UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 Quarterly
Report Under Section 13 or 15(d) of the
 Securities
Exchange Act of 1934
 
 For the
Quarterly Period Ended September 30, 2009
  Commission
File No. 000-51229
 
 STRATUM
HOLDINGS, INC.
 (Exact
Name of Registrant as specified in its charter)
 
 Nevada
              
              51-0482104(State
      or other jurisdiction
                of
      incorporation)
              
              (IRS
      Employer Identification Number)
 
 Three
      Riverway, Suite 1590
                Houston,
      Texas
              
              77056(Address
      of principal
                executive
      offices)
              
              (zip
      code)
 (713)
479-7050
 (Registrant’s
telephone number, including area code)
 
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes: [X]   No: [ ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes: [ ]   No:
[X]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer    [ ]
              Accelerated
      filer     [ ]
              Non-accelerated
      filer    [ ]
              Smaller
      reporting company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [ ] No [X]
 
 The
number of shares outstanding of Common Stock, par value $.001 per share, as of
November 10, 2009 was 26,556,429 shares.
 
  
  STRATUM
HOLDINGS, INC.
 FORM
10-Q
 SEPTEMBER
30, 2009
 
 INDEX
 
 PART
      I. FINANCIAL INFORMATION
              PageItem
      1. Financial StatementsConsolidated Balance Sheets as of September 30, 2009
      (Unaudited) and
                December
      31, 2008 (Unaudited)
              3Consolidated Statements of Operations for the three months
      ended
                September
      30, 2009 and 2008 (Unaudited)
              4Consolidated Statements of Operations for the nine months
      ended
                September
      30, 2009 and 2008 (Unaudited)
              5Consolidated Statements of Cash Flows for the nine months
      ended
                September
      30, 2009 and 2008 (Unaudited)
              6Notes to Consolidated Financial Statements
      (Unaudited)
              7Item 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations
              14Item 3. Quantitative and Qualitative Disclosures About Market
      Risk
              19Item 4T. Controls and Procedures
              19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
              20Item 1A. Risk Factors
              20Item 2. Unregistered Sales of Equity Securities and Use of
      Proceeds
              20Item 3. Defaults Upon Senior Securities
              20Item 4. Submission of Matters to a Vote of Security
      Holders
              20Item 5. Other Information
              20Item 6. Exhibits
              20Signatures
              21
  -
2 -
  STRATUM HOLDINGS, INC.
 Consolidated
Balance Sheets
 (Unaudited)
   September
      30,
                
                
                December
      31,2009
                
                
                2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                163,097
                
                
                $
                203,200Restricted
      cash (Note 3)
                
                
                1,613,234
                
                
                
                1,491,958Accounts
      receivable
                
                
                1,874,758
                
                
                
                2,900,750Prepaid
      expenses and other
                
                
                186,902
                
                
                
                133,088Fair
      value of oil and gas derivatives
                
                
                32,480
                
                
                
                -Total
      current assets
                
                
                3,870,471
                
                
                
                4,728,996Property
      and equipment:Oil
      and gas properties (full cost method)
                
                
                14,310,115
                
                
                
                14,177,055Other
      property and equipment
                
                
                148,793
                
                
                
                108,06014,458,908
                
                
                
                14,285,115Less:  Accumulated
      depreciation, depletion & amortization
                
                
                (1,673,293
                )
                
                
                (1,332,227
                )Impairment
      allowance
                
                
                (7,000,000
                )
                
                
                (7,000,000
                )Net
      property and equipment
                
                
                5,785,615
                
                
                
                5,952,888Other
      assets:Restricted
      cash (Note 3)
                
                
                -
                
                
                
                1,611,742Goodwill
      (less impairment allowance of $3,400,000 and $1,500,000,respectively)
                
                
                1,536,313
                
                
                
                3,436,313Other
      assets
                
                
                344,551
                
                
                
                175,171Total
      other assets
                
                
                1,880,864
                
                
                
                5,223,226Total
      assets
                
                $
                11,536,950
                
                
                $
                15,905,110Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Current
      portion of long-term debt - stockholders
                
                $
                1,729,143
                
                
                $
                246,826Current
      portion of long-term debt - others
                
                
                4,683,512
                
                
                
                81,729Accounts
      payable
                
                
                1,814,928
                
                
                
                2,818,488Accrued
      liabilities
                
                
                1,412,413
                
                
                
                1,153,292Income
      taxes payable
                
                
                -
                
                
                
                282,975Total
      current liabilities
                
                
                9,639,996
                
                
                
                4,583,310Long-term
      debt, net of current portion
                
                
                465,998
                
                
                
                6,884,155Deferred
      income taxes
                
                
                1,328,400
                
                
                
                1,486,900Asset
      retirement obligations
                
                
                187,870
                
                
                
                175,990Total
      liabilities
                
                
                11,622,264
                
                
                
                13,130,355Stockholders’
      equity:Preferred
      stock, $.01 par value per share, 1,000,000 shares
    authorized,None
      issued
                
                
                -
                
                
                
                -Common
      stock, $.001 par value per share, 50,000,000 shares
      authorized,26,556,429
      shares issued and outstanding
                
                
                26,556
                
                
                
                26,556Additional
      paid in capital
                
                
                12,799,659
                
                
                
                12,758,510Accumulated
      deficit
                
                
                (12,718,231
                )
                
                
                (9,852,596
                )Accumulated
      foreign currency translation adjustment
                
                
                (193,298
                )
                
                
                (157,715
                )Total
      stockholders’ equity
                
                
                (85,314
                )
                
                
                2,774,755Total
      liabilities and stockholders’ equity
                
                $
                11,536,950
                
                
                $
                15,905,110
   See
accompanying notes to consolidated financial statements.
 
  -
3 -
 Return to Index
  STRATUM HOLDINGS, INC.
 Consolidated
Statements of Operations
 (Unaudited)
 Three
      Months Ended September 30,2009
                
                
                2008Revenues:Energy
      services
                
                $
                2,876,844
                
                
                $
                6,984,337Oil
      and gas sales
                
                
                782,297
                
                
                
                1,305,017Other
                
                
                13,192
                
                
                
                119,3883,672,333
                
                
                
                8,408,742Expenses:Energy
      services
                
                
                2,620,190
                
                
                
                6,516,720Lease
      operating expense
                
                
                368,301
                
                
                
                378,314Depreciation,
      depletion & amortization
                
                
                118,402
                
                
                
                82,866Impairment
      of acquisition goodwill
                
                
                -
                
                
                
                -Workover
      expense
                
                
                105,579
                
                
                
                293,871Selling,
      general and administrative
                
                
                405,724
                
                
                
                836,0493,618,196
                
                
                
                8,107,820Operating
      income (loss)
                
                
                54,137
                
                
                
                300,922Other
      expenses:Interest
      expense
                
                
                (192,969
                )
                
                
                (204,504
                )Unrealized
      gain on oil and gas derivatives
                
                
                4,868
                
                
                
                -Income
      (loss) from continuing operations before income taxes
                
                
                (133,964
                )
                
                
                96,418Benefit
      (provision) for income taxes
                
                
                (68,500
                )
                
                
                (32,800
                )Net
      income (loss) from continuing operations
                
                
                (202,464
                )
                
                
                63,618Discontinued
      operations, net of tax
                
                
                -
                
                
                
                -Net
      income (loss)
                
                $
                (202,464
                )
                
                $
                63,618Net
      income (loss) per share, basic and dilutedNet
      income (loss) from continuing operations
                
                $
                (0.01
                )
                
                $
                0.00Discontinued
      operations
                
                
                -
                
                
                
                -Net
      income (loss)
                
                $
                (0.01
                )
                
                $
                0.00Weighted
      average shares outstanding, basic and diluted
                
                
                26,556,429
                
                
                
                26,556,429
 See
accompanying notes to consolidated financial statements.
 
 
  -
4 -
 Return to Index
  STRATUM HOLDINGS, INC.
 Consolidated
Statements of Operations
 (Unaudited)
  Nine
      Months Ended September 30,2009
                    
                    
                    2008Revenues:Energy services
                    
                    $
                    10,691,581
                    
                    
                    $
                    19,387,099Oil and gas sales
                    
                    
                    1,915,140
                    
                    
                    
                    3,533,194Other
                    
                    
                    63,757
                    
                    
                    
                    216,82112,670,478
                    
                    
                    
                    23,137,114Expenses:Energy services
                    
                    
                    9,758,434
                    
                    
                    
                    17,858,583Lease operating expense
                    
                    
                    1,308,523
                    
                    
                    
                    1,305,173Depreciation, depletion & amortization
                    
                    
                    341,137
                    
                    
                    
                    332,919Impairment of acquisition goodwill
                    
                    
                    1,900,000
                    
                    
                    
                    -Workover expense
                    
                    
                    297,723
                    
                    
                    
                    522,877Selling, general and administrative
                    
                    
                    1,385,827
                    
                    
                    
                    3,499,04414,991,644
                    
                    
                    
                    23,518,596Operating
      loss
                    
                    
                    (2,321,166
                    )
                    
                    
                    (381,482
                    )Other
      expenses:Interest expense
                    
                    
                    (581,230
                    )
                    
                    
                    (1,050,903
                    )Unrealized loss on oil and gas derivatives
                    
                    
                    (92,520
                    )
                    
                    
                    -Loss
      from continuing operations before income taxes
                    
                    
                    (2,994,916
                    )
                    
                    
                    (1,432,385
                    )Benefit
      for income taxes
                    
                    
                    154,700
                    
                    
                    
                    487,000Net loss from continuing operations
                    
                    
                    (2,840,216
                    )
                    
                    
                    (945,385
                    )Discontinued
      operations, net of tax
                    
                    
                    (25,419
                    )
                    
                    
                    (409,533
                    )Net loss
                    
                    $
                    (2,865,635
                    )
                    
                    $
                    (1,354,918
                    )Net
      loss per share, basic and dilutedNet loss from continuing operations
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.04
                    )Discontinued operations
                    
                    
                    (0.00
                    )
                    
                    
                    (0.01
                    )Net loss
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.05
                    )Weighted
      average shares outstanding, basic and diluted
                    
                    
                    26,556,429
                    
                    
                    
                    26,227,701
 
 See
accompanying notes to consolidated financial
statements.
 
 
  -
5 -
 Return to Index
  STRATUM HOLDINGS, INC.
 Consolidated
Statements of Cash Flows
 (Unaudited)
  Nine
      Months Ended September 30,2009
                
                
                2008Cash
      flows provided by (used in) operating activities:Net
      loss from continuing operations
                
                $
                (2,840,216
                )
                
                $
                (945,385
                )Adjustments
      to reconcile net loss from continuingoperations
      to cash provided by (used in) operations:Depreciation,
      depletion & amortization
                
                
                341,137
                
                
                
                332,919Impairment
      expense
                
                
                1,900,000
                
                
                
                -Benefit
      for income taxes
                
                
                (154,700
                )
                
                
                (487,000
                )Stock
      based compensation
                
                
                41,149
                
                
                
                635,335Unrealized
      loss on oil and gas derivatives
                
                
                92,520
                
                
                
                -Working
      capital changes
                
                
                (274,036
                )
                
                
                -Other
      changes, net
                
                
                (103,154
                )
                
                
                (248,084
                )Net
      cash flows from continuing operations
                
                
                (997,300
                )
                
                
                (712,215
                )Net
      cash flows from discontinued operations
                
                
                (25,419
                )
                
                
                296,349Total
      cash flows from operating activities
                
                
                (1,022,719
                )
                
                
                (415,866
                )Cash
      flows provided by (used in) investing activities:Sale
      of subsidiary
                
                
                -
                
                
                
                11,932,917Decrease
      in restricted cash from sale of subsidiary
                
                
                1,490,466
                
                
                
                -Purchase
      of property and equipment
                
                
                (173,793
                )
                
                
                (418,766
                )Net
      cash flows from investing activities
                
                
                1,316,673
                
                
                
                11,514,151Cash
      flows provided by (used in) financing activities:Proceeds
      from long term debt
                
                
                640,280
                
                
                
                485,000Payments
      of long term debt
                
                
                (714,337
                )
                
                
                (11,631,759
                )Net
      (payments) proceeds of stockholder advances
                
                
                (260,000
                )
                
                
                66,727Net
      cash flows from financing activities
                
                
                (334,057
                )
                
                
                (11,080,032
                )Net
      increase in cash and cash equivalents
                
                
                (40,103
                )
                
                
                18,253Cash
      and equivalents at beginning of period
                
                
                203,200
                
                
                
                238,395Cash
      and equivalents at end of period
                
                $
                163,097
                
                
                $
                256,648Supplemental
      cash flow data:Cash
      paid for interest
                
                $
                399,932
                
                
                $
                1,050,903Cash
      paid for income taxes
                
                
                273,682
                
                
                
                -Supplemental
      investing activity:Restricted
      cash withheld on sale of subsidiary - current
                
                $
                -
                
                
                $
                1,500,000Restricted
      cash withheld on sale of subsidiary - noncurrent
                
                
                -
                
                
                
                1,600,000
 See
accompanying notes to consolidated financial statements.
  -
6 -
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  STRATUM HOLDINGS, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 (1)        Basis
of Presentation
 
 Interim Financial Information– The accompanying consolidated financial statements have been prepared
by the Company without audit, in accordance with accounting principles generally
accepted in the Unites States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission.  In the opinion of management, these consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to fairly state the financial position of the
Company as of September 30, 2009, the results of its operations for the three
month and nine month periods ended September 30, 2009 and 2008, and cash flows
for the nine month periods ended September 30, 2009 and 2008.  These
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2008.
 
 Recently Issued Accounting
Pronouncements – Effective for the quarter ended June 30, 2009, the
Company implemented ASC 855, “Subsequent Events”. This
standard establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued.  The Company evaluated all events or transactions that
occurred after September 30, 2009 up through November 10, 2009, the date
the Company issued these financial statements.  Except as disclosed in Note
12, the Company had no subsequent events during this period.
 
 In July
2009, the FASB issued new guidance relating to the “FASB Accounting Standards
Codification” at ASC 105, as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards are superseded as described in ASC
105. All other accounting literature not included in the Codification is
nonauthoritative. Management is currently evaluating the impact of the adoption
of ASC 105 but does not expect the adoption of ASC 105 to impact the Company’s
results of operations, financial position or cash flows.
 
 In
September 2009, the FASB issued a Proposed Accounting Standards Update – “Extractive Industries – Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and
Disclosures”.  The comment period for this Proposed Accounting
Standards Update ended on October 15, 2009 and the FASB is evaluating the
results of the comments received before making further decisions regarding this
Update.
 
 SEC Amendments to Oil and Gas
Reporting Requirements– In December 2008, the SEC adopted the final
rules regarding amendments to current oil and gas reporting
requirements.  The amendments are designed to modernize and update the
oil and gas disclosure requirements to align them with current practices and
changes in technology.  The amendments are effective for annual
reports on Form 10-K for fiscal years ending on or after December 31,
2009.  The Company is currently evaluating the impact of the
amendments on its consolidated financial position, results of operations and
cash flows.
 
 
 (2)        Going
Concern
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has reported
substantial losses from continuing operations in the last two years and has a
net working capital deficit in the amount of $5,769,525 and a stockholders’
equity deficit in the amount of $85,314 at September 30, 2009.  These
factors, among others, indicate that the Company may be unable to continue as a
going concern for a reasonable period of time.
  -
7 -
 Return to Index
  
 A
substantial portion of this deficit relates to outstanding borrowings under two
separate bank credit agreements, both of which expire in less than one year (see
Note 5).  The Company expects to ultimately extend and/or restructure
these credit agreements on a satisfactory basis.  Accordingly, the
Company believes that it will be able to repay or refinance its present
obligations.
 
 The
consolidated financial statements do not contain any adjustments to reflect the
possible future effects on the classification of assets or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
 
 
 (3)        Impairment
Adjustment
 
 The
Company recognized a non-cash impairment adjustment in the carrying value of the
goodwill assigned to its Canadian Energy Services subsidiary, Decca Consulting,
Ltd. (“Decca”), as of March 31, 2009 in the amount of
$1,900,000.  This amount is in addition to a similar impairment
adjustment recognized as of December 31, 2008 in the amount of
$1,500,000.
 
 Since the
worldwide decline in energy prices began in the fourth quarter of 2008, Decca
has experienced a substantial decrease in the demand for its drilling,
completion and other on-site consulting services provided to the Canadian oil
and gas industry.  The impairment adjustment recognized as of March
31, 2009 was based on then current projections of Decca’s discounted future net
cash flows and, based on the latest such projections, no further impairment has
been recorded since that date.  As with the impairment adjustment
recorded as of December 31, 2008, the Company has not recognized a tax benefit
for the impairment adjustment of $1,900,000 in the nine months ended September
30, 2009 because no temporary difference was recognized when the goodwill was
initially established upon the acquisition of Decca in March 2007.
 
 
 (4)        Discontinued
Operations
 
 On March
11, 2008, the Company sold the capital stock of its domestic Energy Services
subsidiary, Petroleum Engineers, Inc. (“PEI”), to Hamilton Engineering, Inc. for
a total sales price of $15.0 million.  The Company applied the sales
proceeds to the repayment of debt and other accrued obligations including the
outstanding indebtedness 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 (see Note 5).
 
 The
Company recognized a pre-tax gain from the sale of PEI in the first quarter of
2008 in the amount of $1,350,000 (which was subsequently reduced in the first
quarter of 2009 due to payment of an indemnified loss in the amount of
$39,000).  The results of discontinued operations of PEI for the nine
months ended September 30, 2009 and 2008, including the original and adjusted
gain on the sale, are summarized as follows:
 Nine
      Months Ended September 30,2009
                
                
                2008Energy
      services revenues
                
                $
                -
                
                
                $
                3,876,949Cost
      of energy services
                
                
                -
                
                
                
                (2,919,987
                )Gross
      profit
                
                
                -
                
                
                
                956,962General
      &
      administrative
                
                
                -
                
                
                
                (914,929
                )Interest
      expense, net
                
                
                -
                
                
                
                (255,321
                )Gain
      on
      sale
                
                
                (38,519
                )
                
                
                1,349,855Net
      income before
      taxes
                
                
                (38,519
                )
                
                
                1,136,567Provision
      for income
      taxes
                
                
                13,100
                
                
                
                (1,546,100
                )Net
      income (loss)
                
                $
                (25,419
                )
                
                $
                (409,533
                )
 The
Company has indemnified Hamilton with respect to certain other pre-sale
contingencies of PEI for a two year period.  In order to secure such
indemnities, Hamilton withheld sales proceeds in a two-year escrow account in
the amount of $1.6 million and a one-year tax reserve account in the amount of
$1.5 million (which has now expired).  Upon expiration of the two-year
indemnity period in March 2010, the unexpended balance of the escrow account
will revert to the Company.  The escrow account, along with accrued
interest thereon, is reflected as restricted cash on the Balance Sheet as of
September 30, 2009.
   -
8 -
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 (5)        Long
Term Debt
 
 As of
September 30, 2009 and December 31, 2008, the Company had the following
long-term debt obligations:
 September
      30,
                
                
                December
      31,2009
                
                
                2008$25,000,000
      line of credit with a bank, maturing on August 5, 2010, interest at 1.0%
      above prime payable monthly, secured by first lien on CYMRI, LLC’s oil and
      gas properties, with a declining borrowing base of $3,076,000 as of
      September 30, 2009
                
                
                $
                3,001,000
                
                
                $
                2,600,000Notes
      payable to individuals and entities, incurred in acquisition of CYMRI,
      bearing interest at 10%, with principal and accrued interest due at
      extended maturity in March 2010, unsecured
                
                
                
                1,125,000
                
                
                
                1,125,000$4,000,000
      (Cdn) revolving line of credit with a bank, interest at 4.5% above
      Canadian prime payable monthly through maturity in May 2010, secured by
      accounts receivable of Canadian petroleum services
business
                
                
                
                785,503
                
                
                
                1,272,799Notes
      payable to 2 individuals, incurred in acquisition of Decca Consulting,
      Ltd., bearing interest at 9%, payable in monthly installments of $30,099
      (Cdn) from April 1, 2007 through March 31, 2012, unsecured
                
                
                
                675,998
                
                
                
                779,040Advances
      from stockholders, bearing interest at 10%, with principal and accrued
      interest due in March 2010, unsecured
                
                
                
                1,047,317
                
                
                
                1,307,317Other
      short term notes for liability insurance and accrued payables, interest
      rates at 7% to 9%
                
                
                
                243,835
                
                
                
                128,5546,878,653
                
                
                
                7,212,710Current
      portion of long term debt - stockholders
                
                
                
                (1,729,143
                )
                
                
                (246,826
                )Current
      portion of long term debt - others
                
                
                
                (4,683,512
                )
                
                
                (81,729
                )$
                465,998
                
                
                $
                6,884,155
 
  -
9 -
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  Borrowings
under the bank credit agreement secured by the oil and gas properties owned by
CYMRI, LLC (“CYMRI”), a subsidiary in the Exploration & Production segment,
are subject to a borrowing base, which is periodically redetermined, based on
oil and gas reserves.  The bank credit agreement requires maintenance
of certain financial covenants regarding working capital, interest coverage
level, tangible net worth, and the non-payment of dividends.  The bank
credit agreement does not require monthly principal payments so long as
outstanding borrowings are less than a declining borrowing base.  As
of September 30, 2009, the borrowing base stood at $3,076,000, and was declining
by $58,000 per month.
 
 CYMRI was
in violation of certain financial covenants under the credit agreement for the
first three quarters of 2009, however, CYMRI was not in default of any principal
or interest payments due under the credit agreement during this
period.  The bank granted a waiver of such covenant violation in
exchange for the Company agreeing to put in place an acceptable commodity
hedging transaction (see Note 6). The bank
recently agreed to amend the credit agreement to waive similar covenant
violations in the second quarter of 2009 and to establish new financial
covenants with which the Company was in compliance in the third quarter of
2009.  Because the credit agreement, as presently structured, matures
in August 2010, the outstanding borrowings are reflected as a current liability
as of September 30,
2009.
 
 The
Company has a second bank credit agreement, which is secured by accounts
receivable of its Canadian Energy Services subsidiary, Decca.  The
credit agreement provides for a revolving borrowing base of 85% of qualifying
accounts receivable up to $4,000,000 (Cdn), with an interest rate of 4.5% above
Canadian prime (2.25% as of September 30, 2009).  Since March 31,
2009, Decca has been in violation of certain covenants under the credit
agreement, and is currently in discussions with the bank to obtain a waiver of
such violations.  Because the credit agreement, as presently
structured, matures in May 2010, the outstanding borrowings are reflected as a
current liability as of September 30, 2009.
 
 
 (6)        Commodity
Derivatives
 
 In May
2009, the Company entered into a commodity derivative contract with a major
energy company covering a portion of CYMRI’s projected oil
production.  This contract was purchased with a cash outlay of
$125,000 and consists of a “put” option relating to 2,000 barrels of oil per
month for the period from July 2009 to October 2010.  Pursuant to this
contract, the counterparty will make monthly settlement payments to CYMRI for
the difference, if any, between the “put” price of $50 per barrel and a
published oil index price for that month, multiplied by 2,000 barrels per
month.
 
 The
Company has applied “mark to market” accounting to this derivative contract from
its inception in accordance with ASC 815-20, “Accounting for Derivative
Instruments and Hedging Activities”.  The Company is accounting
for this commodity derivative contract as a non-hedging transaction, as defined
in ASC 815-20.  Accordingly, changes in the fair value of the
commodity derivative contract are reflected in current earnings in the period of
the change.  In its Consolidated Statement of Operations for the nine
months ended September 30, 2009, the Company has reported an unrealized loss in
the amount of $92,520 due to the decrease in the fair value of this derivative
contract between the inception date of the contract (May 26, 2009) and September
30, 2009.
 
 (7)        Net
Income (Loss) Per Share
 
 Basic
income (loss) per common share is computed by dividing the net income or loss by
the weighted average number of shares of common stock outstanding during the
period.  Diluted income (loss) per common share is computed by
dividing net income or loss by the weighted average number of shares of common
stock outstanding during the period and potentially dilutive common share
equivalents, consisting of stock options and warrants, under the Treasury Stock
Method. The effects of potential common stock equivalents are not included in
computations when their effect is anti-dilutive.  Because of the net
loss for the nine month periods ended September 30, 2009 and 2008, the basic and
diluted average outstanding shares are considered the same, since including the
shares would have an antidilutive effect on the net loss per share
calculation.
  -
10 -
 Return to Index
  
 
 
 (8)        Stock-Based
Compensation
 
 The
Company has a stock-based compensation plan which was approved by the
stockholders in October 2005 and amended in October 2006.  Under the
plan, a maximum of 2,400,000 shares may be awarded to directors and employees in
the form of stock options, restricted stock or stock appreciation
rights.
 
 The
exercise price, terms and other conditions applicable to each stock option grant
are generally determined by the Board of Directors.  The exercise
price of stock options is set on the grant date and may not be less than the
fair market value of the Company’s Common Stock on that date.
 
 Option
activity with directors and employees since January 1, 2008 were as follows
(including options granted to directors outside of the plan):
  Number
              
              
              Wtd.Avg.
              
              
              Wtd.Avg.
              
              
              Aggregateof
              
              
              Exercise
              
              
              Remaining
              
              
              IntrinsicShares
              
              
              Price
              
              
              Term (Yrs.)
              
              
              ValueOutstanding
      at January 1, 2008
              
              
              1,814,600
              
              
              $
              1.53Options
      forfeited
              
              
              (1,339,600
              )
              
              
              (2.03
              )Outstanding
      at December 31, 2008
              
              
              475,000
              
              
              
              0.76Option
      activity
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2009
              
              
              475,000
              
              
              $
              0.76
              
              
              
              1.3
              
              
              $
              -Exercisable
      at September 30, 2009
              
              
              475,000
              
              
              $
              0.76
              
              
              
              1.3
              
              
              $
              -
   Stock-based
compensation expense related to these options in the amounts of $41,150 and
$355,335 have been recognized as a current period expense in the accompanying
Consolidated Financial Statements for the nine month periods ended September 30,
2009 and 2008, respectively.  As of September 30, 2009, total
unrecognized compensation cost of approximately $21,000 related to stock options
is expected to be recognized over a weighted average period of approximately 1.6
years.  The estimated fair value of the options granted to employees
under the plan was calculated using a Black Scholes option pricing model. The
following schedule reflects the assumptions included in this model as it relates
to the valuation of such options: (a) Expected volatility – 95%; (b) Expected
risk free interest rate – 6%; (c) Expected dividend yield – zero; (d) Expected
option term – 3 to 4 years, calculated pursuant to the terms of ASC 718-10 as
the option grants qualify as “plain vanilla” under that pronouncement; and (e)
Forfeitures – 0%, subject to adjustment for actual
experience.  Vesting terms of the options are generally three
years.  The aggregate intrinsic value of employee options granted as
of September 30, 2009 was zero as there were no in-the-money options at that
date.
 
 Pursuant
to a Board approved severance agreement, the Company made a cash severance
payment to its former Chief Executive Officer in March 2008 in the amount of
$200,000 and granted him an additional severance benefit via the issuance of
1,142,857 restricted shares of Common Stock with a then current value of
$280,000, which was included in stock-based compensation expense in March
2008.
 
 
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11 -
 Return to Index
  (9)        Stockholder
Advances
 
 The
Company repaid net stockholder advances in the amount of $260,000 in the nine
months ended September 30, 2009 and received net stockholder advances in the
amount $67,000 in the nine months ended September 30,
2008.  Stockholder advances, excluding amounts advanced to finance the
cash portion of the CYMRI purchase price (see Note 5), are reflected as
unsecured long term debt obligations and accrue interest at a rate of 10% per
annum.
 
 
 (10)      Contingencies
 
 A lawsuit
was filed in February 2008 against Decca, the Company’s Canadian Energy Services
subsidiary, claiming unspecified damages related to work performed in the U.S.
in late 2006, prior to the acquisition of Decca.  The plaintiff and
Decca recently reached a settlement whereby the plaintiff agreed to dismiss its
claim against Decca, while continuing to pursue its claim against a
co-defendant. In
accordance with the settlement, Decca will be responsible for fees of its legal
counsel through the point of settlement.  Decca is currently in
negotiations with both its legal counsel and its former shareholders to
determine the amount of such legal fees to be ultimately paid and the portion of
such fees to be borne by Decca and its former shareholders.
 
 In
October 2008, an insurer for the Company’s inactive Construction Staffing
subsidiary filed a lawsuit against the subsidiary alleging default on a premium
finance obligation in the amount of $200,000, plus interest and attorney’s
fees.  Limited discovery in this case has been undertaken to
date.  The Company believes that its inactive Construction Staffing
subsidiary has a meritorious defense in this case.
 
 Triumph
Energy, Inc., a subsidiary in the Exploration & Production segment, is a
defendant in several lawsuits involving professional liability and other matters
arising in the normal course of business in the State of
Louisiana.  It is not practical at the present time to determine the
amount or likelihood of an unfavorable outcome to the Company’s consolidated
financial position or results of operations of any of the actions against
Triumph.  The Company believes that Triumph has meritorious defenses
in each case and is vigorously defending these matters.
 
 
 (11)      Segment
Information
 
 With the
sale of PEI in March 2008 (see Note 4), the Company’s remaining operations are
in the Canadian Energy Services and domestic Exploration & Production
segments.  The table below reflects the allocation of certain amounts
in the consolidated Income Statement, other than interest expense and income
taxes (which the Company does not believe are feasible to allocate), and the
consolidated Balance Sheet as of and for the nine months ended September 30,
2009 (in 000’s):
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12 -
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 Energy
                
                
                Exploration
      &Services
                
                
                Production(Can.)
                
                
                (U. S.)
                
                
                TotalIncome
      Statement Data:Operating
revenues
                
                $
                10,691
                
                
                $
                1,915
                
                
                $
                12,606Other revenues
                
                
                51
                
                
                
                13
                
                
                
                64Total
      revenues
                
                
                10,742
                
                
                
                1,928
                
                
                
                12,670Depreciation, depletion &
      amortization
                
                
                -
                
                
                
                (341
                )
                
                
                (341
                )Impairment
      expense
                
                
                (1,900
                )
                
                
                -
                
                
                
                (1,900
                )Other allocable operating
      expenses
                
                
                (9,758
                )
                
                
                (1,606
                )
                
                
                (11,364
                )Gross profit
      (loss)
                
                
                (916
                )
                
                
                (19
                )
                
                
                (935
                )General &
      administrative
                
                
                
                
                
                
                
                
                
                
                (1,386
                )Operating loss
                
                
                
                
                
                
                
                
                
                
                (2,321
                )Interest expense
                
                
                
                
                
                
                
                
                
                
                (581
                )Unrealized loss on oil and gas
      derivatives
                
                
                
                
                
                
                
                
                
                
                (93
                )Net loss from continuing
      operations before taxes
                
                
                
                
                
                
                
                
                
                $
                (2,995
                )Balance
      Sheet Data:Subsidiary assets
                
                $
                1,593
                
                
                $
                7,267
                
                
                $
                8,860Goodwill
                
                
                1,536
                
                
                
                -
                
                
                
                1,536Segment
      assets
                
                
                3,129
                
                
                
                7,267
                
                
                
                10,396Corporate assets
                
                
                
                
                
                
                
                
                
                
                1,141Consolidated
    assets
                
                
                
                
                
                
                
                
                
                $
                11,537
 The table
below reflects the allocation of certain Income Statement data between these two
reportable segments for the nine months ended September 30, 2008 (in
000’s):
 
 Income
      Statement Data:Operating
revenues
              
              $
              19,387
              
              
              $
              3,533
              
              
              $
              22,920Other revenues
              
              
              217
              
              
              
              -
              
              
              
              217Total revenues
              
              
              19,604
              
              
              
              3,533
              
              
              
              23,137Depreciation, depletion &
      amortization
              
              
              -
              
              
              
              (333
              )
              
              
              (333
              )Other allocable operating
      expenses
              
              
              (17,858
              )
              
              
              (1,828
              )
              
              
              (19,686
              )Gross profit
              
              
              1,746
              
              
              
              1,372
              
              
              
              3,118General &
      administrative
              
              
              
              
              
              
              
              
              
              
              (3,499
              )Operating loss
              
              
              
              
              
              
              
              
              
              
              (381
              )Interest expense
              
              
              
              
              
              
              
              
              
              
              (1,051
              )Net loss from continuing
      operations before taxes
              
              
              
              
              
              
              
              
              
              $
              (1,432
              )
   There is
no presentation of Balance Sheet data allocated between these two reportable
segments as of September 30, 2008 inasmuch as the consolidated Balance Sheet as
of that date is not included in this report.
 
 
 (12)      Subsequent
Event
 
 On
November 5, 2009, the Company’s Board of Directors approved a resolution to
effect a 1-for-10 reverse split of the Company’s Common Stock.  This
transaction does not require shareholder approval and the Company expects to
submit a notice addressing this action to the Financial Industry Regulatory
Authority (“FINRA”) by November 15, 2009 and anticipates that the reverse stock
split will become effective by November 30, 2009.  The reverse stock
split will have no effect on the Company’s total Stockholders’
Equity.
 
 
 -
13 -
 Return to Index
 
 
 
 ITEM 2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements and notes thereto included in Item 1 in this
Quarterly Report on Form 10-Q. This item contains forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from
those indicated in such forward-looking statements.
  Overview
and History
 
 Stratum
Holdings, Inc. was originally incorporated in the State of Nevada on September
3, 2003 under the name Frontier Staffing, Inc.  We were initially
formed to enter the Construction Staffing business and commenced operations in
that segment through a stock-for-stock exchange with a private company in
January 2004.  We completed a public offering of our Common Stock in
March 2005 and our shares began trading on the OTC Bulletin Board in July
2005.  We changed our name in October 2005 to Tradestar Services,
Inc.
 
 On May
23, 2006, we acquired the outstanding common stock of CYMRI Corporation
(“CYMRI”) for total consideration of $12.7 million paid in a combination of
cash, notes payable and Common Stock.  At the time of the acquisition,
CYMRI was engaged in the Exploration & Production business with properties
located in Texas and Louisiana while its subsidiary, Petroleum Engineers, Inc.
(“PEI”), performed Energy Services largely for customers in the United
States.
 
 On March
2, 2007, we acquired the outstanding capital stock of Decca Consulting, Ltd.
(“Decca”) for total consideration of $5.1 million paid in a combination of cash,
notes payable and Common Stock.  At the time of the acquisition, Decca
provided consulting services for the Canadian energy industry.  In
March 2007, we also changed our name to Stratum Holdings, Inc.
 
 On
October 26, 2007, we sold substantially all of the assets of our Construction
Staffing subsidiary, Tradestar Construction Services, Inc. (“Tradestar
Construction”), to a private construction staffing company.  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 accrued obligations including the outstanding indebtedness of
Tradestar Construction under a revolving bank credit agreement in the amount of
$1,810,210 and a bank term loan in the amount of $451,920.  We
reported a pre-tax gain from the sale of these assets in the fourth quarter of
2007 in the amount of $1,664,000 (which was subsequently reduced in the fourth
quarter of 2008 due to an uncollectible insurance refund in the amount of
$357,000).  As a result of this sale, we exited from the Construction
Staffing segment.
 
 On March
11, 2008, we sold the capital stock of our domestic Energy Services subsidiary,
PEI, to Hamilton Engineering, Inc. (“Hamilton”) for a total sales price of $15.0
million.  We applied the sales proceeds to the repayment of debt and
other accrued obligations including the outstanding indebtedness 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-tax gain from the sale of PEI in the first quarter of 2008 in
the amount of $1,350,000 (which was subsequently reduced in the first quarter of
2009 due to payment of an indemnified loss in the amount of
$39,000).  We have reported the revenues and expenses of PEI for the
period that we owned it in 2008 as
discontinued operations in the accompanying Consolidated Statement of
Operations.
 
 As a
result of the PEI sale, we exited from the domestic portion of our Energy
Services segment leaving us with the Canadian portion of our Energy Services
segment as well as our operations in the domestic Exploration & Production
segment.
 
  -
14 -
 Return to Index
  In
addition to the corporate level transactions noted above, we underwent a
significant management change resulting in the election of a new Chief Executive
Officer and the resignation of certain Board members, as disclosed in our
Current Report on Form 8-K filed on June 3, 2008.
  Results
of Operations
 
 The
following discussion reflects the revenues and expenses of our retained Canadian
Energy Services and our domestic Exploration & Production segments as
continuing operations while the revenues and expenses of our exited domestic
Energy Services segment is reported as discontinued operations.
 
 Three months ended September 30,
2009 versus three months ended September 30, 2008— Total revenues from
continuing operations for the three months ended September 30, 2009 were
$3,672,000 compared to $8,409,000 for the three months ended September 30,
2008.
 
 Revenues
from Decca’s continuing Energy Services for the three months ended September 30,
2009 were $2,877,000 compared to $6,984,000 for the three months ended September
30, 2008.  This decrease was largely due to a secular decline of
approximately 50% in the Canadian drilling rig count, Decca’s primary market
indicator.  Decca’s billings for Energy Services in the three months
ended September 30, 2009 were approximately 2,395 man days at an average billing
rate of approximately $1,200 per day.
 
 Revenues
from CYMRI’s oil and gas sales for the three months ended September 30, 2009
were $782,000 compared to $1,305,000 for the three months ended September 30,
2008.   In the three months ended September 30, 2009, revenues
from oil production were $692,000, reflecting volumes of 10,715 barrels at an
average price of $64.55 per barrel, while gas revenues were $90,000, reflecting
volumes of 23,051 Mcf at an average price of $3.89 per Mcf.  In the
three months ended September 30, 2008, revenues from oil production were
$1,042,000, reflecting volumes of 8,008 barrels at an average price of $130.13
per barrel, while gas revenues were $263,000, reflecting volumes of 21,847 Mcf
at an average price of $12.04 per Mcf.
 
 Costs of
Decca’s continuing Energy Services for the three months ended September 30, 2009
were $2,620,000 versus $6,517,000 for the three months ended September 30,
2008.  As with the decrease in Energy Services revenues, this decrease
was largely due to the impact of the decline in the Canadian drilling rig
count.  Despite competitive pressures, Decca was able to slightly
increase the gross margin on its consulting services to approximately 9% of
revenues for the three months ended September 30, 2009 compared to approximately
7% for the three months ended September 30, 2008.
 
 Lease
operating expenses (“LOE”), including production taxes, were $368,000 for the
three months ended September 30, 2009 versus $378,000 for the three months ended
September 30, 2008, representing LOE of CYMRI’s oil and gas production
operations.  This decrease was due to a change in the relative timing
of certain expenses between the third quarter of 2009 compared to the third
quarter of 2008.
 
 Depreciation,
depletion and amortization (“DD&A”) expense for the three months ended
September 30, 2009 was $118,000 versus $83,000 for the three months ended
September 30, 2008, largely representing DD&A of CYMRI’s oil and gas
properties.  This increase was due to slightly higher production
rates.
 
 Workover
expenses for the three months ended September 30, 2009 were $106,000 versus
$294,000 for the three months ended September 30, 2008, representing workovers
on CYMRI’s South Texas oil and gas properties.  This decrease was due
to non-recurring workover operations in the Burnell Field in the third quarter
of 2008.
 
 Selling,
general and administrative (“SG&A”) expenses attributable to continuing
operations for the three months ended September 30, 2009 were $406,000 compared
to $836,000 for the three months ended September 30, 2008.  This
decrease was due to a reduction in the Company’s level of corporate overhead
expenses since the sale of PEI to Hamilton in March 2008.
  -
15 -
 Return to Index
  
 Interest
expense attributable to continuing operations for the three months ended
September 30, 2009 was $193,000 versus $205,000 for the three months ended
September 30, 2008.  This decrease was primarily due to a decline in
interest rates.
 
 Unrealized
gain on oil and gas derivatives for the three months ended September 30, 2009
was $5,000 versus zero for the three months ended September 30,
2008.  This increase was due to the change in fair value of a “put”
option covering 2,000 barrels of oil per month for 16 months, which was acquired
in May 2009 (see Note 6).
 
 Income
taxes attributable to continuing operations were a provision of $68,000 for the
three months ended September 30, 2009 compared to a provision of $33,000 for the
three months ended September 30, 2008 and reflect an adjusted benefit rate in
the current quarter on the year-to-date net loss from continuing
operations.
 
 Nine months ended September
30, 2009 versus nine months
ended September 30,
2008— Total revenues from continuing operations for the nine months
ended September 30, 2009 were $12,670,000 compared to $23,137,000 for the nine
months ended September 30, 2008.
 
 Revenues
from Decca’s continuing Energy Services for the nine months ended September 30,
2009 were $10,692,000 compared to $19,387,000 for the nine months ended
September 30, 2008.  This decrease was largely due to a secular
decline of approximately 45% in the Canadian drilling rig count, Decca’s primary
market indicator.  Decca’s billings for Energy Services in the nine
months ended September 30, 2009 were approximately 9,030 man days at an average
billing rate of approximately $1,185 per day.
 
 Revenues
from CYMRI’s oil and gas sales for the nine months ended September 30, 2009 were
$1,915,000 compared to $3,533,000 for the nine months ended September 30,
2008.   In the nine months ended September 30, 2009, revenues
from oil production were $1,631,000, reflecting volumes of 31,301 barrels at an
average price of $52.09 per barrel, while gas revenues were $284,000, reflecting
volumes of 71,093 Mcf at an average price of $3.99 per Mcf.  In the
nine months ended September 30, 2008, revenues from oil production were
$2,902,000, reflecting volumes of 27,329 barrels at an average price of $106.21
per barrel, while gas revenues were $631,000, reflecting volumes of 66,168 Mcf
at an average price of $9.53 per Mcf.
 
 Costs of
Decca’s continuing Energy Services for the nine months ended September 30, 2009
were $9,758,000 versus $17,859,000 for the nine months ended September 30,
2008.  As with the decrease in Energy Services revenues, this decrease
was largely due to the impact of the decline in the Canadian drilling rig
count.  Despite competitive pressures, Decca was able to slightly
increase the gross margin on its consulting services to approximately 8% of
revenues for the nine months ended September 30, 2009 compared to approximately
8% for the nine months ended September 30, 2008.
 
 Lease
operating expenses (“LOE”), including production taxes, were $1,309,000 for the
nine months ended September 30, 2009 versus $1,305,000 for the nine months ended
September 30, 2008, representing LOE of CYMRI’s oil and gas production
operations.  This increase was primarily due to higher water handling
expenses in CYMRI’s Burnell Field in the first quarter of 2009.
 Depreciation,
depletion and amortization (“DD&A”) expense for the nine months ended
September 30, 2009 was $341,000 versus $333,000 for the nine months ended
September 30, 2008, largely representing DD&A of CYMRI’s oil and gas
properties.  This increase was due to slightly higher production
rates.
 
 Impairment
expense applicable to the goodwill assigned in the Decca acquisition was
$1,900,000 for the nine months ended September 30, 2009 versus zero for the nine
months ended September 30, 2008.  This increase reflects an impairment
adjustment recognized as of March 31, 2009 in the amount of $1,900,000 (see Note
3).
 
 Workover
expenses for the nine months ended September 30, 2009 were $298,000 versus
$523,000 for the nine months ended September 30, 2008, representing workovers on
CYMRI’s South Texas oil and gas properties.  This decrease was due to
non-recurring workover operations in the Burnell Field in the third quarter of
2008.
  -
16 -
 Return to Index
  Selling,
general and administrative (“SG&A”) expenses attributable to continuing
operations for the nine months ended September 30, 2009 were $1,385,000 compared
to $3,499,000 for the nine months ended September 30, 2008.  This
decrease was due to a reduction in the Company’s level of corporate overhead
expenses since the sale of PEI to Hamilton in March 2008.
 
 Interest
expense attributable to continuing operations for the nine months ended
September 30, 2009 was $581,000 versus $1,051,000 for the nine months ended
September 30, 2008.  This decrease was due to an overall decline in
interest rates as well as the repayment of certain corporate debt obligations
following the sale of PEI to Hamilton in March 2008.
 
 Unrealized
loss on oil and gas derivatives for the nine months ended September 30, 2009 was
$93,000 versus zero for the nine months ended September 30,
2008.  This increase was due to the change in fair value of a “put”
option covering 2,000 barrels of oil per month for 16 months, which was acquired
in May 2009 (see Note 6).
 
 Income
taxes attributable to continuing operations were a benefit of $155,000 for the
nine months ended September 30, 2009 compared to a benefit of $487,000 for the
nine months ended September 30, 2008 and reflect a benefit rate of only 5% on
pre-tax net loss of $2,995,000 in the nine months ended September 30, 2009 (due
to no tax benefit being booked for the Decca goodwill impairment of
$1,900,000).
 
 Income
from discontinued Energy Services operations, net of income taxes, was a net
loss of $25,400 for the nine months ended September 30, 2009 versus $410,000 for
the nine months ended September 30, 2008.  As further described in
Note 4, we sold the capital stock of our domestic Energy Services subsidiary,
PEI, to Hamilton in March 2008.  The results of operations of our
domestic Energy Services business, including the pre-tax sales gain in the
amount of $1,350,000, have been classified as discontinued operations in the
Consolidated Statement of Operations, net of applicable income tax expense
reflecting the estimated taxable gain on the sale in 2008.
  Liquidity
and Capital Resources
  Operating activities.  Net
cash used in operating activities from continuing operations for the nine months
ended September 30, 2009 was $997,000 compared to $712,000 for the nine months
ended September 30, 2008.  This increased use of financial resources
reflected a small net decline in certain operating cash flow
components.  Net cash used in operating activities from discontinued
operations was only $25,000 for the nine months ended September 30, 2009 whereas
net cash provided by operating activities from discontinued operations was
$296,000 for the nine months ended September 30, 2008 reflecting positive cash
flow from PEI’s operations.
  Investing activities.Net
cash provided by investing activities for the nine months ended September 30,
2009 was $1,317,000 compared to $11,514,000 for the nine months ended September
30, 2008.  This fluctuation was largely due to the sale of PEI to
Hamilton in March 2008 for $15.0 million, less the initial purchases of
restricted cash in the amount of $3.1 million for an escrow account and a tax
reserve account, pursuant to the securities purchase agreement with
Hamilton.  With expiration of the tax reserve account, the Company
converted $1,491,000 of the tax reserve account from restricted cash to
unrestricted cash in the nine months ended September 30, 2009.
 
 Financing activities.Net
cash used in financing activities for the nine months ended September 30, 2009
was $334,000 compared to $11,080,000 in the prior year period.  This
relative increase in financing cash flows was primarily due to the absence of
non-recurring repayments of long term debt and stockholder advances which were
made with the proceeds of the sale of PEI to Hamilton in March 2008 in the gross
amount of $15.0 million.
 
  -
17 -
 Return to Index
  Following
the sale of PEI in March 2008, we have remaining long term debt obligations to
banks and other lenders (see Note 5).  A substantial portion of our
long term debt is in the form of a bank credit facility secured by CYMRI’s
producing oil and gas properties.  Borrowings under the bank credit
agreement amounted to $3,001,000 as of September 30, 2009 and are subject to a
borrowing base, which is periodically redetermined, based on oil and gas
reserves.  CYMRI’s borrowings under its original bank credit agreement
were refinanced with another bank, pursuant to a new credit agreement having
substantially similar terms, on August 5, 2008.  The new bank credit
agreement does not require monthly principal payments so long as outstanding
borrowings are less than a declining borrowing base.  As of September
30, 2009, the borrowing base stood at $3,076,000, and was declining by $58,000
per month.
 
 CYMRI was
in violation of certain financial covenants under the credit agreement for the
first three quarters of 2009, however, CYMRI was not in default of any principal
or interest payments due under the credit agreement during this
period.  The bank granted a waiver of the covenant violation in the
first quarter of 2009 in exchange for the Company agreeing to put in place an
acceptable commodity hedging transaction (see Note 6).  The bank
recently agreed to amend the credit agreement to waive similar covenant
violations in the second quarter of 2009 and to establish new financial
covenants with which the Company was in compliance in the third quarter of
2009.
 
 We also
have a second bank credit agreement, which is secured by accounts receivable of
our Canadian Energy Services subsidiary, with outstanding borrowings of $785,000
as of September 30, 2009 (see Note 5).  Borrowings under a similar
credit agreement with the same bank were fully paid in the sale of our domestic
Energy Services business in March 2008.  This credit agreement
currently provides for a revolving borrowing base of 85% of qualifying accounts
receivable up to $4,000,000 (Cdn), with an interest rate of 4.5% above Canadian
prime.  Since March 31, 2009, Decca has been in violation of certain
covenants under the credit agreement, and the Company is currently in
discussions with the bank to obtain a waiver of such violations.
 
 With the
completion of our sales of PEI in March 2008 and Tradestar Construction in
October 2007, our primary ongoing capital expenditures are in the Exploration
& Production segment, which can be highly capital intensive.  In
this business, expenditures for CYMRI’s drilling and equipping of oil and gas
wells are typically required to maintain or increase existing production levels
and production often declines in a relatively short period of time if
maintenance capital is not invested timely.  We normally attempt to
finance CYMRI’s capital expenditure requirements through a combination of cash
flow from operations and secured bank borrowings and we expect that these
sources will be sufficient to meet our capital expenditures in
2009.  We presently have relatively low capital expenditure
requirements relating to CYMRI’s oil and gas properties as evidenced by a total
of only $174,000 being spent in the first three quarters of
2009.  While we expect additional amounts of capital expenditures in
the fourth quarter of 2009, we do not expect such amounts to be significant and
we believe that such amounts, as well as any short term operating losses, can be
financed under our existing bank credit agreement through a combination of a
borrowing base increase and/or reduced monthly principal payments.
  Strategic
Plans
 
 The
Company has reported substantial consolidated operating losses and working
capital deficits since completing the acquisitions of CYMRI/PEI in May 2006 and
Decca in March 2007.  In order to address longer term liquidity needs,
our Board of Directors authorized Management in July 2007 to pursue a range of
alternative actions including the sale of one or more of the Company’s operating
assets or businesses.  This decision by our Board of Directors
ultimately led the Company to seek the sales of: (a) Tradestar Construction to a
private construction staffing company in October 2007; and (b) PEI to an
affiliate of Hamilton in March 2008.  There are no further corporate
level transactions contemplated at the present time although we may decide to
expand our domestic Exploration & Production business by making selective
acquisitions of low risk oil and gas properties with exploitation
potential.
 
 
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  Critical
Accounting Policies and Estimates
 
 Our
discussion and analysis of our financial condition and results of operations are
based on consolidated financial statements which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We believe that certain accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements as indicated below.  See our Annual Report on
Form 10-K for the year ended December 31, 2008 for a further description of our
critical accounting policies and estimates.
 
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 
 Information
for this Item is not required as the Registrant is a “smaller reporting company”
as defined in Rule 12b-2 of the Exchange Act.
 
 
 ITEM 4T.        CONTROLS AND
PROCEDURES
 
 (a)
Disclosure controls and procedures
 
 As of the
date of this report, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our internal controls
over financial reporting which encompasses our disclosure controls and
procedures.  Based on this evaluation, our Chief Executive Office and
Chief Financial Officer have concluded that our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report were not
effective because of a material weakness in our internal controls over financial
reporting, as described below, which we view as an integral part of our
disclosure controls and procedures.
 
 The
material weakness relates to deficient completeness and cut-off controls with
regard to revenues and cost of sales at our Canadian Energy Services subsidiary,
Decca Consulting, Ltd.  The situation giving rise to this lack of
independent review arose since approximately the end of the second quarter of
2008 as Decca previously employed a highly experienced accountant to review the
subsidiary’s monthly financial statements.  In order to address this
material weakness, management has implemented an interim compensating control in
the form of an entity level analytical review by its Chief Financial
Officer.  To the extent practical in light of Decca’s current
financial performance (see Note 3), the Company anticipates the implementation
of improved completeness and cut-off controls with regard to revenues and cost
of sales at the operating unit level at an appropriate time.  It
should be noted, however, that the impact of this material weakness on Stratum’s
consolidated results of operations is substantially mitigated by the fact that
Decca has a relatively low gross margin between revenues and cost of sales of
approximately 9%.
 
 Notwithstanding
this material weakness, management believes that the consolidated financial
statements included in this report fairly present, in all material respects, our
consolidated financial position and results of operations as of and for the
quarter ended September 30, 2009.
 
 (b)
Changes in internal controls over financial reporting
 
 There was
no change in our internal controls over financial reporting that occurred during
the quarter ended September 30, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
 
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  PART II.         OTHER
INFORMATION
 
 
 ITEM 1.          LEGAL
PROCEEDINGS
 
 See Note
10 to Consolidated Financial Statements.
   ITEM 1A.       RISK
FACTORS
 
 Information
for this Item is not required as the Registrant is a “smaller reporting company”
as defined in Rule 12b-2 of the Exchange Act.
 
 
 ITEM 2.         
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  None.
 
 ITEM 3.         
DEFAULTS UPON SENIOR SECURITIES
  None.
 ITEM
4.          SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
  None.


ITEM 5.          OTHER
INFORMATION
  None.
   ITEM
6.          EXHIBITS
 
 31.1
              Certification
      of Chief Executive Officer pursuant to Rule
      13a-14(a)/15(d)-14(a)31.2
              Certification
      of Chief Financial Officer pursuant to Rule
      13a-14(a)/15(d)-14(a)32.1
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted
                pursuant
      to Section 906 of the Sarbanes-Oxley Act of 200232.2
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted
                pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
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  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 STRATUM
      HOLDINGS, INC./s/  Larry M.
      WrightLarry
      M. WrightChief
      Executive Officer/s/D. Hughes
      Watler,
      Jr.D.
      Hughes Watler, Jr.Chief
      Financial Officer
  
   November
10, 2009
   
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