          | (24,451,145                 | )          |
| Stockholders’  equity                                                                                                                                     |       | (3,826,660                | )          | 5,858,199                   |       |
|                                                                                                                                                           |       | $                         | 23,323,199 |                        | $          | 29,490,683 |   |

 

*The accompanying notes are anintegral 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,**          | ** ** |
| ** **                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                  |       |                             |       |                           |       |   |   |   |   |
| Oil and gas  sales                                         |       | $                                | 491,966    |                           | $          | 375,825 |   | $ | 1,166,937 |   | $ | 823,813 |   |
| Total revenues                                             |       | $                                | 491,966    |                           | $          | 375,825 |   | $ | 1,166,937 |   | $ | 823,813 |   |
| Costs and  expenses:                                       |       |                             |       |                           |       |   |   |   |   |
| Oil and gas  production, operating and development costs   |       | 399,743                          |       | 181,422                        |       | 764,099 |   | 421,612 |   |
| General and  administrative expenses                       |       | 449,094                          |       | 453,811                        |       | 900,393 |   | 827,304 |   |
| Depreciation,  depletion and non-loan-related amortization |       | 296,227                          |       | 204,249                        |       | 559,984 |   | 486,253 |   |
| Impairment loss  on oil and gas properties                 |       | 8,599,871                        |       | —                         |       | 8,599,871 |   | — |   |
| Total operating  costs and expenses                        |       | 9,744,935                        |       | 839,482                        |       | 10,824,347 |   | 1,735,169 |   |
| Operating loss                                             |       | (9,252,969                       | )          | (463,657                       | )          | (9,657,410 | ) | (911,356 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Non-operating  income (expense):                           |       |                             |       |                           |       |   |   |   |   |
| Other income                                               |       | 12,290                           |       | 11,286                         |       | 30,395 |   | 29,156 |   |
| Interest  expense, including amortization of loan discount |       | (540,600                         | )          | (480,556                       | )          | (1,085,875 | ) | (877,722 | ) |
| Amortization of  loan costs                                |       | (33,960                          | )          | (14,048                        | )          | (67,921 | ) | (28,096 | ) |
| Total  non-operating expense                               |       | (562,270                         | )          | (483,318                       | )          | (1,123,401 | ) | (876,662 | ) |
| Loss from  operations before income taxes                  |       | (9,815,239                       | )          | (946,975                       | )          | (10,780,811 | ) | (1,788,018 | ) |
| Provision for  income taxes                                |       | —                           |       | —                         |       | — |   | — |   |
| Net loss                                                   |       | $                                | (9,815,239 | )                              | $          | (946,975 | ) | $ | (10,780,811 | ) | $ | (1,788,018 | ) |
| Net loss per  common share - basic and diluted             |       | $                                | (0.16      | )                              | $          | (0.02 | ) | $ | (0.18 | ) | $ | (0.03 | ) |
| Weighted average  common shares outstanding                |       | 60,335,564                       |       | 56,362,581                     |       | 60,310,917 |   | 56,160,026 |   |

 

*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,**          |
| ** **                                                                            | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                            |       |                           |   |   |   |
| Net (loss)                                                                            |       | (10,780,811                    | ) | $ | (1,788,018 | ) |
| Adjustments to  reconcile net (loss) to cash provided (used) by operating activities: |       |                           |   |   |   |
| Depreciation,  depletion and amortization                                             |       | 887,329                        |   | 773,774 |   |
| Impairment Loss  on Oil and Gas properties                                            |       | 8,599,871                      |   |   |   |
| Stock issued for  compensation                                                        |       | —                         |   | 225,612 |   |
| Change in assets  and liabilities:                                                    |       |                           |   |   |   |
| (Increase)  decrease in accounts receivable - trade                                   |       | 42,305                         |   | 94,486 |   |
| (Increase)  decrease in other prepaid expenses                                        |       | 45,551                         |   | 25,392 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                      |       | (38,805                        | ) | 146,502 |   |
| Increase  (decrease) in due to affiliates                                             |       | 175,727                        |   | (371,282 | ) |
| Net cash  provided (used) by operating activities                                     |       | (1,068,834                     | ) | (893,534 | ) |
|                                                                                  |       |                           |   |   |   |
| **Cash  flows from investing activities:**                                            |       |                           |   |   |   |
| Acquisition and  development of oil and gas properties                                |       | (4,175,529                     | ) | (8,679,932 | ) |
| Increase  (decrease) in capital portion of due to affiliates                          |       | (51,171                        | ) | (498,210 | ) |
| Purchase of  office equipment                                                         |       | (13,748                        | ) | (1,786 | ) |
| (Increase)  decrease in advances on development costs                                 |       | 33,399                         |   | (814,229 | ) |
| Net cash  provided (used) by investing activities                                     |       | (4,207,049                     | ) | (9,994,157 | ) |
|                                                                                  |       |                           |   |   |   |
| **Cash  flows from financing activities:**                                            |       |                           |   |   |   |
| Proceeds from  credit facility                                                        |       | 3,172,200                      |   | 8,658,410 |   |
| Issuance of  common stock, net                                                        |       | 1,095,952                      |   | 303,000 |   |
| Net cash  provided (used) by financing activities                                     |       | 4,268,152                      |   | 8,961,410 |   |
|                                                                                  |       |                           |   |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | $                              | (1,007,731 | ) | $ | (1,926,281 | ) |
| ** **                                                                            |       |                           |   |   |   |
| **Cash  and cash equivalents:**                                                       |       |                           |   |   |   |
| Beginning of  period                                                                  |       | 2,144,002                      |   | 3,122,273 |   |
| End of period                                                                         |       | $                              | 1,136,271 |   | $ | 1,195,992 |   |
| Other  information:                                                                   |       |                           |   |   |   |
| Cash interest  paid on debt                                                           |       | $                              | 857,111 |   | $ | 618,296 |   |

 

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

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**AS OF DECEMBER 31, 2008**

**(Unaudited)**

 

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

 

**Basis of presentation**

 

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

 

The financial information included herein asof December 31, 2008, and for the three and six month periods ended December 31,2008, and 2007, have been presented without an audit, pursuant to accountingprinciples for interim financial information generally accepted in the UnitedStates of America, and the rules of the Securities and ExchangeCommission.

 

The Company believes that the disclosures areadequate to make the information presented not misleading. The informationpresented reflects all adjustments (consisting solely of normal recurringadjustments, 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. 128 reportingrequirements replace primary and fully-diluted earnings per share (“EPS”) withbasic 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 convertible debt) have not been considered becausethe Company reported net losses in the three and six month periods ended December 31,2008, and 2007, and, accordingly, their effects would be anti-dilutive. Theweighted average number of common and common equivalent shares outstanding was60,335,634 and 56,362,581 for the quarters ended December 31, 2008 and2007, respectively, and 60,310,917 and 56,160,026 for the six month periodsended December 31, 2008 and 2007, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2008**

**(Unaudited)**

 

**NoteB**–Stockholders’ Equity:

** **

**Stock issuances**

 

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

 

Aggregate proceeds to the Company of theaforementioned stock issuances were $1,095,952, 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 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 Company’sstock incentive plan (the “Plan”). As of such dates, the aggregate market valueof the common stock granted was $391,600 and $42,000, respectively, based onthe last sale price on the OTC Bulletin Board (the “OTCBB”) of the Company’scommon stock. Such amounts were amortized to compensation expense on a quarterlybasis during calendar year 2007. An additional $30,000 was accelerated into thequarter ended June 30, 2007 when one of our former Chief FinancialOfficers resigned in May 2007. Accordingly, $93,400 was recorded ascompensation expense and included in general and administrative expense for thequarter ended September 30, 2007.

 

On August 20, 2007, the Company issued90,000 unregistered shares to a former Chief Financial Officer of the Company,pursuant to the Plan, with such grant subject to vesting in quarterlyinstallments over the following four quarters. On August 20, 2008, theremaining 33,750 shares of the August 20, 2007 restricted stock grantvested. As of the date of the grant, the aggregate market value of the commonstock granted was $103,500 based on the then market price on the OTCBB of theCompany’s common stock. Such amount was amortized to compensation expense on aquarterly basis during fiscal years 2008 and 2009. Accordingly, $12,937,$25,875, $25,875, $25,875 and $12,938 was recorded as compensation expense andincluded in

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2008**

**(Unaudited)**

 

general and administrative expenses for thequarters ended September 30, 2007, December 31, 2007, March 31,2008, June 30, 2008 and September 30, 2008, respectively.

 

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.

 

**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 $8,599,871 for the three and six monthsended December 31, 2008 as a result of the full cost ceiling test. Theweighted average natural gas price utilized for the December 31, 2008ceiling impairment evaluation was $5.907 per Mcf.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2008**

**(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 credit facility is subject to a borrowing base, initially set at$4,000,000, and is subject to periodic review. The convertible term loan of$5,000,000 is convertible into 5,000,000 shares of Cubic common stock.

 

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 $129,713 for thequarters ended December 31, 2008 and 2007, and was $259,425 for the sixmonth periods ended December 31, 2008 and 2007. Amortization for thefiscal years ending June 30, 2009 and 2010 is expected to be approximately$514,620 and $342,610, respectively.

 

Cubic incurred loan costsof $240,613 on the issuance of the debt and warrants. The amount allocable tothe debt of $166,590 has been capitalized and is being amortized over the termof the debt. Amortization was $14,048 for the quarters ended December 31,2008 and 2007, and was $28,096 for the six month periods ended December 31, 2008 and 2007. Amortization forthe fiscal years ending June 30, 2009 and 2010 is expected to beapproximately $55,733 and $37,105, respectively. Cubic also incurred commitment fees of$170,000 related to subsequent increases in the Credit Facility’s borrowingbase; such amount was capitalized in fiscal 2008 and is being amortized overthe remaining term of the loan. Amortization for the quarters ended December 31,2008 and 2007 was $19,913 and $0, respectively; and amortization for the sixmonth periods ended December 31, 2008 and 2007 was $39,826 and $0,respectively. Amortization for the fiscal years ending June 30, 2009 and2010 is expected to be approximately $79,001 and $52,595, respectively.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**AS OF DECEMBER 31, 2008**

**(Unaudited)**

 

**May 2008subordinated debt issue**

 

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

 

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

 

**Note E – Related partytransactions**

 

An affiliated company,Tauren Exploration, Inc. (“Tauren”), which is owned 100% by the Company’sPresident and Chief Executive Officer, Calvin Wallen III, owns a workinginterest in the wells in which the Company owns a working interest. As of December 31,2008 and June 30, 2008, the Company owed Tauren $6,105 and was owed $942by Tauren, 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 December 31, 2008 and June 30, 2008, theCompany owed Fossil $852,967 and $862,895, respectively, for drilling costs andlease and operating expenses, and was owed by Fossil $323,232 and $450,699,respectively, for oil and gas sales.

 

**Note F – Subsequent Events**

 

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 Alternext of theCompany’s common stock. Suchamounts were expensed upon issuance to compensation expense.

 

On January 28, 2009,the Company authorized the issuance of 250,000 and 122,500 unregistered shares,respectively, to the officers and key employees of the Company pursuant to thePlan, which shares are subject to forfeiture in the event that such recipient’sservice with the Company terminates prior to a specified date.

 

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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 December 31, 2008and June 30, 2008 and our operations for the three and six month periodsended December 31, 2008 and 2007 should be read in conjunction with ourcondensed financial statements and the notes thereto included in this QuarterlyReport on Form 10-Q and with the financial statements, notes andmanagement’s discussion and analysis included in our Annual Report on Form 10-Kfor 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 northwestLouisiana, combined with our position in DeSoto and Caddo Parishes, Louisiananot only puts us in a reservoir rich environment with the Cotton Valleyformation, but also gives us the potential to discover additional commercialhorizons that can add value to the bottom line. We have had success on ouracreage with wells drilled by achieving production from not only the Cotton Valley,but also the Upper and Lower Hosston, Pettet and Rodessa formations.

 

As of December 31, 2008, the Company hassuccessfully drilled 22 wells in its northwest Louisiana properties (12 in itsJohnson Branch acreage in Caddo Parish, and 10 in its Bethany Longstreetacreage in Caddo and DeSoto Parishes). In its Johnson Branch acreage, Cubic hasdrilled 12 wells through the Cotton Valley sandstones, with three of thesewells penetrating deeper into the Bossier/Haynesville shales. Two of suchBossier/Haynesville wells have been completed and are producing from theHaynesville formation; the third such well was completed and is producing fromthe Cotton Valley formation. To date, 10 Johnson Branch wells have beencompleted as hydrocarbon producers in the Cotton Valley sandstones.Additionally, in its Bethany Longstreet acreage, Cubic has eight producingwells in the Cotton Valley and Hosston formations and two producing wells inthe Haynesville Shale.

 

On or about, January 12, 2009, the Companyelected to participate in the horizontal drilling of Chesapeake’s HA RA SUM; SMitchell 12-15-16H1 well. The well is located in the Johnson Branch Field ofCaddo Parish, Louisiana, and is expected to be horizontally drilled to ameasured depth of 16,500 feet, followed by a Haynesville Shale completion.Cubic has an estimated 2.5% working interest in the well. Cubic has a workinginterest with Chesapeake Energy in three Johnson Branch Cotton Valley wells:the Copeland 12-1, the Soaring Ridge 15-1, and the Fiest 21-1. Cubic’s futureplans include participation in the Beauregard 21-1, the Clingman 11 H-1 wells,and other wells in sections controlled by Chesapeake, in which Cubic has aworking interest in the Haynesville Shale.

 

Participatingin the S Mitchell well is expected to give Cubic’s technical personnel valuableinsights in the methods and technologies to help the Company in developing andenhancing the development of the balance of our acreage.

 

**Capital Resources andLiquidity**

 

**Working Capital**

 

TheCompany’s working capital decreased 70% to $532,004 at December 31, 2008from $1,746,741 at June 30, 2008. This decrease was primarily due to cashused by investing activities of $4,207,049 and operating activities of$1,068,834, mainly for the drilling and completion of new wells, in the sixmonths ended

 

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December 31,2008. These cash outflows were partially offset by cash flows provided byfinancing activities of $4,268,152 resulting from $1,095,952 of proceeds fromthe issuance of common stock (as a result of the exercise of warrants), and theborrowing of $3,172,200 on the aforementioned revolving line of credit withWells Fargo in the six months ended December 31, 2008.

 

TheCompany has reduced its planned capital expenditures for the remainder offiscal 2009. The Company anticipates the following capital projects in theremainder of fiscal 2009: re-completions of up to four wells in our JohnsonBranch acreage; the acquisition of additional leaseholds in and around its coreacreage position; final payments that may be outstanding in the acquisition ofrights-of-way in certain of our leases; and the election to participate incertain horizontal Haynesville Shale wells operated by an unrelatedthird-party, which are expected to begin production in the second half offiscal 2009. As a result, our projected capital expenditures for fiscal 2009are expected to be approximately $4,000,000, which is below the minimum amountthat we projected in both our Quarterly Report on Form 10-Q for thequarter 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 to fully fund the projected capitalexpenditures 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.

 

**Cash Flow**

 

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

 
| ** **                                            | ** ** | **Six months ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Net cash  provided (used) by operating activities     |       | $                                                 | (1,068,834 | ) | $ | (893,534 | ) |
| Net cash  provided (used) by investing activities     |       | (4,207,049                                        | )          | (9,994,157 | ) |
| Net cash  provided (used) by financing activities     |       | 4,268,152                                         |       | 8,961,410 |   |
| Net increase  (decrease) in cash and cash equivalents |       | $                                                 | (1,007,731 | ) | $ | (1,926,281 | ) |

 

***OperatingActivities*****–**Duringthe six months ended December 31, 2008, the Company used cash flows fromoperating activities of ($1,068,834) as compared to ($893,534) 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 used in investingactivities consists of capital expenditures related to the drilling andcompletion of new wells and the acquisition and development of additional oiland gas properties. In the six months ended December 31, 2008, we hadcapital spending related to the acquisition

 

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anddevelopment of oil and gas properties of $4,175,529 and used net cash of$4,207,049 in investing activities. In the six months ended December 31,2007, we had capital spending related to the acquisition and development of oiland gas properties of $9,178,142 and used net cash of $9,994,157 in investingactivities.

 

***Financing Activities*********—**Net cash flows provided by financing activitieswere $4,268,152 and $8,961,410 in the six month periods ended December 31,2008 and 2007, respectively.

 

During the 2008period, we received an aggregate of $1,095,952 in proceeds from the issuance ofstock (resulting from the exercise of warrants), and, on August 20, 2008,Cubic drew upon an additional $3,172,200 from Wells Fargo under the revolvingline of credit component of our Credit Facility in order to fund the completionof four wells drilled in our Johnson Branch acreage in fiscal 2008 and thedrilling of two additional wells located in the Company’s Bethany Longstreetacreage in Caddo and DeSoto parishes. As a result, the Company has borrowed thefull $20,000,000 available under the Credit Facility’s Revolving Note (and anaggregate of $25,000,000 under the Credit Facility). During the 2007 period, wereceived an aggregate of $303,000 in proceeds from the issuance of stock(resulting from the exercise of warrants) and drew upon $8,658,410 from theRevolving Note of our Credit Facility.

 

**Contractual Obligations**

 

We have no material changes in our long-termcommitments associated with our capital expenditure plans or operatingagreements other than those described above. Our level of capital expenditureswill vary in future periods depending on: the success we experience in 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, 2008 and 2007*

 
| ** **                                |   | **Three months ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|--------|----------------------------------|------------|------------|------------|
| ** **                                |   | **December 31,**            | ** ** | **Change** | ** ** |
| ** **                                |   | **2008**                         | ** ** | **2007**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production  Volumes:**                  |   |                             |       |       |       |   |   |   |   |
| Oil (Bbl)                                 |   | 524                              |       | 322        |       | 202 |   | 63 | % |
| Natural gas  liquids (gallons)            |   | 25,967                           |       | —     |       | 25,967 |   | — |   |
| Natural gas  (Mcf)                        |   | 68,913                           |       | 44,393     |       | 24,520 |   | 55 | % |
| Total (Mcfe)                              |   | 75,764                           |       | 46,325     |       | 29,439 |   | 64 | % |
|                                      |   |                             |       |       |       |   |   |   |   |
| **Weighted  Average Sales Prices:**       |   |                             |       |       |       |   |   |   |   |
| Oil (per Bbl)                             |   | $                                | 48.46      |       | $          | 91.49 |   | $ | (43.03 | ) | -47 | % |
| Natural gas  liquids (per gallon)         |   | $                                | 0.79       |       | $          | — |   | $ | 0.79 |   | — |   |
| Natural gas (per  Mcf)                    |   | $                                | 6.47       |       | $          | 7.80 |   | $ | (1.33 | ) | -17 | % |
|                                      |   |                             |       |       |       |   |   |   |   |
| **Selected  Expenses per Mcfe:**          |   |                             |       |       |       |   |   |   |   |
| Production costs                          |   | $                                | 4.80       |       | $          | 2.61 |   | $ | 2.19 |   | 84 | % |
| Workover  expenses (non-recurring)        |   | $                                | 0.14       |       | $          | 0.02 |   | $ | 0.12 |   | 657 | % |
| Severance taxes                           |   | $                                | 0.17       |       | $          | 0.32 |   | $ | (0.15 | ) | -47 | % |
| Other revenue  deductions                 |   | $                                | 0.31       |       | $          | 0.97 |   | $ | (0.66 | ) | -68 | % |
| Total lease  operating expenses           |   | $                                | 5.42       |       | $          | 3.92 |   | $ | 1.50 |   | 38 | % |
| General and  administrative expenses      |   | $                                | 5.93       |       | $          | 9.80 |   | $ | (3.87 | ) | -39 | % |
| Depreciation,  depletion and amortization |   | $                                | 3.91       |       | $          | 4.41 |   | $ | (0.50 | ) | -11 | % |

 

**Revenues**

 

OILAND GAS SALES increased 31% to $491,966 for the quarter ended December 31,2008 from $375,825 for the quarter ended December 31, 2007 primarily dueto higher gas volumes resulting from 14 new wells being online in the 2008quarter versus the 2007 quarter. The weighted average natural gas price wereceived in the 2008 quarter was $6.47 per mcf versus $7.80 in the 2007quarter.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased 120% to $399,743(81% of oil and gas sales) for 2008 from $181,422 (48% of oiland gas sales) for 2007 primarily due to more wells being on-line in Louisiana,which resulted in: a $35,855 increase in the cost of chemicals; a $65,950increase in salt water hauling and disposal costs; and $55,814 in commonfacility expenses for production from the Company’s Johnson Branch wells, whichdid not occur in the prior year period. Such increases were partially offset bya $21,522 decrease in costs passed-through to the Company by the purchaser ofthe Company’s gas. Such costs are deducted from the Company’s gross revenue bythe purchaser and include, but are not limited to: costs to market the Company’sgas, compression fees, and the cost of fuel used by the purchaser to convey theCompany’s gas.

 

GENERALAND ADMINISTRATIVE EXPENSES decreased 1% to $449,094 for 2008 from $453,811 in2007 primarily as a result of overall decreases of $119,275 in non-cash stockcompensation and a $44,793 decrease in contracted professional services relatedto a decrease in “division order” accounting work. These amounts were partiallyoffset by a $71,947 increase in contract services related to accountingconsulting fees

 

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anda $53,894 increase in marketing expenses, which occurred in the three monthsended December 31, 2008.

 

DEPRECIATION,DEPLETION AND NON-LOAN RELATED AMORTIZATION increased 45% to $296,227in 2008from $204,249 in 2007. The increase was primarily due to a $10,851,248, or 45%,increase in “Property and equipment (at cost)”, prior to the Impairment Loss onOil and Gas Properties described in the next paragraph, at December 31,2008 as compared to December 31, 2007.

 

IMPAIRMENTLOSS ON OIL AND GAS PROPERTIES increased in the amount of $8,599,871 for thethree months ended December 31, 2008 as a result of the full cost ceilingtest. The weighted average natural gas price utilized for the December 31,2008 ceiling impairment evaluation was $5.907 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 December 31, 2007.

 

INTERESTEXPENSE increased 12% to $540,601 in 2008 from $480,556 in 2007 primarily dueto an increase in debt to $27,000,000 at December 31, 2008 from$17,658,410 at December 31, 2007. This year over year increase resultedfrom draws of approximately $7,341,590 on the revolving line of credit withWells Fargo, and the borrowing of $2,000,000 under the terms of the May 6,2008 Subordinated Note. The weighted average debt balance (before discounts)for the 2008 quarter was $27,000,000 as compared to $17,658,410 in the 2007quarter. The Credit Facility with Wells Fargo also resulted in a loan discountbeing recorded. The discount is being amortized over the original three-yearterm of the debt as additional interest expense with $129,713 being recorded ineach of the 2008 and 2007 quarters.

 

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*For the Six Months ended December 31, 2008 and 2007*

 
| ** **                                |   | **Six months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
| ** **                                |   | **December 31,**          | ** ** | **Change** | ** ** |
| ** **                                |   | **2008**                       | ** ** | **2007**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Production  Volumes:**                  |   |                           |       |       |       |       |       |   |   |
| Oil (Bbl)                                 |   | 789                            |       | 428        |       | 361        |       | 84 | % |
| Natural gas liquids  (gallons)            |   | 45,287                         |       | —     |       | 45,287     |       | — |   |
| Natural gas  (Mcf)                        |   | 132,940                        |       | 108,136    |       | 24,804     |       | 23 | % |
| Total (Mcfe)                              |   | 144,145                        |       | 110,707    |       | 33,439     |       | 30 | % |
|                                      |   |                           |       |       |       |       |       |   |   |
| **Weighted  Average Sales Prices:**       |   |                           |       |       |       |       |       |   |   |
| Oil (per Bbl)                             |   | $                              | 74.12      |       | $          | 87.31      |       | $ | (13.19 | ) | -15 | % |
| Natural gas  liquids (per gallon)         |   | $                              | 1.33       |       | $          | —     |       | $ | 1.33 |   | — |   |
| Natural gas (per  Mcf)                    |   | $                              | 7.89       |       | $          | 7.27       |       | $ | 0.62 |   | 9 | % |
|                                      |   |                           |       |       |       |       |       |   |   |
| **Selected  Expenses per Mcfe:**          |   |                           |       |       |       |       |       |   |   |
| Production costs                          |   | $                              | 4.65       |       | $          | 2.41       |       | $ | 2.25 |   | 93 | % |
| Workover  expenses (non-recurring)        |   | $                              | 0.11       |       | $          | 0.08       |       | $ | 0.04 |   | 48 | % |
| Severance taxes                           |   | $                              | 0.22       |       | $          | 0.30       |       | $ | (0.08 | ) | -27 | % |
| Other revenue  deductions                 |   | $                              | 0.32       |       | $          | 1.03       |       | $ | (0.71 | ) | -69 | % |
| Total lease  operating expenses           |   | $                              | 5.30       |       | $          | 3.81       |       | $ | 1.49 |   | 39 | % |
| General and  administrative expenses      |   | $                              | 5.30       |       | $          | 3.81       |       | $ | 1.49 |   | 39 | % |
| Depreciation,  depletion and amortization |   | $                              | 3.88       |       | $          | 4.39       |       | $ | (0.51 | ) | -12 | % |

 

**Revenues**

 

OILAND GAS SALES increased 42% to $1,166,937 for the six months ended December 31,2008 from $823,813 for the six months ended December 31, 2007 primarilydue to higher gas volumes resulting from an average of approximately 20 wellsbeing on-line in Louisiana in the 2008 period versus seven in the 2007 period.The weighted average natural gas price we received in the 2008 period was $7.89per mcf versus $7.27 in the 2007 period.

 

**Costs and Expenses**

 

OILAND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased 81% to $764,099(66% of oil and gas sales) for 2008 from $421,612 (51% of oil and gas sales)for 2007 primarily due to more wells being on-line in Louisiana, which resultedin: a $86,357 increase in the cost of chemicals; a $111,993 increase in saltwater hauling and disposal costs; and $120,090 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 $68,209 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 9% to $900,393 for 2008 from $827,304 in2007 primarily as a result of: a $93,831 increase in cash compensation expenseresulting from an increase in the number of our employees; and the followingexpenses, which occurred in the six months ended on December 31, 2008:$112,162 increase in contract services related to accounting consulting feesand $63,926 in marketing expenses. These amounts were partially offset by a$212,674 decrease in non-cash stock compensation and a $97,935 decrease incontracted professional services related to a decrease in “division order”accounting work.

 

DEPRECIATION,DEPLETION AND AMORTIZATION increased 15% to $559,984 in 2008 from $486,253 in2007. The increase was primarily due to a $10,851,248, or 45%, increase in “Propertyand equipment (at cost)”, prior to the Impairment Loss on Oil and GasProperties described in the next paragraph, at December 31, 2008 ascompared to December 31, 2007.

 

IMPAIRMENTLOSS ON OIL AND GAS PROPERTIES increased in the amount of $8,599,871 for thesix months ended December 31, 2008 as a result of the full cost ceilingtest. The weighted average natural gas price utilized for the December 31,2008 ceiling impairment evaluation was $5.907 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 six-month period ended December 31, 2007.

 

INTERESTEXPENSE increased 24% to $1,085,875 in 2008 from $877,722 in 2007 primarily dueto an increase in debt to $27,000,000 at December 31, 2008 from$17,658,410 at December 31, 2007. This year over year increase resultedfrom draws of approximately $7,341,590 on the revolving line of credit withWells Fargo, and the borrowing of $2,000,000 under the terms of the May 6,2008 Subordinated Note. The weighted average debt balance (before discounts)for the six months ended December 31, 2008 was $26,137,989 as compared to$12,626,775 in the six months ended December 31, 2007. 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 $259,425 being recorded in the six months 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 financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. Preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. There have been nochanges to our critical accounting policies from those described in our AnnualReport 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 December 31, 2008, we had $27,000,000 of long-term debt outstandingunder our Credit Facility and the Subordinated Note, each of which matures infiscal 2010 and bears interest at the prime rate plus 2.0%. As a result, ourinterest costs fluctuate based on short-term interest rates. Based on theaforementioned borrowings outstanding at December 31, 2008, a 100 basispoint change in interest rates would change our annual interest expense byapproximately $270,000. We had no interest rate derivatives during the secondquarter of fiscal 2009.

 

**Item 4. Controls and Procedures**

 

*Evaluation of disclosure controls and procedures.*Our principal executive and financial officers have concluded, based ontheir evaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures under Exchange Act Rules 13a-15(e) and15d-15(e) are effective to ensure 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:

 

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

 

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

 

***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 2007 continued and substantiallyincreased during the third quarter of 2008. Recently, concerns over inflation,energy costs, geopolitical issues, the availability and cost of credit, theU.S. mortgage market and a declining real estate market in the U.S. havecontributed to increased volatility and diminished expectations for the economyand the markets going forward. These factors, combined with volatile oil andgas 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 our various counterparty risks, increasing the likelihood of non-cashasset write-downs and reducing our ability to comply with financial andrestrictive covenants related to our indebtedness. Furthermore, a prolongedtightening of the credit markets could adversely impact our access to capital,which would reduce our ability to execute our development and acquisitionplans, our ability to replace our reserves, and, eventually, our productionlevels. Any of these effects could have a material adverse effect on ourrevenues, financial condition and results of operations.

 

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

 

Adescription of our stock issuances during the six months ended December 31,2008 is 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 17, 2009 | By:                    | /s/ Calvin A. Wallen, III |
|                         |                   | Calvin A. Wallen, III, President and  Chief Executive Officer |
|                         |                   |   |
|                         |                   |   |
| Date: February 17, 2009 | By:                    | /s/ Larry Badgley |
|                         |                   | Larry Badgley, Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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