[Lime Time]

MHPC went to Expert Market. Has a share offering. What a junk ticker.

STTH to ROKO to STAK to MHPC

Just went Alt. Reporting. This is the suck

[crudeoil24]

MHPC > "Once you chek in, you can never check out!"

Hotel California > The Eagles

[MaddAussi]

Company changed buz plan

[TenKay]

MHPC reverse split 1 for 6 effective March 23, 2018

http://otce.finra.org/DailyList

[Renee]

Stack-it Storage Inc., STAK, changed to Manufactured Housing Properties Inc., MHPC:

http://otce.finra.org/DLSymbolNameChanges

[Renee]

ROKOD changed to STAK:

http://otce.finra.org/DLSymbolNameChanges

[Renee]

Caprock Oil Inc. changed to Stack-it Storage Inc. and a one for 10 reverse split:

http://otce.finra.org/DLSymbolNameChanges

[uziik]

10% Owner buys 250,000 shares

[Renee]

Stratum Holdings Inc., STTH changed to Caprock Oil Inc., ROKO:

http://www.otcbb.com/asp/dailylist_detail.asp?d=03/24/2014&mkt_ctg=NON-OTCBB

[Hockmir]

There is most certainly an interesting trade/volume pattern discernable by examination of the chart

[littlefish]

I agree. Very thin trading, could move big on good news considering the discount to tangible book and revenues on continuing ops.

They do a decent amount of revs in O&G given the market cap IMO. Will be interesting to see how Q1 2012 looks with the workover work put in for Q4.

Think they expensed $300+K in Q4 for workovers and only $200+K thru 9 months prior to that for 2011. If they can show a jump in production/revs and show profitability in Q1, I think you have found an interesting thinly traded company. No idea how much of their revs is oil vs nat gas but if heavily oil then they timed their workovers nicely with Q1 oil pricing likely higher than Q4 2011.

Still has the unknown Triumph legal stuff that wasn't spelled out IMO but the positive counterbalance is what they might collect on the Dacca monies still owed.

Good luck, hopefully continues to work out well for you. Too thin for me but looks like a solid speculative play with potentially multiple positive catalysts to drive it higher.

[10 bagger]

STTH.. $0.41.. + 61% on the day,, I guess someone else has figured out what STTH is worth.. STTH is VERY thin and will explode on any volume..hank

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.29 ) $ (0.20 )
Discontinued operations, net of tax 1.30 0.12
Net income (loss) $ 1.01 $ (0.08 )

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

Strange trading today..

5,000 @ $0.35
482 @ $0.3488
4666 @ $0.3388
672 @ $0.3488
1140 @ $0.3388
2315 @ $0.3388
825 @ $0.38
8375 @ $0.38
2413 @ $0.43
1662 @ $0.42
226 @ $0.45
500 @ $0.45
728 @ $0.45
1540 @ $0.44
516 @ $0.42
1672 @ $0.41..

STRATUM HOLDINGS, INC.
Consolidated Statements of Operations

Year Ended December 31,
2011 2010
Revenues:
Oil and gas sales $ 2,984,992 $ 2,625,586
Total revenues 2,984,992 2,625,586

Operating expenses:
Lease operating expense 1,575,192 1,509,274
Depreciation, depletion and amortization 495,417 528,298
Workover expense 520,090 475,356
Selling, general and administrative 1,178,812 1,042,742
Total operating expenses 3,769,511 3,555,670

Operating loss (784,519 ) (930,084 )

Other income (expense):
Interest income 36,451 1,014
Interest expense (288,269 ) (376,468 )
Gain on debt extinguishment - 438,967
Gain (loss) on oil and gas derivatives (122,144 ) 51,155

Loss before income taxes (1,158,481 ) (815,416 )
Benefit for income taxes 390,400 295,400
Net loss from continuing operations (768,081 ) (520,016 )
Discontinued operations, net of tax 3,460,777 302,151
Net income (loss) $ 2,692,696 $ (217,865 )

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.29 ) $ (0.20 )
Discontinued operations, net of tax 1.30 0.12
Net income (loss) $ 1.01 $ (0.08 )

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

[littlefish]

10bagger- I think there were some potential but not well quantified legal items with Triumph. That said, this still looks potentially interesting especially if they can turn a profit in Q1.

They trade well under book although my guess is that's a combination of the illiquidity and the potential to not be able to fully collect on what is owed them from the sale of Dacca and/or possibly legal risk.
Then again, it seems like they have a pretty clear case to collect that money if they can and it is hard to know what the liability side is with Triumph (if any ultimately).
And that's like $1.6+ million the Dacca buyer still owes. A big amount conisdering the very small market cap here.

An interesting spec play here IMO just doing some cursory glancing at it. It should be one to watch and see what happens both on the ops side in Q1 (from the rework done) and from the potential collections side if they can settle or collect on what is still owed them.


If they do both that would be interesting. Potentially a company trading at a fraction of book and being profitable in the O&G sector with low float and tiny market cap.

All IMO.

[littlefish]

10bagger, I don't own this one but figure I'll comment just a bit on here- seems an appropriate place.

The company had increased workover expense in Q4 which should hopefully lead to boost in production for Q1 2012.

There seems to be an issue in collecting on some of the Dacca sale moneis still owed (pg 10 annual, also see note 2). Here's some from note 2:

"...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, without giving any specific reason for this action. Such payments were required commencing in the fourth quarter of 2011 and principal and interest payments totaling $270,984 were past due in early March 2012, at which time the remaining principal balance was $1,649,704. Notwithstanding this action, the Company believes that collection of the Installment Notes is fully enforceable,..."

So maybe the company can collect. I'd want to look at the buyer of Dacca to see how healthy they are if the company had to pursue them in court for collection or get some kind of settlement/agreement on what is still owed to the company.

Their bank note looks maxed out currently (Note 5 i nannual with Table) with declining borrowing base but probably only modestly declining so probably not a bunch needed to pay back/stay current.
Looked like they also got it extended out to 2014 so that's helpful. If they can boost production and/or reserves, they may be able to tap more of the $25 mill loan (since they can only borrow roughly $3 mill now). They did mention not being in compliance with the covenants but probably not a real big concern givien the bank extended terms to 2014.

They have a 2nd lien now it looks like on their O&G property for $900K- 2nd to the bank loan I believe. Not sure if that would further restrict the bank note or not. They do have enough cash on hand probably for a little bit. May be worth waiting to see what Q1 produces with the workover $ spent in Q4. See if it pays off.

Q4 had the loss on something like $600-$700K revs. Not bad or good and the workover expense certainly meant more expense in the Q. I would probably try to find out more about the property if I had more time but am squeezed a bit tonight.

This is just me glancing thru so could be some errors. Looks mildly interesting to me (which is pretty good considering I've become so dang skeptical in my old age LOL) but thin obviously.

Good luck. Hope that helps.

[10 bagger]

Form 4 Wright Larry M

--------------------------------------------------------------------------------
(Last) (First) (Middle)
THREE RIVERWAY, SUITE 1590


--------------------------------------------------------------------------------
(Street)HOUSTON TX 77056

--------------------------------------------------------------------------------
(City) (State) (Zip)
2. Issuer Name and Ticker or Trading Symbol
STRATUM HOLDINGS, INC. [STTH] 5. Relationship of Reporting Person(s) to Issuer
(Check all applicable)X Director X 10% Owner
X Officer (give title below) Other (specify below)
Chairman and CEO

3. Date of Earliest Transaction (Month/Day/Year)
04/09/2012
4. If Amendment, Date of Original Filed (Month/Day/Year)
6. Individual or Joint/Group Filing (Check Applicable Line)X Form filed by One Reporting Person
Form filed by More than One Reporting Person



Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1.Title of Security
(Instr. 3) 2. Transaction Date (Month/Day/Year) 2A. Deemed Execution Date, if any (Month/Day/Year) 3. Transaction Code
(Instr. 8) 4. Securities Acquired (A) or Disposed of (D)
(Instr. 3, 4 and 5) 5. Amount of Securities Beneficially Owned Following Reported Transaction(s)
(Instr. 3 and 4) 6. Ownership Form: Direct (D) or Indirect (I)
(Instr. 4) 7. Nature of Indirect Beneficial Ownership
(Instr. 4)
Code V Amount (A) or (D) Price
Common Stock 04/09/2012 P 353,694 A $ 0.119 1,828,738 D


Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned
(e.g., puts, calls, warrants, options, convertible securities)
1. Title of Derivative Security
(Instr. 3) 2. Conversion or Exercise Price of Derivative Security 3. Transaction Date (Month/Day/Year) 3A. Deemed Execution Date, if any (Month/Day/Year) 4. Transaction Code
(Instr. 8) 5. Number of Derivative Securities Acquired (A) or Disposed of (D)
(Instr. 3, 4, and 5) 6. Date Exercisable and Expiration Date
(Month/Day/Year) 7. Title and Amount of Underlying Securities
(Instr. 3 and 4) 8. Price of Derivative Security
(Instr. 5) 9. Number of Derivative Securities Beneficially Owned Following Reported Transaction(s)
(Instr. 4) 10. Ownership Form of Derivative Security: Direct (D) or Indirect (I)
(Instr. 4) 11. Nature of Indirect Beneficial Ownership
(Instr. 4)
Code V (A) (D) Date Exercisable Expiration Date Title Amount or Number of Shares
Explanation of Responses:
/s/ Larry M. Wright 04/09/2012

[10 bagger]

STTH. $0.30

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Fiscal Year Ended December 31, 2011


Commission File No. 000-51229


STRATUM HOLDINGS, INC.
(Exact Name of Registrant as specified in its charter)


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



Three Riverway, Suite 1590
Houston, Texas
77056
(Address of principal
executive offices) (zip code)


[phone]
(Registrant's telephone number, including area code)


Securities Registered Under Section 12(b) of the Exchange Act:
None


Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value


Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act): Yes o No þ


Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act): Yes o No þ


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 Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes þ No o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. þ


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 Non-accelerated filer o
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 Act): Yes o No þ


The aggregate market value of Common Stock held by non-affiliates of the Registrant (based upon the closing price of such shares as quoted on the OTC Bulletin Board) as of the last business day of the most recently completed second fiscal quarter was approximately $152,000.


The number of shares outstanding of the Registrant's Common Stock as of March 23, 2012 was 2,655,738 shares.


--------------------------------------------------------------------------------

--------------------------------------------------------------------------------



--------------------------------------------------------------------------------



STRATUM HOLDINGS, INC.
2011 FORM 10-K


INDEX

Page

PART I
Item 1 and 2. Description of Business and Properties. 3

Item 3. Legal Proceedings. 6

PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 7

Item 6. Selected Financial Data. 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8

Item 8. Financial Statements and Supplementary Data. 11

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 11

Item 9A. Controls and Procedures. 11

Item 9B. Other Information. 12

PART III
Item 10. Directors, Executive Officers and Corporate Governance. 13

Item 11. Executive Compensation. 14

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 15

Item 13. Certain Relationships and Related Transactions, and Director Independence. 15

Item 14. Principal Accounting Fees and Services. 15

PART IV
Item 15. Exhibits, Financial Statement Schedules. 16

Signatures. 18




2
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PART I


ITEM 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES.


Stratum Holdings, Inc. (“we”, “our” or the “Company”) is a holding company headquartered in Houston, Texas, whose operations are presently focused on the domestic Exploration & Production business. In that business, our wholly-owned subsidiaries, CYMRI, L.L.C. (“CYMRI”) and Triumph Energy, Inc. (“Triumph”), 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.


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, as more fully described in the section on Energy Services below. Although we have sold Decca, the note payments that we are receiving from the purchaser pursuant to the sales agreement represent a current source of liquidity for our continuing operations.

We seek to increase shareholder value through an approach focused on both growth and transaction opportunities in the energy industry. Our management team has executive level contacts throughout the energy industry and has expertise in identifying and closing transaction opportunities.

The following two sections provide additional background information on our continuing Exploration & Production business and our discontinued Canadian Energy Services business.

Exploration & Production


Our Exploration & Production operations commenced with the acquisition of CYMRI’s predecessor company in May 2006 for a combination of cash, notes payable and Common Stock totaling $12.7 million. CYMRI was originally formed by our present Chief Executive Officer, Larry Wright, in July 2001 to acquire long-lived oil and gas reserves. CYMRI completed several oil and gas property acquisitions in South Texas, primarily known as the Burnell and Kibbe Fields, in 2001-2003.


CYMRI had previously acquired Petroleum Engineers, Inc. (“PEI”) in June 2004 for total consideration of $5.1 million and that acquisition included interests in non-operated oil and gas properties in South Louisiana owned by Triumph, which was a PEI affiliate at that time. The Company’s subsequent sale of PEI in March 2008 did not include the oil and gas properties of Triumph.


Shown below are certain SEC required disclosures regarding our Exploration & Production business.

Oil and Gas Reserves


The following table sets forth summary information with respect to the estimates of CYMRI/Triumph’s proved oil and gas reserves, as of December 31, 2011, prepared by Prator Bett, L.L.C., our independent reservoir engineering firm:

Oil Gas Total PV10 Value
(MBbl) (MMcf) (MMcfe) (000's)

Proved developed reserves 424 771 3,316 $ 11,372
Proved undeveloped reserves 48 - 287 1,390
Total proved reserves 472 771 3,603 12,762
Discounted future income taxes (3,917 )
Standardized measure of discounted
future net cash flows $ 8,845



3
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Proved reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. The technical persons responsible for preparing our reserve estimates are independent petroleum engineers that meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We employ adequate internal controls over the data provided to our independent reservoir engineers to insure that our reserve estimates are in compliance with the Securities and Exchange Commission (“SEC”) definitions and guidance.


In accordance with the guidelines of the SEC, the reservoir engineers’ estimates of future net revenues from our properties and the pre-tax PV 10 Value amounts thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The average beginning of the month prices for the year ended December 31, 2011 used in such estimates were $97.95 per barrel of oil and $4.46 per Mcf of gas.


Productive Oil and Gas Wells and Acreage


As of December 31, 2011, CYMRI and Triumph maintained ownership interests in a total of 34.0 gross (25.5 net) productive wells in the State of Texas and 28.0 gross (5.2 net) productive wells in the State of Louisiana for a grand total of 62.0 gross (30.7 net) productive oil and gas wells. CYMRI and Triumph did not participate in the drilling of any new oil and gas wells in the three years ended December 31, 2011.


As of December 31, 2011, CYMRI and Triumph had ownership interests in approximately 3,000 net productive acres in the States of Texas and Louisiana. CYMRI and Triumph had no significant interests in any undeveloped acreage.


Production Prices and Costs


The average per barrel oil price received for CYMRI/ Triumph’s net oil production in the years ended December 31, 2011, 2010 and 2009 were $95.63, $75.34 and $64.03, respectively. The average per Mcf gas price received for CYMRI/ Triumph’s net gas production in the years ended December 31, 2011, 2010 and 2009 were $4.42, $4.64 and $7.35, respectively. In the same periods, CYMRI/ Triumph’s net production costs averaged $6.58, $5.93 and $4.42, respectively, per Mcf equivalent.


CYMRI/ Triumph’s oil and gas production is sold to various purchasers in the States of Texas and Louisiana at spot or market sensitive prices under short-term contracts. CYMRI/ Triumph had no delivery commitments in the three years ended December 31, 2011.

Energy Services


As previously indicated, we also operated in the Canadian Energy Services business via our ownership of Decca through June 3, 2011. 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 recognized a pre-tax gain on the sale of Decca in June 2011 in the amount of $2.7 million.


Decca operates from an office in Calgary, Canada, with a cadre of independent field consultants who provide drilling, completion and other on-site consulting services to oil and gas operators in Alberta and neighboring provinces as well as in selected international locations. These services are generally performed on a per diem rate for the customer operators, pursuant to term agreements which are subject to periodic rate adjustments. Decca’s customers include a number of international oil and gas companies with operations in Canada in addition to some of the largest independent oil and gas companies based in Canada.


4
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Competition


Competition in the domestic Exploration & Production business is extremely intense. Competitors include major oil and gas companies, large and small independent producers, and individual producers and operators. Many competitors have financial resources substantially greater than ours, and staffs and facilities substantially larger than ours. In the Exploration & Production business, our success in operating our existing oil and gas properties as well as in acquiring and developing additional properties will depend on our ability to operate in this highly competitive environment.

Employees


As of December 31, 2011, the Company had a total of six permanent employees between its corporate headquarters located in Houston, Texas, and its domestic Exploration & Production offices located in Lafayette, Louisiana. All of these individuals are co-employed by CYMRI, L.L.C. and Insperity, Inc., a professional employer organization. Our field operations are performed substantially by independent contractors in Texas and Louisiana.

Regulation


The oil and gas industry is subject to extensive federal and state governmental regulations which affect our domestic Exploration & Production business. These governmental mandates include federal and state regulations governing environmental quality and pollution control, state limits on allowable rates of production by individual well or proration unit, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels.

Oil and Gas Terminology


The following terms are used to describe quantities of oil and natural gas in this document.


? Bbl—One stock tank barrel, or 42 US gallons liquid volume, of crude oil or other liquid hydrocarbons.


? Mcf—One thousand cubic feet of natural gas.


? MBbl—One thousand Bbls.


? MMcf—One million cubic feet of natural gas.


? MMcfe—One million cubic feet of natural gas equivalent, converting oil to gas at the ratio of 6 Mcf of gas to 1 Bbl of oil.


Available Information


Our website address is www.stratum-holdings.com, however, the website information is not part of this report. We file annual, quarterly, and special reports, proxy statements, and other information periodically with the SEC. Such reports, proxy statements and other information filed with the SEC may be accessed electronically by means of the SEC's website at www.sec.gov. This material may also be inspected and copied at the public reference facilities of the SEC at 100 F Street N.E., Washington, DC 20549.



5
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ITEM 3. LEGAL PROCEEDINGS.


Triumph and a former subsidiary, PEI, are joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. It is not practical at the present time to determine the amount or likelihood of an unfavorable outcome to the Company’s consolidated financial position or results of operations of any of the these actions against Triumph. The Company believes that Triumph has meritorious defenses in each case and is vigorously defending these matters.


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 non-appealable judgment was rendered in favor of the plaintiff in January 2011, however, the Company believes that the loss exposure of its defunct Construction Staffing subsidiary would be reduced by approximately one-half due to an offsetting amount that would be due from the underlying carrier. Accordingly, the Company has recorded an accrual for such estimated net loss exposure in this matter as of December 31, 2011.


With respect to the proceedings noted above, none involves primarily a claim for damages, exclusive of interest and costs, in excess of 10 percent of the Company’s current assets on a consolidated basis.



6
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PART II


ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


Since July 2005, our Common Stock has been quoted and traded on the OTC Bulletin Board. In March 2007, our trading symbol was changed to STTH.OB. Because we trade in the OTC Bulletin Board, a shareholder may find it difficult to dispose of or obtain accurate quotations as to price of our Common Stock. In addition, the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure related to the market for penny stock and for trades in any stock defined as a penny stock.


On December 17, 2009, we completed a 1-for-10 reverse stock split of our Common Stock, pursuant to a plan approved by our Board of Directors. Accordingly, all Common Stock share and per share amounts in this annual report have been retroactively adjusted to reflect the reverse stock split. As of March 23, 2012, we had a total of 2,655,738 shares of our Common Stock outstanding and the number of holders of record of our Common Stock at that date was approximately 100. The following table sets forth the high and low bid prices of our Common Stock for each quarter during the calendar years 2010 and 2011:


Bid Price
2010 High Low
First Quarter $ 0.10 $ 0.05
Second Quarter $ 0.12 $ 0.02
Third Quarter $ 0.15 $ 0.08
Fourth Quarter $ 0.14 $ 0.12

2011
First Quarter $ 0.50 $ 0.10
Second Quarter $ 0.31 $ 0.16
Third Quarter $ 0.25 $ 0.16
Fourth Quarter $ 0.30 $ 0.16



We have never declared nor paid any cash dividends on our Common Stock and do not anticipate declaring any dividends in the foreseeable future. We expect to retain our cash for the operation and maintenance of our business. In addition, our senior bank credit facility contains restrictions on the payment of dividends to the holders of our Common Stock. We have made no repurchases of our Common Stock for the year ended December 31, 2011.


As indicated in Note 7 of the Consolidated Financial Statements, the Company has an equity-based compensation plan which was approved by the stockholders in October 2005 and amended in October 2006. Under the plan, as amended, a maximum of 240,000 shares may be awarded to directors and employees via the issuance of equity-based derivatives in the form of stock options, restricted stock or stock appreciation rights.


As of December 31, 2011, the Company had no such equity-based derivatives outstanding under the stockholder approved plan referenced above. As of December 31, 2011, the Company had only a nominal number of equity-based derivatives, in the form of stock warrants, which were issued and outstanding outside of the stockholder approved plan.

ITEM 6. SELECTED FINANCIAL DATA.


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.


7
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ITEM 7. 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 Company’s consolidated financial statements and notes thereto included in Item 8 in this Annual Report on Form 10-K. 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 Nevada holding company whose operations are presently focused on the domestic Exploration & Production business. In that business, our wholly-owned subsidiaries, CYMRI and Triumph, 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 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 years ended December 31, 2011 and 2010, as reported in our consolidated financial statements and notes thereto included in Item 8.

Year ended December 31, 2011 versus year ended December 31, 2010 — Total revenues from continuing operations, not including interest income, were $2,985,000 for the year ended December 31, 2011 compared to $2,626,000 for the year ended December 31, 2010.


Revenues from CYMRI’s and Triumph’s oil and gas sales for the year ended December 31, 2011 were $2,985,000 compared to $2,626,000 for the year ended December 31, 2010. In the year ended December 31, 2011, revenues from oil production were $2,667,000, reflecting volumes of 27,889 barrels at an average price of $95.63 per barrel, while gas revenues were $318,000, reflecting volumes of 71,884 Mcf at an average price of $4.42 per Mcf. These amounts reflect a 21% increase in average sales prices, largely due to oil price volatility, which was partially offset by a 6% decline in production volumes. Due to the mechanical condition of our properties, we believe that continuing declines in production volumes are reasonably possible in the near future.


Lease operating expenses (“LOE”), including production taxes, were $1,575,000 for the year ended December 31, 2011 versus $1,509,000 for the year ended December 31, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This relatively small increase was mostly due to the impact of inflation on oilfield operating costs.


Depreciation, depletion and amortization (“DD&A”) expense for the year ended December 31, 2011 was $495,000 versus $528,000 for the year ended December 31, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was primarily due to the above noted decline in oil and gas production volumes.

Workover expenses for the year ended December 31, 2011 were $520,000 versus $475,000 for the year ended December 31, 2010, representing workovers on CYMRI’s South Texas oil and gas properties. This relatively small increase was largely experienced in CYMRI’s Burnell Field.


8
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Selling, general and administrative (“SG&A”) expenses from continuing operations for the year ended December 31, 2011 were $1,179,000 compared to $1,043,000 for the year ended December 31, 2010. This increase mostly reflected a reduction in such expenses recovered from third parties under operating agreements.


Interest income from continuing operations for the year ended December 31, 2011 was $36,000 versus $1,000 for the year ended December 31, 2010. 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 year ended December 31, 2011 was $288,000 versus $376,000 for the year ended December 31, 2010. This decrease was primarily due to interest no longer being incurred on the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).


Gain on debt extinguishment for the year ended December 31, 2011 was zero compared to $439,000 for the year ended December 31, 2010. This decrease was due to the forgiveness of a portion of the principal and all of the accrued interest on unsecured notes payable to certain unrelated parties in March 2010 (see Note 5).


Gain (loss) on oil and gas derivatives reflected a loss of $122,000 for the year ended December 31, 2011 versus a gain of $51,000 for the year ended December 31, 2010. 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 $390,000 for the year ended December 31, 2011 compared to a benefit of $295,000 for the year ended December 31, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 34% and 36%, respectively.


Income from discontinued operations, net of income taxes, was $3,461,000 for the year ended December 31, 2011 versus $302,000 for the year ended December 31, 2010. 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, including the pre-tax gain in the amount of $2,695,000 recognized from the sale, have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax benefit reflecting the estimated taxable loss on this sale in the 2011 period.

Liquidity and Capital Resources

Operating activities. Net cash provided by operating activities for the year ended December 31, 2011 was $351,000 compared to net cash used in operating activities of $472,000 for the year ended December 31, 2010. This comparative difference in net operating cash flows was primarily due to changes in net cash flows from discontinued operations arising from the Decca sale (see Note 2).

Investing activities. Net cash provided by investing activities, after deducting capital expenditures, was $2,212,000 for the year ended December 31, 2011 compared to $1,474,000 for the year ended December 31, 2010. In the year ended December 31, 2011, the Company received proceeds from the sale of Decca in the amount of $350,000 of cash paid at closing and $2,146,000 from the post-closing collection of notes receivable from the purchaser. In the year ended December 31, 2010, the Company converted approximately $1.6 million of restricted cash arising from the March 2008 sale of a former subsidiary into unrestricted cash.


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Financing activities. Net cash used in financing activities from continuing operations for the year ended December 31, 2011 was $693,000 compared to $1,499,000 for the year ended December 31, 2010. This relative increase in net financing cash flows was primarily due to the liquidation of the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5) and payments made 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 $2,786,000 as of December 31, 2011 and fluctuated very little in the year then ended. The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of December 31, 2011, there was no available 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.


We also have other debt amounts outstanding to the sellers of acquired businesses and to stockholders as more fully described in Note 5 and reflected in the table below (however, we have no off Balance Sheet arrangements). The following table sets forth the contractual obligations under our long-term debt and operating lease agreements as of December 31, 2011 (in thousands):

Payments Due By Period
Total 2012 2013-2014 2015-2016 After 2016

Long-term debt $ 3,454 $ 3,210 $ 167 $ 77 $ -
Interest on long-term debt 236 211 23 2 -
Operating leases for office space 30 30 - - -

Total $ 3,720 $ 3,451 $ 190 $ 79 $ -


Our ongoing capital expenditures are in the domestic Exploration & Production business, 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 $260,000 being spent in the year ended December 31, 2011. We believe that our capital expenditures for the foreseeable future 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 $3,077,000. 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, potentially improves 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 notes receivable. As disclosed in Note 2, the purchaser informed the Company in early March 2012 that it would not make the monthly principal and interest payments required under the interest bearing installment notes and we intend to vigorously pursue our legal rights to enforce collection of such notes. Nonetheless, it is possible that we and the purchaser may mutually agree to restructure the terms of these notes at some point in the future, although no definitive agreement has been reached in that regard.


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Critical Accounting Policies and Estimates


Since the sale of Decca in June 2011, our current business operations are solely in the Exploration & Production business. Shown below are the critical accounting policies pertaining to that industry.


Full Cost Accounting for Oil and Gas Properties
In our Exploration & Production business, we have adopted the “full cost” method of accounting for oil and gas properties. Under full cost accounting, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. Other significant features of full cost accounting are as follows:


? All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

? The capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.

? Sales of properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.



In our Exploration & Production business, there is also a significant degree of complexity in our accounting for income taxes due to substantial differences between the financial accounting and tax treatments for certain oil and gas property expenditures.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


The required financial statements are included in this report as set forth in the “Index to Consolidated Financial Statements” on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.


None.

ITEM 9A. CONTROLS AND PROCEDURES.


(a) Disclosure Controls and Procedures


Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports that it files under the Securities Exchange Act of 1934 (the “Act”) is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, to allow for timely decisions regarding required disclosures. As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.


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Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report were effective at the reasonable assurance level.


(b) Management’s Annual Report on Internal Controls over Financial Reporting


Management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Because of its inherent limitation, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of such controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management has performed an assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making this assessment, management elected to use the criteria set forth in Internal Control – Integrated Framework (1992) created by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as the chosen internal control framework. Based on our assessment using those criteria, management concluded that our internal controls over financial reporting were effective at the reasonable assurance level.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding our internal controls over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit the Company to provide only management’s assessment in this Annual Report. Accordingly, management’s assessment has not been audited by MaloneBailey LLP or any other independent registered public accounting firm.

(c) Changes in Internal Controls over Financial Reporting


There was no change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.


None.


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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE.


Directors and Executive Officers


The following table sets forth our Directors and Executive Officers, their ages and positions held with us as of March 23, 2012:

Name Age Position
Larry M. Wright 67 Chairman and Chief Executive Officer
D. Hughes Watler, Jr. 63 Chief Financial Officer


Larry M. Wright was elected to our Board of Directors on May 23, 2006 and was elected Chairman and Chief Executive Officer on May 27, 2008. Mr. Wright founded CYMRI and served as its Chief Executive Officer from its inception in 2002. He previously co-founded and served as Chief Executive Officer of PANACO, Inc., a public oil and gas company, through September 2000. Prior thereto, he served as an executive with various independent oil and gas companies after beginning his career with UNOCAL in 1966.


D. Hughes Watler, Jr. was elected Chief Financial Officer in February 2007 after initially joining the Company as Vice President-Capital Markets in September 2006. He previously served as Senior Vice President & Chief Financial Officer of Goodrich Petroleum Corporation (NYSE: GDP) from March 2003 to May 2006 and as a financial officer of several other public and private energy companies. He was formerly an audit partner with Price Waterhouse LLP.

Corporate Governance


Upon the election of Mr. Wright as Chairman and Chief Executive Officer and the resignation of certain former Board members on May 27, 2008, the Company ceased to have both an independent Audit Committee and an independent Compensation Committee. Since the resignation of a former Board member on November 16, 2009, Mr. Wright has been the sole member of the Board of Directors (however, Mr. Wright does not qualify as an audit committee “financial expert”).


The Board and management strive to perform and fulfill their respective duties and obligations in a responsible and ethical manner. The Company has not formally adopted a code of ethics, however, it will consider the adoption of a code of ethics at a future date as growth and other circumstances should dictate. At the present time, we are a small company with only six employees and our management is in close contact with the daily activities of all employees. Accordingly, we do not believe that it would represent a cost effective use of our limited financial resources to incur the legal fees and other expenses that would be required to implement a formal code of ethics pursuant to Item 406 of Regulation S-K.

Section 16(a) Beneficial Ownership Reporting Compliance


Under the Exchange Act, our directors, our executive officers, and any persons holding more than 10% of our Common Stock are required to report their ownership of the Common Stock and any changes in that ownership to the Commission. Specific due dates for these reports have been established and we are required to report any failure to file by these dates during the year fiscal ended December 31, 2011. The Company is not aware of any such persons who have not filed timely reports required by Section 16(a) of the Exchange Act for the year ended December 31, 2011.


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ITEM 11. EXECUTIVE COMPENSATION


The following table summarizes certain information with respect to the compensation earned by the Company’s executive officers for services rendered in all capacities during the years indicated.

Summary Compensation Table

Name & Principal Fiscal Annual Compensation Stock Option Nonequity
Incentive Nonqual.
Deferred All Other Total
Position Year Salary Bonus Awards Awards Comp. Comp. Comp. Comp.

Larry M. Wright 2011 $ 277,500 $ 10,000 $ - $ - $ - $ - $ - $ 287,500
Chairman & CEO 2010 $ 277,500 $ - $ - $ - $ - $ - $ - $ 277,500

D. Hughes Watler, Jr. 2011 $ 93,750 (1) $ 30,000 $ - $ - (2) $ - $ - $ 3,712 (3) $ 127,462
Chief Financial
Officer 2010 $ 92,500 (1) $ - $ - $ 11,525 (2) $ - $ - $ 2,250 (3) $ 106,275


(1) Mr. Watler became a Company employee effective February 1, 2010. Previously, he had received semi-monthly compensation as an independent consultant, with no Company paid benefits, since his employee status ended following the sale of PEI in March 2008.



(2) Stock options granted to Mr. Watler in 2006 were approved by the Compensation Committee of the Board of Directors, at an exercise price of $21.00 per share, with a three year vesting period. The amounts shown above represent the compensation expense recognized for financial reporting purposes in the respective years in accordance with ASC 718 (for a discussion of valuation assumptions, see Note 7 to the Consolidated Financial Statements).



(3) Effective January 1, 2010, the Company offered participation in a company sponsored 401(k) Plan to its employees. This amount represents the company contributions to the 401(k) Plan on behalf of Mr. Watler in the years ended December 31, 2011 and 2010 (Mr. Wright did not participate).



Outstanding Equity Awards at 2011 Fiscal Year-End


The following table sets forth all outstanding stock and option awards held by our named executive officers as of December 31, 2011.


Stock and Option Awards
Name Number of
Securities
Underlying
Unexercised
Options
Exercisable (#) Number of
Securities
Underlying
Unexercised
Options
Unexercisable (#) Option
Exercise
Price ($) Option
Expiration
Date
Larry M. Wright -0- -0- -0- N/A
D. Hughes Watler, Jr. -0- -0- -0- N/A




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.


The following table sets forth information as to the shares of Common Stock beneficially owned as of March 23, 2012 by (i) each person known to us to be the beneficial owner of more than 5% of our Common Stock; (ii) each Director; (iii) each Executive Officer; and (iv) all of our Directors and Executive Officers as a group. Unless otherwise indicated in the footnotes following the table, the persons as to whom the information is given had sole voting and investment power over the shares of Common Stock shown as beneficially owned by them.

Beneficial Ownership
Directors and Executive Officers Amount Percent
Larry M. Wright (1) 1,475,044 55.5
D. Hughes Watler, Jr. (2) 2,000 *
Directors and Executive Officers as a Group (3) 1,477,044 55.6

Other 5% Beneficial Owners
Clarence J. Downs (4) 348,534 13.2
Larry M. Wright, II (5) 268,400 10.0

_____________
* Less than 1%


(1) Includes the following securities: (a) 1,475,044 shares of Common Stock held by Mr. Wright on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock.


(2) Includes the following securities: (a) 2,000 shares of Common Stock held by Mr. Watler on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock.


(3) Includes the following securities: (a) 1,477,044 shares of Common Stock held by Directors and Officers on their own behalf; and (b) no currently vested options or warrants held by Directors and Officers to purchase shares of Common Stock.


(4) Includes the following securities: (a) 348,534 shares of Common Stock held by Mr. Downs on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock. Mr. Downs served as President & Chief Executive Officer until May 23, 2006, at which time he resigned from those positions. He subsequently resigned as a Director of the Company. The address of Mr. Downs is 8825 Gypsy Drive NE, Albuquerque, NM 87122.


(5) Includes the following securities: (a) 262,400 shares of Common Stock held by Mr. Wright, II on his own behalf; and (b) 6,000 shares of Common Stock owned of record by his wife. Larry M. Wright, II is the adult son of Larry M. Wright and has been employed in a management position by the Company since June 2008. The address of Mr. Wright, II is Three Riverway, Suite 1590, Houston, Texas 77056.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


In the year ended December 31, 2011, the Company partially repaid stockholder notes and advances from a company owned by Larry M. Wright in the net amount of $210,000. As of December 31, 2011, the outstanding balance of such advances owed to the company owned by Mr. Wright was $320,000. Such unsecured advances accrue interest at the rate 10% per annum (see Note 9 to the Consolidated Financial Statements). In addition, the Company has granted a second lien on its oil and gas properties to a former stockholder in the amount of approximately $900,000.


Our sole current director, Larry M. Wright, is not considered to be an “independent” director as that term is defined by The Nasdaq Stock Market.

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES.


MaloneBailey LLP has served as our independent registered public accounting firm since the year ended December 31, 2008. The following table presents fees for professional audit services rendered by MaloneBailey LLP for the years ended December 31, 2011 and 2010 in their audits of our annual financial statements.

2011 2010
Audit Fees $ 83,750 $ 112,000
Audit-related Fees - -
Tax Fees - 2,500
Other Fees - -
$ 83,750 $ 114,500




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PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.


The following Exhibits are required to be filed pursuant to Item 601 of Regulation S-K:

EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed July 30, 2004)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed July 30, 2004)
3.3 Certificate of Amendment to Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report for the year ended December 31, 2005)
3.4 Certificate of Amendment to Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed March 8,2007)
10.1 Letter Agreement, dated February 28, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd., Dave Hunter Resources Inc., Barry Ahearn and Dave Hunter(a)
10.2 Amended and Restated Stock Purchase Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 1297181 Alberta Ltd., 383210 Alberta Ltd., Dave Hunter Resources Inc., Barry Ahearn and
Dave Hunter(a)
10.3 Registration Rights Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd. and Dave Hunter Resources Inc.(a)
10.4 Pledge and Security Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd. and Dave Hunter Resources Inc.(a)
10.5.1 Decca Promissory Note No. 1, dated March 2, 2007, made by Tradestar Services, Inc. in favor of 383210 Alberta Ltd. in the original principal amount of Cdn $725,000(a)
10.5.2 Decca Promissory Note No. 2, dated March 2, 2007, made by Tradestar Services, Inc. in favor Dave Hunter Resources Inc. in original principal amount Cdn $725,000(a)
10.6.1 Warrant, dated March 2, 2007, to purchase 100,000 shares of common stock of Tradestar Services, Inc. issued to 383210 Alberta Ltd.(a)
10.6.2 Warrant, dated March 2, 2007, to purchase 100,000 shares of common stock of Tradestar Services, Inc. issued to Dave Hunter Resources Inc.(a)
10.7 Second Amended and Restated Credit Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a Reducing Revolving
Line of Credit of up to $25,000,000 (b)
10.8 Guaranty Agreement, dated August 5, 2008, executed by Stratum Holdings, Inc. (Guarantor) for benefit of Texas Capital Bank, N.A (as Lender) (b)
10.9 Promissory Note, dated August 5, 2008, issued by CYMRI, L.L.C. and Triumph Energy, Inc. (as Makers) to Texas Capital Bank, N.A. (as Payee) in amount of $25,000,000 (b)
10.10 Security Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc.
(as Debtors) and Texas Capital Bank, N.A. (as Secured Party) (b)
10.11 First Amendment to Second Amended and Restated Credit Agreement, dated May 28, 2009, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a
Reducing Revolving Line of Credit of up to $25,000,000 (c)
10.12 Second Amendment to Second Amended and Restated Credit Agreement, dated November 16, 2009, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender)
for a Reducing Revolving Line of Credit of up to $25,000,000 (d)
10.13 Exhibits I through VI to Second Amended and Restated Credit Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a
Reducing Revolving Line of Credit of up to $25,000,000 (e)
10.14 Stock Purchase Agreement dated as of June 3, 2011, by and among Stratum Holdings, Inc., SB Group Holdings, Inc. and 1607920 Alberta Ltd. (f)



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10.15 Canadian Receivables Note dated as of June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,710,000. (f)
10.16 American Receivables Note dated as of June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $690,000. (f)
10.17 Canadian Note dated as of June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,318,125. (f)
10.18 American Note dated as of June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $531,875. (f)
10.19 Canadian Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc. (f)
10.20 American Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc. (f)
21.1 Subsidiaries of the Registrant
CYMRI, L.L.C. (Nevada)
Triumph Energy, Inc. (Louisiana)
Stratum Construction Services, Inc. (New Mexico)

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 (g)
101.SCH XBRL Taxonomy Extension Schema Document (g)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (g)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (g)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (g)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (g)


(a) Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed March 8, 2007.

(b) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 13, 2008.

(c) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 11, 2009.

(d) Incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed April 15, 2010.

(e) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 11, 2010.

(f) Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed June 10, 2011.

(g) 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.



* Filed herewith.


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STRATUM HOLDINGS, INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page (s)

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2011 and 2010 F-3

Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2011 and 2010 F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 F-6

Notes to Consolidated Financial Statements F-7- F-20




F-1
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Report of Independent Registered Public Accounting Firm

To the Board of Directors
Stratum Holdings, Inc.
Houston, Texas


We have audited the accompanying consolidated balance sheets of Stratum Holdings, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stratum Holdings, Inc. and its subsidiaries at December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has losses from continuing operations and has a working capital deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/S/ MaloneBailey LLP
Houston, Texas
March 23, 2012


F-2
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STRATUM HOLDINGS, INC.
Consolidated Balance Sheets

December 31,
2011 2010
Assets
Current assets:
Cash and cash equivalents $ 758,940 $ 63,133
Accounts receivable (less allowance for doubtful accounts of
$208,574 and $43,408, respectively) 536,829 605,041
Prepaid expenses and other 53,434 122,348
Notes receivable from sale of subsidiary 1,146,191 -
Current assets of discontinued operations - 4,032,400
Total current assets 2,495,394 4,822,922

Property and equipment:
Oil and gas properties, evaluated (full cost method) 14,820,142 14,560,532
Other property and equipment 158,234 133,692
Total property and equipment 14,978,376 14,694,224
Less: Accumulated depreciation, depletion and amortization (9,107,252 ) (8,611,835 )
Net property and equipment 5,871,124 6,082,389

Other assets:
Notes receivable from sale of subsidiary 1,333,883 -
Noncurrent assets of discontinued operations - 1,659,431
Total other assets 1,333,883 1,659,431

Total assets $ 9,700,401 $ 12,564,742

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt - stockholders $ 320,000 $ 730,709
Current portion of long-term debt - others 2,889,780 3,079,380
Accounts payable 744,180 881,904
Accrued liabilities 1,462,984 1,241,840
Fair value of oil and gas derivatives 155,440 37,835
Current liabilities of discontinued operations - 4,652,823
Total current liabilities 5,572,384 10,624,491

Long-term debt, net of current portion 244,189 337,378
Deferred income taxes 907,000 1,559,500
Asset retirement obligations 364,740 333,670
Total liabilities 7,088,313 12,855,039

Stockholders’ equity (deficit):
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 (10,308,959 ) (13,001,655 )
Accumulated foreign currency translation adjustment - (209,689 )
Total stockholders’ equity (deficit) 2,612,088 (290,297 )

Total liabilities and stockholders’ equity (deficit) $ 9,700,401 $ 12,564,742


See Accompanying Notes to Consolidated Financial Statements.


F-3
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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations

Year Ended December 31,
2011 2010
Revenues:
Oil and gas sales $ 2,984,992 $ 2,625,586
Total revenues 2,984,992 2,625,586

Operating expenses:
Lease operating expense 1,575,192 1,509,274
Depreciation, depletion and amortization 495,417 528,298
Workover expense 520,090 475,356
Selling, general and administrative 1,178,812 1,042,742
Total operating expenses 3,769,511 3,555,670

Operating loss (784,519 ) (930,084 )

Other income (expense):
Interest income 36,451 1,014
Interest expense (288,269 ) (376,468 )
Gain on debt extinguishment - 438,967
Gain (loss) on oil and gas derivatives (122,144 ) 51,155

Loss before income taxes (1,158,481 ) (815,416 )
Benefit for income taxes 390,400 295,400
Net loss from continuing operations (768,081 ) (520,016 )
Discontinued operations, net of tax 3,460,777 302,151
Net income (loss) $ 2,692,696 $ (217,865 )

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.29 ) $ (0.20 )
Discontinued operations, net of tax 1.30 0.12
Net income (loss) $ 1.01 $ (0.08 )

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


See Accompanying Notes to Consolidated Financial Statements.


F-4
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STRATUM HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2011 and 2010

Accumulated
Additional Foreign Total
Common Stock Paid-in Accumulated Currency Stockholders'
Shares Amount Capital Deficit Translation Equity (Deficit)

Balance at January 1, 2010 2,655,738 $ 26,557 $ 12,808,867 $ (12,783,790 ) $ (230,831 ) $ (179,197 )

Stock Based Compensation - - 11,525 - - 11,525

Stockholder Debt Forgiveness - - 74,098 - - 74,098

Net Loss - - - (217,865 ) - (217,865 )

Foreign Currency Translation - - - - 21,142 21,142

Balance at December 31, 2010 2,655,738 26,557 12,894,490 (13,001,655 ) (209,689 ) (290,297 )

Net Income - - - 2,692,696 - 2,692,696

Foreign Currency Translation - - - - 209,689 209,689

Balance at December 31, 2011 2,655,738 $ 26,557 $ 12,894,490 $ (10,308,959 ) $ - $ 2,612,088


See Accompanying Notes to Consolidated Financial Statements.


F-5
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STRATUM HOLDINGS, INC.
Consolidated Statements of Cash Flows

Year Ended December 31,
2011 2010
Cash flows from operating activities:
Net income (loss) $ 2,692,696 $ (217,865 )
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations
Depreciation, depletion and amortization 495,417 528,298
Benefit for income taxes (390,400 ) (295,400 )
Stock based compensation - 11,525
Gain on sale of subsidiary (2,695,100 ) -
Gain on debt extinguishment - (438,967 )
Unrealized (gain) loss on oil and gas derivatives 117,605 (51,155 )
Changes in current assets and liabilities 220,546 385,109
Other changes, net (350,865 ) 62,903
Net cash flows from continuing operations 89,899 (15,552 )
Net cash flows from discontinued operations 261,002 (456,176 )
Total cash flows from operating activities 350,901 (471,728 )

Cash flows from investing activities:
Receipt of cash from sale of subsidiary 350,000 -
Collection of notes receivable from sale of subsidiary 2,146,200 -
Decrease in restricted cash - 1,613,637
Purchase of property and equipment (284,152 ) (139,633 )
Net cash flows from investing activities 2,212,048 1,474,004

Cash flows from financing activities:
Payments of long term debt (519,778 ) (1,151,906 )
Proceeds from long term debt 36,280 114,000
Net payments of stockholder advances (210,000 ) (460,854 )
Net cash flows from continuing operations (693,498 ) (1,498,760 )
Net cash flows from discontinued operations (1,173,644 ) 416,914
Total cash flows from financing activities (1,867,142 ) (1,081,846 )

Net increase (decrease) in cash and cash equivalents 695,807 (79,570 )
Cash and cash equivalents at beginning of period 63,133 142,703

Cash and cash equivalents at end of period $ 758,940 $ 63,133

Supplemental cash flow data:
Cash paid for interest - continuing operations $ 213,798 $ 193,163
Cash paid for interest - discontinued operations 120,605 413,767

Supplemental investing activity:
Notes receivable issued for sale of subsidiary - non interest bearing $ 2,776,274 -
Notes receivable issued for sale of subsidiary - interest bearing 1,850,000 -

Supplemental financing activity:
Gain on debt extinguishment - related party $ - $ 74,098


See Accompanying Notes to Consolidated Financial Statements.


F-6
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STRATUM HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010

(1) Business and Summary of Significant Accounting Policies


Description of Business – Stratum Holdings, Inc. (“we”, “our” or the "Company") is a Nevada corporation, whose operations are presently focused on the domestic Exploration & Production business. On June 3, 2011, we sold the capital stock of our two Canadian Energy Services subsidiaries, Decca Consulting, Ltd. and Decca Consulting, Inc. (collectively referred to as “Decca”), as more fully described in Note 2. As a result of the sale of Decca, we exited from the Canadian Energy Services segment. The following accounting policies relate to the retained Exploration & Production segment as continuing operations while the exited Canadian Energy Services segment is reported as discontinued operations.


Principles of Consolidation – The consolidated financial statements include the accounts of Stratum Holdings, Inc. and its wholly-owned subsidiaries, CYMRI, LLC and Triumph Energy, Inc. Significant intercompany amounts are eliminated in consolidation. Certain reclassifications have been made to the prior year statements to conform to the current year presentation.


Cash Equivalents – For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.


Oil and Gas Operations – For its oil and gas operations, the Company follows the sales method for recognizing its revenues and the full cost method in accounting for its costs. Costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. (a) Capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized; (b) The capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties; and (c) Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.


Asset Retirement Obligations and Environmental Costs - The Company records the fair value of legal obligations to retire and remove long-lived assets in the period in which the obligation is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, the cost is capitalized by increasing the carrying amount of the related properties, plant and equipment. Over time the liability is increased for the change in its present value, and the capitalized cost in properties, plant and equipment is depreciated over the useful life of the related asset. Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and do not have a future economic benefit, are expensed.



F-7
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Other Property and Equipment – Other property and equipment, primarily office furniture and fixtures, is depreciated on a straight-line basis over their useful lives ranging from three to five years.


Stock-Based Compensation – The Company follows Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation,” requiring that compensation expense related to share-based payment transactions with employees be recognized in the financial statements (see Note 7).


Allowance for Doubtful Accounts – The Company has provided an allowance for uncollectible accounts receivable based on management's evaluation of collectability of outstanding balances. The allowance is based on estimates and actual losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the period in which they become known.


Income Taxes – Income taxes are accounted for under the asset and liability method (see Note 8). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change.


We follow ASC 740, “Income Taxes.” ASC 740 creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements. We apply significant judgment in evaluating our tax positions and estimating our provision for income taxes. The actual outcome of these future tax consequences could differ significantly from these estimates, which could impact our financial position, results of operations and cash flows. The evaluation of a tax position in accordance with ASC 740 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement. No liability for unrecognized tax benefits was recorded as of December 31, 2011 or 2010.


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 per common share is computed by considering dilutive common share equivalents under the Treasury Stock method. For the years ended December 31, 2011 and 2010, the basic and diluted average outstanding shares are the same because inclusion of common share equivalents would be anti-dilutive.


Use of Estimates – Management has made a number of estimates and assumptions in preparing these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.


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.



F-8
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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.


Changes in Accounting Principles – Effective January 1, 2010, the Company adopted revised oil and gas reserve estimation standards. These standards allow the use of reliable technology in determining estimates of proved reserve quantities and require the use of a 12-month average price to estimate proved reserves (see Note 12). The Company’s adoption of the revised reserve estimation standards did not have a material impact on its depreciation, depletion and amortization expense.


(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 (as of December 31, 2011, note payments of $2,146,200 had been made by the purchaser and the remaining balance of $630,074 was classified as a current asset); 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 indicated in the subsequent paragraph, the purchaser has not thus far made any of the monthly installments payments under this note). The Company recognized a pre-tax gain from this sale in the year ended December 31, 2011 in the amount of $2,695,100.


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, without giving any specific reason for this action. Such payments were required commencing in the fourth quarter of 2011 and principal and interest payments totaling $270,984 were past due in early March 2012, at which time the remaining principal balance was $1,649,704. Notwithstanding this action, the Company believes that collection of the Installment Notes is fully enforceable, based upon its legal position, and intends to vigorously 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 years ended December 31, 2011 and 2010, including the pre-tax gain on sale in 2011, are summarized below (such amounts in the first column reflect Decca’s operating results only through the date of the sale):

Year Ended December 31,
2011 2010

Energy services revenues $ 12,768,505 $ 20,114,217
Cost of energy services (11,720,562 ) (18,470,895 )
Gross profit 1,047,943 1,643,322
General and administrative expenses (424,301 ) (771,704 )
Interest expense (120,065 ) (413,767 )
Gain on sale 2,695,100 -
Net income before income taxes 3,198,677 457,851
Benefit (provision) for income taxes 262,100 (155,700 )
Net income $ 3,460,777 $ 302,151


The above benefit for income taxes from discontinued operations includes an estimated taxable loss in the 2011 period on the sale of Decca reflecting the recognition for tax purposes of goodwill impairments recorded in previous years for which no temporary differences were originally recognized (see Note 8).



F-9
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The following table presents the current assets, noncurrent assets and current liabilities applicable to the Company’s discontinued operations as of December 31, 2011 and 2010:


December 31,
2011 2010
Current assets:
Cash $ - $ 79,103
Accounts receivable - 3,927,635
Prepaid expenses - 25,662
- 4,032,400
Noncurrent assets:
Goodwill - 1,536,313
Other assets - 123,118
- 1,659,431
Current liabilities:
Current portion of long term debt - (1,806,581 )
Accounts payable - (2,841,850 )
Accrued liabilities - (4,392 )
- (4,652,823 )

Net assets of discontinued operations $ - $ 1,039,008


(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 losses from continuing operations in the last two years and has a net working capital deficit in the amount of $3,077,000 at December 31, 2011. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time.


The working capital deficit noted above reflects outstanding borrowings of $2,786,000 under a bank credit agreement, for which the maturity was recently extended to January 1, 2014 (see Note 5). Notwithstanding this extension, 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.


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.



F-10
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(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 essentially replaced a similar contract which expired in December 2011. The current contract 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 contract 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, changes in the fair value of such derivative contracts are reflected in current earnings in the period of the change. In the years ended December 31, 2011 and 2010, the Company reported an unrealized derivative loss of $117,605 and an unrealized derivative gain of $51,155, respectively, based on “Level 3” inputs (see Note 11). In the years ended December 31, 2011 and 2010, the Company reported realized derivative losses of $4,539 and zero, respectively.

(5) Long-Term Debt


As of December 31, 2011 and 2010, the Company had the following long-term debt obligations:

December 31,
2011 2010
$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 $2,786,000 as of December 31, 2011 $ 2,786,000 $ 2,951,000

$4,000,000 (Cdn) receivables factoring facility with a factoring company, interest on factored invoices at annual rate of 18.25%, compounded daily, for a minimum of 15 days, secured by accounts receivable of Canadian energy services business - 1,806,581

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) 283,922 538,087

Advances from stockholders, bearing interest at 10%, unsecured (extended since March 2010 - see discussion below) 320,000 530,000

Other short term notes for automobile and insurance financing, interest rates at 6% to 8% 64,047 128,380

3,453,969 5,954,048
Current portion of long term debt - stockholders (320,000 ) (730,709 )
Current portion of long term debt - others (2,889,780 ) (3,079,380 )
Current portion of long term debt - discontinued operations - (1,806,581 )

Long term debt, net of current portions $ 244,189 $ 337,378



F-11
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Future maturities of long-term debt as of December 31, 2011 are as follows:

Year ending December 31, 2012 $ 3,209,780
Year ending December 31, 2013 80,501
Year ending December 31, 2014 86,578
Year ending December 31, 2015 71,043
Year ending December 31, 2016 6,067

$ 3,453,969



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 December 31, 2011, there was no available 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 (see Note 3).

Through June 3, 2011, the Company also had outstanding institutional borrowings under a factoring facility, which was secured by accounts receivable of Decca, our former Canadian Energy Services subsidiary (see Note 2). At that date, the Company sold the outstanding stock of Decca to a private company which effectively assumed Decca’s then outstanding borrowings under the factoring facility and the Company’s guarantee of Decca’s outstanding borrowings under this facility was replaced by a guarantee of the purchaser.

In March 2010, the Company reached an agreement with certain unsecured noteholders in the principal amount of $1,407,000 to accept a payment of 80% of the principal balance in full satisfaction of their notes payable. Accordingly, the Company fully extinguished the debt to these noteholders in March 2010 with principal payments totaling $1,125,000 resulting in a total gain of $551,000 on the forgiven principal and accrued interest. Of this amount, $112,000 was attributable to debt of a current shareholder, therefore, the Company credited the after-tax equivalent of $74,000 to Additional paid in capital and recognized a pre-tax gain in the year ended December 31, 2010 on the remaining portion attributable to unrelated parties in the amount of approximately $439,000.

The sole remaining unsecured noteholder is a company owned by our Chairman and Chief Executive Officer and the Company also reached an agreement with that company in March 2010 to make a net principal payment of $265,000, in exchange for indefinitely deferring the maturity of the remaining balance of $500,000 (which has been subsequently reduced to a balance of $320,000 as of December 31, 2011 due to net payments totaling $180,000). The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or a troubled debt restructuring.



F-12
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(6) Stockholders’ Equity (Deficit)


There were no transactions in the Company’s Common Stock in the years ended December 31, 2011 and 2010. As of December 31, 2011, the Company had no outstanding employee options to purchase shares of Common Stock under its equity-based compensation plan (see Note 7). As of December 31, 2011, the Company had outstanding warrants to purchase a total of 20,000 shares of Common Stock at an exercise price of $21.00 per share, expiring in March 2012, outside of its equity-based compensation plan.

(7) Stock-Based Compensation


The Company has a stock-based compensation plan which was approved by the stockholders in October 2005 and amended in October 2006. Under the plan, as amended, a maximum of 240,000 shares may be awarded to directors and employees in the form of stock options, restricted stock or stock appreciation rights. The exercise price, terms and other conditions applicable to each stock option grant are generally determined by the Board of Directors. The exercise price of stock options is set on the grant date and may not be less than the fair market value of the Company’s Common Stock on that date. Option activity with directors and employees since January 1, 2010 were as follows (including options granted to directors outside of the plan):

Number Wtd. Avg. Wtd. Avg. Aggregate
of Exercise Remaining Intrinsic
Shares Price Term (Yrs.) Value

Outstanding at January 1, 2010 47,500 $ 7.60
Options forfeited (25,000 ) (2.40 )
Outstanding at December 31, 2010 22,500 13.30
Options forfeited (22,500 ) (13.30 )
Outstanding at December 31, 2011 - $ - - $ -

Exercisable at December 31, 2011 - $ - - $ -



Stock-based compensation expense related to these options in the amounts of zero and $11,525 have been recognized as a current period expense in the accompanying Consolidated Financial Statements for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, all previously issued options had expired and there was no unrecognized compensation cost remaining to be recognized in future periods.


The estimated fair value of the options granted to employees under the plan was calculated using a Black Scholes option pricing model using the following assumptions: (a) Expected volatility – 95%; (b) Expected risk free interest rate – 6%; (c) Expected dividend yield – zero; (d) Expected option term – 3 to 4 years, calculated pursuant to the terms of ASC 718-10; and (e) Forfeitures – 0%, subject to adjustment for actual experience. Vesting terms of the options are generally three years.



F-13
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(8) Income Taxes

The Company provided the following amounts of income tax benefit attributable to continuing operations for the years ended December 31, 2011 and 2010:

Year ended December 31,
2011 2010

Current income taxes $ - $ -
Deferred income taxes (390,400 ) (295,400 )
Total $ (390,400 ) $ (295,400 )


The following table shows components of income tax benefit/provision attributable to both continuing operations and discontinued operations in comparison to the U.S. statutory tax rate of 34% for the years ended December 31, 2011 and 2010:

Year ended December 31,
2011 2010
Loss from continuing operations:
Tax (benefit) at U.S. statutory rate $ (393,884 ) $ (277,241 )
Non-deductible items 3,484 (18,159 )
(390,400 ) (295,400 )
Income from discontinued operations:
Tax provision at U.S. statutory rate 1,087,550 155,700
Tax (benefit) from sale of Decca (1,349,650 ) -
(262,100 ) 155,700

Total income tax benefit $ (652,500 ) $ (139,700 )



F-14
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The above benefit for income taxes from discontinued operations includes an estimated taxable loss in the 2011 period on the sale of Decca reflecting the recognition for tax purposes of goodwill impairments recorded in previous years for which no temporary differences were originally recognized (see Note 2). There was no tax benefit recognized for such previous impairments because no temporary difference was recognized when the goodwill was initially established upon the acquisition of Decca in March 2007.


The following table indicates the tax effects of temporary differences giving rise to our deferred tax assets and liabilities as of December 31, 2011 and 2010:

December 31,
2011 2010
Deferred tax assets:
Operating loss carryforwards $ 726,100 $ 222,300
Other, net 111,800 72,700
Gross deferred tax assets 837,900 295,000

Deferred tax liabilities:
Property and equipment (1,744,900 ) (1,854,500 )
Other, net - -
Gross deferred tax liabilities (1,744,900 ) (1,854,500 )

Net deferred tax liabilities $ (907,000 ) $ (1,559,500 )


As of December 31, 2011, we have consolidated U.S. tax operating loss carryforwards of approximately $2,135,000, which largely expire on December 31, 2021 (subject to certain annual limitations). We have offset the tax effect of our net operating loss carryforwards against our deferred tax liabilities to the extent permitted under the tax accounting rules.


(9) Related Party Transactions


The Company repaid net stockholder notes and advances in the amounts of $210,000 and $461,000 in the years ended December 31, 2011 and 2010, respectively. Stockholder advances are reflected as unsecured long term debt obligations and accrue interest at a rate of 10% per annum (see Note 5). As of December 31, 2011 and 2010, the Company had granted a second lien on its oil and gas properties to a former stockholder in the amount of approximately $900,000.


F-15
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(10) Commitments and Contingencies


The Company and its subsidiaries have operating leases for office space under which rental expense from continuing operations amounted to $87,000 and $93,000 in the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, aggregate commitments under the Company’s operating leases were as follows:

Year ending December 31, 2012 $ 30,000
Year ending December 31, 2013 -
Year ending December 31, 2014 -
Year ending December 31, 2015 -
Year ending December 31, 2016 -
$ 30,000


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 business, and a former subsidiary are joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. It is not practical at the present time to determine the amount or likelihood of an unfavorable outcome to the Company’s consolidated financial position or results of operations of any of the these 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 December 31, 2011.

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 non-appealable judgment was rendered in favor of the plaintiff in January 2011, however, the Company believes that the loss exposure of its defunct Construction Staffing subsidiary would be reduced by approximately one-half due to an offsetting amount that would be due from the underlying carrier. Accordingly, the Company has recorded an accrual for such estimated net loss exposure in this matter as of December 31, 2011.


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 December 31, 2011, 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.



F-16
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(11) Other Required Disclosures


Segment Information – The Company operated in two segments, domestic Exploration & Production and Canadian Energy Services, at the time of the sale of Decca in June 2011 (see Note 2). As a result of the sale of Decca, the Company is treating the Canadian Energy Services segment as discontinued operations and has reported summarized financial information of that segment in Note 2. Since the Company’s continuing operations consist solely of one remaining segment (domestic Exploration & Production), there is no need for disaggregated segment information for continuing operations in this report.


Asset Retirement Obligations – The Company records an asset retirement obligation (“ARO”) when the total depth of a drilled well is reached and the Company can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. The Company records the ARO liability on the consolidated balance sheets and capitalizes a portion of the cost in oil and gas properties equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date and adjusted for the Company’s credit risk. This amount is discounted to present value using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds. The Company did not drill or abandon any properties in the years ended December 31, 2011 and 2010. Therefore, the only ARO transactions were to accrue accretion expense of $31,000 and $28,000, respectively, in the years ended December 31, 2011 and 2010.


Credit Risk Concentrations – As previously noted, the Company’s remaining operations are in the domestic Exploration & Production segment. In that segment, the Company sells produced oil and gas mostly to well known commodity purchasers from whom it does not require collateral. In the years ended December 31, 2011 and 2010, there was one major customer, Gulfmark Energy, which represented 77% and 76%, respectively, of the Company’s consolidated revenues from continuing operations. There were no other customers representing more than 10% of the Company’s consolidated revenues from continuing operations in the years ended December 31, 2011 and 2010.


The Company maintains its domestic cash accounts in three different federally chartered banking institutions. Its bank accounts in each bank are government insured up to $250,000 with the Company’s book balance at one bank exceeding that level by approximately $425,000 as of December 31, 2011.


Fair Value of Financial Instruments – ASC 820, “Fair Value Measurements,” establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Disclosures about fair value of financial instruments are based on pertinent information available to management and are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.


The statement requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. It requires fair value measurements be classified and disclosed in one of the following categories: (1) Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. (2) Level 2 - Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps, investments and interest rate swaps. (3) Level 3 - Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). Our valuation models are primarily industry-standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors and (d) current market and contractual prices for the underlying instruments, as well as other relevant information.


Management has estimated the fair values of cash, accounts receivable, accounts payable and accrued expenses to approximate their respective carrying values reported on these financial statements because of their short maturities. The carrying amounts of notes receivable and notes payable approximate fair value because their interest rates approximate market for items of similar risk. Additionally, ASC 820 requires that we disclose the valuation methodology for our commodity derivatives contract as of December 31, 2011 (see Note 4). Pursuant to ASC 820, we valued this derivative contract based on a “Level 3” input which consisted of a valuation model provided by the counterparty.



F-17
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(12) Oil and Gas Producing Activities (Unaudited)


Capitalized Costs of Oil and Gas Properties – The Company has owned working interests in oil and gas properties since acquiring CYMRI in May 2006. The table below reflects the capitalized costs of such oil and gas properties as of December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Proved oil and gas properties $ 14,820 $ 14,560
Unproved oil and gas properties - -
Gross oil and gas properties 14,820 14,560
Less: Accumulated depreciation, depletion & amortization (8,976 ) (8,480 )

Net oil and gas properties $ 5,844 $ 6,080


Costs Incurred in Oil and Gas Producing Activities – The table below presents the costs incurred in oil and gas producing activities for the years ended December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Property acquisition $ - $ -
Exploration - -
Development 260 135

Total costs incurred $ 260 $ 135


Results of Operations for Oil and Gas Producing Activities – The table below presents the results of operations for oil and gas producing activities for the years ended December 31, 2011 and 2010 (in thousands):

Year ended December 31,
2011 2010

Revenues $ 2,985 $ 2,626
Production costs (2,095 ) (1,985 )
Depreciation, depletion & amortization (495 ) (528 )
Impairment expense - -
Income taxes (134 ) (38 )

Results of operations $ 261 $ 75


Oil and Gas Reserves – The following table sets forth summary information with respect to CYMRI/Triumph’s proved oil and gas reserves as of December 31, 2011, prepared by the Company’s independent reservoir engineering firm. The estimates of proved and proved developed reserve quantities and the related measure of discounted future net cash flows are estimates only and do not purport to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise and generally more conservative than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in the United States.


F-18
--------------------------------------------------------------------------------



Oil Gas Total PV10 Value
(MBbl) (MMcf) (MMcfe) (000's)

Proved developed reserves 424 771 3,316 $ 11,372
Proved undeveloped reserves 48 - 287 1,390
Total proved reserves 472 771 3,603 12,762
Discounted future income taxes (3,917 )
Standardized measure of discounted
future net cash flows $ 8,845


Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods.


The following table sets forth changes in the Company’s proved oil and gas reserves in the years ended December 31, 2011 and 2010 (in thousands):

Oil Gas Total
(MBbl) (MMcf) (MMcfe)

Balance at January 1, 2010 323 719 2,657
Revisions of previous estimates 228 184 1,552
Production (30 ) (73 ) (253 )
Balance at December 31, 2010 521 830 3,956
Revisions of previous estimates (21 ) 13 (113 )
Production (28 ) (72 ) (240 )

Balance at December 31, 2011 472 771 3,603



F-19
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The standardized measure of discounted future net cash flows is computed by applying estimated prices of oil and gas (at year-end 2011 average monthly prices) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (at year-end 2011 costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10-percent per year to reflect the estimated timing of the future net cash flows. The Company does not believe that the standardized measure of discounted future net cash flows is necessarily indicative of the fair value of its oil and gas properties. The following table sets forth the components of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves as of December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Future net revenues $ 49,686 $ 43,367
Future lease operating expenses and production taxes (22,779 ) (21,143 )
Future development costs (1,468 ) (1,818 )
Future income taxes (7,807 ) (6,596 )
Future net cash flows 17,632 13,810
10% annual discount for estimated timing of cash flows (8,787 ) (6,875 )

Standardized measure of discounted future net cash flows $ 8,845 $ 6,935


The following table sets forth changes in the standardized measure of the Company’s discounted future cash flows (“FCF”) relating to its proved oil and gas reserves in the years ended December 31, 2011 and 2010 (in thousands):

Year ended December 31,
2011 2010

Net changes in prices and production costs $ 3,751 $ 5,653
Sales and transfers of oil and gas produced (1,410 ) (1,116 )
Net change due to revisions in quantity estimates (198 ) 2,156
Future development costs 176 117
Net change in income taxes (605 ) (2,142 )
Changes in production rates, other (498 ) (1,789 )
Accretion of discount 694 369
Changes in standardized measure of discounted FCF 1,910 3,248
Beginning standardized measure of discounted FCF 6,935 3,687

Ending standardized measure of discounted FCF $ 8,845 $ 6,935


In accordance with the guidelines of the SEC, the reservoir engineers’ estimates of future net revenues from our properties and the pre-tax PV 10 Value amounts thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The average beginning of the month prices for the year ended December 31, 2011 used in such estimates were $97.95 per barrel of oil and $4.46 per Mcf of gas.


F-20
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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.

By: /s/ Larry M. Wright
Larry M. Wright
Chairman and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities indicated on March 23, 2012.

Signature Title

/s/Larry M. Wright Chairman and Chief Executive Officer
Larry M. Wright (Principal Executive Officer)


/s/ D. Hughes Watler, Jr. Chief Financial Officer
D. Hughes Watler, Jr. (Principal Financial and Accounting Officer)





18

EXHIBIT 31.1


CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Larry M. Wright, certify that:


1. I have reviewed this annual report on Form 10-K of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.




Date: March 23, 2012

/s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer
EXHIBIT 31.2


CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, D. Hughes Watler, Jr., certify that:


1. I have reviewed this annual report on Form 10-K of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: March 23, 2012

/s/ D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer
EXHIBIT 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry M. Wright, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


/s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer
March 23, 2012

EXHIBIT 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, D. Hughes Watler, Jr., Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


/s/ D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer
March 23, 2012

[10 bagger]

STTH. $0.30 FORM 10-K


Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Fiscal Year Ended December 31, 2011


Commission File No. 000-51229


STRATUM HOLDINGS, INC.
(Exact Name of Registrant as specified in its charter)


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



Three Riverway, Suite 1590
Houston, Texas
77056
(Address of principal
executive offices) (zip code)


[phone]
(Registrant's telephone number, including area code)


Securities Registered Under Section 12(b) of the Exchange Act:
None


Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value


Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act): Yes o No þ


Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act): Yes o No þ


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 Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes þ No o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. þ


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 Non-accelerated filer o
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 Act): Yes o No þ


The aggregate market value of Common Stock held by non-affiliates of the Registrant (based upon the closing price of such shares as quoted on the OTC Bulletin Board) as of the last business day of the most recently completed second fiscal quarter was approximately $152,000.


The number of shares outstanding of the Registrant's Common Stock as of March 23, 2012 was 2,655,738 shares.


--------------------------------------------------------------------------------

--------------------------------------------------------------------------------



--------------------------------------------------------------------------------



STRATUM HOLDINGS, INC.
2011 FORM 10-K


INDEX

Page

PART I
Item 1 and 2. Description of Business and Properties. 3

Item 3. Legal Proceedings. 6

PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 7

Item 6. Selected Financial Data. 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8

Item 8. Financial Statements and Supplementary Data. 11

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 11

Item 9A. Controls and Procedures. 11

Item 9B. Other Information. 12

PART III
Item 10. Directors, Executive Officers and Corporate Governance. 13

Item 11. Executive Compensation. 14

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 15

Item 13. Certain Relationships and Related Transactions, and Director Independence. 15

Item 14. Principal Accounting Fees and Services. 15

PART IV
Item 15. Exhibits, Financial Statement Schedules. 16

Signatures. 18




2
--------------------------------------------------------------------------------




PART I


ITEM 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES.


Stratum Holdings, Inc. (“we”, “our” or the “Company”) is a holding company headquartered in Houston, Texas, whose operations are presently focused on the domestic Exploration & Production business. In that business, our wholly-owned subsidiaries, CYMRI, L.L.C. (“CYMRI”) and Triumph Energy, Inc. (“Triumph”), 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.


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, as more fully described in the section on Energy Services below. Although we have sold Decca, the note payments that we are receiving from the purchaser pursuant to the sales agreement represent a current source of liquidity for our continuing operations.

We seek to increase shareholder value through an approach focused on both growth and transaction opportunities in the energy industry. Our management team has executive level contacts throughout the energy industry and has expertise in identifying and closing transaction opportunities.

The following two sections provide additional background information on our continuing Exploration & Production business and our discontinued Canadian Energy Services business.

Exploration & Production


Our Exploration & Production operations commenced with the acquisition of CYMRI’s predecessor company in May 2006 for a combination of cash, notes payable and Common Stock totaling $12.7 million. CYMRI was originally formed by our present Chief Executive Officer, Larry Wright, in July 2001 to acquire long-lived oil and gas reserves. CYMRI completed several oil and gas property acquisitions in South Texas, primarily known as the Burnell and Kibbe Fields, in 2001-2003.


CYMRI had previously acquired Petroleum Engineers, Inc. (“PEI”) in June 2004 for total consideration of $5.1 million and that acquisition included interests in non-operated oil and gas properties in South Louisiana owned by Triumph, which was a PEI affiliate at that time. The Company’s subsequent sale of PEI in March 2008 did not include the oil and gas properties of Triumph.


Shown below are certain SEC required disclosures regarding our Exploration & Production business.

Oil and Gas Reserves


The following table sets forth summary information with respect to the estimates of CYMRI/Triumph’s proved oil and gas reserves, as of December 31, 2011, prepared by Prator Bett, L.L.C., our independent reservoir engineering firm:

Oil Gas Total PV10 Value
(MBbl) (MMcf) (MMcfe) (000's)

Proved developed reserves 424 771 3,316 $ 11,372
Proved undeveloped reserves 48 - 287 1,390
Total proved reserves 472 771 3,603 12,762
Discounted future income taxes (3,917 )
Standardized measure of discounted
future net cash flows $ 8,845



3
--------------------------------------------------------------------------------



Proved reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. The technical persons responsible for preparing our reserve estimates are independent petroleum engineers that meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We employ adequate internal controls over the data provided to our independent reservoir engineers to insure that our reserve estimates are in compliance with the Securities and Exchange Commission (“SEC”) definitions and guidance.


In accordance with the guidelines of the SEC, the reservoir engineers’ estimates of future net revenues from our properties and the pre-tax PV 10 Value amounts thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The average beginning of the month prices for the year ended December 31, 2011 used in such estimates were $97.95 per barrel of oil and $4.46 per Mcf of gas.


Productive Oil and Gas Wells and Acreage


As of December 31, 2011, CYMRI and Triumph maintained ownership interests in a total of 34.0 gross (25.5 net) productive wells in the State of Texas and 28.0 gross (5.2 net) productive wells in the State of Louisiana for a grand total of 62.0 gross (30.7 net) productive oil and gas wells. CYMRI and Triumph did not participate in the drilling of any new oil and gas wells in the three years ended December 31, 2011.


As of December 31, 2011, CYMRI and Triumph had ownership interests in approximately 3,000 net productive acres in the States of Texas and Louisiana. CYMRI and Triumph had no significant interests in any undeveloped acreage.


Production Prices and Costs


The average per barrel oil price received for CYMRI/ Triumph’s net oil production in the years ended December 31, 2011, 2010 and 2009 were $95.63, $75.34 and $64.03, respectively. The average per Mcf gas price received for CYMRI/ Triumph’s net gas production in the years ended December 31, 2011, 2010 and 2009 were $4.42, $4.64 and $7.35, respectively. In the same periods, CYMRI/ Triumph’s net production costs averaged $6.58, $5.93 and $4.42, respectively, per Mcf equivalent.


CYMRI/ Triumph’s oil and gas production is sold to various purchasers in the States of Texas and Louisiana at spot or market sensitive prices under short-term contracts. CYMRI/ Triumph had no delivery commitments in the three years ended December 31, 2011.

Energy Services


As previously indicated, we also operated in the Canadian Energy Services business via our ownership of Decca through June 3, 2011. 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 recognized a pre-tax gain on the sale of Decca in June 2011 in the amount of $2.7 million.


Decca operates from an office in Calgary, Canada, with a cadre of independent field consultants who provide drilling, completion and other on-site consulting services to oil and gas operators in Alberta and neighboring provinces as well as in selected international locations. These services are generally performed on a per diem rate for the customer operators, pursuant to term agreements which are subject to periodic rate adjustments. Decca’s customers include a number of international oil and gas companies with operations in Canada in addition to some of the largest independent oil and gas companies based in Canada.


4
--------------------------------------------------------------------------------



Competition


Competition in the domestic Exploration & Production business is extremely intense. Competitors include major oil and gas companies, large and small independent producers, and individual producers and operators. Many competitors have financial resources substantially greater than ours, and staffs and facilities substantially larger than ours. In the Exploration & Production business, our success in operating our existing oil and gas properties as well as in acquiring and developing additional properties will depend on our ability to operate in this highly competitive environment.

Employees


As of December 31, 2011, the Company had a total of six permanent employees between its corporate headquarters located in Houston, Texas, and its domestic Exploration & Production offices located in Lafayette, Louisiana. All of these individuals are co-employed by CYMRI, L.L.C. and Insperity, Inc., a professional employer organization. Our field operations are performed substantially by independent contractors in Texas and Louisiana.

Regulation


The oil and gas industry is subject to extensive federal and state governmental regulations which affect our domestic Exploration & Production business. These governmental mandates include federal and state regulations governing environmental quality and pollution control, state limits on allowable rates of production by individual well or proration unit, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels.

Oil and Gas Terminology


The following terms are used to describe quantities of oil and natural gas in this document.


? Bbl—One stock tank barrel, or 42 US gallons liquid volume, of crude oil or other liquid hydrocarbons.


? Mcf—One thousand cubic feet of natural gas.


? MBbl—One thousand Bbls.


? MMcf—One million cubic feet of natural gas.


? MMcfe—One million cubic feet of natural gas equivalent, converting oil to gas at the ratio of 6 Mcf of gas to 1 Bbl of oil.


Available Information


Our website address is www.stratum-holdings.com, however, the website information is not part of this report. We file annual, quarterly, and special reports, proxy statements, and other information periodically with the SEC. Such reports, proxy statements and other information filed with the SEC may be accessed electronically by means of the SEC's website at www.sec.gov. This material may also be inspected and copied at the public reference facilities of the SEC at 100 F Street N.E., Washington, DC 20549.



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ITEM 3. LEGAL PROCEEDINGS.


Triumph and a former subsidiary, PEI, are joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. It is not practical at the present time to determine the amount or likelihood of an unfavorable outcome to the Company’s consolidated financial position or results of operations of any of the these actions against Triumph. The Company believes that Triumph has meritorious defenses in each case and is vigorously defending these matters.


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 non-appealable judgment was rendered in favor of the plaintiff in January 2011, however, the Company believes that the loss exposure of its defunct Construction Staffing subsidiary would be reduced by approximately one-half due to an offsetting amount that would be due from the underlying carrier. Accordingly, the Company has recorded an accrual for such estimated net loss exposure in this matter as of December 31, 2011.


With respect to the proceedings noted above, none involves primarily a claim for damages, exclusive of interest and costs, in excess of 10 percent of the Company’s current assets on a consolidated basis.



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PART II


ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


Since July 2005, our Common Stock has been quoted and traded on the OTC Bulletin Board. In March 2007, our trading symbol was changed to STTH.OB. Because we trade in the OTC Bulletin Board, a shareholder may find it difficult to dispose of or obtain accurate quotations as to price of our Common Stock. In addition, the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure related to the market for penny stock and for trades in any stock defined as a penny stock.


On December 17, 2009, we completed a 1-for-10 reverse stock split of our Common Stock, pursuant to a plan approved by our Board of Directors. Accordingly, all Common Stock share and per share amounts in this annual report have been retroactively adjusted to reflect the reverse stock split. As of March 23, 2012, we had a total of 2,655,738 shares of our Common Stock outstanding and the number of holders of record of our Common Stock at that date was approximately 100. The following table sets forth the high and low bid prices of our Common Stock for each quarter during the calendar years 2010 and 2011:


Bid Price
2010 High Low
First Quarter $ 0.10 $ 0.05
Second Quarter $ 0.12 $ 0.02
Third Quarter $ 0.15 $ 0.08
Fourth Quarter $ 0.14 $ 0.12

2011
First Quarter $ 0.50 $ 0.10
Second Quarter $ 0.31 $ 0.16
Third Quarter $ 0.25 $ 0.16
Fourth Quarter $ 0.30 $ 0.16



We have never declared nor paid any cash dividends on our Common Stock and do not anticipate declaring any dividends in the foreseeable future. We expect to retain our cash for the operation and maintenance of our business. In addition, our senior bank credit facility contains restrictions on the payment of dividends to the holders of our Common Stock. We have made no repurchases of our Common Stock for the year ended December 31, 2011.


As indicated in Note 7 of the Consolidated Financial Statements, the Company has an equity-based compensation plan which was approved by the stockholders in October 2005 and amended in October 2006. Under the plan, as amended, a maximum of 240,000 shares may be awarded to directors and employees via the issuance of equity-based derivatives in the form of stock options, restricted stock or stock appreciation rights.


As of December 31, 2011, the Company had no such equity-based derivatives outstanding under the stockholder approved plan referenced above. As of December 31, 2011, the Company had only a nominal number of equity-based derivatives, in the form of stock warrants, which were issued and outstanding outside of the stockholder approved plan.

ITEM 6. SELECTED FINANCIAL DATA.


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 7. 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 Company’s consolidated financial statements and notes thereto included in Item 8 in this Annual Report on Form 10-K. 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 Nevada holding company whose operations are presently focused on the domestic Exploration & Production business. In that business, our wholly-owned subsidiaries, CYMRI and Triumph, 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 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 years ended December 31, 2011 and 2010, as reported in our consolidated financial statements and notes thereto included in Item 8.

Year ended December 31, 2011 versus year ended December 31, 2010 — Total revenues from continuing operations, not including interest income, were $2,985,000 for the year ended December 31, 2011 compared to $2,626,000 for the year ended December 31, 2010.


Revenues from CYMRI’s and Triumph’s oil and gas sales for the year ended December 31, 2011 were $2,985,000 compared to $2,626,000 for the year ended December 31, 2010. In the year ended December 31, 2011, revenues from oil production were $2,667,000, reflecting volumes of 27,889 barrels at an average price of $95.63 per barrel, while gas revenues were $318,000, reflecting volumes of 71,884 Mcf at an average price of $4.42 per Mcf. These amounts reflect a 21% increase in average sales prices, largely due to oil price volatility, which was partially offset by a 6% decline in production volumes. Due to the mechanical condition of our properties, we believe that continuing declines in production volumes are reasonably possible in the near future.


Lease operating expenses (“LOE”), including production taxes, were $1,575,000 for the year ended December 31, 2011 versus $1,509,000 for the year ended December 31, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This relatively small increase was mostly due to the impact of inflation on oilfield operating costs.


Depreciation, depletion and amortization (“DD&A”) expense for the year ended December 31, 2011 was $495,000 versus $528,000 for the year ended December 31, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was primarily due to the above noted decline in oil and gas production volumes.

Workover expenses for the year ended December 31, 2011 were $520,000 versus $475,000 for the year ended December 31, 2010, representing workovers on CYMRI’s South Texas oil and gas properties. This relatively small increase was largely experienced in CYMRI’s Burnell Field.


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Selling, general and administrative (“SG&A”) expenses from continuing operations for the year ended December 31, 2011 were $1,179,000 compared to $1,043,000 for the year ended December 31, 2010. This increase mostly reflected a reduction in such expenses recovered from third parties under operating agreements.


Interest income from continuing operations for the year ended December 31, 2011 was $36,000 versus $1,000 for the year ended December 31, 2010. 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 year ended December 31, 2011 was $288,000 versus $376,000 for the year ended December 31, 2010. This decrease was primarily due to interest no longer being incurred on the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).


Gain on debt extinguishment for the year ended December 31, 2011 was zero compared to $439,000 for the year ended December 31, 2010. This decrease was due to the forgiveness of a portion of the principal and all of the accrued interest on unsecured notes payable to certain unrelated parties in March 2010 (see Note 5).


Gain (loss) on oil and gas derivatives reflected a loss of $122,000 for the year ended December 31, 2011 versus a gain of $51,000 for the year ended December 31, 2010. 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 $390,000 for the year ended December 31, 2011 compared to a benefit of $295,000 for the year ended December 31, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 34% and 36%, respectively.


Income from discontinued operations, net of income taxes, was $3,461,000 for the year ended December 31, 2011 versus $302,000 for the year ended December 31, 2010. 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, including the pre-tax gain in the amount of $2,695,000 recognized from the sale, have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax benefit reflecting the estimated taxable loss on this sale in the 2011 period.

Liquidity and Capital Resources

Operating activities. Net cash provided by operating activities for the year ended December 31, 2011 was $351,000 compared to net cash used in operating activities of $472,000 for the year ended December 31, 2010. This comparative difference in net operating cash flows was primarily due to changes in net cash flows from discontinued operations arising from the Decca sale (see Note 2).

Investing activities. Net cash provided by investing activities, after deducting capital expenditures, was $2,212,000 for the year ended December 31, 2011 compared to $1,474,000 for the year ended December 31, 2010. In the year ended December 31, 2011, the Company received proceeds from the sale of Decca in the amount of $350,000 of cash paid at closing and $2,146,000 from the post-closing collection of notes receivable from the purchaser. In the year ended December 31, 2010, the Company converted approximately $1.6 million of restricted cash arising from the March 2008 sale of a former subsidiary into unrestricted cash.


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Financing activities. Net cash used in financing activities from continuing operations for the year ended December 31, 2011 was $693,000 compared to $1,499,000 for the year ended December 31, 2010. This relative increase in net financing cash flows was primarily due to the liquidation of the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5) and payments made 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 $2,786,000 as of December 31, 2011 and fluctuated very little in the year then ended. The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of December 31, 2011, there was no available 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.


We also have other debt amounts outstanding to the sellers of acquired businesses and to stockholders as more fully described in Note 5 and reflected in the table below (however, we have no off Balance Sheet arrangements). The following table sets forth the contractual obligations under our long-term debt and operating lease agreements as of December 31, 2011 (in thousands):

Payments Due By Period
Total 2012 2013-2014 2015-2016 After 2016

Long-term debt $ 3,454 $ 3,210 $ 167 $ 77 $ -
Interest on long-term debt 236 211 23 2 -
Operating leases for office space 30 30 - - -

Total $ 3,720 $ 3,451 $ 190 $ 79 $ -


Our ongoing capital expenditures are in the domestic Exploration & Production business, 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 $260,000 being spent in the year ended December 31, 2011. We believe that our capital expenditures for the foreseeable future 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 $3,077,000. 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, potentially improves 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 notes receivable. As disclosed in Note 2, the purchaser informed the Company in early March 2012 that it would not make the monthly principal and interest payments required under the interest bearing installment notes and we intend to vigorously pursue our legal rights to enforce collection of such notes. Nonetheless, it is possible that we and the purchaser may mutually agree to restructure the terms of these notes at some point in the future, although no definitive agreement has been reached in that regard.


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Critical Accounting Policies and Estimates


Since the sale of Decca in June 2011, our current business operations are solely in the Exploration & Production business. Shown below are the critical accounting policies pertaining to that industry.


Full Cost Accounting for Oil and Gas Properties
In our Exploration & Production business, we have adopted the “full cost” method of accounting for oil and gas properties. Under full cost accounting, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. Other significant features of full cost accounting are as follows:


? All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.

? The capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.

? Sales of properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.



In our Exploration & Production business, there is also a significant degree of complexity in our accounting for income taxes due to substantial differences between the financial accounting and tax treatments for certain oil and gas property expenditures.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


The required financial statements are included in this report as set forth in the “Index to Consolidated Financial Statements” on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.


None.

ITEM 9A. CONTROLS AND PROCEDURES.


(a) Disclosure Controls and Procedures


Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports that it files under the Securities Exchange Act of 1934 (the “Act”) is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, to allow for timely decisions regarding required disclosures. As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.


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Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report were effective at the reasonable assurance level.


(b) Management’s Annual Report on Internal Controls over Financial Reporting


Management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Because of its inherent limitation, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of such controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management has performed an assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making this assessment, management elected to use the criteria set forth in Internal Control – Integrated Framework (1992) created by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as the chosen internal control framework. Based on our assessment using those criteria, management concluded that our internal controls over financial reporting were effective at the reasonable assurance level.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding our internal controls over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit the Company to provide only management’s assessment in this Annual Report. Accordingly, management’s assessment has not been audited by MaloneBailey LLP or any other independent registered public accounting firm.

(c) Changes in Internal Controls over Financial Reporting


There was no change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.


None.


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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE.


Directors and Executive Officers


The following table sets forth our Directors and Executive Officers, their ages and positions held with us as of March 23, 2012:

Name Age Position
Larry M. Wright 67 Chairman and Chief Executive Officer
D. Hughes Watler, Jr. 63 Chief Financial Officer


Larry M. Wright was elected to our Board of Directors on May 23, 2006 and was elected Chairman and Chief Executive Officer on May 27, 2008. Mr. Wright founded CYMRI and served as its Chief Executive Officer from its inception in 2002. He previously co-founded and served as Chief Executive Officer of PANACO, Inc., a public oil and gas company, through September 2000. Prior thereto, he served as an executive with various independent oil and gas companies after beginning his career with UNOCAL in 1966.


D. Hughes Watler, Jr. was elected Chief Financial Officer in February 2007 after initially joining the Company as Vice President-Capital Markets in September 2006. He previously served as Senior Vice President & Chief Financial Officer of Goodrich Petroleum Corporation (NYSE: GDP) from March 2003 to May 2006 and as a financial officer of several other public and private energy companies. He was formerly an audit partner with Price Waterhouse LLP.

Corporate Governance


Upon the election of Mr. Wright as Chairman and Chief Executive Officer and the resignation of certain former Board members on May 27, 2008, the Company ceased to have both an independent Audit Committee and an independent Compensation Committee. Since the resignation of a former Board member on November 16, 2009, Mr. Wright has been the sole member of the Board of Directors (however, Mr. Wright does not qualify as an audit committee “financial expert”).


The Board and management strive to perform and fulfill their respective duties and obligations in a responsible and ethical manner. The Company has not formally adopted a code of ethics, however, it will consider the adoption of a code of ethics at a future date as growth and other circumstances should dictate. At the present time, we are a small company with only six employees and our management is in close contact with the daily activities of all employees. Accordingly, we do not believe that it would represent a cost effective use of our limited financial resources to incur the legal fees and other expenses that would be required to implement a formal code of ethics pursuant to Item 406 of Regulation S-K.

Section 16(a) Beneficial Ownership Reporting Compliance


Under the Exchange Act, our directors, our executive officers, and any persons holding more than 10% of our Common Stock are required to report their ownership of the Common Stock and any changes in that ownership to the Commission. Specific due dates for these reports have been established and we are required to report any failure to file by these dates during the year fiscal ended December 31, 2011. The Company is not aware of any such persons who have not filed timely reports required by Section 16(a) of the Exchange Act for the year ended December 31, 2011.


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ITEM 11. EXECUTIVE COMPENSATION


The following table summarizes certain information with respect to the compensation earned by the Company’s executive officers for services rendered in all capacities during the years indicated.

Summary Compensation Table

Name & Principal Fiscal Annual Compensation Stock Option Nonequity
Incentive Nonqual.
Deferred All Other Total
Position Year Salary Bonus Awards Awards Comp. Comp. Comp. Comp.

Larry M. Wright 2011 $ 277,500 $ 10,000 $ - $ - $ - $ - $ - $ 287,500
Chairman & CEO 2010 $ 277,500 $ - $ - $ - $ - $ - $ - $ 277,500

D. Hughes Watler, Jr. 2011 $ 93,750 (1) $ 30,000 $ - $ - (2) $ - $ - $ 3,712 (3) $ 127,462
Chief Financial
Officer 2010 $ 92,500 (1) $ - $ - $ 11,525 (2) $ - $ - $ 2,250 (3) $ 106,275


(1) Mr. Watler became a Company employee effective February 1, 2010. Previously, he had received semi-monthly compensation as an independent consultant, with no Company paid benefits, since his employee status ended following the sale of PEI in March 2008.



(2) Stock options granted to Mr. Watler in 2006 were approved by the Compensation Committee of the Board of Directors, at an exercise price of $21.00 per share, with a three year vesting period. The amounts shown above represent the compensation expense recognized for financial reporting purposes in the respective years in accordance with ASC 718 (for a discussion of valuation assumptions, see Note 7 to the Consolidated Financial Statements).



(3) Effective January 1, 2010, the Company offered participation in a company sponsored 401(k) Plan to its employees. This amount represents the company contributions to the 401(k) Plan on behalf of Mr. Watler in the years ended December 31, 2011 and 2010 (Mr. Wright did not participate).



Outstanding Equity Awards at 2011 Fiscal Year-End


The following table sets forth all outstanding stock and option awards held by our named executive officers as of December 31, 2011.


Stock and Option Awards
Name Number of
Securities
Underlying
Unexercised
Options
Exercisable (#) Number of
Securities
Underlying
Unexercised
Options
Unexercisable (#) Option
Exercise
Price ($) Option
Expiration
Date
Larry M. Wright -0- -0- -0- N/A
D. Hughes Watler, Jr. -0- -0- -0- N/A




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.


The following table sets forth information as to the shares of Common Stock beneficially owned as of March 23, 2012 by (i) each person known to us to be the beneficial owner of more than 5% of our Common Stock; (ii) each Director; (iii) each Executive Officer; and (iv) all of our Directors and Executive Officers as a group. Unless otherwise indicated in the footnotes following the table, the persons as to whom the information is given had sole voting and investment power over the shares of Common Stock shown as beneficially owned by them.

Beneficial Ownership
Directors and Executive Officers Amount Percent
Larry M. Wright (1) 1,475,044 55.5
D. Hughes Watler, Jr. (2) 2,000 *
Directors and Executive Officers as a Group (3) 1,477,044 55.6

Other 5% Beneficial Owners
Clarence J. Downs (4) 348,534 13.2
Larry M. Wright, II (5) 268,400 10.0

_____________
* Less than 1%


(1) Includes the following securities: (a) 1,475,044 shares of Common Stock held by Mr. Wright on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock.


(2) Includes the following securities: (a) 2,000 shares of Common Stock held by Mr. Watler on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock.


(3) Includes the following securities: (a) 1,477,044 shares of Common Stock held by Directors and Officers on their own behalf; and (b) no currently vested options or warrants held by Directors and Officers to purchase shares of Common Stock.


(4) Includes the following securities: (a) 348,534 shares of Common Stock held by Mr. Downs on his own behalf; and (b) no currently vested options or warrants to purchase shares of Common Stock. Mr. Downs served as President & Chief Executive Officer until May 23, 2006, at which time he resigned from those positions. He subsequently resigned as a Director of the Company. The address of Mr. Downs is 8825 Gypsy Drive NE, Albuquerque, NM 87122.


(5) Includes the following securities: (a) 262,400 shares of Common Stock held by Mr. Wright, II on his own behalf; and (b) 6,000 shares of Common Stock owned of record by his wife. Larry M. Wright, II is the adult son of Larry M. Wright and has been employed in a management position by the Company since June 2008. The address of Mr. Wright, II is Three Riverway, Suite 1590, Houston, Texas 77056.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


In the year ended December 31, 2011, the Company partially repaid stockholder notes and advances from a company owned by Larry M. Wright in the net amount of $210,000. As of December 31, 2011, the outstanding balance of such advances owed to the company owned by Mr. Wright was $320,000. Such unsecured advances accrue interest at the rate 10% per annum (see Note 9 to the Consolidated Financial Statements). In addition, the Company has granted a second lien on its oil and gas properties to a former stockholder in the amount of approximately $900,000.


Our sole current director, Larry M. Wright, is not considered to be an “independent” director as that term is defined by The Nasdaq Stock Market.

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES.


MaloneBailey LLP has served as our independent registered public accounting firm since the year ended December 31, 2008. The following table presents fees for professional audit services rendered by MaloneBailey LLP for the years ended December 31, 2011 and 2010 in their audits of our annual financial statements.

2011 2010
Audit Fees $ 83,750 $ 112,000
Audit-related Fees - -
Tax Fees - 2,500
Other Fees - -
$ 83,750 $ 114,500




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PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.


The following Exhibits are required to be filed pursuant to Item 601 of Regulation S-K:

EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed July 30, 2004)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed July 30, 2004)
3.3 Certificate of Amendment to Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report for the year ended December 31, 2005)
3.4 Certificate of Amendment to Articles of Incorporation of Tradestar Services, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed March 8,2007)
10.1 Letter Agreement, dated February 28, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd., Dave Hunter Resources Inc., Barry Ahearn and Dave Hunter(a)
10.2 Amended and Restated Stock Purchase Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 1297181 Alberta Ltd., 383210 Alberta Ltd., Dave Hunter Resources Inc., Barry Ahearn and
Dave Hunter(a)
10.3 Registration Rights Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd. and Dave Hunter Resources Inc.(a)
10.4 Pledge and Security Agreement, dated March 2, 2007, by and among Tradestar Services, Inc., 383210 Alberta Ltd. and Dave Hunter Resources Inc.(a)
10.5.1 Decca Promissory Note No. 1, dated March 2, 2007, made by Tradestar Services, Inc. in favor of 383210 Alberta Ltd. in the original principal amount of Cdn $725,000(a)
10.5.2 Decca Promissory Note No. 2, dated March 2, 2007, made by Tradestar Services, Inc. in favor Dave Hunter Resources Inc. in original principal amount Cdn $725,000(a)
10.6.1 Warrant, dated March 2, 2007, to purchase 100,000 shares of common stock of Tradestar Services, Inc. issued to 383210 Alberta Ltd.(a)
10.6.2 Warrant, dated March 2, 2007, to purchase 100,000 shares of common stock of Tradestar Services, Inc. issued to Dave Hunter Resources Inc.(a)
10.7 Second Amended and Restated Credit Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a Reducing Revolving
Line of Credit of up to $25,000,000 (b)
10.8 Guaranty Agreement, dated August 5, 2008, executed by Stratum Holdings, Inc. (Guarantor) for benefit of Texas Capital Bank, N.A (as Lender) (b)
10.9 Promissory Note, dated August 5, 2008, issued by CYMRI, L.L.C. and Triumph Energy, Inc. (as Makers) to Texas Capital Bank, N.A. (as Payee) in amount of $25,000,000 (b)
10.10 Security Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc.
(as Debtors) and Texas Capital Bank, N.A. (as Secured Party) (b)
10.11 First Amendment to Second Amended and Restated Credit Agreement, dated May 28, 2009, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a
Reducing Revolving Line of Credit of up to $25,000,000 (c)
10.12 Second Amendment to Second Amended and Restated Credit Agreement, dated November 16, 2009, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender)
for a Reducing Revolving Line of Credit of up to $25,000,000 (d)
10.13 Exhibits I through VI to Second Amended and Restated Credit Agreement, dated August 5, 2008, among CYMRI, L.L.C. and Triumph Energy, Inc. (as Borrowers) and Texas Capital Bank, N.A. (as Lender) for a
Reducing Revolving Line of Credit of up to $25,000,000 (e)
10.14 Stock Purchase Agreement dated as of June 3, 2011, by and among Stratum Holdings, Inc., SB Group Holdings, Inc. and 1607920 Alberta Ltd. (f)



16
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10.15 Canadian Receivables Note dated as of June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,710,000. (f)
10.16 American Receivables Note dated as of June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $690,000. (f)
10.17 Canadian Note dated as of June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,318,125. (f)
10.18 American Note dated as of June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $531,875. (f)
10.19 Canadian Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc. (f)
10.20 American Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc. (f)
21.1 Subsidiaries of the Registrant
CYMRI, L.L.C. (Nevada)
Triumph Energy, Inc. (Louisiana)
Stratum Construction Services, Inc. (New Mexico)

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 (g)
101.SCH XBRL Taxonomy Extension Schema Document (g)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (g)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (g)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (g)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (g)


(a) Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed March 8, 2007.

(b) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 13, 2008.

(c) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 11, 2009.

(d) Incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed April 15, 2010.

(e) Incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 11, 2010.

(f) Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed June 10, 2011.

(g) 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.



* Filed herewith.


17
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STRATUM HOLDINGS, INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page (s)

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2011 and 2010 F-3

Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2011 and 2010 F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 F-6

Notes to Consolidated Financial Statements F-7- F-20




F-1
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Report of Independent Registered Public Accounting Firm

To the Board of Directors
Stratum Holdings, Inc.
Houston, Texas


We have audited the accompanying consolidated balance sheets of Stratum Holdings, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stratum Holdings, Inc. and its subsidiaries at December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has losses from continuing operations and has a working capital deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/S/ MaloneBailey LLP
Houston, Texas
March 23, 2012


F-2
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STRATUM HOLDINGS, INC.
Consolidated Balance Sheets

December 31,
2011 2010
Assets
Current assets:
Cash and cash equivalents $ 758,940 $ 63,133
Accounts receivable (less allowance for doubtful accounts of
$208,574 and $43,408, respectively) 536,829 605,041
Prepaid expenses and other 53,434 122,348
Notes receivable from sale of subsidiary 1,146,191 -
Current assets of discontinued operations - 4,032,400
Total current assets 2,495,394 4,822,922

Property and equipment:
Oil and gas properties, evaluated (full cost method) 14,820,142 14,560,532
Other property and equipment 158,234 133,692
Total property and equipment 14,978,376 14,694,224
Less: Accumulated depreciation, depletion and amortization (9,107,252 ) (8,611,835 )
Net property and equipment 5,871,124 6,082,389

Other assets:
Notes receivable from sale of subsidiary 1,333,883 -
Noncurrent assets of discontinued operations - 1,659,431
Total other assets 1,333,883 1,659,431

Total assets $ 9,700,401 $ 12,564,742

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt - stockholders $ 320,000 $ 730,709
Current portion of long-term debt - others 2,889,780 3,079,380
Accounts payable 744,180 881,904
Accrued liabilities 1,462,984 1,241,840
Fair value of oil and gas derivatives 155,440 37,835
Current liabilities of discontinued operations - 4,652,823
Total current liabilities 5,572,384 10,624,491

Long-term debt, net of current portion 244,189 337,378
Deferred income taxes 907,000 1,559,500
Asset retirement obligations 364,740 333,670
Total liabilities 7,088,313 12,855,039

Stockholders’ equity (deficit):
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 (10,308,959 ) (13,001,655 )
Accumulated foreign currency translation adjustment - (209,689 )
Total stockholders’ equity (deficit) 2,612,088 (290,297 )

Total liabilities and stockholders’ equity (deficit) $ 9,700,401 $ 12,564,742


See Accompanying Notes to Consolidated Financial Statements.


F-3
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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations

Year Ended December 31,
2011 2010
Revenues:
Oil and gas sales $ 2,984,992 $ 2,625,586
Total revenues 2,984,992 2,625,586

Operating expenses:
Lease operating expense 1,575,192 1,509,274
Depreciation, depletion and amortization 495,417 528,298
Workover expense 520,090 475,356
Selling, general and administrative 1,178,812 1,042,742
Total operating expenses 3,769,511 3,555,670

Operating loss (784,519 ) (930,084 )

Other income (expense):
Interest income 36,451 1,014
Interest expense (288,269 ) (376,468 )
Gain on debt extinguishment - 438,967
Gain (loss) on oil and gas derivatives (122,144 ) 51,155

Loss before income taxes (1,158,481 ) (815,416 )
Benefit for income taxes 390,400 295,400
Net loss from continuing operations (768,081 ) (520,016 )
Discontinued operations, net of tax 3,460,777 302,151
Net income (loss) $ 2,692,696 $ (217,865 )

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.29 ) $ (0.20 )
Discontinued operations, net of tax 1.30 0.12
Net income (loss) $ 1.01 $ (0.08 )

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


See Accompanying Notes to Consolidated Financial Statements.


F-4
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STRATUM HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2011 and 2010

Accumulated
Additional Foreign Total
Common Stock Paid-in Accumulated Currency Stockholders'
Shares Amount Capital Deficit Translation Equity (Deficit)

Balance at January 1, 2010 2,655,738 $ 26,557 $ 12,808,867 $ (12,783,790 ) $ (230,831 ) $ (179,197 )

Stock Based Compensation - - 11,525 - - 11,525

Stockholder Debt Forgiveness - - 74,098 - - 74,098

Net Loss - - - (217,865 ) - (217,865 )

Foreign Currency Translation - - - - 21,142 21,142

Balance at December 31, 2010 2,655,738 26,557 12,894,490 (13,001,655 ) (209,689 ) (290,297 )

Net Income - - - 2,692,696 - 2,692,696

Foreign Currency Translation - - - - 209,689 209,689

Balance at December 31, 2011 2,655,738 $ 26,557 $ 12,894,490 $ (10,308,959 ) $ - $ 2,612,088


See Accompanying Notes to Consolidated Financial Statements.


F-5
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STRATUM HOLDINGS, INC.
Consolidated Statements of Cash Flows

Year Ended December 31,
2011 2010
Cash flows from operating activities:
Net income (loss) $ 2,692,696 $ (217,865 )
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations
Depreciation, depletion and amortization 495,417 528,298
Benefit for income taxes (390,400 ) (295,400 )
Stock based compensation - 11,525
Gain on sale of subsidiary (2,695,100 ) -
Gain on debt extinguishment - (438,967 )
Unrealized (gain) loss on oil and gas derivatives 117,605 (51,155 )
Changes in current assets and liabilities 220,546 385,109
Other changes, net (350,865 ) 62,903
Net cash flows from continuing operations 89,899 (15,552 )
Net cash flows from discontinued operations 261,002 (456,176 )
Total cash flows from operating activities 350,901 (471,728 )

Cash flows from investing activities:
Receipt of cash from sale of subsidiary 350,000 -
Collection of notes receivable from sale of subsidiary 2,146,200 -
Decrease in restricted cash - 1,613,637
Purchase of property and equipment (284,152 ) (139,633 )
Net cash flows from investing activities 2,212,048 1,474,004

Cash flows from financing activities:
Payments of long term debt (519,778 ) (1,151,906 )
Proceeds from long term debt 36,280 114,000
Net payments of stockholder advances (210,000 ) (460,854 )
Net cash flows from continuing operations (693,498 ) (1,498,760 )
Net cash flows from discontinued operations (1,173,644 ) 416,914
Total cash flows from financing activities (1,867,142 ) (1,081,846 )

Net increase (decrease) in cash and cash equivalents 695,807 (79,570 )
Cash and cash equivalents at beginning of period 63,133 142,703

Cash and cash equivalents at end of period $ 758,940 $ 63,133

Supplemental cash flow data:
Cash paid for interest - continuing operations $ 213,798 $ 193,163
Cash paid for interest - discontinued operations 120,605 413,767

Supplemental investing activity:
Notes receivable issued for sale of subsidiary - non interest bearing $ 2,776,274 -
Notes receivable issued for sale of subsidiary - interest bearing 1,850,000 -

Supplemental financing activity:
Gain on debt extinguishment - related party $ - $ 74,098


See Accompanying Notes to Consolidated Financial Statements.


F-6
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STRATUM HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010

(1) Business and Summary of Significant Accounting Policies


Description of Business – Stratum Holdings, Inc. (“we”, “our” or the "Company") is a Nevada corporation, whose operations are presently focused on the domestic Exploration & Production business. On June 3, 2011, we sold the capital stock of our two Canadian Energy Services subsidiaries, Decca Consulting, Ltd. and Decca Consulting, Inc. (collectively referred to as “Decca”), as more fully described in Note 2. As a result of the sale of Decca, we exited from the Canadian Energy Services segment. The following accounting policies relate to the retained Exploration & Production segment as continuing operations while the exited Canadian Energy Services segment is reported as discontinued operations.


Principles of Consolidation – The consolidated financial statements include the accounts of Stratum Holdings, Inc. and its wholly-owned subsidiaries, CYMRI, LLC and Triumph Energy, Inc. Significant intercompany amounts are eliminated in consolidation. Certain reclassifications have been made to the prior year statements to conform to the current year presentation.


Cash Equivalents – For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.


Oil and Gas Operations – For its oil and gas operations, the Company follows the sales method for recognizing its revenues and the full cost method in accounting for its costs. Costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. (a) Capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized; (b) The capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties; and (c) Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.


Asset Retirement Obligations and Environmental Costs - The Company records the fair value of legal obligations to retire and remove long-lived assets in the period in which the obligation is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, the cost is capitalized by increasing the carrying amount of the related properties, plant and equipment. Over time the liability is increased for the change in its present value, and the capitalized cost in properties, plant and equipment is depreciated over the useful life of the related asset. Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and do not have a future economic benefit, are expensed.



F-7
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Other Property and Equipment – Other property and equipment, primarily office furniture and fixtures, is depreciated on a straight-line basis over their useful lives ranging from three to five years.


Stock-Based Compensation – The Company follows Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation,” requiring that compensation expense related to share-based payment transactions with employees be recognized in the financial statements (see Note 7).


Allowance for Doubtful Accounts – The Company has provided an allowance for uncollectible accounts receivable based on management's evaluation of collectability of outstanding balances. The allowance is based on estimates and actual losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the period in which they become known.


Income Taxes – Income taxes are accounted for under the asset and liability method (see Note 8). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change.


We follow ASC 740, “Income Taxes.” ASC 740 creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements. We apply significant judgment in evaluating our tax positions and estimating our provision for income taxes. The actual outcome of these future tax consequences could differ significantly from these estimates, which could impact our financial position, results of operations and cash flows. The evaluation of a tax position in accordance with ASC 740 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement. No liability for unrecognized tax benefits was recorded as of December 31, 2011 or 2010.


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 per common share is computed by considering dilutive common share equivalents under the Treasury Stock method. For the years ended December 31, 2011 and 2010, the basic and diluted average outstanding shares are the same because inclusion of common share equivalents would be anti-dilutive.


Use of Estimates – Management has made a number of estimates and assumptions in preparing these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.


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.



F-8
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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.


Changes in Accounting Principles – Effective January 1, 2010, the Company adopted revised oil and gas reserve estimation standards. These standards allow the use of reliable technology in determining estimates of proved reserve quantities and require the use of a 12-month average price to estimate proved reserves (see Note 12). The Company’s adoption of the revised reserve estimation standards did not have a material impact on its depreciation, depletion and amortization expense.


(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 (as of December 31, 2011, note payments of $2,146,200 had been made by the purchaser and the remaining balance of $630,074 was classified as a current asset); 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 indicated in the subsequent paragraph, the purchaser has not thus far made any of the monthly installments payments under this note). The Company recognized a pre-tax gain from this sale in the year ended December 31, 2011 in the amount of $2,695,100.


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, without giving any specific reason for this action. Such payments were required commencing in the fourth quarter of 2011 and principal and interest payments totaling $270,984 were past due in early March 2012, at which time the remaining principal balance was $1,649,704. Notwithstanding this action, the Company believes that collection of the Installment Notes is fully enforceable, based upon its legal position, and intends to vigorously 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 years ended December 31, 2011 and 2010, including the pre-tax gain on sale in 2011, are summarized below (such amounts in the first column reflect Decca’s operating results only through the date of the sale):

Year Ended December 31,
2011 2010

Energy services revenues $ 12,768,505 $ 20,114,217
Cost of energy services (11,720,562 ) (18,470,895 )
Gross profit 1,047,943 1,643,322
General and administrative expenses (424,301 ) (771,704 )
Interest expense (120,065 ) (413,767 )
Gain on sale 2,695,100 -
Net income before income taxes 3,198,677 457,851
Benefit (provision) for income taxes 262,100 (155,700 )
Net income $ 3,460,777 $ 302,151


The above benefit for income taxes from discontinued operations includes an estimated taxable loss in the 2011 period on the sale of Decca reflecting the recognition for tax purposes of goodwill impairments recorded in previous years for which no temporary differences were originally recognized (see Note 8).



F-9
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The following table presents the current assets, noncurrent assets and current liabilities applicable to the Company’s discontinued operations as of December 31, 2011 and 2010:


December 31,
2011 2010
Current assets:
Cash $ - $ 79,103
Accounts receivable - 3,927,635
Prepaid expenses - 25,662
- 4,032,400
Noncurrent assets:
Goodwill - 1,536,313
Other assets - 123,118
- 1,659,431
Current liabilities:
Current portion of long term debt - (1,806,581 )
Accounts payable - (2,841,850 )
Accrued liabilities - (4,392 )
- (4,652,823 )

Net assets of discontinued operations $ - $ 1,039,008


(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 losses from continuing operations in the last two years and has a net working capital deficit in the amount of $3,077,000 at December 31, 2011. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time.


The working capital deficit noted above reflects outstanding borrowings of $2,786,000 under a bank credit agreement, for which the maturity was recently extended to January 1, 2014 (see Note 5). Notwithstanding this extension, 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.


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.



F-10
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(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 essentially replaced a similar contract which expired in December 2011. The current contract 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 contract 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, changes in the fair value of such derivative contracts are reflected in current earnings in the period of the change. In the years ended December 31, 2011 and 2010, the Company reported an unrealized derivative loss of $117,605 and an unrealized derivative gain of $51,155, respectively, based on “Level 3” inputs (see Note 11). In the years ended December 31, 2011 and 2010, the Company reported realized derivative losses of $4,539 and zero, respectively.

(5) Long-Term Debt


As of December 31, 2011 and 2010, the Company had the following long-term debt obligations:

December 31,
2011 2010
$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 $2,786,000 as of December 31, 2011 $ 2,786,000 $ 2,951,000

$4,000,000 (Cdn) receivables factoring facility with a factoring company, interest on factored invoices at annual rate of 18.25%, compounded daily, for a minimum of 15 days, secured by accounts receivable of Canadian energy services business - 1,806,581

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) 283,922 538,087

Advances from stockholders, bearing interest at 10%, unsecured (extended since March 2010 - see discussion below) 320,000 530,000

Other short term notes for automobile and insurance financing, interest rates at 6% to 8% 64,047 128,380

3,453,969 5,954,048
Current portion of long term debt - stockholders (320,000 ) (730,709 )
Current portion of long term debt - others (2,889,780 ) (3,079,380 )
Current portion of long term debt - discontinued operations - (1,806,581 )

Long term debt, net of current portions $ 244,189 $ 337,378



F-11
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Future maturities of long-term debt as of December 31, 2011 are as follows:

Year ending December 31, 2012 $ 3,209,780
Year ending December 31, 2013 80,501
Year ending December 31, 2014 86,578
Year ending December 31, 2015 71,043
Year ending December 31, 2016 6,067

$ 3,453,969



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 December 31, 2011, there was no available 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 (see Note 3).

Through June 3, 2011, the Company also had outstanding institutional borrowings under a factoring facility, which was secured by accounts receivable of Decca, our former Canadian Energy Services subsidiary (see Note 2). At that date, the Company sold the outstanding stock of Decca to a private company which effectively assumed Decca’s then outstanding borrowings under the factoring facility and the Company’s guarantee of Decca’s outstanding borrowings under this facility was replaced by a guarantee of the purchaser.

In March 2010, the Company reached an agreement with certain unsecured noteholders in the principal amount of $1,407,000 to accept a payment of 80% of the principal balance in full satisfaction of their notes payable. Accordingly, the Company fully extinguished the debt to these noteholders in March 2010 with principal payments totaling $1,125,000 resulting in a total gain of $551,000 on the forgiven principal and accrued interest. Of this amount, $112,000 was attributable to debt of a current shareholder, therefore, the Company credited the after-tax equivalent of $74,000 to Additional paid in capital and recognized a pre-tax gain in the year ended December 31, 2010 on the remaining portion attributable to unrelated parties in the amount of approximately $439,000.

The sole remaining unsecured noteholder is a company owned by our Chairman and Chief Executive Officer and the Company also reached an agreement with that company in March 2010 to make a net principal payment of $265,000, in exchange for indefinitely deferring the maturity of the remaining balance of $500,000 (which has been subsequently reduced to a balance of $320,000 as of December 31, 2011 due to net payments totaling $180,000). The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or a troubled debt restructuring.



F-12
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(6) Stockholders’ Equity (Deficit)


There were no transactions in the Company’s Common Stock in the years ended December 31, 2011 and 2010. As of December 31, 2011, the Company had no outstanding employee options to purchase shares of Common Stock under its equity-based compensation plan (see Note 7). As of December 31, 2011, the Company had outstanding warrants to purchase a total of 20,000 shares of Common Stock at an exercise price of $21.00 per share, expiring in March 2012, outside of its equity-based compensation plan.

(7) Stock-Based Compensation


The Company has a stock-based compensation plan which was approved by the stockholders in October 2005 and amended in October 2006. Under the plan, as amended, a maximum of 240,000 shares may be awarded to directors and employees in the form of stock options, restricted stock or stock appreciation rights. The exercise price, terms and other conditions applicable to each stock option grant are generally determined by the Board of Directors. The exercise price of stock options is set on the grant date and may not be less than the fair market value of the Company’s Common Stock on that date. Option activity with directors and employees since January 1, 2010 were as follows (including options granted to directors outside of the plan):

Number Wtd. Avg. Wtd. Avg. Aggregate
of Exercise Remaining Intrinsic
Shares Price Term (Yrs.) Value

Outstanding at January 1, 2010 47,500 $ 7.60
Options forfeited (25,000 ) (2.40 )
Outstanding at December 31, 2010 22,500 13.30
Options forfeited (22,500 ) (13.30 )
Outstanding at December 31, 2011 - $ - - $ -

Exercisable at December 31, 2011 - $ - - $ -



Stock-based compensation expense related to these options in the amounts of zero and $11,525 have been recognized as a current period expense in the accompanying Consolidated Financial Statements for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, all previously issued options had expired and there was no unrecognized compensation cost remaining to be recognized in future periods.


The estimated fair value of the options granted to employees under the plan was calculated using a Black Scholes option pricing model using the following assumptions: (a) Expected volatility – 95%; (b) Expected risk free interest rate – 6%; (c) Expected dividend yield – zero; (d) Expected option term – 3 to 4 years, calculated pursuant to the terms of ASC 718-10; and (e) Forfeitures – 0%, subject to adjustment for actual experience. Vesting terms of the options are generally three years.



F-13
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(8) Income Taxes

The Company provided the following amounts of income tax benefit attributable to continuing operations for the years ended December 31, 2011 and 2010:

Year ended December 31,
2011 2010

Current income taxes $ - $ -
Deferred income taxes (390,400 ) (295,400 )
Total $ (390,400 ) $ (295,400 )


The following table shows components of income tax benefit/provision attributable to both continuing operations and discontinued operations in comparison to the U.S. statutory tax rate of 34% for the years ended December 31, 2011 and 2010:

Year ended December 31,
2011 2010
Loss from continuing operations:
Tax (benefit) at U.S. statutory rate $ (393,884 ) $ (277,241 )
Non-deductible items 3,484 (18,159 )
(390,400 ) (295,400 )
Income from discontinued operations:
Tax provision at U.S. statutory rate 1,087,550 155,700
Tax (benefit) from sale of Decca (1,349,650 ) -
(262,100 ) 155,700

Total income tax benefit $ (652,500 ) $ (139,700 )



F-14
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The above benefit for income taxes from discontinued operations includes an estimated taxable loss in the 2011 period on the sale of Decca reflecting the recognition for tax purposes of goodwill impairments recorded in previous years for which no temporary differences were originally recognized (see Note 2). There was no tax benefit recognized for such previous impairments because no temporary difference was recognized when the goodwill was initially established upon the acquisition of Decca in March 2007.


The following table indicates the tax effects of temporary differences giving rise to our deferred tax assets and liabilities as of December 31, 2011 and 2010:

December 31,
2011 2010
Deferred tax assets:
Operating loss carryforwards $ 726,100 $ 222,300
Other, net 111,800 72,700
Gross deferred tax assets 837,900 295,000

Deferred tax liabilities:
Property and equipment (1,744,900 ) (1,854,500 )
Other, net - -
Gross deferred tax liabilities (1,744,900 ) (1,854,500 )

Net deferred tax liabilities $ (907,000 ) $ (1,559,500 )


As of December 31, 2011, we have consolidated U.S. tax operating loss carryforwards of approximately $2,135,000, which largely expire on December 31, 2021 (subject to certain annual limitations). We have offset the tax effect of our net operating loss carryforwards against our deferred tax liabilities to the extent permitted under the tax accounting rules.


(9) Related Party Transactions


The Company repaid net stockholder notes and advances in the amounts of $210,000 and $461,000 in the years ended December 31, 2011 and 2010, respectively. Stockholder advances are reflected as unsecured long term debt obligations and accrue interest at a rate of 10% per annum (see Note 5). As of December 31, 2011 and 2010, the Company had granted a second lien on its oil and gas properties to a former stockholder in the amount of approximately $900,000.


F-15
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(10) Commitments and Contingencies


The Company and its subsidiaries have operating leases for office space under which rental expense from continuing operations amounted to $87,000 and $93,000 in the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, aggregate commitments under the Company’s operating leases were as follows:

Year ending December 31, 2012 $ 30,000
Year ending December 31, 2013 -
Year ending December 31, 2014 -
Year ending December 31, 2015 -
Year ending December 31, 2016 -
$ 30,000


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 business, and a former subsidiary are joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. It is not practical at the present time to determine the amount or likelihood of an unfavorable outcome to the Company’s consolidated financial position or results of operations of any of the these 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 December 31, 2011.

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 non-appealable judgment was rendered in favor of the plaintiff in January 2011, however, the Company believes that the loss exposure of its defunct Construction Staffing subsidiary would be reduced by approximately one-half due to an offsetting amount that would be due from the underlying carrier. Accordingly, the Company has recorded an accrual for such estimated net loss exposure in this matter as of December 31, 2011.


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 December 31, 2011, 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.



F-16
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(11) Other Required Disclosures


Segment Information – The Company operated in two segments, domestic Exploration & Production and Canadian Energy Services, at the time of the sale of Decca in June 2011 (see Note 2). As a result of the sale of Decca, the Company is treating the Canadian Energy Services segment as discontinued operations and has reported summarized financial information of that segment in Note 2. Since the Company’s continuing operations consist solely of one remaining segment (domestic Exploration & Production), there is no need for disaggregated segment information for continuing operations in this report.


Asset Retirement Obligations – The Company records an asset retirement obligation (“ARO”) when the total depth of a drilled well is reached and the Company can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. The Company records the ARO liability on the consolidated balance sheets and capitalizes a portion of the cost in oil and gas properties equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date and adjusted for the Company’s credit risk. This amount is discounted to present value using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds. The Company did not drill or abandon any properties in the years ended December 31, 2011 and 2010. Therefore, the only ARO transactions were to accrue accretion expense of $31,000 and $28,000, respectively, in the years ended December 31, 2011 and 2010.


Credit Risk Concentrations – As previously noted, the Company’s remaining operations are in the domestic Exploration & Production segment. In that segment, the Company sells produced oil and gas mostly to well known commodity purchasers from whom it does not require collateral. In the years ended December 31, 2011 and 2010, there was one major customer, Gulfmark Energy, which represented 77% and 76%, respectively, of the Company’s consolidated revenues from continuing operations. There were no other customers representing more than 10% of the Company’s consolidated revenues from continuing operations in the years ended December 31, 2011 and 2010.


The Company maintains its domestic cash accounts in three different federally chartered banking institutions. Its bank accounts in each bank are government insured up to $250,000 with the Company’s book balance at one bank exceeding that level by approximately $425,000 as of December 31, 2011.


Fair Value of Financial Instruments – ASC 820, “Fair Value Measurements,” establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Disclosures about fair value of financial instruments are based on pertinent information available to management and are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.


The statement requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. It requires fair value measurements be classified and disclosed in one of the following categories: (1) Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. (2) Level 2 - Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps, investments and interest rate swaps. (3) Level 3 - Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). Our valuation models are primarily industry-standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors and (d) current market and contractual prices for the underlying instruments, as well as other relevant information.


Management has estimated the fair values of cash, accounts receivable, accounts payable and accrued expenses to approximate their respective carrying values reported on these financial statements because of their short maturities. The carrying amounts of notes receivable and notes payable approximate fair value because their interest rates approximate market for items of similar risk. Additionally, ASC 820 requires that we disclose the valuation methodology for our commodity derivatives contract as of December 31, 2011 (see Note 4). Pursuant to ASC 820, we valued this derivative contract based on a “Level 3” input which consisted of a valuation model provided by the counterparty.



F-17
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(12) Oil and Gas Producing Activities (Unaudited)


Capitalized Costs of Oil and Gas Properties – The Company has owned working interests in oil and gas properties since acquiring CYMRI in May 2006. The table below reflects the capitalized costs of such oil and gas properties as of December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Proved oil and gas properties $ 14,820 $ 14,560
Unproved oil and gas properties - -
Gross oil and gas properties 14,820 14,560
Less: Accumulated depreciation, depletion & amortization (8,976 ) (8,480 )

Net oil and gas properties $ 5,844 $ 6,080


Costs Incurred in Oil and Gas Producing Activities – The table below presents the costs incurred in oil and gas producing activities for the years ended December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Property acquisition $ - $ -
Exploration - -
Development 260 135

Total costs incurred $ 260 $ 135


Results of Operations for Oil and Gas Producing Activities – The table below presents the results of operations for oil and gas producing activities for the years ended December 31, 2011 and 2010 (in thousands):

Year ended December 31,
2011 2010

Revenues $ 2,985 $ 2,626
Production costs (2,095 ) (1,985 )
Depreciation, depletion & amortization (495 ) (528 )
Impairment expense - -
Income taxes (134 ) (38 )

Results of operations $ 261 $ 75


Oil and Gas Reserves – The following table sets forth summary information with respect to CYMRI/Triumph’s proved oil and gas reserves as of December 31, 2011, prepared by the Company’s independent reservoir engineering firm. The estimates of proved and proved developed reserve quantities and the related measure of discounted future net cash flows are estimates only and do not purport to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise and generally more conservative than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in the United States.


F-18
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Oil Gas Total PV10 Value
(MBbl) (MMcf) (MMcfe) (000's)

Proved developed reserves 424 771 3,316 $ 11,372
Proved undeveloped reserves 48 - 287 1,390
Total proved reserves 472 771 3,603 12,762
Discounted future income taxes (3,917 )
Standardized measure of discounted
future net cash flows $ 8,845


Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods.


The following table sets forth changes in the Company’s proved oil and gas reserves in the years ended December 31, 2011 and 2010 (in thousands):

Oil Gas Total
(MBbl) (MMcf) (MMcfe)

Balance at January 1, 2010 323 719 2,657
Revisions of previous estimates 228 184 1,552
Production (30 ) (73 ) (253 )
Balance at December 31, 2010 521 830 3,956
Revisions of previous estimates (21 ) 13 (113 )
Production (28 ) (72 ) (240 )

Balance at December 31, 2011 472 771 3,603



F-19
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The standardized measure of discounted future net cash flows is computed by applying estimated prices of oil and gas (at year-end 2011 average monthly prices) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (at year-end 2011 costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10-percent per year to reflect the estimated timing of the future net cash flows. The Company does not believe that the standardized measure of discounted future net cash flows is necessarily indicative of the fair value of its oil and gas properties. The following table sets forth the components of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves as of December 31, 2011 and 2010 (in thousands):

December 31,
2011 2010

Future net revenues $ 49,686 $ 43,367
Future lease operating expenses and production taxes (22,779 ) (21,143 )
Future development costs (1,468 ) (1,818 )
Future income taxes (7,807 ) (6,596 )
Future net cash flows 17,632 13,810
10% annual discount for estimated timing of cash flows (8,787 ) (6,875 )

Standardized measure of discounted future net cash flows $ 8,845 $ 6,935


The following table sets forth changes in the standardized measure of the Company’s discounted future cash flows (“FCF”) relating to its proved oil and gas reserves in the years ended December 31, 2011 and 2010 (in thousands):

Year ended December 31,
2011 2010

Net changes in prices and production costs $ 3,751 $ 5,653
Sales and transfers of oil and gas produced (1,410 ) (1,116 )
Net change due to revisions in quantity estimates (198 ) 2,156
Future development costs 176 117
Net change in income taxes (605 ) (2,142 )
Changes in production rates, other (498 ) (1,789 )
Accretion of discount 694 369
Changes in standardized measure of discounted FCF 1,910 3,248
Beginning standardized measure of discounted FCF 6,935 3,687

Ending standardized measure of discounted FCF $ 8,845 $ 6,935


In accordance with the guidelines of the SEC, the reservoir engineers’ estimates of future net revenues from our properties and the pre-tax PV 10 Value amounts thereof are made using oil and gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties, except where such guidelines permit alternate treatment, including the use of fixed and determinable contractual price escalations. The average beginning of the month prices for the year ended December 31, 2011 used in such estimates were $97.95 per barrel of oil and $4.46 per Mcf of gas.


F-20
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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.

By: /s/ Larry M. Wright
Larry M. Wright
Chairman and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities indicated on March 23, 2012.

Signature Title

/s/Larry M. Wright Chairman and Chief Executive Officer
Larry M. Wright (Principal Executive Officer)


/s/ D. Hughes Watler, Jr. Chief Financial Officer
D. Hughes Watler, Jr. (Principal Financial and Accounting Officer)





18

EXHIBIT 31.1


CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Larry M. Wright, certify that:


1. I have reviewed this annual report on Form 10-K of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.




Date: March 23, 2012

/s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer
EXHIBIT 31.2


CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, D. Hughes Watler, Jr., certify that:


1. I have reviewed this annual report on Form 10-K of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: March 23, 2012

/s/ D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer
EXHIBIT 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry M. Wright, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


/s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer
March 23, 2012

EXHIBIT 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, D. Hughes Watler, Jr., Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


/s/ D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer
March 23, 2012

[10 bagger]

STTH.. Form 4..

Wright Larry M

--------------------------------------------------------------------------------
(Last) (First) (Middle)
THREE RIVERWAY, SUITE 1590


--------------------------------------------------------------------------------
(Street)HOUSTON TX 77056

--------------------------------------------------------------------------------
(City) (State) (Zip)
2. Issuer Name and Ticker or Trading Symbol
STRATUM HOLDINGS, INC. [STTH] 5. Relationship of Reporting Person(s) to Issuer
(Check all applicable)X Director X 10% Owner
X Officer (give title below) Other (specify below)
Chairman and CEO

3. Date of Earliest Transaction (Month/Day/Year)
02/10/2012
4. If Amendment, Date of Original Filed (Month/Day/Year)
6. Individual or Joint/Group Filing (Check Applicable Line)X Form filed by One Reporting Person
Form filed by More than One Reporting Person



Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1.Title of Security
(Instr. 3) 2. Transaction Date (Month/Day/Year) 2A. Deemed Execution Date, if any (Month/Day/Year) 3. Transaction Code
(Instr. 8) 4. Securities Acquired (A) or Disposed of (D)
(Instr. 3, 4 and 5) 5. Amount of Securities Beneficially Owned Following Reported Transaction(s)
(Instr. 3 and 4) 6. Ownership Form: Direct (D) or Indirect (I)
(Instr. 4) 7. Nature of Indirect Beneficial Ownership
(Instr. 4)
Code V Amount (A) or (D) Price
Common Stock 02/10/2012 P 41,429 A $ 0.2 1,475,044 D


Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned
(e.g., puts, calls, warrants, options, convertible securities)
1. Title of Derivative Security
(Instr. 3) 2. Conversion or Exercise Price of Derivative Security 3. Transaction Date (Month/Day/Year) 3A. Deemed Execution Date, if any (Month/Day/Year) 4. Transaction Code
(Instr. 8) 5. Number of Derivative Securities Acquired (A) or Disposed of (D)
(Instr. 3, 4, and 5) 6. Date Exercisable and Expiration Date
(Month/Day/Year) 7. Title and Amount of Underlying Securities
(Instr. 3 and 4) 8. Price of Derivative Security
(Instr. 5) 9. Number of Derivative Securities Beneficially Owned Following Reported Transaction(s)
(Instr. 4) 10. Ownership Form of Derivative Security: Direct (D) or Indirect (I)
(Instr. 4) 11. Nature of Indirect Beneficial Ownership
(Instr. 4)
Code V (A) (D) Date Exercisable Expiration Date Title Amount or Number of Shares
Explanation of Responses:
/s/ Larry M. Wright 02/10/2012
** Signature of

[10 bagger]

STTH.. $0.30 FORM 10-Q


Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934


For the Quarterly Period Ended September 30, 2011

Commission File No. 000-51229


STRATUM HOLDINGS, INC.
(Exact Name of Registrant as specified in its charter)


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



Three Riverway, Suite 1590
Houston, Texas
77056
(Address of principal executive offices) (zip code)


[phone]
(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 November 4, 2011 was 2,655,738 shares.


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STRATUM HOLDINGS, INC.
FORM 10-Q
SEPTEMBER 30, 2011


INDEX


PART I. FINANCIAL INFORMATION Page

Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and
December 31, 2010 (Unaudited) 3
Consolidated Statements of Operations for the three months ended
September 30, 2011 and 2010 (Unaudited) 4
Consolidated Statements of Operations for the nine months ended
September 30, 2011 and 2010 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2011 and 2010 (Unaudited) 6

Notes to Consolidated Financial Statements (Unaudited) 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 19



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STRATUM HOLDINGS, INC.
Consolidated Balance Sheets
(Unaudited)

September 30, December 31,
2011 2010
Assets
Current assets:
Cash and cash equivalents $ 297,382 $ 63,133
Accounts receivable 665,538 605,041
Prepaid expenses and other 83,356 122,348
Notes receivable from sale of subsidiary 2,115,520 -
Fair value of oil and gas derivatives 1,190 -
Current assets of discontinued operations - 4,032,400
Total current assets 3,162,986 4,822,922

Property and equipment:
Oil and gas properties, evaluated (full cost method) 14,737,863 14,560,532
Other property and equipment 133,692 133,692
Total property and equipment 14,871,555 14,694,224
Less: Accumulated depreciation, depletion and amortization (8,982,913 ) (8,611,835 )
Net property and equipment 5,888,642 6,082,389

Other assets:
Notes receivable from sale of subsidiary 1,441,262 -
Noncurrent assets of discontinued operations - 1,659,431
Total other assets 1,441,262 1,659,431

Total assets $ 10,492,890 $ 12,564,742

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt - stockholders $ 476,282 $ 730,709
Current portion of long-term debt - others 2,969,506 3,079,380
Accounts payable 693,298 881,904
Accrued liabilities 1,483,448 1,241,840
Fair value of oil and gas derivatives - 37,835
Current liabilities of discontinued operations - 4,652,823
Total current liabilities 5,622,534 10,624,491

Long-term debt, net of current portion 233,718 337,378
Deferred income taxes 1,587,100 1,559,500
Asset retirement obligations 356,710 333,670
Total liabilities 7,800,062 12,855,039

Stockholders’ equity (deficit):
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 (10,228,219 ) (13,001,655 )
Accumulated foreign currency translation adjustment - (209,689 )
Total stockholders’ equity (deficit) 2,692,828 (290,297 )

Total liabilities and stockholders’ equity (deficit) $ 10,492,890 $ 12,564,742


See accompanying notes to unaudited consolidated financial statements.


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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)

Three Months Ended September 30,
2011 2010
Revenues:
Oil and gas sales $ 738,760 $ 689,502
Other - 38
Total revenues 738,760 689,540

Operating expenses:
Lease operating expense 347,596 320,411
Depreciation, depletion and amortization 125,421 216,333
Workover expense 36,519 93,461
Selling, general and administrative 299,223 201,686
Total operating expenses 808,759 831,891

Operating loss (69,999 ) (142,351 )

Other income (expense):
Interest expense (77,884 ) (52,078 )
Gain on oil and gas derivatives 16,135 160

Loss before income taxes (131,748 ) (194,269 )
Benefit for income taxes 31,000 66,000
Net loss from continuing operations (100,748 ) (128,269 )
Discontinued operations, net of tax - (1,694 )
Net loss $ (100,748 ) $ (129,963 )

Net loss per share, basic and diluted:
Net loss from continuing operations $ (0.04 ) $ (0.05 )
Discontinued operations, net of tax - (0.00 )
Net loss $ (0.04 ) $ (0.05 )

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


See accompanying notes to unaudited consolidated financial statements.


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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)

Nine Months Ended September 30,
2011 2010
Revenues:
Oil and gas sales $ 2,323,964 $ 2,061,977
Other - 1,012
Total revenues 2,323,964 2,062,989

Operating expenses:
Lease operating expense 1,171,780 1,151,154
Depreciation, depletion and amortization 371,078 626,234
Workover expense 207,357 310,630
Selling, general and administrative 869,612 676,645
Total operating expenses 2,619,827 2,764,663

Operating loss (295,863 ) (701,674 )

Other income (expense):
Interest expense (206,759 ) (288,688 )
Gain on debt extinguishment - 438,967
Gain on oil and gas derivatives 34,486 82,660

Loss before income taxes (468,136 ) (468,735 )
Benefit for income taxes 143,600 159,300
Net loss from continuing operations (324,536 ) (309,435 )
Discontinued operations, net of tax 3,097,972 224,679
Net income (loss) $ 2,773,436 $ (84,756 )

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.12 ) $ (0.12 )
Discontinued operations, net of tax 1.16 0.09
Net income (loss) $ 1.04 $ (0.03 )

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


See accompanying notes to unaudited consolidated financial statements.


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STRATUM HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended September 30,
2011 2010
Cash flows from operating activities:
Net loss from continuing operations $ (324,536 ) $ (309,435 )
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used in) operations
Depreciation, depletion and amortization 371,078 626,234
Benefit for income taxes (143,600 ) (159,300 )
Stock based compensation - 11,525
Gain on debt extinguishment - (438,967 )
Unrealized gain on oil and gas derivatives (39,025 ) (82,660 )
Changes in current assets and liabilities 31,497 22,164
Other changes, net 15,313 63,988
Net cash flows from continuing operations (89,273 ) (266,451 )
Net cash flows from discontinued operations 659,916 743,334
Total cash flows from operating activities 570,643 476,883

Cash flows from investing activities:
Receipt of cash from sale of subsidiary 350,000 -
Collection of notes receivable from sale of subsidiary 1,132,542 -
Decrease in restricted cash - 1,613,637
Purchase of property and equipment (177,331 ) (148,025 )
Net cash flows from investing activities 1,305,211 1,465,612

Cash flows from financing activities:
Payments of long term debt (396,111 ) (1,013,876 )
Proceeds from long term debt 48,150 32,725
Net payments of stockholder advances (120,000 ) (460,854 )
Net cash flows from continuing operations (467,961 ) (1,442,005 )
Net cash flows from discontinued operations (1,173,644 ) (512,111 )
Total cash flows from financing activities (1,641,605 ) (1,954,116 )

Net increase (decrease) in cash and cash equivalents 234,249 (11,621 )
Cash and cash equivalents at beginning of period 63,133 142,703

Cash and cash equivalents at end of period $ 297,382 $ 131,082

Supplemental cash flow data:
Cash paid for interest - continuing operations $ 154,961 $ 145,610
Cash paid for interest - discontinued operations 120,065 320,205

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

Supplemental financing activity:
Gain on debt extinguishment - related party $ - $ 74,097


See accompanying notes to unaudited consolidated financial statements.


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STRATUM HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

(1) Basis of Presentation


Interim Financial Information – The accompanying consolidated financial statements have been prepared by 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 September 30, 2011, the results of its operations for the three month and nine month periods ended September 30, 2011 and 2010, and cash flows for the nine month periods ended September 30, 2011 and 2010. 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, 2010.


Recently Issued Accounting Pronouncements – In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Presentation of Comprehensive Income.” This update eliminates the option to present other comprehensive income and its components in the statement of changes in equity, effective for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-05 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 issued by the purchaser in the amount of $2,400,000 (plus an estimated working capital adjustment of $439,324), payable out of the post-closing collection of Decca’s accounts receivable (as of September 30, 2011, note payments of $1,132,542 had been made by the purchaser); and (c) Interest bearing 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 of September 30, 2011, $408,738 of this note amount was classified as a current asset). The Company recognized a preliminary pre-tax gain from this sale in the nine months ended September 30, 2011 in the amount of $2,765,595.


As noted above, the purchaser has issued non-interest bearing “receivables” notes to the Company in the total amount of $2,839,324 (including an estimated working capital adjustment of $439,324). The Company believes that these non-interest bearing notes will be paid by the purchaser from the post-closing collection of Decca’s accounts receivable within the current operating cycle. At the present time, the Company and the purchaser are operating under a mutually acceptable agreement for the payment of the non-interest bearing “receivables” notes to the Company from the post-closing collection of Decca’s accounts receivable. The Company and the purchaser expect to ultimately restructure the interest bearing “installment” notes, however, no definitive agreement has yet been reached in that regard.



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The results of discontinued operations of Decca for the nine months ended September 30, 2011 and 2010, including the estimated gain on sale in 2011, are summarized below (such amounts in the first column reflect Decca’s operating results only through the date of the sale):

Nine Months Ended September 30,
2011 2010

Energy services revenues $ 12,768,505 $ 14,736,836
Cost of energy services (11,720,562 ) (13,469,582 )
Gross profit 1,047,943 1,267,254
General and administrative expenses (424,301 ) (606,670 )
Interest expense (120,065 ) (320,205 )
Gain on sale (estimated) 2,765,595 -
Net income before income taxes 3,269,172 340,379
Provision for income taxes (171,200 ) (115,700 )
Net income $ 3,097,972 $ 224,679


The above provision for income taxes reflects the sales gain as a permanent tax difference in the 2011 period as it essentially reflects the reversal of goodwill impairments recorded in previous years for which no temporary differences were originally recognized. The following table presents the current assets, noncurrent assets and current liabilities applicable to the Company’s discontinued operations as of September 30, 2011 and December 31, 2010:

September 30, December 31,
2011 2010
Current assets:
Cash $ - $ 79,103
Accounts receivable - 3,927,635
Prepaid expenses - 25,662
- 4,032,400
Noncurrent assets:
Goodwill - 1,536,313
Other assets - 123,118
- 1,659,431
Current liabilities:
Current portion of long term debt - (1,806,581 )
Accounts payable - (2,841,850 )
Accrued liabilities - (4,392 )
- (4,652,823 )

Net assets of discontinued operations $ - $ 1,039,008


(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 September 30, 2011. 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) Commodity Derivatives


The Company currently has an unexpired commodity derivative contract with a major energy company covering a portion of a subsidiary’s domestic oil production. This contract consists of a “costless collar,” with a floor price of $65.00 per barrel and a ceiling price of $105.50 per barrel, covering 1,000 barrels of oil per month for the calendar year 2011.


The Company applies “mark to market” accounting to open derivative contract 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, changes in the fair value of such derivative contracts are reflected in current earnings in the period of the change. In the nine months ended September 30, 2011 and 2010, the Company reported unrealized derivative gains of $39,025 and $82,660, respectively, based on “Level 2” inputs. In the nine months ended September 30, 2011 and 2010, the Company reported realized derivative losses of $4,539 and zero, respectively.


(5) Long Term Debt


As of September 30, 2011 and December 31, 2010, the Company had the following long-term debt obligations:


September 30. December 31.
2011 2010
$25,000,000 line of credit with a bank, maturity currently extended to October 2011, interest at 1.0% above prime (but not less than 8.0%) payable monthly, secured by first lien on CYMRI, LLC’s oil and gas properties, with a borrowing base of $2,886,000 as of September 30, 2011 $ 2,886,000 $ 2,951,000

$4,000,000 (Cdn) receivables factoring facility with a factoring company, interest on factored invoices at annual rate of 18.25%, compounded daily, for a minimum of 15 days, secured by accounts receivable of Canadian energy services business - 1,806,581

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) 300,000 538,087

Advances from stockholders, bearing interest at 10%, with principal and accrued interest due in March 2010, unsecured (extended since March 2010 - see discussion below) 410,000 530,000

Other short term notes for liability insurance and accrued payables, interest rates at 7% to 9% 83,506 128,380

3,679,506 5,954,048
Current portion of long term debt - stockholders (476,282 ) (730,709 )
Current portion of long term debt - others (2,969,506 ) (3,079,380 )
Current portion of long term debt - discontinued operations - (1,806,581 )

Long term debt, net of current portions $ 233,718 $ 337,378



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Borrowings under the bank credit agreement secured by the oil and gas properties owned by CYMRI, LLC (“CYMRI”), a subsidiary in the Exploration & Production segment, are subject to a borrowing base, which is periodically redetermined based on oil and gas reserves.


The bank credit agreement does not require monthly principal payments so long as outstanding borrowings are less than a declining borrowing base. As of September 30, 2011, there was no available borrowing base and the maturity was scheduled in October 2011, however, the bank informally agreed to extend the maturity on a month-to-month basis until a more permanent arrangement can be made. The bank credit agreement requires maintenance of certain financial covenants which CYMRI did not fully meet as of September 30, 2011 and December 31, 2010. Due to the covenant violations as well as the near term maturity, we have reported this debt in our current liabilities at September 30, 2011.

Through June 3, 2011, the Company also had outstanding institutional borrowings under a factoring facility, which was secured by accounts receivable of Decca, our former Canadian Energy Services subsidiary (see Note 2). At that date, the Company sold the outstanding stock of Decca to a private company which effectively assumed Decca’s then outstanding borrowings under the factoring facility and the Company’s guarantee of Decca’s outstanding borrowings under this facility was replaced by a guarantee of the purchaser.

In March 2010, the Company reached an agreement with certain unsecured noteholders in the principal amount of $1,407,000 to accept a payment of 80% of the principal balance in full satisfaction of their notes payable. Accordingly, the Company fully extinguished the debt to these noteholders in March 2010 with principal payments totaling $1,125,000 resulting in a total gain of $551,000 on the forgiven principal and accrued interest. Of this amount, $112,000 was attributable to debt of a current shareholder, therefore, the Company credited the after-tax equivalent of $74,000 to Additional paid in capital and recognized a pre-tax gain in the nine months ended September 30, 2010 on the remaining portion attributable to unrelated parties in the amount of approximately $439,000.

The remaining unsecured noteholder is a company owned by our Chairman and Chief Executive Officer and the Company also reached an agreement with that company in March 2010 to make a net principal payment of $265,000, in exchange for indefinitely deferring the maturity of the remaining balance of $500,000 (which has been subsequently reduced to a balance of $410,000 as of September 30, 2011 due to net payments totaling $90,000). The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or a troubled debt restructuring.

(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 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 nine months ended September 30, 2011, there were no dilutive common stock equivalents reflected in the determination of net income per share as there were no outstanding in-the-money employee stock options (see Note 7). In the nine months ended September 30, 2010, there were no dilutive common stock equivalents reflected in the determination of net loss per share as the effect would have been anti-dilutive.



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(7) Stock-Based Compensation


The Company has a stock-based compensation plan which was approved by the stockholders in October 2005 and amended in October 2006. Under the plan, a maximum of 240,000 shares may be awarded to directors and employees in the form of stock options, restricted stock or stock appreciation rights. The exercise price, terms and other conditions applicable to each stock option grant are generally determined by the Board of Directors. The exercise price of stock options is set on the grant date and may not be less than the fair market value of the Company’s Common Stock on that date. Option activity with directors and employees since January 1, 2010 were as follows (including options granted to directors outside of the plan):

Number Wtd. Avg. Wtd. Avg. Aggregate
of Exercise Remaining Intrinsic
Shares Price Term (Yrs.) Value

Outstanding at January 1, 2010 47,500 $ 7.60
Options forfeited (25,000 ) (2.40 )
Outstanding at December 31, 2010 22,500 13.30
Options forfeited (22,500 ) (13.30 )
Outstanding at September 30, 2011 - $ - - $ -

Exercisable at September 30, 2011 - $ - - $ -


Stock-based compensation expense related to these options in the amounts of zero and $11,525 have been recognized as a current period expense in the accompanying Consolidated Financial Statements for the six month periods ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there is no unrecognized compensation cost remaining to be recognized in future periods. The estimated fair value of the options granted to employees under the plan was calculated using a Black Scholes option pricing model. The following schedule reflects the assumptions included in this model as it relates to the valuation of such options: (a) Expected volatility – 95%; (b) Expected risk free interest rate – 6%; (c) Expected dividend yield – zero; (d) Expected option term – 3 to 4 years, calculated pursuant to the terms of ASC 718-10 as the option grants qualify as “plain vanilla” under that pronouncement; and (e) Forfeitures – 0%, subject to adjustment for actual experience. Vesting terms of the options are generally three years. The aggregate intrinsic value of employee options granted as of September 30, 2011 and 2010 were zero as there were no in-the-money options at those dates.

(8) Stockholder Advances


The Company repaid net stockholder notes and advances in the amounts of $120,000 and $461,000 in the nine months ended September 30, 2011 and 2010, respectively. Such advances, excluding amounts advanced to finance the cash portion of the CYMRI purchase price (see Note 5), are reflected as unsecured long term debt obligations and accrue interest at a rate of 10% per annum.



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(9) 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 are joint defendants in several lawsuits involving professional liability and other matters arising in the normal course of business in the State of Louisiana. It is not practical at the present time to determine the amount or likelihood of an unfavorable outcome to the Company’s consolidated financial position or results of operations of any of the these actions against Triumph. The Company believes that Triumph has meritorious defenses in each case and is vigorously defending these matters.


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 non-appealable judgment was rendered in favor of the plaintiff in January 2011, however, the Company believes that the loss exposure of its defunct Construction Staffing subsidiary would be reduced by approximately one-half due to an offsetting amount that would be due from the underlying carrier. Accordingly, the Company has recorded an accrual for such estimated net loss exposure in this matter as of September 30, 2011.


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 September 30, 2011, 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.

(10) Segment Information


The Company operated in two segments, domestic Exploration & Production and Canadian Energy Services, at the time of the sale of Decca in June 2011 (see Note 2). As a result of the sale of Decca, the Company is treating the Canadian Energy Services segment as discontinued operations and has reported summarized financial information of that segment in Note 2. Since the Company’s continuing operations consist solely of one remaining segment (domestic Exploration & Production), there is no need for disaggregated segment information for continuing operations in this report.



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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” 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 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 nine month periods ended September 30, 2011 and 2010, as reported in our consolidated financial statements and notes thereto included in Item 1.


Three months ended September 30, 2011 versus three months ended September 30, 2010 — Total revenues from continuing operations for the three months ended September 30, 2011 were $739,000 compared to $690,000 for the three months ended September 30, 2010.


Revenues from CYMRI’s and Triumph’s oil and gas sales for the three months ended September 30, 2011 were $739,000 compared to $690,000 for the three months ended September 30, 2010. In the three months ended September 30, 2011, revenues from oil production were $642,000, reflecting volumes of 6,916 barrels at an average price of $92.83 per barrel, while gas revenues were $97,000, reflecting volumes of 19,418 Mcf at an average price of $5.00 per Mcf. On an overall basis, these amounts reflect a 17% increase in average oil and gas prices which was partially offset by a 9% decline in production volumes. The Company believes that continuing declines in CYMRI’s and Triumph’s production volumes are likely in the foreseeable future.


Lease operating expenses (“LOE”), including production taxes, were $348,000 for the three months ended September 30, 2011 versus $320,000 for the three months ended September 30, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This increase was largely due to a change in the relative timing of certain lease operating expenses between the two quarterly periods.



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Depreciation, depletion and amortization (“DD&A”) expense for the three months ended September 30, 2011 was $125,000 versus $216,000 for the three months ended September 30, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was due to a significant decline in depletion rates as well as a decrease in production volumes.


Workover expenses for the three months ended September 30, 2011 were $37,000 versus $93,000 for the three months ended September 30, 2010, 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 from continuing operations for the three months ended September 30, 2011 were $299,000 compared to $202,000 for the three months ended September 30, 2010. This increase primarily reflected a reduction in administrative expenses recovered from third parties under contract operating agreements.


Interest expense from continuing operations for the three months ended September 30, 2011 was $78,000 versus $52,000 for the three months ended September 30, 2010. This increase was substantially due to a higher interest rate on outstanding borrowings secured by CYMRI’s and Triumph’s oil and gas properties.


Gain on oil and gas derivatives for the three months ended September 30, 2011 was $16,000 versus nil for the three months ended September 30, 2010. 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 $31,000 for the three months ended September 30, 2011 compared to a benefit of $66,000 for the three months ended September 30, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 24% and 34%, respectively.


Income from discontinued operations, net of income taxes, was zero for the three months ended September 30, 2011 versus a net loss $2,000 for the three months ended September 30, 2010. 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.


Nine months ended September 30, 2011 versus nine months ended September 30, 2010 — Total revenues from continuing operations for the nine months ended September 30, 2011 were $2,324,000 compared to $2,063,000 for the nine months ended September 30, 2010.


Revenues from CYMRI’s and Triumph’s oil and gas sales for the nine months ended September 30, 2011 were $2,324,000 compared to $2,062,000 for the nine months ended September 30, 2010. In the nine months ended September 30, 2011, revenues from oil production were $2,078,000, reflecting volumes of 21,677 barrels at an average price of $95.86 per barrel, while gas revenues were $246,000, reflecting volumes of 51,123 Mcf at an average price of $4.81 per Mcf. On an overall basis, these amounts reflect a 24% increase in average oil and gas prices which was partially offset by a 9% decline in production volumes. The Company believes that continuing declines in CYMRI’s and Triumph’s production volumes are likely in the foreseeable future.


Lease operating expenses (“LOE”), including production taxes, were $1,172,000 for the nine months ended September 30, 2011 versus $1,151,000 for the nine months ended September 30, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This slight increase between the two quarterly periods was not considered to be significant.


Depreciation, depletion and amortization (“DD&A”) expense for the nine months ended September 30, 2011 was $371,000 versus $626,000 for the nine months ended September 30, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was due to a significant decline in depletion rates as well as a decrease in production volumes.



14
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Workover expenses for the nine months ended September 30, 2011 were $207,000 versus $311,000 for the nine months ended September 30, 2010, representing workovers on CYMRI’s South Texas oil and gas properties. This decrease was largely experienced in CYMRI’s Burnell Field.


Selling, general and administrative (“SG&A”) expenses from continuing operations for the nine months ended September 30, 2011 were $870,000 compared to $677,000 for the nine months ended September 30, 2010. This increase primarily reflected a reduction in administrative expenses recovered from third parties under contract operating agreements.


Interest expense from continuing operations for the nine months ended September 30, 2011 was $207,000 versus $289,000 for the nine months ended September 30, 2010. This decrease was due in large part to interest no longer being incurred on the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).


Gain on debt extinguishment for the nine months ended September 30, 2011 was zero compared to $439,000 for the nine months ended September 30, 2010. This decrease was due to the forgiveness of a portion of the principal and all of the accrued interest on unsecured notes payable to certain unrelated parties in March 2010 (see Note 5).


Gain on oil and gas derivatives for the nine months ended September 30, 2011 was $34,000 versus $83,000 for the nine months ended September 30, 2010. 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 $144,000 for the nine months ended September 30, 2011 compared to a benefit of $159,000 for the nine months ended September 30, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 31% and 34%, respectively.


Income from discontinued operations, net of income taxes, was $3,098,000 for the nine months ended September 30, 2011 versus $225,000 for the nine months ended September 30, 2010. 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, including the pre-tax gain in the estimated amount of $2,766,000 recognized from the sale, have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax expense reflecting the sales gain as a permanent tax difference in the 2011 period.

Liquidity and Capital Resources

Operating activities. Net cash used in operating activities from continuing operations for the nine months ended September 30, 2011 was $89,000 compared to $266,000 for the nine months ended September 30, 2010. This comparative difference in net operating cash flows reflected a relative improvement in the level of cash usage in our domestic Exploration & Production segment, primarily due to the effect of higher average oil and gas prices.

Investing activities. Net cash provided by investing activities, after deducting capital expenditures, was $1,305,000 for the nine months ended September 30, 2011 compared to $1,466,000 for the nine months ended September 30, 2010. In the nine months ended September 30, 2011, the Company received proceeds from the sale of Decca in the amount of $350,000 of cash paid at closing and $1,133,000 from the post-closing collection of notes receivable from the purchaser. In the nine months ended September 30, 2010, the Company converted approximately $1.6 million of restricted cash arising from the March 2008 sale of a former subsidiary into unrestricted cash.



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Financing activities. Net cash used in financing activities from continuing operations for the nine months ended September 30, 2011 was $468,000 compared to $1,442,000 for the nine months ended September 30, 2010. This relative increase in net financing cash flows was primarily due to the liquidation of the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).

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 amounted to $2,886,000 as of September 30, 2011 and 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 September 30, 2011, there was no available borrowing base and the maturity was scheduled in October 2011, however, the bank has informally agreed to extend the maturity on a month-to-month basis until a more permanent arrangement can be made. The Company is currently seeking commitments from its current bank and other financial institutions for a new credit facility to replace the maturing credit agreement.


CYMRI did not fully meet certain financial covenants under the credit agreement as of September 30, 2011 and December 31, 2010. The bank is aware of these covenant violations, however, it has not requested, nor does the Company expect it to request, accelerated payment of this debt, which is classified in our current liabilities, as a result of both the covenant violations and the near term maturity.


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 and we expect that these sources will be sufficient to meet our capital expenditures in 2011. We presently have relatively low capital expenditure requirements relating to CYMRI/Triumph’s oil and gas properties as evidenced by a total of only $177,000 being spent as of September 30, 2011. We believe that our capital expenditures for the remainder of 2011 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 $2,460,000. 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, potentially improves our financial condition. It should be noted, however, that we received only a relatively small portion 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 notes receivable. Assuming that the purchaser makes the note payments to us in accordance with their terms, we believe that such note payments will provide an enhanced source of liquidity for our continuing operations.

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, 2010 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 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 September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



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PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


See Note 9 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 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.




18
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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STRATUM HOLDINGS, INC.

November 4, 2011 By: /s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer

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



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EXHIBIT 31.1

CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Larry M. Wright, certify that:


1. I have reviewed this quarterly report on Form 10-Q of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 4, 2011 By: /s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer

EXHIBIT 31.2


CERTIFICATION PURSUANT TO
15 U.S.C. SECTION 7241 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, D. Hughes Watler, Jr., certify that:


1. I have reviewed this quarterly report on Form 10-Q of Stratum Holdings, Inc. (the “registrant”);


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 4, 2011 By: /s/ D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer

EXHIBIT 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry M. Wright, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


November 4, 2011 By: /s/ Larry M. Wright
Larry M. Wright
Chief Executive Officer

EXHIBIT 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Stratum Holdings, Inc. (the “registrant”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, D. Hughes Watler, Jr., Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of this Sarbanes Oxley Act of 2002, that, to my knowledge:


(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


November 4, 2011 By: /s/D. Hughes Watler, Jr.
D. Hughes Watler, Jr.
Chief Financial Officer

[10 bagger]

STTH.. $0.30 No news to report..

[10 bagger]

STTH.. $0.228

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” 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 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 nine month periods ended September 30, 2011 and 2010, as reported in our consolidated financial statements and notes thereto included in Item 1.

Three months ended September 30, 2011 versus three months ended September 30, 2010 — Total revenues from continuing operations for the three months ended September 30, 2011 were $739,000 compared to $690,000 for the three months ended September 30, 2010.

Revenues from CYMRI’s and Triumph’s oil and gas sales for the three months ended September 30, 2011 were $739,000 compared to $690,000 for the three months ended September 30, 2010. In the three months ended September 30, 2011, revenues from oil production were $642,000, reflecting volumes of 6,916 barrels at an average price of $92.83 per barrel, while gas revenues were $97,000, reflecting volumes of 19,418 Mcf at an average price of $5.00 per Mcf. On an overall basis, these amounts reflect a 17% increase in average oil and gas prices which was partially offset by a 9% decline in production volumes. The Company believes that continuing declines in CYMRI’s and Triumph’s production volumes are likely in the foreseeable future.

Lease operating expenses (“LOE”), including production taxes, were $348,000 for the three months ended September 30, 2011 versus $320,000 for the three months ended September 30, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This increase was largely due to a change in the relative timing of certain lease operating expenses between the two quarterly periods.

Depreciation, depletion and amortization (“DD&A”) expense for the three months ended September 30, 2011 was $125,000 versus $216,000 for the three months ended September 30, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was due to a significant decline in depletion rates as well as a decrease in production volumes.

Workover expenses for the three months ended September 30, 2011 were $37,000 versus $93,000 for the three months ended September 30, 2010, 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 from continuing operations for the three months ended September 30, 2011 were $299,000 compared to $202,000 for the three months ended September 30, 2010. This increase primarily reflected a reduction in administrative expenses recovered from third parties under contract operating agreements.

Interest expense from continuing operations for the three months ended September 30, 2011 was $78,000 versus $52,000 for the three months ended September 30, 2010. This increase was substantially due to a higher interest rate on outstanding borrowings secured by CYMRI’s and Triumph’s oil and gas properties.

Gain on oil and gas derivatives for the three months ended September 30, 2011 was $16,000 versus nil for the three months ended September 30, 2010. 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 $31,000 for the three months ended September 30, 2011 compared to a benefit of $66,000 for the three months ended September 30, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 24% and 34%, respectively.

Income from discontinued operations, net of income taxes, was zero for the three months ended September 30, 2011 versus a net loss $2,000 for the three months ended September 30, 2010. 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.

Nine months ended September 30, 2011 versus nine months ended September 30, 2010 — Total revenues from continuing operations for the nine months ended September 30, 2011 were $2,324,000 compared to $2,063,000 for the nine months ended September 30, 2010.

Revenues from CYMRI’s and Triumph’s oil and gas sales for the nine months ended September 30, 2011 were $2,324,000 compared to $2,062,000 for the nine months ended September 30, 2010. In the nine months ended September 30, 2011, revenues from oil production were $2,078,000, reflecting volumes of 21,677 barrels at an average price of $95.86 per barrel, while gas revenues were $246,000, reflecting volumes of 51,123 Mcf at an average price of $4.81 per Mcf. On an overall basis, these amounts reflect a 24% increase in average oil and gas prices which was partially offset by a 9% decline in production volumes. The Company believes that continuing declines in CYMRI’s and Triumph’s production volumes are likely in the foreseeable future.

Lease operating expenses (“LOE”), including production taxes, were $1,172,000 for the nine months ended September 30, 2011 versus $1,151,000 for the nine months ended September 30, 2010, representing LOE of CYMRI’s and Triumph’s oil and gas production operations. This slight increase between the two quarterly periods was not considered to be significant.

Depreciation, depletion and amortization (“DD&A”) expense for the nine months ended September 30, 2011 was $371,000 versus $626,000 for the nine months ended September 30, 2010, representing DD&A of CYMRI’s and Triumph’s oil and gas properties. This decrease was due to a significant decline in depletion rates as well as a decrease in production volumes.

Workover expenses for the nine months ended September 30, 2011 were $207,000 versus $311,000 for the nine months ended September 30, 2010, representing workovers on CYMRI’s South Texas oil and gas properties. This decrease was largely experienced in CYMRI’s Burnell Field.

Selling, general and administrative (“SG&A”) expenses from continuing operations for the nine months ended September 30, 2011 were $870,000 compared to $677,000 for the nine months ended September 30, 2010. This increase primarily reflected a reduction in administrative expenses recovered from third parties under contract operating agreements.

Interest expense from continuing operations for the nine months ended September 30, 2011 was $207,000 versus $289,000 for the nine months ended September 30, 2010. This decrease was due in large part to interest no longer being incurred on the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).

Gain on debt extinguishment for the nine months ended September 30, 2011 was zero compared to $439,000 for the nine months ended September 30, 2010. This decrease was due to the forgiveness of a portion of the principal and all of the accrued interest on unsecured notes payable to certain unrelated parties in March 2010 (see Note 5).

Gain on oil and gas derivatives for the nine months ended September 30, 2011 was $34,000 versus $83,000 for the nine months ended September 30, 2010. 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 $144,000 for the nine months ended September 30, 2011 compared to a benefit of $159,000 for the nine months ended September 30, 2010. These benefit amounts reflected consolidated income tax rates from continuing operations of 31% and 34%, respectively.

Income from discontinued operations, net of income taxes, was $3,098,000 for the nine months ended September 30, 2011 versus $225,000 for the nine months ended September 30, 2010. 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, including the pre-tax gain in the estimated amount of $2,766,000 recognized from the sale, have been classified as discontinued operations in the Consolidated Statement of Operations, net of applicable income tax expense reflecting the sales gain as a permanent tax difference in the 2011 period.

Liquidity and Capital Resources

Operating activities. Net cash used in operating activities from continuing operations for the nine months ended September 30, 2011 was $89,000 compared to $266,000 for the nine months ended September 30, 2010. This comparative difference in net operating cash flows reflected a relative improvement in the level of cash usage in our domestic Exploration & Production segment, primarily due to the effect of higher average oil and gas prices.

Investing activities. Net cash provided by investing activities, after deducting capital expenditures, was $1,305,000 for the nine months ended September 30, 2011 compared to $1,466,000 for the nine months ended September 30, 2010. In the nine months ended September 30, 2011, the Company received proceeds from the sale of Decca in the amount of $350,000 of cash paid at closing and $1,133,000 from the post-closing collection of notes receivable from the purchaser. In the nine months ended September 30, 2010, the Company converted approximately $1.6 million of restricted cash arising from the March 2008 sale of a former subsidiary into unrestricted cash.

Financing activities. Net cash used in financing activities from continuing operations for the nine months ended September 30, 2011 was $468,000 compared to $1,442,000 for the nine months ended September 30, 2010. This relative increase in net financing cash flows was primarily due to the liquidation of the Company’s unsecured notes payable that were repaid in March 2010 (see Note 5).

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 amounted to $2,886,000 as of September 30, 2011 and 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 September 30, 2011, there was no available borrowing base and the maturity was scheduled in October 2011, however, the bank has informally agreed to extend the maturity on a month-to-month basis until a more permanent arrangement can be made. The Company is currently seeking commitments from its current bank and other financial institutions for a new credit facility to replace the maturing credit agreement.

CYMRI did not fully meet certain financial covenants under the credit agreement as of September 30, 2011 and December 31, 2010. The bank is aware of these covenant violations, however, it has not requested, nor does the Company expect it to request, accelerated payment of this debt, which is classified in our current liabilities, as a result of both the covenant violations and the near term maturity.

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 and we expect that these sources will be sufficient to meet our capital expenditures in 2011. We presently have relatively low capital expenditure requirements relating to CYMRI/Triumph’s oil and gas properties as evidenced by a total of only $177,000 being spent as of September 30, 2011. We believe that our capital expenditures for the remainder of 2011 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 $2,460,000. 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, potentially improves our financial condition. It should be noted, however, that we received only a relatively small portion 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 notes receivable. Assuming that the purchaser makes the note payments to us in accordance with their terms, we believe that such note payments will provide an enhanced source of liquidity for our continuing operations.

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, 2010 for a further description of our critical accounting policies and estimates.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting; and


5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

[10 bagger]

STTH.. $0.228

STRATUM HOLDINGS, INC.
Consolidated Balance Sheets
(Unaudited)

September 30, December 31,
2011 2010
Assets
Current assets:
Cash and cash equivalents $ 297,382 $ 63,133
Accounts receivable 665,538 605,041
Prepaid expenses and other 83,356 122,348
Notes receivable from sale of subsidiary 2,115,520 -
Fair value of oil and gas derivatives 1,190 -
Current assets of discontinued operations - 4,032,400
Total current assets 3,162,986 4,822,922

Property and equipment:
Oil and gas properties, evaluated (full cost method) 14,737,863 14,560,532
Other property and equipment 133,692 133,692
Total property and equipment 14,871,555 14,694,224
Less: Accumulated depreciation, depletion and amortization (8,982,913 ) (8,611,835 )
Net property and equipment 5,888,642 6,082,389

Other assets:
Notes receivable from sale of subsidiary 1,441,262 -
Noncurrent assets of discontinued operations - 1,659,431
Total other assets 1,441,262 1,659,431

Total assets $ 10,492,890 $ 12,564,742

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt - stockholders $ 476,282 $ 730,709
Current portion of long-term debt - others 2,969,506 3,079,380
Accounts payable 693,298 881,904
Accrued liabilities 1,483,448 1,241,840
Fair value of oil and gas derivatives - 37,835
Current liabilities of discontinued operations - 4,652,823
Total current liabilities 5,622,534 10,624,491

Long-term debt, net of current portion 233,718 337,378
Deferred income taxes 1,587,100 1,559,500
Asset retirement obligations 356,710 333,670
Total liabilities 7,800,062 12,855,039

Stockholders’ equity (deficit):
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 (10,228,219 ) (13,001,655 )
Accumulated foreign currency translation adjustment - (209,689 )
Total stockholders’ equity (deficit) 2,692,828 (290,297 )

Total liabilities and stockholders’ equity (deficit) $ 10,492,890 $ 12,564,742


See accompanying notes to unaudited consolidated financial statements.


3
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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)

Three Months Ended September 30,
2011 2010
Revenues:
Oil and gas sales $ 738,760 $ 689,502
Other - 38
Total revenues 738,760 689,540

Operating expenses:
Lease operating expense 347,596 320,411
Depreciation, depletion and amortization 125,421 216,333
Workover expense 36,519 93,461
Selling, general and administrative 299,223 201,686
Total operating expenses 808,759 831,891

Operating loss (69,999 ) (142,351 )

Other income (expense):
Interest expense (77,884 ) (52,078 )
Gain on oil and gas derivatives 16,135 160

Loss before income taxes (131,748 ) (194,269 )
Benefit for income taxes 31,000 66,000
Net loss from continuing operations (100,748 ) (128,269 )
Discontinued operations, net of tax - (1,694 )
Net loss $ (100,748 ) $ (129,963 )

Net loss per share, basic and diluted:
Net loss from continuing operations $ (0.04 ) $ (0.05 )
Discontinued operations, net of tax - (0.00 )
Net loss $ (0.04 ) $ (0.05 )

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


See accompanying notes to unaudited consolidated financial statements.


4
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STRATUM HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)

Nine Months Ended September 30,
2011 2010
Revenues:
Oil and gas sales $ 2,323,964 $ 2,061,977
Other - 1,012
Total revenues 2,323,964 2,062,989

Operating expenses:
Lease operating expense 1,171,780 1,151,154
Depreciation, depletion and amortization 371,078 626,234
Workover expense 207,357 310,630
Selling, general and administrative 869,612 676,645
Total operating expenses 2,619,827 2,764,663

Operating loss (295,863 ) (701,674 )

Other income (expense):
Interest expense (206,759 ) (288,688 )
Gain on debt extinguishment - 438,967
Gain on oil and gas derivatives 34,486 82,660

Loss before income taxes (468,136 ) (468,735 )
Benefit for income taxes 143,600 159,300
Net loss from continuing operations (324,536 ) (309,435 )
Discontinued operations, net of tax 3,097,972 224,679
Net income (loss) $ 2,773,436 $ (84,756 )

Net income (loss) per share, basic and diluted:
Net loss from continuing operations $ (0.12 ) $ (0.12 )
Discontinued operations, net of tax 1.16 0.09
Net income (loss) $ 1.04 $ (0.03 )

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


See accompanying notes to unaudited consolidated financial statements.


5
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STRATUM HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended September 30,
2011 2010
Cash flows from operating activities:
Net loss from continuing operations $ (324,536 ) $ (309,435 )
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used in) operations
Depreciation, depletion and amortization 371,078 626,234
Benefit for income taxes (143,600 ) (159,300 )
Stock based compensation - 11,525
Gain on debt extinguishment - (438,967 )
Unrealized gain on oil and gas derivatives (39,025 ) (82,660 )
Changes in current assets and liabilities 31,497 22,164
Other changes, net 15,313 63,988
Net cash flows from continuing operations (89,273 ) (266,451 )
Net cash flows from discontinued operations 659,916 743,334
Total cash flows from operating activities 570,643 476,883

Cash flows from investing activities:
Receipt of cash from sale of subsidiary 350,000 -
Collection of notes receivable from sale of subsidiary 1,132,542 -
Decrease in restricted cash - 1,613,637
Purchase of property and equipment (177,331 ) (148,025 )
Net cash flows from investing activities 1,305,211 1,465,612

Cash flows from financing activities:
Payments of long term debt (396,111 ) (1,013,876 )
Proceeds from long term debt 48,150 32,725
Net payments of stockholder advances (120,000 ) (460,854 )
Net cash flows from continuing operations (467,961 ) (1,442,005 )
Net cash flows from discontinued operations (1,173,644 ) (512,111 )
Total cash flows from financing activities (1,641,605 ) (1,954,116 )

Net increase (decrease) in cash and cash equivalents 234,249 (11,621 )
Cash and cash equivalents at beginning of period 63,133 142,703

Cash and cash equivalents at end of period $ 297,382 $ 131,082

Supplemental cash flow data:
Cash paid for interest - continuing operations $ 154,961 $ 145,610
Cash paid for interest - discontinued operations 120,065 320,205

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

Supplemental financing activity:
Gain on debt extinguishment - related party $ - $ 74,097


See accompanying notes to unaudited consolidated financial statements.


6
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STRATUM HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

(1) Basis of Presentation


Interim Financial Information – The accompanying consolidated financial statements have been prepared by 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 September 30, 2011, the results of its operations for the three month and nine month periods ended September 30, 2011 and 2010, and cash flows for the nine month periods ended September 30, 2011 and 2010. 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, 2010.


Recently Issued Accounting Pronouncements – In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Presentation of Comprehensive Income.” This update eliminates the option to present other comprehensive income and its components in the statement of changes in equity, effective for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-05 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 issued by the purchaser in the amount of $2,400,000 (plus an estimated working capital adjustment of $439,324), payable out of the post-closing collection of Decca’s accounts receivable (as of September 30, 2011, note payments of $1,132,542 had been made by the purchaser); and (c) Interest bearing 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 of September 30, 2011, $408,738 of this note amount was classified as a current asset). The Company recognized a preliminary pre-tax gain from this sale in the nine months ended September 30, 2011 in the amount of $2,765,595.


As noted above, the purchaser has issued non-interest bearing “receivables” notes to the Company in the total amount of $2,839,324 (including an estimated working capital adjustment of $439,324). The Company believes that these non-interest bearing notes will be paid by the purchaser from the post-closing collection of Decca’s accounts receivable within the current operating cycle. At the present time, the Company and the purchaser are operating under a mutually acceptable agreement for the payment of the non-interest bearing “receivables” notes to the Company from the post-closing collection of Decca’s accounts receivable. The Company and the purchaser expect to ultimately restructure the interest bearing “installment” notes, however, no definitive agreement has yet been reached in that regard.



7
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The results of discontinued operations of Decca for the nine months ended September 30, 2011 and 2010, including the estimated gain on sale in 2011, are summarized below (such amounts in the first column reflect Decca’s operating results only through the date of the sale):

Nine Months Ended September 30,
2011 2010

Energy services revenues $ 12,768,505 $ 14,736,836
Cost of energy services (11,720,562 ) (13,469,582 )
Gross profit 1,047,943 1,267,254
General and administrative expenses (424,301 ) (606,670 )
Interest expense (120,065 ) (320,205 )
Gain on sale (estimated) 2,765,595 -
Net income before income taxes 3,269,172 340,379
Provision for income taxes (171,200 ) (115,700 )
Net income $ 3,097,972 $ 224,679


The above provision for income taxes reflects the sales gain as a permanent tax difference in the 2011 period as it essentially reflects the reversal of goodwill impairments recorded in previous years for which no temporary differences were originally recognized. The following table presents the current assets, noncurrent assets and current liabilities applicable to the Company’s discontinued operations as of September 30, 2011 and December 31, 2010:

September 30, December 31,
2011 2010
Current assets:
Cash $ - $ 79,103
Accounts receivable - 3,927,635
Prepaid expenses - 25,662
- 4,032,400
Noncurrent assets:
Goodwill - 1,536,313
Other assets - 123,118
- 1,659,431
Current liabilities:
Current portion of long term debt - (1,806,581 )
Accounts payable - (2,841,850 )
Accrued liabilities - (4,392 )
- (4,652,823 )

Net assets of discontinued operations $ - $ 1,039,008

[10 bagger]

STTH. $0.228

[10 bagger]

No updates to report since last post....

[10 bagger]

STTH...

No updates to report since last post....

[10 bagger]

STTH.. $0.18

Surprising earnings and true Cash Flow .. I have updated the I-box to reflect latest release..

STRATUM HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)


Three Months Ended June 30,
2011 2010
Revenues:
Oil and gas sales $ 828,703 $ 778,045
Other - 49
Total revenues 828,703 778,094

Operating expenses:
Lease operating expense 426,061 353,385
Depreciation, depletion & amortization 121,522 241,564
Workover expense 67,189 16,674
Selling, general and administrative 247,117 274,055
Total operating expenses 861,889 885,678

Operating loss (33,186 ) (107,584 )

Other income (expense):
Interest expense (63,130 ) (111,490 )
Gain on debt extinguishment - -
Gain on oil and gas derivatives 59,271 60,910

Loss before income taxes (37,045 ) (158,164 )
Benefit for income taxes 11,700 53,800
Net loss from continuing operations (25,345 ) (104,364 )
Discontinued operations, net of tax 2,866,185 67,490
Net income (loss) $ 2,840,840 $ (36,874 )

Net income (loss) per share, basic and diluted
Net loss from continuing operations $ (0.01 ) $ (0.04 )
Discontinued operations, net of tax 1.08 0.03
Net income (loss) $ 1.07 $ (0.01 )

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


See accompanying notes to unaudited consolidated financial statements.

[10 bagger]

Item 1.01 Entry into a Material Definitive Agreement
Item 2.01. Completion of Acquisition or Disposition of Assets


On June 3, 2011, Stratum Holdings, Inc. (the “Company”) entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with 1607920 Alberta Ltd., a corporation organized and existing under the laws of Alberta, Canada (the “Canadian Purchaser”), and SB Group Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (the “American Purchaser” and together with Canadian Purchaser, the “Purchasers’), for the sale of 100% of the capital stock of the Canadian Energy Services subsidiaries of the Company, Decca Consulting, Ltd. (“Decca Ltd.”) and Decca Consulting, Inc. (“Decca Inc.” and together with Decca Ltd., “Decca”). The Purchasers are private entities owned by an independent personal trust.


The total sale price was $4,600,000.00, subject to certain working capital adjustments, and consisted of the following components: (a) $100,250.00 in cash paid by the American Purchaser and $249,375.00 in cash paid by the Canadian Purchaser to the Company at closing; (b) issuance of a non-interest bearing note by the American Purchaser in favor of the Company in the principal amount of $690,000.00 (the “American Receivables Note”) and issuance of a non-interest bearing note by the Canadian Purchaser in favor of the Company in the principal amount of $1,710,000.00 (the “Canadian Receivables Note” and together with the American Receivables Note, the “Receivables Notes”); and (c) issuance of an interest bearing note by the American Purchaser in favor of the Company in the principal amount of $531,875.00, payable in 48 monthly installments of principal and interest (at 8% per annum), commencing on October 1, 2011 (the “American Note”) and issuance of an interest bearing note by the Canadian Purchaser in favor of the Company in the principal amount of $1,318,125.00, payable in 48 monthly installments of principal and interest (at 8% per annum), commencing on October 1, 2011 (the “Canadian Note”, and together with the American Note, the “Installment Notes”).


In conjunction with the issuance of the Receivables Notes and the Installment Notes by the Purchasers to the Company, the Company and the American Purchaser entered into separate Pledge and Security Agreements pursuant to which the American Purchaser granted to the Company security interests in, and pledged to the Company, 100% of the capital stock of the Decca Inc. and Decca Ltd. (effective as of the amalgamation of the Canadian Purchaser with and into Decca Ltd., as described below), respectively, until the obligations to the Company reflected in the underlying Receivables Notes and Installment Notes are fully paid. The security interests granted by the American Purchaser under the Pledge and Security Agreements are subordinated to Decca’s secured debt with Century Services, Inc., which has been assumed by the American Purchaser. The Company is no longer a guarantor of such debt.


On June 6, 2011, the Canadian Purchaser amalgamated with and into Decca Ltd. and as a result of such amalgamation the obligations of the Canadian Purchaser under the Purchase Agreement for (a) the payment of all amounts due under the Canadian Note and the Canadian Receivable Notes and (b) its satisfaction of all of its other obligations under the Purchase Agreement, in each case were transferred to Decca Ltd. by operation of law.


- 2 -
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The Purchase Agreement contains customary representations and warranties by the parties to each other and provides for the indemnification by the Company to the Purchasers of certain pre-closing liabilities for a three-year period, subject in most instances to a $100,000 threshold and a cap equal to the total original principal amount of the Installment Notes.


Copies of the Purchase Agreement, the Receivables Notes, the Installment Notes and the Pledge and Security Agreements are attached hereto as Exhibits.




Item 9.01. Financial Statements and Exhibits


(b) Pro Forma Financial Information


The Company has prepared unaudited pro forma financial statements to present the impact of the sale of the capital stock of Decca Ltd. and Decca Inc. on the terms indicated above. These unaudited pro forma financial statements should be read in conjunction with the Company’s historical consolidated financial statements and the related notes that are included in its Annual Report on Form 10-K for the year ended December 31, 2010 and its Quarterly Report on Form 10-Q for the three months ended March 31, 2011.

The following unaudited pro forma balance sheet as of March 31, 2011 gives effect to the Decca sale as if the receipts of the sales proceeds and recognition of transaction costs had occurred on that date. The following unaudited pro forma statements of operations for the three months ended March 31, 2011 and for the year ended December 31, 2010 give effect to the Decca sale as if the receipts of the sales proceeds and recognition of transaction costs had occurred as of the beginning of each period.

The following unaudited pro forma financial statements are presented for illustrative purposes only and do not necessarily indicate the financial results of the Company had the transaction actually occurred as of the dates indicated. This financial information has been derived from and should be read together with the historical consolidated financial statements and the related notes of the Company incorporated by reference in this Form 8-K. In addition, the allocation of the sales price reflected in the unaudited pro forma financial statements is preliminary and is subject to adjustment and may vary from the actual sales price allocation that will be recorded as of the effective date of the transaction.


- 3 -
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STRATUM HOLDINGS, INC.
PRO FORMA BALANCE SHEET
MARCH 31, 2011


As Reported Pro Forma Adjustments As Adjusted

Assets
Current assets:
Cash and cash equivalents $ 28,864 $ - $ 100,000 (B) $ 128,864
Accounts receivable 4,698,598 (4,050,994 ) (A) - 647,604
Prepaid expenses and other 126,938 (41,913 ) (A) - 85,025
Notes receivable - - 2,535,000 (B) 2,535,000
Total current assets 4,854,400 (4,092,907 ) 2,635,000 3,396,493

Property and equipment:
Oil and gas properties (full cost method) 14,683,846 - - 14,683,846
Other property and equipment 149,676 - - 149,676
14,833,522 - - 14,833,522
Less: Accumulated DD&A (8,739,975 ) - - (8,739,975 )
Net property and equipment 6,093,547 - - 6,093,547

Other assets:
Goodwill 1,536,313 (1,536,313 ) (A) - -
Other assets 119,472 (119,472 ) (A) - -
Notes receivable - - 1,715,000 (B) 1,715,000
Total other assets 1,655,785 (1,655,785 ) 1,715,000 1,715,000

Total assets $ 12,603,732 $ (5,748,692 ) $ 4,350,000 $ 11,205,040

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long term debt $ 4,527,012 $ (737,754 ) (A) $ (100,000 ) (B) $ 3,689,258
Accounts payable 4,730,002 (3,738,935 ) (A) - 991,067
Accrued liabilities 1,382,817 (10,688 ) (A) 550,000 (B) 1,922,129
Fair value of oil and gas derivatives 78,755 - - 78,755
Total current liabilities 10,718,586 (4,487,377 ) 450,000 6,681,209

Long-term debt, net of current portion 262,524 - - 262,524
Deferred income taxes 1,578,000 - - 1,578,000
Asset retirement obligations 341,180 - - 341,180
Total liabilities 12,900,290 (4,487,377 ) 450,000 8,862,913

Stockholders’ equity:
Preferred stock - - - -
Common stock 26,557 - - 26,557
Additional paid-in capital 12,894,490 - - 12,894,490
Accumulated deficit (12,968,310 ) (1,510,610 ) (A) 3,900,000 (B) (10,578,920 )
Accumulated foreign currency translation (249,295 ) 249,295 (A) - -
Total stockholders’ equity (296,558 ) (1,261,315 ) 3,900,000 2,342,127

Total liabilities and stockholders equity $ 12,603,732 $ (5,748,692 ) $ 4,350,000 $ 11,205,040







- 4 -
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STRATUM HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2011


Pro Forma
As Reported Adjustments As Adjusted
Revenues:
Energy services $ 7,775,868 $ (7,775,868 ) (C) $ -
Oil and gas sales 756,500 - 756,500
Other 15,323 (15,323 ) (C) -
8,547,691 (7,791,191 ) 756,500
Expenses:
Energy services 7,152,211 (7,152,211 ) (C) -
Lease operating expense 398,123 - 398,123
Depreciation, depletion and amortization 124,135 - 124,135
Workover expense 103,649 - 103,649
General and administrative 544,387 (221,116 ) (C) 323,271
8,322,505 (7,373,327 ) 949,178

Operating income (loss) 225,186 (417,864 ) (192,678 )

Other income (expense):
Interest expense (132,421 ) 66,676 (C) (65,745 )
Gain (loss) on oil and gas derivatives (40,920 ) - (40,920 )

Income (loss) from continuing operations before tax 51,845 (351,188 ) (299,343 )
Benefit (provision) for income taxes (18,500 ) 119,400 (C) 100,900

Net income (loss) from continuing operations 33,345 (231,788 ) (198,443 )

Gain from sale of discontinued operations - 2,389,390 (C) 2,389,390

Net income $ 33,345 $ 2,157,602 $ 2,190,947

Net income per share, basic
and diluted $ 0.01 $ 0.82

Weighted average shares outstanding 2,655,738 2,655,738






- 5 -
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STRATUM HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010


Pro Forma
As Reported Adjustments As Adjusted
Revenues:
Energy services $ 20,058,038 $ (20,058,038 ) (C) $ -
Oil and gas sales 2,625,586 - 2,625,586
Other 57,193 (56,179 ) (C) 1,014
22,740,817 (20,114,217 ) 2,626,600
Expenses:
Energy services 18,470,895 (18,470,895 ) (C) -
Lease operating expense 1,509,274 - 1,509,274
Depreciation, depletion and amortization 528,298 - 528,298
Workover expense 475,356 - 475,356
General and administrative 1,814,446 (771,704 ) (C) 1,042,742
22,798,269 (19,242,599 ) 3,555,670

Operating income (loss) (57,452 ) (871,618 ) (929,070 )

Other income (expense):
Interest expense (790,235 ) 413,767 (C) (376,468 )
Gain on debt extinguishment 438,967 438,967
Gain (loss) on oil and gas derivatives 51,155 - 51,155

Income (loss) from continuing operations before tax (357,565 ) (457,851 ) (815,416 )
Benefit (provision) for income taxes 139,700 155,700 (C) 295,400

Net loss from continuing operations (217,865 ) (302,151 ) (520,016 )

Gain from sale of discontinued operations - 2,389,390 (C) 2,389,390

Net income (loss) $ (217,865 ) $ 2,087,239 $ 1,869,374

Net income (loss) per share, basic
and diluted $ (0.08 ) $ 0.70

Weighted average shares outstanding 2,655,738 2,655,738






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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

(A) To eliminate the assets and liabilities of Decca Consulting, Ltd. (“Decca Ltd.”) and Decca Consulting, Inc. (“Decca Inc.” and together with Decca Ltd., “Decca”) assumed in the sale to the Purchasers from the historical Balance Sheet as of March 31, 2011.



(B) To record the sale of the capital stock of Decca Inc. and Decca Ltd. to the Purchasers, for a total sales price of $4.6 million, payable in a combination of: (i) cash paid at closing, (ii) non-interest bearing notes, payable out of Decca’s collected accounts receivable, and (iii) interest bearing notes, payable in 48 monthly installments; and to recognize third party liabilities related to the transaction (both paid and accrued).



(C) To eliminate the revenues and expenses of Decca Inc. and Decca Ltd. from the historical Statement of Operations of the respective period and to recognize the estimated gain on the sale of the capital stock of Decca Inc. and Decca Ltd. to the Purchasers.



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(d) Exhibits



Exhibit Number Title of Document

10.1 Stock Purchase Agreement dated as of June 3, 2011, by and among Stratum Holdings, Inc., SB Group Holdings, Inc. and 1607920 Alberta Ltd.

10.2 Canadian Receivables Note dated June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,710,000.

10.3 American Receivables Note dated June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $690,000.

10.4 Canadian Note dated June 3, 2011, issued by 1607920 Alberta Ltd. in favor of Stratum Holdings, Inc. in the principal amount of $1,318,125.

10.5 American Note dated June 3, 2011, issued by SB Group Holdings, Inc. in favor of Stratum Holdings, Inc. in the principal amount of $531,875.

10.6 Canadian Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc.

10.7 American Pledge and Security Agreement dated as of June 3, 2011, by and among SB Group Holdings, Inc. and Stratum Holdings, Inc.





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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


STRATUM HOLDINGS, INC.


June 9, 2011 By: /s/ D. Hughes Watler, Jr.
Name: D. Hughes Watler, Jr.
Title: Chief Financial Officer






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Exhibit 10.1













STOCK PURCHASE AGREEMENT


by and among


STRATUM HOLDINGS, INC.,


SB GROUP HOLDINGS, INC.


AND


1607920 ALBERTA LTD.








Dated as of June 3, 2011





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ARTICLE I DEFINITIONS 1

ARTICLE II PURCHASE AND SALE OF THE STOCK 6
2.1 TRANSFER OF STOCK BY SELLER 6
2.2 PURCHASE PRICE 7
2.3 PAYMENT OF PURCHASE PRICE 7
2.4 THE CLOSING 8
2.5 CLOSING DELIVERIES BY SELLER 8
2.6 CLOSING DELIVERIES BY PURCHASERS 10
2.7 AMALGAMATION OF THE CANADIAN PURCHASER WITH AND INTO DECCA LTD 10

ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 10
3.1 ORGANIZATION AND QUALIFICATION OF EACH COMPANY 10
3.2 CAPITALIZATION 11
3.3 STOCK OWNERSHIP BY SELLER 12
3.4 AUTHORIZATION; ENFORCEABILITY 12
3.5 NO CONFLICT; GOVERNMENTAL CONSENTS. 12
3.6 FINANCIAL STATEMENTS AND UNDISCLOSED LIABILITIES. 12
3.7 LABOR MATTERS 13
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS 13
3.9 TAXES 14
3.10 MATERIAL CONTRACTS 16
3.11 PERSONAL PROPERTY; TITLE TO PROPERTY; LEASES. 17
3.12 CONDITION AND SUFFICIENCY OF TANGIBLE ASSETS 18
3.13 LICENSES, PERMITS AND AUTHORIZATIONS 18
3.14 INTELLECTUAL PROPERTY. 18
3.15 LITIGATION; COMPLIANCE WITH LAWS. 19
3.16 INSURANCE. 20
3.17 EMPLOYEE BENEFIT PLANS 20
3.18 TRANSACTIONS WITH AFFILIATES 21
3.19 NO BROKERS OR FINDERS 21
3.20 ACCURACY OF INFORMATION 21
3.21 RECEIVABLES 21
3.22 ENVIRONMENTAL 21
3.23 RESTRICTIONS ON BUSINESS ACTIVITIES 22
3.24 BANK ACCOUNTS 22
3.25 BOOKS AND RECORDS 22
3.26 CERTAIN PAYMENTS 22






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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 23
4.1 ORGANIZATION AND AUTHORITY 23
4.2 NO CONFLICT; GOVERNMENTAL CONSENTS 23
4.3 NO BROKERS OR FINDERS 23
4.4 AUTHORIZATION; ENFORCEABILITY 23

ARTICLE V TAX MATTERS 24
5.1 LIABILITY FOR TRANSACTION TAXES 24
5.2 SECTION 338(H)(10) ELECTION 24

ARTICLE VI INDEMNIFICATION 24
6.1 OBLIGATIONS OF SELLER 24
6.2 OBLIGATIONS OF PURCHASER 25
6.3 PROCEDURE 25
6.4 SURVIVAL 26
6.5 NOTICE BY INDEMNIFYING PARTY 26
6.6 INDEMNITY THRESHOLD AND CAP 26
6.7 EXCLUSIVE REMEDY 27
6.8 SET-OFF 27
6.9 MITIGATION 27

ARTICLE VII I GENERAL 27
7.1 AMENDMENTS; WAIVERS 27
7.2 SCHEDULES; EXHIBITS; INTEGRATION 27
7.3 LAW 27
7.4 NO ASSIGNMENT 27
7.5 COUNTERPARTS 27
7.6 PUBLICITY AND REPORTS 27
7.7 PARTIES IN INTEREST 27
7.8 NOTICES 28
7.9 REMEDIES; WAIVER 29
7.10 ATTORNEY’S FEES 29
7.11 SEVERABILITY 29
7.12 ENTIRE AGREEMENT 30
7.13 ARBITRATION 30
7.14 SPECIFIED LITIGATION 30
7.15 EXPENSES 30
7.16 FURTHER ASSURANCES 30
7.17 COOPERATION WITH RESPECT TO TAX RETURNS 30







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STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement is entered into as of June 3, 2011, by and among (i) SB Group Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (the “American Purchaser”); (ii) 1607920 Alberta Ltd., a corporation organized and existing under the laws of Alberta (the “Canadian Purchaser” and, together with the American Purchaser, the “Purchasers”), and (iii) STRATUM HOLDINGS, INC., a corporation organized and existing under the laws of the state of Nevada (“Seller”), and holder of 100% of the capital stock of each Company. Seller and Purchasers are each a “party” and together are “parties” to this Agreement.


R E C I T A L S

WHEREAS, as of the date hereof, Seller owns 100% of the Stock (as defined below) of Decca Consulting Ltd., a corporation organized and existing under the laws of Alberta, Canada (“Decca Ltd.”), and Decca Consulting, Inc. (“Decca Inc.”) a corporation organized and existing under the laws of Nevada (each a “Company”, and collectively, the “Companies”);

WHEREAS, Seller desires to sell, and Purchasers desire to buy, all of the Stock for the consideration described herein; and

WHEREAS, the parties desire to make certain representations, warranties, covenants and agreements in connection with the sale of all of the Stock and also to prescribe various conditions to such sale.

A G R E EM E N T

NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound the parties agree as follows:

ARTICLE I

DEFINITIONS

For all purposes of this Agreement, except as otherwise expressly provided,

(a) the terms defined in this Article I have the meanings assigned to them in this Article I and include the plural as well as the singular,

(b) all accounting terms not otherwise defined herein have the meanings assigned under GAAP,

(c) all references in this Agreement to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of the body of this Agreement,

(d) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, and

(e) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision.



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As used in this Agreement and the Disclosure Schedules delivered pursuant to this Agreement, the following definitions shall apply:

“AAA Rules” has the meaning set forth in Section 7.13.

“Action” means any action, complaint, claim, charge, petition, investigation, suit or other proceeding, whether civil or criminal, in law or in equity, or before any mediator, arbitrator or Governmental Entity.

“Affiliate” means with respect to any specified Person, any other Person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified Person.

“Agreement” means this Stock Purchase Agreement, as amended or supplemented, together with all schedules attached or incorporated by reference.

“American Note” has the meaning set forth in Section 2.3(c).

“American Note Portion of the Purchase Price” has the meaning set forth in Section 2.3(c).

“American Receivables Note” has the meaning set forth in Section 2.3(b).

“Approval” means any approval, authorization, consent, qualification or registration, or any waiver of any of the foregoing, required to be obtained from, or any notice, statement or other communication required to be filed with or delivered to, any Governmental Entity or any other Person.

“Assets” has the meaning set forth in Section 3.11(c).

“Benefit Plans” has the meaning set forth in Section 3.17.

“Business” means the business of each Company, and shall be deemed to include any of the following incidents of such business: income, cash flow, operations, condition (financial or other), assets, anticipated revenues, prospects, liabilities and personnel.

“Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in the City of Houston, Texas.

“Canadian Note” has the meaning set forth in Section 2.3(c).

“Canadian Note Portion of the Purchase Price” has the meaning set forth in Section 2.3(c).

“Canadian Receivables Note” has the meaning set forth in Section 2.3(b).

“Cash Portion of the Purchase Price” has the meaning set forth in Section 2.3(a).

“Claim” has the meaning set forth in Section 6.3.

“Claim Notice” has the meaning set forth in Section 6.3.

“Closing” has the meaning set forth in Section 2.4.

“Closing Date” means the date of the Closing as set forth in Section 2.4.



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“Company” and “Companies” have the meanings set forth on the Recitals to this Agreement.

“Company Financial Statements” means the unaudited consolidated balance sheet of the Companies as of December 31, 2010 (the “December 2010 Balance Sheet”) and the statement of income for each of the fiscal years ended December 31, 2009 and 2010.

“Consultant” or “Consultants” means any individual who is a consultant of either of the Companies immediately prior to the Closing Date.

“Consulting Agreement” has the meaning set forth in Section 2.5(k).

“Contract” means any agreement, contract, arrangement, bond, loan commitment, franchise, indemnity, indenture, instrument, lease, license or understanding, whether or not in writing.

“Decca Inc.” has the meaning set forth on the Recitals to this Agreement.

“Decca Ltd.” has the meaning set forth on the Recitals to this Agreement.

“December 2010 Balance Sheet” has the meaning given in the definition of Company Financial Statements.

“Encumbrance” means any claim, charge, easement, encumbrance, lease, covenant, security interest, lien, option, pledge, rights of others, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by agreement, understanding, law, equity or otherwise, except for any restrictions on transfer generally arising under any applicable federal, or state or provincial securities law.

“Environmental Defect” shall mean a condition with respect to the Assets that constitutes a violation of Environmental Law; provided that an Environmental Defect shall not be deemed to exist for the purposes of this Agreement unless the estimated Lowest Cost Response for remedying such Environmental Defect exceeds $5,000.

“Environmental Laws” means all applicable statutes, regulations, ordinances, by-laws, and codes and all international treaties and agreements, now in existence in the United States or Canada (whether federal, state, provincial or municipal) relating to the protection and preservation of the environment, occupational health and safety, product safety, product liability or hazardous substances.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the related regulations and published interpretations.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

“GAAP” means generally accepted accounting principles in the United States, as in effect on the date of this Agreement.

“Governmental Entity” means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state, provincial, municipal or local, domestic or foreign.

“Indemnified Party” has the meaning set forth in Section 6.3.

“Indemnifying Party” has the meaning set forth in Section 6.3.



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“Intellectual Property” has the meaning set forth in Section 3.14(a).

“IRS” means the U.S. Internal Revenue Service.

“Knowledge of the Purchaser” or “Known to the Purchaser” or any permutation thereof shall mean, with respect to either Purchaser, the actual knowledge (without investigation) of the Chief Executive Officer of Purchaser.


“Knowledge of Seller “ or “Known to the Seller” or any permutation thereof shall mean, with respect to Seller, the actual knowledge (without investigation) of Larry M. Wright, Chief Executive Officer of Seller, and D. Hughes Watler, Jr., Chief Financial Officer of Seller.


“Law” means any constitutional provision, statute or other law, rule, regulation, or interpretation of any Governmental Entity and any Order.


“Leased Real Property” has the meaning set forth in Section 3.11(a).


“Loss” means any action, cost, damage, disbursement, expense, liability, loss, deficiency, diminution in value, obligation, penalty or settlement of any kind or nature, whether foreseeable or unforeseeable, including but not limited to, interest or other carrying costs, penalties, legal (on a solicitor and client basis), accounting and other professional fees and expenses incurred in the investigation, collection, prosecution and defense of claims and amounts paid in settlement, that may be imposed on or otherwise incurred or suffered by the specified Person.


“Lowest Cost Response” shall mean the response required or allowed under Environmental Laws that addresses the condition present at the lowest cost (considered as a whole taking into consideration any material negative impact such response may have on the operations of the relevant assets and any potential material additional costs or liabilities that may likely arise a result of such response) as compared to any other response that is consistent with Environmental Laws.

“Material Adverse Effect” means, with respect to any Person, (i) a material adverse effect on the condition (financial or otherwise), business, prospects, assets, liabilities, or results of operations of such Person in an amount individually or in the aggregate equal to or greater than $75,000; or (ii) a material adverse effect on the ability of such Person to consummate the transactions contemplated by this Agreement.

“Material Contract” means any Contract deemed material by Section 3.10.

“Notes Portion of the Purchase Price” has the meaning set forth in Section 2.3(c).

“Notes” has the meaning set forth in Section 2.3(c).

“Order” means any decree, injunction, judgment, order, ruling, assessment or writ of any Governmental Entity.

“Permit” means any license, permit, franchise, certificate of authority, or order, or any waiver of the foregoing, required to be issued by any Governmental Entity.


“Permitted Encumbrances” means (i) Encumbrances for Taxes, assessments and governmental charges not yet due and payable or the validity of which are being contested in good faith by appropriate proceedings; (ii) statutory liens arising in the ordinary course of business relating to obligations as to which there is no default on the part of the Company, excluding any mortgage; and (iii) the Encumbrances listed on Schedule 3.11(d).



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“Person” means an association, a corporation, an individual, a partnership, a limited liability company, a trust or any other entity or organization, including a Governmental Entity.


“Personal Property” has the meaning set forth in Section 3.11(a).


“Purchase Price” has the meaning set forth in Section 2.3.


“Purchaser” has the meaning set forth in the opening paragraph.


“Purchaser Indemnified Party” has the meaning set forth in Section 6.1.

“Purchaser Indemnifying Party” has the meaning set forth in Section 6.2.

“Receivables Notes” has the meaning set forth in Section 2.3(b).


“Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through air, soil, surface water, ground water, wetlands, land or subsurface strata.


“Representative” means with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.


“SEC” means the United States Securities and Exchange Commission.


“Section 338 Allocation Schedule” has the meaning set forth in Section 5.2.


“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.


“Security Agreement” has the meaning set forth in Section 2.5(l).


“Seller” has the meaning set forth in the opening paragraph.


“Seller Indemnified Party” has the meaning set forth in Section 6.2.


“Specified Litigation” shall mean (i) the litigation identified as Cenovus Energy, Inc. v Roland Charest, Outsource Marketing Corp., Decca Consulting Ltd., Jared Charest, Voltage Wireline Inc., Richard Yurko, 900160 Alberta Ltd., Curtis Swain, Rock Losier, Bill McFadden and Daryl Jensen, Court File Number 1001-14045 in the Court of Queen's Bench of Alberta, and (ii) any similar litigation, claims or complaints, whether involving the same or other plaintiffs and whether involving the same or different defendants or any combination of the foregoing, whether filed in the same or different court, if involving claims similar to those alleged in the litigation identified in clause (i) or claims arising out of the facts alleged in the litigation identified in clause (i).


“Stock” means the issued and outstanding capital stock or shares of each of the Companies, as the case may be.


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“Subsidiary” means, with respect to any Person, (a) any corporation 50% or more of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person, directly or indirectly through Subsidiaries; and (b) any partnership, limited liability company, association, joint venture, trust or other entity in which such Person, directly or indirectly through Subsidiaries, is either a general partner, has a 50% or greater equity interest at the time or otherwise owns a controlling interest.


“Tax” (and, with correlative meaning, “Taxes”) means: (i) any federal, state, provincial, local or foreign income, gross receipts, windfall, profits, gains, capital, capital stock, production, recapture, land transfer, severance, property, production, sales, goods and services, harmonized sales, use, license, excise, franchise, employment, payroll, workers compensation, withholding, alternative or add-on minimum, ad valorem, value added, transfer, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, including all employment insurance, health insurance and government pension plan premiums or contributions, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority; and (ii) any liability of the Company for the payment of amounts with respect to payments of a type described in clause (i) as a result of transferee liability, of being a member of an affiliated, consolidated, combined or unitary group or otherwise through operation of Law, or as a result of any obligation of the Company under any Tax Sharing Arrangement or Tax Indemnity Agreement.


“Tax Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended.


“Tax Indemnity Agreement” means any written or unwritten agreement or arrangement pursuant to which the Company may be required to indemnify or reimburse another party for any liability relating to Taxes.


“Tax Return” means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.


“Tax Sharing Arrangement” means any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which includes the Companies.


“Threshold” has the meaning set forth in Section 6.6(a).


“Third Party Intellectual Rights” has the meaning set forth in Section 3.14(b).


“Working Capital” shall mean that amount, as of any measurement date, equal to the sum of cash in the Toronto Dominion bank accounts, account #’s 5235406 and 7335049 of the Companies which are listed on Schedule 3.24, plus Total Accounts Receivable, minus Total Accounts Payable.


ARTICLE II

PURCHASE AND SALE OF THE STOCK

2.1 Transfer of Stock by Seller

Subject to the terms and conditions of this Agreement, Seller agrees to sell and transfer all of the Stock of Decca Ltd. and deliver the certificates evidencing all of the Stock of Decca Ltd. to the Canadian Purchaser at the Closing and the Canadian Purchaser will



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purchase all of the Stock of Decca Ltd. from Seller at the Closing. The certificates will be properly endorsed for transfer to, or accompanied by duly executed stock powers in favor of the Canadian Purchaser and otherwise in a form acceptable for transfer on the books of Decca Ltd. Subject to the terms and conditions of this Agreement, Seller agrees to sell and transfer all of the Stock of Decca Inc. and deliver the certificates evidencing all of the Stock of Decca Inc. to the American Purchaser at the Closing, and the American Purchaser will purchase all of the Stock of Decca Inc. from Seller at the Closing. The certificates will be properly endorsed for transfer to, or accompanied by duly executed stock powers in favor of the American Purchaser and otherwise in a form acceptable for transfer on the books of Decca Inc.

2.2 Purchase Price

(a) Subject to the terms and conditions of this Agreement, Purchasers, jointly and severally, agree to purchase and acquire all of the Stock from the Seller for an aggregate purchase price of U.S. $4,600,000.00 (the “Purchase Price”), subject to potential adjustment in accordance with Section 2.2(b), as follows: the American Purchaser shall purchase the Stock of Decca Inc. for $1,322,500.00 and the Canadian Purchaser shall purchase all of the Stock of Decca Ltd. For $3,277,500.00.

(b) The Purchase Price will be adjusted, upward or downward, by an amount equal to the difference between the Working Capital of the consolidated Companies on the Closing Date (the “Closing Date Working Capital”), and the Working Capital of the consolidated Companies on April 30, 2011 (the “Measurement Date Working Capital”), as calculated from the consolidated balance sheet of the Companies, which balance sheet is attached hereto as Schedule 2.2(b). For avoidance of doubt, the Working Capital of the consolidated Companies on April 30, 2011 was ($13,443), and was comprised of cash of ($155,751), Total Accounts Receivable of $2,510,578, and Total Accounts Payable of $2,368,270.

(c) Within five (5) business days after the Closing Date, Purchasers will deliver to Seller a calculation of consolidated working capital of the Companies as of the Closing Date, prepared on a basis consistent with past practice of the Companies. The amount of the purchase price adjustment, if any, will result in an adjustment to the balance of the Receivables Notes.

2.3 Payment of Purchase Price

Subject to the terms and conditions of this Agreement, in reliance on the representations and warranties of Seller, and in consideration of the obligations of Seller herein, Purchasers will pay the Purchase Price for all of the Stock to Seller as follows:

(a) (i) the American Purchaser shall pay the aggregate sum of U.S. $100,625.00 in cash to the Seller on the Closing Date and (ii) the Canadian Purchaser shall pay the aggregate sum of U.S. $249,375.00 in cash to the Seller on the Closing Date (collectively, the “Cash Portion of the Purchase Price”);

(b) (i) the American Purchaser shall pay U.S. $690,000.00 to Seller by transferring the first U.S. $690,000.00 in collections of accounts receivable of Decca Inc. which occur on or after the Closing Date, and which shall be forwarded to Seller immediately after receipt by the American Purchaser or Decca Inc. via bank wire transfer. This payment obligation shall be documented by a limited recourse secured promissory note made by the American Purchaser in the original principal amount of U.S. $690,000.00 in favor of Seller (the “American Receivables Note”), the American Receivables Note being in a form mutually acceptable to the American Purchaser and Seller, acting reasonably, and secured in accordance with the terms of the Security Agreement. In the event there is an adjustment to the Purchase Price for the stock of Decca Inc.



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in accordance with Section 2.2 hereof, such adjustment, upward or downward, shall be effected by increasing or decreasing the amount of the American Receivables Note by the amount of the adjustment to the Purchase Price, and (ii) the Canadian Purchaser shall pay U.S. $1,710,000.00 to Seller by transferring the first U.S. $1,710,000.00 in collections of accounts receivable of Decca Ltd. which occur on or after the Closing Date, and which shall be forwarded to Seller immediately after receipt by the Canadian Purchaser or Decca Ltd. via bank wire transfer. This payment obligation shall be documented by a limited recourse secured promissory note made by the Canadian Purchaser in the original principal amount of U.S. $1,710,000.00 in favor of Seller (the “Canadian Receivables Note” and, together with the American Receivables Note, the “Receivables Notes”), the Canadian Receivables Note being in a form mutually acceptable to the Canadian Purchaser and Seller, acting reasonably, and secured in accordance with the terms of the Security Agreement. In the event there is an adjustment to the Purchase Price for the stock of Decca Ltd. in accordance with Section 2.2 hereof, such adjustment, upward or downward, shall be effected by increasing or decreasing the amount of the Canadian Receivables Note by the amount of the adjustment to the Purchase Price.

(c) (i) the American Purchaser shall pay U.S. $531,875.00 to Seller by issuing on the Closing Date a secured promissory note made by the American Purchaser in the original principal amount of U.S. $531,875.00 (the “American Note”) in favor of Seller (the “American Note Portion of the Purchase Price”), the American Note being in a form mutually acceptable to American Purchaser and Seller, acting reasonably, and secured in accordance with the terms of the Security Agreement, and (ii) the Canadian Purchaser shall pay U.S. $1,318,125.00 to Seller by issuing on the Closing Date a secured promissory note made by the Canadian Purchaser in the original principal amount of U.S. $1,318,125.00 (the “Canadian Note” and, together with the American Note, the “Notes”) in favor of Seller (the “Canadian Note Portion of the Purchase Price”), the Canadian Note being in a form mutually acceptable to Canadian Purchaser and Seller, acting reasonably, and secured in accordance with the terms of the Security Agreement.

2.4 The Closing

. The closing of the transactions contemplated herein (the “Closing”) shall take place at 10:00 a.m. on the date of this Agreement (the “Closing Date”) at the offices of Haynes and Boone, LLP, legal counsel to the Seller, located at 1221 McKinney Street, Suite 2100, Houston, Texas 77010, unless another date, time or place is agreed to by the parties hereto. The Closing may, with the consent of all parties, take place by delivering an exchange of documents by facsimile transmission or electronic mail with originals to follow by overnight mail service or courier.

2.5 Closing Deliveries by Seller

At the Closing, against delivery of, among other things, the Purchase Price, Seller shall deliver or cause to be delivered to Purchaser:

(a) stock certificates evidencing all of the Stock duly endorsed in blank, or accompanied by stock powers duly executed in blank, in a form satisfactory to Purchaser;

(b) each in form and substance satisfactory to Purchaser, all Approvals of all Governmental Entities and officials which are necessary for the consummation of the transactions contemplated by this Agreement and all third party consents and estoppel certificates identified on Schedule 3.5;

(c) all minute books, seals and other records of the Companies;

(d) certificate of status issued by the Alberta Corporate Registry, dated not more than five (5) days prior to the Closing Date, attesting to the incorporation and good standing of Decca Ltd. as a corporation in its jurisdiction of incorporation; and certificate of status issued by the



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Nevada Corporate Registry, dated not more than one (1) day prior to the Closing Date, attesting to the incorporation and good standing of Decca Inc. as a corporation in its jurisdiction of incorporation;

(e) copies, certified by the Secretary or Assistant Secretary of the Companies as of the Closing Date, of the Articles of Incorporation of Decca Inc., and all amendments thereto, and the Articles of Amalgamation of Decca Ltd., and all amendments thereto, each of which are provided on Schedule 2.5(e);

(f) copies, certified the by Secretary or Assistant Secretary of the Company as of the Closing Date, of the Bylaws of Decca Inc., and all amendments thereto, which are provided on Schedule 2.5(f);

(g) any Permits necessary to the operations of the Business amended to adequately reflect any change of control or other amendment necessary to reflect the sale of all of the Stock;

(h) a duly executed resignation of each director and officer of each Company which will not continue as an officer or director subsequent to the Closing Date;

(i) a copy, certified as of the Closing Date by the Secretary or Assistant Secretary of Seller, of the resolutions of the Board of Directors of Seller authorizing Seller’s execution, delivery and performance of this Agreement, the consummation the transactions contemplated herein, and the taking of all such other corporate action as shall have been required as a condition to, or in connection with the consummation of the contemplated transactions;

(j) the consents of any Person required for the consummation by the Seller, and the Companies of the transactions contemplated hereby;

(k) Consulting, Confidentiality and Non-Solicitation Agreements (i) by and among Dave Hunter, Dave Hunter Resources Inc. and each of the Companies and (ii) by and among Barry Ahearn, 383210 Alberta Ltd. and each of the Companies, each in a form mutually acceptable to the to the parties thereto acting reasonably (the “Consulting Agreements”);

(l) a Pledge and Security Agreement by and among Seller and Purchasers granting a security interest in the stock of the Companies to Seller until the payment in full of the Notes and the Receivables Notes, in a form mutually acceptable to Purchasers and Seller, acting reasonably (the “Security Agreement”), duly executed by Seller;

(m) evidence of the discharge of any Encumbrances with respect to the Assets or the Stock;

(n) evidence of the disposition of the shares of Molopo Australia Limited by Decca Ltd.; and

(o) Non Competition Agreement by and between Larry M. Wright and the Canadian Purchaser in a form mutually acceptable to the parties thereto acting reasonably.






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2.6 Closing Deliveries by Purchasers

At the Closing, against delivery of, among other things, stock certificate(s) representing all of the Stock, Purchasers shall deliver to Seller:

(a) the Cash Portion of the Purchase Price by wire transfer in immediately available funds to the bank account designated by Seller;

(b) the American Note, duly executed by the American Purchaser, evidencing the American Note Portion of the Purchase Price;

(c) the Canadian Note, duly executed by the Canadian Purchaser, evidencing the Canadian Note Portion of the Purchase Price;

(d) the American Receivables Note, duly executed by the American Purchaser;


(e) the Canadian Receivables Note, duly executed by the Canadian Purchaser;


(f) a copy, certified as of the Closing Date by the Secretary or Assistant Secretary of each Purchaser, of resolutions of the Board of Directors of such Purchaser authorizing such Purchaser’s execution, delivery and performance of this Agreement, the consummation the transactions contemplated herein, and the taking of all such other corporate action as shall have been required as a condition to, or in connection with the consummation of the contemplated transactions;


(g) the Security Agreement, duly executed by Purchasers; and


(h) the Consulting Agreements.


2.7 Amalgamation of the Canadian Purchaser with and into Decca Ltd

Immediately following the Closing, the Canadian Purchaser will amalgamate with and into Decca Ltd., and as a result of such amalgamation the obligations of the Canadian Purchaser under this Agreement for (i) the payment of all amounts due under the Canadian Note and the Canadian Receivables Note, and (ii) its satisfaction of all of its other obligations under this Agreement, in each case will transfer to Decca Ltd. by operation of law. As of the effective time of such amalgamation, Decca Ltd. will be a Subsidiary of the American Purchaser.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Purchasers as follows:

3.1 Organization and Qualification of each Company.

(a) Decca Ltd. is a corporation duly incorporated, validly existing and in good standing under the laws of the Province of Alberta. Decca Ltd. has all necessary corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on the Business as it has been and is currently conducting. Decca Ltd. is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of the Business makes such licensing or qualification necessary. Schedule 3.1(a) correctly lists with respect to Decca Ltd. its jurisdiction of incorporation, each jurisdiction in which it is qualified to do business as an extra-provincial or a foreign corporation, and its directors and executive officers. Seller has delivered to the



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(b) Canadian Purchaser complete and correct copies of the articles and bylaws of Decca Ltd. as now in effect. No proceedings have been taken or authorized by Decca Ltd., the Seller or, to the best of the Seller’s knowledge, by any other Person, with respect to the bankruptcy, insolvency, liquidation, dissolution or winding up of the Decca Ltd. or with respect to any amalgamation, merger, consolidation, arrangement or reorganization relating to Decca Ltd.

(c) Decca Inc. is a corporation duly incorporated, validly existing and in good standing under the laws of Nevada. Decca Inc. has all necessary corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on the Business as it has been and is currently conducting. Decca Inc. is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of the Business makes such licensing or qualification necessary. Schedule 3.1(b) correctly lists with respect to the Decca Inc. its jurisdiction of incorporation, each jurisdiction in which it is qualified to do business as an extra-provincial or a foreign corporation, and its directors and executive officers. Seller has delivered to American Purchaser complete and correct copies of the articles and bylaws of Decca Inc. as now in effect. No proceedings have been taken or authorized by Decca Inc., the Seller or, to the best of the Seller’s knowledge, by any other Person, with respect to the bankruptcy, insolvency, liquidation, dissolution or winding up of the Decca Ltd. or with respect to any amalgamation, merger, consolidation, arrangement or reorganization relating to Decca Inc.

(d) Each Company owns all assets and rights necessary to conduct the Business of the Company as presently conducted. Each Company has no Subsidiaries. Schedule 3.1(c) correctly lists all capital stock, partnership interests, membership interests or other ownership interests that each Company owns in any Person and all joint ventures that each Company is a party to.

3.2 Capitalization

(a) Decca Ltd. is authorized to issue an unlimited number of Common Shares. As of the date hereof, two hundred (200) Common Shares of Decca Ltd. are issued and outstanding, and the registered owner of such Common Shares is Stratum Holdings, Inc.

(b) Decca Inc. is authorized to issue 75,000 shares of voting Common Stock, and no other class of stock shall be authorized. As of the date hereof, one (1) share of Common Stock of Decca Inc. is issued and outstanding and the registered owner of such share of Common Stock is Stratum Holdings, Inc.

(c) There are no outstanding options, warrants, agreements, conversion rights, preemptive rights or other rights to subscribe for or purchase from Seller or either Company, or any plans, contracts or commitments providing for the issuance of, or the granting of rights to acquire, (i) any capital stock or other ownership interests of either Company, including, but not limited to the shares of Stock; or (ii) any securities convertible into or exchangeable for any such capital stock or other ownership interests. Except for each Company’s obligations hereunder, there are no outstanding contractual obligations or plans of Seller or the Companies to transfer, issue, repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests of either Company, including, but not limited to the all of the shares of Stock. Neither Company owns nor is party to any contract, agreement or understanding to acquire any equity securities or other securities of any Person or any direct or indirect equity or ownership interest in any other business.



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3.3 Stock Ownership by Seller

Seller has good and marketable title to, and sole record and beneficial ownership of the Stock and the shares of Stock are free and clear of any and all covenants, conditions, marital property rights or other Encumbrances. Upon consummation of the transactions contemplated by this Agreement, Purchaser will own all the issued and outstanding capital stock of each Company free and clear of all Encumbrances, and such capital stock will be fully paid and nonassessable. There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the shares of Stock, except for customary legends with respect to transfer restrictions under the laws of the Province of Alberta.

3.4 Authorization; Enforceability

.The execution, delivery and performance of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby have been duly authorized by all requisite action on the part of Seller. This Agreement has been duly executed and delivered by Seller, and assuming due authorization, execution and delivery by Purchaser, this Agreement constitutes a valid and binding obligation of Seller enforceable against Seller in accordance with its terms.


3.5 No Conflict; Governmental Consents.

(a) The execution, delivery and performance of this Agreement by Seller does not and will not (i) violate, conflict with or result in the breach of any provision of the articles or bylaws of each Company or Seller; (ii) to the Knowledge of Seller, conflict with or violate in any material respect any Law or Order applicable to either the Seller or either Company; or (iii) except as set forth in Schedule 3.5, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the shares of Stock or on any of the assets or properties of Seller or either of the Companies pursuant to, any note, bond, mortgage, indenture, license, permit, lease, sublease or other Contract to which Seller or either of the Companies is a party or by which any of the Stock or any of such assets or properties is bound or affected.

(b) The execution, delivery and performance of this Agreement by Seller does not and will not require any Approval or Order of any Governmental Entity.

3.6 Financial Statements and Undisclosed Liabilities.

(a) Seller has delivered to Purchasers true, correct and complete copies of the Company’s Financial Statements (which have been prepared on a consolidated basis). The Companies’ Financial Statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis (except that such Company Financial Statements may not include footnotes which may be required by generally accepted accounting principles and may be subject to normal year-end adjustments). Such statements of operations and cash flow present fairly in all material respects the results of operations and cash flows of the Companies for the respective periods covered, and the balance sheets present fairly in all material respects the financial condition of the Company as of their respective dates. Schedule 3.6(a) contains true, correct and complete copies of the Company Financial Statements and, since December 31, 2010, there has been no change in any of the significant accounting policies, practices or procedures of either Company.

(b) Each Company has no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise), except for liabilities or obligations reflected or reserved against the December 31, 2010 Balance Sheet [include stub financials through April 30, 3011, current liabilities incurred in the ordinary course of business and consistent with past practice since December 31, 2010 and liabilities that would not be reasonably expected to result in a Material Adverse Effect on the Companies.




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(d) Since December 31, 2010, there has not been any change which would be a Material Adverse Effect in the business, operations, properties, prospects, assets, or condition of either Company, and no event has occurred or circumstance exists that may result in such a Material Adverse Effect.

3.7 Labor Matters

.Neither the Companies nor any Affiliate of the Companies has any common-law employees, nor have they had any common-law employees since the date of its incorporation. Schedule 3.7 contains a list of all of the names of the consultants or other contingent workers engaged by the Companies and a description of the services they provide for the Companies. The Companies have not entered into any collective bargaining agreements. With respect to each Company, there are no presently pending, or to the Knowledge of Seller, threatened (x) arbitration proceedings, labor strikes, slowdowns or stoppages, grievances or other labor disputes; (y) actions related to an alleged material violation pertaining to labor relations or employment matters, including but not limited to claims for unpaid wages or penalties, discrimination, harassment, or retaliation, or wrongful discharge in violation of public policy; or (z) any scheduled vote or application for certification of a collective bargaining agent or, to the Knowledge of any of Seller, any organizing campaign. The Companies are not delinquent in any material respect in payments to any of its consultants for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it or amounts required to be reimbursed to such consultants. There are no pending claims against the Companies under any workers’ compensation plan or policy or for long term disability. To the Knowledge of Seller, no consultant of the Companies is in any material respect in violation of any term of any consulting contract, non-disclosure agreement, non-competition agreement, or any restrictive covenant to a former consultant relating to the right of any such consultant to be hired by the Companies because of the nature of the business conducted by it or to the use of trade secrets or proprietary information of others.

3.8 Absence of Certain Changes or Events

.Except as set forth in Schedule 3.8 (with subsection references corresponding to those set forth below), since December 31, 2010, the Companies have operated the Business only in the ordinary course and consistent with past practice. As amplification and not limitation of the foregoing, since December 31, 2010, except as described on Schedule 3.8, there has not been:

(a) any change in either Company’s authorized or issued capital stock;

(b) any amendment to either Company’s articles or bylaws;

(c) the occurrence of any event that might reasonably be deemed to have a Material Adverse Effect on either Company;

(d) to the Knowledge of Seller, any damage, destruction or loss, whether covered by insurance or not, adversely affecting each Company’s properties or businesses which might reasonably be expected to result in a Material Adverse Effect on either Company;



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(e) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to, or the incurrence of any obligation to repurchase, any shares of any class of capital stock of either Company;

(f) any entry into a consulting, employment or severance agreement or any understanding for payments to any consultant, employee or former consultant or employee of either Company which might reasonably be expected to result in a Material Adverse Effect on either Company;

(g) any material increase in compensation or benefits expense to either Company, any increase in the compensation or other benefits payable or to become payable by either Company to its directors, officers, consultants or employees or any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any of its directors, officers, consultants or employees, other than the items disclosed on Schedule 3.8;

(h) any entry into any commitment or transaction material to either Company (including but not limited to, any borrowing, sale, lease or other disposition of an asset or group of assets with an original cost in excess of $75,000 in the aggregate or capital expenditure or group of capital expenditures in excess of $75,000 in the aggregate);

(i) any entry into any transaction with any director, officer, shareholder or Affiliate of either Company that is either not in the ordinary course of business, or on terms less favorable to either Company than those that would have been obtained in a comparable transaction by either Company with an unrelated Person;

(j) any cancellation or waiver of any claims or rights which might reasonably be expected to result in a Material Adverse Effect on either Company;

(k) any material change in the Tax or accounting methods used by either Company;

(l) to the Knowledge of the Seller, any cancellation, termination or amendment to any Material Contract; or

(m) any agreement, whether oral or written, to do any of the foregoing.

3.9 Taxes

.Except as set forth in Schedule 3.9 (with subsection references corresponding to those set forth below):

(a) Each Company has filed or caused to be filed with the appropriate Governmental Entity, within the times and in the manner prescribed by applicable Law, all federal, provincial, state, local and foreign Tax Returns which are required to be filed by or with respect to it. The information contained in such Tax Returns is correct and complete in all respects and such Tax Returns reflect accurately all liability for Taxes of the Companies for the periods covered thereby;

(b) The Companies have paid all Taxes which are due and payable within the time required by applicable Law, and have paid all assessments and reassessments it has received in respect of Taxes. The Companies have made full and adequate provision in the Company Financial Statements as at and for the year ended December 31, 2010 for all Taxes which are not



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yet due and payable but which relate to periods ending on or before December 31, 2010. The Company has not received any refund of Taxes to which it is not entitled;

(c) To the Knowledge of Seller, no claim has ever been made by an authority in a jurisdiction where either Company does not file a Tax Return that either Company may be subject to taxation in that jurisdiction and no basis exists for any such claim. There is no proposed assessment and no audit, claim, action, proceedings, examination, suit, investigation or similar proceeding pending, proposed or threatened with respect to Taxes of either Company and, to the Knowledge of Seller, no basis exists therefore;

(d) There are no outstanding waivers extending the statutory period of limitation relating to the payment of Taxes due from either Company which are expected to be outstanding as of the Closing Date;

(e) All Tax Sharing Arrangements and Tax Indemnity Agreements relating to either Company (other than this Agreement) will terminate prior to the Closing Date and the Companies will not have any liability thereunder on or after the Closing Date;

(f) There are no Encumbrances for Taxes upon the assets of the Companies except Encumbrances relating to current Taxes not yet due and payable;

(g) No power of attorney granted by or with respect to the Companies relating to Taxes is currently in force;

(h) All amounts which each Company is required by Law to withhold or to collect on account of Taxes have been duly withheld and collected, and have been remitted to the appropriate Governmental Entity within the time prescribed under applicable law. To the Knowledge of Seller, each Company has complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts owing to any employee, independent contractor, creditor, stockholder or other third party;

(i) The Companies have not prepared or filed any Tax Return inconsistent with past practice or, on any such Tax Return, taken any position, made any election, or adopted any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods (including, without limitation, positions, elections or methods which would have the effect of deferring income to periods after the Closing Date or accelerating deductions to periods on or prior to the Closing Date);

(j) No Tax rulings have been requested by the Companies;

(k) The Companies do not have any income reportable for a period ending after the Closing Date but attributable to a transaction (e.g., installment sale) or a change in accounting method occurring in or made for a period ending on or prior to the Closing Date which results in a deferred reporting on income from such transaction or from such change in accounting method. Seller has delivered to Purchasers (i) a schedule of the filing dates of all Tax Returns required to be filed by each Company, and (ii) a list of the countries, states, provinces, territories and jurisdictions (whether foreign or domestic) to which any Tax is properly payable by each Company. The Companies have retained all supporting and backup papers, receipts, spreadsheets and other information necessary for (i) the preparation of all Tax Returns that have not yet been filed, and (ii) the defense of all Tax audits involving taxable periods either ending on or during



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the six (6) years prior to the Closing Date or from which there are unutilized net operating losses, capital losses or investment tax credit carryovers;

(l) The Companies are not subject to any joint venture, partnership or other arrangement or contract that is treated as a partnership for income tax purposes in any jurisdiction.

3.10 Material Contracts

. The following shall be deemed to be Material Contracts and identified on Schedule 3.10, and each such Contract was entered into in the ordinary course of business by each Company:

(a) any Contract for the furnishing of services to or by each Company or otherwise related to the Business under the terms of which each Company (i) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate during the calendar years ending December 31, 2010 and December 31, 2011, (ii) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate over the remaining term of such Contract or (iii) cannot be canceled by either Company without penalty or further payment and without more than thirty (30) days’ notice;

(b) any Contract that represents a contract upon which the Business is substantially dependent or which is otherwise material to the Business;

(c) any Contract that limits or restricts the ability of each Company to compete or otherwise to conduct its Business in any manner or place;

(d) any Contract for the engagement, employment, severance or retention of any director, officer, agent, shareholder, consultant or advisor or any other Contract with any director, officer, agent, shareholder, consultant or advisor that does not provide for termination at will by each Company without further cost or liability to either Company as of or at any time after the date of this Agreement;

(e) any Contract in the nature of a profit sharing, bonus, stock option, stock purchase, pension, deferred compensation or retirement, severance, hospitalization, insurance or other plan or contract providing benefits to any Person or former director, officer, employee, agent, shareholder, consultant or advisor or such Persons’ dependents, beneficiaries or heirs;

(f) any Contract in an amount exceeding $25,000 or with a value exceeding $25,000 in the nature of an indenture, mortgage, promissory note, loan or credit agreement or other Contract relating to the borrowing of money or a line of credit by or from each Company or to the direct or indirect guaranty or assumption by each Company of obligations of others;

(g) any Contract for capital expenditures in an amount exceeding $25,000 in any individual case or in the aggregate;

(h) any Contract that is a joint venture, partnership, or other agreement (however named) involving a sharing of profits, losses, costs, or liabilities involving an amount exceeding $25,000 individually or in the aggregate;

(i) any Contracts that are leases, rental or occupancy agreements, licenses, installments and conditional sale agreements, and other agreements affecting the ownership of,



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leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $25,000 and with terms of less than one (1) year), including but not limited to the lease agreements for the Lease Real Property;

(j) any Contracts that are licensing agreements or other agreements with respect to patents, trademarks, copyrights, or other Intellectual Property, including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property;

(k) any Contracts in an amount exceeding or with a value exceeding $75,000 to which either Company is a party with any Governmental Entity;

(l) any Contracts between or among either Company and Seller or a Shareholder of Seller or any other person not dealing at arms' length with the Companies;

(m) any Contract that was not made in the ordinary course of business, including agreements with:

(i) consequential or liquidated damages or other indemnity provisions that are not based upon either Company’s negligence in the performance of its services;


(ii) fitness for purpose warranties or process, efficacy or similar guarantees;


(iii) lump sum turnkey, or similar contract risks or arrangements; or


(iv) provisions relating to the testing, discovery, removal, remediation or disposal of any Hazardous Substance.


True and complete copies of the Contracts appearing on Schedule 3.10, including all amendments and supplements, have been delivered or made available to Purchasers. Each Material Contract is valid and legally binding and either Company has duly performed all its obligations thereunder to the extent that such obligations to perform have accrued. No breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a breach or default thereunder by either Company or, to the Knowledge of Seller, any other party or obligor with respect thereto, has occurred or as a result of this Agreement or performance thereof will occur. Consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any rights of, or accelerate or augment any obligation of, either Company under any of those agreements to the extent such termination, modification, acceleration or augmentation could be reasonably expected to have a Material Adverse Effect on either Company.

3.11 Personal Property; Title to Property; Leases.

(a) Neither Company owns real property. Schedule 3.11 accurately identifies all real property leased by the Company (the “Leased Real Property”) and all personal property owned or leased by each Company (collectively, the “Personal Property”). Seller has delivered or made available to Purchasers copies of the lease agreements in the possession of Seller or each Company and relating to such Leased Real Property or the leased Personal Property by which each Company leased such Leased Real Property or leased Personal Property.



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(b) The Personal Property is free and clear of all Encumbrances.

(c) Each Company owns, leases or has the legal right to use all the properties and assets, including, without limitation, the Intellectual Property, the Leased Real Property and the Personal Property, used or intended to be used in the conduct of the Business or otherwise owned, leased or used by the Companies (all such properties and assets being the “Assets”).

(d) The Assets constitute all the properties, assets and rights forming a part of, used, held or intended to be used in, and all such properties, assets and rights as are necessary in the conduct of, the Business as it is currently conducted as of the date hereof. The Assets are free and clear of all Encumbrances or other third party interests of any nature whatsoever, except (i) those set forth on Schedule 3.11(d) hereto and (ii) Permitted Encumbrances.

(e) Immediately following the consummation of the transactions contemplated by this Agreement, each Company will continue to own, or lease, under valid and subsisting Contracts, or otherwise retain its respective interest in the Assets without incurring any penalty or other adverse consequence, including, without limitation, any increase in rentals, royalties, or licenses or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement, except for Permitted Encumbrances. Immediately following the Closing, each Company shall own and possess all documents, books, records, agreements and financial data of any sort used by either Company in the conduct of the Business.

3.12 Condition and Sufficiency of Tangible Assets

.To the Knowledge of Seller, the buildings, plants, structures, and equipment of each Company are structurally sound, are in good operating condition and repair, except for ordinary wear and tear, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. To the Knowledge of Seller, the building, plants, structures, and equipment of each Company are sufficient for the continued conduct of the Business after the Closing in substantially the same manner as conducted prior to the Closing.

3.13 Licenses, Permits and Authorizations

.Each Company and, to the Knowledge of Seller, the Consultants hold all licenses, permits, franchises and other authorizations required by any Governmental Entity that are necessary for the Business as presently conducted or, in the case of such Consultants, to carry out their services for the Companies. Such licenses, permits, franchises and other authorizations of each Company and, to the Knowledge of Seller, each Company’s Consultants are valid and in full force and effect and will remain so upon consummation of the transactions contemplated by this Agreement. Seller knows of no threatened suspension, cancellation or invalidation of, or challenge to, any such license, permit, franchise or other authorization.

3.14 Intellectual Property.

(a) To the Knowledge of Seller, each Company owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, domain names, copyrights, and any applications therefore, trade secrets, and computer software programs or applications (collectively, the “Intellectual Property”) that is used in the Business as currently conducted. Schedule 3.14 sets forth each item of Intellectual Property and lists the owners of all right, title and interest in and to any item of Intellectual Property not solely owned



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by either Company. All requisite renewals and affidavits of use have been filed with respect to each of the registrations set forth in Schedule 3.14, and each is presently in full force and effect and each of the trade names and trademarks is valid, and is in good standing and active use and none has been abandoned.

(b) To the Knowledge of Seller, there is no unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of either Company, or any third party patents, trademarks or copyrights, including software (collectively, the “Third Party Intellectual Property Rights”) to the extent licensed by or through either Company, by any third party.

(c) To the Knowledge of Seller, neither Company is in breach of any license or other agreement relating to the Intellectual Property of the Company or any Third Party Intellectual Property Rights.

(d) Within the last three (3) years, neither of the Companies (i) has been a party to, or to the Knowledge of Seller, been notified or advised of, any suit, action or proceeding that involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party; or (ii) has not brought any action, suit or proceeding for infringement of Intellectual Property or breach of any license agreement involving Intellectual Property against any third party. To the Knowledge of Seller, the design, development, distribution, marketing, licensing or sale of products or services of each Company does not infringe on any patent, trademark, service mark or copyright of any third party.

(e) Except where failure to do so would not have a Material Adverse Effect on either Company, each Company has secured valid written assignments or work for hire agreements from all consultants and employees who contributed to the creation and development of Intellectual Property of the rights to such contributions that either Company does not already own by operation of law.

(f) To the Knowledge of Seller, each Company has taken reasonable steps to protect its rights in its confidential information and trade secrets that reasonably require protection.

3.15 Litigation; Compliance with Laws.

(a) Except as set forth on Schedule 3.15, there is no Action pending or, to the Knowledge of Seller, threatened against or affecting Seller, either Company, or any of their respective assets, and there is no basis Known to Seller for any such Action.

(b) Except as disclosed on Schedule 3.15, neither Seller, nor either of the Companies is (i) to the Knowledge of Seller, in violation of any applicable Law or (ii) subject to or in default with respect to any Order to which any of them, or any of their respective properties or assets (owned or used), is subject. Each of the Companies has been in full compliance with each Law that is or was applicable to it or to the conduct or operation of the Business or the ownership or use of any of its Assets.

(c) To the Knowledge of Seller, no event has occurred or circumstance exists that (with or without notice or lapse of time) may constitute or result in a violation by either Company of, or a failure on the part of any of them, to comply with, any Law.



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(d) Except as provided in Schedule 3.15, the Seller, nor either Company has received any notice or other communication (whether oral or written) from any Governmental Entity or any other Person regarding (i) any actual, alleged, possible, or potential violation of, or failure to comply with, any Law or (ii) any actual, alleged, possible, or potential obligation on the part of either Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.


3.16 Insurance.

(a) Schedule 3.16 sets forth the following information with respect to each insurance policy under which each Company has been an insured, a named insured or otherwise the principal beneficiary of coverage at any time within the past year:

(i) the name, address and telephone number of the agent or broker;

(ii) the name of the insurer and the names of the principal insured and each named insured; and

(iii) the policy number, general description of coverage and the period of coverage.

Each Company has delivered or made available to the Purchasers copies of all such insurance policies.

(b) Except as set forth in Schedule 3.16, there is no actual, pending, or, to the Knowledge of the Seller, threatened claims against either Company that would come within the scope of such coverage listed on Schedule 3.16, nor has any current carrier provided notice to either Company that it intends to terminate any policy or to deny coverage with respect to any claim. There are no actual, pending or, to the Knowledge of the Seller, threatened claims against either Company that would not come within the scope of the insurance coverage of either Company listed in Schedule 3.16.

(c) Each Company has maintained since inception and currently maintains (i) insurance on all of the Assets used in connection with the Business of a type customarily insured, covering property damage and loss of income by fire or other casualty, and (ii) adequate insurance protection (subject to the deductible amounts and dollar limits of coverage) against all errors and omissions and other liabilities, claims, and risks, which it is customary and reasonable to insure with respect to the Business. Each Company has not, within the past three (3) years, allowed any insurance policy to lapse for failure to renew or for any other reason. Neither Company has failed to give any notice or present any claim under any insurance policy in due and timely fashion under the applicable insurance policy.

(d) Seller has no Knowledge of (i) any proposed material increases in the premiums for insurance or for contributions for worker’s compensation or unemployment insurance applicable to either Company, (ii) any conditions or circumstances applicable to the Business as currently conducted that could reasonably be expected to result in such increase, or (iii) any material decrease in coverage or other policy benefits.



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3.17 Employee Benefit Plans

.Neither of the Companies nor any Affiliate of either Company currently maintains, administers, or contributes to, nor has either Company or any Affiliate of either Company maintained, administered, or contributed to, any employee benefit plans, any specified fringe benefit plans, or any other bonus, incentive compensation, deferred compensation, profit sharing, stock option, stock appreciation right, stock bonus, stock purchase, employee stock ownership, savings, severance, supplemental unemployment, layoff, salary continuation, retirement, pension, health, life insurance, dental, disability, accident, group insurance, vacation, holiday, sick leave, fringe benefit or welfare plan, or any other employee compensation or benefit plan, agreement, policy, practice, commitment, contract, or understanding (whether qualified or nonqualified, currently effective or terminated, written or unwritten), or any trust, escrow or other agreement related thereto (collectively, “Benefit Plans”), nor does either Company have any liability, contingent or otherwise, with respect to any Benefit Plan.

3.18 Transactions with Affiliates

To the Knowledge of Seller, except (i) for employment and benefit arrangements, (ii) arrangements on arm’s length terms in the ordinary course of business and (iii) agreements set forth on Schedule 3.18, no director, officer or Affiliate of either Company or, to the Knowledge of Seller, any Person with whom any such director, officer or Affiliate has any direct or indirect relation by blood, marriage or adoption, or any entity in which any such director, officer or Affiliate owns any beneficial interest (other than a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market and less than one percent (1%) of the stock of which is beneficially owned by all such Persons), has any interest in (a) any Contract with either Company or relating to the Business, including any Contract for or relating to indebtedness of either Company; or (b) any Assets, including Intellectual Property, the Leased Real Property and the Personal Property, used or currently intended to be used in, the Business.

3.19 No Brokers or Finders

.Except for Seller’s contract with Overture Advisors, LLC, no agent, broker, finder, or investment or commercial banker, or other Person or firm engaged by or acting on behalf of any of Seller, either Company, or any of their respective Affiliates, in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder’s or similar fee or other commission as a result of this Agreement or such transactions.

3.20 Accuracy of Information

None of the information supplied in writing by or on behalf of Seller or either Company, to Purchasers or its Representatives in connection with the transactions contemplated in this Agreement, this Agreement or the negotiations leading up to this Agreement contain, or at the respective times such information was delivered, contained any untrue statement of a material fact, or omit or omitted to state any material fact required to be stated therein or necessary in order to make the statements in process therein not misleading.



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3.21 Receivables

All receivables of each Company, including “work in process” inventory and accrued and unbilled revenues, represent actual revenues invoiced or expected to be invoiced in the ordinary course of business, and are, or when invoiced, will be, fully collectible net of any reserves. Seller has delivered to Purchasers a complete and accurate aging list of all receivables of each Company. None of the receivables of either Company are subject to assignments, pledges, liens or other interests of third parties nor are they subject to any counterclaim or set-off, other than a security interest held by Century Services, Inc. as security for the performance of each Company’s obligations under its credit facilities.

3.22 Environmental.

(a) Except as set forth in Schedule 3.22, to Seller’s Knowledge, the Assets and each Company are free of any Environmental Defects, except as would not reasonably be expected to have a Material Adverse Effect on either Company or the Assets.

(b) With respect to the Assets, neither Company has entered into, or is subject to, any agreements, consents, orders, decrees, judgments or other directives of Governmental Entities in existence at this time based on any Environmental Laws.

(c) Except as set forth in Schedule 3.22, neither Company has received notice, written or oral, from any Person of, and no investigation or written claim is pending regarding, any Release, disposal, event, condition, current or prior operations of any land, facility, asset or property currently or formerly owned or lease by either Company and alleging either (i) a violation of Environmental Law, including common law, (ii) obligations, including remediation or other liabilities under Environmental Law.

(d) Except as set out in Schedule 3.22 the operation of the Business, the property and assets owned or used by the Companies and the use, maintenance and operation thereof have been and are in compliance with all Environmental Laws, (ii) the Companies have complied with all reporting and monitoring requirements under all Environmental Laws, and (iii) the Companies have at all times, used, generated, treated, stored, transported, disposed of or otherwise handled its Hazardous Substances in compliance with all Environmental Laws and all licenses, permits or other authorizations granted to the Companies under Environmental Laws.

(e) Except as set forth in Schedule 3.22, there has been no Release on or from the Assets or on or from any property currently or formerly owned, leased, or operated by the Companies of any Hazardous Materials in any substantial amount or concentration.

(f) Except as set forth in Schedule 3.22, The Companies hold those licenses, permits, or other authorizations necessary under Environmental Laws to carry on operations connected with the Assets to the extent of and as currently conducted.

3.23 Restrictions on Business Activities

There is no agreement, judgment, injunction, order or decree binding upon either Company that has, or could reasonably be expected to have, the effect of prohibiting or materially impairing the conduct of the Business as presently conducted.

3.24 Bank Accounts

Schedule 3.24 sets forth an accurate list of each bank, trust company, savings institution or other financial institution with which either Company has an account or safe deposit box and the names and identification of all Persons authorized to draw thereon or to have access thereto, and sets forth the names of each Person holding powers of attorney or agency authority from either Company and a summary of the terms thereof.



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3.25 Books and Records

The books of account, minute books, stock record books, and other records of the Companies, all of which have been made available to the Purchasers, are complete and correct and have been maintained in accordance with applicable Law and sound business practice. The minute books of the Companies contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the Boards of Directors, and the committees of the Boards of Directors of the Companies and no meetings of any stockholders, Board of Directors or committee has been held for which minutes have not been prepared and are not contained in such minute books. At the closing, all of those books and records will be in the possession of the Companies.

3.26 Certain Payments

Since March 2, 2007, none of the Companies or any director, officer, agent or employee of either of the Companies, or any other Person associated with or acting for or on behalf of either of the Companies, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kick-back, or other payment to any Person, private or public, regardless of form, whether in money, property, or services, (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of either of the Companies or any affiliate of either of the Companies, or (iv) in violation of any legal requirement, or (b) established or maintained any fund or asset that has not been recorded in the books and records for the Companies. None of the Business of Decca Ltd. constitutes a “cultural business” as defined in section 14.1(6) of the Investment Canada Act and none of the Business of Decca Ltd. constitutes a specific type of business activity set out in Schedule IV to the Investment Canada Regulations.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

The Purchasers, jointly and severally, represent and warrant to Seller as follows:

4.1 Organization and Authority

The American Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware and the execution, delivery and performance of this Agreement by the American Purchaser and the consummation by the American Purchaser of the transactions contemplated hereby have been duly authorized by all requisite action on the part of the American Purchaser. The Canadian Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Alberta and the execution, delivery and performance of this Agreement by the Canadian Purchaser and the consummation by the Canadian Purchaser of the transactions contemplated hereby have been duly authorized by all requisite action on the part of the Canadian Purchaser.

4.2 No Conflict; Governmental Consents.

(a) The execution, delivery and performance of this Agreement by the Purchasers does not and will not (i) violate, conflict with or result in the breach of any provision of the articles or bylaws of either Purchaser, (ii) conflict with or violate in any material respect any Law or Order applicable to either Purchaser, or (iii) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of either Purchaser pursuant to, any note, bond, mortgage, indenture, license, permit, lease, sublease or other material contract, agreement, or instrument or arrangement to which either Purchaser is a party or by which any of their assets or properties is bound or affected, except for conflicts or violations which would not have a material adverse effect on the ability of either Purchaser to consummate the transactions contemplated by this Agreement.



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(b) The execution, delivery and performance of this Agreement by the Purchasers does not and will not require any Approval or Order of any Governmental Entity.

4.3 No Brokers or Finders

No agent, broker, finder, or investment or commercial banker, or other Person or firm engaged by or acting on behalf of either Purchaser or their Affiliates, in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder’s or similar fee or other commission as a result of this Agreement or such transactions.

4.4 Authorization; Enforceability

The execution, delivery and performance of this Agreement by the Purchasers and the consummation by the Purchasers of the transactions contemplated hereby have been duly authorized by all requisite action on the part of the Purchasers. This Agreement has been duly executed and delivered by the Purchasers and assuming due authorization, execution and delivery by Seller, this Agreement constitutes a valid and binding obligation of the Purchaser enforceable against each Purchaser in accordance with its terms, except to the extent that the enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws, or by equitable principles relating to the rights of creditors generally. The Canadian Purchaser is a “WTO investor” as that term is defined by the Investment Canada Act.

ARTICLE V

TAX MATTERS

5.1 Liability for Transaction Taxes

Seller shall pay any real property transfer or gains, sales, use, transfer, value added, stock transfer, and stamp taxes, any transfer, recording, registration, and other fees, and any similar Taxes which become payable in connection with the transactions contemplated by this Agreement, and shall file such applications and documents as shall permit any such Tax to be assessed and paid on or prior to the Closing Date in accordance with any available pre-sale filing procedure. Each party hereto shall execute and deliver all instruments and certificates necessary to enable the other party or parties to comply with the foregoing. Notwithstanding the foregoing, Purchasers shall pay any goods and services taxes applicable to the purchase of the Stock by Purchasers hereunder.

5.2 Section 338(h)(10) Election

The American Purchaser and Seller shall make, or shall cause to be made, an election under Section 338(h)(10) of the Code (and any similar elections under state, local or foreign Law) with respect to the transfer of the Stock of Decca Inc. The American Purchaser and Seller shall report and treat, and shall cause their respective Affiliates to report and treat, the sale and purchase of the Stock of Decca Inc. as a sale of the assets and liabilities of Decca Inc. The American Purchaser and Seller shall duly execute, or cause to be executed, any form (including IRS Form 8023) required for purposes of making such election, and such forms shall be delivered to the other party at or prior to the Closing. The American Purchaser and Seller shall not make any inconsistent election under Section 338 of the Code or other similar state, local or foreign Tax Law, or file any inconsistent Tax Return.

Within sixty (60) days following the Closing Date, the American Purchaser shall prepare and deliver to Seller a schedule allocating the aggregate deemed sale price, as defined in Treasury Regulations Section 1.338-4 (or, if different, the sales price that is required to be used for purposes of any state, local or foreign Law), for the Stock of Decca Inc. among the assets of Decca Inc. (the “Section 338 Allocation Schedule”). The American Purchaser and Seller shall, and shall cause their respective Affiliates to, file all federal, state, local and foreign Tax Returns in accordance with the Section 338 Allocation Schedule, unless otherwise required by applicable Law.


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ARTICLE VI

INDEMNIFICATION

6.1 Obligations of Seller

Seller agrees to indemnify and hold harmless the Purchasers, the Companies and their respective directors, officers, agents, managers, employees, representatives and Affiliates and their successors and assigns (each a “Purchaser Indemnified Party”) from and against any and all Losses of the Purchaser Indemnified Parties, directly or indirectly, as a result of, or based upon or arising from:

(a) the breach of any representation or warranty made by Seller contained in this Agreement;

(b) the breach of any covenant or agreement by Seller contained in this Agreement;

(c) the ownership of the Stock prior to the Closing Date;

(d) the ownership, management or use of the Assets and the operation of the Business, all prior to the Closing Date;

(e) any and all Taxes in respect of any taxation year or period ending on or prior to the Closing Date at such time as either Company or Purchasers receive an assessment or other form of recognized document assessing liability for such Taxes; and


(f) any losses, including legal expenses, associated with litigation in existence prior to the Closing Date, including litigation set forth on Schedule 3.15.


6.2 Obligations of Purchaser

Each of the Purchasers (“Purchaser Indemnifying Party”), jointly and severally, agrees to indemnify and hold harmless Seller and its respective directors, officers, agents, managers, employees, representatives and Affiliates and their successors and assigns (each a “Seller Indemnified Party”) from and against any and all Losses of the Seller Indemnified Parties, directly or indirectly, as a result of, or based upon or arising from:

(a) the breach of any representation or warranty made by the Purchasers contained in this Agreement;


(b) the breach of any covenant or agreement by the Purchasers contained in this Agreement;

(c) the ownership, management or use of the Assets and the operation of the Business, all as after the Closing Date, unless and to the extent that such Losses arise solely from any action or inaction of Seller or any of its Affiliates after the Closing Date; and/or

(d) any Losses, including any punitive or special damages, as a result of or arising out of the Specified Litigation.



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6.3 Procedure

A Seller Indemnified Party or a Purchaser Indemnified Party (each, an “Indemnified Party”) shall give the Purchaser Indemnifying Party or the Seller Indemnifying Party (each, an “Indemnifying Party”), as applicable, notice (a “Claim Notice”) of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement (a “Claim”), within sixty (60) days of such determination; provided, however, that any failure of the Indemnified Party to provide such Claim Notice shall not release the Indemnifying Party from any of its obligations under this Article except to the extent the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or liability that it may have to any Indemnified Party otherwise than under this Article X. Upon receipt of the Claim Notice, the Indemnifying Party shall be entitled to assume and control the defense of such Claim at its expense if it gives notice of its intention to do so to the Indemnified Party within five (5) Business Days of the receipt of such Claim Notice from the Indemnified Party; provided, however, that (i) Indemnified Party must approve of the selection of legal counsel by Indemnifying Party, which approval shall not be unreasonably withheld or delayed and (ii) if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of the Indemnified Party, in its sole and absolute discretion, for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel, in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnifying Party. In the event the Indemnifying Party exercises the right to undertake any such defense against any such Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party’s expense, all witnesses, pertinent records, materials and information in the Indemnified Party’s possession or under the Indemnified Party’s control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party’s expense, all such witnesses, records, materials and information in the Indemnifying Party’s possession or under the Indemnifying Party’s control relating thereto as is reasonably required by the Indemnified Party. No such Claim may be settled by the Indemnifying Party without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld so long as (a) there is no payment or other consideration required of the Indemnified Party and (b) such settlement does not require or otherwise involve any restrictions on the conduct of business by the Indemnified Party.

6.4 Survival.

(a) The representations and warranties of Seller and the Purchasers contained in this Agreement, including the Exhibits and the Disclosure Schedules to this Agreement, shall survive the Closing until the third (3rd) anniversary of the Closing Date; provided, however, that the representations and warranties in Section 3.2 (Capitalization), Section 3.3 (Stock Ownership by Seller), Section 3.4 (Authorization; Enforceability), Section 3.17 (Employee Benefit Plans), Section 3.21 (Receivables), and Section 3.22 (Environmental), shall survive the Closing indefinitely; provided further that the representations and warranties in Section 3.9 (Taxes), shall survive until sixty (60) days after the expiration of the statute of limitations period or periods legally applicable to them. Neither the period of survival nor the liability of Seller or the Purchasers with respect to Seller’s or Purchasers’ representations and warranties shall be reduced by any investigation made at any time by or on behalf of Purchasers or Seller. An Indemnifying Party is not required to make any indemnification payment hereunder unless a Claim is initiated prior to expiration of the survival period set forth in this Section 6.4(a), except with respect to claims based on fraud committed by the Indemnifying Party.

(b) Any matter as to which a Claim has been asserted by a Claim Notice to the other party that is pending or unresolved at the end of any applicable limitation period shall continue to be covered by this Article VI, notwithstanding any applicable statute of limitations (which the parties hereby waive) until such matter is finally terminated or otherwise resolved by the parties under this Agreement or by a court of competent jurisdiction and any amounts payable hereunder are finally determined and paid.



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6.5 Notice by Indemnifying Party

The Indemnifying Party agrees to notify the Indemnified Party of any liabilities, claims or misrepresentations, breaches or other matters covered by this Article VI upon discovery or receipt of notice thereof (other than such claims from the Indemnified Party).

6.6 Indemnity Threshold and Cap.

(a) Seller shall not have any liability to any Purchaser Indemnified Party with respect to Losses arising out of any of the matters referred to in Section 6.1 until such time as the amount of all such liability shall collectively exceed $100,000.00 (the “Threshold”), whereupon the Losses exceeding the Threshold shall be payable by the Seller. Also, in no event shall Seller’s aggregate liability to any Purchaser Indemnified Party under Section 6.1 exceed the original principal amount of the Notes (the “Seller Cap”); provided, however, that the Threshold and the Seller Cap shall not apply to (i) Claims based on fraud committed by the Seller, (ii) the matters referred to in Section 6.1(e) or (iii) a breach of any representation or warranty made by the Sellers in Sections 3.1, 3.2, 3.3, 3.4 or 3.5 of this Agreement, but Seller’s aggregate liability to any Purchaser Indemnified Party with respect to any of the matters referred to in clauses (i), (ii) or (iii) of this Section 6.6(a) shall not exceed the Purchase Price.

(b) The Purchasers shall not have any liability to any Seller Indemnified Party with respect to Losses arising out of any of the matters referred to in Section 6.2, except with respect to Claims based on fraud committed by the Purchasers, until such time as the amount of all such liability shall collectively exceed the Threshold, whereupon the Losses exceeding the Threshold shall be payable by the Purchasers. Also, in no event shall the Purchasers’ combined aggregate liability under Section 6.2 exceed any unpaid amounts owing under the Notes and the Receivables Notes.

6.7 Exclusive Remedy

Other than rights to equitable relief or claims for fraud to the extent available under applicable Law, Seller and the Purchasers acknowledge and agree that the sole and exclusive remedy for any Losses arising from Claims described in Sections 6.1 and 6.2 shall be indemnification in accordance with this Article VI.

6.8 Set-Off

Notwithstanding any other provision of this Agreement and without prejudice to and supplemental to any other rights or remedies which Purchasers may have under this Agreement, Purchasers may set-off against any amounts owing under the Notes the amount of any Claims owed to Purchasers pursuant to this Article VI.

6.9 Mitigation

Prior to the resolution of any Claim for indemnification under this Agreement, the Indemnified Party shall utilize all commercially reasonable efforts, consistent with normal past practices and policies and good commercial practice, to mitigate such Losses. All indemnification or reimbursement payments required pursuant to this Agreement shall be made after all insurance benefits actually received by the Indemnified Party.


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ARTICLE VIII

GENERAL

7.1 Amendments; Waivers

Agreement and any schedule or exhibit attached hereto may be amended only by agreement in writing of all parties. No waiver of any provision nor consent to any exception to the terms of this Agreement or any agreement contemplated hereby shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided.

7.2 Schedules; Exhibits; Integration

Each schedule and exhibit delivered pursuant to the terms of this Agreement shall be in writing and shall constitute a part of this Agreement, although schedules need not be attached to each copy of this Agreement. This Agreement, together with such schedules and exhibits, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith.

7.3 Law

This Agreement, the legal relations between the parties and any Action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, including but not limited to the negotiation, execution, interpretation, coverage, scope, performance, breach, termination, validity, or enforceability of this Agreement, shall be governed by and construed in accordance with the laws of the State of New York.

7.4 No Assignment

Neither this Agreement nor any rights or obligations under it are assignable without the express written consent of Seller or the Purchaser. The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement.

7.5 Counterparts

This Agreement and any amendment hereto or any other agreement (or document) delivered pursuant hereto may be executed in one or more counterparts and by different parties in separate counterparts. All of such counterparts shall constitute one and the same agreement (or other document) and shall become effective (unless otherwise provided therein) when one or more counterparts have been signed by each party and delivered to the other party.

7.6 Publicity and Reports

The Seller and the Purchasers shall coordinate all publicity relating to the transactions contemplated by this Agreement and no party shall issue any press release, publicity statement or other public notice relating to this Agreement, or the transactions contemplated by this Agreement, without obtaining the prior consent of all of Seller and Purchasers.

7.7 Parties in Interest

This Agreement shall be binding upon and inure to the benefit of each party, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Nothing in this Agreement is intended to relieve or discharge the obligation of any third person to any party to this Agreement.

7.8 Notices

Any notice or other communication hereunder must be given in writing and (a) delivered in person, (b) transmitted by facsimile or (c) mailed by certified mail, postage prepaid, return receipt requested as follows:


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(a) If to the Seller, addressed to:

Stratum Holdings, Inc.


Three Riverway, Suite 1590

Houston, Texas 77056

Attn: Chief Executive Officer

Telephone: [phone]

Facsimile: [phone]


With a copy to:

Haynes and Boone, LLP


One Houston Center

1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]





(b) If to the Purchasers, addressed to:

SB Group Holdings, Inc.
3820 State Street
Santa Barbara, California 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]









or to such other address or to such other person as either party shall have last designated by such notice to the other party. Each such notice or other communication shall be effective (i) if given by facsimile, when transmitted to the applicable number so specified in (or pursuant to) this Section 7.8 and an appropriate answerback is received, (ii) if given by mail, five (5) days after such communication is deposited in the mails by certified mail, return receipt requested, with postage prepaid and addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address.

7.9 Remedies; Waiver

Subject to Section 6.7, to the extent permitted by Law, all rights and remedies existing under this Agreement are cumulative to and not exclusive of, any rights or remedies otherwise available under applicable Law. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right.

7.10 Attorney’s Fees

In the event of any Action by any party to enforce against another party a right or claim, the prevailing party shall be entitled to reasonable attorney’s fees, costs and expenses incurred in such Action (on a solicitor and client basis). Attorney’s fees incurred in enforcing any judgment in respect of this Agreement are recoverable as a separate item.

7.11 Severability

If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Entity, the remaining provisions of this Agreement to the extent permitted by Law shall remain in full force and effect; provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable. In event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by Law, the parties hereby to the same extent waive any provision of Law that renders any provision hereof prohibited or unenforceable in any respect.


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7.12 Entire Agreement

This Agreement constitutes and includes that entire agreement of the parties with reference to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. No promise or representation of any kind has been made to any of the parties to this Agreement by any other party or parties to this Agreement or anyone acting for any of such parties, except as is expressly stated in this Agreement.

7.13 Arbitration

Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be resolved by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules in effect on the date of this Agreement (herein the “AAA Rules”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be selected pursuant to the AAA Rules and shall be a neutral and impartial lawyer with excellent academic and professional credentials (i) who is or has been practicing law for at least fifteen (15) years, specializing in general commercial litigation or general corporate and commercial matters and (ii) who has both training and experience as an arbitrator and is generally available to serve as an arbitrator. The arbitration shall be governed by the arbitration law of the Federal Arbitration Act and shall be held in Houston, Texas.

7.14 Specified Litigation

. The Seller shall cooperate with the Purchasers in connection with defending and settling the Specified Litigation and shall exercise their commercially reasonable efforts to cause the Specified Litigation to be resolved, including by settlement, without a disruption to the business of the Companies.

7.15 Expenses

. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated herein, including all fees and expenses of agents, representatives, counsel, and accountants.

7.16 Further Assurances

. From time-to-time after the Closing Date, each party hereto shall at the request of any other party execute and deliver such conveyances, transfers and other assurances as may be reasonably required to effectively transfer the Stock to Purchasers and to carry out the intent of this Agreement.

7.17 Cooperation With Respect to Tax Returns

. Purchasers and Seller agree to furnish or cause to be furnished to each other, and each at their own expense, as promptly as practicable, such information (including access to books and records) and assistance, including making employees available on a mutually convenient basis to provide additional information and explanations of any material provided, relating to the Companies as is reasonably necessary for the filing of any Tax Return to be consistent with this Agreement, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any adjustment or proposed adjustment with respect to Taxes.

[SIGNATURE PAGE FOLLOWS




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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement effective as of the day and year first written above.



PURCHASERS:


SB GROUP HOLDINGS, INC.




By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


1607920 ALBERTA LTD.




By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary




SELLER:


STRATUM HOLDINGS, INC.




By: /s/ Larry M. Wright
Name: Larry M. Wright
Title: Chief Executive Officer




[Signature Page to Stock Purchase Agreement]


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Exhibit 10.2

CANADIAN RECEIVABLES NOTE


U.S. $1,710,000.00 Houston, TX June 3, 2011



FOR VALUE RECEIVED, the undersigned, 1607920 Alberta, Ltd., an Alberta, Canada corporation (“Maker”), hereby unconditionally promises to pay to the order of Stratum Holdings, Inc., a corporation organized and existing under the laws of Nevada (“Payee”), the principal sum of U.S.$1,710,000.00, or such other amount as may result from any adjustment to the Purchase Price in accordance with Section 2.2(b) of the Stock Purchase Agreement; provided, however, that the amount owed by Maker to Payee hereunder shall be limited to no more than the amount of outstanding accounts receivable of Maker (which shall include the accounts receivable on the books of the Company) on the date hereof, plus the amount of the difference, if any, between the Purchase Price as adjusted upward due in accordance with Section 2.2(b) of the Stock Purchase Agreement, and the outstanding accounts receivable shown on the books and records of the Maker on the date hereof that are actually collected by the Maker in the ordinary course of business after the date hereof.


1. Definitions. When used in this Note, the following terms shall have the respective meanings specified herein or in the Section referred to:


“Business Day” means a day upon which business is transacted by national banks in Houston, Texas.


“Default” has the meaning ascribed to it in Section 6 hereof.


“Maximum Rate” means, with respect to the holder hereof, the maximum non-usurious rate of interest which, under all applicable legal requirements, such holder is permitted to contract for, charge, take, reserve, or receive on this Note. If the laws of the State of Texas are applicable for purposes of determining the “Maximum Rate”, then such terms means the “weekly ceiling” from time to time in effect under Texas Finance code 303.001, as amended, as limited by Texas Finance Code 303.009.


“Note” means this Canadian Receivables Note.


“Pledge” means that certain Pledge and Security Agreement, dated of even date herewith, by and between Payee and SB Group Holdings, Inc.


“Stock Purchase Agreement” means that certain Stock Purchase Agreement, dated June 3, 2011, pursuant to which Maker purchased all of the issued and outstanding capital stock of Decca Consulting, Ltd., an Alberta, Canada corporation.


2. Payment. The principal on this Note shall be payable to Payee by Maker upon the receipt by Maker, or by Decca Consulting, Inc. (the “Company”), a wholly-owned subsidiary of Maker, within 5 Business Days of collections of good funds received from customers of the Company on account of accounts receivable of the Company in existence on the date of this Note.


All payments of principal and interest of this Note shall be made by Maker to Payee in immediately available funds.


Should any installment of the principal on this Note become due and payable on any day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day.



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3. Security. The payment of this Note is secured by the Pledge.


4. Waivers. Maker and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable upon this Note, jointly and severally waive presentment, demand, protest, notice of protest and non-payment or other notice of default, notice of acceleration, and intention to accelerate, or other notice of any kind, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases, or changes.


No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise, shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee.


5. Representations and Warranties. Maker hereby represents and warrants to Payee as follows:


(a) Maker is a corporation, duly organized, validly existing and in good standing under the laws of Alberta, Canada and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business.



(b) Maker has full power and authority to execute and deliver this Note and to incur and perform the obligations provided for herein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Maker. No consent or approval of any public authority or other third party is required as a condition to the validity of this Note.



(c) There is no event that is, or with notice of passage of time, or both, would be, a Default under this Note and the Pledge.



(d) This Note constitutes the valid and legally binding obligation of Maker, enforceable against Maker in accordance with its terms.



(e) There is no charter, bylaw, stock provision or other document pertaining to the organization, power or authority of Maker and no provision of any existing agreement, mortgage, indenture or contract binding on Maker or affecting Maker’s property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Note and the Pledge.



All representations and warranties made under this Note shall be deemed to be made at and as of the date hereof.



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6. Default and Remedies.


A “Default” shall exist hereunder if any one or more of the following events shall occur and be continuing: (i) Maker shall fail to pay when due any principal on this Note and after receipt of written notice from Payee, Maker fails to make such payment within 15 days of receipt of such notice (the “Cure Period”); (ii) this Promissory Note shall cease to be a legal, valid, binding agreeable enforceable against Maker in accordance with its terms or shall in any way be terminated or become or be declared ineffective or inoperative; (iii) maker shall (A) apply for or consent to the appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all of substantially all of its assets, (B) be adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or take corporate action for the purpose of effecting any of the foregoing; (iv) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Maker or appointing a receiver, trustee, intervenor or liquidator of any such person, or of all or substantially all of its or their assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days.


If Maker fails or refuses to pay any part of the principal upon this Note after receipt of written notice from Payee and expiration of the applicable Cure Period, then Payee may, at its option (i) declare the entire unpaid balance of principal of the Note to be immediately due and payable without presentment or further notice of any kind which Maker waives pursuant to Section 4 herein (ii) reduce any claim to judgment, and/or (iii) pursue and enforce any of Payee’s rights and remedies under the Pledge or available pursuant to any applicable law or agreement.


7. Reporting Requirement. Upon request, Maker shall provide to Payee a report of the accounts receivable of the Maker on the date hereof, all collections received since the date hereof (whether or not such collections have been remitted to Payee), and an aging of such accounts receivable from the date of invoice; provided, that Maker shall not make a request pursuant to this clause 7 more frequently than weekly.


8. Voluntary Prepayment. Maker reserves the right to prepay the outstanding principal balance of, and all accrued but unpaid interest on, this Note, in whole or in part, at any time and from time to time, without premium or penalty.


9. Costs. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity, or in bankruptcy, receivership or other court proceedings, Maker agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorney’s fees, including all costs of appeal.



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10. Notices. Any notice that may be given by either Maker or Payee shall be in writing and shall be deemed given upon the earlier of the time of receipt thereof by the person entitled to receive such notice, or if mailed by registered or certified mail or with a recognized overnight mail courier upon two (2) days after deposit with the Post Office of the United States or Canada or one (1) day after deposit with such overnight mail courier, if postage is prepaid and mailing is addressed to Maker or Payee, as the case may be, at the following addresses, or to a different address previously given in a written notice to the other party:


To Maker: 1607920 Alberta, Ltd.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

To Payee: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]
With a copy to:
Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]



11. GOVERNING LAW. THIS INSTRUMENT AND ALL ISSUES AND CLAIMS ARISING IN CONNECTION WITH OR RELATING TO THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE GOVERNED AND CONSTRUED INACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.


12. ENTIRETY. THE PROVISIONS OF THIS NOTE MAY BE AMENDED OR REVISED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY MAKER AND PAYEE. THIS NOTE, THE PLEDGE AND THE STOCK PURCHASE AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF MAKER AND PAYEE AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUIBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.



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13. WAIVER OF JURY TRIAL. MAKER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY KNOWINGLY, INTENTIONALLY, IRREVOCABLY, UNCONDITIONALLY AND VOLUNTARYILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FOREGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING OT THIS NOTE OR THE PLEDGE.


14. Assignment. Neither this Note nor any rights or obligations under it are assignable without the express written consent of Maker and Payee.


15. Parties in Interest. This Note shall be binding upon and insure to the benefit of each party hereto and their respective successors and assigns, and nothing in this Note, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Note. Nothing in this Note is intended to relieve or discharge the obligation of any third person to any party to this Note.


16. Limited Recourse. Notwithstanding anything in this Note to the contrary, the amount owed by Maker to Payee hereunder shall be limited to no more than the amount of outstanding accounts receivable of Maker on the date hereof, plus the amount of the difference, if any, between the Purchase Price as adjusted upward due in accordance with Section 2.2(b), and the outstanding accounts receivable shown on the books and records of the Maker on the date hereof that are actually collected by the Maker in the ordinary course of business after the date hereof.




(SIGNATURE PAGE FOLLOWS)





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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.


MAKER:

1607920 ALBERTA, LTD.


By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PAYEE:

STRATUM HOLDINGS, INC.


By: /s/ D. Hughes Watler, Jr.
Name: D. Hughes Watler, Jr.
Title: Chief Financial Office







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Exhibit 10.3

AMERICAN RECEIVABLES NOTE


U.S. $690,000.00 Houston, TX June 3, 2011



FOR VALUE RECEIVED, the undersigned, SB Group Holdings, Inc., a Delaware corporation (“Maker”), hereby unconditionally promises to pay to the order of Stratum Holdings, Inc., a corporation organized and existing under the laws of Nevada, (“Payee”), the principal sum of U.S.$690,000.00, or such other amount as may result from any adjustment to the Purchase Price in accordance with Section 2.2(b) of the Stock Purchase Agreement; provided, however, that the amount owed by Maker to Payee hereunder shall be limited to no more than the amount of outstanding accounts receivable of Maker (which shall include the accounts receivable on the books of the Company) on the date hereof, plus the amount of the difference, if any, between the Purchase Price as adjusted upward due in accordance with Section 2.2(b) of the Stock Purchase Agreement, and the outstanding accounts receivable shown on the books and records of the Maker on the date hereof that are actually collected by the Maker in the ordinary course of business after the date hereof.


1. Definitions. When used in this Note, the following terms shall have the respective meanings specified herein or in the Section referred to:


“Business Day” means a day upon which business is transacted by national banks in Houston, Texas.


“Default” has the meaning ascribed to it in Section 6 hereof.


“Maximum Rate” means, with respect to the holder hereof, the maximum non-usurious rate of interest which, under all applicable legal requirements, such holder is permitted to contract for, charge, take, reserve, or receive on this Note. If the laws of the State of Texas are applicable for purposes of determining the “Maximum Rate”, then such terms means the “weekly ceiling” from time to time in effect under Texas Finance code 303.001, as amended, as limited by Texas Finance Code 303.009.


“Note” means this American Receivables Note.


“Pledge” means that certain Pledge and Security Agreement, dated of even date herewith, by and between Maker and Payee.


“Stock Purchase Agreement” means that certain Stock Purchase Agreement, dated June 3, 2011, pursuant to which Maker purchased all of the issued and outstanding capital stock of Decca Consulting, Inc., a corporation organized and existing under the laws of Nevada.


2. Payment. The principal on this Note shall be payable to Payee by Maker upon the receipt by Maker, or by Decca Consulting, Inc. (the “Company”), a wholly-owned subsidiary of Maker, within 5 Business Days of collections of good funds received from customers of the Company on account of accounts receivable of the Company in existence on the date of this Note.


All payments of principal and interest of this Note shall be made by Maker to Payee in immediately available funds.



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Should any installment of the principal on this Note become due and payable on any day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day.


3. Security. The payment of this Note is secured by the Pledge.


4. Waivers. Maker and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable upon this Note, jointly and severally waive presentment, demand, protest, notice of protest and non-payment or other notice of default, notice of acceleration, and intention to accelerate, or other notice of any kind, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases, or changes.


No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise, shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee.


5. Representations and Warranties. Maker hereby represents and warrants to Payee as follows:


(a) Maker is a corporation, duly organized, validly existing and in good standing under the laws of Nevada and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business.



(b) Maker has full power and authority to execute and deliver this Note and to incur and perform the obligations provided for herein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Maker. No consent or approval of any public authority or other third party is required as a condition to the validity of this Note.



(c) There is no event that is, or with notice of passage of time, or both, would be, a Default under this Note and the Pledge.



(d) This Note constitutes the valid and legally binding obligation of Maker, enforceable against Maker in accordance with its terms.



(e) There is no charter, bylaw, stock provision or other document pertaining to the organization, power or authority of Maker and no provision of any existing agreement, mortgage, indenture or contract binding on Maker or affecting Maker’s property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Note and the Pledge.



All representations and warranties made under this Note shall be deemed to be made at and as of the date hereof.



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6. Default and Remedies.


A “Default” shall exist hereunder if any one or more of the following events shall occur and be continuing: (i) Maker shall fail to pay when due any principal on this Note and after receipt of written notice from Payee, Maker fails to make such payment within 15 days of receipt of such notice (the “Cure Period”); (ii) this Promissory Note shall cease to be a legal, valid, binding agreeable enforceable against Maker in accordance with its terms or shall in any way be terminated or become or be declared ineffective or inoperative; (iii) maker shall (A) apply for or consent to the appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all of substantially all of its assets, (B) be adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or take corporate action for the purpose of effecting any of the foregoing; (iv) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Maker or appointing a receiver, trustee, intervenor or liquidator of any such person, or of all or substantially all of its or their assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days.


If Maker fails or refuses to pay any part of the principal upon this Note after receipt of written notice from Payee and expiration of the applicable Cure Period, then Payee may, at its option (i) declare the entire unpaid balance of principal of the Note to be immediately due and payable without presentment or further notice of any kind which Maker waives pursuant to Section 4 herein (ii) reduce any claim to judgment, and/or (iii) pursue and enforce any of Payee’s rights and remedies under the Pledge or available pursuant to any applicable law or agreement.


7. Reporting Requirement. Upon request, Maker shall provide to Payee a report of the accounts receivable of the Maker on the date hereof, all collections received since the date hereof (whether or not such collections have been remitted to Payee), and an aging of such accounts receivable from the date of invoice; provided, that Maker shall not make a request pursuant to this clause 7 more frequently than weekly.


8. Voluntary Prepayment. Maker reserves the right to prepay the outstanding principal balance of, and all accrued but unpaid interest on, this Note, in whole or in part, at any time and from time to time, without premium or penalty.


9. Costs. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity, or in bankruptcy, receivership or other court proceedings, Maker agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorney’s fees, including all costs of appeal.


10. Notices. Any notice that may be given by either Maker or Payee shall be in writing and shall be deemed given upon the earlier of the time of receipt thereof by the person entitled to receive such notice, or if mailed by registered or certified mail or with a recognized overnight mail courier upon two (2) days after deposit with the Post Office of the United States or Canada or one (1) day after deposit with such overnight mail courier, if postage is prepaid and mailing is addressed to Maker or Payee, as the case may be, at the following addresses, or to a different address previously given in a written notice to the other party:



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To Maker: SB Group Holdings, Inc.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

To Payee: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]
With a copy to:
Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]



11. GOVERNING LAW. THIS INSTRUMENT AND ALL ISSUES AND CLAIMS ARISING IN CONNECTION WITH OR RELATING TO THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE GOVERNED AND CONSTRUED INACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.


12. ENTIRETY. THE PROVISIONS OF THIS NOTE MAY BE AMENDED OR REVISED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY MAKER AND PAYEE. THIS NOTE, THE PLEDGE AND THE STOCK PURCHASE AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF MAKER AND PAYEE AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUIBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.


13. WAIVER OF JURY TRIAL. MAKER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY KNOWINGLY, INTENTIONALLY, IRREVOCABLY, UNCONDITIONALLY AND VOLUNTARYILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FOREGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING OT THIS NOTE OR THE PLEDGE.


14. Assignment. Neither this Note nor any rights or obligations under it are assignable without the express written consent of Maker and Payee.



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15. Parties in Interest. This Note shall be binding upon and insure to the benefit of each party hereto and their respective successors and assigns, and nothing in this Note, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Note. Nothing in this Note is intended to relieve or discharge the obligation of any third person to any party to this Note.


16. Limited Recourse. Notwithstanding anything in this Note to the contrary, the amount owed by Maker to Payee hereunder shall be limited to no more than the amount of outstanding accounts receivable of Maker on the date hereof, plus the amount of the difference, if any, between the Purchase Price as adjusted upward due in accordance with Section 2.2(b) of the Stock Purchase Agreement, and the outstanding accounts receivable shown on the books and records of the Maker on the date hereof that are actually collected by the Maker in the ordinary course of business after the date hereof.




(SIGNATURE PAGE FOLLOWS)








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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.


MAKER:

SB GROUP HOLDINGS, INC.


By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PAYEE:

STRATUM HOLDINGS, INC.


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



6




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Exhibit 10.4

CANADIAN NOTE


U.S. $1,318,125.00 Houston, TX June 3, 2011



FOR VALUE RECEIVED, the undersigned, 1607920 Alberta Ltd., a Calgary, Canada corporation (“Maker”), hereby unconditionally promises to pay to the order of Stratum Holdings, Inc., a corporation organized and existing under the laws of Nevada, (“Payee”), the principal sum of U.S. $1,318,125.00, plus interest (calculated on the basis of a 360 day year) at the rate of eight percent (8%) per annum on the unpaid principal balance from the date hereof until maturity (or acceleration of maturity).


1. Definitions. When used in this Note, the following terms shall have the respective meanings specified herein or in the Section referred to:


“Business Day” means a day upon which business is transacted by national banks in Houston, Texas.


“Default” has the meaning ascribed to it in Section 6 hereof.


“Maximum Rate” means, with respect to the holder hereof, the maximum non-usurious rate of interest which, under all applicable legal requirements, such holder is permitted to contract for, charge, take, reserve, or receive on this Note. If the laws of the State of Texas are applicable for purposes of determining the “Maximum Rate”, then such terms means the “weekly ceiling” from time to time in effect under Texas Finance code 303.001, as amended, as limited by Texas Finance Code 303.009.


“Canadian Note” means this Promissory Note.


“Note” means this Canadian Promissory Note.


“Pledge” means that certain Pledge and Security Agreement, dated of even date herewith, by and among Maker and Payee.


“Stock Purchase Agreement” means that certain Stock Purchase Agreement, dated June 3, 2011, by and among Maker and Payee.


2. Payment. The principal and interest on this Note shall be due and payable in forty-eight (48) installments of principal and accrued interest in the amount of $32,179.35, being due and payable on the first day of October, 2011, and thereafter on the 1st day of each successive calendar month until all outstanding principal and interest due under this Note has been paid in full.


All payments of principal and interest of this Note shall be made by Maker to Payee in immediately available funds. Payments made to Payee by Maker hereunder shall be applied first to accrued interest and then to principal.


Should the principal of, or any installment of the principal of or interest upon, this Note become due and payable on any day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable with respect to such extension.



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3. Security. The payment of this Note is secured by the Pledge.


4. Waivers. Maker and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable upon this Note, jointly and severally waive presentment, demand, protest, notice of protest and non-payment or other notice of default, notice of acceleration, and intention to accelerate, or other notice of any kind, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases, or changes.


No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise, shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee.


5. Representations and Warranties. Maker hereby represents and warrants to Payee as follows:


(a) Maker is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business.



(b) Maker has full power and authority to execute and deliver this Note and to incur and perform the obligations provided for herein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Maker. No consent or approval of any public authority or other third party is required as a condition to the validity of this Note.



(c) There is no event that is, or with notice of passage of time, or both, would be, a Default under this Note and the Pledge.



(d) This Note constitutes the valid and legally binding obligation of Maker, enforceable against Maker in accordance with its terms.



(e) There is no charter, bylaw, stock provision or other document pertaining to the organization, power or authority of Maker and no provision of any existing agreement, mortgage, indenture or contract binding on Maker or affecting Maker’s property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Note and the Pledge.



All representations and warranties made under this Note shall be deemed to be made at and as of the date hereof.



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6. Default and Remedies.


A “Default” shall exist hereunder if any one or more of the following events shall occur and be continuing: (i) Maker shall fail to pay when due any principal on this Note and after receipt of written notice from Payee, Maker fails to make such payment within 15 days of receipt of such notice (the “Cure Period”); (ii) this Promissory Note shall cease to be a legal, valid, binding agreeable enforceable against Maker in accordance with its terms or shall in any way be terminated or become or be declared ineffective or inoperative; (iii) maker shall (A) apply for or consent to the appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all of substantially all of its assets, (B) be adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or take corporate action for the purpose of effecting any of the foregoing; (iv) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Maker or appointing a receiver, trustee, intervenor or liquidator of any such person, or of all or substantially all of its or their assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days.


If Maker fails or refuses to pay any part of the principal upon this Note after receipt of written notice from Payee and expiration of the applicable Cure Period, then Payee may, at its option (i) declare the entire unpaid balance of principal of the Note to be immediately due and payable without present or further notice of any kind which Maker waives pursuant to Section 4 herein (ii) reduce any claim to judgment, and/or (iii) pursue and enforce any of Payee’s rights and remedies under the Pledge or available pursuant to nay applicable law or agreement.

7. Voluntary Prepayment. Maker reserves the right to prepay the outstanding principal balance of, and all accrued but unpaid interest on, this Note, in whole or in part, at any time and from time to time, without premium or penalty.


8. Usury Laws. Regardless of any provisions contained in this Note, the Payee shall never be deemed to have contracted for or be entitled to receive, collect, or apply as interest on the Note, any amount in excess of the Maximum Rate permitted by applicable law, and, in the event Payee ever receives, collects, or applies any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full, then any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (a) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) thereof, and (c) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout such term.



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9. Costs. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity, or in bankruptcy, receivership or other court proceedings, Maker agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorney’s fees, including all costs of appeal.


10. Notices. Any notice that may be given by either Maker or Payee shall be in writing and shall be deemed given upon the earlier of the time of receipt thereof by the person entitled to receive such notice, or if mailed by registered or certified mail or with a recognized overnight mail courier upon two (2) days after deposit with the Post Office of the United States or Canada or one (1) day after deposit with such overnight mail courier, if postage is prepaid and mailing is addressed to Maker or Payee, as the case may be, at the following addresses, or to a different address previously given in a written notice to the other party:


To Maker: 1607920 Alberta Ltd.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

To Payee: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]

With a copy to:

Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]




11. GOVERNING LAW. THIS INSTRUMENT AND ALL ISSUES AND CLAIMS ARISING IN CONNECTION WITH OR RELATING TO THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE GOVERNED AND CONSTRUED INACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.



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12. ENTIRETY. THE PROVISIONS OF THIS NOTE MAY BE AMENDED OR REVISED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY MAKER AND PAYEE. THIS NOTE, THE PLEDGE AND THE STOCK PURCHASE AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF MAKER AND PAYEE AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUIBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.


13. WAIVER OF JURY TRIAL. MAKER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY KNOWINGLY, INTENTIONALLY, IRREVOCABLY, UNCONDITIONALLY AND VOLUNTARYILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FOREGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING OT THIS NOTE OR THE PLEDGE.


14. Assignment. Neither this Note nor any rights or obligations under it are assignable without the express written consent of Maker and Payee.


15. Parties in Interest. This Note shall be binding upon and insure to the benefit of each party hereto and their respective successors and assigns, and nothing in this Note, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Note. Nothing in this Note is intended to relieve or discharge the obligation of any third person to any party to this Note.








(SIGNATURE PAGE FOLLOWS)









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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.


MAKER:

1607920 Alberta Ltd.


By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PAYEE:

STRATUM HOLDINGS, INC.


By: /s/ D. Hughes Watler, Jr.
Name: D. Hughes Watler, Jr.
Title: Chief Financial Office






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Exhibit 10.5

AMERICAN NOTE


U.S. $531,875.00 Houston, TX June 3, 2011





FOR VALUE RECEIVED, the undersigned, SB Group Holdings, Inc., a Delaware corporation (“Maker”), hereby unconditionally promises to pay to the order of Stratum Holdings, Inc., a corporation organized and existing under the laws of Nevada, (“Payee”), the principal sum of U.S. $531,875.00, plus interest (calculated on the basis of a 360 day year) at the rate of eight percent (8%) per annum on the unpaid principal balance from the date hereof until maturity (or acceleration of maturity).


1. Definitions. When used in this Note, the following terms shall have the respective meanings specified herein or in the Section referred to:


“Business Day” means a day upon which business is transacted by national banks in Houston, Texas.


“Default” has the meaning ascribed to it in Section 6 hereof.


“Maximum Rate” means, with respect to the holder hereof, the maximum non-usurious rate of interest which, under all applicable legal requirements, such holder is permitted to contract for, charge, take, reserve, or receive on this Note. If the laws of the State of Texas are applicable for purposes of determining the “Maximum Rate”, then such terms means the “weekly ceiling” from time to time in effect under Texas Finance code 303.001, as amended, as limited by Texas Finance Code 303.009.


“Note” means this American Note.


“Pledge” means that certain Pledge and Security Agreement, dated of even date herewith, by and among Maker and Payee.


“Stock Purchase Agreement” means that certain Stock Purchase Agreement, dated June 3, 2011, pursuant to which Maker purchased all of the issued and outstanding capital stock of Decca Consulting, Inc., a corporation organized and existing under the laws of Nevada.


2. Payment. The principal and interest on this Note shall be due and payable in forty-eight (48) installments of principal and accrued interest in the amount of $12,984.65, being due and payable on the first day of October, 2011, and thereafter on the 1st day of each successive calendar month until all outstanding principal and interest due under this Note has been paid in full.


All payments of principal and interest of this Note shall be made by Maker to Payee in immediately available funds. Payments made to Payee by Maker hereunder shall be applied first to accrued interest and then to principal.


Should the principal of, or any installment of the principal of or interest upon, this Note become due and payable on any day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable with respect to such extension.


3. Security. The payment of this Note is secured by the Pledge.


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4. Waivers. Maker and each surety, endorser, guarantor, and other party ever liable for payment of any sums of money payable upon this Note, jointly and severally waive presentment, demand, protest, notice of protest and non-payment or other notice of default, notice of acceleration, and intention to accelerate, or other notice of any kind, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number of such renewals, extensions, indulgences, releases, or changes.


No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise, shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee.


5. Representations and Warranties. Maker hereby represents and warrants to Payee as follows:


(a) Maker is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business.



(b) Maker has full power and authority to execute and deliver this Note and to incur and perform the obligations provided for herein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Maker. No consent or approval of any public authority or other third party is required as a condition to the validity of this Note.



(c) There is no event that is, or with notice of passage of time, or both, would be, a Default under this Note and the Pledge.



(d) This Note constitutes the valid and legally binding obligation of Maker, enforceable against Maker in accordance with its terms.



(e) There is no charter, bylaw, stock provision or other document pertaining to the organization, power or authority of Maker and no provision of any existing agreement, mortgage, indenture or contract binding on Maker or affecting Maker’s property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Note and the Pledge.



All representations and warranties made under this Note shall be deemed to be made at and as of the date hereof.


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6. Default and Remedies.


A “Default” shall exist hereunder if any one or more of the following events shall occur and be continuing: (i) Maker shall fail to pay when due any principal on this Note and after receipt of written notice from Payee, Maker fails to make such payment within 15 days of receipt of such notice (the “Cure Period”); (ii) this Promissory Note shall cease to be a legal, valid, binding agreeable enforceable against Maker in accordance with its terms or shall in any way be terminated or become or be declared ineffective or inoperative; (iii) maker shall (A) apply for or consent to the appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all of substantially all of its assets, (B) be adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or take corporate action for the purpose of effecting any of the foregoing; (iv) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Maker or appointing a receiver, trustee, intervenor or liquidator of any such person, or of all or substantially all of its or their assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days.


If Maker fails or refuses to pay any part of the principal upon this Note after receipt of written notice from Payee and expiration of the applicable Cure Period, then Payee may, at its option (i) declare the entire unpaid balance of principal of the Note to be immediately due and payable without present or further notice of any kind which Maker waives pursuant to Section 4 herein (ii) reduce any claim to judgment, and/or (iii) pursue and enforce any of Payee’s rights and remedies under the Pledge or available pursuant to any applicable law or agreement.


7. Voluntary Prepayment. Maker reserves the right to prepay the outstanding principal balance of, and all accrued but unpaid interest on, this Note, in whole or in part, at any time and from time to time, without premium or penalty.


8. Usury Laws. Regardless of any provisions contained in this Note, the Payee shall never be deemed to have contracted for or be entitled to receive, collect, or apply as interest on the Note, any amount in excess of the Maximum Rate permitted by applicable law, and, in the event Payee ever receives, collects, or applies any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full, then any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (a) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) thereof, and (c) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout such term.


9. Costs. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity, or in bankruptcy, receivership or other court proceedings, Maker agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorney’s fees, including all costs of appeal.


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10. Notices. Any notice that may be given by either Maker or Payee shall be in writing and shall be deemed given upon the earlier of the time of receipt thereof by the person entitled to receive such notice, or if mailed by registered or certified mail or with a recognized overnight mail courier upon two (2) days after deposit with the Post Office of the United States or Canada or one (1) day after deposit with such overnight mail courier, if postage is prepaid and mailing is addressed to Maker or Payee, as the case may be, at the following addresses, or to a different address previously given in a written notice to the other party:


To Maker: SB Group Holdings, Inc.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

To Payee: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]
With a copy to:
Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]



11. GOVERNING LAW. THIS INSTRUMENT AND ALL ISSUES AND CLAIMS ARISING IN CONNECTION WITH OR RELATING TO THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE GOVERNED AND CONSTRUED INACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.


12. ENTIRETY. THE PROVISIONS OF THIS NOTE MAY BE AMENDED OR REVISED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY MAKER AND PAYEE. THIS NOTE, THE PLEDGE AND THE STOCK PURCHASE AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT OF MAKER AND PAYEE AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUIBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF MAKER AND PAYEE. THERE ARE NO ORAL AGREEMENTS BETWEEN MAKER AND PAYEE.


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13. WAIVER OF JURY TRIAL. MAKER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY KNOWINGLY, INTENTIONALLY, IRREVOCABLY, UNCONDITIONALLY AND VOLUNTARYILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FOREGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING OT THIS NOTE OR THE PLEDGE.


14. Assignment. Neither this Note nor any rights or obligations under it are assignable without the express written consent of Maker and Payee.


15. Parties in Interest. This Note shall be binding upon and insure to the benefit of each party hereto and their respective successors and assigns, and nothing in this Note, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Note. Nothing in this Note is intended to relieve or discharge the obligation of any third person to any party to this Note.


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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.



MAKER:

SB GROUP HOLDINGS, INC.


By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PAYEE:

STRATUM HOLDINGS, INC.


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




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Exhibit 10.6


CANADIAN PLEDGE AND SECURITY AGREEMENT



This PLEDGE AND SECURITY AGREEMENT (this “Agreement”) is entered into effective as of this 3rd day of June, 2011, by and between SB Group Holdings, Inc., a Delaware corporation (the “Pledgor”), and Stratum Holdings, Inc., a Nevada corporation (“Pledgee”). Pledgor and Pledgee are each a “party” and together are “parties” to this Agreement.


RECITALS


A. Pledgor, Pledgee and 1607920 Alberta Ltd., a corporation organized and existing under the laws of Alberta, Canada (the “Canadian Purchaser”), are parties to that certain Stock Purchase Agreement, dated June 3, 2011 (the “Stock Purchase Agreement”), pursuant to which the Canadian Purchaser purchased all of the issued and outstanding capital stock of Decca Consulting Ltd., a corporation organized and existing under the laws of Alberta, Canada (the “Company”);


B. Immediately following the consummation of such transaction, the Canadian Purchaser will amalgamate with and into the Company, and as a result of such amalgamation the obligations of the Canadian Purchaser under the Stock Purchase Agreement for the payment of all amounts due under the Notes (as defined below) will be transferred to the Company by operation of law, and the Company will become a wholly owned subsidiary of Pledgor;


C. As part of the purchase price for the Stock, the Canadian Purchaser has delivered the following promissory notes, dated of even date herewith (the “Notes”), to the Pledgee:


1. The Canadian Note payable to Pledgee in the original principal amount of U.S. $1,318,125.00.



2. The Canadian Receivables Note payable to Pledgee in the original principal amount of U.S. $1,710,000.00, as may be adjusted in accordance with the terms of the Stock Purchase Agreement.



Promptly following the consummation of such transaction, the Canadian Purchaser will amalgamate with and into the Company, and as a result of such amalgamation the obligations of the Canadian Purchaser under Canadian Note and the Canadian Receivables Notes will be transferred to the Company by operation of law. The Company will promptly issue new notes to the Payee in replacement of the Canadian Purchaser's Notes.


D. As part of the consideration of Pledgee accepting the Notes (as opposed to cash or other consideration) under the Stock Purchase Agreement, Pledgor desires to pledge and deliver to Pledgee the Stock as security for the Notes and other obligations hereafter identified.


AGREEMENT


NOW, THEREFORE, to induce Pledgee to accept the Notes, and as security for Pledgor’s obligations under the Notes and any other obligations or liabilities of Pledgor under this Agreement (this Agreement and the Notes, the “Loan Documents” and the obligations and liabilities of Pledgor under the Loan Documents are collectively referred to herein as the “Secured Indebtedness”), and for other good and valuable consideration, the parties agree as follows:


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1. Pledge of Common Stock. Pledgor hereby grants to Pledgee a security interest in, and pledges to Pledgee, 100% of the stock of the Canadian Purchaser and, after the amalgamation described above, the Company (collectively, the “Stock”) and hereby assigns, transfers and sets over to Pledgee all of Pledgor’s right, title and interest in and to the Stock, to be held by Pledgee as security for the Secured Indebtedness and further upon the terms and conditions set forth in this Agreement.


2. Pledge of Additional Common Stock. If Pledgor shall, at any time after the date hereof, acquire, by purchase, dividend or otherwise, any additional shares of capital stock of whatever class or description of either of the Canadian Purchaser or the Company, or any other securities or other instruments convertible or exchangeable for any such additional shares or any rights in participations of profits, options or warrants or any other contractual rights relating to any participation in the Canadian Purchaser or the Company (collectively, the “Additional Stock”), Pledgor shall be deemed to have pledged to Pledgee the Additional Stock pursuant to this Agreement. Pledgor hereby grants a security interest in and assigns, transfers and sets over to Pledgee all of Pledgors' right, title and interest in and to the Additional Stock and such certificates, instruments, documents and contracts evidencing the same as security for the Secured Indebtedness. The Stock, the Additional Stock and any shares of capital stock or other securities of the Canadian Purchaser or the Company issued in exchange therefore or replacement thereof are hereafter called the “Pledged Securities”. Pledgor hereby further assigns transfers, sets over and grants to Pledgee a security interest in and to all proceeds of the Pledged Securities.


3. Representations, Warranties and Covenants. Pledgor represents, warrants and covenants that:


(a) So long as the Secured Indebtedness or any part thereof remains unpaid, Pledgor covenants and agrees that Pledgor shall furnish to Pledgee such stock powers, consents, security agreements and other instruments as may be required by Pledgee to evidence its interest in the Pledged Securities and to assure the transferability of the Pledged Securities;


(b) If the validity or the priority of this Agreement or of any right, title, security or other interest created or evidenced hereby or of any right, title, security interest or other interest of Pledgor in and to the Pledged Securities shall be attached, endangered or questioned or if any legal proceedings are instituted against Pledgor with respect thereto, Pledgor will give prompt notice thereof to Pledgee.


4. Restrictions on Disposition of the Pledged Securities of Pledgor. Pledgor will not, directly or indirectly, sell, assign, transfer, mortgage, pledge, hypothecate or otherwise dispose of the Pledged Securities or any interest therein, or create, assume or permit any lien or encumbrance of any kind whatsoever to exist with respect thereto, without the express written consent of Pledgee.


5. Voting. Unless and until an Event of Default shall have occurred and be continuing, Pledgor shall have the right to vote the Pledged Securities and to otherwise act with respect thereto. All right to vote shall, without further action by any party, cease if an Event of Default shall occur.

6. Dividends and other Distributions. Pledgor agrees that it shall not cause or allow the Company to declare a dividend or make a distribution of its Stock, subdivide its outstanding Stock, combine its outstanding Stock into a smaller number of shares, or issue by reclassification of its Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing entity) any securities of its capital ownership that would in any way reduce the percentage ownership interest of the Pledged Securities in the Company or otherwise dilute such ownership interest.


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7. Remedies. If Pledgor defaults on any of the Notes or any of the Secured Indebtedness, or defaults upon any obligations hereunder and such breach or default is not cured after thirty (30) days following the delivery of written notice of such default to Pledgor (each an “Event of Default”), then upon written notice to Pledgor that Pledgee intends to exercise rights and/or remedies under this Agreement and/or any other Loan Document, Pledgee shall be entitled to exercise all of the rights, powers and remedies conveyed by this Agreement or the Notes and all rights, powers and remedies now or hereafter existing at law or in equity or by statute or otherwise for the protection and enforcement of its rights with respect to the Pledged Securities, and Pledgee shall be entitled, without limitation:


(a) to transfer all or any part of the Pledged Securities into Pledgee’s name or the names of its nominees and to cause new certificates or instruments to be issued in the names of such transferees;


(b) to vote all or any part of the Pledged Securities, whether or not transferred into the name of Pledgee or nominees, and to give all consents, waivers and ratifications with respect to the Pledged Securities and otherwise act with respect thereto as though it were the outright owner thereof, Pledgor hereby irrevocably constituting and appointing Pledgee the proxy and attorney-in-fact of Pledgor, with full power of substitution to do so, and


(c) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Pledged Securities, or any interest therein, at any public or private sale, without demand or performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or otherwise, other than written notice to Pledgor of same, for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, for such reasonable price or prices and on such terms as Pledgee in its absolute discretion may determine. Pledgor hereby waives demand, advertisement and notice, other than to Pledgor of Pledgee’s intention to sell and the time and place of the sale;


(d) To have and exercise all the rights of a secured party after default under the Uniform Commercial Code of Texas and in conjunction with, in addition to or in substitution for those rights and remedies and the rights and remedies provided for herein:


(i) Written notice mailed to Pledgor as provided herein five (5) days prior to the date of public sale of the Pledged Securities or prior to the date after which private sale of the Pledged Securities will be made shall constitute reasonable notice; and


(ii) It shall not be necessary that the Pledged Securities or any part thereof be present at the location of such sale; and


(iii) Prior to the application of proceeds of the disposition of the Pledged Securities to the Secured Indebtedness, such proceeds shall be applied to the reasonable expenses of retaking, holding, preparing for sale, selling, and the attorney’s fees and legal expenses incurred by Pledgee; and


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(iv) The sale by Pledgee of less than the whole of the Pledged Securities shall not exhaust the rights of Pledgee hereunder and Pledgee is specifically empowered to make successive sales hereunder until the whole of the Pledged Securities shall be sold, and if the proceeds of such sale of less than the whole of the Pledged Securities shall be less than the aggregate of the Secured Indebtedness, this Agreement and the security interest created hereby shall remain in full force and effect as to the unsold portion of the Pledged Securities as though no sale had been made; and


(v) The holder of the Secured Indebtedness or any part thereof on which payment or performance is delinquent shall have the option to proceed with foreclosure in satisfaction of such delinquent payment or performance either through judicial proceedings or by proceeding as if under a full foreclosure, conducting the sale as herein provided without declaring the entire Secured Indebtedness due, and if sale is made because of a default upon an installment or other performance due under the Secured Indebtedness, such sale may be made subject to the unmatured part of the Secured Indebtedness, but as to such unmatured part this Agreement shall remain in full force and effect as though no sale had been under the provisions of this subparagraph. Several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Indebtedness; and


(vi) In the event any sale hereunder is not completed or is defective in the opinion of Pledgee, such sale shall not exhaust the rights of Pledgee hereunder and Pledgee shall have the right to cause a subsequent sale or sales to be made hereunder; and


(vii) any and all statements of fact or other recitals made in any bill of sale or assignment or other instrument evidencing any foreclosure sale hereunder as to nonpayment of the Secured Indebtedness or as to the occurrence of any default, or as to Pledgee having declared all of such indebtedness to be due and payable, or as to notice of time, place and terms of sale and the properties to be sold having been duly given, or as to any other act or thing having been duly done by Pledgee, shall be taken as prima facie evidence of the truth of the facts so stated and recited; and


(viii) Pledgee may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Pledgee including the sending of notices and the conduct of sale.


(e) To resort to any security given by this Agreement or to any other security now existing or hereafter given to secure the payment of the Secured Indebtedness in whole or in part and in such portions and in such order as may seem best to Pledgee in its sole discretion, and any such action shall not be considered as a waiver of any of the rights, benefits or security interests evidenced by this Agreement.


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To the full extent Pledgor may do so, Pledgor agrees that Pledgor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption with respect to the Pledged Securities and Pledgor for Pledgor’s heirs, devisees, personal representatives, receivers, trustees, successors and assigns and for any and all person ever claiming any interest in the Pledged Securities, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of intention to mature or declare due the whole of the Secured Indebtedness, notice of election to mature or declare due the whole of the Secured Indebtedness and all rights to a marshalling of the assets of Pledgor, including the Pledged Securities or proceeds thereof, or to a sale in inverse order of alienation in the event of foreclosure of the security interest hereby created.


8. Application of Proceeds by Pledgee. All proceeds collected upon any sale of the Pledged Securities or part thereof hereunder, together with all other cash received by Pledgee hereunder, shall be applied as follows:


(a) First: to the payment of all reasonable costs and expenses of retaking, holding, preparing for sale, selling and to reasonable attorney’s fees and legal expenses incurred by Pledgee;



(b) Second: to the satisfaction of any indebtedness under the Canadian Receivables Note secured by this Agreement, including without limitation, the Secured Indebtedness, Pledgor to remain liable for any deficiency;



(c) Third: to the satisfaction of any indebtedness under the Canadian Note secured by this Agreement, including without limitation, the Secured Indebtedness, Pledgor to remain liable for any deficiency;



(d) Fourth: the balance, if any, to Pledgor.



9. Pledgor’s Obligations Absolute. The obligations of Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from the application provisions of any of the Notes, any other Loan Documents or with respect to any of the Secured Indebtedness, or any assignment or transfer of any interest thereon; (b) any waiver, consent, extension, or other action or inaction under or with respect to any Secured Indebtedness to Pledgee or any exercise or non-exercise of any right, remedy, power or privilege under or with respect thereto or with respect to this Agreement or any other Loan Document; (c) any furnishing of additional security to Pledgee or any release of security or guaranty by Pledgee; (d) any bankruptcy, insolvency, reorganization, dissolution, liquidation or other like proceeding relating to Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding; (e) release of any party liable either directly or indirectly for the Secured Indebtedness or any part thereof or for any covenant herein or in any other Loan Document; or (f) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor with respect to the performance of its obligations under this Agreement. Without notice to or consent of Pledgor, and without impairment of the lien and security interest and other rights created by this Agreement, Pledgee may accept from Pledgor, or from any other person or persons, additional security for the Secured Indebtedness to Pledgee.


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10. Non-Public Sale. If at any time when Pledgee shall elect to exercise its right to sell all or any of the Pledged Securities pursuant to Section 7 of this Agreement, the Pledged Securities, or the part thereof to be sold, Pledgee may, in its sole and absolute discretion, sell the Pledged Securities or part thereof by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without applicable registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion (a) may proceed to make the private sale notwithstanding that a registration statement for the purpose of registering the Pledged Securities shall have been filed under the Securities Acts, (b) may approach and negotiate with as few as one possible purchaser to effect the sale and (c) may restrict the sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of the Pledged Securities and who will satisfy other conditions that at the time are or may be required for a lawful non-public sale or are reasonably requested by Pledgee. Any sale complying with the foregoing shall be deemed to have been conducted in a commercially reasonable manner, but the foregoing shall not be considered minimum requirements for a commercially reasonable sale. In the event of any non-public sale, Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged securities at a price that Pledgee may in good faith deem reasonable under the circumstances, notwithstanding that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid.


11. Costs and Expenses. Pledgor will upon demand pay to Pledgee the amount of any and all reasonable expenses incurred by Pledgee in administering this Agreement, including, without limitation, the reasonable expenses of Pledgee’s counsel that Pledgee may incur in connection with (a) the realization upon the Pledged Securities (b) the failure by Pledgor to perform or observe any of the provisions hereof or (c) the successful defense of any counterclaim, cross-claim or other cause of action asserted by Pledgor in connection with this Agreement.


12. Remedies Cumulative. Each right, power and remedy of Pledgee provided for in this Agreement, any Note, and any of the other Loan Documents, now or hereafter existing at law, in equity and by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power and remedy. The exercise by Pledgee of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise of all such other rights, powers or remedies. No failure or delay on the part of Pledgee to exercise any right, power or remedy shall operate as a waiver thereof.


13. Reasonable Care. Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Securities in their possession if the Pledged Securities are accorded treatment substantially equal to that which Pledgee accords their own property, it being understood that Pledgee shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to the Pledged Securities. Pledgee shall not be responsible in any way for any depreciation in the value of the Pledged Securities.


14. Further Assurances. Pledgor, at its sole cost and expense, will duly execute, acknowledge and deliver all instruments and take all action as Pledgee from time to time may request in order to further effectuate the intent and purpose of this Agreement.


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15. Termination. Upon receipt by Pledgee of payment in full of all Secured Indebtedness, this Agreement shall terminate, and Pledgee, at the request and expense of Pledgor, will execute and deliver to Pledgor a proper instrument acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to Pledgor the Pledged Securities or portion thereof then in their possession that have not been theretofore sold or otherwise applied or released pursuant to this Agreement.


16. Notices. All notices and other communications under this Agreement shall be in writing and either (a) delivered against a receipt therefore; (b) mailed by registered or certified mail, return receipt requested, or (c) sent by telecopy, in each case addressed as follows:


(a) If to Pledgor, to: SB Group Holdings, Inc.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

(b) If to Pledgee, to: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]

With a copy to:

Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]





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17. Provisions Subject to Applicable Law. All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or unenforceable. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the remainder of this Agreement and the validity of the other terms of this Agreement shall be in no way be affected thereby. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, AND IS PERFORMABLE IN HARRIS COUNTY, TEXAS.


18. Miscellaneous. This Agreement shall be binding upon Pledgor and its successors and assigns and shall inure to the benefit of and be enforceable by Pledgee and its successors and assigns. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. The headings in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. A carbon, photographic or other reproduction of this Agreement or of any financing statement relating to this Agreement shall be sufficient as a financing statement. If any part of the Secured Indebtedness cannot be lawfully secured by this Agreement, or if any part of the Pledged Securities cannot be lawfully subject to the security interest hereof to the full extent of such Secured Indebtedness, then all payments made shall be applied on the Secured Indebtedness first in discharge of that portion thereof which is not secured by this Agreement. For the purposes of the Texas Uniform Commercial Code and other applicable law, Pledgor shall be the “Debtor” and Pledgee shall be the “Secured Party”.


19. Benefits. Pledgor does hereby acknowledge that it has investigated fully the benefits and advantages that it will receive from the execution of this Agreement and Pledgor does hereby acknowledge, warrant and represent that its officers have found that a direct or indirect benefit will accrue to Pledgor by reason of its execution of this Agreement in favor of Pledgee. Pledgor further acknowledges that but for Pledgor’s agreement to execute this Agreement and the Notes executed by the Pledgor, Pledgee would not have accepted the Notes as payment for the Stock.


20. Representation of Parties. Each of the parties signing below represents and warrants to the other that such party has the power and authority to execute this Agreement.


(SIGNATURE PAGE FOLLOWS)



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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.


PLEDGOR:

SB GROUP HOLDINGS, INC.


By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PLEDGEE:

STRATUM HOLDINGS, INC.


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





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Exhibit 10.7


AMERICAN PLEDGE AND SECURITY AGREEMENT



This PLEDGE AND SECURITY AGREEMENT (this “Agreement”) is entered into effective as of this 3rd day of June, 2011, by and between SB Group Holdings, Inc., a Delaware corporation (the “Pledgor”), and Stratum Holdings, Inc., a Nevada corporation (“Pledgee”). Pledgor and Pledgee are each a “party” and together are “parties” to this Agreement.


RECITALS


A. Pledgor and Pledgee are parties to that certain Stock Purchase Agreement, dated June 3, 2011 (the “Stock Purchase Agreement”), pursuant to which the Purchaser purchased all of the issued and outstanding capital stock (the “Stock”) of Decca Consulting, Inc., a corporation organized and existing under the laws of Nevada (the “Company”);


B. As part of the purchase price for the Stock, Pledgor has delivered the following promissory notes, dated of even date herewith (the “Notes”) to the Pledgee:


1. The American Note payable to Pledgee in the original principal amount of U.S. $531,875.00.



2. The American Receivables Note payable to Pledgee in the original principal amount of U.S. $690,000.00, as may be adjusted in accordance with the terms of the Stock Purchase Agreement.



C. Following the acquisition of the Stock by the Purchaser, Pledgor owns all of the Stock; and


D. As part of the consideration of Pledgee accepting the Notes (as opposed to cash or other consideration) under the Stock Purchase Agreement, Pledgor desires to pledge and deliver to Pledgee the Stock as security for the Notes and other obligations hereafter identified.

AGREEMENT


NOW, THEREFORE, to induce Pledgee to accept the Notes, and as security for Pledgor’s obligations under the Notes and any other obligations or liabilities of Pledgor under this Agreement (this Agreement and the Notes, the “Loan Documents” and the obligations and liabilities of Pledgor under the Loan Documents are collectively referred to herein as the “Secured Indebtedness”), and for other good and valuable consideration, the parties agree as follows:


1. Pledge of Common Stock. Pledgor hereby grants to Pledgee a security interest in, and pledges to Pledgee, 100% of the Stock of the Company and hereby assigns, transfers and sets over to Pledgee all of Pledgor’s right, title and interest in and to the Stock, to be held by Pledgee as security for the Secured Indebtedness and further upon the terms and conditions set forth in this Agreement.


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2. Pledge of Additional Common Stock. If Pledgor shall, at any time after the date hereof, acquire, by purchase, dividend or otherwise, any additional shares of capital stock of whatever class or description of either of the Company, or any other securities or other instruments convertible or exchangeable for any such additional shares or any rights in participations of profits, options or warrants or any other contractual rights relating to any participation in the Companies (collectively, the “Additional Stock”), Pledgor shall be deemed to have pledged to Pledgee the Additional Stock pursuant to this Agreement. Pledgor hereby grants a security interest in and assigns, transfers and sets over to Pledgee all of Pledgors' right, title and interest in and to the Additional Stock and such certificates, instruments, documents and contracts evidencing the same as security for the Secured Indebtedness. The Stock, the Additional Stock and any shares of capital stock or other securities of the Companies issued in exchange therefore or replacement thereof are hereafter called the “Pledged Securities”. Pledgor hereby further assigns transfers, sets over and grants to Pledgee a security interest in and to all proceeds of the Pledged Securities.


3. Representations, Warranties and Covenants. Pledgor represents, warrants and covenants that:


(a) So long as the Secured Indebtedness or any part thereof remains unpaid, Pledgor covenants and agrees that Pledgor shall furnish to Pledgee such stock powers, consents, security agreements and other instruments as may be required by Pledgee to evidence its interest in the Pledged Securities and to assure the transferability of the Pledged Securities;


(b) If the validity or the priority of this Agreement or of any right, title, security or other interest created or evidenced hereby or of any right, title, security interest or other interest of Pledgor in and to the Pledged Securities shall be attached, endangered or questioned or if any legal proceedings are instituted against Pledgor with respect thereto, Pledgor will give prompt notice thereof to Pledgee.


4. Restrictions on Disposition of the Pledged Securities of Pledgor. Pledgor will not, directly or indirectly, sell, assign, transfer, mortgage, pledge, hypothecate or otherwise dispose of the Pledged Securities or any interest therein, or create, assume or permit any lien or encumbrance of any kind whatsoever to exist with respect thereto, without the express written consent of Pledgee.


5. Voting. Unless and until an Event of Default shall have occurred and be continuing, Pledgor shall have the right to vote the Pledged Securities and to otherwise act with respect thereto. All right to vote shall, without further action by any party, cease if an Event of Default shall occur.


6. Dividends and other Distributions. Pledgor agrees that it shall not cause or allow the Company to declare a dividend or make a distribution of its Stock, subdivide its outstanding Stock, combine its outstanding Stock into a smaller number of shares, or issue by reclassification of its Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing entity) any securities of its capital ownership that would in any way reduce the percentage ownership interest of the Pledged Securities in the Company or otherwise dilute such ownership interest.


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7. Remedies. If Pledgor defaults on any of the Notes or any of the Secured Indebtedness, or defaults upon any obligations hereunder and such breach or default is not cured after thirty (30) days following the delivery of written notice of such default to Pledgor (each an “Event of Default”), then upon written notice to Pledgor that Pledgee intends to exercise rights and/or remedies under this Agreement and/or any other Loan Document, Pledgee shall be entitled to exercise all of the rights, powers and remedies conveyed by this Agreement or the Notes and all rights, powers and remedies now or hereafter existing at law or in equity or by statute or otherwise for the protection and enforcement of its rights with respect to the Pledged Securities, and Pledgee shall be entitled, without limitation:

(a) to transfer all or any part of the Pledged Securities into Pledgee’s name or the names of its nominees and to cause new certificates or instruments to be issued in the names of such transferees;


(b) to vote all or any part of the Pledged Securities, whether or not transferred into the name of Pledgee or nominees, and to give all consents, waivers and ratifications with respect to the Pledged Securities and otherwise act with respect thereto as though it were the outright owner thereof, Pledgor hereby irrevocably constituting and appointing Pledgee the proxy and attorney-in-fact of Pledgor, with full power of substitution to do so, and


(c) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Pledged Securities, or any interest therein, at any public or private sale, without demand or performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or otherwise, other than written notice to Pledgor of same, for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, for such reasonable price or prices and on such terms as Pledgee in its absolute discretion may determine. Pledgor hereby waives demand, advertisement and notice, other than to Pledgor of Pledgee’s intention to sell and the time and place of the sale;


(d) To have and exercise all the rights of a secured party after default under the Uniform Commercial Code of Texas and in conjunction with, in addition to or in substitution for those rights and remedies and the rights and remedies provided for herein:


(i) Written notice mailed to Pledgor as provided herein five (5) days prior to the date of public sale of the Pledged Securities or prior to the date after which private sale of the Pledged Securities will be made shall constitute reasonable notice; and



(ii) It shall not be necessary that the Pledged Securities or any part thereof be present at the location of such sale; and



(iii) Prior to the application of proceeds of the disposition of the Pledged Securities to the Secured Indebtedness, such proceeds shall be applied to the reasonable expenses of retaking, holding, preparing for sale, selling, and the attorney’s fees and legal expenses incurred by Pledgee; and



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(iv) The sale by Pledgee of less than the whole of the Pledged Securities shall not exhaust the rights of Pledgee hereunder and Pledgee is specifically empowered to make successive sales hereunder until the whole of the Pledged Securities shall be sold, and if the proceeds of such sale of less than the whole of the Pledged Securities shall be less than the aggregate of the Secured Indebtedness, this Agreement and the security interest created hereby shall remain in full force and effect as to the unsold portion of the Pledged Securities as though no sale had been made; and



(v) The holder of the Secured Indebtedness or any part thereof on which payment or performance is delinquent shall have the option to proceed with foreclosure in satisfaction of such delinquent payment or performance either through judicial proceedings or by proceeding as if under a full foreclosure, conducting the sale as herein provided without declaring the entire Secured Indebtedness due, and if sale is made because of a default upon an installment or other performance due under the Secured Indebtedness, such sale may be made subject to the unmatured part of the Secured Indebtedness, but as to such unmatured part this Agreement shall remain in full force and effect as though no sale had been under the provisions of this subparagraph. Several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Indebtedness; and



(vi) In the event any sale hereunder is not completed or is defective in the opinion of Pledgee, such sale shall not exhaust the rights of Pledgee hereunder and Pledgee shall have the right to cause a subsequent sale or sales to be made hereunder; and



(vii) any and all statements of fact or other recitals made in any bill of sale or assignment or other instrument evidencing any foreclosure sale hereunder as to nonpayment of the Secured Indebtedness or as to the occurrence of any default, or as to Pledgee having declared all of such indebtedness to be due and payable, or as to notice of time, place and terms of sale and the properties to be sold having been duly given, or as to any other act or thing having been duly done by Pledgee, shall be taken as prima facie evidence of the truth of the facts so stated and recited; and



(viii) Pledgee may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Pledgee including the sending of notices and the conduct of sale.



(e) To resort to any security given by this Agreement or to any other security now existing or hereafter given to secure the payment of the Secured Indebtedness in whole or in part and in such portions and in such order as may seem best to Pledgee in its sole discretion, and any such action shall not be considered as a waiver of any of the rights, benefits or security interests evidenced by this Agreement.


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To the full extent Pledgor may do so, Pledgor agrees that Pledgor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption with respect to the Pledged Securities and Pledgor for Pledgor’s heirs, devisees, personal representatives, receivers, trustees, successors and assigns and for any and all person ever claiming any interest in the Pledged Securities, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of intention to mature or declare due the whole of the Secured Indebtedness, notice of election to mature or declare due the whole of the Secured Indebtedness and all rights to a marshalling of the assets of Pledgor, including the Pledged Securities or proceeds thereof, or to a sale in inverse order of alienation in the event of foreclosure of the security interest hereby created.


8. Application of Proceeds by Pledgee. All proceeds collected upon any sale of the Pledged Securities or part thereof hereunder, together with all other cash received by Pledgee hereunder, shall be applied as follows:


(a) First: to the payment of all reasonable costs and expenses of retaking, holding, preparing for sale, selling and to reasonable attorney’s fees and legal expenses incurred by Pledgee;



(b) Second: to the satisfaction of any indebtedness under the American Receivables Note secured by this Agreement, including without limitation, the Secured Indebtedness, Pledgor to remain liable for any deficiency;



(c) Third: to the satisfaction of any indebtedness under the American Note secured by this Agreement, including without limitation, the Secured Indebtedness, Pledgor to remain liable for any deficiency;



(d) Fourth: the balance, if any, to Pledgor.



9. Pledgor’s Obligations Absolute. The obligations of Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any renewal, extension, amendment or modification of or addition or supplement to or deletion from the application provisions of any of the Notes, any other Loan Documents or with respect to any of the Secured Indebtedness, or any assignment or transfer of any interest thereon; (b) any waiver, consent, extension, or other action or inaction under or with respect to any Secured Indebtedness to Pledgee or any exercise or non-exercise of any right, remedy, power or privilege under or with respect thereto or with respect to this Agreement or any other Loan Document; (c) any furnishing of additional security to Pledgee or any release of security or guaranty by Pledgee; (d) any bankruptcy, insolvency, reorganization, dissolution, liquidation or other like proceeding relating to Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding; (e) release of any party liable either directly or indirectly for the Secured Indebtedness or any part thereof or for any covenant herein or in any other Loan Document; or (f) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor with respect to the performance of its obligations under this Agreement. Without notice to or consent of Pledgor, and without impairment of the lien and security interest and other rights created by this Agreement, Pledgee may accept from Pledgor, or from any other person or persons, additional security for the Secured Indebtedness to Pledgee.


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10. Non-Public Sale. If at any time when Pledgee shall elect to exercise its right to sell all or any of the Pledged Securities pursuant to Section 7 of this Agreement, the Pledged Securities, or the part thereof to be sold, Pledgee may, in its sole and absolute discretion, sell the Pledged Securities or part thereof by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without applicable registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion (a) may proceed to make the private sale notwithstanding that a registration statement for the purpose of registering the Pledged Securities shall have been filed under the Securities Acts, (b) may approach and negotiate with as few as one possible purchaser to effect the sale and (c) may restrict the sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of the Pledged Securities and who will satisfy other conditions that at the time are or may be required for a lawful non-public sale or are reasonably requested by Pledgee. Any sale complying with the foregoing shall be deemed to have been conducted in a commercially reasonable manner, but the foregoing shall not be considered minimum requirements for a commercially reasonable sale. In the event of any non-public sale, Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged securities at a price that Pledgee may in good faith deem reasonable under the circumstances, notwithstanding that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid.


11. Costs and Expenses. Pledgor will upon demand pay to Pledgee the amount of any and all reasonable expenses incurred by Pledgee in administering this Agreement, including, without limitation, the reasonable expenses of Pledgee’s counsel that Pledgee may incur in connection with (a) the realization upon the Pledged Securities (b) the failure by Pledgor to perform or observe any of the provisions hereof or (c) the successful defense of any counterclaim, cross-claim or other cause of action asserted by Pledgor in connection with this Agreement.


12. Remedies Cumulative. Each right, power and remedy of Pledgee provided for in this Agreement, any Note, and any of the other Loan Documents, now or hereafter existing at law, in equity and by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power and remedy. The exercise by Pledgee of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise of all such other rights, powers or remedies. No failure or delay on the part of Pledgee to exercise any right, power or remedy shall operate as a waiver thereof.


13. Reasonable Care. Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Securities in their possession if the Pledged Securities are accorded treatment substantially equal to that which Pledgee accords their own property, it being understood that Pledgee shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to the Pledged Securities. Pledgee shall not be responsible in any way for any depreciation in the value of the Pledged Securities.


14. Further Assurances. Pledgor, at its sole cost and expense, will duly execute, acknowledge and deliver all instruments and take all action as Pledgee from time to time may request in order to further effectuate the intent and purpose of this Agreement.


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15. Termination. Upon receipt by Pledgee of payment in full of all Secured Indebtedness, this Agreement shall terminate, and Pledgee, at the request and expense of Pledgor, will execute and deliver to Pledgor a proper instrument acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to Pledgor the Pledged Securities or portion thereof then in their possession that have not been theretofore sold or otherwise applied or released pursuant to this Agreement.


16. Notices. All notices and other communications under this Agreement shall be in writing and either (a) delivered against a receipt therefore; (b) mailed by registered or certified mail, return receipt requested, or (c) sent by telecopy, in each case addressed as follows:


(a) If to Pledgor, to: SB Group Holdings, Inc.
3820 State Street
Santa Barbara, CA 93105
Attn: Grant Haws
Telephone: [phone]
Facsimile: [phone]

(b) If to Pledgee, to: Stratum Holdings, Inc.
Three Riverway, Suite 1590
Houston, Texas 77056
Attn.: Chief Executive Officer
Telephone: [phone]
Facsimile: [phone]
With a copy to:
Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attn: Bryce D. Linsenmayer, Esq.
Telephone: [phone]
Facsimile: [phone]



17. Provisions Subject to Applicable Law. All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or unenforceable. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the remainder of this Agreement and the validity of the other terms of this Agreement shall be in no way be affected thereby. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, AND IS PERFORMABLE IN HARRIS COUNTY, TEXAS.


18. Miscellaneous. This Agreement shall be binding upon Pledgor and its successors and assigns and shall inure to the benefit of and be enforceable by Pledgee and its successors and assigns. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. The headings in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. A carbon, photographic or other reproduction of this Agreement or of any financing statement relating to this Agreement shall be sufficient as a financing statement. If any part of the Secured Indebtedness cannot be lawfully secured by this Agreement, or if any part of the Pledged Securities cannot be lawfully subject to the security interest hereof to the full extent of such Secured Indebtedness, then all payments made shall be applied on the Secured Indebtedness first in discharge of that portion thereof which is not secured by this Agreement. For the purposes of the Texas Uniform Commercial Code and other applicable law, Pledgor shall be the “Debtor” and Pledgee shall be the “Secured Party”.


19. Benefits. Pledgor does hereby acknowledge that it has investigated fully the benefits and advantages that it will receive from the execution of this Agreement and Pledgor does hereby acknowledge, warrant and represent that its officers have found that a direct or indirect benefit will accrue to Pledgor by reason of its execution of this Agreement in favor of Pledgee. Pledgor further acknowledges that but for Pledgor’s agreement to execute this Agreement and the Notes executed by the Pledgor, Pledgee would not have accepted the Notes as payment for the Stock.

20. Representation of Parties. Each of the parties signing below represents and warrants to the other that such party has the power and authority to execute this Agreement.



(SIGNATURE PAGE FOLLOWS)







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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above and effective as of the date first written above.




PLEDGOR:
SB GROUP HOLDINGS, INC.

By: /s/ Robert Olson
Name: Robert Olson
Title: Secretary


PLEDGEE:

STRATUM HOLDINGS, INC.



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





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