Exhibit 99.2
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information and explanatory entries present how the combined financial statements of Stratum and Decca may have appeared had the businesses actually been combined as of December 31, 2006 (with respect to the balance sheet information) and as of January 1, 2005 (with respect to the statements of operations information for the years ended December 31, 2006 and 2005). The unaudited pro forma condensed combined financial information shows the impact of Stratum’s acquisition of Decca on the companies’ historical financial position and results of operations under the purchase method of accounting with Stratum treated as the acquirer. Under this method of accounting, the assets and liabilities of Decca are recorded by Stratum at their estimated fair values as of March 2, 2007, the date the Stock Purchase Agreement was completed.
Pursuant to the Stock Purchase Agreement, Stratum acquired the outstanding capital stock of Decca for: (a) cash of $2,212,600 (representing the U.S. currency equivalent of $2,600,000 in Canadian currency, using the March 2, 2007 exchange rate of $0.851 U.S./$1.00 Canadian); (b) long term debt of $1,233,950 (representing the U.S. currency equivalent of $1,450,000 in Canadian currency, using the March 2, 2007 exchange rate of $0.851 U.S./$1.00 Canadian); (c) 828,572 shares of Stratum’s common stock, with an agreed upon value of $1.75 per share, for a total equity value of $1,450,000, and (d) accrued liabilities of $200,000, representing estimated third party costs of the transaction. Additionally, the Stock Purchase Agreement provides for the issuance of a promissory note to the sellers for an amount equal to Decca’s December 31, 2006 net working capital (as defined), to be paid as the net working capital amount is liquidated.
The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined companies had the companies actually been combined 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 Stratum, incorporated by reference to its periodic SEC filings, and of Decca, appearing elsewhere in this document. In addition, as explained in more detail in the accompanying entries to the unaudited pro forma condensed combined financial information, the allocation of the purchase price reflected in the pro forma condensed combined financial information is preliminary and is subject to adjustment and may vary from the actual purchase price allocation that will be recorded as of the effective date of the acquisition.
PF-1
STRATUM HOLDINGS, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 2006
Stratum | Decca | Pro Forma | Pro Forma | |||||||||||||
Holdings, Inc. | Consulting, Ltd. | Adjustments | Combined | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 261,010 | $ | 37,531 | $ | (212,600 | ) | (1/3) | $ | 85,941 | ||||||
Accounts receivable | 8,277,568 | 3,576,552 | - | 11,854,120 | ||||||||||||
Marketable securities | - | 17,164 | - | 17,164 | ||||||||||||
Prepaid expenses and other | 880,230 | 30,627 | - | 910,857 | ||||||||||||
Total current assets | 9,418,808 | 3,661,874 | (212,600 | ) | 12,868,082 | |||||||||||
Property and equipment: | ||||||||||||||||
Oil and gas properties (full cost method) | 13,433,333 | - | - | 13,433,333 | ||||||||||||
Other property and equipment | 893,512 | 9,425 | - | 902,937 | ||||||||||||
14,326,845 | 9,425 | - | 14,336,270 | |||||||||||||
Less: Accumulated DD&A | (816,871 | ) | (3,202 | ) | - | (820,073 | ) | |||||||||
Net property and equipment | 13,509,974 | 6,223 | - | 13,516,197 | ||||||||||||
Other assets: | ||||||||||||||||
Goodwill | 9,089,162 | - | 4,980,462 | (1/2) | 14,069,624 | |||||||||||
Deferred income taxes | 489,100 | - | - | 489,100 | ||||||||||||
Other | 636,821 | - | - | 636,821 | ||||||||||||
Total other assets | 10,215,083 | - | 4,980,462 | 15,195,545 | ||||||||||||
Total assets | $ | 33,143,865 | $ | 3,668,097 | $ | 4,767,862 | $ | 41,579,824 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 7,661,885 | $ | - | $ | 239,920 | $ | 7,901,805 | ||||||||
Accounts payable | 2,129,381 | 2,777,811 | - | 4,907,192 | ||||||||||||
Accrued liabilities | 1,492,973 | 534,328 | 199,950 | (1) | 2,227,251 | |||||||||||
Income taxes payable | 21,883 | - | - | 21,883 | ||||||||||||
Total current liabilities | 11,306,122 | 3,312,139 | 439,870 | 15,058,131 | ||||||||||||
Long-term debt, net of current portion | 10,577,969 | - | 3,233,950 | (1/3) | 13,811,919 | |||||||||||
Deferred income taxes | 3,378,400 | 5,670 | (5,670 | ) | (2) | 3,378,400 | ||||||||||
Total liabilities | 25,262,491 | 3,317,809 | 3,668,150 | 32,248,450 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock | 23,804 | 1 | 828 | (1/2) | 24,633 | |||||||||||
Additional paid-in capital | 9,441,664 | - | 1,449,171 | (1) | 10,890,835 | |||||||||||
Retained earnings (deficit) | (1,584,094 | ) | 321,591 | (321,591 | ) | (2) | (1,584,094 | ) | ||||||||
Cumulative foreign currency translation | - | 28,696 | (28,696 | ) | (2) | - | ||||||||||
Total stockholders’ equity | 7,881,374 | 350,288 | 1,099,712 | 9,331,374 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 33,143,865 | $ | 3,668,097 | $ | 4,767,862 | $ | 41,579,824 |
PF-2
(1 | ) | |||||||||||||||||||||
Investment in Decca | 5,096,500 | |||||||||||||||||||||
Cash | 2,212,600 | |||||||||||||||||||||
Accrued liabilities | 199,950 | |||||||||||||||||||||
Long term debt | 1,233,950 | |||||||||||||||||||||
Common stock | 829 | |||||||||||||||||||||
Paid in capital | 1,449,171 | |||||||||||||||||||||
5,096,500 | 5,096,500 | |||||||||||||||||||||
To record purchase of Decca for (a) cash of $2,212,600 ($2,600,000 Cdn), (b) long term debt of $1,233,950 ($1,450,000 Cdn), (c) 828,572 shares of STTH common stock, with an agreed upon value of $1.75 per share, for a total equity value of $1,450,000, and (d) accrued liabilities of $199,950, representing estimated third party costs of the transaction. | ||||||||||||||||||||||
(2 | ) | |||||||||||||||||||||
Goodwill | 4,980,462 | |||||||||||||||||||||
Deferred income taxes | 5,670 | |||||||||||||||||||||
Common stock | 1 | |||||||||||||||||||||
Retained earnings | 321,591 | |||||||||||||||||||||
Cumulative foreign currency translation | 28,696 | |||||||||||||||||||||
Current portion of long-term debt | 239,920 | |||||||||||||||||||||
Investment in Decca | 5,096,500 | |||||||||||||||||||||
5,336,420 | 5,336,420 | |||||||||||||||||||||
To record preliminary allocation of the purchase price paid for acquisition of Decca. The excess of the purchase price over the fair value of acquired net assets has been allocated to goodwill (a) after elimination of Decca's historical balances of deferred taxes, common stock, retained earnings and cumulative foreign currency translation, and (b) recognition of notes payable to sellers for net working capital adjustment. | ||||||||||||||||||||||
(3 | ) | |||||||||||||||||||||
Cash | 2,000,000 | |||||||||||||||||||||
2,000,000 | ||||||||||||||||||||||
2,000,000 | 2,000,000 | |||||||||||||||||||||
To record additional borrowings of $2,000,000 under Wells Fargo credit facility to finance cash portion of Decca purchase price reflected in (1) above. | ||||||||||||||||||||||
PF-3
STRATUM HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
Stratum | Decca | Pro Forma | Pro Forma | ||||||||||||
Holdings, Inc. | Consulting, Ltd. | Adjustments | Combined | ||||||||||||
Revenues: | |||||||||||||||
Staffing services | |||||||||||||||
Construction | $ | 16,758,412 | $ | - | $ | - | $ | 16,758,412 | |||||||
Petroleum engineering | 15,239,239 | 18,018,526 | 9,287,831 | (4) | 42,545,596 | ||||||||||
Oil and gas sales | 2,187,827 | - | 1,581,605 | (4) | 3,769,432 | ||||||||||
Other | 65,724 | 34,996 | 40 | (4) | 100,760 | ||||||||||
34,251,202 | 18,053,522 | 10,869,476 | 63,174,200 | ||||||||||||
Expenses: | |||||||||||||||
Cost of staffing services | |||||||||||||||
Construction | 13,591,864 | - | - | 13,591,864 | |||||||||||
Petroleum engineering | 10,952,316 | 16,409,342 | 5,879,346 | (4) | 33,241,004 | ||||||||||
Annual partner compensation | - | 932,902 | (572,902 | ) | (5) | 360,000 | |||||||||
Lease operating expense | 1,185,902 | - | 676,608 | (4) | 1,862,510 | ||||||||||
Depreciation, depletion & amortization | 876,161 | 1,450 | 260,142 | (4) | 1,137,753 | ||||||||||
Workover expense | 525,867 | - | 280,603 | (4) | 806,470 | ||||||||||
General and administrative | 6,436,071 | 447,272 | 3,066,504 | (4) | 9,949,847 | ||||||||||
Interest expense | 1,036,100 | 7,252 | 646,218 | (4/5) | 1,689,570 | ||||||||||
34,604,281 | 17,798,218 | 10,236,519 | 62,639,018 | ||||||||||||
Income (loss) before income taxes | (353,079 | ) | 255,304 | 632,957 | 535,182 | ||||||||||
Provision for income taxes | 120,002 | (41,058 | ) | (260,906 | ) | (6) | (181,962 | ) | |||||||
Net income (loss) | $ | (233,077 | ) | $ | 214,246 | $ | 372,051 | $ | 353,220 | ||||||
Net income (loss) per share, basic | |||||||||||||||
and diluted | $ | (0.01 | ) | $ | 0.01 | ||||||||||
Weighted average shares outstanding, basic | 18,579,652 | 5,738,970 | (7) | 24,318,622 | |||||||||||
Weighted average shares outstanding, diluted | 25,164,803 |
PF-4
(4) | ||||||||||||||||||||||
Cost of staffing services | 5,879,346 | |||||||||||||||||||||
Lease operating expense | 676,608 | |||||||||||||||||||||
DD&A expense | 260,142 | |||||||||||||||||||||
Workover expense | 280,603 | |||||||||||||||||||||
General and administrative | 3,066,504 | |||||||||||||||||||||
Interest expense | 322,823 | |||||||||||||||||||||
Retained earnings | 383,450 | |||||||||||||||||||||
Revenue - petroleum engineering | 9,287,831 | |||||||||||||||||||||
Oil and gas sales | 1,581,605 | |||||||||||||||||||||
Other | 40 | |||||||||||||||||||||
10,869,476 | 10,869,476 | |||||||||||||||||||||
To adjust Stratum's historical Statement of Operations to reflect the purchase of outstanding common stock of CYMRI Corporation, which occurred on May 23, 2006, as if the purchase had occurred on January 1, 2006. | ||||||||||||||||||||||
(5) | ||||||||||||||||||||||
Interest expense | 323,395 | |||||||||||||||||||||
Accrued liabilities | 249,507 | |||||||||||||||||||||
Cost of staffing services - petroleum | 572,902 | |||||||||||||||||||||
572,902 | 572,902 | |||||||||||||||||||||
To adjust historical amounts of (a) cost of staffing services for annual partner bonuses of Decca principals, less annual compensation of $180,000 each to be paid to both former Decca partners by Stratum, and (b) interest expense for the effect of debt issued in the Decca acquisition consisting of (i) $1,233,950 of notes issued to the former shareholders of Decca, and (ii) $2,000,000 of additional borrowings under Wells Fargo credit facility to finance cash portion of Decca purchase price. All such debt bears interest at assumed rate of 10% per annum. | ||||||||||||||||||||||
(6 | ) | |||||||||||||||||||||
Provision for income taxes | 260,906 | |||||||||||||||||||||
Deferred income taxes | 260,906 | |||||||||||||||||||||
260,906 | 260,906 | |||||||||||||||||||||
To adjust historical tax expense based on the pro forma combined results of operations at an assumed effective tax rate of 34%. | ||||||||||||||||||||||
(7 | ) | |||||||||||||||||||||
To reflect issuances of (a) 4,910,398 new shares of STTH common stock in the CYMRI acquisition (representing pro forma effect of 12,540,000 shares issued on May 23, 2006 as if such shares had been issued on January 1, 2006), and (b) 828,572 new shares of STTH common stock in the Decca acquisition. |
PF-5
STRATUM HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005
Stratum | Decca | Pro Forma | Pro Forma | |||||||||||||||
Holdings, Inc. | Consulting, Ltd. | Adjustments | Combined | |||||||||||||||
Revenues: | ||||||||||||||||||
Staffing services | ||||||||||||||||||
Construction | $ | 8,070,569 | $ | - | $ | - | $ | 8,070,569 | ||||||||||
Petroleum engineering | - | 12,393,564 | 17,777,272 | (4) | 30,170,836 | |||||||||||||
Oil and gas sales | - | - | 4,168,128 | (4) | 4,168,128 | |||||||||||||
Other | - | 71,542 | 68,347 | (4) | 139,889 | |||||||||||||
8,070,569 | 12,465,106 | 22,013,747 | 42,549,422 | |||||||||||||||
Expenses: | ||||||||||||||||||
Cost of staffing services | ||||||||||||||||||
Construction | 6,890,286 | - | - | 6,890,286 | ||||||||||||||
Petroleum engineering | - | 11,106,080 | 11,748,639 | (4) | 22,854,719 | |||||||||||||
Annual partner compensation | - | 885,169 | (525,169 | ) | (5) | 360,000 | ||||||||||||
Lease operating expense | - | - | 1,363,398 | (4) | 1,363,398 | |||||||||||||
Depreciation, depletion & amortization | 24,998 | 1,237 | 1,463,556 | (4) | 1,489,791 | |||||||||||||
Workover expense | - | - | 185,734 | (4) | 185,734 | |||||||||||||
General and administrative | 1,562,476 | 242,577 | 6,637,385 | (4) | 8,442,438 | |||||||||||||
Interest expense | 133,641 | 3,871 | 1,534,845 | (4/5) | 1,672,357 | |||||||||||||
8,611,401 | 12,238,934 | 22,408,388 | 43,258,723 | |||||||||||||||
Income (loss) before income taxes | (540,832 | ) | 226,172 | (394,641 | ) | (709,301 | ) | |||||||||||
Provision for income taxes | - | 37,318 | (37,318 | ) | (6) | - | ||||||||||||
Net income (loss) | $ | (540,832 | ) | $ | 188,854 | $ | (357,323 | ) | $ | (709,301 | ) | |||||||
Net income (loss) per share, basic | ||||||||||||||||||
and diluted | $ | (0.05 | ) | $ | (0.03 | ) | ||||||||||||
Weighted average shares outstanding, | ||||||||||||||||||
basic and diluted | 10,950,000 | 13,368,572 | (7) | 24,318,572 | ||||||||||||||
PF-6
(4) | ||||||||||
Cost of staffing services | 11,748,639 | |||||||||
Lease operating expense | 1,363,398 | |||||||||
DD&A expense | 1,463,556 | |||||||||
Workover expense | 185,734 | |||||||||
General and administrative | 6,637,385 | |||||||||
Interest expense | 1,211,450 | |||||||||
Revenue - petroleum engineering | 17,777,272 | |||||||||
Oil and gas sales | 4,168,128 | |||||||||
Other | 68,347 | |||||||||
Retained earnings | 596,415 | |||||||||
22,610,162 | 22,610,162 | |||||||||
To record historical results of operations of CYMRI Corporation, which was acquired by Stratum on May 23, 2006, as if the acquisition had occurred on January 1, 2005. | ||||||||||
(5) | ||||||||||
Interest expense | 323,395 | |||||||||
Accrued liabilities | 201,774 | |||||||||
Cost of staffing services - petroleum | 525,169 | |||||||||
525,169 | 525,169 | |||||||||
To adjust historical amounts of (a) cost of staffing services for annual partner bonuses of Decca principals, less annual compensation of $180,000 each to be paid to both former Decca partners by Stratum, and (b) interest expense for the effect of debt issued in the Decca acquisition consisting of (i) $1,233,950 of notes issued to the former shareholders of Decca, and (ii) $2,000,000 of additional borrowings under Wells Fargo credit facility to finance cash portion of Decca purchase price. All such debt bears interest at assumed rate of 10% per annum. | ||||||||||
(6) | ||||||||||
Deferred income taxes | 37,318 | |||||||||
Provision for income taxes | 37,318 | |||||||||
37,318 | 37,318 | |||||||||
To adjust Decca's historical tax expense based on the pro forma combined results of operations at an assumed effective tax rate of zero. | ||||||||||
(7) | ||||||||||
To reflect issuances of (a) 12,540,000 new shares of STTH common stock in the CYMRI acquisition, and (b) 828,572 new shares of STTH common stock in the Decca acquisition. |
PF-7