Table of Contents

** **

 

** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

**Securities Exchange Act of 1934**

** **

**For the Nine Months Ended September 30,2008**

** **

**Commission File No. 000-51229**

 

**STRATUM HOLDINGS, INC.**

(Exact Name of Registrant as specified inits charter)

 

| **Nevada**(State  or other jurisdiction

of incorporation) | ** ** | **51-0482104**(IRS  Employer Identification   Number) |
|------------------------------------------------------------|------------|-------------------------------------------------------|

 

| **Three  Riverway, Suite 1590**

**Houston,  Texas**(Address  of principal

executive offices) | ** ** | **77056**(zip  code)

** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|

 

**(713)479-7050**

(Registrant’s telephone number, includingarea code)

 

Check whether the registrant: (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports); and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   Noo

 

Indicate by check mark whether theregistrant is a large accelerated filer o, anaccelerated filer o, anon-accelerated filer o, or asmaller reporting company x

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct) Yes o   Nox

 

The number of shares outstanding ofCommon Stock, par value $.001 per share, as of November 7, 2008 was26,556,429 shares and the aggregate market value of such shares held bynon-affiliates of the registrant (based upon the closing bid price of suchshares as listed on the OTC Bulletin Board on November 7, 2008) wasapproximately $404,700.

 

 

 

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** **

**STRATUMHOLDINGS, INC.**

**FORM 10-Q**

**SEPTEMBER30, 2008**

** **

**INDEX**

 
|                                                   | **Page**                                                                                                       |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
| PART I.  FINANCIAL INFORMATION                    | ** **                                                                                                     |
|                                                   |                                                                                                           |
| Item  1.                                               | Financial  Statements                                                                                          |   |
|                                                   | Consolidated  Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007 (Unaudited)  | 3 |
|                                                   | Consolidated  Statements of Operations for the three months ended September 30, 2008 and 2007 (Unaudited) | 4 |
|                                                   | Consolidated  Statements of Operations for the nine months ended September 30, 2008 and 2007 (Unaudited)  | 5 |
|                                                   | Consolidated Statements of Cash Flows for the nine  months ended September 30,  2008 and 2007 (Unaudited) | 6 |
|                                                   |                                                                                                           |
| Notes to Consolidated Financial Statements (Unaudited) | 7                                                                                                              |
| Item 2.                                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                    | 14 |
| Item 3.                                                | Quantitative and Qualitative Disclosures  About Market Risk                                                    | 20 |
| Item 4T.                                               | Controls and Procedures                                                                                        | 21 |
|                                                   |                                                                                                           |
| PART II. OTHER INFORMATION                        |                                                                                                           |
|                                                   |                                                                                                           |
| Item 1.                                                | Legal Proceedings                                                                                              | 22 |
| Item 1A.                                               | Risk Factors                                                                                                   | 22 |
| Item 2.                                                | Unregistered Sales of Equity Securities  and Use of Proceeds                                                   | 22 |
| Item 3.                                                | Defaults Upon Senior Securities                                                                                | 22 |
| Item 4.                                                | Submission of Matters to a Vote of  Security Holders                                                           | 22 |
| Item 5.                                                | Other Information                                                                                              | 22 |
| Item 6.                                                | Exhibits                                                                                                       | 22 |
| Signatures                                             | 23                                                                                                             |

 

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**STRATUM HOLDINGS, INC.**

**Consolidated Balance Sheet**

**(Unaudited)**

 
| ** **                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                      |       |                   |       |                  |       |
| Current assets:                                                                                                                                 |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                       |       | $                      | 256,648    |                  | $          | 238,395 |   |
| Restricted cash (Note 3)                                                                                                                        |       | 1,460,000              |       | —                |       |
| Accounts receivable                                                                                                                             |       | 4,655,933              |       | 2,970,842             |       |
| Prepaid expenses and other                                                                                                                      |       | 440,658                |       | 978,648               |       |
| Current assets of  discontinued operations                                                                                                      |       | 357,407                |       | 6,894,723             |       |
| Total current assets                                                                                                                            |       | 7,170,646              |       | 11,082,608            |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Property and equipment:                                                                                                                         |       |                   |       |                  |       |
| Oil and gas properties  (full cost method)                                                                                                      |       | 14,026,073             |       | 13,653,081            |       |
| Other property and  equipment                                                                                                                   |       | 136,983                |       | 91,209                |       |
|                                                                                                                                            |       | 14,163,056             |       | 13,744,290            |       |
| Less: Accumulated  depreciation, depletion & amortization                                                                              |       | (1,253,641             | )          | (874,894              | )          |
| Impairment  allowance                                                                                                                           |       | (7,000,000             | )          | (7,000,000            | )          |
| Net property and equipment                                                                                                                      |       | 5,909,415              |       | 5,869,396             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Other assets:                                                                                                                                   |       |                   |       |                  |       |
| Restricted cash (Note 3)                                                                                                                        |       | 1,607,083              |       | —                |       |
| Goodwill                                                                                                                                        |       | 4,936,313              |       | 4,936,313             |       |
| Deferred income taxes                                                                                                                           |       | —                 |       | 451,400               |       |
| Other assets                                                                                                                                    |       | 259,871                |       | 132,361               |       |
| Noncurrent assets of  discontinued operations                                                                                                   |       | —                 |       | 9,681,080             |       |
| Total other assets                                                                                                                              |       | 6,803,267              |       | 15,201,154            |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Total assets                                                                                                                                    |       | $                      | 19,883,328 |                  | $          | 32,153,158 |   |
|                                                                                                                                            |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                   |       |                   |       |                  |       |
| Current liabilities:                                                                                                                            |       |                   |       |                  |       |
| Current portion of  long-term debt                                                                                                              |       | $                      | 4,193,626  |                  | $          | 3,347,205 |   |
| Accounts payable                                                                                                                                |       | 2,606,334              |       | 2,491,527             |       |
| Accrued liabilities                                                                                                                             |       | 1,277,122              |       | 1,238,047             |       |
| Income taxes payable                                                                                                                            |       | 1,013,000              |       | —                |       |
| Current liabilities of  discontinued operations                                                                                                 |       | —                 |       | 4,639,716             |       |
| Total current liabilities                                                                                                                       |       | 9,090,082              |       | 11,716,495            |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Long-term debt, net of current portion                                                                                                          |       |                   |       |                  |       |
| Continuing operations                                                                                                                           |       | 4,283,982              |       | 9,018,603             |       |
| Discontinued operations                                                                                                                         |       | —                 |       | 3,957,911             |       |
| Deferred income taxes                                                                                                                           |       | 1,128,500              |       | 1,193,400             |       |
| Total liabilities                                                                                                                               |       | 14,502,564             |       | 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                                                                                                                      |       | 12,729,535             |       | 12,095,362            |       |
| Accumulated deficit                                                                                                                             |       | (7,180,606             | )          | (5,825,688            | )          |
| Accumulated foreign  currency translation adjustment                                                                                            |       | (194,721               | )          | (28,319               | )          |
| Total stockholders’ equity                                                                                                                 |       | 5,380,764              |       | 6,266,749             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                                                |       | $                      | 19,883,328 |                  | $          | 32,153,158 |   |

 

See accompanying notesto consolidated financial statements.

 

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** **

**STRATUMHOLDINGS, INC.**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| Revenues:                                                    |       |                                                     |       |   |   |
| Energy services                                              |       | $                                                        | 6,984,337  |   | $ | 5,370,358 |   |
| Oil and gas sales                                            |       | 1,305,017                                                |       | 825,013 |   |
| Other                                                        |       | 119,388                                                  |       | 18,449 |   |
|                                                         |       | 8,408,742                                                |       | 6,213,820 |   |
| Expenses:                                                    |       |                                                     |       |   |   |
| Energy services                                              |       | 6,516,720                                                |       | 4,665,080 |   |
| Lease operating expense                                      |       | 378,314                                                  |       | 340,596 |   |
| Depreciation,  depletion & amortization             |       | 82,866                                                   |       | 210,284 |   |
| Impairment expense                                           |       | —                                                   |       | 7,000,000 |   |
| Workover expense                                             |       | 293,871                                                  |       | 73,632 |   |
| Selling, general and  administrative                         |       | 836,049                                                  |       | 855,155 |   |
|                                                         |       | 8,107,820                                                |       | 13,144,747 |   |
|                                                         |       |                                                     |       |   |   |
| Income (loss) from operations                                |       | 300,922                                                  |       | (6,930,927 | ) |
| Other expenses:                                              |       |                                                     |       |   |   |
| Interest expense                                             |       | (204,504                                                 | )          | (487,640 | ) |
|                                                         |       |                                                     |       |   |   |
| Income (loss) from continuing operations before income taxes |       | 96,418                                                   |       | (7,418,567 | ) |
| Benefit (provision) for income taxes                         |       | (32,800                                                  | )          | 2,522,313 |   |
| Net income (loss) from  continuing operations                |       | 63,618                                                   |       | (4,896,254 | ) |
| Discontinued operations, net of tax                          |       |                                                     |       |   |   |
| Construction staffing                                        |       | —                                                   |       | 197,838 |   |
| Energy services                                              |       | —                                                   |       | 371,600 |   |
| Net income (loss)                                            |       | $                                                        | 63,618     |   | $ | (4,326,816 | ) |
|                                                         |       |                                                     |       |   |   |
| Net income (loss) per share, basic and diluted               |       |                                                     |       |   |   |
| Net income (loss) from continuing  operations                |       | $                                                        | 0.00       |   | $ | (0.19 | ) |
| Discontinued operations                                      |       | —                                                   |       | 0.02 |   |
| Net income (loss)                                            |       | $                                                        | 0.00       |   | $ | (0.17 | ) |
|                                                         |       |                                                     |       |   |   |
| Weighted average shares outstanding, basic and diluted       |       | 26,556,429                                               |       | 25,393,572 |   |

 

 See accompanying notes to consolidated financialstatements.

 

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** **

**STRATUMHOLDINGS, INC.**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Revenues:                                              |       |                                                    |       |   |   |
| Energy services                                        |       | $                                                       | 19,387,099 |   | $ | 9,877,582 |   |
| Oil and gas sales                                      |       | 3,533,194                                               |       | 2,233,880 |   |
| Other                                                  |       | 216,821                                                 |       | 95,948 |   |
|                                                   |       | 23,137,114                                              |       | 12,207,410 |   |
| Expenses:                                              |       |                                                    |       |   |   |
| Energy services                                        |       | 17,858,583                                              |       | 8,752,914 |   |
| Lease operating expense                                |       | 1,305,173                                               |       | 1,052,387 |   |
| Depreciation,  depletion & amortization       |       | 332,919                                                 |       | 628,816 |   |
| Impairment expense                                     |       | —                                                  |       | 7,000,000 |   |
| Workover expense                                       |       | 522,877                                                 |       | 528,638 |   |
| Selling, general and  administrative                   |       | 3,499,044                                               |       | 2,738,715 |   |
|                                                   |       | 23,518,596                                              |       | 20,701,470 |   |
|                                                   |       |                                                    |       |   |   |
| Loss from operations                                   |       | (381,482                                                | )          | (8,494,060 | ) |
| Other expenses:                                        |       |                                                    |       |   |   |
| Interest expense                                       |       | (1,050,903                                              | )          | (1,194,188 | ) |
|                                                   |       |                                                    |       |   |   |
| Loss from continuing operations before income taxes    |       | (1,432,385                                              | )          | (9,688,248 | ) |
| Benefit from income taxes                              |       | 487,000                                                 |       | 3,294,005 |   |
| Net loss from continuing  operations                   |       | (945,385                                                | )          | (6,394,243 | ) |
| Discontinued operations, net of tax                    |       |                                                    |       |   |   |
| Construction staffing                                  |       | —                                                  |       | 374,735 |   |
| Energy services                                        |       | (409,533                                                | )          | 1,016,436 |   |
| Net loss                                               |       | $                                                       | (1,354,918 | ) | $ | (5,003,072 | ) |
|                                                   |       |                                                    |       |   |   |
| Net income (loss) per share, basic and diluted         |       |                                                    |       |   |   |
| Net loss from continuing  operations                   |       | $                                                       | (0.04      | ) | $ | (0.26 | ) |
| Discontinued operations                                |       | (0.01                                                   | )          | 0.06 |   |
| Net loss                                               |       | $                                                       | (0.05      | ) | $ | (0.20 | ) |
|                                                   |       |                                                    |       |   |   |
| Weighted average shares outstanding, basic and diluted |       | 26,227,701                                              |       | 25,112,620 |   |

 

See accompanying notesto consolidated financial statements.

 

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** **

**STRATUM HOLDINGS, INC.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| **Cash flows provided (used in) operating  activities:**                                                 |       |                                                    |       |   |   |
| Net loss from continuing  operations                                                                     |       | $                                                       | (945,385   | ) | $ | (6,394,243 | ) |
| Adjustments to reconcile  net loss from continuing  operations to cash provided by (used in) operations: |       |                                                    |       |   |   |
| Depreciation,  depletion & amortization                                                         |       | 332,919                                                 |       | 628,816 |   |
| Impairment expense                                                                                       |       | —                                                  |       | 7,000,000 |   |
| Deferred income taxes                                                                                    |       | (487,000                                                | )          | (3,294,005 | ) |
| Stock based compensation                                                                                 |       | 635,335                                                 |       | 317,664 |   |
| Other changes, net                                                                                       |       | (248,084                                                | )          | (312,947 | ) |
| Net cash flows from  continuing operations                                                               |       | (712,215                                                | )          | (2,054,715 | ) |
| Net cash flows from  discontinued operations                                                             |       | 296,349                                                 |       | 969,908 |   |
| Total cash flows from  operating activities                                                              |       | (415,866                                                | )          | (1,084,807 | ) |
|                                                                                                     |       |                                                    |       |   |   |
| **Cash flows provided (used in) investing  activities:**                                                 |       |                                                    |       |   |   |
| Sale of subsidiary                                                                                       |       | 11,932,917                                              |       | — |   |
| Purchase of subsidiary                                                                                   |       | —                                                  |       | (151,841 | ) |
| Purchase of property and  equipment                                                                      |       | (418,766                                                | )          | (515,139 | ) |
| Net cash flows from  investing activities                                                                |       | 11,514,151                                              |       | (666,980 | ) |
|                                                                                                     |       |                                                    |       |   |   |
| **Cash flows provided (used in) financing  activities:**                                                 |       |                                                    |       |   |   |
| Proceeds from long term  debt                                                                            |       | 485,000                                                 |       | 4,848,264 |   |
| Payments of long term debt                                                                               |       | (11,631,759                                             | )          | (4,573,863 | ) |
| Net proceeds of  stockholder advances                                                                    |       | 66,727                                                  |       | 518,046 |   |
| 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                                                                |       | (11,080,032                                             | )          | 1,564,947 |   |
|                                                                                                     |       |                                                    |       |   |   |
| Net increase in cash and cash equivalents                                                                |       | 18,253                                                  |       | (186,840 | ) |
| Cash and equivalents at beginning of period                                                              |       | 238,395                                                 |       | 261,010 |   |
|                                                                                                     |       |                                                    |       |   |   |
| Cash and equivalents at  end of period                                                                   |       | $                                                       | 256,648    |   | $ | 74,170 |   |
|                                                                                                     |       |                                                    |       |   |   |
| Supplemental cash flow data:                                                                             |       |                                                    |       |   |   |
| Cash paid for interest                                                                                   |       | $                                                       | 1,050,903  |   | $ | 1,194,188 |   |
| Cash paid for income taxes                                                                               |       | —                                                  |       | — |   |
|                                                                                                     |       |                                                    |       |   |   |
| Supplemental investing activity:                                                                         |       |                                                    |       |   |   |
| Restricted cash withheld on  sale of subsidiary - current                                                |       | $                                                       | 1,500,000  |   | — |   |
| Restricted cash withheld  on sale of subsidiary - noncurrent                                             |       | 1,600,000                                               |       | — |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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** **

**STRATUM HOLDINGS, INC.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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

 

Theaccompanying consolidated financial statements have been prepared by theCompany without audit, in accordance with accounting principles for interimfinancial information and pursuant to the rules and regulations of theSecurities and Exchange Commission.  Inthe opinion of management, these consolidated financial statements contain alladjustments (consisting only of normal recurring adjustments) necessary tofairly state the financial position of the Company as of September 30,2008, the results of its operations for the three month and nine month periodsended September 30, 2008 and 2007, and cash flows for the nine monthperiods ended September 30, 2008 and 2007. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted. Interim results of operations arenot necessarily indicative of results for subsequent interim periods. Thesefinancial statements should be read in conjunction with our Annual Report on Form 10-KSBfor the year ended December 31, 2007.

 

InMay 2008, a change of control occurred at the shareholder level asdescribed in the Current Report on Form 8-K, filed on June 3,2008.  As a result, the Company’s mainfocus is presently on the domestic Exploration & Production business witha secondary focus on the Canadian Energy Services business.

 

The Company has reporteda net loss from continuing operations of $945,385 for the nine months endedSeptember 30, 2008 and has a net working capital deficit of $1,919,436 atSeptember 30, 2008.  In order to addressits liquidity needs, the Company recently refinanced its bank borrowingssecured by a subsidiary’s oil and gas assets resulting in a substantiallyincreased borrowing base (see Note 4). Additionally, the Company is negotiating with another bank on the termsof a revolving bank credit agreement secured by its Canadian accountsreceivable (see Note 4).  While theresults of those negotiations are presently uncertain, the Company believesthat it will be able to repay or refinance its debt and other obligations asthey are presently structured.

 

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

 

OnMay 23, 2006, the Company acquired the outstanding common stock of CYMRICorporation (“CYMRI”) for total consideration of $12.7 million paid in acombination of cash, notes payable and 12,540,000 shares of Common Stock.  At the time of the acquisition, CYMRI wasengaged in the Exploration & Production business with propertieslocated in Texas and Louisiana while its subsidiary, Petroleum Engineers, Inc.(“PEI”), performed Energy Services largely for customers in the UnitedStates.  The Company has accounted forthe acquisition of CYMRI, at a deemed effective date of June 1, 2006, as apurchase with Stratum treated as the acquirer. As further discussed in Note 3, the Company sold the capital stock ofPEI to a third party in March 2008 while retaining the Exploration &Production business.

 

OnMarch 2, 2007, the Company acquired the outstanding capital stock of DeccaConsulting, Ltd. (“Decca”) for total consideration of $5.1 million (plusworking capital) paid in a combination of cash, notes payable and 828,572shares of Common Stock.  At the time ofthe 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 |   |

 

OnMarch 11, 2008, the Company sold the capital stock of PEI to HamiltonEngineering, Inc. (“Hamilton”) for a total sales price of $15.0 millionand granted Hamilton a three month, non-binding option to acquire the capitalstock of Decca for $4.25 million which expired unexercised on June 9, 2008(see Note 3).  The Company presently hasno plans to sell Decca or any other assets or subsidiaries.

 

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

 

OnOctober 26, 2007, the Company sold substantially all of the assets of itswholly-owned subsidiary, Tradestar Construction Services, Inc. (“TradestarConstruction”) to a private construction staffing company receiving cashproceeds of $3.2 million, plus a working capital adjustment, and applied thesales proceeds to the repayment of debt and other accrued obligations includingthe outstanding indebtedness of Tradestar Construction under a revolving bankcredit agreement in the amount of $1,810,210 and a bank term loan in the amountof $451,920 (see Note 4).  The Companyreported a pre-tax gain from the sale of these assets in the fourth quarter of2007 in the amount of $1,664,000.  Theresults of discontinued operations of Tradestar Construction for the ninemonths ended September 30, 2007 are summarized as follows:

 
| Construction staffing revenues    |   | $          | 11,841,377 |   |
|-----------------------------------|--------|------------|------------|--------|
| Cost of construction staffing     |   | (9,335,129 | )          |
| Gross profit                      |   | 2,506,248  |       |
| General & administrative |   | (1,851,501 | )          |
| Interest expense, net             |   | (86,967    | )          |
| Net income before taxes           |   | 567,780    |       |
| Provision for income taxes        |   | (193,045   | )          |
| Net income                        |   | $          | 374,735    |   |

 

OnMarch 11, 2008, the Company sold the capital stock of its domestic EnergyServices subsidiary, PEI, to Hamilton for a total sales price of $15.0 millionand granted Hamilton a three month, non-binding option to acquire the capitalstock of its Canadian Energy Services subsidiary, Decca, for $4.25 millionwhich expired unexercised on June 9, 2008. The Company applied the sales proceeds to the repayment of debt andother accrued obligations including the outstanding indebtedness of PEI under arevolving bank credit agreement in the amount of $3.2 million and unsecuredseller debt and other liabilities in the amount of $4.5 million (see Note4).  The Company recognized a pre-taxgain from the sale of PEI in the first quarter of 2008 in the estimated amountof $1,350,000.  The results of discontinuedoperations of PEI for the nine months ended September 30, 2008 and 2007,including the gain in the first quarter of 2008, are summarized as follows:

 
| ** **                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                        | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Energy services revenues          |       | $                                                       | 3,876,949  |   | $ | 20,722,345 |   |
| Cost of energy services           |       | (2,919,987                                              | )          | (15,321,319 | ) |
| Gross profit                      |       | 956,962                                                 |       | 5,401,026 |   |
| General & administrative |       | (914,929                                                | )          | (3,632,768 | ) |
| Interest expense, net             |       | (255,321                                                | )          | (228,203 | ) |
| Gain on sale                      |       | 1,349,855                                               |       | — |   |
| Net income before taxes           |       | 1,136,567                                               |       | 1,540,055 |   |
| Provision for income taxes        |       | (1,546,100                                              | )          | (523,619 | ) |
| Net income (loss)                 |       | $                                                       | (409,533   | ) | $ | 1,016,436 |   |

 

Asa result of the sale of PEI, the Company exited from the domestic EnergyServices segment leaving only its operations in the Canadian Energy Servicesand Exploration & Production segments. In conjunction with the sale of PEI, the Company has indemnifiedHamilton with respect to certain pre-sale contingencies for a two yearperiod.  In order to secure theseindemnities, Hamilton withheld $1.6 million of the sales proceeds in an escrowaccount.  Upon the expiration of theindemnity period, the unexpended balance of the escrow account will revert tothe Company.  The escrow account and a$1.5 million tax reserve related to the PEI sale are reflected as restricted cashon the balance sheet as of September 30, 2008.

 

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

 

Asof September 30, 2008 and December 31, 2007, the Company had thefollowing long-term debt obligations:

 
| ** **                                                                                                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                             | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| $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’s oil and gas properties, with a declining borrowing base of $3,275,000  as of September 30, 2008                    |       | $                      | 2,700,000  |                  | $          | 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  4.5% above Canadian prime payable monthly through maturity in May 2010,  secured by accounts receivable of Canadian petroleum services business                                                               |       | 2,017,954              |       | 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                                                                            |       | 971,666                |       | 1,381,684             |       |
|                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Advances from stockholders, bearing interest at 10%, interest only  payable monthly through various maturities, unsecured                                                                                                                                                              |       | 1,457,316              |       | 1,357,317             |       |
|                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Other short term notes for liability insurance and accrued payables,  interest rates at 7% to 9%                                                                                                                                                                                       |       | 205,672                |       | 952,205               |       |
|                                                                                                                                                                                                                                                                                   |       | 8,477,608              |       | 19,557,640            |       |
| Current portion of long term debt                                                                                                                                                                                                                                                      |       | (4,193,626             | )          | (6,581,127            | )          |
|                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                                                   |       | $                      | 4,283,982  |                  | $          | 12,976,513 |   |

 

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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.  CYMRI’s borrowingsunder its original bank credit agreement were refinanced with another bank,pursuant to a new credit agreement having substantially similar terms, on August 5,2008.  As with the original bank creditagreement, the terms of the new bank credit agreement require CYMRI to maintaincertain financial covenants regarding working capital ratio, interest coveragelevel, tangible net worth, and the non-payment of dividends.  The original bank credit agreement expired onNovember 30, 2007, however, the bank agreed to initially extend the termof the debt to March 31, 2008, with the requirement that CYMRI continue tomake monthly payments of $115,000 principal plus accrued interest.  Pursuant to the terms of this extension, theCompany made an additional principal payment of $1,948,468 in March 2008using a portion of the proceeds from the sale of PEI (see Note 3).  In March 2008, the bank agreed tofurther extend the maturity of the debt to January 1, 2009, with therequirement that CYMRI continue to make monthly payments of $115,000 principalplus accrued interest.  CYMRI made suchrequired monthly payments prior to refinancing the outstanding balance in August 2008with another bank.  The new bank creditagreement does not require monthly principal payments so long as outstandingborrowings are less than a declining borrowing base.  As of September 30, 2008, the borrowingbase stood at $3,275,000, and was declining by $125,000 per month.

 

TheCompany has a second bank credit agreement, which was secured by accountsreceivable of both its Construction Staffing and its domestic and CanadianEnergy Services businesses, through October 2007.  This credit agreement provided for arevolving borrowing base of 85% of qualifying accounts receivable up to$7,000,000 in the U.S. and $4,000,000 (Cdn) in Canada, with an interest rate of1% above prime.  As further discussed inNote 3: (a) In October 2007, the Company sold substantially all ofthe assets of Tradestar Construction to a private construction staffing companyreceiving cash proceeds of $3.2 million, plus a working capital adjustment,which were applied to the repayment of debt and other accrued obligationsincluding the outstanding indebtedness of Tradestar Construction under therevolving bank credit agreement in the amount of $1,810,210 and a bank termloan in the amount of $451,920; and (b) In March 2008, the Companysold the capital stock of its domestic Energy Services subsidiary, PEI, toHamilton 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.

 

Asof September 30, 2008, the Company was in violation of certainnon-financial covenants under the revolving bank credit agreement secured byits Canadian accounts receivable.  TheCompany and the bank are currently negotiating a restructuring of the creditagreement which may result in an acceleration of the maturity of theoutstanding borrowings under the credit agreement to as early as March 31,2009.  Accordingly, the Company hasclassified the total outstanding borrowings under the credit agreement as of September 30,2008 as a current liability in the amount of $2,017,954.  In the event that the Company and the bankagree to a restructuring of the credit agreement providing for such anaccelerated maturity, the Company believes that it will be able to refinancethe borrowings with another lender.

 

**(5)****                                ****Net Income (Loss) Per Share**

 

Basicincome (loss) per common share is computed by dividing the net income or lossby the weighted 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 first quarter of2007.  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 

 

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Method.The effects of potential common stock equivalents are not included incomputations when their effect is anti-dilutive.  Because of the net loss for the nine monthsended September 30, 2008 and 2007, the basic and diluted averageoutstanding shares are considered the same, since including the shares wouldhave an antidilutive effect on the net loss per share calculation.

 

**(6)****                                ****Stock-Based Compensation**

 

TheCompany has a stock-based compensation plan which was approved by thestockholders in October 2005 and amended in October 2006.  Under the plan, as amended, a maximum of2,400,000 shares may be awarded to directors and employees in the form of stockoptions, restricted stock or stock appreciation 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.

 

EffectiveJanuary 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,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s requisite service period (generally, the vestingperiod of the award).   Prior to January 1,2006, the Company accounted for share-based compensation to employees inaccordance with 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.

 

Optionactivity with directors and employees since January 1, 2007 were asfollows (including options granted to directors outside of the plan):

 
| ** **                             | ** ** | **Number  of  Shares** | ** ** | **Wtd. Avg.  Exercise  Price** | ** ** | **Wtd. Avg.  Remaining  Term (Yrs.)** | ** ** | **Aggregate  Intrinsic  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                      |       | (1,339,600             | )          | (2.03                               | )          |                                       |       |                            |       |
| Outstanding at September 30, 2008 |       | 475,000                |       | $                                   | 0.76       |                                       | 2.3        |                            | $          | — |   |
|                                   |       |                   |       |                                |       |                                       |       |                            |       |   |   |
| Exercisable at September 30, 2008 |       | 400,000                |       | $                                   | 0.65       |                                       | 2.2        |                            | $          | — |   |
|                                        |            |                        |            |                                     |            |                                            |            |                                 |            |  |  |  |  |

 

Stock-basedcompensation expense related to these options in the amounts of $355,335 and$317,664 have been recognized as a current period expense in the accompanyingConsolidated Financial Statements for the nine month periods ended September 30,2008 and 2007, respectively.  As of September 30,2008, total unrecognized compensation cost of approximately $77,000 related tostock options is expected to be recognized over a weighted average period ofapproximately 2.1 years.  The estimatedfair value of the options granted to employees under the plan was calculatedusing a Black Scholes option pricing model. The following schedule reflects theassumptions included in this model as it relates to the valuation of suchoptions: (a) Expected volatility – 95%; (b) Expected risk freeinterest rate – 6%; (c) Expected dividend yield – zero; (d) Expectedoption term – 3 to 4 years calculated pursuant to the terms of SAB 107 as theoption grants qualify as “plain vanilla” under that literature; and (e) Forfeitures– 0%, subject to adjustment for actual experience.  Vesting terms of the options are generallythree years.  The aggregate intrinsicvalue of employee options granted as of September 30, 2008 was zero asthere were no in-the-money options at that date.

 

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Inconjunction with the sale of PEI to Hamilton in March 2008 (see Note 3),the Company’s Chief Executive Officer resigned his position with theCompany.  Pursuant to a Board approvedseverance agreement, the Company made a cash severance payment to the formerChief Executive Officer in the amount of $200,000 and granted him an additionalseverance benefit via the issuance of 1,142,857 restricted shares of CommonStock with a then current value of $280,000. The value of such restricted shares issued to the former Chief ExecutiveOfficer was included in stock-based compensation expense in March 2008.

 

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

 

TheCompany received net stockholder advances in the amount of $67,000 in the ninemonths ended September 30, 2008 and received net stockholder advances inthe amount of $518,000 in the nine months ended September 30, 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**

 

Certaindomestic subsidiaries, including Triumph Energy, Inc., a subsidiary in theExploration & Production segment, are defendants in several lawsuitsinvolving professional liability and other matters arising in the normal courseof business.  In June 2008, Triumphsettled one of these lawsuits at a net cost to the company of $167,000 whichwas recognized as an expense in the second quarter of 2008.  It is not practical at the present time todetermine the amount or likelihood of an unfavorable outcome to the Company’sconsolidated financial position or results of operations of any of the otheractions against Triumph or the other domestic subsidiaries.  The Company believes that its subsidiarieshave meritorious defenses in each case and are vigorously defending thesematters.

 

Alawsuit was filed in February 2008 against Decca, the Company’s CanadianEnergy Services subsidiary, claiming unspecified damages related to workperformed by Decca on a well drilled in the U.S. in late 2006, prior to theCompany’s acquisition of Decca.  Pursuantto the terms of the stock purchase agreement under which the Company acquiredDecca in March 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)****                                ****Segment Information**

 

Withthe sales of Tradestar Construction in October 2007 and PEI in March 2008(see Note 3), the Company’s remaining operations are in the Canadian EnergyServices and domestic Exploration & Production segments.  The table below reflects the allocation ofcertain Income Statement and Balance Sheet data between these two reportablesegments as of and for the nine months ended September 30, 2008 (in 000’s):

 

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| ** **                                        | ** ** | **Energy   Services   (Can.)** | ** ** | **Exploration &  Production   (U. S.)** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Income Statement Data:                            |       |                           |       |                                             |       |      |       |
| Operating revenues                                |       | $                              | 19,387     |                                             | $          | 3,533     |       | $ | 22,920 |   |
| Other revenues                                    |       | 217                            |       | —                                           |       | 217       |       |
| Total revenues                                    |       | 19,604                         |       | 3,533                                            |       | 23,137    |       |
| Depreciation,  depletion & amortization  |       | —                         |       | (333                                             | )          | (333      | )          |
| Other allocable operating  expenses               |       | (17,858                        | )          | (1,828                                           | )          | (19,686   | )          |
| Gross profit                                      |       | 1,746                          |       | 1,372                                            |       | 3,118     |       |
| General &  administrative                |       |                           |       |                                             |       | (3,499    | )          |
| Loss from operations                              |       |                           |       |                                             |       | (381      | )          |
| Interest expense                                  |       |                           |       |                                             |       | (1,051    | )          |
| Net loss from continuing  operations before taxes |       |                           |       |                                             |       | $         | (1,432     | ) |
|                                              |       |                           |       |                                             |       |      |       |
| Balance Sheet Data:                               |       |                           |       |                                             |       |      |       |
| Subsidiary assets                                 |       | $                              | 4,261      |                                             | $          | 7,172     |       | $ | 11,433 |   |
| Goodwill                                          |       | 4,936                          |       | —                                           |       | 4,936     |       |
| Segment assets                                    |       | 9,197                          |       | 7,172                                            |       | 16,369    |       |
| Corporate assets                                  |       |                           |       |                                             |       | 3,514     |       |
| Consolidated assets                               |       |                           |       |                                             |       | $         | 19,883     |   |

 

Due to thesignificant organizational changes resulting from the sales of TradestarConstruction in October 2007 and PEI in March 2008, the Company doesnot believe that the presentation of segment information for the prior yearperiod is meaningful.

 

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

 

Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with, and is qualified in its entirety by, theconsolidated financial statements and notes thereto included in Item 1 in thisQuarterly Report on Form 10-Q. This item contains forward-lookingstatements that involve risks and uncertainties. Actual results may differmaterially from those indicated in such forward-looking statements.

 

**Forward-Looking Statements**

 

This QuarterlyReport on Form 10-Q and the documents incorporated herein by referencecontain forward-looking statements that have been made pursuant to theprovisions of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements are based on current expectations, estimates, andprojections about our industry, management beliefs, and certain assumptionsmade by our management. Words such as “anticipates,” “expects,” “intends,” “plans,”“believes,” “seeks,” “estimates,” variations of such words, and similarexpressions are intended to identify such forward-looking statements. These statementsare not guarantees of future performance and are subject to certain risks,uncertainties, and assumptions that are difficult to predict; therefore, actualresults may differ materially from those expressed or forecasted in any suchforward-looking statements. Unless required by law, we undertake no obligationto update publicly any forward-looking statements, whether as a result of newinformation, future events, or otherwise. However, readers should carefullyreview the risk factors set forth in other reports and documents that we filefrom time to time with the Securities and Exchange Commission, particularly theQuarterly Reports on Form 10-Q, and future Annual Reports on Form 10-Kand any Current Reports on Form 8-K.

 

**Overview and History**

 

StratumHoldings, Inc. (formerly, Tradestar Services, Inc.) was incorporatedin the State of Nevada on September 3, 2003 under the name FrontierStaffing, Inc. We were formed to acquire Tradestar Construction Services, Inc.,a New Mexico corporation, which operated as an employment staffing servicespecializing in the placement of both long-term and short-term skilled andunskilled construction labor to the New Mexico construction market. In January 2004,we acquired Tradestar Construction Services, Inc. in a stock-for-stockexchange. We issued a total of 6,400,000 shares of Common Stock in connectionwith this transaction.

 

On July 7,2004, we filed a registration statement under cover of Form SB-2 with theSEC. This registration statement was declared effective by the SEC on February 10,2005.  On March 30, 2005, we closedthis public offering.  We raised a totalof $600,000 and 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 the outstanding common stock of CYMRI Corporation (“CYMRI”)for total consideration of $12.7 million paid in a combination of cash, notespayable and Common Stock.  At the time ofthe acquisition, CYMRI was engaged in the Exploration & Productionbusiness with properties located in Texas and Louisiana while its subsidiary,Petroleum Engineers, Inc. (“PEI”), performed Energy Services largely forcustomers 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, notespayable and Common Stock.  At the time ofthe acquisition, Decca provided consulting services for the Canadian energyindustry.  In March 2007, we also changedour name to Stratum Holdings, Inc.

 

On October 26,2007, we sold substantially all of the assets of Tradestar Construction to aprivate construction staffing company. We received cash proceeds of $3.2 million plus a working capitaladjustment.  We applied the salesproceeds to the repayment of debt and other accrued obligations including theoutstanding indebtedness of our Construction Staffing subsidiary under arevolving bank credit

 

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agreement inthe amount of $1,810,210 and a bank term loan in the amount of $451,920.  We reported a pre-tax gain from the sale ofthese assets in the fourth quarter of 2007 in the amount of $1,664,000.  We have reported the revenues and expenses ofTradestar Construction for the period that we owned it in 2007 as discontinuedoperations in the accompanying Consolidated Statement of Operations.

 

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 and granted Hamilton a three month, non-binding option to acquirethe capital stock of our Canadian Energy Services subsidiary, Decca, for $4.25million which expired unexercised on June 9, 2008.  We presently have no plans to sell Decca orany other assets or subsidiaries.  Weapplied the sales proceeds to the repayment of debt and other accruedobligations including the outstanding indebtedness of PEI under a revolvingbank credit agreement in the amount of $3.2 million and unsecured seller debtand other liabilities in the amount of $4.5 million.  We recognized a pre-tax gain from the sale ofPEI in the first quarter of 2008 in the estimated amount of $1,350,000.  We have reported the revenues and expenses ofPEI for the period that we owned it in 2008 and 2007 as discontinued operationsin the accompanying Consolidated Statement of Operations.  As a result of this sale, we exited from thedomestic portion of our Energy Services segment leaving us with the Canadianportion of our Energy Services segment as well as our operations in theExploration & Production segment.

 

Following thePEI sale, our main focus is now on the domestic Exploration &Production business with a secondary focus on the Canadian Energy Servicesbusiness.

 

**Results of Operations**

 

The following discussionreflects the revenues and expenses of our retained Canadian Energy Services andExploration & Production segments as continuing operations while therevenues and expenses of our exited domestic Energy Services and ConstructionStaffing segments are reported as discontinued operations.

 

*Three months ended September 30, 2008 versus three months ended September 30,2007*— Total revenuesfrom continuing operations for the three months ended September 30, 2008were $8,409,000 compared to $6,214,000 for the three months ended September 30,2007.

 

Revenues from continuingEnergy Services for the three months ended September 30, 2008 were$6,984,000 compared to $5,370,000 for the three months ended September 30,2007.  The amounts in both periods wereentirely attributable to Decca, acquired effective March 1, 2007, with theapproximate 30% increase in comparative revenues being largely due to theoverall increase in the level of Canadian drilling activity.  Total billings for continuing Energy Servicesin the three months ended September 30, 2008 were approximately 5,600 mandays at an average billing rate of approximately $1,250 per day.

 

Revenues from oil and gassales for the three months ended September 30, 2008 were $1,305,000compared to $825,000 for the three months ended September 30, 2007.   In the three months ended September 30,2008, revenues from oil production were $1,042,000, reflecting volumes of 8,008barrels 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 perMcf.  In the three months ended September 30,2007, revenues from oil production were $638,000, reflecting volumes of 9,763barrels at an average price of $65.36 per barrel, while gas revenues were$187,000, reflecting volumes of 23,456 Mcf at an average price of $7.97 perMcf.

 

Costs of continuingEnergy Services for the three months ended September 30, 2008 were$6,517,000 versus $4,665,000 for the three months ended September 30,2007.  The amounts in both periods wereentirely attributable to Decca, acquired effective March 1, 2007.  Costs of Energy Services for the three monthsended September 30, 2008 represented approximately 93% of revenues, whichis generally consistent with the historical percentage experienced by Decca forthis period.

 

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Lease operating expenses (“LOE”),including production taxes, were $378,000 for the three months ended September 30,2008 versus $341,000 for the three months ended September 30, 2007,representing LOE of CYMRI’s oil and gas production operations, acquiredeffective June 1, 2006.  Thisincrease was due to certain non-recurring expenses in the third quarter of2008.

 

Depreciation, depletion andamortization (“DD&A”) expense for the three months ended September 30,2008 was $83,000 versus $210,000 for the three months ended September 30,2007, largely representing DD&A of CYMRI’s oil and gas properties, acquiredeffective June 1, 2006.  Thisdecrease was primarily due to the impact of an impairment adjustment in thecarrying value of CYMRI’s oil and pas properties, which was booked in the thirdquarter of 2007 in the amount of $7,000,000, as well as a relatively smalldecline in production volumes.

 

Workover expenses for thethree months ended September 30, 2008 were $294,000 versus $74,000 for thethree months ended September 30, 2007, representing workovers on CYMRI’sSouth Texas oil and gas properties, acquired effective June 1, 2006.  This increase was due to the higher number ofworkover operations in the third quarter of 2008 compared to the third quarterof 2007.

 

Selling,general and administrative (“SG&A”) expenses attributable to continuingoperations for the three months ended September 30, 2008 were $836,000compared to $855,000 for the three months ended September 30, 2007.  This decrease was primarily due to thereduction in corporate overhead expenses following the sale of PEI to Hamiltonin March 2008.

 

Interest expenseattributable to continuing operations for the three months ended September 30,2008 was $204,000 versus $488,000 for the three months ended September 30,2007.  This decrease was primarily due tothe repayment of certain corporate debt obligations in conjunction with thesale of PEI to Hamilton in March 2008.

 

Income taxesattributable to continuing operations were a provision of $33,000 for the threemonths ended September 30, 2008 compared to a benefit of $2,522,000 forthe three months ended September 30, 2007 and reflect a provision rate of34% on pre-tax net income of $96,000 in the three months ended September 30,2008.

 

Income fromdiscontinued Construction Staffing operations, net of income taxes, was zerofor the three months ended September 30, 2008 versus $198,000 for the threemonths ended September 30, 2007.  Asfurther described in Note 3 of the Consolidated Financial Statements, we soldsubstantially all of the assets of Tradestar Construction to a privateconstruction 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 fromdiscontinued Energy Services operations, net of income taxes, was zero for thethree months ended September 30, 2008 versus $372,000 for the three monthsended September 30, 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 have been classified asdiscontinued operations in the Consolidated Statement of Operations, net ofincome tax expense at the statutory rate.

 

*Nine months ended September 30, 2008 versus nine months ended September 30,2007*—Total revenues from continuing operations for the nine months ended September 30,2008 were $23,137,000 compared to $12,207,000 for the nine months ended September 30,2007.

 

Revenues from continuingEnergy Services for the nine months ended September 30, 2008 were$19,387,000 compared to $9,878,000 for the nine months ended September 30,2007.  The 2008 amount consists of ninemonths of revenues from Decca, acquired effective March 1, 2007, whereasthe 2007 amount only includes seven months of Decca’s revenues.  Total billings for continuing Energy Servicesin the nine months ended September 30, 2008, reflecting the two additionalmonths of activity as well as an overall increase in the level of Canadiandrilling activity, were approximately 15,500 man days at an average billingrate of approximately $1,250 per day.

 

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Revenues from oil and gassales for the nine months ended September 30, 2008 were $3,533,000compared to $2,234,000 for the nine months ended September 30, 2007.  In the nine months ended September 30,2008, revenues from oil production were $2,902,000, reflecting volumes of27,329 barrels at an average price of $106.21 per barrel, while gas revenueswere $631,000, reflecting volumes of 66,168 Mcf at an average price of $9.53per Mcf.  In the nine months ended September 30,2007, revenues from oil production were $1,700,000, reflecting volumes of28,452 barrels at an average price of $59.75 per barrel, while gas revenueswere $534,000, reflecting volumes of 72,021 Mcf at an average price of $7.41per Mcf.

 

Costs ofcontinuing Energy Services for the nine months ended September 30, 2008were $17,858,000 versus $8,753,000 for the nine months ended September 30,2007.  The 2008 amount consists of ninemonths of costs from Decca, acquired effective March 1, 2007, whereas the2007 amount only includes seven months of Decca’s costs.  Costs of Energy Services for the nine monthsended September 30, 2008 represented approximately 92% of revenues, whichis generally consistent with the historical percentage experienced by Decca forthis period.

 

Lease operating expenses (“LOE”),including production taxes, were $1,305,000 for the nine months ended September 30,2008 versus $1,052,000 for the nine months ended September 30, 2007,representing LOE of CYMRI’s oil and gas production operations, acquiredeffective June 1, 2006.  Thisincrease was due to certain non-recurring expenses in the second and thirdquarters of 2008.

 

Depreciation, depletion andamortization (“DD&A”) expense for the nine months ended September 30,2008 was $333,000 versus $629,000 for the nine months ended September 30,2007, largely representing DD&A of CYMRI’s oil and gas properties, acquiredeffective June 1, 2006.  Thisdecrease was primarily due to the impact of an impairment adjustment in thecarrying value of CYMRI’s oil and pas properties, which was booked in the thirdquarter of 2007 in the amount of $7,000,000, as well as a relatively smalldecline in production volumes.

 

Workover expenses for thenine months ended September 30, 2008 were $523,000 versus $529,000 for thenine months ended September 30, 2007, representing workovers on CYMRI’sSouth Texas oil and gas properties, acquired effective June 1, 2006.  This decrease from the 2007 period comparedto the 2008 period was not significant.

 

Selling,general and administrative (“SG&A”) expenses attributable to continuingoperations for the nine months ended September 30, 2008 were $3,499,000compared to $2,739,000 for the nine months ended September 30, 2007.  This increase was due to non-recurringSG&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 nine months in the 2008period versus only seven months in the 2007 period.

 

Interest expenseattributable to continuing operations for the nine months ended September 30,2008 was $1,051,000 versus $1,194,000 for the nine months ended September 30,2007.  This decrease was primarily due tothe repayment of certain corporate debt obligations in conjunction with thesale of PEI to Hamilton in March 2008.

 

Income taxesattributable to continuing operations were a benefit of $487,000 and $3,294,000for the nine months ended September 30, 2008 and 2007, respectively, andreflect a benefit rate of 34% on pre-tax net loss of $1,432,000 in the ninemonths ended September 30, 2008.

 

Income fromdiscontinued Construction Staffing operations, net of income taxes, was zerofor the nine months ended September 30, 2008 versus $375,000 for the ninemonths ended September 30, 2007.  Asfurther described in Note 3 of the Consolidated Financial Statements, we soldsubstantially all of the assets of Tradestar Construction to a privateconstruction 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 the statutoryrate.

 

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Income fromdiscontinued Energy Services operations, net of income taxes, was a net loss of$410,000 for the nine months ended September 30, 2008 versus net income of$1,016,000 for the nine months ended September 30, 2007.  As further described in Note 3 of theConsolidated Financial Statements, we sold the capital stock of our domesticEnergy Services subsidiary, PEI, to Hamilton in March 2008.  The results of operations of our domesticEnergy Services business, including the pre-tax gain in the estimated amount of$1,350,000 realized on the sale, have been classified as discontinuedoperations in the Consolidated Statement of Operations, net of applicableincome tax expense reflecting the estimated taxable gain on the sale in the2008 period.

 

**Liquidity and Capital Resources**

 

*Operating**activities.*  Net cash used in operating activities fromcontinuing operations for the nine months ended September 30, 2008 was$712,000 compared to $2,055,000 for the nine months ended September 30,2007.  Net cash provided by operatingactivities from discontinued operations for the nine months ended September 30,2008 was $296,000 compared to $970,000 for the nine months ended September 30,2007.  This decrease in operating cashflow was primarily due to changes in relative timing between the accrual andpayment of accounts receivable and accounts payable associated with discontinuedoperations.

 

*Investing**activities. *Netcash provided by investing activities for the nine months ended September 30,2008 was $11,514,000 compared to net cash used in investing activities of$667,000 for the nine months ended September 30, 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.

 

*Financingactivities.*Net cash usedin financing activities for the nine months ended September 30, 2008 was$11,080,000 compared to net cash provided by financing activities of $1,565,000for the nine months ended September 30, 2007.  This decrease in financing cash flows wasprimarily due to non-recurring repayments of long term debt and stockholderadvances which were made with the proceeds of the sale of PEI to Hamilton in March 2008in the gross amount of $15.0 million.  Asfurther described in the next two paragraphs, we have significantly reduced,but not eliminated, the Company’s ongoing debt service requirements.

 

Followingthe sales of Tradestar Construction in October 2007 and PEI in March 2008,we have remaining long term debt obligations to banks and other lenders (seeNote 4, “Long Term Debt”).  A substantialportion of our long term debt is in the form of a bank credit facility securedby CYMRI’s producing 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.  CYMRI’s borrowings under its original bankcredit agreement were refinanced with another bank, pursuant to a new creditagreement having substantially similar terms, on August 5, 2008.  As with the original bank credit agreement,the terms of the new bank credit agreement require CYMRI to maintain certainfinancial covenants regarding working capital ratio, interest coverage level,tangible net worth, and the non-payment of dividends.  The original bank credit agreement expired onNovember 30, 2007, however, the bank agreed to initially extend the termof the debt to March 31, 2008, with the requirement that CYMRI continue tomake monthly payments of $115,000 principal plus accrued interest.  Pursuant to the terms of this extension, theCompany made an additional principal payment of $1,948,468 in March 2008using a portion of the proceeds from the sale of PEI.  In March 2008, the bank agreed tofurther extend the maturity of the debt to January 1, 2009, with therequirement that CYMRI continue to make monthly payments of $115,000 principalplus accrued interest.  CYMRI made suchrequired monthly payments prior to refinancing the outstanding balance in August 2008with another bank.  The new bank creditagreement does not require monthly principal payments so long as outstandingborrowings are less than a declining borrowing base.  As of September 30, 2008, the borrowingbase stood at $3,275,000, and was declining by $125,000 per month.

 

Wealso have a second bank credit agreement, which was secured by accountsreceivable of both our Construction Staffing and our domestic and CanadianEnergy Services businesses through October 2007.  Borrowings under that revolving bank creditagreement were substantially reduced in the sales of our Construction Staffingand domestic Energy Services businesses in October 2007 and

 

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March 2008,respectively.  As of September 30,2008, we were in violation of certain non-financial covenants under therevolving bank credit agreement, as more fully described in Note 4, “Long TermDebt.”

 

Withthe completion of our sales of Tradestar Construction in October 2007 andPEI in March 2008, our primary ongoing capital expenditures are in the Exploration & 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.

 

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

 

**Strategic Plans**

 

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.  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 granted Hamilton athree month, non-binding option to acquire Decca which expired unexercised on June 9,2008.  The Company presently has no plansto sell Decca or any other assets or subsidiaries.

 

To further address its liquidity needs,the Company recently refinanced its bank borrowings secured by a subsidiary’soil and gas assets resulting in a substantially increased borrowing base (seeNote 4).  Additionally, the Company isnegotiating with another bank on the terms of a revolving bank credit agreementsecured by its Canadian accounts receivable (see Note 4).  While the results of those negotiations arepresently uncertain, the Company believes that it will be able to repay orrefinance its debt and other obligations as they are presently structured.

 

**Recently Issued Accounting Pronouncements**

 

In May 2008,the Financial Accounting Standards Board (“FASB”) issued Statement No. 163“*Accounting for Financial Guarantee InsuranceContracts, an interpretation of FASB Statement No. 60*” (“SFAS163”), which relates to claim liability recognition by insuranceenterprises.  We do not engage ininsurance activities, therefore, we do not expect the adoption of SFAS 163 tohave a material impact on our consolidated financial statements.

 

In May 2008, the FASB issued Statement No. 162“*The Hierarchy* of *GenerallyAccepted Accounting Principles*” (“SFAS 162”), which identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements of nongovernmentalentities that are presented in accordance with generally accepted accountingprinciples (GAAP) in the U.S.  ThisStatement is not expected to result in a change in current practice forfinancial statement issuers in the U.S. This Statement does not require formal adoption and we do not expect itto have a material impact on our consolidated financial statements.

 

In March 2008, the FASB issued StatementNo. 161 “*Disclosures about Derivative Instruments andHedging Activities, **an amendment of** FASBStatement No. 133*” (“SFAS 161”), which establishes new disclosurerequirements for derivative instruments and hedging activities.  We do not presently engage in hedgingactivities, therefore, we do not expect the adoption of SFAS 161 to have amaterial impact on our consolidated financial statements.

 

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In December 2007, the FASB issued StatementNo. 160 “*Non-controlling Interests in ConsolidatedFinancial Statements, **an amendment of ARB No. 51***”(“SFAS 160”), which establishes accounting and reporting standards for thenon-controlling interest in a subsidiary and the deconsolidation of a subsidiary.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material impact onour consolidated financial statements.

 

In December 2007, the FASB issued Statement No. 141(R),“*Business Combinations”* (“SFAS 141(R)”) arevision of SFAS No. 141.  SFAS 141(R) retainsthe purchase method of accounting for acquisitions, but requires a number ofchanges, including changes in the way assets and liabilities are recognized inpurchase accounting.  It also changes therecognition of assets acquired and liabilities assumed arising fromcontingencies and requires the expensing of acquisition-related costs asincurred.  Generally, SFAS 141(R) willbe effective for the Company on a prospective basis for all businesscombinations for which the acquisition date is on or after January 1,2009. We do not expect the adoption of SFAS 141(R) to have a materialimpact on our financial position or results of operations, provided we do notundertake a significant acquisition or business combination.

 

In February 2007, the FASB issuedStatement No. 159 “**The Fair Value Option for Financial Assetsand Financial Liabilities****—****Including an amendment of FASB Statement No. 115** “ (“SFAS 159”),which allows measurement at fair value of eligible financial assets andliabilities that are not otherwise measured at fair value. SFAS 159 iseffective for fiscal years beginning after November 15, 2007.  The adoption of SFAS 159 has not had amaterial impact on our consolidated financial statements.

 

**Critical Accounting Policies and Estimates**

 

Our discussionand analysis of our financial condition and results of operations are based onconsolidated financial statements which have been prepared in accordance withgenerally accepted accounting principles in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Webelieve that certain accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statementsas indicated below.  See our AnnualReport on Form 10-KSB for the year ended December 31, 2007 for afurther description of our critical accounting policies and estimates.

 
| **ITEM 3.** |   | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-------------|--------|-----------------------------------------------------------------|

 

Information forthis Item is not required as the Registrant is a “smaller reporting company” asdefined in Rule 12b-2 of the Exchange Act.

 

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| **ITEM 4T.** |   | **CONTROLS  AND PROCEDURES** |
|--------------|--------|------------------------------|

 

(a) Disclosurecontrols and procedures

 

As of the dateof this report, management evaluated the effectiveness of the design andoperation of our internal controls over financial reporting which encompassesour disclosure controls and procedures. Based on this evaluation, management concluded that there is a materialweakness in our internal controls over financial reporting as well as in ourdisclosure controls and procedures.  Thematerial weakness relates to the fact that there is no individual currentlyavailable at the Company’s Energy Services subsidiary, Decca Consulting, Ltd., toreview the recording of the consultants’ invoices or the customers’ invoicesafter the front-line processing of such source documents has been completed byDecca’s administrative personnel.

 

The situation giving rise to this lack ofindependent review arose since approximately the end of the second quarter of2008 as Decca previously employed a highly experienced accountant to review thesubsidiary’s monthly financial statements. In order to address this material weakness, the Company’s management isconsidering one or more of the following courses of action: (i) Engage anexperienced replacement for the accountant in Calgary to perform the same orsimilar duties; (ii) Engage an accountant in Houston to perform a reviewof Decca’s monthly financial statements and other reports prior to submittingthem for consolidation; or (iii) Transfer responsibility for recording ofthe consultants’ invoices and the customers’ invoices to Houston where they canbe subjected to corporate level controls.

 

Notwithstandingthis material weakness, management believes that the consolidated financialstatements included in this report fairly present, in all material respects,our consolidated financial position and results of operations as of and for thequarter ended September 30, 2008.

 

(b) Changesin internal controls over financial reporting

 

Except for thematter discussed in the preceding section, there was no change in our internalcontrols over financial reporting that occurred during the quarter ended September 30,2008, that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                  |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                              |
| **ITEM 1.**       | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                  |
| ** **        | ** ** | ** **                                                                                                                                                                              |
|              |       | See  Note 8 to Consolidated Financial Statements.                                                                                                                                       |
|              |       |                                                                                                                                                                                    |
| **ITEM 1A.**      | ** ** | **RISK  FACTORS**                                                                                                                                                                       |
| ** **        | ** ** | ** **                                                                                                                                                                              |
| ** **        | ** ** | Information  for this Item is not required as the Registrant is a “smaller reporting company”  as defined in Rule 12b-2 of the Exchange Act.                                  |
| ** **        | ** ** |                                                                                                                                                                                    |
| **ITEM 2.**       | ** ** | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                        |
| ** **        | ** ** | ** **                                                                                                                                                                              |
|              |       | None.                                                                                                                                                                                   |
|              |       |                                                                                                                                                                                    |
| **ITEM 3.**       | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                    |
| ** **        | ** ** | ** **                                                                                                                                                                              |
|              |       | None.                                                                                                                                                                                   |
|              |       |                                                                                                                                                                                    |
| **ITEM 4.**       | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                                                                |
| ** **        | ** ** | ** **                                                                                                                                                                              |
|              |       | None.                                                                                                                                                                                   |
|              |       |                                                                                                                                                                                    |
| **ITEM 5.**       | ** ** | **OTHER  INFORMATION**                                                                                                                                                                  |
| ** **        | ** ** | ** **                                                                                                                                                                              |
|              |       | The Company recently  changed its address to Three Riverway, Suite 1590, Houston, Texas 77056.  The Company was previously located in  Suite 1500 at the same street address. |
|              |       |                                                                                                                                                                                    |
| **ITEM 6.**       | ** ** | **EXHIBITS**                                                                                                                                                                            |
| ** **        | ** ** | ** **                                                                                                                                                                              |
| 31.1              |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)                                                                                                   |
|              |       |                                                                                                                                                                                    |
| 31.2              |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)                                                                                                   |
|              |       |                                                                                                                                                                                    |
| 32.1              |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                           |
|              |       |                                                                                                                                                                                    |
| 32.2              |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                           |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                    | STRATUM HOLDINGS, INC. |
|-------------------------|------------------------|
|                    |                   |
|                    |                   |
|                    | /s/                    | Larry M. Wright |
|                    |                   | Larry M. Wright |
|                    |                   | Chief Executive Officer |
|                    |                   |
|                    | /s/                    |  D. Hughes Watler, Jr. |
|                    |                   | D. Hughes Watler, Jr. |
|                    |                   | Chief Financial Officer |
|                    |                   |   |
|                    |                   |   |
| November 10,  2008 |                   |   |

 

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