stth_10q.htm

10-Q 1 stth_10q.htm QUARTERLY REPORT stth_10q.htm

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 June 30, 2012

Commission File No. 000-51229

STRATUM HOLDINGS, INC.

(Exact Name of Registrant as specified in its charter)

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

11011 Richmond Avenue, Suite 525 Houston, Texas		77042
(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: 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 August 1, 2012 was 2,655,738 shares.

STRATUM HOLDINGS, INC.

FORM 10-Q

JUNE 30, 2012

INDEX

PART I. FINANCIAL INFORMATION		Page

Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Unaudited)		3
	Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011 (Unaudited)		4
	Consolidated Statements of Operations for the six months ended June 30, 2012 and 2011 (Unaudited)		5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)		6

	Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		16
Item 1A.	Risk Factors		16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3.	Defaults Upon Senior Securities		16
Item 4.	Mine Safety Disclosures		16
Item 5.	Other Information		16
Item 6.	Exhibits		17
Signatures			18

STRATUM HOLDINGS, INC.

Consolidated Balance Sheets

(Unaudited)

	June 30,			December 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	619,865		$	758,940
Accounts receivable (net of allowance for doubtful accounts of $208,574 at June 30, 2012 and December 31, 2011)		358,677			536,829
Prepaid expenses and other		66,491			53,434
Notes receivable from sale of subsidiary		727,074			1,146,191
Fair value of oil and gas derivatives		47,132			-
Total current assets		1,819,239			2,495,394

Property and equipment:
Oil and gas properties, evaluated (full cost method)		14,885,014			14,820,142
Other property and equipment		158,234			158,234
Total property and equipment		15,043,248			14,978,376
Less: Accumulated depreciation, depletion and amortization		(9,351,797	)		(9,107,252	)
Net property and equipment		5,691,451			5,871,124

Other assets:
Notes receivable from sale of subsidiary		1,112,595			1,333,883
Fair value of oil and gas derivatives		22,928			-
Other noncurrent assets		4,742			-
Total other assets		1,140,265			1,333,883

Total assets	$	8,650,955		$	9,700,401

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt - stockholders	$	14,714		$	320,000
Current portion of long-term debt - others		2,774,349			2,889,780
Accounts payable		638,090			744,180
Accrued liabilities		1,495,715			1,462,984
Fair value of oil and gas derivatives		-			155,440
Total current liabilities		4,922,868			5,572,384

Long-term debt, net of current portion		212,439			244,189
Deferred income taxes		777,900			907,000
Asset retirement obligations		381,350			364,740
Total liabilities		6,294,557			7,088,313

Stockholders’ equity:
Preferred stock, $.01 par value per share, 1,000,000 shares authorized,
None issued		-			-
Common stock, $.01 par value per share, 5,000,000 shares authorized,
2,655,738 shares issued and outstanding		26,557			26,557
Additional paid in capital		12,894,490			12,894,490
Accumulated deficit		(10,564,649	)		(10,308,959	)
Total stockholders’ equity		2,356,398			2,612,088

Total liabilities and stockholders’ equity	$	8,650,955		$	9,700,401

See accompanying notes to unaudited consolidated financial statements.

STRATUM HOLDINGS, INC.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,
	2012			2011
Revenues:
Oil and gas sales	$	754,657		$	828,703
Total revenues		754,657			828,703

Operating expenses:
Lease operating expense		393,919			426,061
Depreciation, depletion and amortization		121,954			121,522
Workover expense		212,521			67,189
Selling, general and administrative		240,507			247,117
Total operating expenses		968,901			861,889

Operating loss		(214,244	)		(33,186	)

Other income (expense):
Interest income		32,621			-
Interest expense		(52,001	)		(63,130	)
Gain on oil and gas derivatives		329,378			59,271

Income (loss) before income taxes		95,754			(37,045	)
Benefit (provision) for income taxes		(33,400	)		11,700
Net income (loss) from continuing operations		62,354			(25,345	)
Discontinued operations, net of tax		-			2,866,185
Net income	$	62,354		$	2,840,840

Net income (loss) per share, basic and diluted:
Net income (loss) from continuing operations	$	0.02		$	(0.01	)
Discontinued operations, net of tax		-			1.08
Net income	$	0.02		$	1.07

Weighted average shares outstanding, basic and diluted		2,655,738			2,655,738

See accompanying notes to unaudited consolidated financial statements.

STRATUM HOLDINGS, INC.

Consolidated Statements of Operations

(Unaudited)

	Six Months Ended June 30,
	2012			2011
Revenues:
Oil and gas sales	$	1,460,217		$	1,585,204
Total revenues		1,460,217			1,585,204

Operating expenses:
Lease operating expense		755,251			824,184
Depreciation, depletion and amortization		244,545			245,657
Workover expense		472,347			170,838
Selling, general and administrative		568,798			570,389
Total operating expenses		2,040,941			1,811,068

Operating loss		(580,724	)		(225,864	)

Other income (expense):
Interest income		67,223			-
Interest expense		(96,789	)		(128,875	)
Gain on oil and gas derivatives		225,500			18,351

Loss before income taxes		(384,790	)		(336,388	)
Benefit for income taxes		129,100			112,600
Net loss from continuing operations		(255,690	)		(223,788	)
Discontinued operations, net of tax		-			3,097,973
Net income (loss)	$	(255,690	)	$	2,874,185

Net income (loss) per share, basic and diluted:
Net loss from continuing operations	$	(0.10	)	$	(0.09	)
Discontinued operations, net of tax		-			1.17
Net income (loss)	$	(0.10	)	$	1.08

Weighted average shares outstanding, basic and diluted		2,655,738			2,655,738

See accompanying notes to unaudited consolidated financial statements.

STRATUM HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	(255,690	)	$	2,874,185
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations
Depreciation, depletion and amortization		244,545			245,657
Benefit for income taxes		(129,100	)		(112,600	)
Gain on sale of subsidiary		-			(2,765,595	)
Unrealized gain on oil and gas derivatives		(225,500	)		(22,890	)
Changes in current assets and liabilities		57,390			354,026
Other changes, net		11,868			7,463
Net cash flows from continuing operations		(296,487	)		580,246
Net cash flows from discontinued operations		-			327,539
Total cash flows from operating activities		(296,487	)		907,785

Cash flows from investing activities:
Receipt of cash from sale of subsidiary		-			350,000
Collection of notes receivable from sale of subsidiary		674,751			332,542
Purchase of property and equipment		(64,872	)		(130,014	)
Net cash flows from investing activities		609,879			552,528

Cash flows from financing activities:
Payments of long term debt		(181,665	)		(193,590	)
Proceeds from long term debt		34,484			48,150
Net payments of stockholder advances		(305,286	)		(30,000	)
Net cash flows from continuing operations		(452,467	)		(175,440	)
Net cash flows from discontinued operations		-			(1,173,644	)
Total cash flows from financing activities		(452,467	)		(1,349,084	)

Net increase (decrease) in cash and cash equivalents		(139,075	)		111,229
Cash and cash equivalents at beginning of period		758,940			63,133

Cash and cash equivalents at end of period	$	619,865		$	174,362

Supplemental cash flow data:
Cash paid for interest - continuing operations	$	74,510		$	95,927
Cash paid for interest - discontinued operations		-			120,065

Supplemental investing activity:
Notes receivable issued for sale of subsidiary - non interest bearing	$	-		$	2,839,324
Notes receivable issued for sale of subsidiary - interest bearing		-			1,850,000

See accompanying notes to unaudited 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 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 June 30, 2012, the results of its operations for the three and six month periods ended June 30, 2012 and 2011, and cash flows for the six month periods ended June 30, 2012 and 2011. 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, 2011.

Recently Issued Accounting Pronouncements – In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) Update No. 2011-12, “ Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers requirements regarding reclassifications of items out of comprehensive income on the face of the income statement while retaining other requirements of ASU 2011-05, effective for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 is not expected to have a material impact on the Company’s financial statements.

In December 2011, the FASB also issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This update requires disclosure of reconciling differences under certain asset/liability offsetting requirements, effective for fiscal years beginning after January 1, 2013. The adoption of ASU 2011-11 is not expected to have a material impact on the Company’s financial statements.

(2) Discontinued Operations

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 an estimated 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.

As noted above, the purchaser issued the Receivables Notes to the Company in the total amount of $2,776,274 (including an estimated working capital adjustment). The purchaser made periodic payments of this note out of the post-closing collection of Decca’s accounts receivable through early March 2012, at which time, the original note amount and the estimated working capital adjustment had been fully paid (although the Company and the purchaser have not agreed on the final working capital adjustment). In early March 2012, the purchaser informed the Company that it would not make the monthly principal and interest payments required under the Installment Notes, in accordance with the stated terms.

Such monthly installment payments were required commencing in the fourth quarter of 2011, however, the purchaser did not make any such note payments in the fourth quarter of 2011, nor in the first quarter of 2012. 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 which would ultimately result in the total stated amount of principal and interest being paid. In light of this agreement, the Company believes that the Installment Notes will be fully collectible. In the event that the purchaser should not continue to abide by the informal agreement, however, the Company intends to pursue its legal rights to enforce collection of such notes. Pursuant to the SPA, the purchaser has granted security interests in the stock of Decca to the Company, which are to remain in effect until the obligations under the Receivables Notes and Installment Notes are fully satisfied.

The results of discontinued operations of Decca for the six months ended June 30, 2011 are summarized below:

Energy services revenues	$	12,768,505
Cost of energy services		(11,720,562	)
Gross profit		1,047,943
General and administrative expenses		(424,300	)
Interest expense		(120,065	)
Gain on sale (preliminary)		2,765,595
Net income before income taxes		3,269,173
Provision for income taxes		(171,200	)
Net income	$	3,097,973

In the second quarter of 2011, the Company recognized a preliminary gain from the sale of Decca in the amount of $2,765,595, which was subsequently adjusted in the fourth quarter of 2011 to $2,695,100.

(3) 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 has a substantial working capital deficit as of June 30, 2012. 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.

(4) Commodity Derivatives

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”. The Company accounts for commodity derivative contracts as non-hedging transactions, as defined in ASC 815-20. Accordingly, we reflect changes in fair value of such derivative contracts in current period earnings, based on “Level 3” inputs. In the six months ended June 30, 2012 and 2011, we recorded unrealized gains of $225,500 and $22,890, respectively, due to fair value changes, and a realized settlement loss of $4,539 in the 2011 period.

(5) Long Term Debt

As of June 30, 2012 and December 31, 2011, the Company had the following long-term debt obligations:

	June 30,			December 31,
	2012			2011
$25,000,000 line of credit with a bank, maturing on 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 $2,671,000 as of June 30, 2012	$	2,671,000		$	2,786,000

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)		250,787			283,922

Advances from stockholders, bearing interest at 10%, unsecured (extended since March 2010)		14,714			320,000

Other short term notes for automobile and insurance financing, interest rates at 6% to 8%		65,001			64,047

		3,001,502			3,453,969
Current portion of long term debt - stockholders		(14,714	)		(320,000	)
Current portion of long term debt - others		(2,774,349	)		(2,889,780	)

Long term debt, net of current portions	$	212,439		$	244,189

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 June 30, 2012, 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 classified this debt as a current liability due to continued inability to meet certain financial covenants under the credit agreement. Pursuant to debt accounting rules, the Company will maintain the current liability classification until it is able to meet such financial covenants in the future.

(6) 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 outstanding 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 six months ended June 30, 2012, the amounts for basic and diluted net loss per share were the same as the inclusion of any common stock equivalents would have been anti-dilutive due to the net loss. In the six months ended June 30, 2011, the amounts for basic and diluted net income per share were the same as there were no dilutive common stock equivalents outstanding in that period.

(7) Stockholder Advances

The Company repaid net stockholder notes and advances in the amounts of $305,286 and $30,000 in the six months ended June 30, 2012 and 2011, respectively. Such advances are reflected as unsecured short term debt obligations and accrue interest at a rate of 10% per annum (see Note 5).

(8) Contingencies

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 that could have a material adverse effect on its results of operations, cash flows or financial condition.

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 June 30, 2012.

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 June 30, 2012.

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 June 30, 2012, 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.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.

Overview

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., own working interests in approximately 60 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 in the energy industry.

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 (see Note 2).

As a result of the sale of Decca, we are treating the revenues and expenses of the Canadian Energy Services segment for the three month and six month periods ended June 30, 2011 as discontinued operations in this report, with our domestic Exploration & Production segment being reported as continuing operations.

Results of Operations

The following discussion reflects the revenues and expenses for the three month and six month periods ended June 30, 2012 and 2011, as reported in our consolidated financial statements and notes thereto included in Item 1.

Three months ended June 30, 2012 versus three months ended June 30, 2011 — Total revenues from continuing operations, not including interest income, for the three months ended June 30, 2012 were $755,000 compared to $829,000 for the three months ended June 30, 2011.

Revenues from CYMRI’s and Triumph’s oil and gas sales for the three months ended June 30, 2012 were $755,000 compared to $829,000 for the three months ended June 30, 2011. In the three months ended June 30, 2012, revenues from oil production were $707,000, reflecting volumes of 7,302 barrels at an average price of $96.82 per barrel, while gas revenues were $48,000, reflecting volumes of 21,550 Mcf at an average price of $2.23 per Mcf. On an overall basis, these amounts reflect an 18% decrease in average oil and gas prices which was partially offset by an increase in production volumes of approximately 11% due to the effect of recent field workover operations.

Lease operating expenses (“LOE”), including production taxes, were $394,000 for the three months ended June 30, 2012 versus $426,000 for the three months ended June 30, 2011, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This slight decrease was due to certain lease operating expenses being supplanted by the increase in workover expenses.

Depreciation, depletion and amortization (“DD&A”) expense for the three months ended June 30, 2012 was $122,000 versus $122,000 for the three months ended June 30, 2011, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This lack of variation was due to the increase in production volumes being offset by the decrease in depletion rates.

Workover expenses for the three months ended June 30, 2012 were $213,000 versus $67,000 for the three months ended June 30, 2011, representing workovers on CYMRI’s and Triumph’s oil and gas properties. This increase was largely experienced in CYMRI’s Kibbe Field and Triumph’s Egan Field.

Selling, general and administrative (“SG&A”) expenses from continuing operations for the three months ended June 30, 2012 were $241,000 compared to $247,000 for the three months ended June 30, 2011. This relatively small decrease was not considered to be significant.

Interest income from continuing operations for the three months ended June 30, 2012 was $33,000 versus zero for the three months ended June 30, 2011. This increase resulted from interest income earned on the long-term, interest-bearing notes receivable arising from the sale of Decca in June 2011 (see Note 2).

Interest expense from continuing operations for the three months ended June 30, 2012 was $52,000 versus $63,000 for the three months ended June 30, 2011. This decrease was due to declines in interest rates as well as in outstanding borrowings.

Gain on oil and gas derivatives for the three months ended June 30, 2012 was $329,000 versus $59,000 for the three months ended June 30, 2011. This fluctuation was largely due to the change in fair value of CYMRI’s outstanding oil and gas derivative contracts (see Note 4).

Income taxes from continuing operations were a provision of $33,000 for the three months ended June 30, 2012 compared to a benefit of $12,000 for the three months ended June 30, 2011. These amounts reflected consolidated income tax rates from continuing operations of approximately 34% and 32%, respectively.

Income from discontinued operations, net of income taxes, was zero for the three months ended June 30, 2012 versus net income of $2,866,000 for the three months ended June 30, 2011. As further described in Note 2, we sold the outstanding capital stock of our Canadian Energy Services subsidiary, Decca, to a private company on June 3, 2011. The results of operations of our Canadian Energy Services business have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax expense.

Six months ended June 30, 2012 versus six months ended June 30, 2011 — Total revenues from continuing operations, not including interest income, for the six months ended June 30, 2012 were $1,460,000 compared to $1,585,000 for the six months ended June 30, 2011.

Revenues from CYMRI’s and Triumph’s oil and gas sales for the six months ended June 30, 2012 were $1,460,000 compared to $1,585,000 for the six months ended June 30, 2011. In the six months ended June 30, 2012, revenues from oil production were $1,352,000, reflecting volumes of 13,422 barrels at an average price of $100.73 per barrel, while gas revenues were $108,000, reflecting volumes of 41,950 Mcf at an average price of $2.57 per Mcf. On an overall basis, these amounts reflect a 10% decrease in average oil and gas prices which was partially offset by an increase in production volumes of approximately 2% due to the effect of recent field workover operations.

Lease operating expenses (“LOE”), including production taxes, were $755,000 for the six months ended June 30, 2012 versus $824,000 for the six months ended June 30, 2011, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This relatively small decrease was due to certain lease operating expenses being supplanted by the increase in workover expenses.

Depreciation, depletion and amortization (“DD&A”) expense for the six months ended June 30, 2012 was $245,000 versus $246,000 for the six months ended June 30, 2011, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This lack of meaningful variation was due to the increase in production volumes being essentially offset by the decrease in depletion rates.

Workover expenses for the six months ended June 30, 2012 were $472,000 versus $171,000 for the six months ended June 30, 2011, representing workovers on CYMRI’s and Triumph’s oil and gas properties. This increase was largely experienced in CYMRI’s Kibbe Field and Triumph’s Egan Field.

Selling, general and administrative (“SG&A”) expenses from continuing operations for the six months ended June 30, 2012 were $569,000 compared to $570,000 for the six months ended June 30, 2011. This slight decrease was not considered to be significant.

Interest income from continuing operations for the six months ended June 30, 2012 was $67,000 versus zero for the six months ended June 30, 2011. This increase resulted from interest income earned on the long-term, interest-bearing notes receivable arising from the sale of Decca in June 2011 (see Note 2).

Interest expense from continuing operations for the six months ended June 30, 2012 was $97,000 versus $129,000 for the six months ended June 30, 2011. This decrease was due to declines in interest rates as well as in outstanding borrowings.

Gain on oil and gas derivatives for the six months ended June 30, 2012 was $226,000 versus $18,000 for the six months ended June 30, 2011. This fluctuation was largely due to the change in fair value of CYMRI’s outstanding oil and gas derivative contracts (see Note 4).

Income taxes from continuing operations were a benefit of $129,000 for the six months ended June 30, 2012 compared to $113,000 for the six months ended June 30, 2011. These benefit amounts reflected consolidated income tax rates from continuing operations of approximately 34% in both periods.

Income from discontinued operations, net of income taxes, was zero for the six months ended June 30, 2012 versus net income of $3,098,000 for the six months ended June 30, 2011. As further described in Note 2, we sold the outstanding capital stock of our Canadian Energy Services subsidiary, Decca, to a private company on June 3, 2011. The results of operations of our Canadian Energy Services business have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax expense.

Liquidity and Capital Resources

Operating activities. Net cash used in operating activities for the six months ended June 30, 2012 was $296,000 compared to net cash provided by operating activities of $908,000 for the six months ended June 30, 2011. This comparative difference was primarily due to changes in operating net cash flows from our discontinued operations arising from the Decca sale (see Note 2).

Investing activities. Net cash provided by investing activities, after deducting capital expenditures, was $610,000 for the six months ended June 30, 2012 compared to $553,000 for the six months ended June 30, 2011. The Company generated positive cash flows from investing activities in both of these periods primarily due to the proceeds from the post-closing collection of notes receivable arising from the Decca sale (see Note 2).

Financing activities. Net cash used in financing activities for the six months ended June 30, 2012 was $452,000 compared to $1,349,000 for the six months ended June 30, 2011. This relative difference in net financing cash flows was primarily due to changes in net cash flows from our discontinued operations arising from the Decca sale (see Note 2) and largely offsets the change in net operating cash flows noted above under “Operating activities.”

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 $2,671,000 as of June 30, 2012. The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of June 30, 2012, there was no unutilized borrowing base and the maturity was scheduled on January 1, 2014. Notwithstanding this scheduled maturity, the Company has classified such borrowings as a current liability due to continued inability to meet certain financial covenants under the bank credit agreement. Pursuant to debt accounting rules, the Company will maintain the current liability classification until it is able to meet such financial covenants in the future.

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 $65,000 being spent as of June 30, 2012. We believe that our capital expenditures for the remainder of 2012 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 $3,103,000. 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 making scheduled payments of principal and interest to us in accordance with the terms of our installment note receivable. As disclosed in Note 2, the purchaser was delinquent in a making the scheduled note payments through the first quarter of 2012, although the Company and the purchaser recently reached an informal agreement for the payment of the remaining amount due under this note receivable. In the event that the purchaser should not continue to abide by the informal agreement, however, the Company intends to pursue its legal rights to enforce collection of such note. Nonetheless, it is possible that we and the purchaser may mutually agree to restructure the terms of this note at some point in the future, although no definitive agreement has been reached in that regard.

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, 2011 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 4.

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 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 June 30, 2012, 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 8 to Consolidated Financial Statements.

ITEM 1A. RISK FACTORS

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1		Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		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 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

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

____________

These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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.

August 1, 2012	By:	/s/ Larry M. Wright
		Larry M. Wright
		Chief Executive Officer

	By:	/s/ D. Hughes Watler, Jr.
		D. Hughes Watler, Jr.
		Chief Financial Officer