Table of Contents

 

 

 

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Under Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**Forthe Three Months Ended March 31, 2009**

 

**CommissionFile No. 000-51229**

 

**STRATUM HOLDINGS, INC.**

(Exact Name of Registrant as specified inits charter)

 

| **Nevada**                                       | ** ** | **51-0482104**                         |
|--------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction  of incorporation) |       | (IRS Employer  Identification  Number) |

 

| **Three  Riverway, Suite 1590**      | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Houston,  Texas**                       | ** ** | **77056**  |
| (Address of principal  executive offices) |       | (zip code) |

 

**(713)479-7050**

(Registrant’s telephone number, includingarea code)

 

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

 

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

 

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

 

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

 

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

 

The number of shares outstanding ofCommon Stock, par value $.001 per share, as of May 15, 2009 was 26,556,429shares.

 

 

 

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**STRATUMHOLDINGS, INC.**

**FORM 10-Q**

**MARCH 31,2009**

 

**INDEX**

 
|                                                                                                       | ** ** | **Page**   |
|------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I.  FINANCIAL INFORMATION                                                                        | ** ** | ** ** |
|                                                                                                       |       |       |
| Item  1. Financial Statements                                                                              |       |       |
| Consolidated  Balance Sheets as of March 31, 2009 (Unaudited) and December 31,  2008 (Unaudited) |       | 3          |
| Consolidated Statements of Operations for the three  months ended March 31, 2009 and 2008 (Unaudited) |       | 4          |
| Consolidated Statements of Cash Flows for the three  months ended March 31, 2009 and 2008 (Unaudited) |       | 5          |
|                                                                                                       |       |       |
| Notes to Consolidated Financial Statements (Unaudited)                                                     |       | 6          |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations        |       | 12         |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                        |       | 16         |
| Item 4T. Controls and Procedures                                                                           |       | 16         |
|                                                                                                       |       |       |
| PART II.  OTHER INFORMATION                                                                           |       |       |
|                                                                                                       |       |       |
| Item 1.  Legal Proceedings                                                                                 |       | 17         |
| Item 1A. Risk  Factors                                                                                     |       | 17         |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                       |       | 17         |
| Item 3. Defaults Upon Senior Securities                                                                    |       | 17         |
| Item 4. Submission of Matters to a Vote of Security  Holders                                               |       | 17         |
| Item 5.  Other Information                                                                                 |       | 17         |
| Item 6. Exhibits                                                                                           |       | 17         |
| Signatures                                                                                                 |       | 18         |

 

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**STRATUM HOLDINGS, INC.**

**Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                                                         |       | $                  | 189,987    |                  | $          | 203,200 |   |
| Restricted cash (Note 3)                                                                                          |       | 2,578,746          |       | 1,491,958             |       |
| Accounts receivable                                                                                               |       | 2,859,200          |       | 2,900,750             |       |
| Prepaid expenses and other                                                                                        |       | 116,494            |       | 133,088               |       |
| Total current assets                                                                                              |       | 5,744,427          |       | 4,728,996             |       |
|                                                                                                              |       |               |       |                  |       |
| Property and equipment:                                                                                           |       |               |       |                  |       |
| Oil and gas properties  (full cost method)                                                                        |       | 14,178,022         |       | 14,177,055            |       |
| Other property and  equipment                                                                                     |       | 108,060            |       | 108,060               |       |
|                                                                                                              |       | 14,286,082         |       | 14,285,115            |       |
| Less: Accumulated  depreciation, depletion & amortization                                                |       | (1,453,964         | )          | (1,332,227            | )          |
| Impairment allowance                                                                                              |       | (7,000,000         | )          | (7,000,000            | )          |
| Net property and equipment                                                                                        |       | 5,832,118          |       | 5,952,888             |       |
|                                                                                                              |       |               |       |                  |       |
| Other assets:                                                                                                     |       |               |       |                  |       |
| Restricted cash (Note 3)                                                                                          |       | —             |       | 1,611,742             |       |
| Goodwill (less impairment  allowance of $3,400,000 and $1,500,000, respectively)                                  |       | 1,536,313          |       | 3,436,313             |       |
| Other assets                                                                                                      |       | 269,347            |       | 175,171               |       |
| Total other assets                                                                                                |       | 1,805,660          |       | 5,223,226             |       |
|                                                                                                              |       |               |       |                  |       |
| Total assets                                                                                                      |       | $                  | 13,382,205 |                  | $          | 15,905,110 |   |
|                                                                                                              |       |               |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                              |       |               |       |                  |       |
| Current portion of  long-term debt - stockholders                                                                 |       | $                  | 1,954,143  |                  | $          | 246,826 |   |
| Current portion of  long-term debt - others                                                                       |       | 3,621,022          |       | 81,729                |       |
| Accounts payable                                                                                                  |       | 2,472,618          |       | 2,818,488             |       |
| Accrued liabilities                                                                                               |       | 1,281,129          |       | 1,153,292             |       |
| Income taxes payable                                                                                              |       | 103,100            |       | 282,975               |       |
| Total current liabilities                                                                                         |       | 9,432,012          |       | 4,583,310             |       |
|                                                                                                              |       |               |       |                  |       |
| Long-term debt, net of current portion                                                                            |       | 1,775,127          |       | 6,884,155             |       |
| Deferred income taxes                                                                                             |       | 1,281,700          |       | 1,486,900             |       |
| Asset retirement obligations                                                                                      |       | 179,950            |       | 175,990               |       |
| Total liabilities                                                                                                 |       | 12,668,789         |       | 13,130,355            |       |
|                                                                                                              |       |               |       |                  |       |
| Stockholders’ equity:                                                                                        |       |               |       |                  |       |
| Preferred stock, $.01 par  value per share, 1,000,000 shares authorized, None issued                              |       | —             |       | —                |       |
| Common stock, $.001 par  value per share, 50,000,000 shares authorized, 26,556,429 shares issued and  outstanding |       | 26,556             |       | 26,556                |       |
| Additional paid in capital                                                                                        |       | 12,767,951         |       | 12,758,510            |       |
| Accumulated deficit                                                                                               |       | (12,011,136        | )          | (9,852,596            | )          |
| Accumulated foreign  currency translation adjustment                                                              |       | (69,955            | )          | (157,715              | )          |
| Total stockholders’ equity                                                                                   |       | 713,416            |       | 2,774,755             |       |
|                                                                                                              |       |               |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                  |       | $                  | 13,382,205 |                  | $          | 15,905,110 |   |

 

See accompanying notesto consolidated financial statements.

 

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**STRATUMHOLDINGS, INC.**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Revenues:                                               |       |                                  |       |   |   |
| Energy services                                         |       | $                                     | 5,593,914  |   | $ | 7,754,189 |   |
| Oil and gas sales                                       |       | 548,931                               |       | 1,049,030 |   |
| Other                                                   |       | 42,610                                |       | 86,111 |   |
|                                                    |       | 6,185,455                             |       | 8,889,330 |   |
| Expenses:                                               |       |                                  |       |   |   |
| Energy services                                         |       | 5,087,417                             |       | 6,923,815 |   |
| Lease operating expense                                 |       | 549,344                               |       | 399,603 |   |
| Depreciation,  depletion & amortization        |       | 121,809                               |       | 158,716 |   |
| Impairment of acquisition  goodwill                     |       | 1,900,000                             |       | — |   |
| Workover expense                                        |       | 39,598                                |       | 144,017 |   |
| Selling, general and  administrative                    |       | 562,045                               |       | 1,852,087 |   |
|                                                    |       | 8,260,213                             |       | 9,478,238 |   |
|                                                    |       |                                  |       |   |   |
| Operating loss                                          |       | (2,074,758                            | )          | (588,908 | ) |
| Other expenses:                                         |       |                                  |       |   |   |
| Interest expense                                        |       | (178,463                              | )          | (608,159 | ) |
|                                                    |       |                                  |       |   |   |
| Loss from continuing  operations before income taxes    |       | (2,253,221                            | )          | (1,197,067 | ) |
| Benefit for income taxes                                |       | 120,100                               |       | 406,900 |   |
| Net loss from continuing  operations                    |       | (2,133,121                            | )          | (790,167 | ) |
| Discontinued operations,  net of tax                    |       | (25,419                               | )          | (409,533 | ) |
| Net loss                                                |       | $                                     | (2,158,540 | ) | $ | (1,199,700 | ) |
|                                                    |       |                                  |       |   |   |
| Net loss per share, basic  and diluted                  |       |                                  |       |   |   |
| Net loss from continuing  operations                    |       | $                                     | (0.08      | ) | $ | (0.03 | ) |
| Discontinued operations                                 |       | (0.00                                 | )          | (0.02 | ) |
| Net loss                                                |       | $                                     | (0.08      | ) | $ | (0.05 | ) |
|                                                    |       |                                  |       |   |   |
| Weighted average shares  outstanding, basic and diluted |       | 26,556,429                            |       | 25,572,207 |   |

 

 See accompanying notes to consolidatedfinancial statements.

 

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**STRATUM HOLDINGS, INC.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Cash flows provided by  (used in) operating activities:**                                             |       |                                  |       |   |   |
| Net loss from continuing  operations                                                                    |       | $                                     | (2,133,121 | ) | $ | (790,167 | ) |
| Adjustments to reconcile  net loss from continuing operations to cash provided by (used in) operations: |       |                                  |       |   |   |
| Depreciation,  depletion & amortization                                                        |       | 121,809                               |       | 158,716 |   |
| Impairment expense                                                                                      |       | 1,900,000                             |       | — |   |
| Provision (benefit) from  income taxes                                                                  |       | (120,100                              | )          | (406,900 | ) |
| Stock based compensation                                                                                |       | 9,441                                 |       | 469,266 |   |
| Working capital changes                                                                                 |       | (424,864                              | )          | — |   |
| Other changes, net                                                                                      |       | (2,528                                | )          | (190,463 | ) |
| Net cash flows from  continuing operations                                                              |       | (649,363                              | )          | (759,548 | ) |
| Net cash flows from  discontinued operations                                                            |       | (25,419                               | )          | (76,259 | ) |
| Total cash flows from  operating activities                                                             |       | (674,782                              | )          | (835,807 | ) |
|                                                                                                    |       |                                  |       |   |   |
| **Cash flows provided by  (used in) investing activities:**                                             |       |                                  |       |   |   |
| Sale of subsidiary                                                                                      |       | —                                |       | 11,900,000 |   |
| Decrease in restricted  cash from sale of subsidiary                                                    |       | 524,954                               |       | — |   |
| Purchase of property and  equipment                                                                     |       | (967                                  | )          | (107,650 | ) |
| Net cash flows from  investing activities                                                               |       | 523,987                               |       | 11,792,350 |   |
|                                                                                                    |       |                                  |       |   |   |
| **Cash flows provided by  (used in) financing activities:**                                             |       |                                  |       |   |   |
| Proceeds from long term  debt                                                                           |       | 257,745                               |       | — |   |
| Payments of long term debt                                                                              |       | (85,163                               | )          | (10,137,526 | ) |
| Net (payments) proceeds of  stockholder advances                                                        |       | (35,000                               | )          | (708,273 | ) |
| Net cash flows from  financing activities                                                               |       | 137,582                               |       | (10,845,799 | ) |
|                                                                                                    |       |                                  |       |   |   |
| Net increase in cash and  cash equivalents                                                              |       | (13,213                               | )          | 110,744 |   |
| Cash and equivalents at  beginning of period                                                            |       | 203,200                               |       | 238,395 |   |
|                                                                                                    |       |                                  |       |   |   |
| Cash and equivalents at  end of period                                                                  |       | $                                     | 189,987    |   | $ | 349,139 |   |
|                                                                                                    |       |                                  |       |   |   |
| Supplemental cash flow  data:                                                                           |       |                                  |       |   |   |
| Cash paid for interest                                                                                  |       | $                                     | 118,130    |   | $ | 608,159 |   |
| Cash paid for income taxes                                                                              |       | 251,875                               |       | — |   |
|                                                                                                    |       |                                  |       |   |   |
| Supplemental investing  activity:                                                                       |       |                                  |       |   |   |
| Restricted cash withheld  on sale of subsidiary - current                                               |       | $                                     | —     |   | $ | 1,500,000 |   |
| Restricted cash withheld  on sale of subsidiary - noncurrent                                            |       | —                                |       | 1,600,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**STRATUMHOLDINGS, INC.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**(1)****                                 Basisof Presentation**

 

*Interim Financial Information* — Theaccompanying consolidated financial statements have been prepared by theCompany without audit, in accordance with accounting principles generallyaccepted in the Unites States of America for interim financial information andpursuant to the rules and regulations of the Securities and ExchangeCommission.  In the opinion ofmanagement, these consolidated financial statements contain all adjustments(consisting only of normal recurring adjustments) necessary to fairly state thefinancial position of the Company as of March 31, 2009, the results of itsoperations for the three month periods ended March 31, 2009 and 2008, and cashflows for the three month periods ended March 31, 2009 and 2008.  These financial statements should be read inconjunction with our Annual Report on Form 10-K for the year ended December 31,2008.

 

*Recently Issued Accounting Pronouncements* — InJune 2008, the Financial Accounting Standards Board (“FASB”) issued EITF No.07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to anEntity’s Own Stock.”  This Issue iseffective for fiscal years beginning after December 15, 2008.  We do not expect the adoption of EITF No.07-5 to have a material impact on our consolidated financial statements.

 

*SEC Amendments to Oil and Gas Reporting Requirements*— In December 2008, the SEC adopted the final rules regarding amendments tocurrent oil and gas reporting requirements. The amendments are designed to modernize and update the oil and gasdisclosure requirements to align them with current practices and changes intechnology.  The amendments are effectivefor annual reports on Form 10-K for fiscal years ending on or after December31, 2009.  The Company is currentlyevaluating the impact of the amendments on its consolidated financial position,results of operations and cash flows.

 

**(2)****                                 ImpairmentAdjustment**

 

As of March31, 2009, the Company recognized a non-cash impairment adjustment in thecarrying value of the goodwill assigned to its Canadian Energy Servicessubsidiary, Decca Consulting, Ltd. (“Decca”), in the amount of $1,900,000.  This amount is in addition to a similarimpairment adjustment recognized as of December 31, 2008 in the amount of$1,500,000.  Since the worldwide declinein energy prices began in the fourth quarter of 2008, Decca has experienced asubstantial decrease in the demand for its drilling, completion and otheron-site consulting services provided to the Canadian oil and gas industry.  The impairment adjustment recognized as ofMarch 31, 2009 reflects a reduction in the Company’s projections of Decca’sdiscounted future net cash flows as of that date compared to its projections asof December 31, 2008.

 

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As with theimpairment adjustment recorded as of December 31, 2008, the Company has notrecognized a tax benefit for the impairment adjustment as of March 31, 2009because no temporary difference was recognized when the goodwill was initiallyestablished upon the acquisition of Decca in March 2007.

 

**(3)****                                 DiscontinuedOperations**

 

On March 11,2008, the Company sold the capital stock of its domestic Energy Servicessubsidiary, Petroleum Engineers, Inc. (“PEI”), to Hamilton Engineering, Inc.for a total sales price of $15.0 million. The Company applied the sales proceeds to the repayment of debt andother accrued obligations including the outstanding indebtedness of PEI under arevolving bank credit agreement in the amount of $3.2 million and unsecuredseller debt and other liabilities in the amount of $4.5 million (see Note 4).

 

The Companyrecognized a pre-tax gain from the sale of PEI in the first quarter of 2008 inthe amount of $1,350,000 (which was subsequently reduced in the first quarterof 2009 due to payment of an indemnified loss in the amount of $39,000).  The results of discontinued operations of PEIfor the three months ended March 31, 2009 and 2008, including the original andadjusted gain on the sale, are summarized as follows:

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                         |       |                             |       |   |   |
| Energy services revenues     |       | $                                | —     |   | $ | 3,876,949 |   |
| Cost of energy services      |       | —                           |       | (2,919,987 | ) |
| Gross profit                 |       | —                           |       | 956,962 |   |
| General & administrative |       | —                           |       | (914,929 | ) |
| Interest expense, net        |       | —                           |       | (255,321 | ) |
| Gain on sale                 |       | (38,519                          | )          | 1,349,855 |   |
| Net income  before taxes     |       | (38,519                          | )          | 1,136,567 |   |
| Provision for income taxes   |       | 13,100                           |       | (1,546,100 | ) |
| Net income  (loss)           |       | $                                | (25,419    | ) | $ | (409,533 | ) |

 

The Companyhas indemnified Hamilton with respect to certain other pre-sale contingenciesof PEI for a two year period.  In orderto secure such indemnities, Hamilton withheld $1.6 million of sales proceeds inan escrow account.  Upon expiration ofthe indemnity period, the unexpended balance of the escrow account will revertto the Company.  The escrow account andthe unexpended portion of a tax reserve account related to the PEI sale arereflected as restricted cash on the Balance Sheet as of March 31, 2009.

 

**(4)****                                 LongTerm Debt**

 

As of March31, 2009 and December 31, 2008, the Company had the following long-term debtobligations:

 

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| ** **                                                                                                                                                                                                                                                  | ** ** | **March 31,** | ** **      | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|-----------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **2009**      | ** **      | **2008**         | ** ** |
| $25,000,000  line of credit with a bank, maturing on August 5, 2010, interest at 1.0%  above prime payable monthly, secured by first lien on CYMRI, LLC’s oil and  gas properties, with a declining borrowing base of $3,250,000 as of March 31,  2009 |       | $             | 2,850,000       |             | $          | 2,600,000 |   |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| Notes  payable to individuals and entities, incurred in acquisition of CYMRI,  bearing interest at 10%, with principal and accrued interest due at extended  maturity in March 2010, unsecured                                                              |       | 1,125,000     |            | 1,125,000        |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| $4,000,000  (Cdn) revolving line of credit with a bank, interest at 4.5% above Canadian  prime payable monthly through maturity in May 2010, secured by accounts  receivable of Canadian petroleum services business                                        |       | 1,280,544     |            | 1,272,799        |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| Notes  payable to 2 individuals, incurred in acquisition of Decca Consulting, Ltd.,  bearing interest at 9%, payable in monthly installments of $30,099 (Cdn) from  April 1, 2007 through March 31, 2012, unsecured                                         |       | 704,583       |            | 779,040          |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| Advances  from stockholders, bearing interest at 10%, with principal and accrued  interest due in March 2010, unsecured                                                                                                                                     |       | 1,272,317     |            | 1,307,317        |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| Other short  term notes for liability insurance and accrued payables, interest rates at 7%  to 9%                                                                                                                                                           |       | 117,848       |            | 128,554          |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
|                                                                                                                                                                                                                                                        |       | 7,350,292     |            | 7,212,710        |       |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
| Current  portion of long term debt - stockholders                                                                                                                                                                                                           |       | (1,954,143    | )               | (246,826         | )          |
| Current  portion of long term debt - others                                                                                                                                                                                                                 |       | (3,621,022    | )               | (81,729          | )          |
|                                                                                                                                                                                                                                                        |       |          |            |             |       |
|                                                                                                                                                                                                                                                        |       | $             |  1,775,127 |             | $          | 6,884,155 |   |

 

Borrowingsunder the bank credit agreement secured by the oil and gas properties owned byCYMRI, LLC (“CYMRI”), a subsidiary in the Exploration & Production segment,are subject to a borrowing base, which is periodically redetermined, based onoil and gas reserves.  The terms of thebank credit agreement require CYMRI to maintain certain financial covenantsregarding working capital ratio, interest coverage level, tangible net worth,and the non-payment of dividends.  Thebank credit agreement does not require monthly principal payments so long asoutstanding borrowings are less than a declining borrowing base.  As of March 31, 2009, the borrowing basestood at $3,250,000, and was declining by $50,000 per month.

 

CYMRI was inviolation of a certain financial covenant under the credit agreement as ofMarch 31, 2009.  The bank has agreed togrant a waiver of this covenant violation provided the Company puts in place anacceptable hedging transaction on approximately 50% of CYMRI’s projected oilproduction through the end of 2010.  TheCompany expects to arrange the hedge and obtain the waiver in a relatively shortperiod of time.  However, since thewaiver has not been obtained as of the date of this report, the Company hasclassified the entire $2,850,000 indebtedness to the bank as a currentliability as of March 31, 2009.

 

The Companyhas a second bank credit agreement, which is secured by accounts receivable ofits Canadian Energy Services subsidiary, Decca. The credit agreement provides for a revolving borrowing base of 85% ofqualifying accounts receivable up to $4,000,000 (Cdn), with an interest rate of4.5% above Canadian prime (2.5% as of March 31, 2009).  Decca was in violation of certainnon-financial covenants under the credit agreement as of March 31, 2009,however, the bank has not taken any action as a result of theseviolations.  As of March 31, 2009,borrowings under the Canadian credit agreement were secured by Decca’s accountsreceivable in the amount of $2,206,000 (U.S.).

 

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**(5)****                                 NetIncome (Loss) Per Share**

 

Basic income(loss) per common share is computed by dividing the net income or loss by theweighted average number of shares of common stock outstanding during theperiod.  Diluted income (loss) per commonshare is computed by dividing net income or loss by the weighted average numberof shares of common stock outstanding during the period and potentiallydilutive common share equivalents, consisting of stock options and warrants,under the Treasury Stock Method. The effects of potential common stockequivalents are not included in computations when their effect isanti-dilutive.  Because of the net lossfor the three months ended March 31, 2009 and 2008, the basic and dilutedaverage outstanding shares are considered the same, since including the shareswould have an antidilutive effect on the net loss per share calculation.

 

**(6)****                                 Stock-BasedCompensation**

 

The Companyhas a stock-based compensation plan which was approved by the stockholders inOctober 2005 and amended in October 2006. Under the plan, a maximum of 2,400,000 shares may be awarded todirectors and employees in the form of stock options, restricted stock or stockappreciation rights.  The exercise price,terms and other conditions applicable to each stock option grant are generallydetermined by the Board of Directors. The exercise price of stock options is set on the grant date and may notbe less than the fair market value of the Company’s Common Stock on that date.

 

Optionactivity with directors and employees since January 1, 2008 were as follows(including options granted to directors outside of the plan):

 
| ** **                        | ** ** | **Number** | ** ** | **Wtd. Avg.** | ** ** | **Wtd. Avg.**   | ** ** | **Aggregate** | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                        | ** ** | **of**     | ** ** | **Exercise**  | ** ** | **Remaining**   | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term (Yrs.)** | ** ** | **Value**     | ** ** |
| Outstanding  at January 1, 2008   |       | 1,814,600  |       | $             | 1.53       |            |       |          |       |   |
| Options  forfeited                |       | (1,339,600 | )          | (2.03         | )          |            |       |          |       |
| Outstanding  at December 31, 2008 |       | 475,000    |       | 0.76          |       |            |       |          |       |
| Option  activity                  |       | —     |       | —        |       |            |       |          |       |
| Outstanding  at March 31, 2009    |       | 475,000    |       | $             | 0.76       |            | 1.8        |          | $          | — |   |
|                              |       |       |       |          |       |            |       |          |       |
| Exercisable  at March 31, 2009    |       | 425,000    |       | $             | 0.68       |            | 1.7        |          | $          | — |   |

 

Stock-basedcompensation expense related to these options in the amounts of $9,441 and$189,266 have been recognized as a current period expense in the accompanyingConsolidated Financial Statements for the three month periods ended March 31,2009 and 2008, respectively.  As of March31, 2009, total unrecognized compensation cost of approximately $52,000 relatedto stock options is expected to be recognized over a weighted average period ofapproximately 1.8 years.  The estimatedfair value of the options granted to employees under the plan was calculatedusing a Black Scholes option pricing model. The following schedule reflects theassumptions included in this model as it relates to the valuation of such options:(a) Expected volatility — 95%; (b) Expected risk free interest rate — 6%; (c)Expected dividend yield — zero; (d) Expected option term — 3 to 4 years,calculated pursuant to the terms of SAB 107 as the option grants qualify as“plain vanilla” under that pronouncement; and (e) Forfeitures — 0%, subject toadjustment for actual experience. Vesting terms of the options are generally three years.  The aggregate intrinsic value of employeeoptions granted as of March 31, 2009 was zero as there were no in-the-moneyoptions at that date.

 

Pursuant to aBoard approved severance agreement, the Company made a cash severance paymentto its former Chief Executive Officer in March 2008 in the amount of $200,000and granted him an additional severance benefit via the issuance of 1,142,857restricted shares of Common Stock with a then current value of $280,000, whichwas included in stock-based compensation expense in March 2008.

 

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**(7)**                                 **Stockholder Advances**

 

The Companyrepaid net stockholder advances in the amounts of $35,000 and $708,000 in thethree months ended March 31, 2009 and 2008, respectively.  Stockholder advances, excluding amountsadvanced to finance the cash portion of the CYMRI purchase price (see Note 4),are reflected as unsecured long term debt obligations and accrue interest at arate of 10% per annum.

 

**(8)**                                 **Contingencies**

 

TriumphEnergy, Inc., a subsidiary in the Exploration & Production segment, is adefendant in several lawsuits involving professional liability and othermatters arising in the normal course of business.  It is not practical at the present time todetermine the amount or likelihood of an unfavorable outcome to the Company’sconsolidated financial position or results of operations of any of the actionsagainst Triumph.  The Company believesthat Triumph has meritorious defenses in each case and is vigorously defendingthese matters.

 

A lawsuit was filedin February 2008 against Decca, the Company’s Canadian Energy Servicessubsidiary, claiming unspecified damages related to work performed by Decca ona well drilled in the U.S. in late 2006, prior to the Company’s acquisition ofDecca.  Pursuant to the terms of thestock purchase agreement under which the Company acquired Decca in March 2007,management believes that the Company is indemnified by the prior owners ofDecca for any losses that may be sustained as a result of this litigation.  Decca believes that it has a meritoriousdefense in this case and is vigorously defending this matter.

 

In October2008, an insurer for the Company’s inactive Construction Staffing subsidiaryfiled a lawsuit against the subsidiary alleging default on a premium financeobligation in the amount of $200,000, plus interest and attorney’s fees.  Limited discovery in this case has beenundertaken to date.  The Company believesthat its inactive Construction Staffing subsidiary has a meritorious defense inthis case.

 

**(9)**                                 **Segment Information**

 

With the saleof PEI in March 2008 (see Note 3), the Company’s remaining operations are inthe Canadian Energy Services and domestic Exploration & Productionsegments.  The table below reflects theallocation of certain amounts in the consolidated Income Statement, other thaninterest expense and income taxes (which the Company does not believe arefeasible to allocate), and the consolidated Balance Sheet as of and for thethree months ended March 31, 2009 (in 000’s):

 
| ** **                                        | ** ** | **Energy**   | ** ** | **Exploration &** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|--------------|------------|-----------------------|------------|------------|------------|
| ** **                                        | ** ** | **Services** | ** ** | **Production**        | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **(Can.)**   | ** ** | **(U. S.)**           | ** ** | **Total**  | ** ** |
| Income Statement Data:                            |       |         |       |                  |       |       |       |
| Operating  revenues                               |       | $            | 5,594      |                  | $          | 549        |       | $ | 6,143 |   |
| Other  revenues                                   |       | 33           |       | 9                     |       | 42         |       |
| Total  revenues                                   |       | 5,627        |       | 558                   |       | 6,185      |       |
| Depreciation,  depletion & amortization       |       | —       |       | (122                  | )          | (122       | )          |
| Impairment  expense                               |       | (1,900       | )          | —                |       | (1,900     | )          |
| Other  allocable operating expenses               |       | (5,087       | )          | (589                  | )          | (5,676     | )          |
| Gross profit  (loss)                              |       | (1,360       | )          | (153                  | )          | (1,513     | )          |
| General  & administrative                     |       |         |       |                  |       | (562       | )          |
| Operating  loss                                   |       |         |       |                  |       | (2,075     | )          |
| Interest  expense                                 |       |         |       |                  |       | (178       | )          |
| Net loss  from continuing operations before taxes |       |         |       |                  |       | $          | (2,253     | ) |
|                                              |       |         |       |                  |       |       |       |
| Balance Sheet Data:                               |       |         |       |                  |       |       |       |
| Subsidiary  assets                                |       | $            | 2,586      |                  | $          | 6,901      |       | $ | 9,487 |   |
| Goodwill                                          |       | 1,536        |       | —                |       | 1,536      |       |
| Segment  assets                                   |       | 4,122        |       | 6,901                 |       | 11,023     |       |
| Corporate  assets                                 |       |         |       |                  |       | 2,359      |       |
| Consolidated  assets                              |       |         |       |                  |       | $          | 13,382     |   |

 

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The tablebelow reflects the allocation of certain Income Statement data between thesetwo reportable segments for the three months ended March 31, 2008 (in 000’s):

 
| Income  Statement Data:                           |   |   |   |   |   |   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Operating  revenues                               |   | $      | 7,754  |   | $      | 1,049  |   | $ | 8,803 |   |
| Other  revenues                                   |   | 86     |   | — |   | 86     |   |
| Total  revenues                                   |   | 7,840  |   | 1,049  |   | 8,889  |   |
| Depreciation,  depletion & amortization       |   | — |   | (159   | )      | (159   | )      |
| Other  allocable operating expenses               |   | (6,924 | )      | (543   | )      | (7,467 | )      |
| Gross profit                                      |   | 916    |   | 347    |   | 1,263  |   |
| General  & administrative                     |   |   |   |   |   | (1,852 | )      |
| Operating  loss                                   |   |   |   |   |   | (589   | )      |
| Interest  expense                                 |   |   |   |   |   | (608   | )      |
| Net loss  from continuing operations before taxes |   |   |   |   |   | $      | (1,197 | ) |
|                                                   |        |        |        |        |        |        |        |  |  |  |

 

There is nopresentation of Balance Sheet data allocated between these two reportablesegments as of March 31, 2008 inasmuch as the consolidated Balance Sheet as ofthat date is not included in this report.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

The following discussion of ourfinancial condition and results of operations should be read in conjunctionwith, and is qualified in its entirety by, the consolidated financialstatements and notes thereto included in Item 1 in this Quarterly Report onForm 10-Q. This item contains forward-looking statements that involve risks anduncertainties. Actual results may differ materially from those indicated insuch forward-looking statements.

 

**Forward-LookingStatements**

 

This Quarterly Report on Form10-Q and the documents incorporated herein by reference contain forward-lookingstatements that have been made pursuant to the provisions of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements arebased on current expectations, estimates, and projections about our industry,management beliefs, and certain assumptions made by our management. Words suchas “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates,” variations of such words, and similar expressions are intended toidentify such forward-looking statements. These statements are not guaranteesof future performance and are subject to certain risks, uncertainties, andassumptions that are difficult to predict; therefore, actual results may differmaterially from those expressed or forecasted in any such forward-lookingstatements. Unless required by law, we undertake no obligation to updatepublicly any forward-looking statements, whether as a result of newinformation, future events, or otherwise. However, readers should carefully reviewthe risk factors set forth in other reports and documents that we file fromtime to time with the Securities and Exchange Commission, particularly theQuarterly Reports on Form 10-Q, and future Annual Reports on Form 10-K and anyCurrent Reports on Form 8-K.

 

**Overviewand History**

 

Stratum Holdings, Inc. wasoriginally incorporated in the State of Nevada on September 3, 2003 under thename Frontier Staffing, Inc.  We wereinitially formed to enter the Construction Staffing business and commencedoperations in that segment through a stock-for-stock exchange with a privatecompany in January 2004.  We completed apublic offering of our Common Stock in March 2005 and our shares began tradingon the OTC Bulletin Board in July 2005. We changed our name in October 2005 to Tradestar Services, Inc.

 

On May 23, 2006, we acquiredthe outstanding common stock of CYMRI Corporation (“CYMRI”) for totalconsideration of $12.7 million paid in a combination of cash, notes payable andCommon Stock.  At the time of the acquisition,CYMRI was engaged in the Exploration & Production business with propertieslocated in Texas and Louisiana while its subsidiary, Petroleum Engineers, Inc.(“PEI”), performed Energy Services largely for customers in the United States.

 

On March 2, 2007, we acquiredthe outstanding capital stock of Decca Consulting, Ltd. (“Decca”) for totalconsideration of $5.1 million paid in a combination of cash, notes payable andCommon Stock.  At the time of theacquisition, Decca provided consulting services for the Canadian energyindustry.  In March 2007, we also changedour name to Stratum Holdings, Inc.

 

On October 26, 2007, we soldsubstantially all of the assets of our Construction Staffing subsidiary,Tradestar Construction Services, Inc. (“Tradestar Construction”), to a privateconstruction staffing company.  Wereceived cash proceeds of $3.2 million plus a working capital adjustment.  We applied the sales proceeds to the repaymentof debt and other accrued obligations including the outstanding indebtedness ofTradestar Construction under a revolving bank credit agreement in the amount of$1,810,210 and a bank term loan in the amount of $451,920.  We reported a pre-tax gain from the sale ofthese assets in the fourth quarter of 2007 in the amount of $1,664,000 (whichwas subsequently reduced in the fourth quarter of 2008 due to an uncollectibleinsurance refund in the amount of $357,000). As a result of this sale, we exited from the Construction Staffingsegment.

 

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On March 11, 2008, we sold thecapital stock of our domestic Energy Services subsidiary, PEI, to HamiltonEngineering, Inc. (“Hamilton”) for a total sales price of $15.0 million.  We applied the sales proceeds to therepayment of debt and other accrued obligations including the outstandingindebtedness of PEI under a revolving bank credit agreement in the amount of $3.2million and unsecured seller debt and other liabilities in the amount of $4.5million.  We recognized a pre-tax gainfrom the sale of PEI in the first quarter of 2008 in the amount of $1,350,000(which was subsequently reduced in the first quarter of 2009 due to payment ofan indemnified loss in the amount of $39,000). We have reported the revenues and expenses of PEI for the period that weowned it in 2008 as discontinued operations in the accompanying ConsolidatedStatement of Operations.

 

As a result of the PEI sale, weexited from the domestic portion of our Energy Services segment leaving us withthe Canadian portion of our Energy Services segment as well as our operationsin the domestic Exploration & Production segment.

 

**Results ofOperations**

 

The following discussionreflects the revenues and expenses of our retained Canadian Energy Services andour domestic Exploration & Production segments as continuing operationswhile the revenues and expenses of our exited domestic Energy Services segmentis reported as discontinued operations.

 

*Threemonths ended March 31, 2009 versus three months ended March 31, 2008*— Total revenues from continuing operations for the three months ended March31, 2009 were $6,185,000 compared to $8,889,000 for the three months endedMarch 31, 2008.

 

Revenues from Decca’scontinuing Energy Services for the three months ended March 31, 2009 were$5,594,000 compared to $7,754,000 for the three months ended March 31,2008.  This decrease was due to a declineof approximately 20% in the exchange rate of the Canadian dollar as well as adecrease in the demand for Decca’s consulting services provided to the Canadianoil and gas industry.  Total billings forcontinuing Energy Services in the three months ended March 31, 2009 were approximately4,850 man days at an average billing rate of approximately $1,150 per day.

 

Revenues from CYMRI’s oil andgas sales for the three months ended March 31, 2009 were $549,000 compared to$1,049,000 for the three months ended March 31, 2008.   In the three months ended March 31, 2009,revenues from oil production were $394,000, reflecting volumes of 10,766barrels at an average price of $36.62 per barrel, while gas revenues were$155,000, reflecting volumes of 28,587 Mcf at an average price of $5.41 perMcf.  In the three months ended March 31,2008, revenues from oil production were $879,000, reflecting volumes of 9,642barrels at an average price of $91.14 per barrel, while gas revenues were$170,000, reflecting volumes of 22,516 Mcf at an average price of $7.56 perMcf.

 

Costs of Decca’s continuingEnergy Services for the three months ended March 31, 2009 were $5,087,000versus $6,924,000 for the three months ended March 31, 2008.  This decrease was due to declines in theexchange rate of the Canadian dollar and in the demand for Decca’s consultingservices.  As a result of competitivepressures, Decca was forced to reduce the gross margin on its consultingservices to approximately 9% of revenues for the three months ended March 31,2009 compared to approximately 11% for the three months ended March 31, 2008.

 

Lease operating expenses(“LOE”), including production taxes, were $549,000 for the three months endedMarch 31, 2009 versus $400,000 for the three months ended March 31, 2008,representing LOE of CYMRI’s oil and gas production operations.  This increase was primarily due to higherwater handling expenses in CYMRI’s Burnell Field in the first quarter of 2009.

 

Depreciation, depletion andamortization (“DD&A”) expense for the three months ended March 31, 2009 was$122,000 versus $159,000 for the three months ended March 31, 2008, largelyrepresenting DD&A of CYMRI’s oil and gas properties.  This decrease was primarily due to a declinein depletion rates.

 

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Impairment expense applicableto the goodwill assigned in the Decca acquisition was $1,900,000 for the threemonths ended March 31, 2009 versus zero for the three months ended March 31,2008.  The impairment adjustmentrecognized as of March 31, 2009 reflects a reduction in the Company’sprojections of Decca’s discounted future net cash flows as of that datecompared to its projections as of December 31, 2008, at which time a similarimpairment adjustment in the amount of $1,500,000 was recognized (see Note 2).

 

Workover expenses for the threemonths ended March 31, 2009 were $40,000 versus $144,000 for the three monthsended March 31, 2008, representing workovers on CYMRI’s South Texas oil and gasproperties.  This decrease was due to areduction in workover operations in the first quarter of 2009.

 

Selling, general andadministrative (“SG&A”) expenses attributable to continuing operations forthe three months ended March 31, 2009 were $562,000 compared to $1,852,000 forthe three months ended March 31, 2008. This decrease was due to non-recurring SG&A expenses associated withthe sale of PEI to Hamilton in March 2008 (including Board approved executiveseverance costs of $675,000) as well as a dramatic reduction in the Company’slevel of corporate overhead expenses following the PEI sale.

 

Interest expense attributableto continuing operations for the three months ended March 31, 2009 was $178,000versus $608,000 for the three months ended March 31, 2008.  This decrease was primarily due to therepayment of certain corporate debt obligations in conjunction with the sale ofPEI to Hamilton in March 2008.

 

Income taxes attributable tocontinuing operations were a benefit of $120,000 for the three months endedMarch 31, 2009 compared to a benefit of $407,000 for the three months endedMarch 31, 2008 and reflect a benefit rate of only 5% on pre-tax net loss of$2,253,000 in the three months ended March 31, 2009 (due to no tax benefitbeing booked for the Decca goodwill impairment of $1,900,000).

 

Income from discontinued EnergyServices operations, net of income taxes, was a net loss of $25,400 for thethree months ended March 31, 2009 versus $410,000 for the three months endedMarch 31, 2008.  As further described inNote 3, we sold the capital stock of our domestic Energy Services subsidiary,PEI, to Hamilton in March 2008.  Theresults of operations of our domestic Energy Services business, including thepre-tax sales gain in the amount of $1,350,000, have been classified asdiscontinued operations in the Consolidated Statement of Operations, net ofapplicable income tax expense reflecting the estimated taxable gain on the salein the 2008 period.

 

**Liquidityand Capital Resources**

 

*Operatingactivities.*  Netcash used in operating activities from continuing operations for the threemonths ended March 31, 2009 was $649,000 compared to $760,000 for the threemonths ended March 31, 2008.  Thisdecreased use of financial resources reflected a small net improvement incertain operating cash flow components. Net cash used in operating activities from discontinued operationsdecreased by a minor amount to $25,000 for the three months ended March 31,2009 from $76,000 for the three months ended March 31, 2008.

 

*Investingactivities.*  Netcash provided by investing activities for the three months ended March 31, 2009was $524,000 compared to $11,792,000 for the three months ended March 31,2008.  This fluctuation was largely dueto the sale of PEI to Hamilton in March 2008 for $15.0 million, less theinitial purchases of restricted cash in the amount of $3.1 million for anescrow account and a tax reserve account, pursuant to the securities purchaseagreement with Hamilton.  The Company wasallowed to expend approximately $524,000 of the tax reserve account in thefirst quarter of 2009.

 

*Financingactivities.*  Netcash provided by financing activities for the three months ended March 31, 2009was $138,000 compared to net cash used in financing activities of $10,846,000for the three months ended March 31, 2008. This increase in financing cash flows was primarily due to non-recurringrepayments of long term debt and stockholder advances which were made with theproceeds of the sale of PEI to Hamilton in March 2008 in the gross amount of$15.0 million.

 

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Following the sale of PEI inMarch 2008, we have remaining long term debt obligations to banks and other lenders(see Note 4).  A substantial portion ofour long term debt is in the form of a bank credit facility secured by CYMRI’sproducing oil and gas properties. Borrowings under the bank credit agreement amounted to $2,850,000 as ofMarch 31, 2009 and are subject to a borrowing base, which is periodicallyredetermined, based on oil and gas reserves. CYMRI’s borrowings under its original bank credit agreement wererefinanced with another bank, pursuant to a new credit agreement havingsubstantially similar terms, on August 5, 2008. The new bank credit agreement does not require monthly principalpayments so long as outstanding borrowings are less than a declining borrowingbase.  As of March 31, 2009, theborrowing base stood at $3,250,000, and was declining by $50,000 permonth.   CYMRI was in violation of acertain financial covenant under the new credit agreement as of March 31,2009.  The bank has agreed to grant awaiver of this covenant violation provided the Company puts in place anacceptable hedging transaction covering approximately 50% of CYMRI’s projectedoil production through the end of 2010. The Company expects to arrange the hedge and obtain the waiver in arelatively short period of time.

 

We also have a second bankcredit agreement, which is secured by accounts receivable of our CanadianEnergy Services subsidiary, with outstanding borrowings of $1,281,000 as ofMarch 31, 2009 (see Note 4).  Borrowingsunder a similar credit agreement with the same bank were fully paid in the saleof our domestic Energy Services business in March 2008.  This credit agreement currently provides fora revolving borrowing base of 85% of qualifying accounts receivable up to$4,000,000 (Cdn), with an interest rate of 4.5% above Canadian prime.  Decca was in violation of certainnon-financial covenants under the credit agreement as of March 31, 2009,however, the bank has not taken any action as a result of these violations.

 

With the completion of oursales of PEI in March 2008 and Tradestar Construction in October 2007, ourprimary ongoing capital expenditures are in the Exploration & Productionsegment, which can be highly capital intensive. In this business, expenditures for CYMRI’s drilling and equipping of oiland gas wells are typically required to maintain or increase existingproduction levels and production often declines in a relatively short period oftime if maintenance capital is not invested timely.  We normally attempt to finance CYMRI’scapital expenditure requirements through a combination of cash flow fromoperations and secured bank borrowings and we expect that these sources will besufficient to meet our capital expenditures in 2009.

 

**StrategicPlans**

 

The Company has reportedsubstantial consolidated operating losses and working capital deficits sincecompleting the acquisitions of CYMRI/PEI in May 2006 and Decca in March2007.  In order to address longer termliquidity needs, our Board of Directors authorized Management in July 2007 topursue a range of alternative actions including the sale of one or more of theCompany’s operating assets or businesses. This decision by our Board of Directors ultimately led the Company toseek the sales of: (a) Tradestar Construction to a private constructionstaffing company in October 2007; and (b) PEI to an affiliate of Hamilton inMarch 2008.  There are no furthercorporate level transactions contemplated at the present time although we maydecide to expand our domestic Exploration & Production business by makingselective acquisitions of low risk oil and gas properties with exploitationpotential.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion and analysis ofour financial condition and results of operations are based on consolidatedfinancial statements which have been prepared in accordance with generallyaccepted accounting principles in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses. We believethat certain accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements asindicated below.  See our Annual Report onForm 10-K for the year ended December 31, 2008 for a further description of ourcritical accounting policies and estimates.

 

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**ITEM 3.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Information for this Item isnot required as the Registrant is a “smaller reporting company” as defined inRule 12b-2 of the Exchange Act.

 

**ITEM 4T.****                     CONTROLSAND PROCEDURES**

 

(a) Disclosure controls andprocedures

 

As of the date of this report,management evaluated the effectiveness of the design and operation of ourinternal controls over financial reporting which encompasses our disclosurecontrols and procedures.  Based on thisevaluation, management concluded that there is a material weakness in ourinternal controls over financial reporting as well as in our disclosurecontrols and procedures.

 

The material weakness relatesto deficient completeness and cut-off controls at our Canadian Energy Servicessubsidiary, Decca Consulting, Ltd.  Thesituation giving rise to this lack of independent review arose sinceapproximately the end of the second quarter of 2008 as Decca previouslyemployed a highly experienced accountant to review the subsidiary’s monthlyfinancial statements.  In order toaddress this material weakness, management has implemented an interimcompensating control in the form of an entity level analytical review by itsChief Financial Officer.  To the extentpractical in light of Decca’s current financial performance (see Note 2), theCompany anticipates the implementation of improved completeness and cut-offcontrols at the operating unit level at an appropriate time.

 

Notwithstanding this materialweakness, management believes that the consolidated financial statementsincluded in this report fairly present, in all material respects, ourconsolidated financial position and results of operations as of and for thequarter ended March 31, 2009.

 

(b) Changes in internalcontrols over financial reporting

 

Subsequent to the issuance ofits consolidated financial statements for the year ended December 31, 2008, theCompany determined that it had recorded an over accrual of oil and gas revenuesfor the year ended December 31, 2008. Following the detection of this error,the Company implemented new accounting procedures in the first quarter of 2009to provide additional assurance that oil and gas revenues in its domesticExploration & Production business are properly accounted for on a monthlybasis between quarterly reporting periods. Management believes that these new procedures will be adequate toaddress the deficiency giving rise to the over accrual of oil and gas revenuesas of December 31, 2008.  Except for theimplementation of such new oil and revenue accrual procedures, there was nochange in our internal controls over financial reporting that occurred duringthe quarter ended March 31, 2009, that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

 

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| **PART II.** | **OTHER  INFORMATION**                                                                                                                                 |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                             |
| **ITEM 1.**  | **LEGAL  PROCEEDINGS**                                                                                                                                 |
| ** **   | ** **                                                                                                                                             |
| ** **   | See Note 8  to Consolidated Financial Statements.                                                                                                      |
| ** **   |                                                                                                                                                   |
| **ITEM 1A.** | **RISK  FACTORS**                                                                                                                                      |
| ** **   |                                                                                                                                                   |
| ** **   | Information  for this Item is not required as the Registrant is a “smaller reporting  company” as defined in Rule 12b-2 of the Exchange Act. |
| ** **   |                                                                                                                                                   |
| **ITEM 2.**  | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                       |
| ** **   |                                                                                                                                                   |
| ** **   | None.                                                                                                                                                  |
| ** **   |                                                                                                                                                   |
| **ITEM 3.**  | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                   |
| ** **   |                                                                                                                                                   |
| ** **   | None.                                                                                                                                                  |
| ** **   |                                                                                                                                                   |
| **ITEM 4.**  | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                               |
| ** **   |                                                                                                                                                   |
| ** **   | None.                                                                                                                                                  |
| ** **   |                                                                                                                                                   |
| **ITEM 5.**  | **OTHER  INFORMATION**                                                                                                                                 |
| ** **   |                                                                                                                                                   |
| ** **   | None.                                                                                                                                                  |
| ** **   |                                                                                                                                                   |
| **ITEM 6.**  | **EXHIBITS**                                                                                                                                           |
| ** **   | ** **                                                                                                                                             |
| 31.1         | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)                                                                       |
|         |                                                                                                                                                   |
| 31.2         | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)                                                                       |
|         |                                                                                                                                                   |
| 32.1         | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002    |
|         |                                                                                                                                                   |
| 32.2         | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002    |

 

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**SIGNATURES**

 

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

 

 
|   | STRATUM  HOLDINGS, INC. |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | /s/                     | Larry M.  Wright |
|   |                    | Larry M.  Wright |
|   |                    | Chief  Executive Officer |
|   |                    |
|   | /s/                     | D. Hughes  Watler, Jr. |
|   |                    | D. Hughes  Watler, Jr. |
|   |                    | Chief  Financial Officer |

 

 

May 15, 2009

 

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