MANUFACTURED HOUSING PROPERTIES INC. - Quarter Report: 2013 March (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 March 31, 2013
Commission File No. 000-51229
STRATUM HOLDINGS, INC.
(Exact Name of Registrant as specified in its charter)
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Nevada
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51-0482104
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification Number)
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11011 Richmond Avenue, Suite 525
Houston, Texas
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77042
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(Address of principal
executive offices)
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(zip code)
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(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: þ No: o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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: þ No: o
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 o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes: o No: þ
The number of shares outstanding of Common Stock, par value $.01 per share, as of May 1, 2013 was 2,655,738 shares.
STRATUM HOLDINGS, INC.
FORM 10-Q
MARCH 31, 2013
INDEX
| PART I. FINANCIAL INFORMATION |
Page
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| Item 1. |
Financial Statements
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3
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4
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5
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6
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| Item 2. |
10
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| Item 3. |
13
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| Item 4. |
13
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| PART II. OTHER INFORMATION | ||
| Item 1. |
14
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| Item 1A. |
14
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| Item 2. |
14
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| Item 3. |
14
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| Item 4. |
14
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| Item 5. |
14
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| Item 6. |
15
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| Signature |
16
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2
(Unaudited)
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March 31,
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December 31,
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|||||||
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2013
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2012
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 340,934 | $ | 512,835 | ||||
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Accounts receivable (net of allowance for doubtful accounts of $228,574)
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373,450 | 333,601 | ||||||
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Prepaid expenses and other
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62,129 | 77,315 | ||||||
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Notes receivable from sale of subsidiary
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923,180 | 778,596 | ||||||
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Total current assets
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1,699,693 | 1,702,347 | ||||||
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Property and equipment:
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Oil and gas properties, evaluated (full cost method)
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14,939,278 | 14,928,690 | ||||||
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Other property and equipment
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187,568 | 187,568 | ||||||
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Total property and equipment
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15,126,846 | 15,116,258 | ||||||
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Less: Accumulated depreciation, depletion and amortization
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(9,717,873 | ) | (9,597,881 | ) | ||||
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Net property and equipment
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5,408,973 | 5,518,377 | ||||||
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Other assets:
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Notes receivable from sale of subsidiary (less allowance for uncollectible
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amount of $250,000)
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513,673 | 632,306 | ||||||
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Other noncurrent assets
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5,237 | 5,238 | ||||||
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Total other assets
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518,910 | 637,544 | ||||||
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Total assets
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$ | 7,627,576 | $ | 7,858,268 | ||||
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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
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$ | 14,714 | $ | 14,714 | ||||
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Current portion of long-term debt - others
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2,419,474 | 2,558,790 | ||||||
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Accounts payable
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696,508 | 723,513 | ||||||
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Accrued liabilities
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1,694,018 | 1,613,474 | ||||||
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Fair value of oil and gas derivatives
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12,340 | 4,900 | ||||||
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Total current liabilities
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4,837,054 | 4,915,391 | ||||||
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Long-term debt, net of current portion
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170,972 | 194,324 | ||||||
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Deferred income taxes
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462,800 | 508,800 | ||||||
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Asset retirement obligations
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407,690 | 398,710 | ||||||
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Total liabilities
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5,878,516 | 6,017,225 | ||||||
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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, $.01 par value per share, 5,000,000 shares authorized,
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2,655,738 shares issued and outstanding
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26,557 | 26,557 | ||||||
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Additional paid in capital
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12,894,490 | 12,894,490 | ||||||
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Accumulated deficit
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(11,171,987 | ) | (11,080,004 | ) | ||||
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Total stockholders’ equity
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1,749,060 | 1,841,043 | ||||||
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Total liabilities and stockholders’ equity
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$ | 7,627,576 | $ | 7,858,268 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
(Unaudited)
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Three Months Ended March 31,
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2013
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2012
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Revenues:
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Oil and gas sales
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$ | 765,300 | $ | 705,560 | ||||
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Total revenues
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765,300 | 705,560 | ||||||
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Operating expenses:
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Lease operating expense
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402,556 | 361,332 | ||||||
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Depreciation, depletion and amortization
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119,993 | 122,591 | ||||||
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Workover expense
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42,782 | 259,826 | ||||||
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Selling, general and administrative
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308,897 | 328,291 | ||||||
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Total operating expenses
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874,228 | 1,072,040 | ||||||
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Operating loss
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(108,928 | ) | (366,480 | ) | ||||
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Other income (expense):
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Interest income
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26,146 | 34,602 | ||||||
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Interest expense
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(47,761 | ) | (44,788 | ) | ||||
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Loss on oil and gas derivatives
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(7,440 | ) | (103,878 | ) | ||||
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Loss before income taxes
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(137,983 | ) | (480,544 | ) | ||||
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Benefit for income taxes
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46,000 | 162,500 | ||||||
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Net loss
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$ | (91,983 | ) | $ | (318,044 | ) | ||
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Net loss per share, basic and diluted
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$ | (0.03 | ) | $ | (0.12 | ) | ||
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Weighted average shares outstanding, basic and diluted
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2,655,738 | 2,655,738 | ||||||
See accompanying notes to unaudited consolidated financial statements.
4
| Three Months Ended March 31, | ||||||||
| 2013 | 2012 | |||||||
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Cash flows from operating activities:
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Net loss
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$ | (91,983 | ) | $ | (318,044 | ) | ||
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Adjustments to reconcile net loss to net
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Depreciation, depletion and amortization
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119,993 | 122,591 | ||||||
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Benefit for income taxes
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(46,000 | ) | (162,500 | ) | ||||
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Unrealized loss on oil and gas derivatives
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7,440 | 103,878 | ||||||
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Changes in current assets and liabilities
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2,925 | (84,923 | ) | |||||
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Other changes, net
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8,980 | 3,468 | ||||||
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Net cash flows from operating activties
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1,355 | (335,530 | ) | |||||
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Cash flows from investing activities:
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Collection of notes receivable from sale of subsidiary
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- | 593,732 | ||||||
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Purchase of property and equipment
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(10,588 | ) | (20,086 | ) | ||||
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Net cash flows from investing activities
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(10,588 | ) | 573,646 | |||||
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Cash flows from financing activities:
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Payments of long term debt
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(167,449 | ) | (81,657 | ) | ||||
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Proceeds from long term debt
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4,781 | 34,484 | ||||||
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Net payments of stockholder advances
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- | (188,286 | ) | |||||
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Net cash flows from financing activities
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(162,668 | ) | (235,459 | ) | ||||
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Net increase (decrease) in cash and cash equivalents
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(171,901 | ) | 2,657 | |||||
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Cash and cash equivalents at beginning of period
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512,835 | 758,940 | ||||||
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Cash and cash equivalents at end of period
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$ | 340,934 | $ | 761,597 | ||||
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Supplemental cash flow data:
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Cash paid for interest
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$ | 32,723 | $ | 31,341 |
See accompanying notes to unaudited consolidated financial statements.
5
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(1)
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Basis of Presentation
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Interim Financial Information – The accompanying consolidated financial statements have been prepared by Stratum Holdings, Inc. (“we”, “our” or 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 March 31, 2013, the results of its operations for the three month periods ended March 31, 2013 and 2012, and cash flows for the three month periods ended March 31, 2013 and 2012. Certain prior year amounts have been reclassified to conform with the current year presentation. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012.
Recently Issued Accounting Pronouncements – In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update addresses the reporting of certain reclassifications out of accumulated other comprehensive income on the respective line items in the income statement, depending on whether such amounts are required to be reclassified in their entirety to net income. The adoption of ASU 2013-02, effective January 1, 2013, has not had a material impact on the Company’s financial statements.
In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This update clarifies the asset/liability offsetting requirements in a previous update, with respect to derivatives and certain other types of debt and security agreements. The adoption of ASU 2013-01, effective January 1, 2013, has not had a material impact on the Company’s financial statements.
In 2012 and early 2013, the FASB issued several additional Accounting Standards Updates which do not have applicability to the Company.
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(2)
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Sale of Canadian Energy Services Business
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On June 3, 2011, the Company entered into a Stock Purchase Agreement (“SPA”) with a private company to sell the capital stock of its Canadian Energy Services subsidiaries, Decca Consulting, Ltd. and Decca Consulting, Inc. (collectively referred to as “Decca”), for a total sales price of $4,600,000 (plus a working capital adjustment). The sales price consisted of the following components: (a) Cash amount of $350,000 paid at closing; (b) Non-interest bearing notes (the “Receivables Notes”) issued by the purchaser in the amount of $2,776,274 (including the working capital adjustment), payable out of the post-closing collection of Decca’s accounts receivable; and (c) Interest bearing notes (the “Installment Notes”) issued by the purchaser in the amount of $1,850,000, payable in 48 monthly installments of principal and interest, at 8% per annum, commencing on October 1, 2011. The Company recognized a pre-tax gain from this sale in the year ended December 31, 2011 in the amount of $2,695,100.
Subsequent to the sale, the purchaser made periodic payments to the Company on the Receivables Notes in the aggregate amount of $2,776,274 through March 2012, at which time, the notes had been fully paid (except for the difference between the Company’s and the purchaser’s estimates of the final working capital adjustment).
With regard to the Installment Notes in the aggregate amount of $1,850,000, the purchaser did not make monthly payments on the notes beginning in October 2011, in accordance with the stated terms. In April 2012, the Company and the purchaser reached an informal agreement whereby the purchaser began making the stated monthly note payments under a delayed payment plan. Such monthly payments continued through December 2012, at which time, the purchaser informed the Company that it would defer making further monthly payments on the Installment Notes, pending resolution of certain indemnity provisions in the SPA. At that time, the outstanding balance of principal and accrued interest on the Installment Notes was $1,660,902.
6
In February 2013, the purchaser filed a request that the dispute between the parties regarding the Installment Notes be referred to binding arbitration as permitted under the SPA. The Company disagrees with the purchaser’s position on the Installment Notes although it recognizes that limited merit may exist to support the claim of indemnity. Therefore, the Company has filed a counterclaim to the arbitration request while also attempting to reach a negotiated settlement with the purchaser. The Company believes that its probable loss under either an arbitration or settlement would only result in a reduction of the remaining amounts due under the Installment Notes of approximately $250,000. Accordingly, we recorded a loss provision to reduce the carrying value of the Installment Notes in the fourth quarter of 2012 in the amount of $250,000. The Company made no further adjustment to this loss provision in the first quarter of 2013, resulting in an outstanding balance of principal and accrued interest on the Installment Notes as of March 31, 2013, in the net amount of $1,436,853 (of which, $923,180 is classified as a current asset). It is possible that such loss provision will require adjustment in the future as additional information becomes available regarding this matter.
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(3)
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Going Concern
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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 net losses from continuing operations in the last two years and has a substantial working capital deficit as of March 31, 2013. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. 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.
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(4)
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Commodity Derivatives
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In December 2011, the Company entered into a new commodity derivative contract with a major energy company covering a portion of a subsidiary’s domestic oil production. This contract replaced an expiring contract and consists of a “costless collar,” with a floor price of $80.00 per barrel and a ceiling price of $108.00 per barrel, covering 2,000 barrels of oil per month for the calendar years 2012 and 2013.
The Company applies “mark to market” accounting to open derivative contracts in accordance with ASC 815-20, “Accounting for Derivative Instruments and Hedging Activities,” and accounts for such contracts as non-hedging transactions, as defined in ASC 815-20. Accordingly, we reflect changes in fair value of open derivative contracts in current period earnings, based on “Level 3” inputs. In the three month periods ended March 31, 2013 and 2012, the Company reported unrealized derivative losses of $7,440 and $103,878, respectively, based on “Level 3” inputs. In the three month periods ended March 31, 2013 and 2012, the Company reported no realized derivative gains or losses.
7
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(5)
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Long Term Debt
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As of March 31, 2013 and December 31, 2012, the Company had the following long-term debt obligations:
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March 31,
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December 31,
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2013
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2012
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$25,000,000 line of credit with a bank, maturity currently extended to January 1, 2014, interest at 1.0% above prime (but not less than 5.5%) payable monthly, secured by first lien on CYMRI, LLC’s oil and gas properties, with a declining borrowing base of $2,286,000 as of March 31, 2013
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$ | 2,286,000 | $ | 2,436,000 | ||||
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Notes payable to 2 individuals, incurred in acquisition of Decca Consulting, Ltd., paid and restructured into newly issued notes payable in 48 monthly installments of principal and interest (at 8% per annum) commencing October 1, 2011, in conjunction with sale of Decca (see Note 2)
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216,305 | 216,305 | ||||||
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Advances from stockholder, bearing interest at 10%, unsecured (extended since March 2010)
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14,714 | 14,714 | ||||||
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Other short term notes for automobile and insurance financing, interest rates at 6% to 8%
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88,141 | 100,809 | ||||||
| 2,605,160 | 2,767,828 | |||||||
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Current portion of long term debt - stockholders
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(14,714 | ) | (14,714 | ) | ||||
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Current portion of long term debt - others
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(2,419,474 | ) | (2,558,790 | ) | ||||
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Long term debt, net of current portions
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$ | 170,972 | $ | 194,324 | ||||
Borrowings under the bank credit agreement secured by the oil and gas properties owned by CYMRI, LLC (“CYMRI”), a subsidiary in the Exploration & Production business, are subject to a borrowing base, which is periodically redetermined based on oil and gas reserves. The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of March 31, 2013, there was no unutilized borrowing base under the bank credit agreement.
In December 2011, the bank credit agreement was amended to redefine the declining borrowing base, reduce the minimum interest rate to 5.5%, and extend the maturity to January 1, 2014. Notwithstanding this extension, the Company has continuously classified this debt as a current liability since the extension in December 2011 due to its inability to consistently meet certain financial covenants under the credit agreement. As of March 31, 2013, the bank credit agreement will mature in less than one year.
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(6)
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Net Loss Per Share
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Basic income or 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 or 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. In the three months ended March 31, 2013 and 2012, there were no dilutive common stock equivalents reflected in the determination of net loss per share as the effect would have been anti-dilutive.
8
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(7)
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Stockholder Advances
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The Company repaid net stockholder notes and advances in the amounts of zero and $188,286 in the three months ended March 31, 2013 and 2012, respectively. Such advances are reflected as unsecured short term debt obligations and accrue interest at a rate of 10% per annum (see Note 5).
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(8)
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Contingencies
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From time to time the Company may become involved in litigation in the ordinary course of business. At the present time, other than the Company’s disclosures below, the Company’s management is not aware of any such litigation or other legal proceedings that could have a material adverse effect on its results of operations, cash flows or financial condition.
The Company became a party to an arbitration action in the first quarter of 2013 as the result of a dispute with the Decca purchaser regarding payment of the remaining balance of the Installment Notes arising from the sale of Decca in June 2011, as more fully described in Note 2.
Triumph Energy, Inc., a subsidiary in the Exploration & Production segment, and a former subsidiary which was sold in 2008, have been named as joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. Most of these cases have been settled with little or no net cost to Triumph. 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 remaining actions against Triumph. The Company believes that Triumph has meritorious defenses in each case and is vigorously defending these matters. The Company has recorded no provision for estimated losses in these cases as of March 31, 2013.
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 approximately $200,000, plus interest and attorney’s fees. The Company believes that its inactive Construction Staffing subsidiary has a meritorious position in this matter and has not engaged legal counsel to defend this case. A default judgment was rendered in favor of the plaintiff in January 2011 and the Company has recorded an accrual for the subsidiary’s estimated loss exposure of approximately $100,000 as of March 31, 2013.
The Company, as a lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks. The Company is not aware of any environmental claims existing as of March 31, 2013, which have not been provided for, covered by insurance or otherwise have a material impact on its financial position or results of operations. There can be no assurance, however, that current regulatory requirements will not change, or past noncompliance with environmental laws will not be discovered on the Company’s properties
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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
Stratum Holdings, Inc. (“we”, “our” or the “Company”) is a holding company whose operations are presently focused on the domestic Exploration & Production business. In that business, our wholly-owned subsidiaries, CYMRI, L.L.C. and Triumph Energy, Inc., maintain working interests in approximately 45 to 50 producing oil and gas wells in Texas and Louisiana, with net production of approximately 700 MCF equivalent per day. We seek to increase shareholder value through an approach focused on growth and transaction opportunities, either as an acquirer or a seller, in the energy industry.
In late 2012, we formed a new wholly-owned subsidiary, Deployed Energy, Inc., to enter the domestic Energy Services business, primarily in Texas. As of March 31, 2013, this new subsidiary was still in the formative stages and had not commenced revenue producing operations. In conjunction with the startup of Deployed Energy, we may consider divesting oil and gas properties in our Exploration & Production business.
Through June 3, 2011, we also operated in the Canadian Energy Services business via two wholly-owned subsidiaries, Decca Consulting, Ltd. and Decca Consulting, Inc. (collectively referred to as “Decca”). On that date, we sold the outstanding capital stock of Decca to a private company for a total sales price of $4.6 million (subject to certain adjustments), payable in a combination of: (a) Cash; (b) Non-interest bearing notes, which are payable out of the post-closing collection of Decca’s accounts receivable; and (c) Interest bearing notes, payable in 48 monthly installments of principal and interest, commencing on October 1, 2011. We are presently involved in a dispute with the Decca purchaser regarding the timely payment of amounts due to us under the interest bearing notes (see Note 2).
Results of Operations
The following discussion reflects the revenues and expenses for the three month periods ended March 31, 2013 and 2012, as reported in our consolidated financial statements and notes thereto included in Item 1.
Three months ended March 31, 2013 versus three months ended March 31, 2012 — Total revenues, not including interest income, for the three months ended March 31, 2013 were $765,000 compared to $706,000 for the three months ended March 31, 2012.
Revenues from CYMRI’s and Triumph’s oil and gas sales for the three months ended March 31, 2013 were $765,000 compared to $706,000 for the three months ended March 31, 2012. In the three months ended March 31, 2013, revenues from oil production were $709,000, reflecting volumes of 7,058 barrels at an average price of $100.45 per barrel, while gas revenues were $56,000, reflecting volumes of 15,247 Mcf at an average price of $3.67 per Mcf. On an overall basis, these amounts reflect a slight increase in production volumes of approximately 1% as well as an increase in average oil and gas prices of approximately 8%. We expect continued volatility in oil and gas commodity prices in the future.
Lease operating expenses (“LOE”), including production taxes, were $403,000 for the three months ended March 31, 2013 versus $361,000 for the three months ended March 31, 2012, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This increase was due to certain non-recurring expense items in the first quarter of 2013.
10
Depreciation, depletion and amortization (“DD&A”) expense for the three months ended March 31, 2013 was $120,000 versus $123,000 for the three months ended March 31, 2012, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This slight decrease was not considered to be significant.
Workover expenses for the three months ended March 31, 2013 were $43,000 versus $260,000 for the three months ended March 31, 2012, representing workovers on CYMRI’s and Triumph’s oil and gas properties. This decrease was largely experienced in CYMRI’s Burnell Field.
Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2013 were $309,000 compared to $328,000 for the three months ended March 31, 2012. This relatively small decrease was due to the reduction of certain overhead costs.
Interest income for the three months ended March 31, 2013 was $26,000 versus $35,000 for the three months ended March 31, 2012. In both periods, these amounts largely resulted from interest income accrued on the long-term, interest-bearing notes receivable arising from the sale of Decca in June 2011 (see Note 2).
Interest expense for the three months ended March 31, 2013 was $48,000 versus $45,000 for the three months ended March 31, 2012. This slight increase was not considered to be significant.
Loss on oil and gas derivatives for the three months ended March 31, 2013 was $7,000 versus $104,000 for the three months ended March 31, 2012. This fluctuation was due to the change in fair value of CYMRI’s outstanding oil and gas derivative contracts (see Note 4).
Income taxes were a benefit of $46,000 for the three months ended March 31, 2013 compared to $162,000 for the three months ended March 31, 2012. These benefit amounts reflected consolidated income tax rates of approximately 34% in both periods.
Liquidity and Capital Resources
Operating activities. Net cash provided by operating activities for the three months ended March 31, 2013 was $1,000 compared to net cash used in operating activities for the three months ended March 31, 2012 of $336,000. This difference was primarily due to the comparatively lower operating loss in the first quarter of 2013.
Investing activities. Net cash used in investing activities was $11,000 for the three months ended March 31, 2013 compared to net cash provided by investing activities, after deducting capital expenditures, of $573,000 for the three months ended March 31, 2012. This fluctuation largely reflected receipt of payments of the notes receivable from the Decca purchaser of $594,000 in the three months ended March 31, 2012 whereas no such payments were received in the three months ended March 31, 2013 due to the dispute with the purchaser (see Note 2).
Financing activities. Net cash used in financing activities for the three months ended March 31, 2013 was $163,000 compared to $235,000 for the three months ended March 31, 2012. This relative difference in net financing cash flows was primarily due to the reduction in payments of stockholder advances.
As disclosed in Note 5, a substantial portion of our existing long term debt is in the form of a bank credit facility secured by CYMRI/Triumph’s producing oil and gas properties. Borrowings under the bank credit agreement are subject to a borrowing base, which is periodically redetermined, based on oil and gas reserves. Such short term borrowings amounted to $2,286,000 as of March 31, 2013. The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of March 31, 2013, there was no unutilized borrowing base and the maturity was scheduled on January 1, 2014. Notwithstanding this scheduled maturity, the Company has consistently classified such borrowings as a current liability since the extension in December 2011 due to its inability to consistently meet certain financial covenants under the credit agreement. As of March 31, 2013, the bank credit agreement will mature in less than one year.
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Our ongoing capital expenditures are in the Exploration & Production segment, which can be highly capital intensive. In this business, expenditures for CYMRI/Triumph’s drilling and equipping of oil and gas wells are typically required to maintain or increase existing production levels. We normally attempt to finance CYMRI/Triumph’s capital expenditure requirements through a combination of cash flow from operations and secured bank borrowings. We presently have relatively low capital expenditure requirements relating to CYMRI/Triumph’s oil and gas properties as evidenced by a total of only $11,000 being spent as of March 31, 2013. We believe that our capital expenditures for the remainder of 2013 can be financed largely through our traditional sources.
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 net losses from continuing operations in the last two years and presently has a working capital deficit in the amount of $3,137,000. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. 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.
We believe that the June 2011 sale of Decca, on the terms summarized in Note 2, has improved our financial condition. It should be noted, however, that we did not receive the full amount of the sales price in cash at closing and our realization of the remaining sales price will depend on the purchaser ultimately making payments of principal and interest to us in accordance with the terms of our installment notes receivable. In that regard, the purchaser did not make monthly payments on the notes beginning in October 2011, in accordance with the stated terms. In April 2012, the Company and the purchaser reached an informal agreement whereby the purchaser began making the stated monthly note payments under a delayed payment plan. Such monthly payments continued through December 2012, at which time, the purchaser informed the Company that it would defer making further monthly payments on the installment notes, pending resolution of certain indemnity provisions in the Stock Purchase Agreement (“SPA”).
In February 2013, the purchaser filed a request that the dispute between the parties regarding the installment notes be referred to binding arbitration as permitted under the SPA. The Company disagrees with the purchaser’s position on the installment notes although it recognizes that limited merit may exist to support the purchaser’s claim of indemnity. Therefore, the Company has filed a counterclaim to the arbitration request while also attempting to reach a negotiated settlement with the purchaser (see Note 2).
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. See our Annual Report on Form 10-K for the year ended December 31, 2012 for a further description of our critical accounting policies and estimates.
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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 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures
As of March 31, 2013, 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 effective at the reasonable assurance level.
(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 March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II.
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OTHER INFORMATION
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ITEM 1.
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See Note 8 to Consolidated Financial Statements.
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ITEM 1A.
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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.
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ITEM 3.
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None.
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ITEM 4.
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None.
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OTHER INFORMATION
On April 13, 2013, Larry M. Wright, Chief Executive Officer and sole director of the Company passed away unexpectedly. As a result, the Company’s Chief Financial Officer, D. Hughes Watler, Jr., is currently functioning as the senior executive officer of the Company with full authority to carry on the business of the Company. In the circumstances, the Company is providing the signature solely of Mr. Watler at the end of this report and the certifications solely of Mr. Watler in Exhibits 31 and 32 of this report, as indicated below.
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EXHIBITS
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| 31.1 | Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | 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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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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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. | |||
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By:
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/s/ D. Hughes Watler, Jr. | ||
| D. Hughes Watler, Jr. | |||
| Chief Financial Officer | |||
May 1, 2013
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