**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**Quarterly Report Under Section 13or 15(d) of the**

**Securities Exchange Act of 1934**

 

**Forthe Three Months Ended March 31, 2008**

 

**CommissionFile No. 000-51229**

 

**STRATUM HOLDINGS, INC.**

(ExactName of Small Business Issuer as specified in its charter)

 

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

 

| **Three  Riverway, Suite 1500  Houston, Texas** | ** ** | **77056**  |
|------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)            |       | (zip code) |

 

**(713) 479-7000**

(Issuer’stelephone number, including area code)

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports); and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act) Yes o No x

 

Thenumber of shares outstanding of Common Stock, par value $.001 per share, as of May 9,2008 was 26,556,429 shares and the aggregate market value of such shares heldby non-affiliates of the registrant (based upon the closing bid price of suchshares as listed on the NASD Bulletin Board on May 9, 2008) wasapproximately $930,800.

 

TransitionalSmall Business Disclosure Format (check one):   Yes o No x

 

 

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**STRATUM HOLDINGS, INC.**

**FORM 10-QSB**

**MARCH 31, 2008**

 

**INDEX**

 
|                                                                                                                 | **Page** |
|----------------------------------------------------------------------------------------------------------------------|----------|
| PART I.  FINANCIAL INFORMATION                                                                                  |     |
|                                                                                                                 |     |
| Item  1. Financial Statements                                                                                        |     |
| Condensed  Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007              | 3        |
| Condensed Consolidated  Statements of Operations for the three months ended March 31, 2008 and 2007 (Unaudited) | 4        |
| Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (Unaudited) | 5        |
|                                                                                                                 |     |
| Notes to Condensed Consolidated Financial Statements                                                                 | 6        |
| Item 2. Management’s Discussion and Analysis or Plan  of Operation                                              | 12       |
| Item 3. Controls and Procedures                                                                                      | 17       |
|                                                                                                                 |     |
|                                                                                                                 |     |
| PART II.  OTHER INFORMATION                                                                                     |     |
|                                                                                                                 |     |
| Item  1. Legal Proceedings                                                                                           | 18       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                 | 18       |
| Item 3. Defaults Upon Senior Securities                                                                              | 18       |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                         | 18       |
| Item  5. Other Information                                                                                           | 18       |
| Item 6.  Exhibits                                                                                                    | 18       |
| Signatures                                                                                                           | 19       |

 

2

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**STRATUM HOLDINGS, INC.**

**Condensed Consolidated Balance Sheet**

 
| ** **                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                     |       |               |       |                  |       |
| Current  assets:                                                                                                                               |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                     |       | $                  | 349,139    |                  | $          | 238,395 |   |
| Restricted  cash (Note 3)                                                                                                                      |       | 1,500,000          |       | —                |       |
| Accounts  receivable                                                                                                                           |       | 5,801,917          |       | 2,970,842             |       |
| Prepaid  expenses and other                                                                                                                    |       | 331,547            |       | 978,648               |       |
| Current  assets of discontinued operations                                                                                                     |       | 357,407            |       | 6,894,723             |       |
| Total  current assets                                                                                                                          |       | 8,340,010          |       | 11,082,608            |       |
|                                                                                                                                           |       |               |       |                  |       |
| Property and  equipment:                                                                                                                       |       |               |       |                  |       |
| Oil and gas  properties (full cost method)                                                                                                     |       | 13,733,382         |       | 13,653,081            |       |
| Other  property and equipment                                                                                                                  |       | 118,558            |       | 91,209                |       |
|                                                                                                                                           |       | 13,851,940         |       | 13,744,290            |       |
| Less:  Accumulated depreciation, depletion & amortization                                                                             |       | (8,033,610         | )          | (7,874,894            | )          |
| Net property  and equipment                                                                                                                    |       | 5,818,330          |       | 5,869,396             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other  assets:                                                                                                                                 |       |               |       |                  |       |
| Restricted  cash (Note 3)                                                                                                                      |       | 1,600,000          |       | —                |       |
| Goodwill                                                                                                                                       |       | 4,936,313          |       | 4,936,313             |       |
| Deferred  income taxes                                                                                                                         |       | —             |       | 451,400               |       |
| Other assets                                                                                                                                   |       | 207,367            |       | 132,361               |       |
| Noncurrent  assets of discontinued operations                                                                                                  |       | —             |       | 9,681,080             |       |
| Total other  assets                                                                                                                            |       | 6,743,680          |       | 15,201,154            |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total assets                                                                                                                                   |       | $                  | 20,902,020 |                  | $          | 32,153,158 |   |
|                                                                                                                                           |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                 |       |               |       |                  |       |
| Current  liabilities:                                                                                                                          |       |               |       |                  |       |
| Current  portion of long-term debt                                                                                                             |       | $                  | 3,723,679  |                  | $          | 3,347,205 |   |
| Accounts  payable                                                                                                                              |       | 3,234,679          |       | 2,491,527             |       |
| Accrued  liabilities                                                                                                                           |       | 1,421,442          |       | 1,238,047             |       |
| Income taxes  payable                                                                                                                          |       | 1,013,000          |       | —                |       |
| Current  liabilities of discontinued operations                                                                                                |       | —             |       | 4,639,716             |       |
| Total  current liabilities                                                                                                                     |       | 9,392,800          |       | 11,716,495            |       |
|                                                                                                                                           |       |               |       |                  |       |
| Long-term  debt, net of current portion                                                                                                        |       |               |       |                  |       |
| Continuing  operations                                                                                                                         |       | 4,988,162          |       | 9,018,603             |       |
| Discontinued  operations                                                                                                                       |       | —             |       | 3,957,911             |       |
| Deferred  income taxes                                                                                                                         |       | 1,100,200          |       | 1,193,400             |       |
| Total liabilities                                                                                                                              |       | 15,481,162         |       | 25,886,409            |       |
|                                                                                                                                           |       |               |       |                  |       |
| 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  and 25,393,572 shares issued and outstanding, respectively |       | 26,556             |       | 25,394                |       |
| Additional  paid in capital                                                                                                                    |       | 12,563,466         |       | 12,095,362            |       |
| Accumulated  deficit                                                                                                                           |       | (7,025,388         | )          | (5,825,688            | )          |
| Accumulated  foreign currency translation adjustment                                                                                           |       | (143,776           | )          | (28,319               | )          |
| Total stockholders’  equity                                                                                                               |       | 5,420,858          |       | 6,266,749             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                               |       | $                  | 20,902,020 |                  | $          | 32,153,158 |   |

 

See accompanying notesto condensed consolidated financial statements.

 

3

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**STRATUM HOLDINGS, INC.**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Revenues:                                               |       |                                                 |       |   |   |
| Energy  services                                        |       | $                                                    | 7,754,189  |   | $ | 1,956,154 |   |
| Oil and gas  sales                                      |       | 1,049,030                                            |       | 684,705 |   |
| Other                                                   |       | 86,111                                               |       | 68,972 |   |
|                                                    |       | 8,889,330                                            |       | 2,709,831 |   |
| Expenses:                                               |       |                                                 |       |   |   |
| Energy  services                                        |       | 6,733,755                                            |       | 1,814,978 |   |
| Lease  operating expense                                |       | 399,603                                              |       | 372,765 |   |
| Depreciation,  depletion & amortization        |       | 158,716                                              |       | 211,167 |   |
| Impairment  expense                                     |       | —                                               |       | — |   |
| Workover  expense                                       |       | 144,017                                              |       | 191,276 |   |
| Selling,  general and administrative                    |       | 2,042,147                                            |       | 773,603 |   |
| Interest  expense                                       |       | 608,159                                              |       | 315,370 |   |
|                                                    |       | 10,086,397                                           |       | 3,679,159 |   |
|                                                    |       |                                                 |       |   |   |
| Loss from  continuing operations before income taxes    |       | (1,197,067                                           | )          | (969,328 | ) |
| Benefit from  income taxes                              |       | 406,900                                              |       | 329,572 |   |
| Net loss  from continuing operations                    |       | (790,167                                             | )          | (639,756 | ) |
| Discontinued  operations, net of tax                    |       |                                                 |       |   |   |
| Construction  staffing                                  |       | —                                               |       | 110,163 |   |
| Energy  services                                        |       | (409,533                                             | )          | 389,879 |   |
| Net loss                                                |       | $                                                    | (1,199,700 | ) | $ | (139,714 | ) |
|                                                    |       |                                                 |       |   |   |
| Net income  (loss) per share, basic and diluted         |       |                                                 |       |   |   |
| Net loss  from continuing operations                    |       | $                                                    | (0.03      | ) | $ | (0.03 | ) |
| Discontinued  operations                                |       | (0.02                                                | )          | 0.02 |   |
| Net loss                                                |       | $                                                    | (0.05      | ) | $ | (0.01 | ) |
|                                                    |       |                                                 |       |   |   |
| Weighted  average shares outstanding, basic and diluted |       | 25,572,207                                           |       | 24,541,350 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**STRATUM HOLDINGS, INC.**

**Condensed Consolidated Statements of CashFlows**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash  flows provided (used in) operating activities:**                                                 |       |                                                 |       |   |   |
| Net loss  from continuing operations                                                                     |       | $                                                    | (790,167   | ) | $ | (639,756 | ) |
| Adjustments  to reconcile net loss from continuing operations to cash provided by (used  in) operations: |       |                                                 |       |   |   |
| Depreciation,  depletion & amortization                                                         |       | 158,716                                              |       | 211,167 |   |
| Impairment  expense                                                                                      |       | —                                               |       | — |   |
| Deferred  income taxes                                                                                   |       | (406,900                                             | )          | (329,572 | ) |
| Stock based  compensation                                                                                |       | 469,266                                              |       | 115,740 |   |
| Other  changes, net                                                                                      |       | (190,463                                             | )          | 167,373 |   |
| Net cash  flows from continuing operations                                                               |       | (759,548                                             | )          | (475,048 | ) |
| Net cash  flows from discontinued operations                                                             |       | (76,259                                              | )          | 1,330,525 |   |
| Total cash  flows from operating activities                                                              |       | (835,807                                             | )          | 855,477 |   |
|                                                                                                     |       |                                                 |       |   |   |
| **Cash  flows provided (used in) investing activities:**                                                 |       |                                                 |       |   |   |
| Sale of  subsidiary                                                                                      |       | 15,000,000                                           |       | — |   |
| Purchase of  restricted cash - current                                                                   |       | (1,500,000                                           | )          | — |   |
| Purchase of  restricted cash - noncurrent                                                                |       | (1,600,000                                           | )          | — |   |
| Purchase of  subsidiary                                                                                  |       | —                                               |       | (151,841 | ) |
| Purchase of  property and equipment                                                                      |       | (107,650                                             | )          | (199,066 | ) |
| Net cash  flows from investing activities                                                                |       | 11,792,350                                           |       | (350,907 | ) |
|                                                                                                     |       |                                                 |       |   |   |
| **Cash  flows provided (used in) financing activities:**                                                 |       |                                                 |       |   |   |
| Proceeds  from long term debt                                                                            |       | —                                               |       | 98,647 |   |
| Payments of  long term debt                                                                              |       | (10,137,526                                          | )          | (1,467,351 | ) |
| Net proceeds  of stockholder advances                                                                    |       | (708,273                                             | )          | 182,063 |   |
| Proceeds  from issuance of common stock                                                                  |       | —                                               |       | 675,000 |   |
| Proceeds  from exercise of warrants                                                                      |       | —                                               |       | 75,000 |   |
| Proceeds  from exercise of options                                                                       |       | —                                               |       | 22,500 |   |
| Net cash  flows from financing activities                                                                |       | (10,845,799                                          | )          | (414,141 | ) |
|                                                                                                     |       |                                                 |       |   |   |
| Net increase  in cash and cash equivalents                                                               |       | 110,744                                              |       | 90,429 |   |
|                                                                                                     |       |                                                 |       |   |   |
| Cash and  equivalents at beginning of period                                                             |       | 238,395                                              |       | 261,010 |   |
|                                                                                                     |       |                                                 |       |   |   |
| Cash and  equivalents at end of period                                                                   |       | $                                                    | 349,139    |   | $ | 351,439 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

5

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**STRATUMHOLDINGS, INC.**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**(1)****          ****Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements have been prepared bythe Company without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission and in accordance with accounting principlesfor interim financial information. In the opinion of management, thesecondensed consolidated financial statements contain all adjustments (consistingonly of normal recurring adjustments) necessary to fairly state the financialposition of the Company as of March 31, 2008, the results of itsoperations for the three month periods ended March 31, 2008 and 2007, andcash flows for the three month periods ended March 31, 2008 and 2007.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted. Interim results of operations are not necessarilyindicative of results for subsequent interim periods or the remainder of thefull year. These financial statements should be read in conjunction with ourAnnual Report on Form 10-KSB for the year ended December 31, 2007.

 

**(2)****          ****Corporate Acquisitions**

 

On May 23,2006, the Company acquired the outstanding common stock of CYMRI Corporation (“CYMRI”)for total consideration of $12.7 million paid in a combination of cash, notespayable and 12,540,000 shares of Common Stock. At the time of the acquisition, CYMRI was engaged in the Exploration &Production business with properties located in Texas and Louisiana while itssubsidiary, Petroleum Engineers, Inc. (“PEI”), performed Energy Serviceslargely for customers in the United States. The Company has accounted for the acquisition of CYMRI, at a deemedeffective date of June 1, 2006, as a purchase with Stratum treated as theacquirer.  The following is a condensedbalance sheet showing the fair values of the assets acquired and liabilitiesassumed from CYMRI as of the date of the acquisition (including transactioncosts of $250,000):

 
| Current  assets                      |   | $          | 4,850,647  |   |
|--------------------------------------|--------|------------|------------|--------|
| Property and  equipment              |   | 13,774,229 |       |
| Goodwill  arising in the acquisition |   | 9,224,162  |       |
| Other assets                         |   | 77,453     |       |
| Current  liabilities                 |   | (3,208,571 | )          |
| Long-term  debt (see Note 4)         |   | (8,666,639 | )          |
| Deferred  income taxes               |   | (3,318,081 | )          |
|                                 |   | $          | 12,733,200 |   |

 

On March 2,2007, the Company acquired the outstanding capital stock of Decca Consulting,Ltd. (“Decca”) for total consideration of $5.1 million (plus working capital)paid in a combination of cash, notes payable and 828,572 shares of CommonStock.  At the time of the acquisition,Decca provided consulting services for the Canadian energy industry.  The Company has accounted for the acquisitionof Decca, at a deemed effective date of March 1, 2007, as a purchase withStratum treated as the acquirer.  Thefollowing is a condensed balance sheet showing the fair values of the assetsacquired and liabilities assumed from Decca as of the date of the acquisition(including transaction costs of $300,000):

 
| Current  assets                      |   | $          | 3,280,427 |   |
|--------------------------------------|--------|------------|-----------|--------|
| Property and  equipment              |   | 9,675      |      |
| Goodwill  arising in the acquisition |   | 4,936,313  |      |
| Current  liabilities                 |   | (2,442,015 | )         |
|                                 |   | $          | 5,784,400 |   |

 

6

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On March 11,2008, the Company sold the capital stock of PEI to Hamilton Engineering, Inc.(“Hamilton”) for a total sales price of $15.0 million and granted Hamilton athree month, non-binding option to acquire the capital stock of Decca for $4.25million through June 9, 2008 (see Note 3).

 

**(3)****          ****Discontinued Operations**

 

On October 26,2007, the Company sold substantially all of the assets of its wholly-ownedsubsidiary, Tradestar Construction Services, Inc. (“Tradestar Construction”)to a private construction staffing company receiving cash proceeds of $3.2million, plus a working capital adjustment, and applied the sales proceeds tothe repayment of debt and other accrued obligations including the outstandingindebtedness of Tradestar Construction under a revolving bank credit agreementin the amount of $1,810,210 and a bank term loan in the amount of $451,920 (seeNote 4).  The Company reported a pre-taxgain from the sale of these assets in the fourth quarter of 2007 in the amountof $1,664,000.  The results ofdiscontinued operations of Tradestar Construction for the three months ended March 31,2007 are summarized as follows:

 
| Construction  staffing revenues    |   | $          | 3,766,629 |   |
|------------------------------------|--------|------------|-----------|--------|
| Cost of  construction staffing     |   | (2,926,762 | )         |
| Gross profit                       |   | 839,867    |      |
| General &  administrative |   | (640,619   | )         |
| Interest  expense, net             |   | (32,335    | )         |
| Net income  before taxes           |   | 166,913    |      |
| Provision  for income taxes        |   | (56,750    | )         |
| Net income                         |   | $          | 110,163   |   |

 

On March 11,2008, the Company sold the capital stock of its domestic Energy Servicessubsidiary, PEI, to Hamilton for a total sales price of $15.0 million andgranted Hamilton a three month, non-binding option to acquire the capital stockof its Canadian Energy Services subsidiary, Decca, for $4.25 million through June 9,2008.  The Company applied the salesproceeds to the repayment of debt and other accrued obligations including theoutstanding indebtedness of PEI under a revolving bank credit agreement in theamount of $3.2 million and unsecured seller debt and other liabilities in theamount of $4.5 million (see Note 4).  TheCompany recognized a pre-tax gain from the sale of PEI in the first quarter of2008 in the estimated amount of $1,350,000. The comparative results of discontinued operations of PEI, including thegain in the first quarter of 2008, are summarized as follows:

 
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Energy  services revenues          |       | $                                                    | 3,876,949  |   | $ | 7,210,299 |   |
| Cost of  energy services           |       | (2,919,987                                           | )          | (5,392,342 | ) |
| Gross profit                       |       | 956,962                                              |       | 1,817,957 |   |
| General &  administrative |       | (914,929                                             | )          | (1,158,960 | ) |
| Interest  expense, net             |       | (255,321                                             | )          | (68,272 | ) |
| Gain on sale                       |       | 1,349,855                                            |       | — |   |
| Net income  before taxes           |       | 1,136,567                                            |       | 590,725 |   |
| Provision  for income taxes        |       | (1,546,100                                           | )          | (200,846 | ) |
| Net income  (loss)                 |       | $                                                    | (409,533   | ) | $ | 389,879 |   |

 

As a result ofthe sale of PEI, the Company exited from the domestic Energy Services segmentleaving only its operations in the Canadian Energy Services and Exploration &Production segments.  In conjunction withthe sale of PEI, the Company has indemnified Hamilton with respect to certainpre-sale contingencies for a two year period. In order to secure these indemnities, Hamilton withheld $1.6 million ofthe sales proceeds in an escrow account. Upon the expiration of the indemnity period, the unexpended balance ofthe escrow account will revert to the Company. The escrow account and a $1.5 million tax reserve related to the PEIsale are reflected as restricted cash on the balance sheet as of March 31,2008.

 

7

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**(4)****          ****Long Term Debt**

 

As of March 31,2008 and December 31, 2007, the Company had the following long-term debtobligations:

 
| ** **                                                                                                                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                              | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| $20,000,000  line of credit with a bank, principal payable $115,000 per month through  extended maturity on January 1, 2009, interest at 1.0% above prime  payable monthly, secured by first lien on CYMRI’s oil and gas properties and  deposits held by stockholders        |       | $                  | 2,675,000  |                  | $          | 4,955,000 |   |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| $7,000,000  revolving line of credit with a bank, interest at 1.0% above prime payable  monthly through maturity in May 2010, secured by accounts receivable of  domestic petroleum services businesses                                                                            |       | —             |       | 3,133,663             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Notes  payable to former CYMRI shareholders, bearing interest at 10%, payable in  total monthly installments of $65,335 beginning in June 2006 through  maturity at May 2008, and secured by substantially all assets, subject  to liens on oil and gas properties            |       | —             |       | 2,261,166             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Notes  payable to 8 individuals, incurred in acquisition of CYMRI, bearing interest  at 10%, interest only payable monthly beginning in July 2006 through  extended maturity in March 2010, unsecured                                                                         |       | 1,125,000          |       | 2,250,000             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| $4,000,000  (Cdn) revolving line of credit with a bank, interest at 2.5% above Canadian  prime payable monthly through maturity in May 2010, secured by accounts  receivable of Canadian petroleum services business                                                               |       | 2,934,126          |       | 1,469,602             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| $1,500,000  term loan from a bank, interest at 4.0% above prime payable monthly through  maturity in March 2009, secured by accounts receivable of petroleum  services businesses                                                                                                  |       | —             |       | 506,020               |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Notes  payable to 3 individuals, incurred by CYMRI in acquisition of a subsidiary,  bearing interest at 8%, payable in total monthly installments of $54,219  beginning in March 2005 through maturity at February 2010, secured  by subsidiary’s oil and gas properties |       | —             |       | 1,290,983             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Notes  payable to 2 individuals, incurred in acquisition of Decca, bearing interest  at 9%, payable in monthly installments of $30,099 (Cdn) from April 1,  2007 through March 31, 2012, unsecured                                                                            |       | 1,149,036          |       | 1,381,684             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Advances  from stockholders, bearing interest at 10%, interest only payable monthly  through various maturities, unsecured                                                                                                                                                              |       | 682,317            |       | 1,357,317             |       |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Other short  term notes for liability insurance and accrued payables, interest rates at 7%  to 9%                                                                                                                                                                                       |       | 146,362            |       | 952,205               |       |
|                                                                                                                                                                                                                                                                                    |       | 8,711,841          |       | 19,557,640            |       |
| Current  portion of long term debt                                                                                                                                                                                                                                                      |       | (3,723,679         | )          | (6,581,127            | )          |
|                                                                                                                                                                                                                                                                                    |       |               |       |                  |       |
|                                                                                                                                                                                                                                                                                    |       | $                  | 4,988,162  |                  | $          | 12,976,513 |   |

 

8

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Borrowingsunder the bank credit agreement secured by CYMRI’s oil and gas properties aresubject to a borrowing base, which is periodically redetermined, based on oiland gas reserves.  The terms of the bank creditagreement require CYMRI to maintain certain financial covenants regardingworking capital ratio, interest coverage level, the ratio of loan balance toloan balance plus stockholders’ equity, and the non-payment of dividends, forwhich CYMRI has received certain forbearances from the bank since the secondquarter of 2007.  The bank creditagreement expired on November 30, 2007, however, the bank agreed toinitially extend the terms of the credit agreement through March 31,2008.  CYMRI continued to make monthlypayments of $115,000 principal plus accrued interest since November 30,2007, accordingly, the outstanding balance of the debt as of December 31,2007 was $4,955,000.  Pursuant to theterms of the extended bank credit agreement, the Company made an additionalprincipal payment of $1,948,468 in March 2008 using a portion of theproceeds from the sale of PEI (see Note 3) reducing the outstanding balance at March 31,2008 to $2,675,000.  In March 2008,the bank agreed to further extend the maturity of the debt to January 1,2009, with the requirement that CYMRI continue to make monthly payments of$115,000 principal plus accrued interest. The Company is currently seeking to refinance this debt with anotherbank.

 

The Company hasa second bank credit agreement, which was secured by accounts receivable ofboth its Construction Staffing and its domestic and Canadian Energy Servicesbusinesses, through October 2007. This credit agreement provided for a revolving borrowing base of 85% ofqualifying accounts receivable up to $7,000,000 in the U.S. and $4,000,000(Cdn) in Canada, with an interest rate of 1% above prime.  As further discussed in Note 3: (a) In October 2007,the Company sold substantially all of the assets of Tradestar Construction to aprivate construction staffing company receiving cash proceeds of $3.2 million,plus a working capital adjustment, which were applied to the repayment of debtand other accrued obligations including the outstanding indebtedness ofTradestar Construction under the revolving bank credit agreement in the amountof $1,810,210 and a bank term loan in the amount of $451,920; and (b) In March 2008,the Company sold the capital stock of its domestic Energy Services subsidiary,PEI, to Hamilton for a total sales price of $15.0 million and applied the salesproceeds to the repayment of debt and other accrued obligations including theoutstanding indebtedness of PEI under the revolving credit agreement in theamount of $3.2 million and unsecured seller debt and other liabilities in theamount of $4.5 million.  As a result ofthese two sales, the Company terminated the U.S. portion of its revolving bankcredit agreement in March 2008 while retaining the Canadian portion.

 

**(5)****          ****Net Income (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, including the issuance of 385,714 shares in a private placement at$1.75 per share for gross proceeds of $675,000 in the three months ended March 31,2007.  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, 2008 and 2007, 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-Based Compensation**

 

The Company hasa stock-based compensation plan which was approved by the stockholders in October 2005and amended in October 2006.  Underthe plan, as amended, a maximum of 2,400,000 shares may be awarded to directorsand employees in the form of stock options, restricted stock or stockappreciation

 

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rights.  The exercise price, terms and otherconditions applicable to each stock option grant are generally determined bythe Board of Directors.  The exerciseprice of stock options is set on the grant date and may not be less than thefair market value of the Company’s Common Stock on that date.  The stock options generally becomeexercisable over a three year period and expire after five years.

 

Effective January 1,2006, the Company adopted SFAS No. 123 (revised 2004), “*Share-Based Paymen*t” (“SFAS 123R”)requiring that compensation expense related to share-based payment transactionswith employees be recognized in the financial statements.  The cost is measured at the grant date, basedon the calculated fair value of the award, and is recognized as an expense overthe employee’s requisite service period (generally, the vesting period of theaward).  Prior to January 1, 2006,the Company accounted for share-based compensation to employees in accordancewith APB Opinion No. 25, “*Accounting for StockIssued to Employees”* (“APB 25”) and related interpretations.  The Company adopted SFAS 123R using themodified prospective method, accordingly, financial statements for priorperiods were not restated.

 

Option activitywith directors and employees since January 1, 2007 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, 2007   |       | 1,694,100  |       | $                          | 1.34       |                       |       |          |       |   |
| Options  granted                       |       | 400,000    |       | 2.10                       |       |                       |       |          |       |
| Options  exercised                     |       | (125,000   | )          | (0.18                      | )          |                       |       |          |       |
| Options  forfeited                     |       | (154,500   | )          | (2.10                      | )          |                       |       |          |       |
| Outstanding  at December 31, 2007 |       | 1,814,600  |       | 1.53                       |       |                       |       |          |       |
| Options  forfeited                     |       | (370,000   | )          | (2.10                      | )          |                       |       |          |       |
| Outstanding  at March 31, 2008    |       | 1,444,600  |       | $                          | 1.58       |                       | 3.6        |          | $          | 7,000 |   |
|                                   |       |       |       |                       |       |                       |       |          |       |
| Exercisable  at March 31, 2008    |       | 931,533    |       | $                          | 1.46       |                       | 3.7        |          | $          | 7,000 |   |

 

Stock-basedcompensation expense in the amounts of $189,266 and $115,740 for the threemonth periods ended March 31, 2008 and 2007, respectively, have beenrecognized as a current period expense in the accompanying ConsolidatedFinancial Statements.  As of March 31,2008, total unrecognized compensation cost of $659,572 related to stock optionsis expected to be recognized over a weighted average period of approximately4.1 years.  The estimated fair value ofthe options granted to employees under the plan was calculated using a BlackScholes option pricing model. The following schedule reflects the assumptionsincluded in this model as it relates to the valuation of such options: (a) Expectedvolatility – 95%; (b) Expected risk free interest rate – 6%; (c) Expecteddividend yield – zero; (d) Expected option term – 3 years; and (e) Forfeitures– 0%, subject to adjustment for actual experience.

 

The aggregateintrinsic value in the table above represents the total pre-tax intrinsic value(the difference between the Company’s closing stock price on the last tradingday of the first quarter of 2008 and the exercise price, multiplied by thenumber of in-the-money options) that would have been received by the optionholders had all option holders exercised their options on March 31, 2008.The amount of aggregate intrinsic value will change based on the fair marketvalue of the Company’s stock.

 

In conjunctionwith the sale of PEI to Hamilton in March 2008 (see Note 3), the Company’sChief Executive Officer resigned his position with the Company.  Pursuant to a Board approved severanceagreement, the Company made a cash severance payment to the former ChiefExecutive Officer in the amount of $200,000 and granted him an additionalseverance benefit via the issuance of 1,142,857 restricted shares of Common Stockwith a then current value of $280,000. The value of the restricted shares issued to the former Chief ExecutiveOfficer was included in stock-based compensation expense for the three monthsended March 31, 2008.

 

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

 

The Companyrepaid net stockholder advances in the amount of $708,000 in the three monthsended March 31, 2008 and received net stockholder advances in the amountof $182,000 in the three months ended March 31, 2007.  Stockholder advances, excluding amountsadvanced to finance the cash portion of the CYMRI purchase price (see Note 2),are reflected as unsecured long term debt obligations and accrue interest at arate of 10% per annum.

 

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

 

PEI and TriumphEnergy, Inc., a subsidiary in the Exploration & Productionsegment, are defendants in certain lawsuits involving professional liabilityarising in the normal course of business. In the second quarter of 2007, PEI settled a long-standing lawsuit foran amount in excess of the $100,000 insurance deductible.  The Company recorded the deductible paymentand the associated settlement costs of approximately $35,000 as an adjustmentto the May 2006 purchase price paid for CYMRI/PEI (see Note 2).  With respect to Triumph’s other lawsuits, itis not practical at the present time to determine the amount or likelihood ofan unfavorable outcome to the Company’s consolidated financial position orresults of operations.  However,management believes that Triumph has meritorious defenses in each case and isvigorously defending these matters.

 

A lawsuit wasfiled in February 2008 against Decca, the Company’s Canadian EnergyServices subsidiary, claiming unspecified damages related to work performed byDecca on a well drilled in the U.S. in late 2006, prior to the Company’sacquisition of Decca.  Pursuant to theterms of the stock purchase agreement under which the Company acquired Decca inMarch 2007 (see Note 2), management believes that the Company isindemnified by the prior owners of Decca for any losses that may be sustainedas a result of this litigation.  Deccabelieves that it has a meritorious defense in this case and is vigorouslydefending this matter.

 

**(9)****          ****Liquidity**

 

The Company hasreported substantial consolidated operating losses and working capital deficitssince completing the acquisitions of CYMRI/PEI in May 2006 and Decca in March 2007(see Note 2).  In order to address itsliquidity needs, the Company’s Board of Directors authorized Management in July 2007to pursue a range of alternative actions including the sale of one or more ofthe Company’s operating assets or businesses. This decision by the 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 ofHamilton in March 2008 (see Note 3). Additionally, the Company has granted Hamilton a three month,non-binding option to acquire Decca through June 9, 2008.  The Company is also considering a possiblesale of its Exploration & Production business and the effectiveliquidation of its remaining business operations, however, there is presentlyno firm commitment to sell the Exploration & Production business.

 

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**ITEM 2.       MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

The following discussion of our financialcondition and results of operations should be read in conjunction with, and isqualified in its entirety by, the condensed consolidated financial statementsand notes thereto included in Item 1 in this Quarterly Report on Form 10-QSB.This item contains forward-looking statements that involve risks anduncertainties. Actual results may differ materially from those indicated insuch forward-looking statements.

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-QSB andthe 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 to identify suchforward-looking statements. These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties, and assumptionsthat are difficult to predict; therefore, actual results may differ materiallyfrom those expressed or forecasted in any such forward-looking statements.Unless required by law, we undertake no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents, or otherwise. However, readers should carefully review the risk factorsset forth in other reports and documents that we file from time to time withthe Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-QSB,and future Annual Reports on Form 10-KSB and any Current Reports on Form 8-K.

 

**Overview and History**

 

Stratum Holdings, Inc. (formerly, TradestarServices, Inc.) was incorporated in the State of Nevada on September 3,2003 under the name Frontier Staffing, Inc. We were formed to acquireTradestar Construction Services, Inc., a New Mexico corporation, whichoperated as an employment staffing service specializing in the placement ofboth long-term and short-term skilled and unskilled construction labor to theNew Mexico construction market. In January 2004, we acquired TradestarConstruction Services, Inc. in a stock-for-stock exchange. We issued atotal of 6,400,000 shares of Common Stock in connection with this transaction.

 

On July 7, 2004, we filed a registrationstatement under cover of Form SB-2 with the SEC. This registrationstatement was declared effective by the SEC on February 10, 2005.  On March 30, 2005, we closed this publicoffering.  We raised a total of $600,000and sold a total of 2,000,000 shares of Common Stock.  In October 2005, we changed our name toTradestar Services, Inc.

 

On May 23, 2006, we acquired theoutstanding common stock of CYMRI Corporation (“CYMRI”) for total considerationof $12.7 million paid in a combination of cash, notes payable and CommonStock.  At the time of the acquisition,CYMRI was engaged in the Exploration & Production business withproperties located in Texas and Louisiana while its subsidiary, PetroleumEngineers, Inc. (“PEI”), performed Energy Services largely for customersin the United States.

 

On March 2, 2007, we acquired theoutstanding 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 alsochanged our name to Stratum Holdings, Inc.

 

On October 26, 2007, we sold substantiallyall of the assets of Tradestar Construction to a private construction staffingcompany.  We received cash proceeds of$3.2 million plus a working capital adjustment. We applied the sales proceeds to the repayment of debt and other accruedobligations including the outstanding indebtedness of 

 

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our Construction Staffing subsidiary under arevolving bank credit agreement in the amount of $1,810,210 and a bank termloan in the amount of $451,920.  Wereported a pre-tax gain from the sale of these assets in the fourth quarter of2007 in the amount of $1,664,000.  Wehave reported the revenues and expenses of Tradestar Construction for theperiod that we owned it in 2007 as discontinued operations in the accompanyingConsolidated Statement of Operations.

 

On March 11, 2008, we sold the capitalstock of our domestic Energy Services subsidiary, PEI, to Hamilton Engineering, Inc.(“Hamilton”) for a total sales price of $15.0 million and granted Hamilton athree month, non-binding option to acquire the capital stock of our CanadianEnergy Services subsidiary, Decca, for $4.25 million through June 9,2008.  We applied the sales proceeds tothe repayment of debt and other accrued obligations including the outstandingindebtedness of PEI under a revolving bank credit agreement in the amount of$3.2 million and unsecured seller debt and other liabilities in the amount of$4.5 million.  We recognized a pre-taxgain from the sale of PEI in the first quarter of 2008 in the estimated amountof $1,350,000.  We have reported therevenues and expenses of PEI for the period that we owned it in 2008 and 2007as discontinued operations in the accompanying Consolidated Statement ofOperations.  As a result of this 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 Exploration & Production segment.

 

**Results of Operations**

 

The following discussion reflects therevenues and expenses of our retained Canadian Energy Services and Exploration &Production segments as continuing operations while the revenues and expenses ofour exited domestic Energy Services and Construction Staffing segments arereported as discontinued operations.

 

*Three months ended March 31,2008 versus three months ended March 31, 2007*—Total revenues from continuing operations for the three months ended March 31,2008 were $8,889,000 compared to $2,710,000 for the three months ended March 31,2007.

 

Revenues from continuing Energy Services forthe three months ended March 31, 2008 were $7,754,000 compared to$1,956,000 for the three months ended March 31, 2007.  The 2008 amount consists of three months ofrevenues from Decca, acquired effective March 1, 2007, whereas the 2007amount only includes one month of Decca’s revenues.  Total billings for continuing Energy Servicesin the three months ended March 31, 2008, exclusive of costreimbursements, were approximately 6,440 man days at an average billing rate ofapproximately $1,200 per day.

 

Revenues from oil and gas sales for the threemonths ended March 31, 2008 were $1,049,000 compared to $685,000 for thethree months ended March 31, 2007. In the three months ended March 31, 2008, revenues from oilproduction were $879,000, reflecting volumes of 9,642 barrels at an averageprice of $91.14 per barrel, while gas revenues were $170,000, reflectingvolumes of 22,516 Mcf at an average price of $7.56 per Mcf.  In the three months ended March 31,2007, revenues from oil production were $509,000, reflecting volumes of 9,162barrels at an average price of $55.50 per barrel, while gas revenues were$176,000, reflecting volumes of 24,784 Mcf at an average price of $7.11 perMcf.

 

Costs of continuing Energy Services for thethree months ended March 31, 2008 were $6,734,000 versus $1,815,000 forthe three months ended March 31, 2007. The 2008 amount consists of three months of costs from Decca, acquiredeffective March 1, 2007, whereas the 2007 amount only includes one monthof Decca’s costs.  Costs of EnergyServices for the three months ended March 31, 2008 representedapproximately 87% of revenues, consistent with the historical percentageexperienced by Decca for this period.

 

Lease operating expenses (“LOE”), includingproduction taxes, were $400,000 for the three months ended March 31, 2008versus $373,000 for the three months ended March 31, 2007, representingLOE of CYMRI’s oil and gas production operations, acquired effective June 1,2006.

 

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Depreciation, depletion and amortization (“DD&A”)expense for the three months ended March 31, 2008 was $159,000 versus$211,000 for the three months ended March 31, 2007, largely representingDD&A of CYMRI’s oil and gas properties, acquired effective June 1,2006.  This decrease was due to anon-cash impairment adjustment in the carrying value of CYMRI’s oil and pasproperties which was booked in the third quarter of 2007 in the amount of$7,000,000.

 

Workover expenses for the three months ended March 31,2008 were $144,000 versus $191,000 for the three months ended March 31,2007, representing workovers on CYMRI’s South Texas oil and gas properties,acquired effective June 1, 2006. This decrease was due to the decline in the number of workoveroperations in the first quarter of 2008 compared to the first quarter of 2007.

 

Selling, general and administrative (“SG&A”)expenses attributable to continuing operations for the three months ended March 31,2008 were $2,042,000 compared to $774,000 for the three months ended March 31,2007.  This increase was due tonon-recurring SG&A expenses associated with the sale of PEI to Hamilton in March 2008(including Board approved executive severance costs of $675,000) as well asSG&A expenses applicable to Decca’s Canadian Energy Services operations,acquired effective March 1, 2007, for a total of three months in the 2008period versus only one month in the 2007 period.

 

Interest expense attributable to continuingoperations for the three months ended March 31, 2008 was $608,000 versus$315,000 for the three months ended March 31, 2007.  This increase largely reflected interestexpense applicable to Decca’s Canadian Energy Services operations, acquiredeffective March 1, 2007, for a total of three months in the 2008 periodversus only one month in the 2007 period.

 

Income taxes attributable to continuingoperations were a benefit of $407,000 and $330,000 for the three months ended March 31,2008 and 2007, respectively, and reflect a benefit rate of 34% on a pre-tax netloss of $1,197,000 in the three months ended March 31, 2008.

 

Income from discontinued Construction Staffingoperations, net of income taxes, was zero for the three months ended March 31,2008 versus $110,000 for the three months ended March 31, 2007.  As further described in Note 3 of theConsolidated Financial Statements, we sold substantially all of the assets ofTradestar Construction to a private construction staffing company in October 2007.  The results of operations of our ConstructionStaffing business have been classified as discontinued operations in theConsolidated Statement of Operations, net of income tax expense at thestatutory rate.

 

Income from discontinued Energy Servicesoperations, net of income taxes, was a net loss of $410,000 for the threemonths ended March 31, 2008 versus net income of $390,000 for the threemonths ended March 31, 2007.  Asfurther described in Note 3 of the Consolidated Financial Statements, we soldthe capital stock of our domestic Energy Services subsidiary, PEI, to Hamiltonin March 2008.  The results ofoperations of our domestic Energy Services business, including the pre-tax gainin the estimated amount of $1,350,000 realized on the sale, have beenclassified as discontinued operations in the Consolidated Statement ofOperations, net of applicable income tax expense reflecting the estimatedtaxable gain on the sale in the 2008 period.

 

**Liquidity and Capital Resources**

 

*Operating**activities.*  Net cash used in operating activities fromcontinuing operations for the three months ended March 31, 2008 was$760,000 compared to $475,000 for the three months ended March 31,2007.  Net cash used in operatingactivities from discontinued operations for the three months ended March 31,2008 was $76,000 compared to net cash provided by operating activities fromdiscontinued operations in the amount of $1,331,000 for the three months ended March 31,2007.  This decrease in operating cashflow was primarily due to changes in relative timing between the accrual andpayment of accounts receivable and accounts payable associated withdiscontinued operations.

 

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*Investing**activities. *Netcash provided by investing activities for the three months ended March 31,2008 was $11,792,000 compared to net cash used in investing activities of$351,000 for the three months ended March 31, 2007.  This increase was largely due to the sale ofPEI to Hamilton in March 2008 for $15.0 million, less purchases of currentrestricted cash in the amount of $1.5 million and non-current restricted cashin the amount of $1.6 million, pursuant to the securities purchase agreementwith Hamilton.

 

*Financing activities.*Netcash used in financing activities for the three months ended March 31,2008 was $10,846,000 compared to $414,000 for the three months ended March 31,2007.  This decrease in financing cashflows was primarily due to non-recurring repayments of long term debt andstockholder advances which were made with the proceeds of the sale of PEI toHamilton in March 2008 in the gross amount of $15.0 million.  As further described in the next twoparagraphs, we have significantly reduced, but not eliminated, the Company’songoing debt service requirements.

 

Following the sales of TradestarConstruction in October 2007 and PEI in March 2008, we have remaininglong term debt obligations to banks and other lenders (see Note 4, “Long TermDebt”).  A substantial portion of ourlong 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 are subject to a borrowingbase, which is periodically redetermined, based on oil and gas reserves.  The terms of the bank credit agreementrequire CYMRI to maintain certain financial covenants regarding working capitalratio, interest coverage level, the ratio of loan balance to loan balance plusstockholders’ equity, and the non-payment of dividends, for which CYMRI hasreceived certain forbearances from the bank since the second quarter of2007.  The bank credit agreement expiredon November 30, 2007, however, the bank agreed to initially extend theterms of the credit agreement through March 31, 2008.  CYMRI continued to make monthly payments of$115,000 principal plus accrued interest since November 30, 2007,accordingly, the outstanding balance of the debt as of December 31, 2007was $4,955,000.  Pursuant to the terms ofthe extended bank credit agreement, the Company made an additional principalpayment of $1,948,468 in March 2008 using a portion of the proceeds fromthe sale of PEI reducing the outstanding balance at March 31, 2008 to$2,675,000.  In March 2008, the bankagreed to further extend the maturity of the debt to January 1, 2009, withthe requirement that CYMRI continue to make monthly payments of $115,000principal plus accrued interest.  TheCompany is currently seeking to refinance this debt with another bank.

 

We also have a second bankcredit agreement, which was secured by accounts receivable of both ourConstruction Staffing and our domestic and Canadian Energy Services businessesthrough October 2007.  Borrowingsunder that revolving bank credit agreement were substantially reduced in thesales of our Construction Staffing and domestic Energy Services businesses in October 2007and March 2008, respectively, as more fully described in Note 4, “LongTerm Debt.”

 

To meet short term liquidityneeds following the CYMRI acquisition, we commenced a private offering ofshares of Common Stock and Warrants to a group of Accredited Investors in October 2006.  In the fourth quarter of 2006, we sold atotal of 314,286 shares of Common Stock to Accredited Investors at $1.75 pershare for gross proceeds of $550,000 and issued one year Warrants to suchInvestors to purchase an additional 314,286 shares of its Common Stock at $2.50per share.  In the first quarter of 2007,we sold a total of 385,714 shares of Common Stock to Accredited Investors at$1.75 per share for gross proceeds of $675,000 and issued one year Warrants tosuch Investors to purchase an additional 385,714 shares of our Common Stock at$2.50 per share.

 

With the completion of oursales of Tradestar Construction in October 2007 and PEI in March 2008,our primary ongoing capital expenditures are in theExploration & Production segment.  Generally speaking, the Exploration &Production business can be highly capital intensive.  In this business, expenditures for thedrilling and equipping of oil and gas wells are typically required to maintainor increase existing production levels and production often declines in arelatively short period of time if maintenance capital is not investedtimely.  Further, acquisitions ofadditional lease acreage are often needed to drill new oil and gas wells.  As is the case with most companies with oiland gas producing operations, the Company attempts to finance its capitalexpenditure requirements through a combination of cash flow from operations andsecured bank borrowings.

 

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**Strategic Plans**

 

The Company has reported substantialconsolidated operating losses and working capital deficits since completing theacquisitions of CYMRI/PEI in May 2006 and Decca in March 2007.  In order to address its liquidity needs, theCompany’s Board of Directors authorized Management in July 2007 to pursuea range of alternative actions including the sale of one or more of the Company’soperating assets or businesses.  Thisdecision by the Board of Directors ultimately led the Company to seek the salesof: (a) Tradestar Construction to a private construction staffing companyin October 2007; and (b) PEI to an affiliate of Hamilton in March 2008.  Additionally, the Company has grantedHamilton a three month, non-binding option to acquire Decca through June 9,2008.  The Company is also considering apossible sale of its Exploration & Production business and theeffective liquidation of its remaining business operations, however, there ispresently no firm commitment to sell the Exploration & Productionbusiness.

 

**Recently Issued AccountingPronouncements**

 

In March 2008, the Financial Accounting Standards Board (“FASB”)issued Statement No. 161 “*Disclosures aboutDerivative Instruments and Hedging Activities, **an amendment of**FASB Statement No. 133*” (“SFAS 161”), which establishes new disclosurerequirements for derivative instruments and hedging activities.  We do not engage in hedging activities,therefore, we do not expect the adoption of SFAS 161 to have a material impacton our consolidated financial statements.

 

In December 2007, the FASB issued Statement No. 160 “*Non-controlling Interests in Consolidated Financial Statements, **an amendment ofARB No. 51***” (“SFAS 160”), which establishesaccounting and reporting standards for the non-controlling interest in asubsidiary and the deconsolidation of a subsidiary.  SFAS 160, as well as a companion revision ofSFAS 141, are effective for fiscal years beginning after December 15,2008.  We do not expect the adoption ofSFAS 160, or the revision of SFAS 141, to have a material impact on ourconsolidated financial statements.

 

In February 2007, the FASB issued Statement No. 159 “**The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115** “ (“SFAS 159”), which allowsmeasurement at fair value of eligible financial assets and liabilities that arenot otherwise measured at fair value. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. We do not expect the adoption of SFAS 159 to have a material impact onour consolidated financial statements.

 

In September 2006, the FASB issued Statement No. 158 “*Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88,106, and 132(R)*” (“SFAS 158”), which requires companies to recognizethe funded status of a defined benefit postretirement plan as an asset orliability in its balance sheet.  SFAS 158 is effective for fiscal yearsending after December 15, 2006.  Theadoption of SFAS 158 has not had a material effect on us since we have nodefined benefit plans.

 

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. This Statement applies underother accounting pronouncements that require or permit fair value measurements,the FASB having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute. SFAS 157 is effective forfiscal years beginning after December 15, 2007.  We do not expect the adoption of SFAS 157 tohave a material impact on our consolidated financial statements.

 

In July 2006, the FASB issued Financial Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement No. 109*” (“FIN 48”), toclarify certain aspects of accounting for uncertain tax positions, includingissues related to the recognition and measurement of those tax positions. Thisinterpretation is effective for fiscal years beginning after December 15,2006.  The adoption of FIN 48 has not hada material effect on our consolidated financial statements.

 

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**Critical Accounting Policies andEstimates**

 

Our discussion and analysis of our financialcondition and results of operations are based on consolidated financialstatements which have been prepared in accordance with generally acceptedaccounting principles in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. We believe that certainaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements as indicatedbelow.  See our Annual Report on Form 10-KSBfor the year ended December 31, 2007 for a further description of ourcritical accounting policies and estimates.

 

**ITEM 3.       CONTROLS ANDPROCEDURES**

 

As of the date of this report, our ChiefExecutive Officer and our Chief Financial Officer evaluated the effectivenessof the design and operation of our disclosure controls and procedures pursuantto Rule 13a-15b under the Securities Exchange Act of 1934.  Based on their review of our disclosurecontrols and procedures, they have concluded that our disclosure controls andprocedures are effective in timely alerting each of them to materialinformation relating to us that is required to be included in our periodic SECfilings. Further, there were no significant changes in the internal controls orin other factors that could significantly affect these disclosure controlsafter the evaluation date and the date of this report. Nor were there anysignificant deficiencies or material weaknesses in such disclosure controls andprocedures requiring corrective actions. As a result, no corrective actionswere taken.  The Company has made nochanges in its internal controls over financial reporting in the most recentquarterly reporting period that has materially affected, or is reasonablylikely to affect, the Company’s internal controls over financial reporting,other than those changes that arose as a result of the sale of PEI to Hamiltonin March 2008, as more fully described in Note 3, “DiscontinuedOperations.”  The Company is continuingto make certain organizational changes as a result of the PEI sale during thesecond quarter of 2008.  The Companybelieves that these organizational changes are appropriate in light of the saleof its largest operating subsidiary. However, the Company does not expect that these changes will result insubstantially diminished internal controls over financial reporting.

 

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| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 1.**       | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | See Note 8 to Condensed Consolidated  Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **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**                                                                                                                                                                                                                                                                                                                                                                                                   |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | A Special Meeting of Stockholders of  the Company was held on February 21, 2008. The purpose of the meeting  was to approve the sale by the Company of 100% of the capital stock of PEI  and Decca to Hamilton for a total of $19.25 million. At the Special Meeting,  there were a total of 15,359,144 shares of Common Stock voting for the sale,  no shares voting against it, and 284,000 shares abstaining. Accordingly, the  sale was approved. |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | As further described in Note 3 to the  Condensed Consolidated Financial Statements, the Company sold the capital  stock of PEI to Hamilton on March 11, 2008 for a total sales price of  $15.0 million and granted Hamilton a three month, non-binding option to  acquire the capital stock of Decca for $4.25 million through June 9,  2008                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **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 Executive  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 of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   |   | STRATUM HOLDINGS, INC. |
|--------|--------|------------------------|
|   |   |                   |
|   |   |                   |
|   |   | /s/                    | Frederick A. Huttner |
|   |   |                   | Frederick A. Huttner |
|   |   |                   | Chairman of Board of  Directors |
|   |   |                   |   |
|   |   | /s/                    | D. Hughes Watler, Jr. |
|   |   |                   | D. Hughes Watler, Jr. |
|   |   |                   | Chief  Financial Officer |

 

 

May 12, 2008

 

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