MANUFACTURED HOUSING PROPERTIES INC. - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Under Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the
Quarterly Period Ended September 30, 2009
Commission
File No. 000-51229
STRATUM
HOLDINGS, INC.
(Exact
Name of Registrant as specified in its charter)
|
Nevada
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51-0482104
|
|
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(State
or other jurisdiction
of
incorporation)
|
(IRS
Employer Identification Number)
|
|
Three
Riverway, Suite 1590
Houston,
Texas
|
77056
|
|
|
(Address
of principal
executive
offices)
|
(zip
code)
|
(713)
479-7050
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes: [X] No: [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes: [ ] No:
[X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [ ] No [X]
The
number of shares outstanding of Common Stock, par value $.001 per share, as of
November 10, 2009 was 26,556,429 shares.
STRATUM
HOLDINGS, INC.
FORM
10-Q
SEPTEMBER
30, 2009
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PART
I. FINANCIAL INFORMATION
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Page
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Item
1. Financial Statements
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4
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5
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6
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7
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14
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19
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19
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20
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21
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2 -
STRATUM HOLDINGS, INC.
Consolidated
Balance Sheets
(Unaudited)
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
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Cash
and cash equivalents
|
$ | 163,097 | $ | 203,200 | ||||
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Restricted
cash (Note 3)
|
1,613,234 | 1,491,958 | ||||||
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Accounts
receivable
|
1,874,758 | 2,900,750 | ||||||
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Prepaid
expenses and other
|
186,902 | 133,088 | ||||||
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Fair
value of oil and gas derivatives
|
32,480 | - | ||||||
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Total
current assets
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3,870,471 | 4,728,996 | ||||||
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Property
and equipment:
|
||||||||
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Oil
and gas properties (full cost method)
|
14,310,115 | 14,177,055 | ||||||
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Other
property and equipment
|
148,793 | 108,060 | ||||||
| 14,458,908 | 14,285,115 | |||||||
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Less: Accumulated
depreciation, depletion & amortization
|
(1,673,293 | ) | (1,332,227 | ) | ||||
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Impairment
allowance
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(7,000,000 | ) | (7,000,000 | ) | ||||
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Net
property and equipment
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5,785,615 | 5,952,888 | ||||||
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Other
assets:
|
||||||||
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Restricted
cash (Note 3)
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- | 1,611,742 | ||||||
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Goodwill
(less impairment allowance of $3,400,000 and $1,500,000,
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||||||||
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respectively)
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1,536,313 | 3,436,313 | ||||||
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Other
assets
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344,551 | 175,171 | ||||||
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Total
other assets
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1,880,864 | 5,223,226 | ||||||
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Total
assets
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$ | 11,536,950 | $ | 15,905,110 | ||||
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Liabilities
and Stockholders’ Equity
|
||||||||
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Current
liabilities:
|
||||||||
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Current
portion of long-term debt - stockholders
|
$ | 1,729,143 | $ | 246,826 | ||||
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Current
portion of long-term debt - others
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4,683,512 | 81,729 | ||||||
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Accounts
payable
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1,814,928 | 2,818,488 | ||||||
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Accrued
liabilities
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1,412,413 | 1,153,292 | ||||||
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Income
taxes payable
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- | 282,975 | ||||||
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Total
current liabilities
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9,639,996 | 4,583,310 | ||||||
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Long-term
debt, net of current portion
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465,998 | 6,884,155 | ||||||
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Deferred
income taxes
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1,328,400 | 1,486,900 | ||||||
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Asset
retirement obligations
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187,870 | 175,990 | ||||||
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Total
liabilities
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11,622,264 | 13,130,355 | ||||||
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Stockholders’
equity:
|
||||||||
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Preferred
stock, $.01 par value per share, 1,000,000 shares
authorized,
|
||||||||
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None
issued
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- | - | ||||||
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Common
stock, $.001 par value per share, 50,000,000 shares
authorized,
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||||||||
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26,556,429
shares issued and outstanding
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26,556 | 26,556 | ||||||
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Additional
paid in capital
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12,799,659 | 12,758,510 | ||||||
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Accumulated
deficit
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(12,718,231 | ) | (9,852,596 | ) | ||||
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Accumulated
foreign currency translation adjustment
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(193,298 | ) | (157,715 | ) | ||||
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Total
stockholders’ equity
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(85,314 | ) | 2,774,755 | |||||
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Total
liabilities and stockholders’ equity
|
$ | 11,536,950 | $ | 15,905,110 | ||||
See
accompanying notes to consolidated financial statements.
STRATUM HOLDINGS, INC.
Consolidated
Statements of Operations
(Unaudited)
|
Three
Months Ended September 30,
|
||||||||
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2009
|
2008
|
|||||||
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Revenues:
|
||||||||
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Energy
services
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$ | 2,876,844 | $ | 6,984,337 | ||||
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Oil
and gas sales
|
782,297 | 1,305,017 | ||||||
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Other
|
13,192 | 119,388 | ||||||
| 3,672,333 | 8,408,742 | |||||||
|
Expenses:
|
||||||||
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Energy
services
|
2,620,190 | 6,516,720 | ||||||
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Lease
operating expense
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368,301 | 378,314 | ||||||
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Depreciation,
depletion & amortization
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118,402 | 82,866 | ||||||
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Impairment
of acquisition goodwill
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- | - | ||||||
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Workover
expense
|
105,579 | 293,871 | ||||||
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Selling,
general and administrative
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405,724 | 836,049 | ||||||
| 3,618,196 | 8,107,820 | |||||||
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Operating
income (loss)
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54,137 | 300,922 | ||||||
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Other
expenses:
|
||||||||
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Interest
expense
|
(192,969 | ) | (204,504 | ) | ||||
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Unrealized
gain on oil and gas derivatives
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4,868 | - | ||||||
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Income
(loss) from continuing operations before income taxes
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(133,964 | ) | 96,418 | |||||
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Benefit
(provision) for income taxes
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(68,500 | ) | (32,800 | ) | ||||
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Net
income (loss) from continuing operations
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(202,464 | ) | 63,618 | |||||
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Discontinued
operations, net of tax
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- | - | ||||||
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Net
income (loss)
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$ | (202,464 | ) | $ | 63,618 | |||
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Net
income (loss) per share, basic and diluted
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||||||||
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Net
income (loss) from continuing operations
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$ | (0.01 | ) | $ | 0.00 | |||
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Discontinued
operations
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- | - | ||||||
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Net
income (loss)
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$ | (0.01 | ) | $ | 0.00 | |||
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Weighted
average shares outstanding, basic and diluted
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26,556,429 | 26,556,429 | ||||||
See accompanying notes to consolidated financial statements.
STRATUM HOLDINGS, INC.
Consolidated
Statements of Operations
(Unaudited)
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Nine
Months Ended September 30,
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||||||||
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2009
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2008
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|||||||
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Revenues:
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||||||||
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Energy services
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$ | 10,691,581 | $ | 19,387,099 | ||||
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Oil and gas sales
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1,915,140 | 3,533,194 | ||||||
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Other
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63,757 | 216,821 | ||||||
| 12,670,478 | 23,137,114 | |||||||
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Expenses:
|
||||||||
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Energy services
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9,758,434 | 17,858,583 | ||||||
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Lease operating expense
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1,308,523 | 1,305,173 | ||||||
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Depreciation, depletion & amortization
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341,137 | 332,919 | ||||||
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Impairment of acquisition goodwill
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1,900,000 | - | ||||||
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Workover expense
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297,723 | 522,877 | ||||||
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Selling, general and administrative
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1,385,827 | 3,499,044 | ||||||
| 14,991,644 | 23,518,596 | |||||||
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Operating
loss
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(2,321,166 | ) | (381,482 | ) | ||||
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Other
expenses:
|
||||||||
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Interest expense
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(581,230 | ) | (1,050,903 | ) | ||||
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Unrealized loss on oil and gas derivatives
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(92,520 | ) | - | |||||
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Loss
from continuing operations before income taxes
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(2,994,916 | ) | (1,432,385 | ) | ||||
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Benefit
for income taxes
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154,700 | 487,000 | ||||||
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Net loss from continuing operations
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(2,840,216 | ) | (945,385 | ) | ||||
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Discontinued
operations, net of tax
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(25,419 | ) | (409,533 | ) | ||||
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Net loss
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$ | (2,865,635 | ) | $ | (1,354,918 | ) | ||
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Net
loss per share, basic and diluted
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||||||||
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Net loss from continuing operations
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$ | (0.11 | ) | $ | (0.04 | ) | ||
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Discontinued operations
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(0.00 | ) | (0.01 | ) | ||||
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Net loss
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$ | (0.11 | ) | $ | (0.05 | ) | ||
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Weighted
average shares outstanding, basic and diluted
|
26,556,429 | 26,227,701 | ||||||
See
accompanying notes to consolidated financial
statements.
STRATUM HOLDINGS, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
|
Nine
Months Ended September 30,
|
||||||||
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2009
|
2008
|
|||||||
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Cash
flows provided by (used in) operating activities:
|
||||||||
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Net
loss from continuing operations
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$ | (2,840,216 | ) | $ | (945,385 | ) | ||
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Adjustments
to reconcile net loss from continuing
|
||||||||
|
operations
to cash provided by (used in) operations:
|
||||||||
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Depreciation,
depletion & amortization
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341,137 | 332,919 | ||||||
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Impairment
expense
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1,900,000 | - | ||||||
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Benefit
for income taxes
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(154,700 | ) | (487,000 | ) | ||||
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Stock
based compensation
|
41,149 | 635,335 | ||||||
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Unrealized
loss on oil and gas derivatives
|
92,520 | - | ||||||
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Working
capital changes
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(274,036 | ) | - | |||||
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Other
changes, net
|
(103,154 | ) | (248,084 | ) | ||||
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Net
cash flows from continuing operations
|
(997,300 | ) | (712,215 | ) | ||||
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Net
cash flows from discontinued operations
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(25,419 | ) | 296,349 | |||||
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Total
cash flows from operating activities
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(1,022,719 | ) | (415,866 | ) | ||||
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Cash
flows provided by (used in) investing activities:
|
||||||||
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Sale
of subsidiary
|
- | 11,932,917 | ||||||
|
Decrease
in restricted cash from sale of subsidiary
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1,490,466 | - | ||||||
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Purchase
of property and equipment
|
(173,793 | ) | (418,766 | ) | ||||
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Net
cash flows from investing activities
|
1,316,673 | 11,514,151 | ||||||
|
Cash
flows provided by (used in) financing activities:
|
||||||||
|
Proceeds
from long term debt
|
640,280 | 485,000 | ||||||
|
Payments
of long term debt
|
(714,337 | ) | (11,631,759 | ) | ||||
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Net
(payments) proceeds of stockholder advances
|
(260,000 | ) | 66,727 | |||||
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Net
cash flows from financing activities
|
(334,057 | ) | (11,080,032 | ) | ||||
|
Net
increase in cash and cash equivalents
|
(40,103 | ) | 18,253 | |||||
|
Cash
and equivalents at beginning of period
|
203,200 | 238,395 | ||||||
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Cash
and equivalents at end of period
|
$ | 163,097 | $ | 256,648 | ||||
|
Supplemental
cash flow data:
|
||||||||
|
Cash
paid for interest
|
$ | 399,932 | $ | 1,050,903 | ||||
|
Cash
paid for income taxes
|
273,682 | - | ||||||
|
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 consolidated financial statements.
STRATUM HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(Unaudited)
(1) Basis
of Presentation
Interim Financial Information
– The accompanying consolidated financial statements have been prepared
by the Company without audit, in accordance with accounting principles generally
accepted in the Unites States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, these consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to fairly state the financial position of the
Company as of September 30, 2009, the results of its operations for the three
month and nine month periods ended September 30, 2009 and 2008, and cash flows
for the nine month periods ended September 30, 2009 and 2008. These
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2008.
Recently Issued Accounting
Pronouncements – Effective for the quarter ended June 30, 2009, the
Company implemented ASC 855, “Subsequent Events”. This
standard establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. The Company evaluated all events or transactions that
occurred after September 30, 2009 up through November 10, 2009, the date
the Company issued these financial statements. Except as disclosed in Note
12, the Company had no subsequent events during this period.
In July
2009, the FASB issued new guidance relating to the “FASB Accounting Standards
Codification” at ASC 105, as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards are superseded as described in ASC
105. All other accounting literature not included in the Codification is
nonauthoritative. Management is currently evaluating the impact of the adoption
of ASC 105 but does not expect the adoption of ASC 105 to impact the Company’s
results of operations, financial position or cash flows.
In
September 2009, the FASB issued a Proposed Accounting Standards Update – “Extractive Industries – Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and
Disclosures”. The comment period for this Proposed Accounting
Standards Update ended on October 15, 2009 and the FASB is evaluating the
results of the comments received before making further decisions regarding this
Update.
SEC Amendments to Oil and Gas
Reporting Requirements – In December 2008, the SEC adopted the final
rules regarding amendments to current oil and gas reporting
requirements. The amendments are designed to modernize and update the
oil and gas disclosure requirements to align them with current practices and
changes in technology. The amendments are effective for annual
reports on Form 10-K for fiscal years ending on or after December 31,
2009. The Company is currently evaluating the impact of the
amendments on its consolidated financial position, results of operations and
cash flows.
(2) Going
Concern
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has reported
substantial losses from continuing operations in the last two years and has a
net working capital deficit in the amount of $5,769,525 and a stockholders’
equity deficit in the amount of $85,314 at September 30, 2009. These
factors, among others, indicate that the Company may be unable to continue as a
going concern for a reasonable period of time.
A
substantial portion of this deficit relates to outstanding borrowings under two
separate bank credit agreements, both of which expire in less than one year (see
Note 5). The Company expects to ultimately extend and/or restructure
these credit agreements on a satisfactory basis. Accordingly, the
Company believes that it will be able to repay or refinance its present
obligations.
The
consolidated financial statements do not contain any adjustments to reflect the
possible future effects on the classification of assets or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
(3) Impairment
Adjustment
The
Company recognized a non-cash impairment adjustment in the carrying value of the
goodwill assigned to its Canadian Energy Services subsidiary, Decca Consulting,
Ltd. (“Decca”), as of March 31, 2009 in the amount of
$1,900,000. This amount is in addition to a similar impairment
adjustment recognized as of December 31, 2008 in the amount of
$1,500,000.
Since the
worldwide decline in energy prices began in the fourth quarter of 2008, Decca
has experienced a substantial decrease in the demand for its drilling,
completion and other on-site consulting services provided to the Canadian oil
and gas industry. The impairment adjustment recognized as of March
31, 2009 was based on then current projections of Decca’s discounted future net
cash flows and, based on the latest such projections, no further impairment has
been recorded since that date. As with the impairment adjustment
recorded as of December 31, 2008, the Company has not recognized a tax benefit
for the impairment adjustment of $1,900,000 in the nine months ended September
30, 2009 because no temporary difference was recognized when the goodwill was
initially established upon the acquisition of Decca in March 2007.
(4) Discontinued
Operations
On March
11, 2008, the Company sold the capital stock of its domestic Energy Services
subsidiary, Petroleum Engineers, Inc. (“PEI”), to Hamilton Engineering, Inc. for
a total sales price of $15.0 million. The Company applied the sales
proceeds to the repayment of debt and other accrued obligations including the
outstanding indebtedness of PEI under a revolving bank credit agreement in the
amount of $3.2 million and unsecured seller debt and other liabilities in the
amount of $4.5 million (see Note 5).
The
Company recognized a pre-tax gain from the sale of PEI in the first quarter of
2008 in the amount of $1,350,000 (which was subsequently reduced in the first
quarter of 2009 due to payment of an indemnified loss in the amount of
$39,000). The results of discontinued operations of PEI for the nine
months ended September 30, 2009 and 2008, including the original and adjusted
gain on the sale, are summarized as follows:
|
|
Nine Months Ended September 30, | ||||||||
|
|
2009
|
2008
|
|||||||
|
Energy
services revenues
|
$ | - | $ | 3,876,949 | |||||
|
Cost
of energy services
|
- | (2,919,987 | ) | ||||||
|
Gross
profit
|
- | 956,962 | |||||||
|
General
&
administrative
|
- | (914,929 | ) | ||||||
|
Interest
expense, net
|
- | (255,321 | ) | ||||||
|
Gain
on
sale
|
(38,519 | ) | 1,349,855 | ||||||
|
Net
income before
taxes
|
(38,519 | ) | 1,136,567 | ||||||
|
Provision
for income
taxes
|
13,100 | (1,546,100 | ) | ||||||
|
Net
income (loss)
|
$ | (25,419 | ) | $ | (409,533 | ) | |||
The
Company has indemnified Hamilton with respect to certain other pre-sale
contingencies of PEI for a two year period. In order to secure such
indemnities, Hamilton withheld sales proceeds in a two-year escrow account in
the amount of $1.6 million and a one-year tax reserve account in the amount of
$1.5 million (which has now expired). Upon expiration of the two-year
indemnity period in March 2010, the unexpended balance of the escrow account
will revert to the Company. The escrow account, along with accrued
interest thereon, is reflected as restricted cash on the Balance Sheet as of
September 30, 2009.
(5) Long
Term Debt
As of
September 30, 2009 and December 31, 2008, the Company had the following
long-term debt obligations:
|
September
30,
|
December
31,
|
||||||||
|
2009
|
2008
|
||||||||
|
$25,000,000
line of credit with a bank, maturing on August 5, 2010, interest at 1.0%
above prime payable monthly, secured by first lien on CYMRI, LLC’s oil and
gas properties, with a declining borrowing base of $3,076,000 as of
September 30, 2009
|
$ | 3,001,000 | $ | 2,600,000 | |||||
|
Notes
payable to individuals and entities, incurred in acquisition of CYMRI,
bearing interest at 10%, with principal and accrued interest due at
extended maturity in March 2010, unsecured
|
1,125,000 | 1,125,000 | |||||||
|
$4,000,000
(Cdn) revolving line of credit with a bank, interest at 4.5% above
Canadian prime payable monthly through maturity in May 2010, secured by
accounts receivable of Canadian petroleum services
business
|
785,503 | 1,272,799 | |||||||
|
Notes
payable to 2 individuals, incurred in acquisition of Decca Consulting,
Ltd., bearing interest at 9%, payable in monthly installments of $30,099
(Cdn) from April 1, 2007 through March 31, 2012, unsecured
|
675,998 | 779,040 | |||||||
|
Advances
from stockholders, bearing interest at 10%, with principal and accrued
interest due in March 2010, unsecured
|
1,047,317 | 1,307,317 | |||||||
|
Other
short term notes for liability insurance and accrued payables, interest
rates at 7% to 9%
|
243,835 | 128,554 | |||||||
| 6,878,653 | 7,212,710 | ||||||||
|
Current
portion of long term debt - stockholders
|
(1,729,143 | ) | (246,826 | ) | |||||
|
Current
portion of long term debt - others
|
(4,683,512 | ) | (81,729 | ) | |||||
| $ | 465,998 | $ | 6,884,155 | ||||||
Borrowings
under the bank credit agreement secured by the oil and gas properties owned by
CYMRI, LLC (“CYMRI”), a subsidiary in the Exploration & Production segment,
are subject to a borrowing base, which is periodically redetermined, based on
oil and gas reserves. The bank credit agreement requires maintenance
of certain financial covenants regarding working capital, interest coverage
level, tangible net worth, and the non-payment of dividends. The bank
credit agreement does not require monthly principal payments so long as
outstanding borrowings are less than a declining borrowing base. As
of September 30, 2009, the borrowing base stood at $3,076,000, and was declining
by $58,000 per month.
CYMRI was
in violation of certain financial covenants under the credit agreement for the
first three quarters of 2009, however, CYMRI was not in default of any principal
or interest payments due under the credit agreement during this
period. The bank granted a waiver of such covenant violation in
exchange for the Company agreeing to put in place an acceptable commodity
hedging transaction (see Note 6). The bank
recently agreed to amend the credit agreement to waive similar covenant
violations in the second quarter of 2009 and to establish new financial
covenants with which the Company was in compliance in the third quarter of
2009. Because the credit agreement, as presently structured, matures
in August 2010, the outstanding borrowings are reflected as a current liability
as of September 30,
2009.
The
Company has a second bank credit agreement, which is secured by accounts
receivable of its Canadian Energy Services subsidiary, Decca. The
credit agreement provides for a revolving borrowing base of 85% of qualifying
accounts receivable up to $4,000,000 (Cdn), with an interest rate of 4.5% above
Canadian prime (2.25% as of September 30, 2009). Since March 31,
2009, Decca has been in violation of certain covenants under the credit
agreement, and is currently in discussions with the bank to obtain a waiver of
such violations. Because the credit agreement, as presently
structured, matures in May 2010, the outstanding borrowings are reflected as a
current liability as of September 30, 2009.
(6) Commodity
Derivatives
In May
2009, the Company entered into a commodity derivative contract with a major
energy company covering a portion of CYMRI’s projected oil
production. This contract was purchased with a cash outlay of
$125,000 and consists of a “put” option relating to 2,000 barrels of oil per
month for the period from July 2009 to October 2010. Pursuant to this
contract, the counterparty will make monthly settlement payments to CYMRI for
the difference, if any, between the “put” price of $50 per barrel and a
published oil index price for that month, multiplied by 2,000 barrels per
month.
The
Company has applied “mark to market” accounting to this derivative contract from
its inception in accordance with ASC 815-20, “Accounting for Derivative
Instruments and Hedging Activities”. The Company is accounting
for this commodity derivative contract as a non-hedging transaction, as defined
in ASC 815-20. Accordingly, changes in the fair value of the
commodity derivative contract are reflected in current earnings in the period of
the change. In its Consolidated Statement of Operations for the nine
months ended September 30, 2009, the Company has reported an unrealized loss in
the amount of $92,520 due to the decrease in the fair value of this derivative
contract between the inception date of the contract (May 26, 2009) and September
30, 2009.
(7) Net
Income (Loss) Per Share
Basic
income (loss) per common share is computed by dividing the net income or loss by
the weighted average number of shares of common stock outstanding during the
period. Diluted income (loss) per common share is computed by
dividing net income or loss by the weighted average number of shares of common
stock outstanding during the period and potentially dilutive common share
equivalents, consisting of stock options and warrants, under the Treasury Stock
Method. The effects of potential common stock equivalents are not included in
computations when their effect is anti-dilutive. Because of
the net
loss for the nine month periods ended September 30, 2009 and 2008, the basic and
diluted average outstanding shares are considered the same, since including the
shares would have an antidilutive effect on the net loss per share
calculation.
(8) Stock-Based
Compensation
The
Company has a stock-based compensation plan which was approved by the
stockholders in October 2005 and amended in October 2006. Under the
plan, a maximum of 2,400,000 shares may be awarded to directors and employees in
the form of stock options, restricted stock or stock appreciation
rights.
The
exercise price, terms and other conditions applicable to each stock option grant
are generally determined by the Board of Directors. The exercise
price of stock options is set on the grant date and may not be less than the
fair market value of the Company’s Common Stock on that date.
Option
activity with directors and employees since January 1, 2008 were as follows
(including options granted to directors outside of the plan):
|
Number
|
Wtd. Avg.
|
Wtd. Avg.
|
Aggregate
|
||||||||||||||
|
of
|
Exercise
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Shares
|
Price
|
Term (Yrs.)
|
Value
|
||||||||||||||
|
Outstanding
at January 1, 2008
|
1,814,600 | $ | 1.53 | ||||||||||||||
|
Options
forfeited
|
(1,339,600 | ) | (2.03 | ) | |||||||||||||
|
Outstanding
at December 31, 2008
|
475,000 | 0.76 | |||||||||||||||
|
Option
activity
|
- | - | |||||||||||||||
|
Outstanding
at September 30, 2009
|
475,000 | $ | 0.76 | 1.3 | $ | - | |||||||||||
|
Exercisable
at September 30, 2009
|
475,000 | $ | 0.76 | 1.3 | $ | - | |||||||||||
Stock-based
compensation expense related to these options in the amounts of $41,150 and
$355,335 have been recognized as a current period expense in the accompanying
Consolidated Financial Statements for the nine month periods ended September 30,
2009 and 2008, respectively. As of September 30, 2009, total
unrecognized compensation cost of approximately $21,000 related to stock options
is expected to be recognized over a weighted average period of approximately 1.6
years. The estimated fair value of the options granted to employees
under the plan was calculated using a Black Scholes option pricing model. The
following schedule reflects the assumptions included in this model as it relates
to the valuation of such options: (a) Expected volatility – 95%; (b) Expected
risk free interest rate – 6%; (c) Expected dividend yield – zero; (d) Expected
option term – 3 to 4 years, calculated pursuant to the terms of ASC 718-10 as
the option grants qualify as “plain vanilla” under that pronouncement; and (e)
Forfeitures – 0%, subject to adjustment for actual
experience. Vesting terms of the options are generally three
years. The aggregate intrinsic value of employee options granted as
of September 30, 2009 was zero as there were no in-the-money options at that
date.
Pursuant
to a Board approved severance agreement, the Company made a cash severance
payment to its former Chief Executive Officer in March 2008 in the amount of
$200,000 and granted him an additional severance benefit via the issuance of
1,142,857 restricted shares of Common Stock with a then current value of
$280,000, which was included in stock-based compensation expense in March
2008.
(9) Stockholder
Advances
The
Company repaid net stockholder advances in the amount of $260,000 in the nine
months ended September 30, 2009 and received net stockholder advances in the
amount $67,000 in the nine months ended September 30,
2008. Stockholder advances, excluding amounts advanced to finance the
cash portion of the CYMRI purchase price (see Note 5), are reflected as
unsecured long term debt obligations and accrue interest at a rate of 10% per
annum.
(10) Contingencies
A lawsuit
was filed in February 2008 against Decca, the Company’s Canadian Energy Services
subsidiary, claiming unspecified damages related to work performed in the U.S.
in late 2006, prior to the acquisition of Decca. The plaintiff and
Decca recently reached a settlement whereby the plaintiff agreed to dismiss its
claim against Decca, while continuing to pursue its claim against a
co-defendant. In
accordance with the settlement, Decca will be responsible for fees of its legal
counsel through the point of settlement. Decca is currently in
negotiations with both its legal counsel and its former shareholders to
determine the amount of such legal fees to be ultimately paid and the portion of
such fees to be borne by Decca and its former shareholders.
In
October 2008, an insurer for the Company’s inactive Construction Staffing
subsidiary filed a lawsuit against the subsidiary alleging default on a premium
finance obligation in the amount of $200,000, plus interest and attorney’s
fees. Limited discovery in this case has been undertaken to
date. The Company believes that its inactive Construction Staffing
subsidiary has a meritorious defense in this case.
Triumph
Energy, Inc., a subsidiary in the Exploration & Production segment, is a
defendant in several lawsuits involving professional liability and other matters
arising in the normal course of business in the State of
Louisiana. It is not practical at the present time to determine the
amount or likelihood of an unfavorable outcome to the Company’s consolidated
financial position or results of operations of any of the actions against
Triumph. The Company believes that Triumph has meritorious defenses
in each case and is vigorously defending these matters.
(11) Segment
Information
With the
sale of PEI in March 2008 (see Note 4), the Company’s remaining operations are
in the Canadian Energy Services and domestic Exploration & Production
segments. The table below reflects the allocation of certain amounts
in the consolidated Income Statement, other than interest expense and income
taxes (which the Company does not believe are feasible to allocate), and the
consolidated Balance Sheet as of and for the nine months ended September 30,
2009 (in 000’s):
|
Energy
|
Exploration
&
|
||||||||||||
|
Services
|
Production
|
||||||||||||
|
(Can.)
|
(U. S.)
|
Total
|
|||||||||||
|
Income
Statement Data:
|
|||||||||||||
|
Operating
revenues
|
$ | 10,691 | $ | 1,915 | $ | 12,606 | |||||||
|
Other revenues
|
51 | 13 | 64 | ||||||||||
|
Total
revenues
|
10,742 | 1,928 | 12,670 | ||||||||||
|
Depreciation, depletion &
amortization
|
- | (341 | ) | (341 | ) | ||||||||
|
Impairment
expense
|
(1,900 | ) | - | (1,900 | ) | ||||||||
|
Other allocable operating
expenses
|
(9,758 | ) | (1,606 | ) | (11,364 | ) | |||||||
|
Gross profit
(loss)
|
(916 | ) | (19 | ) | (935 | ) | |||||||
|
General &
administrative
|
(1,386 | ) | |||||||||||
|
Operating loss
|
(2,321 | ) | |||||||||||
|
Interest expense
|
(581 | ) | |||||||||||
|
Unrealized loss on oil and gas
derivatives
|
(93 | ) | |||||||||||
|
Net loss from continuing
operations before taxes
|
$ | (2,995 | ) | ||||||||||
|
Balance
Sheet Data:
|
|||||||||||||
|
Subsidiary assets
|
$ | 1,593 | $ | 7,267 | $ | 8,860 | |||||||
|
Goodwill
|
1,536 | - | 1,536 | ||||||||||
|
Segment
assets
|
3,129 | 7,267 | 10,396 | ||||||||||
|
Corporate assets
|
1,141 | ||||||||||||
|
Consolidated
assets
|
$ | 11,537 | |||||||||||
The table
below reflects the allocation of certain Income Statement data between these two
reportable segments for the nine months ended September 30, 2008 (in
000’s):
|
Income
Statement Data:
|
|||||||||||||
|
Operating
revenues
|
$ | 19,387 | $ | 3,533 | $ | 22,920 | |||||||
|
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 | ) | |||||||||||
|
Operating loss
|
(381 | ) | |||||||||||
|
Interest expense
|
(1,051 | ) | |||||||||||
|
Net loss from continuing
operations before taxes
|
$ | (1,432 | ) | ||||||||||
There is
no presentation of Balance Sheet data allocated between these two reportable
segments as of September 30, 2008 inasmuch as the consolidated Balance Sheet as
of that date is not included in this report.
(12) Subsequent
Event
On
November 5, 2009, the Company’s Board of Directors approved a resolution to
effect a 1-for-10 reverse split of the Company’s Common Stock. This
transaction does not require shareholder approval and the Company expects to
submit a notice addressing this action to the Financial Industry Regulatory
Authority (“FINRA”) by November 15, 2009 and anticipates that the reverse stock
split will become effective by November 30, 2009. The reverse stock
split will have no effect on the Company’s total Stockholders’
Equity.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion of our financial condition and results of operations should
be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements and notes thereto included in Item 1 in this
Quarterly Report on Form 10-Q. This item contains forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from
those indicated in such forward-looking statements.
Overview
and History
Stratum
Holdings, Inc. was originally incorporated in the State of Nevada on September
3, 2003 under the name Frontier Staffing, Inc. We were initially
formed to enter the Construction Staffing business and commenced operations in
that segment through a stock-for-stock exchange with a private company in
January 2004. We completed a public offering of our Common Stock in
March 2005 and our shares began trading on the OTC Bulletin Board in July
2005. We changed our name in October 2005 to Tradestar Services,
Inc.
On May
23, 2006, we acquired the outstanding common stock of CYMRI Corporation
(“CYMRI”) for total consideration of $12.7 million paid in a combination of
cash, notes payable and Common Stock. At the time of the acquisition,
CYMRI was engaged in the Exploration & Production business with properties
located in Texas and Louisiana while its subsidiary, Petroleum Engineers, Inc.
(“PEI”), performed Energy Services largely for customers in the United
States.
On March
2, 2007, we acquired the outstanding capital stock of Decca Consulting, Ltd.
(“Decca”) for total consideration of $5.1 million paid in a combination of cash,
notes payable and Common Stock. At the time of the acquisition, Decca
provided consulting services for the Canadian energy industry. In
March 2007, we also changed our name to Stratum Holdings, Inc.
On
October 26, 2007, we sold substantially all of the assets of our Construction
Staffing subsidiary, Tradestar Construction Services, Inc. (“Tradestar
Construction”), to a private construction staffing company. We
received cash proceeds of $3.2 million plus a working capital
adjustment. We applied the sales proceeds to the repayment of debt
and other accrued obligations including the outstanding indebtedness of
Tradestar Construction under a revolving bank credit agreement in the amount of
$1,810,210 and a bank term loan in the amount of $451,920. We
reported a pre-tax gain from the sale of these assets in the fourth quarter of
2007 in the amount of $1,664,000 (which was subsequently reduced in the fourth
quarter of 2008 due to an uncollectible insurance refund in the amount of
$357,000). As a result of this sale, we exited from the Construction
Staffing segment.
On March
11, 2008, we sold the capital stock of our domestic Energy Services subsidiary,
PEI, to Hamilton Engineering, Inc. (“Hamilton”) for a total sales price of $15.0
million. We applied the sales proceeds to the repayment of debt and
other accrued obligations including the outstanding indebtedness of PEI under a
revolving bank credit agreement in the amount of $3.2 million and unsecured
seller debt and other liabilities in the amount of $4.5 million. We
recognized a pre-tax gain from the sale of PEI in the first quarter of 2008 in
the amount of $1,350,000 (which was subsequently reduced in the first quarter of
2009 due to payment of an indemnified loss in the amount of
$39,000). We have reported the revenues and expenses of PEI for the
period that we owned it in 2008 as
discontinued operations in the accompanying Consolidated Statement of
Operations.
As a
result of the PEI sale, we exited from the domestic portion of our Energy
Services segment leaving us with the Canadian portion of our Energy Services
segment as well as our operations in the domestic Exploration & Production
segment.
In
addition to the corporate level transactions noted above, we underwent a
significant management change resulting in the election of a new Chief Executive
Officer and the resignation of certain Board members, as disclosed in our
Current Report on Form 8-K filed on June 3, 2008.
Results
of Operations
The
following discussion reflects the revenues and expenses of our retained Canadian
Energy Services and our domestic Exploration & Production segments as
continuing operations while the revenues and expenses of our exited domestic
Energy Services segment is reported as discontinued operations.
Three months ended September 30,
2009 versus three months ended September 30, 2008 — Total revenues from
continuing operations for the three months ended September 30, 2009 were
$3,672,000 compared to $8,409,000 for the three months ended September 30,
2008.
Revenues
from Decca’s continuing Energy Services for the three months ended September 30,
2009 were $2,877,000 compared to $6,984,000 for the three months ended September
30, 2008. This decrease was largely due to a secular decline of
approximately 50% in the Canadian drilling rig count, Decca’s primary market
indicator. Decca’s billings for Energy Services in the three months
ended September 30, 2009 were approximately 2,395 man days at an average billing
rate of approximately $1,200 per day.
Revenues
from CYMRI’s oil and gas sales for the three months ended September 30, 2009
were $782,000 compared to $1,305,000 for the three months ended September 30,
2008. In the three months ended September 30, 2009, revenues
from oil production were $692,000, reflecting volumes of 10,715 barrels at an
average price of $64.55 per barrel, while gas revenues were $90,000, reflecting
volumes of 23,051 Mcf at an average price of $3.89 per Mcf. In the
three months ended September 30, 2008, revenues from oil production were
$1,042,000, reflecting volumes of 8,008 barrels at an average price of $130.13
per barrel, while gas revenues were $263,000, reflecting volumes of 21,847 Mcf
at an average price of $12.04 per Mcf.
Costs of
Decca’s continuing Energy Services for the three months ended September 30, 2009
were $2,620,000 versus $6,517,000 for the three months ended September 30,
2008. As with the decrease in Energy Services revenues, this decrease
was largely due to the impact of the decline in the Canadian drilling rig
count. Despite competitive pressures, Decca was able to slightly
increase the gross margin on its consulting services to approximately 9% of
revenues for the three months ended September 30, 2009 compared to approximately
7% for the three months ended September 30, 2008.
Lease
operating expenses (“LOE”), including production taxes, were $368,000 for the
three months ended September 30, 2009 versus $378,000 for the three months ended
September 30, 2008, representing LOE of CYMRI’s oil and gas production
operations. This decrease was due to a change in the relative timing
of certain expenses between the third quarter of 2009 compared to the third
quarter of 2008.
Depreciation,
depletion and amortization (“DD&A”) expense for the three months ended
September 30, 2009 was $118,000 versus $83,000 for the three months ended
September 30, 2008, largely representing DD&A of CYMRI’s oil and gas
properties. This increase was due to slightly higher production
rates.
Workover
expenses for the three months ended September 30, 2009 were $106,000 versus
$294,000 for the three months ended September 30, 2008, representing workovers
on CYMRI’s South Texas oil and gas properties. This decrease was due
to non-recurring workover operations in the Burnell Field in the third quarter
of 2008.
Selling,
general and administrative (“SG&A”) expenses attributable to continuing
operations for the three months ended September 30, 2009 were $406,000 compared
to $836,000 for the three months ended September 30, 2008. This
decrease was due to a reduction in the Company’s level of corporate overhead
expenses since the sale of PEI to Hamilton in March 2008.
Interest
expense attributable to continuing operations for the three months ended
September 30, 2009 was $193,000 versus $205,000 for the three months ended
September 30, 2008. This decrease was primarily due to a decline in
interest rates.
Unrealized
gain on oil and gas derivatives for the three months ended September 30, 2009
was $5,000 versus zero for the three months ended September 30,
2008. This increase was due to the change in fair value of a “put”
option covering 2,000 barrels of oil per month for 16 months, which was acquired
in May 2009 (see Note 6).
Income
taxes attributable to continuing operations were a provision of $68,000 for the
three months ended September 30, 2009 compared to a provision of $33,000 for the
three months ended September 30, 2008 and reflect an adjusted benefit rate in
the current quarter on the year-to-date net loss from continuing
operations.
Nine months ended September
30, 2009 versus nine months
ended September 30,
2008 — Total revenues from continuing operations for the nine months
ended September 30, 2009 were $12,670,000 compared to $23,137,000 for the nine
months ended September 30, 2008.
Revenues
from Decca’s continuing Energy Services for the nine months ended September 30,
2009 were $10,692,000 compared to $19,387,000 for the nine months ended
September 30, 2008. This decrease was largely due to a secular
decline of approximately 45% in the Canadian drilling rig count, Decca’s primary
market indicator. Decca’s billings for Energy Services in the nine
months ended September 30, 2009 were approximately 9,030 man days at an average
billing rate of approximately $1,185 per day.
Revenues
from CYMRI’s oil and gas sales for the nine months ended September 30, 2009 were
$1,915,000 compared to $3,533,000 for the nine months ended September 30,
2008. In the nine months ended September 30, 2009, revenues
from oil production were $1,631,000, reflecting volumes of 31,301 barrels at an
average price of $52.09 per barrel, while gas revenues were $284,000, reflecting
volumes of 71,093 Mcf at an average price of $3.99 per Mcf. In the
nine months ended September 30, 2008, revenues from oil production were
$2,902,000, reflecting volumes of 27,329 barrels at an average price of $106.21
per barrel, while gas revenues were $631,000, reflecting volumes of 66,168 Mcf
at an average price of $9.53 per Mcf.
Costs of
Decca’s continuing Energy Services for the nine months ended September 30, 2009
were $9,758,000 versus $17,859,000 for the nine months ended September 30,
2008. As with the decrease in Energy Services revenues, this decrease
was largely due to the impact of the decline in the Canadian drilling rig
count. Despite competitive pressures, Decca was able to slightly
increase the gross margin on its consulting services to approximately 8% of
revenues for the nine months ended September 30, 2009 compared to approximately
8% for the nine months ended September 30, 2008.
Lease
operating expenses (“LOE”), including production taxes, were $1,309,000 for the
nine months ended September 30, 2009 versus $1,305,000 for the nine months ended
September 30, 2008, representing LOE of CYMRI’s oil and gas production
operations. This increase was primarily due to higher water handling
expenses in CYMRI’s Burnell Field in the first quarter of 2009.
Depreciation, depletion and amortization (“DD&A”) expense for the nine months ended September 30, 2009 was $341,000 versus $333,000 for the nine months ended September 30, 2008, largely representing DD&A of CYMRI’s oil and gas properties. This increase was due to slightly higher production rates.
Impairment
expense applicable to the goodwill assigned in the Decca acquisition was
$1,900,000 for the nine months ended September 30, 2009 versus zero for the nine
months ended September 30, 2008. This increase reflects an impairment
adjustment recognized as of March 31, 2009 in the amount of $1,900,000 (see Note
3).
Workover
expenses for the nine months ended September 30, 2009 were $298,000 versus
$523,000 for the nine months ended September 30, 2008, representing workovers on
CYMRI’s South Texas oil and gas properties. This decrease was due to
non-recurring workover operations in the Burnell Field in the third quarter of
2008.
Selling,
general and administrative (“SG&A”) expenses attributable to continuing
operations for the nine months ended September 30, 2009 were $1,385,000 compared
to $3,499,000 for the nine months ended September 30, 2008. This
decrease was due to a reduction in the Company’s level of corporate overhead
expenses since the sale of PEI to Hamilton in March 2008.
Interest
expense attributable to continuing operations for the nine months ended
September 30, 2009 was $581,000 versus $1,051,000 for the nine months ended
September 30, 2008. This decrease was due to an overall decline in
interest rates as well as the repayment of certain corporate debt obligations
following the sale of PEI to Hamilton in March 2008.
Unrealized
loss on oil and gas derivatives for the nine months ended September 30, 2009 was
$93,000 versus zero for the nine months ended September 30,
2008. This increase was due to the change in fair value of a “put”
option covering 2,000 barrels of oil per month for 16 months, which was acquired
in May 2009 (see Note 6).
Income
taxes attributable to continuing operations were a benefit of $155,000 for the
nine months ended September 30, 2009 compared to a benefit of $487,000 for the
nine months ended September 30, 2008 and reflect a benefit rate of only 5% on
pre-tax net loss of $2,995,000 in the nine months ended September 30, 2009 (due
to no tax benefit being booked for the Decca goodwill impairment of
$1,900,000).
Income
from discontinued Energy Services operations, net of income taxes, was a net
loss of $25,400 for the nine months ended September 30, 2009 versus $410,000 for
the nine months ended September 30, 2008. As further described in
Note 4, we sold the capital stock of our domestic Energy Services subsidiary,
PEI, to Hamilton in March 2008. The results of operations of our
domestic Energy Services business, including the pre-tax sales gain in the
amount of $1,350,000, have been classified as discontinued operations in the
Consolidated Statement of Operations, net of applicable income tax expense
reflecting the estimated taxable gain on the sale in 2008.
Liquidity
and Capital Resources
Operating activities. Net
cash used in operating activities from continuing operations for the nine months
ended September 30, 2009 was $997,000 compared to $712,000 for the nine months
ended September 30, 2008. This increased use of financial resources
reflected a small net decline in certain operating cash flow
components. Net cash used in operating activities from discontinued
operations was only $25,000 for the nine months ended September 30, 2009 whereas
net cash provided by operating activities from discontinued operations was
$296,000 for the nine months ended September 30, 2008 reflecting positive cash
flow from PEI’s operations.
Investing activities. Net
cash provided by investing activities for the nine months ended September 30,
2009 was $1,317,000 compared to $11,514,000 for the nine months ended September
30, 2008. This fluctuation was largely due to the sale of PEI to
Hamilton in March 2008 for $15.0 million, less the initial purchases of
restricted cash in the amount of $3.1 million for an escrow account and a tax
reserve account, pursuant to the securities purchase agreement with
Hamilton. With expiration of the tax reserve account, the Company
converted $1,491,000 of the tax reserve account from restricted cash to
unrestricted cash in the nine months ended September 30, 2009.
Financing activities. Net
cash used in financing activities for the nine months ended September 30, 2009
was $334,000 compared to $11,080,000 in the prior year period. This
relative increase in financing cash flows was primarily due to the absence of
non-recurring repayments of long term debt and stockholder advances which were
made with the proceeds of the sale of PEI to Hamilton in March 2008 in the gross
amount of $15.0 million.
Following
the sale of PEI in March 2008, we have remaining long term debt obligations to
banks and other lenders (see Note 5). A substantial portion of our
long term debt is in the form of a bank credit facility secured by CYMRI’s
producing oil and gas properties. Borrowings under the bank credit
agreement amounted to $3,001,000 as of September 30, 2009 and are subject to a
borrowing base, which is periodically redetermined, based on oil and gas
reserves. CYMRI’s borrowings under its original bank credit agreement
were refinanced with another bank, pursuant to a new credit agreement having
substantially similar terms, on August 5, 2008. The new bank credit
agreement does not require monthly principal payments so long as outstanding
borrowings are less than a declining borrowing base. As of September
30, 2009, the borrowing base stood at $3,076,000, and was declining by $58,000
per month.
CYMRI was
in violation of certain financial covenants under the credit agreement for the
first three quarters of 2009, however, CYMRI was not in default of any principal
or interest payments due under the credit agreement during this
period. The bank granted a waiver of the covenant violation in the
first quarter of 2009 in exchange for the Company agreeing to put in place an
acceptable commodity hedging transaction (see Note 6). The bank
recently agreed to amend the credit agreement to waive similar covenant
violations in the second quarter of 2009 and to establish new financial
covenants with which the Company was in compliance in the third quarter of
2009.
We also
have a second bank credit agreement, which is secured by accounts receivable of
our Canadian Energy Services subsidiary, with outstanding borrowings of $785,000
as of September 30, 2009 (see Note 5). Borrowings under a similar
credit agreement with the same bank were fully paid in the sale of our domestic
Energy Services business in March 2008. This credit agreement
currently provides for a revolving borrowing base of 85% of qualifying accounts
receivable up to $4,000,000 (Cdn), with an interest rate of 4.5% above Canadian
prime. Since March 31, 2009, Decca has been in violation of certain
covenants under the credit agreement, and the Company is currently in
discussions with the bank to obtain a waiver of such violations.
With the
completion of our sales of PEI in March 2008 and Tradestar Construction in
October 2007, our primary ongoing capital expenditures are in the Exploration
& Production segment, which can be highly capital intensive. In
this business, expenditures for CYMRI’s drilling and equipping of oil and gas
wells are typically required to maintain or increase existing production levels
and production often declines in a relatively short period of time if
maintenance capital is not invested timely. We normally attempt to
finance CYMRI’s capital expenditure requirements through a combination of cash
flow from operations and secured bank borrowings and we expect that these
sources will be sufficient to meet our capital expenditures in
2009. We presently have relatively low capital expenditure
requirements relating to CYMRI’s oil and gas properties as evidenced by a total
of only $174,000 being spent in the first three quarters of
2009. While we expect additional amounts of capital expenditures in
the fourth quarter of 2009, we do not expect such amounts to be significant and
we believe that such amounts, as well as any short term operating losses, can be
financed under our existing bank credit agreement through a combination of a
borrowing base increase and/or reduced monthly principal payments.
Strategic
Plans
The
Company has reported substantial consolidated operating losses and working
capital deficits since completing the acquisitions of CYMRI/PEI in May 2006 and
Decca in March 2007. In order to address longer term liquidity needs,
our Board of Directors authorized Management in July 2007 to pursue a range of
alternative actions including the sale of one or more of the Company’s operating
assets or businesses. This decision by our Board of Directors
ultimately led the Company to seek the sales of: (a) Tradestar Construction to a
private construction staffing company in October 2007; and (b) PEI to an
affiliate of Hamilton in March 2008. There are no further corporate
level transactions contemplated at the present time although we may decide to
expand our domestic Exploration & Production business by making selective
acquisitions of low risk oil and gas properties with exploitation
potential.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on consolidated financial statements which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We believe that certain accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements as indicated below. See our Annual Report on
Form 10-K for the year ended December 31, 2008 for a further description of our
critical accounting policies and estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Information
for this Item is not required as the Registrant is a “smaller reporting company”
as defined in Rule 12b-2 of the Exchange Act.
ITEM 4T. CONTROLS AND
PROCEDURES
(a)
Disclosure controls and procedures
As of the
date of this report, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our internal controls
over financial reporting which encompasses our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Office and
Chief Financial Officer have concluded that our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report were not
effective because of a material weakness in our internal controls over financial
reporting, as described below, which we view as an integral part of our
disclosure controls and procedures.
The
material weakness relates to deficient completeness and cut-off controls with
regard to revenues and cost of sales at our Canadian Energy Services subsidiary,
Decca Consulting, Ltd. The situation giving rise to this lack of
independent review arose since approximately the end of the second quarter of
2008 as Decca previously employed a highly experienced accountant to review the
subsidiary’s monthly financial statements. In order to address this
material weakness, management has implemented an interim compensating control in
the form of an entity level analytical review by its Chief Financial
Officer. To the extent practical in light of Decca’s current
financial performance (see Note 3), the Company anticipates the implementation
of improved completeness and cut-off controls with regard to revenues and cost
of sales at the operating unit level at an appropriate time. It
should be noted, however, that the impact of this material weakness on Stratum’s
consolidated results of operations is substantially mitigated by the fact that
Decca has a relatively low gross margin between revenues and cost of sales of
approximately 9%.
Notwithstanding
this material weakness, management believes that the consolidated financial
statements included in this report fairly present, in all material respects, our
consolidated financial position and results of operations as of and for the
quarter ended September 30, 2009.
(b)
Changes in internal controls over financial reporting
There was
no change in our internal controls over financial reporting that occurred during
the quarter ended September 30, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
See Note
10 to Consolidated Financial Statements.
ITEM 1A. RISK
FACTORS
Information
for this Item is not required as the Registrant is a “smaller reporting
company”
as defined in Rule 12b-2 of the Exchange Act.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15(d)-14(a)
|
|
|
|
||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15(d)-14(a)
|
|
|
|
||
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 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
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
STRATUM
HOLDINGS, INC.
|
|
|
/s/ Larry M.
Wright
|
|
|
Larry
M. Wright
|
|
|
Chief
Executive Officer
|
|
|
/s/D. Hughes
Watler,
Jr.
|
|
|
D.
Hughes Watler, Jr.
|
|
|
Chief
Financial Officer
|
November
10, 2009
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