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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended March 31, 2012

 

OR

 

o

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

 

for the transition period from                to

 

Commission File Number 001-34144

 

CUBIC ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Texas

 

87-0352095

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification No.)

 

9870 Plano Road

Dallas, TX 75238

(Address of principal executive offices)

 

(972) 686-0369

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting 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 mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of May 11, 2012, the registrant had 77,215,908 shares of common stock, $0.05 par value, outstanding.

 

 

 



Table of Contents

 

Special note regarding forward-looking statements

 

This quarterly report on Form 10-Q contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, are forward-looking statements. These forward-looking statements relate to, among other things, the following: our future financial and operating performance and results; our business strategy; market prices; and our plans and forecasts.

 

Forward-looking statements 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 we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. You should consider carefully the statements in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, as well as other sections of this report, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, including, but not limited to, the following factors:

 

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

 

·                  the outcome of our dispute with the counterparties of certain drilling credits owed to us;

 

·                  the volatility in commodity prices for oil and natural gas;

 

·                  the possibility that the industry may be subject to future regulatory or legislative actions (including any additional taxes);

 

·                  the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

 

·                  the ability to replace oil and natural gas reserves;

 

·                  lease or title issues or defects to our oil and gas properties;

 

·                  environmental risks;

 

·                  drilling and operating risks;

 

·                  exploration and development risks;

 

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

 

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

 

·                  our ability to retain key members of senior management;

 

·                  our ability to maintain the listing of our common stock on the NYSE — Amex or other established trading market;

 

·                  our dependence on third party operators, and their ability to obtain goods and services, such as drilling rigs and other oilfield equipment, and access to adequate gathering systems and pipeline take-away capacity, to execute their drilling program;

 

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

 

·                  continued hostilities in the Middle East and other sustained military campaigns or acts of terrorism or sabotage; and

 

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

 

All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

i



Table of Contents

 

CUBIC ENERGY, INC.

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

1

 

 

Condensed Balance Sheets
As of March 31, 2012 (unaudited) and June 30, 2011

2

 

 

Condensed Statements of Operations (unaudited)
For the three and nine months ended March 31, 2012 and 2011

3

 

 

Condensed Statements of Cash Flows (unaudited)
For the nine months ended March 31, 2012 and 2011

4

 

 

Notes to Condensed Financial Statements

5-12

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13-18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

 

 

Item 4. Controls and Procedures

20

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

21

 

 

Item 1A. Risk Factors

21

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

Item 3. Defaults Upon Senior Securities

22

 

 

Item 4. Mine Safety Disclosures

22

 

 

Item 5. Other Information

22

 

 

Item 6. Exhibits

23

 

 

Signatures

24

 

ii



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Stockholders and Board of Directors

Cubic Energy, Inc.

 

We have reviewed the accompanying condensed balance sheet as of March 31, 2012, and the related condensed statements of operations for the three and nine-month periods ended March 31, 2012 and 2011, and the cash flows of Cubic Energy, Inc. for the nine-month periods ended March 31, 2012 and 2011. These financial statements are the responsibility of the Company’s management.

 

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

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Cubic Energy, Inc. as of June 30, 2011, and the related statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated September 28, 2011, we expressed an unqualified opinion on those statements.

 

 

PHILIP VOGEL & CO., PC

 

 

 

 

/s/ Philip Vogel & Co., PC

 

 

Certified Public Accountants

 

 

Dallas, Texas

 

May 15, 2012

 

 

1



Table of Contents

 

CUBIC ENERGY, INC.

 

CONDENSED BALANCE SHEETS

 

 

 

March 31,

 

 

 

 

 

2012 (unaudited)

 

June 30, 2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

653,986

 

$

1,542,248

 

Accounts receivable - trade

 

2,796,455

 

1,760,190

 

Due from affiliates

 

 

28,121

 

Other prepaid expenses

 

10,866

 

54,164

 

Total current assets

 

3,461,307

 

3,384,723

 

Property and equipment:

 

 

 

 

 

Oil and gas properties, full cost method:

 

 

 

 

 

Proved properties (including wells and related equipment and facilities)

 

33,686,138

 

25,606,874

 

Office and other equipment

 

28,420

 

28,420

 

Property and equipment, at cost

 

33,714,558

 

25,635,294

 

Less accumulated depreciation, depletion and amortization

 

14,616,698

 

9,795,293

 

Property and equipment, net

 

19,097,860

 

15,840,001

 

Other assets:

 

 

 

 

 

Deferred loan costs, net

 

17,045

 

68,554

 

Other - Long-term Drilling Credit

 

9,733,072

 

17,763,316

 

Total other assets

 

9,750,117

 

17,831,870

 

 

 

$

32,309,284

 

$

37,056,594

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable (net of discounts)

 

$

33,557,064

 

$

 

Note payable to affiliate

 

2,000,000

 

 

Accounts payable and accrued expenses

 

1,066,353

 

1,065,103

 

Total current liabilities

 

36,623,417

 

1,065,103

 

Long-term liabilities:

 

 

 

 

 

Long-term debt, net of discounts

 

 

29,196,541

 

Note payable to affiliate

 

 

2,000,000

 

Total long-term liabilities

 

 

31,196,541

 

Commitments and contingencies (see Note C)

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock - $.01 par value, authorized 10,000,000 shares; Series A - 8% preferred stock, $100 stated value, redeemable at $120 and convertible at $1.20 per common share; authorized 165,000 shares; 109,023 shares issued and outstanding at March 31, 2012; 107,991 at June 30, 2011

 

$

1,091

 

$

1,080

 

Additional paid-in-capital - Preferred Stock

 

10,911,309

 

10,798,020

 

Common stock - $.05 par value, authorized 120,000,000 shares, issued 77,215,908 shares at March 31, 2012 and 76,815,908 shares at June 30, 2011

 

3,860,795

 

3,840,797

 

Additional paid-in capital - Common Stock

 

55,950,805

 

55,695,730

 

Accumulated deficit

 

(75,038,133

)

(65,540,677

)

Total stockholders’ equity (deficit)

 

(4,314,133

)

4,794,950

 

 

 

$

32,309,284

 

$

37,056,594

 

 

2



Table of Contents

 

CUBIC ENERGY, INC.

 

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

1,273,919

 

$

2,261,227

 

$

5,993,320

 

$

4,444,849

 

Total revenues

 

$

1,273,919

 

$

2,261,227

 

$

5,993,320

 

$

4,444,849

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Oil and gas production, operating and development costs

 

410,045

 

603,175

 

1,433,392

 

1,406,496

 

General and administrative expenses

 

1,204,318

 

1,290,167

 

2,721,272

 

2,335,961

 

Depreciation, depletion and non-loan-related amortization

 

1,302,119

 

972,252

 

4,821,405

 

1,833,648

 

Total operating costs and expenses

 

2,916,482

 

2,865,594

 

8,976,069

 

5,576,105

 

Operating loss

 

(1,642,563

)

(604,367

)

(2,982,749

)

(1,131,256

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income

 

537

 

1,696

 

2,645

 

6,277

 

Interest expense, including amortization of loan discount

 

(1,921,287

)

(1,898,790

)

(5,808,705

)

(5,692,534

)

Amortization of loan costs

 

(17,045

)

(16,857

)

(51,509

)

(43,323

)

Total non-operating expense

 

(1,937,795

)

(1,913,951

)

(5,857,569

)

(5,729,580

)

Loss from operations before income taxes

 

(3,580,358

)

(2,518,318

)

(8,840,318

)

(6,860,836

)

Provision for income taxes

 

 

 

 

 

Net loss

 

$

(3,580,358

)

$

(2,518,318

)

$

(8,840,318

)

$

(6,860,836

)

Dividends on preferred shares

 

$

(217,055

)

$

(204,101

)

$

(657,139

)

$

(621,501

)

Net loss available to common shareholders

 

$

(3,797,413

)

$

(2,722,419

)

$

(9,497,457

)

$

(7,482,337

)

Net loss per common share - basic

 

$

(0.05

)

$

(0.03

)

$

(0.11

)

$

(0.09

)

Weighted average common shares outstanding

 

77,193,930

 

76,608,699

 

76,940,999

 

75,794,197

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

CUBIC ENERGY, INC.

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(8,840,318

)

$

(6,860,836

)

Adjustments to reconcile net (loss) to cash provided (used) by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

9,233,437

 

6,174,475

 

Stock issued for compensation

 

236,000

 

 

Stock and stock options issued for compensation

 

39,075

 

561,123

 

Change in assets and liabilities:

 

 

 

 

 

(Increase) decrease in accounts receivable - trade

 

(1,036,265

)

(540,182

)

(Increase) decrease in other prepaid expenses

 

43,298

 

(92,289

)

Increase (decrease) in accounts payable and accrued liabilities

 

25,214

 

(1,990,017

)

Increase (decrease) in due to affiliates

 

12,949

 

(193,665

)

Net cash provided (used) by operating activities

 

(286,610

)

(2,941,391

)

Cash flows from investing activities:

 

 

 

 

 

Acquisition and development of oil and gas properties

 

(49,021

)

(925,297

)

Increase (decrease) in capital portion of due to affiliates

 

13,343

 

(239,738

)

Net cash provided (used) by investing activities

 

(35,678

)

(1,165,035

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from credit facility

 

 

5,000,000

 

Issuance of common stock

 

 

642,780

 

Dividends paid

 

(565,974

)

(204,100

)

Loan costs incurred and other

 

 

(100,000

)

Net cash provided (used) by financing activities

 

(565,974

)

5,338,680

 

Net increase (decrease) in cash and cash equivalents

 

$

(888,262

)

$

1,232,254

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

1,542,248

 

391,898

 

End of period

 

$

653,986

 

$

1,624,152

 

Other information:

 

 

 

 

 

Cash interest paid on debt

 

$

1,448,170

 

$

1,400,208

 

Non-cash investing and financing activities:

 

 

 

 

 

Use of prepaid drilling credit for acquisition and development of oil and gas properties

 

$

8,030,244

 

$

8,118,571

 

Warrants issued for loan costs

 

$

 

$

516,882

 

Preferred stock dividends accrued

 

$

657,139

 

$

621,501

 

Conversion of accrued dividend to Preferred Stock

 

$

113,300

 

$

449,100

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

Note A — Organization

 

Cubic Energy, Inc., a Texas corporation (the “Company” or “Cubic”), is an independent upstream energy company engaged in the development and production of, and exploration for, crude oil and natural gas. The Company’s oil and gas assets and activities are concentrated in Louisiana.

 

The Company’s corporate strategy with respect to its asset acquisition and development efforts was to position the Company in a low risk opportunity while building main stream high yield reserves. The acquisition of its acreage in DeSoto and Caddo Parishes, Louisiana, put it in a reservoir rich environment both in the Cotton Valley and Bossier/Haynesville Shale formations, and gives it the potential to discover additional commercial horizons that can add value to the bottom line. The Company has had success on its acreage with wells drilled by achieving production from the Hosston formation, the Cotton Valley formation and the Bossier/Haynesville Shale formation.

 

Note B — Summary of Significant Account Policies

 

Basis of presentation

 

The accounting policies followed by the Company are set forth in the its financial statements that are a part of its Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2011 and should be read in conjunction with the financial statements contained herein.

 

The financial information included herein as of March 31, 2012, and for the three and nine month periods ended March 31, 2012, and 2011, have been presented without an audit, pursuant to accounting principles for interim financial information generally accepted in the United States of America, and the rules of the Securities and Exchange Commission.

 

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

 

Earnings per share

 

The Company has adopted the provisions of Financial Accounting Standards Board, Accounting Standards Codification (“FASB ASC”) 260, “Earnings per Share”. FASB ASC 260 reporting 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 shareholders) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

Potential dilutive securities (e.g., preferred stock, stock warrants and convertible debt) have been considered, but because the Company reported a net loss in the three and nine month periods ended March 31, 2012 and 2011, and, accordingly, their effects would be anti-dilutive. The weighted average number of common and common equivalent shares outstanding was 77,193,930 and 76,608,699 for the quarters ended March 31, 2012 and 2011, respectively, and 76,940,999 and 75,794,197 for the nine month periods ended March 31, 2012 and 2011, respectively.

 

5



Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

Note C — Commitments and contingencies

 

On May 18, 2011, EXCO Operating Company, LP (“EXCO”) and/or BG US Production Company, LLC (“BG”) informed the Company that they do not intend to honor the balance of the prepaid drilling credits acquired by the Company in November 2009 (the “Drilling Credits”), which was approximately $18 million at the time that EXCO and BG informed the Company of their intention. This dispute was submitted to binding arbitration during the week of January 9, 2012 and a ruling was issued on March 9, 2012.

 

In addition to dismissing all claims of EXCO and BG with prejudice, the Arbitrators’ Award provides the following:

 

·                  EXCO/BG shall place the Company in “consent” status on wells drilled by EXCO/BG through March 9, 2012, and pay the Company the proceeds to which it is entitled;

 

·                  EXCO/BG shall apply the Drilling Credits to wells drilled by EXCO/BG through March 9, 2012;

 

·                  The remaining Drilling Credits are accelerated and immediately due and payable to the Company; and

 

·                  The Company is awarded attorneys’ fees, costs and interest.

 

The Company has filed a motion to have the Arbitrators’ Award confirmed, and EXCO/BG have filed a motion to have the Arbitrators’ Award vacated.  A hearing in the 298th Judicial District Court of Dallas County, Texas is scheduled for May 25, 2012 to rule on these motions.

 

Management believes we will prevail, but if not, we have the option of going “non-consent”, or being deemed non-consent, on current and future horizontal Haynesville Shale wells operated by EXCO/BG.  By being deemed to be non-consent, in addition to penalties, we would reduce our share of revenues from these wells and would be required to pay the royalty owners their share of revenues, which we anticipate to be up to approximately $65,000 per well per month, or an aggregate of approximately $590,000 for the balance of fiscal 2012, based on the current number of EXCO and BG operated wells. Other than this $590,000, we do not expect any additional royalties to be paid out of pocket by Cubic during fiscal 2012, with respect to EXCO and BG operated wells. With future strategies to obtain additional financing, funds generated through existing wells and cash on hand, we expect to be able to continue to pay our expenses as they come due. Regardless of the Arbitrators’ Award that accelerates the remaining Drilling Credits, the balance of the Drilling Credits not exhausted is due and payable to us in cash early in fiscal 2013. Included in results of operations for the nine months ended March 31, 2012, were revenues of $2,248,597and costs of $192,487 related to these disputed properties. Due to the uncertainty of the ultimate confirmation of the Arbitrators Award, we have not changed the presentation of the respective assets and liabilities nor have we recorded any receivables for the reimbursement of the attorneys’ fees, costs and interest.

 

6



Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011

(Unaudited)

 

On December 27, 2011 and February 24, 2012, the Company received letters from NYSE Amex LLC (the “Exchange”) stating that the Company is not in compliance with Section 1003(a)(i) of the Exchange’s Company Guide because the Company has stockholders’ equity of less than $2,000,000 and losses from continuing operations and/or net losses in two out of its three most recent fiscal years, Section 1003(a)(ii) of the Company Guide with stockholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three out of its four most recent fiscal years, and Section 1003(a)(iii) of the Company Guide with stockholders’ equity of less than $6,000,000 and losses from continuing operations and/or net losses in its five most recent fiscal years. Subsequent to the initial letter from the Exchange, the Company submitted its plan of compliance detailing how the Company intends to regain compliance with those requirements.

 

On March 2, 2012, the Exchange notified the Company that the Exchange has accepted the compliance plan, and granted the Company an extension until June 27, 2013 to evidence its compliance with the foregoing listing standards.

 

Included in the March 2, 2012 letter from the Exchange was a notice that, based on a further review of the Company’s quarterly report on Form 10-Q for the period ended December 31, 2011, the Company is not in compliance with Section 1003(a)(iv) of the Company Guide in that the Exchange believes that the Company has sustained losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature. The Company is not required to submit an additional plan of compliance in response to the additional deficiency identified in the Exchange’s letter of March 2, 2012, because the accepted plan effectively addresses how the Company intends to regain compliance with Section 1003(a)(iv). The Company was granted an extension to regain compliance with Section 1003(a)(iv) until July 31, 2012.

 

The Company will be subject to periodic review by the Exchange during the extension periods. If the Company does not make progress consistent with the plan, or the Company is not in compliance with the applicable continued listing standards by the respective dates set forth above, the Company is subject to delisting proceedings. The Company would be entitled to appeal a determination by the Exchange to initiate delisting proceedings.

 

Note D — Stockholders’ Equity

 

Stock issuances

 

In connection with the following common stock issuances, the Company entered into Subscription and Registration Rights Agreements (“Subscription Agreements”) with certain investors. Pursuant to the Subscription Agreements, the Company issued an aggregate of 2,104,001 shares of common stock and warrants exercisable into 1,052,000 shares of common stock. On August 18, 2009, four investors acquired an aggregate of 804,000 shares of common stock and warrants exercisable into an aggregate of 402,000 shares of common stock, through the payment of an aggregate of $683,400. On August 26, 2009, six investors

 

7



Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

acquired an aggregate of 1,300,001 shares of common stock and warrants exercisable into an aggregate of 650,000 shares of common stock, through the payment of an aggregate of $1,105,001. The warrants are exercisable through July 31, 2014, at $0.85 per share. With respect to certain of such issuances, the Company paid broker-dealer commissions in the aggregate amount of $59,500. Pursuant to the Subscription Agreements, the investors paid aggregate consideration of approximately $1,788,400, net of commissions, which has been used for working capital purposes.

 

On November 24, 2009, the Company entered into transactions with Tauren Exploration, Inc. (“Tauren”) and Langtry Mineral & Development, LLC (“Langtry”), both of which are entities controlled by Calvin Wallen III, the Chief Executive Officer of the Company, under which the Company acquired $30,952,810 in pre-paid drilling credits (the “Drilling Credits”) applicable towards the development of its Haynesville Shale rights in Northwest Louisiana through wells drilled by EXCO and BG. During the quarter ended March 31, 2012, the Company incurred $150,103 of charges for drilling, which it has reflected as an offset against the Drilling Credits. EXCO and BG are disputing their obligations under the Drilling Credits.

 

As consideration for the Drilling Credits, the Company (a) conveyed to Tauren a net overriding royalty interest of approximately 2% in its leasehold rights below the Taylor Sand formation of the Cotton Valley and (b) issued to Langtry 10,350,000 shares of Company common stock and preferred stock with a stated value of $10,350,000, convertible into Company common stock at $1.20 per common share, with a five year conversion term. The preferred stock is entitled to cumulative dividends equal to 8% per annum, payable quarterly, which dividends may be paid in cash or in additional shares of preferred stock, at the Company’s discretion. The preferred stock may be redeemed by the Company at any time, at a redemption price equal to 20% over the original issue price.

 

The consideration with respect to the transactions among the Company, Tauren and Langtry was determined pursuant to negotiations among the Company, Tauren and Langtry, and not pursuant to any formula. These transactions were approved by a special committee of the board of directors of the Company comprised exclusively of the Company’s non-employee directors.

 

Stock and option grants; Warrant exercises

 

Through the exercises of warrants, between January 7 and January 19, 2011, the Company issued an aggregate of 954,315 shares of common stock. Aggregate proceeds to the Company of the aforementioned stock issuances were $642,780, all of which has been used for working capital purposes.

 

On January 14, 2011, the Company entered into an employment agreement with its Chief Financial Officer, Larry G. Badgley.  The agreement provides for the grant of stock options, under the 2005 Stock Option Plan (the “Plan”), for the purchase of an aggregate of 288,667 shares of Company common stock.  These options have an exercise price $1.20 per share and expire five years from their issue date.  One option, for the purchase of 15,667 shares, was fully vested upon grant.  The other option, for the purchase of 273,000 shares shall, subject to the other provisions of the option agreement, vest upon the earliest of: (a) immediately prior to a Change in Control (as defined in the Plan), (b) October 1, 2012, provided that Mr. Badgley’s Continuous Service (as defined in the Plan) continues through October 1, 2012, (c) the termination by Mr. Badgley of his Continuous Service prior to October 1, 2012 in compliance with the terms of a then-effective written employment agreement between him and the Company or an affiliate of the Company or (d) the termination by the Company of Mr. Badgley’s Continuous Service prior to October 1, 2012, other than for Just Cause (as

 

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Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

defined in the employment agreement).  We estimated the fair value of the options on the date of grant using the Black-Scholes valuation model to be $100,997.  We charged $13,025 of compensation expense for the three month period ending March 31, 2012 and $39,075 for the nine month period ending March 31, 2012. We estimate that $13,025 will be recognized quarterly until the options are fully vested on October 1, 2012.

 

The weighted-average fair value at the grant date using the Black-Scholes valuation model for options issued during fiscal 2011 was $0.35 per share.  The fair value of options at the date of grant was estimated using the following weighted-average assumptions for fiscal 2011: (a) no dividend yield on our common stock, (b) expected stock price volatility of 73%, (c) a discount rate of 2.04% and (d) an expected option term of 5 years.

 

The expected term of the options represents the estimated period of time until exercise and is based on consideration to the contractual terms, vesting schedules and expectations of future employee behavior.  For fiscal 2011, expected stock price volatility is based on the historical volatility of our common stock.  The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of grant with an equivalent expected term or life.

 

Information regarding activity for stock options under the Plan is as follows:

 

 

 

 

 

Weighted-average

 

Weighted-average

 

Aggregate

 

 

 

 

 

exercise price per

 

remaining contractual

 

intrinsic

 

 

 

Number of shares

 

share

 

term (years)

 

value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2011

 

288,667

 

$

1.20

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

 

Options forfeited/expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, March 31, 2012

 

288,667

 

1.20

 

3.75

 

$

 

 

 

 

 

 

 

 

 

 

 

Exercisable, March 31, 2012

 

15,667

 

$

1.20

 

3.75

 

$

 

 

Information related to the Plan during the quarter ended March 31, 2011 is as follows:

 

Intrinsic value of options exercised

 

0

 

Weighted-average fair value of options granted

 

$

100,997

 

 

On January 11, 2011, the Company issued 460,000 shares of common stock to seven directors of the Company pursuant to the Plan.  As of such date, the aggregate market value of the common stock granted was $538,200 based on the last sale price ($1.17 per share) on January11, 2011, on the NYSE — Amex of the Company’s common stock. Such amount was expensed upon issuance to compensation expense.

 

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CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

On January 4, 2012, the Company issued 400,000 shares of common stock to six directors of the Company pursuant to the Plan.  As of such date, the aggregate market value of the common stock granted was $236,000 based on the last sale price ($0.59 per share) on January 4, 2012, on the NYSE — Amex of the Company’s common stock. Such amount was expensed upon issuance to compensation expense.

 

Note E — Oil and Gas Properties

 

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

 

Note F — Notes Payable

 

Wells Fargo debt

 

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

 

The Term Loan of $5,000,000 is convertible into 5,000,000 shares of Cubic common stock, currently at a conversion price of $0.9911 per share. Approximately $5,000,000 of the funded amount was used, together with cash on hand, to retire the Company’s previously outstanding senior debt that was due February 6, 2009.

 

In connection with entering into the Credit Facility, the Company issued to Wells Fargo warrants, with five-year expirations, for the purchase of up to 2,500,000 shares of Company common stock, currently at an exercise price of $0.9911 per share.

 

On December 18, 2009, the Company entered into a Second Amendment to the Credit Agreement with Wells Fargo, providing for a revolving credit facility of up to $40 million and a convertible term loan of $5 million (the “Amended Credit Agreement”). The borrowing base under the revolving credit facility was initially established at $25 million. The indebtedness bears interest at a fluctuating rate equal to the sum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matures on July 1, 2012 and is secured by substantially all of the assets of the Company. In connection with entering into the Amended Credit Agreement, the Company issued to Wells Fargo additional warrants, expiring on December 1, 2014, for the purchase of up to 5,000,000 shares of Company common stock, currently at an exercise price of $0.9911 per share, and extended the expiration date of the warrants to purchase 2,500,000 shares of Company common stock that were previously issued to Wells Fargo to December 1, 2014.

 

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Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

The Company allocated the proceeds from the issuance of the debt to the warrants, the debt and the beneficial conversion feature based on their fair market values at the date of issuance. The fair market value assigned to the extension of warrants to purchase 2,500,000 shares of Company common stock was $923,302 and the value assigned to the issuance of the warrant to purchase the additional 5,000,000 shares of Company common stock was $8,031,896, which was recorded as an increase in additional paid-in capital relating to common stock. The difference in the fair value of the term loan and the face amount of $1,877,494 was recorded as an extinguishment of debt, offset by the amount of unamortized deferred loan cost and discounts associated with the original debt of $129,871.  The beneficial conversion feature equaled $5,027,494, which was reduced to $3,122,506 based on the limitation to the fair value of debt. The assignment of a value to the warrants and beneficial conversion feature as well as the write-down of the term loan to the fair value resulted in a total loan discount in the amount of $13,955,198 being recorded. The discount is being amortized over the term of the debt as additional interest expense. Amortization was $1,371,407 and $1,356,337 for the quarters ended March 31, 2012 and 2011 respectively, and was $4,129,292 and $4,129,292 for the nine-months ended March 31, 2012 and 2011, respectively. Amortization for the fiscal years ending June 30, 2012 and 2013 is expected to be approximately $5,515,769 and $0, respectively.

 

Cubic incurred loan costs of $50,000 on the issuance of the debt and warrants. The amount was capitalized and allocated to the debt and is being amortized over the term of the debt. Amortization was $4,913 and $4,860 for the quarters ended March 31, 2012 and 2011 respectively, and $14,849 and $14,795 for the nine month period ended March 31, 2012 and 2011 respectively. Amortization for the fiscal years ending June 30, 2012 and 2013 is expected to be approximately $19,762 and $0, respectively.

 

On August 30, 2010, the Company entered into a Third Amendment to the Credit Agreement (the “Third Amendment”) with Wells Fargo providing for an increase in the borrowing base for the Company’s revolving credit facility from $25 million to $30 million. The Company borrowed the full amount of the increase in the borrowing base. The indebtedness under the credit facility, which includes the revolving credit facility and a $5 million convertible term loan, bears interest at a fluctuating rate equal to the sum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matures on July 1, 2012 and is secured by substantially all of the assets of the Company. In connection with entering into the Third Amendment, the Company issued to Wells Fargo additional warrants, expiring on December 1, 2014, for the purchase of up to 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share. Loan discounts of $527,430 were recognized.

 

The Company allocated the proceeds from the issuance of the debt to the warrants and the debt. The value assigned to the warrants of $516,882 was recorded as an increase in additional paid-in-capital relating to common stock. The assignment of a value to the warrants resulted in a loan discount being recorded. The discount amortization is over the two-year term of the debt as additional interest expense. Amortization was $71,529 and was $70,743 for the three month periods ended March 31, 2012 and 2011, respectively and was $216,160 and $168,212 for the nine month periods ended March 31, 2012 and 2011, respectively. Amortization for the fiscal years ending June 30, 2012 and 2013 is expected to be approximately $287,689 and $0, respectively.

 

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Table of Contents

 

CUBIC ENERGY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

AS OF MARCH 31, 2012

(Unaudited)

 

Cubic incurred loan costs of $100,000 on the issuance of the debt and warrants. The amount allocable to the debt of $89,451 has been capitalized and is being amortized over the term of the debt. Amortization was $12,131 and $12,265 for the three month periods ended March 31, 2012 and 2011, respectively and was $36,660 and $34,464 for the six month periods ended March 31, 2012 and 2011, respectively. Amortization for the fiscal years ending June 30, 2012 and 2013 is expected to be approximately $48,791 and $0, respectively.

 

December 2009 subordinated debt issue and refinancing

 

On December 18, 2009, the Company issued a subordinated promissory note payable to Calvin A. Wallen, III, the Company’s Chairman of the Board and Chief Executive Officer, in the principal amount of $2,000,000 (the “Wallen Note”). The Wallen Note bears interest at the prime rate plus one percent (1%), with interest payable monthly. The outstanding principal balance is due and payable on September 30, 2012 and is subordinated to the indebtedness under the Amended Credit Agreement, as amended by the Third Amendment. The proceeds of the Wallen Note were used to repay other indebtedness.

 

Maturity of debt

 

Our debt to Wells Fargo, with a principal amount of $35,000,000, is due on July 1, 2012, and the Wallen Note, with a principle amount of $2,000,000, is due September 30, 2012, and both are classified as a current debt.  As of March 31, 2012, we had a working capital deficit of $33,162,110. This level of negative working capital creates substantial doubt as to our ability to pay our obligations as they come due and remain a ‘going concern’.  We are negotiating with Wells Fargo and Mr. Wallen to extend the maturity date of these debts.  There can be no assurance that the Company will be able to negotiate such extensions.

 

Note G — Related party transactions

 

An affiliated company, Tauren Exploration, Inc. (“Tauren”), which is owned 100% by the Company’s President and Chief Executive Officer, Calvin A. Wallen III, owns working interests in oil and gas properties in which the Company owns working interests. As of March 31, 2012, Tauren owed the Company $5,445 and as of June 30, 2011, the Company owed Tauren $14,537, respectively for revenue, miscellaneous capital expenditures and general and administrative expenses paid by Tauren on the Company’s behalf.

 

In addition, certain oil and gas properties in which the Company owns a working interest were operated by an affiliated company, Fossil Operating, Inc. (“Fossil”), which is owned 100% by Mr. Wallen. As of March 31, 2012 and June 30, 2011, the Company owed Fossil $71,388 and $43,143 respectively, and the Company was owed by Fossil $72,086 and $39,846, respectively, for oil and gas sales.

 

Note H — Subsequent Events

 

On May 9, 2012, the Company engaged Wells Fargo Securities, LLC to serve as the exclusive financial advisor of the Company to explore certain strategic alternatives on behalf of the Company and its shareholders, including a merger, consolidation, business combination, or a disposition of the Company or a substantial portion of its assets.

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of operations for the three and nine months ended March 31, 2012 and 2011 should be read in conjunction with our condensed financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended June 30, 2011.

 

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed.

 

Overview

 

Cubic Energy, Inc. is an independent upstream energy company engaged in the development and production of, and exploration for, crude oil and natural gas. Our oil and gas assets and activities are concentrated in Louisiana.

 

Louisiana Acreage

 

Our corporate strategy with respect to our asset acquisition and development efforts was to position the Company in low risk opportunities while building mainstream high yield reserves.  The acquisition of our acreage in DeSoto and Caddo Parishes, Louisiana, puts us in reservoir rich environments in the Hosston, Cotton Valley and Bossier/Haynesville Shale formations, with additional shallow formations to exploit as well. We have had success on our acreage with wells completed in the Hosston, Cotton Valley and Bossier/Haynesville Shale formations.  We also own an interest in the right-of-ways, infrastructure and pipelines for our Caddo and DeSoto Parish, Louisiana acreage.

 

We share our Northwest Louisiana acreage with Goodrich Petroleum Corporation, Chesapeake Energy Corporation, Petrohawk Energy Corporation, El Paso E&P Company, L.P., Indigo Minerals, LLC and to the greatest extent with both BG US Production Company, LLC (“BG”) and EXCO Operating Company, LP (“EXCO”), and all of these companies are third-party operators actively working on our shared acreage. As a result of this activity, we saw improved production volumes in each of the last three fiscal years.

 

Our financial results currently depend upon our third-party Northwest Louisiana acreage operators along with many factors, which are largely driven by the volume of our natural gas production and the price that we receive for that production. Our natural gas production volumes will decline as reserves are depleted unless we obtain and expend capital in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success.

 

Management believes in the value of our assets, which are being drilled by third-party operators, and will continue to explore strategic alternatives that allow us to leverage those assets to gain full stockholder value.

 

Texas Acreage

 

Our Texas properties are situated in Eastland and Callahan Counties. The Texas properties consist primarily of wells acquired in several transactions between 1991 and 2002 and through overriding royalty interests reserved in farm-out agreements in 1998 and 1999. These wells produce limited amounts of natural gas and oil condensate.

 

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Table of Contents

 

Results of Operations

 

For the Three Months ended March 31, 2012 and 2011

 

 

 

Three months ended

 

 

 

 

 

 

 

March 31,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

Production Volumes:

 

 

 

 

 

 

 

 

 

Oil (Bbl)

 

116

 

390

 

(274

)

-70

%

Natural gas liquids (gallons)

 

12,271

 

13,075

 

(804

)

-6

%

Natural gas (Mcf)

 

495,451

 

559,984

 

(64,534

)

-12

%

Total (Mcfe)

 

497,899

 

564,190

 

(66,291

)

-12

%

 

 

 

 

 

 

 

 

 

 

Weighted Average Sales Prices:

 

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

96.56

 

$

85.91

 

$

10.65

 

12

%

Natural gas liquids (per gallon)

 

$

1.66

 

$

1.61

 

$

0.05

 

3

%

Natural gas (per Mcf)

 

$

2.51

 

$

3.94

 

$

(1.43

)

-36

%

 

 

 

 

 

 

 

 

 

 

Selected Expenses per Mcfe:

 

 

 

 

 

 

 

 

 

Production costs

 

$

0.34

 

$

0.32

 

$

0.02

 

6

%

Workover expenses (non-recurring)

 

$

0.13

 

$

0.10

 

$

0.04

 

36

%

Severance taxes

 

$

(0.02

)

$

0.08

 

$

(0.10

)

-125

%

Other revenue deductions

 

$

0.37

 

$

0.57

 

$

(0.20

)

-35

%

Total lease operating expenses

 

$

0.82

 

$

1.07

 

$

(0.25

)

-23

%

General and administrative expenses

 

$

2.42

 

$

2.29

 

$

0.13

 

6

%

Depreciation, depletion and amortization

 

$

2.62

 

$

1.72

 

$

0.89

 

52

%

 

Revenues

 

OIL AND GAS SALES decreased 44% to $1,273,919 for the quarter ended March 31, 2012 from $2,261,227 for the quarter ended March 31, 2011, primarily due to lower natural gas prices in the 2012 quarter versus the 2011 quarter. Also there were no new wells to come online during this 2012 quarter versus 7 new wells that came online during the same 2011 quarter. The weighted average natural gas price we received in the 2012 quarter was $2.51 per Mcf versus $3.94 in the 2011 quarter.

 

Costs and Expenses

 

OIL AND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS decreased 32% to $410,045 (32% of oil and gas sales) for 2012 from $603,175 (27% of oil and gas sales) for 2011 primarily due to no new wells being on-line in Louisiana, which resulted in a decrease of $55,016 in production tax expenses and a $138,031 decrease of 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 and 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 the Company’s gas.

 

GENERAL AND ADMINISTRATIVE EXPENSES decreased 7% to $1,204,318 for 2012 from $1,290,167 for 2011 primarily as a result a $338,033 increase in legal fees incurred in connection with the EXCO/BG arbitration, which were more than offset by a $307,681 decrease in stock compensation, a $158,650 decrease in franchise taxes, and a $82,500 decrease in legal settlements incurred during the period ended March 31, 2011. The franchise taxes and legal settlement were non-recurring expenses.

 

DEPRECIATION, DEPLETION AND NON-LOAN RELATED AMORTIZATION increased 34% to $1,302,119 in 2012 from $972,252 in 2011. The increase was primarily due to an addition of $1,301,070 to the full cost pool. The depletion rate was .88% for the period ended March 31, 2012 versus 1.96% for the same 2011 period.

 

INTEREST EXPENSE increased 1% to $1,921,287 in the 2012 quarter from $1,898,790 in the 2011 quarter. Debt during both quarters was $37,000,000. This year over year increase resulted a slight increase in amortization of the discount, from the Third Amendment to the Credit Agreement, which increased the revolving line of credit with Wells Fargo, and the draw of $5,000,000 under the terms of the new agreement. The amendment of the Credit Facility with Wells Fargo also resulted in a loan discount being recorded. The discount is being amortized over the amended three-year term of the debt as additional interest expense with $1,383,166 being recorded in the 2012 quarter.

 

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Table of Contents

 

For the nine months ended March 31, 2012 and 2011

 

 

 

Nine months ended

 

 

 

 

 

 

 

March 31,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

Production Volumes:

 

 

 

 

 

 

 

 

 

Oil (Bbl)

 

449

 

1,263

 

(813

)

-64

%

Natural gas liquids (gallons)

 

34,987

 

37,025

 

(2,038

)

-6

%

Natural gas (Mcf)

 

1,846,114

 

1,091,427

 

754,687

 

69

%

Total (Mcfe)

 

1,853,809

 

1,104,293

 

749,516

 

68

%

 

 

 

 

 

 

 

 

 

 

Weighted Average Sales Prices:

 

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

96.02

 

$

79.92

 

$

16.10

 

20

%

Natural gas liquids (per gallon)

 

$

1.74

 

$

1.50

 

$

0.24

 

16

%

Natural gas (per Mcf)

 

$

3.19

 

$

3.93

 

$

(0.74

)

-19

%

 

 

 

 

 

 

 

 

 

 

Selected Expenses per Mcfe:

 

 

 

 

 

 

 

 

 

Production costs

 

$

0.32

 

$

0.46

 

$

(0.14

)

-30

%

Workover expenses (non-recurring)

 

$

0.12

 

$

0.16

 

$

(0.04

)

-27

%

Severance taxes

 

$

(0.08

)

$

0.10

 

$

(0.17

)

-182

%

Other revenue deductions

 

$

0.41

 

$

0.56

 

$

(0.15

)

-26

%

Total lease operating expenses

 

$

0.77

 

$

1.27

 

$

(0.50

)

-39

%

General and administrative expenses

 

$

1.47

 

$

2.12

 

$

(0.65

)

-31

%

Depreciation, depletion and amortization

 

$

2.60

 

$

1.66

 

$

0.94

 

57

%

 

Revenues

 

OIL AND GAS SALES increased 34% to $5,993,320 for the nine months ended March 31, 2012 from $4,444,849 for the nine months ended March 31, 2011 primarily due to a 754,687 Mcf increase in natural gas production during the nine months ended March 31, 2012 versus the same period in 2011. The overall revenue was negatively affected by lower natural gas prices. The weighted average natural gas price we received in the 2012 period was $3.19 per Mcf versus $3.93 in the 2011 period.

 

Costs and Expenses

 

OIL AND GAS PRODUCTION, OPERATING AND DEVELOPMENT COSTS increased 2% to $1,433,392 (24% of oil and gas sales) for 2012 from $1,406,496 (32% of oil and gas sales) for 2011. The increase was primarily due to a $132,727 increase in lease operating expenses and a $144,653 increase of 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 and 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 the Company’s gas. These increases were partially offset by a $250,484 overall decrease in production taxes.

 

GENERAL AND ADMINISTRATIVE EXPENSES increased 16% to $2,721,272 for 2012 from $2,335,961 for 2011 primarily as a result of a $702,922 increase in legal fees incurred in connection with the EXCO/BG arbitration, which were partially offset by a $286,050 decrease in stock compensation, a $146,461 decrease in franchise taxes, and a $82,500 decrease in legal settlements as compared to the period ended March 31, 2011. The franchise taxes and legal settlement were non-recurring expenses.

 

DEPRECIATION, DEPLETION AND AMORTIZATION increased 163% to $4,821,405 in 2012 from $1,833,648 in 2011. The increase was primarily due to an increase of $1,609,780 in capital costs for

 

15



Table of Contents

 

development from the previous year and  $1,377,784 of additions to the full cost pool. The depletion rate was 3.21% for the period ended March 31, 2012 versus 3.78% for the 2011 period.

 

INTEREST EXPENSE increased 2% to $5,808,705 in 2012 from $5,692,534 in 2011.  Our debt was $37,000,000 and $32,000,000 during the nine month periods ended March 31, 2012 and 2011, respectively. During fiscal 2011 the revolving line of credit with Wells Fargo remained at $30,000,000, while the $5,000,000 term note was left in place by Wells Fargo, and both maturity dates are July 1, 2012. The loan costs for the fiscal 2011 amendment to the Credit Facility with Wells Fargo resulted in a loan discount being recorded. The discount is being amortized over the original three-year term of the debt as additional interest expense with $4,360,522 being recorded in the nine months ended March 31, 2012, compared to $4,297,503 for the nine months ended March 31, 2011.

 

Capital Resources and Liquidity

 

Working Capital

 

The Company had a working capital deficit of $33,162,110 at March 31, 2012 compared to working capital of $2,319,620 at June 31, 2011, primarily due to our long-term debt with Wells Fargo and the Wallen Note becoming current liabilities, due to the maturity date of July 1, 2012, and September 30, 2012, respectively, being less than 12 months from March 31, 2012. This level of negative working capital creates two additional concerns. One, it creates substantial doubt as to our ability to pay our obligations as they come due and remain a ‘going concern’.  Secondly, it might prevent us from regaining compliance with the NYSE-Amex continued listing standards, and cause us to face potential delisting. We are negotiating with Wells Fargo and Mr. Wallen to extend the maturity dates of our Credit Agreement and the Wallen Note.  There can be no assurance that the Company will be able to negotiate such extensions.

 

On November 24, 2009, the Company entered into transactions with Tauren and Langtry, both of which are entities controlled by Calvin A. Wallen III, the Chief Executive Officer of the Company, under which the Company acquired $30,952,810 in pre-paid drilling credits (the “Drilling Credits”) applicable towards the development of its Haynesville Shale rights in Northwest Louisiana.

 

As consideration for the Drilling Credits, the Company (a) conveyed to Tauren a net overriding royalty interest of approximately 2% in its leasehold rights below the Taylor Sand formation of the Cotton Valley and (b) issued to Langtry 10,350,000 Company common shares and preferred stock with a stated value of $10,350,000, convertible into Company common shares at $1.20 per common share, at any time prior to the fifth anniversary of its issuance. The preferred stock is entitled to cumulative dividends equal to 8% per annum, payable quarterly, which dividends may be paid in cash or in additional shares of preferred stock, in the Company’s discretion. The preferred stock may be redeemed by the Company at any time, at a redemption price equal to 20% over the original issue price.

 

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

 

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The Company plans to fund its development and exploratory activities through cash on hand, the Drilling Credits, cash provided from operations, and one of, or a combination of, the following potential transactions: incurring additional debt, a private placement of common stock, a public offering of common stock, a joint venture with an industry partner in which we would or could farm-out a to-be-determined percentage of our working interests in certain properties, a disposition of assets, or other transactions.

 

On May 18, 2011, EXCO and BG informed the Company that they do not intend to honor the balance of the Drilling Credits, which was approximately $18 million at that time. This dispute was submitted to binding arbitration during the week of January 9, 2012 and a ruling was issued on March 9, 2012.

 

In addition to dismissing all claims of EXCO and BG with prejudice, the Arbitrators’ Award provides the following:

 

·                  EXCO/BG shall place the Company in “consent” status on wells drilled by EXCO/BG through March 9, 2012, and pay the Company the proceeds to which it is entitled;

 

·                  EXCO/BG shall apply the Drilling Credits to wells drilled by EXCO/BG through March 9, 2012;

 

·                  The remaining Drilling Credits are accelerated and immediately due and payable to the Company; and

 

·                  The Company is awarded attorneys’ fees, costs and interest.

 

The Company has filed a motion to have the Arbitrators’ Award confirmed, and EXCO/BG have filed a motion to have the Arbitrators’ Award vacated.  A hearing in the 298th Judicial District Court of Dallas County, Texas is scheduled for May 25, 2012 to rule on these motions.

 

Management believes we will prevail, but if not, we have the option of going “non-consent”, or being deemed non-consent, on current and future horizontal Haynesville Shale wells operated by EXCO/BG.  By being deemed to be non-consent, in addition to penalties, we would reduce our share of revenues from these wells and would be required to pay the royalty owners their share of revenues, which we anticipate to be up to approximately $65,000 per well per month, or an aggregate of approximately $590,000 for the balance of fiscal 2012, based on the current number of EXCO and BG operated wells. Other than this $590,000, we do not expect any additional royalties to be paid out of pocket by Cubic during fiscal 2012, with respect to EXCO and BG operated wells. With future strategies to obtain additional financing, funds generated through existing wells and cash on hand, we expect to be able to continue to pay our expenses as they come due. Regardless of the Arbitrators’ Award that accelerates the remaining Drilling Credits, the balance of the Drilling Credits not exhausted is due and payable to us in cash early in fiscal 2013. Included in results of operations for the nine months ended March 31, 2012, were revenues of $2,248,597and costs of $192,487 related to these disputed properties. Due to the uncertainty of the ultimate confirmation of the Arbitrators Award, we have not changed the presentation of the respective assets and liabilities nor have we recorded any receivables for the reimbursement of the attorneys’ fees, costs and interest.

 

We expect production from wells drilled and completed in fiscal 2010 and 2011, together with additional wells that have been and are expected to be completed during fiscal 2012, to provide cash flow to support operations.  However, the Company cannot be certain that adequate funds will be available from cash on hand, the Drilling Credits, operating cash flow, and the aforementioned potential transactions to fully fund the projected capital expenditures of $3,000,000 to $6,000,000 for fiscal 2012. Additionally, because future cash flows, the availability of borrowings, and the ability to consummate any of the aforementioned potential transactions are subject to a number of variables, such as prevailing prices of oil and gas, actual production from existing and newly-completed wells, the Company’s success in developing and producing new reserves, the uncertainty of financial markets and joint venture and merger and acquisition activity, and

 

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the uncertainty with respect to the amount of funds which may ultimately be required to finance the Company’s development and exploration program, there can be no assurance that the Company’s capital resources will be sufficient to sustain the Company’s development and exploratory activities.

 

If we are unable to obtain such capital resources on a timely basis, the Company may not have the ability to fund its share of the development and exploratory activities being conducted by third-party operators. If a well is proposed by a third-party operator and the Company does not have a drilling credit or the capital resources to participate in that well, the Company might not receive any revenue generated by that well, while still being required to fulfill the relevant royalty payment obligations to the mineral owner and other royalty holders.

 

The majority of our oil and gas reserves are undeveloped. As such, recovery of the Company’s future undeveloped proved reserves will require significant capital expenditures. Management estimates that aggregate capital expenditures ranging from a minimum of approximately $3,000,000 to a maximum of approximately $6,000,000 will be made to further develop these reserves during fiscal 2012 (from currently available funds, Drilling Credits and projected cash from operating activities). Moreover, additional capital expenditures may be required for exploratory drilling on our undeveloped acreage. The Company’s third-party operators may increase their planned activities for fiscal 2012, if product prices improve. The Company has little or no control with respect to the timing of our third-party operators drilling wells and the timing of drilling expenses incurred. If product prices remain flat or go lower, such activities, and our capital expenditures, may be restricted, although we have little or no control over expenditures incurred by our third-party operators.

 

The Company is considering acquiring leaseholds in additional properties, including properties that are expected to produce primarily oil.  However, the Company cannot give any assurance that any such acquisition will be completed.

 

Cash Flow

 

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

 

 

 

Nine months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Net cash provided (used) by operating activities

 

$

(286,610

)

$

(2,941,391

)

Net cash provided (used) by investing activities

 

(35,678

)

(1,165,035

)

Net cash provided (used) by financing activities

 

(565,974

)

5,338,680

 

Net increase (decrease) in cash and cash equivalents

 

$

(888,262

)

$

1,232,254

 

 

Operating ActivitiesDuring the nine months ended March 31, 2012, the Company used cash flows from operating activities of $286,610 as compared to $2,941,391 in the prior year period. Cash flow from operations is dependent on our ability to increase production through our development and exploratory activities and the price received for oil and natural gas.

 

Investing Activities The cash used in investing activities consists of capital expenditures related to the drilling and completion of new wells and the acquisition and development of additional oil and gas properties. In the nine months ended March 31, 2012, we had capital spending related to the acquisition and development of oil and gas properties of $49,021 and used net cash of $35,678 in investing activities. In the nine months ended March 31, 2011, we had capital spending related to the acquisition and development of oil and gas properties of $925,927 and used net cash of $1,165,035 in investing activities.

 

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Financing Activities Net cash flows used by financing activities were $565,974 in the nine month period ended March 31, 2012, and net cash flows provided by financing activities were $5,338,680 in the nine month periods ended March 31, 2011. During the fiscal 2012 period, we used $565,974 to pay dividends on preferred stock. During the fiscal 2011 period, we received an aggregate of $642,780 in proceeds from the issuance of stock (resulting from the exercise of warrants) and drew an additional $5,000,000 from Wells Fargo under the revolving line of credit component of our Credit Facility in order to pay past due invoices and working interest expenses on our non-operated acreage. As a result, the Company has borrowed $30,000,000 of the $40,000,000 potentially available under the Credit Facility’s Revolving Note (and an aggregate of $45,000,000 under the Credit Facility).

 

Contractual Obligations

 

We have no material changes in our long-term commitments associated with our capital expenditure plans or operating agreements other than those described above. Our level of capital expenditures will vary in future periods depending on: the success we experience in our acquisition, developmental and exploration activities; oil and natural gas price conditions; and other related economic factors. Currently, no sources of liquidity or financing are provided by off-balance sheet arrangements or transactions with unconsolidated, limited-purpose entities. We have no contractual commitments pertaining to exploration, development and production activities.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon the condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the year ended June 30, 2011.

 

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 due primarily to seasonality of demand and other factors beyond our control. Reductions in crude oil, natural gas and natural gas liquids prices could have a material adverse effect on our financial position, results of operations and quantities of reserves recoverable on an economic basis. Any reduction in reserves, including reductions due to price fluctuations, can adversely affect our liquidity and our ability to obtain capital for our acquisition and development activities. To date, we have not entered into futures contracts or other hedging agreements to manage the commodity price risk for any portion of our production.

 

Interest Rate Risk

 

As of March 31, 2012, we have an aggregate of $37,000,000 of current debt outstanding under our Credit Facility and the Wallen Note. The Credit Facility matures on July 1, 2012 and bears interest at the prime rate plus 2.0% and the Wallen Note matures on September 30, 2012 and bears interest at the prime rate plus 1%. As a result, our interest costs fluctuate based on short-term interest rates. Based on the aforementioned borrowings outstanding at March 31, 2012, a 100 basis point change in interest rates would change our annual interest expense by approximately $370,000. We had no interest rate derivatives during the third quarter of fiscal 2012.

 

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Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures. Our principal executive and financial officers have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in internal controls over financial reporting. There were no changes in the Company’s internal controls over financial reporting 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. Legal Proceedings

 

On May 18, 2011, EXCO and BG informed the Company that they do not intend to honor the balance of the Drilling Credits, which was approximately $18 million at that time. This dispute was submitted to binding arbitration during the week of January 9, 2012 and a ruling was issued on March 9, 2012.

 

In addition to dismissing all claims of EXCO and BG with prejudice, the Arbitrators’ Award provides the following:

 

·                  EXCO/BG shall place the Company in “consent” status on wells drilled by EXCO/BG through March 9, 2012, and pay the Company the proceeds to which it is entitled;

 

·                  EXCO/BG shall apply the Drilling Credits to wells drilled by EXCO/BG through March 9, 2012;

 

·                  The remaining Drilling Credits are accelerated and immediately due and payable to the Company; and

 

·                  The Company is awarded attorneys’ fees, costs and interest.

 

The Company has filed a motion to have the Arbitrators’ Award confirmed, and EXCO/BG have filed a motion to have the Arbitrators’ Award vacated.  A hearing in the 298th Judicial District Court of Dallas County, Texas is scheduled for May 25, 2012 to rule on these motions.

 

Item 1A. Risk Factors

 

There have been material changes in the risk factors applicable to us from those disclosed in our Annual Report on Form 10-K for fiscal year ended June 30, 2011.

 

Servicing our debt requires a significant amount of cash, and we will not have sufficient cash flow from our business to pay our substantial debt as it comes due.

 

Our debt to Wells Fargo, with a principal amount of $35,000,000, is due on July 1, 2012, and the Wallen Note, with a principle amount of $2,000,000, is due September 30, 2012, and both are classified as current debt.  As of March 31, 2012, we had a working capital deficit of $33,162,110. This level of negative working capital creates two concerns. One, it creates substantial doubt as to our ability to pay our obligations as they come due and remain a ‘going concern’.  Secondly, it might prevent us from regaining compliance with the NYSE-Amex continued listing standards, and cause us to face potential delisting. We are negotiating with Wells Fargo and Mr. Wallen to extend the maturity dates of our Credit Agreement and the Wallen Note.  There can be no assurance that the Company will be able to negotiate such extensions.

 

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our ability to obtain additional debt and/or equity financing, which is subject to economic and financial factors beyond our control. Our business will not generate cash flow from operations sufficient to pay our obligations to Wells Fargo and under the Wallen Note. We may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition in the immediate future, as well as the value of our properties. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt and have an adverse effect on the market price of our common stock.

 

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We may not be able to secure additional funds to make the required payments to Wells Fargo. If we are not successful, Wells Fargo may pursue all remedies available to it under the terms of the Credit Facility including but not limited to foreclosure on our assets. If that were to occur, our shareholders might lose their entire investment.

 

We are not in compliance with the continued listing requirements of the NYSE-Amex. Failure to regain compliance could result in decreased liquidity for our common stock and make future offerings of securities more difficult.

 

On December 27, 2011 and February 24, 2012, the Company received letters from NYSE Amex LLC (the “Exchange”) stating that the Company is not in compliance with Section 1003(a)(i) of the Exchange’s Company Guide because the Company has stockholders’ equity of less than $2,000,000 and losses from continuing operations and/or net losses in two out of its three most recent fiscal years, Section 1003(a)(ii) of the Company Guide with stockholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three out of its four most recent fiscal years, and Section 1003(a)(iii) of the Company Guide with stockholders’ equity of less than $6,000,000 and losses from continuing operations and/or net losses in its five most recent fiscal years. Subsequent to the initial letter from the Exchange, the Company submitted its plan of compliance detailing how the Company intends to regain compliance with those requirements.

 

On March 2, 2012, the Exchange notified the Company that the Exchange has accepted the compliance plan, and granted the Company an extension until June 27, 2013 to evidence its compliance with the foregoing listing standards.

 

Included in the March 2, 2012 letter from the Exchange was a notice that, based on a further review of the Company’s quarterly report on Form 10-Q for the period ended December 31, 2011, the Company is not in compliance with Section 1003(a)(iv) of the Company Guide in that the Exchange believes that the Company has sustained losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature. The Company is not required to submit an additional plan of compliance in response to the additional deficiency identified in the Exchange’s letter of March 2, 2012, because the accepted plan effectively addresses how the Company intends to regain compliance with Section 1003(a)(iv). The Company was granted an extension to regain compliance with Section 1003(a)(iv) until July 31, 2012.

 

The Company will be subject to periodic review by the Exchange during the extension periods. If the Company does not make progress consistent with the plan, or the Company is not in compliance with the applicable continued listing standards by the respective dates set forth above, the Company is subject to delisting proceedings. The Company would be entitled to appeal a determination by the Exchange to initiate delisting proceedings.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

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

 

 

 

101.INS**

 

XBRL Instance Document

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

101.DEF**

 

XBRL Taxonomy Definition Linkbase Document

 

 

 

101.LAB**

 

XBRL Taxonomy Label Linkbase Document

 

 

 

101.PRE**

 

XBRL Taxonomy Presentation Linkbase Document

 


* Filed herewith.

** Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CUBIC ENERGY, INC.

 

(Registrant)

 

 

 

 

Date: May 15, 2012

By:

/s/ Calvin A. Wallen, III

 

 

Calvin A. Wallen, III, President and Chief Executive Officer

 

 

 

 

Date: May 15, 2012

By:

/s/ Larry G. Badgley

 

 

Larry G. Badgley, Chief Financial Officer (Principal Financial and Accounting Officer)

 

24