STW Resources Holding (STWS) 10-Q 2010 Q3 Quarterly report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

STW RESOURCES HOLDING CORP.

(Exact Name of Registrant as Specified in Its Charter)

Nevada	000-51430	20-3678799
(State or Other Jurisdiction	(Commission File No.)	(I.R.S. Employer
of Incorporation or		Identification No.)
Organization)

619 West Texas Ave
Suite 126	(432-686-7777)
Midland Texas, 79701
(Address of Principal Executive Offices)	(Registrant’s telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x           No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)     Yes ¨           No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one)

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in section 12b-2 of the Exchange Act)

Yes ¨    No x

As of November 22, 2010, there were 36,282,266 shares of the Company’s common stock, par value $0.001 per share issued and outstanding.

STW RESOURCES HOLDING CORP.

FORM 10-Q

TABLE OF CONTENTS

PART I
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 4.	CONTROLS AND PROCEDURES	31
PART II
ITEM 1.	LEGAL PROCEEDINGS	32
ITEM 1A.	RISK FACTORS	32
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33
ITEM 4.	REMOVED AND RESERVED	33
ITEM 5.	OTHER INFORMATION	33
ITEM 6.	EXHIBITS	33
SIGNATURES		34

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Balance Sheets

	September 30,			December 31,
	2010			2009
	( Unaudited)			( Audited)
Assets
Current assets
Cash and cash equivalents	$	43,531		$	11,621
Other current assets		20,738			11,631
Deposits		25,000			425
Deferred finance costs		62,302			88,803
Total current assets		151,571			112,480
Property and equipment, net of accumulated depreciation of $5,778 and $3,812		60,081			14,055,034
Total Assets	$	211,652		$	14,167,514
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	848,506		$	10,092,547
Accrued expenses		7,209			42,464
Accrued interest		298,228			109,146
Notes payable - current, net of $86,365 and $135,843 of unamortized discount		3,494,450			1,335,772
Total current liabilities		4,648,393			11,579,929
Note payable - non-current		279,095			279,095
Shareholders' equity
Preferred stock, par value $.001 per share,
Authorized 10,000,000 shares, Issued 2,140,000 at
September 30, 2010 and 0 shares at December 31, 2009		2,140			-
Common stock, par value $.001 per share, Authorized
100,000,000 shares, Issued 36,282,266 shares at
September 30, 2010, and 30,418,099 at December 31, 2009		36,285			30,418
Paid-in capital		10,084,515			9,048,954
Deficit accumulated during the development stage		(14,838,776	)		(6,770,882	)
Total shareholders' equity		(4,715,836	)		2,308,490
Total Liabilities and Shareholders' Equity	$	211,652		$	14,167,514

The accompanying notes are an integral part of these consolidated unaudited financial statements.

3

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)

	Three Months  Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,			Inception (January 28, 2008) through September 30,
	2010< ;/f ont>			2009< ;/f ont>			2010< ;/f ont>			2009< ;/f ont>			2010< ;/f ont>
Revenues	$	-		$	-		$	-		$	34,000		$	34,000
Cost of Sales		-			-			-			35,355			35,355
		-			-			-			(1,355	)		(1,355	)
Expenses
General and administrative
Salaries and benefits		27,345			402,413			62,803			1,634,830			2,740,895
Professional fees		305,195			142,195			1,218,388			779,124			2,806,302
Stock-based compensation		-			-			112,500			600,300			946,293
Travel		5,220			20,480			13,830			73,378			339,331
Other		67,973			53,101			107,623			158,848			740,126
Total general and administrative		405,733			618,189			1,515,144			3,246,480			7,572,947
Operating loss		(405,733	)		(618,189	)		(1,515,144	)		(3,247,835	)		(7,574,302	)
Other expense
Loss on Disposition of Asset		5,329,624			-			5,329,624			-			5,329,624
Interest, net		163,848			105,016			1,223,126			416,097			1,934,850
Total other expense		5,493,472			105,016			6,552,750			416,097			7,264,474
Loss before income taxes		(5,899,205	)		(723,205	)		(8,067,894	)		(3,663,932	)		(14,838,776	)
Income taxes		-			-			-			-			-
Net loss	$	(5,899,205	)	$	(723,205	)	$	(8,067,894	)	$	(3,663,932	)	$	(14,838,776	)
Basic and Diluted Loss Per Share	$	(0.16	)	$	(0.03	)	$	(0.23	)	$	(0.14	)
Number of Common Shares used in Basic and Diluted Loss Per share		36,077,284			25,682,840			34,975,431			25,682,840

The accompanying notes are an integral part of these consolidated unaudited financial statements.

4

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)

							Inception
	For the			For the			(January 28, 2008)
	Nine Months Ended			Nine Months Ended			through
	September 30,			September 30,			September 30,
	2010			2009			2010
Cash flows from operating activities
Net (loss)	$	(8,067,894	)	$	(3,663,932	)	$	(14,838,776	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation		1,966			20,360			37,239
Write-off of project pilot costs		-			14,960			14,960
Amortization of debt issue costs		303,102			303,545			773,982
Fair value of common shares attached to notes payable		-			25,314			75,709
Notes payable issued for deferred compensation		-			800,436			1,123,851
Stock-based compensation		112,500			600,300			946,293
Fair value of equity issued for consulting services		788,545			273,983			1,190,696
Loss on disposition of equipment		5,329,624			7,449			5,341,148
Fair value of common shares issued as a donation		-			-			50,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other
current assets		(33,682	)		32,189			(55,863	)
Increase in accounts payable and accrued expenses		973,149			674,210			2,035,793
Net cash used in operating activities		(592,690	)		(911,186	)		(3,304,968	)
Cash flows from investing activities
Acquisition of property and equipment		-			(67,887	)		(4,986,876	)
Sale of equipment		-			64,500			64,500
Net cash used in investing activities		-			(3,387	)		(4,922,376	)
Cash flows from financing activities
Issuance of notes payable		709,200			1,150,000			3,360,019
Repayment of notes payable		-			(94,269	)		(1,207,108	)
Debt issue costs		(84,600	)		(176,200	)		(385,179	)
Equity issuances, net		-			93,057			6,503,143
Net cash provided by financing activities		624,600			972,588			8,270,875
Net increase( decrease) in cash and cash equivalents		31,910			58,015			43,531
Cash at beginning of period		11,621			17,639			-
Cash at end of period	$	43,531		$	75,654		$	43,531
Supplemental cash flow information:
Cash paid for interest	$	-		$	8,006		$	29,403
Non-cash investing and financing activities:
Non-cash capital expenditures	$	-		$	4,006,006		$	9,194,416

The accompanying notes are an integral part of these consolidated unaudited financial statements.

5

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Shareholders' Equity

(Unaudited)

												Deficit Accumulated
	Preferred Stock				Common Stock				Paid-in			During the
	Shares		Amount		Shares		Amount		Capital			Development Stage			Total
January 28, 2008, equity offering		100	$	-		8,100,000	$	8,100	$	(8,018	)	$	-		$	81
April 1, 2008, issuance of common stock in connection with notes payable		-		-		275,000		275		11,963			-			12,238
April 9, 2008, equity offering		-		-		5,980,000		5,980		260,130			-			266,110
April 14, 2008, unit offering, net		-		-		4,167,500		4,168		6,139,726			-			6,143,894
June 1, 2008, issuance of common stock in connection with notes payable		-		-		41,325		41		11,116			-			11,157
September 29, 2008, issuance of common stock in connection with note payable		-		-		62,500		63		16,812			-			16,875
December 29, 2008, issuance of common stock in connection with note payable		-		-		37,500		38		10,087			-			10,125
Stock - based compensation		-		-		4,800,000		4,800		228,693			-			233,493
Net loss		-		-		-		-		-			(2,646,568	)		(2,646,568	)
Total Shareholders' Equity, December 31, 2008		100	$	-		23,463,825	$	23,464	$	6,670,509		$	(2,646,568	)	$	4,047,405
April 14, 2008, unit offering follow-on, net		-		-		570,500		572		92,484			-			93,056
Non- Cash Issuances
January 2, 2009, issuance of common stock in connection with note payable		-		-		12,500		12		3,363			-			3,375
January 6, 2009, issuance of common stock in connection with note payable		-		-		12,500		12		3,363			-			3,375

The accompanying notes are an integral part of these consolidated unaudited financial statements.

6

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Shareholders' Equity

(Unaudited)

(Continued)

January 14, 2009, issuance of common stock in connection with note payable	-			-	50,000			50			13,450		-			13,500
January 30, 2009, issuance of common stock in connection with September 29, 2008note payable	-			-	31,250			31			8,406		-			8,437
February 24, 2009, retirement of preferred shares	(100	)		-	-			-			-		-			-
February 28, 2009, issuance of common stock in connection with September 29, 2008note payable	-			-	31,250			31			8,406		-			8,437
March 24, 2009, issuance of common stock in connection with September 29, 2008note payable	-			-	31,250			31			8,406		-			8,437
March 24, 2009, issuance of common stock in connection with amendment of September 29, 2008 note payable	-			-	200,000			200			53,800		-			54,000
Warrants issued in connection with the 2009 Convertible Note	-			-	-			-			295,572		-			295,572
Warrants issued for consulting services	-			-	-			-			180,651		-			180,651
Shares issued for consulting services	-			-	886,000			886			220,614		-			221,500
Stock -based compensation	-			-	1,950,000			1,950			598,350		-			600,300
Cancellation of restricted shares	-			-	(400,000	)		(400	)		400		-			-
Shares issued as donation	-			-	200,000			200			49,800					50,000
Shares issued to employees in connection with deferred compensation note conversion	-			-	3,379,024			3,379			841,377		-			844,756
Net loss	-			-	-			-			-		(4,124,314	)		(4,124,314	)
Total Shareholders' Equity, December 31, 2009	-		$	-	30,418,099		$	30,417		$	9,048,951	$	(6,770,882	)	$	2,308,486

The accompanying notes are an integral part of these consolidated unaudited financial statements.

7

STW RESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Shareholders' Equity

(Unaudited)

(Continued)

														Deficit Accumulated
	Preferred Stock				Common Stock						Paid-in			During the
	Shares		Amount		Shares			Amount			Capital			Development Stage			Total
Warrants issued in connection with the 2010 Convertible Notes pre merger		-		-		-			-			10,067			-			10,067
Shares issued for professional services pre merger		-		-		1,361,905			1,362			339,115			-			340,477
STW Resources, Inc. common stock exchange		-		-		(31,780,004	)		(31,780	)		(9,398,133	)		-			(9,429,913	)
WoozyFly, Inc. common stock acquired in exchange		-		-		31,780,004			31,780			9,398,133			-			9,429,913
Shares issued in connection with merger		2,140,000		2,140		2,260,000			2,260			(4,400	)		-			-
Warrants issued in connection with the 2010 Convertible Notes		-		-		-			-			132,460			-			132,460
Shares issued for professional services		-		-		1,792,262			1,796			446,272			-			448,068
Shares issued for stock compensation		-		-		450,000			450			112,050			-			112,500
Net loss		-		-		-			-			-			(8,067,894	)		(8,067,894	)
Total Shareholders' Equity, September 30, 2010		2,140,000	$	2,140		36,282,266		$	36,285		$	10,084,515		$	(14,838,776	)	$	(4,715,836	)

The accompanying notes are an integral part of these consolidated unaudited financial statements.

8

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization, Nature of Activities and Basis of Presentation

STW Resources Holding Corp., (“STW” or the “Company”) is a development stage corporation formed to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil and gas.  STW has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West Virginia.  STW, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  The Company is also evaluating the deployment of similar technology in the municipal wastewater industry.

The Company’s operations are located in the United States of America and the principal executive offices are located at 619 W. Texas Ave Ste 126, Midland, TX 79701.

Effective January 17, 2010, the Company, through a Shareholder Consent of a majority of its shareholders, entered into an Agreement and Plan of Merger (“Merger Agreement”) with WoozyFly, Inc. ("WoozyFly"), a corporation incorporated under the laws of Nevada and its common shares are quoted on the Over-the-Counter Bulletin Board under the symbol "WZYFQ", whereby a subsidiary of WoozyFly would merge with and into the Company, with the Company continuing as the surviving corporation.  WoozyFly, Inc. filed for Chapter 11 bankruptcy protection and the bankruptcy court approved a plan pursuant to which WoozyFly, through a subsidiary, acquired STW Resources in a one for one exchange of 31,780,004 shares of common stock and securities of WoozyFly for all of the issued and outstanding voting capital stock of the Company, which allowed WoozyFly to exit bankruptcy.

On February 9, 2010, the Court entered an order confirming the Seconded Amended Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger was approved.  The Plan was effective February 19, 2010 (the “Effective Date”). The principal provisions of the Plan are as follows:

· MKM, the DIP Lender, received 400,000 shares of common stock and 2,140,000 shares of preferred stock;

· the holders of the Convertible Notes received 1,760,000 shares of common stock;

· general unsecured claims received 100,000 shares of common stock; and

· the Company’s equity interest was extinguished and cancelled.

On February 12, 2010, pursuant to the terms of the Merger Agreement, the Company merged with and into an acquisition subsidiary, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and the Company becoming a wholly-owned subsidiary of Woozyfly, Woozyfly issued an aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of common stock to the shareholders of the Company at the closing of the merger and all derivative securities of the Company as of the Merger became derivative securities of Woozyfly including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

9

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The par value of the exchanged shares changed from .00001 to .001.  All share amounts presented throughout this document reflect this change in par value.

Considering that, following the merger, the shareholders of the Company control the majority of our outstanding voting common stock and effectively succeeded our otherwise minimal operations to those that are theirs, the Company is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered, and accounted for as, a capital transaction in substance; it is equivalent to the issuance of the Company’s securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, the Company has not recognized any goodwill or other intangible assets in connection with this reverse merger transaction.

Effective March 1, 2010, Woozyfly, Inc. changed its name to STW Global, Inc. in accordance with the Bankruptcy proceeding.   On March 3, 2010, the Company changed its name to STW Resources Holding Corp.  The name change was accomplished by merging a wholly owned subsidiary of the Company into the Company resulting in the Company being the surviving Company and changing the name of the Company.

STW Resources Holding Corp. is the surviving and continuing entity and the historical financials following the reverse merger transaction will be those of STW.   We were a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of STW pursuant to the terms of the Merger Agreement.  As a result of such acquisition, our operations are now focused on the provision of customized water reclamation services.  Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

Basis of Presentation

STW has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Item 310(b) of regulation S-K. These financial statements should be read together with the financial statements and notes in the Company’s 2009 audited financial statements included in the Company’s Form 8-K filed with the SEC on April 1, 2010.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of the entire year.

Status of Relationship with GE Water & Process Technologies

On August 31, 2010, the Company entered into a settlement agreement with GE Water & Process Technologies (“GE Water”) to terminate the purchase order and related teaming agreements to construct a water reclamation unit.  The terms of the settlement agreement include GE Water retaining the water reclamation unit, forgiveness of the Company’s liability to GE Water associated with the water reclamation unit, and established a $1,400,000 note payable (“GE Note”) to GE Water.  The GE Note bears interest at the WSJ prime rate plus 2% which is payable  at maturity and matures at the sooner of 13 months or the Company shall pay to GE Water 30% of each future debt or equity offering of the Company until the note is paid in full.

10

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Pursuant to the terms of the settlement agreement, the Company recorded a $5,329,624 loss on disposition of asset as a result of the write off of $13,992,988 of work in process and capitalized interest on the evaporator system from GE Water, $10,063,364 of accounts payable and accrued interest, as well as recording $1,400,000 of notes payable.

Going Concern

These Consolidated Financial Statements have been prepared on a going concern basis.  The Company from Inception (January 28, 2008) through September 30, 2010, has not had any significant revenues.  The Company has no significant operating history as of September 30, 2010, has accumulated losses of $14.8 million and negative cash flow from operations of $3.3 million since inception. From Inception (January 28, 2008) through September 30, 2010, management has raised net equity and debt financing of $8.3 million to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond.  These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with oil and gas operators and municipal utility districts; and (c) controlling overhead and expenses.  There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing.  There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.

In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.  To date, management has not considered this alternative, nor does management view it as a likely occurrence.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany balances and transactions.

11

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments with an original maturity of three months or less at the date of purchase.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash.  From time to time, the Company has cash in its bank accounts in excess of federally insured limits.

The Company anticipates entering into long-term, fixed-price contracts for its services with select oil and gas producers and municipal utilities.  The Company will control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures.

Fair Value of Financial Instruments

The fair value of cash, accounts payable, accrued expenses and notes payable, including amounts due to and from related parties, approximate carrying values because of the short-term maturity of these instruments.

Stock Based Compensation

The Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 718 “Compensation-Stock Compensation” requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro-forma disclosure is no longer an alternative.  The effective date for the Company’s application of ASC Topic 718 was January 28, 2008 (date of inception).

There were no grants of employee options during the period from January 28, 2008 (date of inception) through September 30, 2010.  There were no unvested options outstanding as of the date of the Company’s adoption of ASC Topic 718.

Basic and Diluted Loss per Share

The Company’s basic earnings per share (EPS) amounts have been computed based on the weighted-average number of shares of Common Stock outstanding for the period. Diluted EPS reflects the potential dilution, using the treasury stock method, which could occur if the above dilutive securities were exercised. As the Company realized a net loss for each of the three months and nine months ended September 30, 2010 and 2009, no potentially dilutive securities were included in the calculation of diluted earnings per share as their impact would have been anti-dilutive.

12

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Property and Equipment

Property and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.

Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized.  Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations.

Impairment of Long-Lived Assets

The Company follows ASC Topic 360, “Property, Plant and Equipment”, which requires that long-lived assets held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability of long-lived assets based upon undiscounted cash flows.  Should impairment in value be indicated, the carrying value of the long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC Topic 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

Segment reporting

The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income taxes

The Company follows ASC Topic 740, “Income Taxes” for recording the provision for income taxes.  Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.  Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

13

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

At Inception (January 28, 2008), the Company implemented the accounting guidance for uncertainty in income taxes using the provisions of ASC Topic 740 ,which is intended to clarify the accounting for income taxes prescribing a minimum recognition threshold for a tax provision before being recognized in the consolidated financial statements. This guidance also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As a result, the Company has concluded that it does not have any unrecognized tax benefits or any additional tax liabilities after applying this guidance.  The adoption of this guidance therefore had no impact on the Company’s consolidated financial statements.

2. Joint Venture

On August 5, 2010, the Company entered into a Joint Venture Agreement (the “JV Agreement”) with Aqua Verde, LLC (“AV”). Pursuant to the JV Agreement, STW and AV agreed to collectively work together through the joint venture to procure water reclamation contracts with natural gas drilling companies in the states of Colorado and Texas. In addition, AV shall assign all of its existing master services agreements and master services contracts to the joint venture.

The joint venture is named Water Reclamation Partners, LLC, and is owned 51% by the Company and 49% by AV, with the Company having exclusive control and management of the business of the joint venture. In addition, a steering committee was established for the purpose of managing and directing the joint pursuits of the joint venture, and is comprised of two representatives from the Company and two representatives of AV.  As of September 30, 2010, there have been no operations within the joint venture, and AV has not contributed the master services contracts to the joint venture, therefore the joint venture had no impact on the current financial statements.

3. Notes Payable

The Company’s notes payable at September 30, 2010 and December 31, 2009, consisted of the following:

14

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	September 30,			December 31,
Name	2010			2009
12% Convertible Notes:
Conversion of outstanding bridge notes	$	727,903		$	727,903
Cash issuances of 2009 Notes		740,000			740,000
Cash issuances of 2010 Notes		705,000			-
GE Note		1,400,000			-
Total 2009 12% Convertible Notes		3,572,903			1,467,903
Deferred Compensation Notes		279,095			279,095
Other Financing		7,912			3,712
Unamortized debt discount		(86,365	)		(135,843	)
Total Notes Payable		3,773,545			1,614,867
Less: Current Portion		(3,494,450	)		(1,335,772	)
Total Long Term Notes Payable	$	279,095		$	279,095

April 2008 Notes

In April 2008, the Company issued promissory notes (the “April 2008 Notes”) totaling $1.1 million.   Each note bore interest at a rate of 10% per annum.  Principal and accrued but unpaid interest on each note was payable in full on June 1, 2008.  Pursuant to the terms of the April 2008 Notes, the Company was also required to issue one-quarter (0.25) share of Common Stock for each dollar of principal amount advanced.  A total of 275,000 shares of Common Stock were issued and were valued at an aggregate of $12,238, based upon the price of the Company’s shares of Common Stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  This value was recorded as a discount to the notes and amortized to interest expense using the effective interest rate method over the term of the notes.  The Company also incurred $55,100 of debt issue costs.  This cost was amortized to interest expense using the effective interest rate method over the term of the notes.

On June 1, 2008, the Company requested and obtained temporary waivers of repayment of the April 2008 Notes until the closing of additional equity funding.  In consideration for such extension, the Company issued to each note holder an additional 0.375 share of Common Stock for each dollar of principal advanced.  A total of 41,325 additional shares of Common Stock were issued.  These additional shares of Common Stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the April 2008 Notes and amortized to interest expense using the effective interest rate method over the term of the notes.

The April 2008 Notes were repaid in full during June 2008.

15

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 2008 Bridge Note and March 2009 Bridge Note

On September 29, 2008, the Company entered into a securities purchase agreement with an accredited investor (the “September 2008 Bridge Investor”) providing for the issuance by the Company to the September 2008 Bridge Investor of its 12% promissory note in the principal amount of $125,000 (the "September 2008 Bridge Note").  In addition to the September 2008 Bridge Note, the September 2008 Bridge Investor also received 62,500 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $16,875, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the notes.  The September 2008 Bridge Note matured on December 28, 2008.  Interest associated with this note was 12% per annum, payable on the maturity date.  In the event that all amounts due under the note were not paid by the maturity date, the Company was required to issue an additional 31,250 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

On March 24, 2009, the Company entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the September 2008 Bridge Note and the advancing of an additional $50,000 (the “March 2009 Bridge Note”).  Pursuant to the terms of the September 2008 Bridge Note, the Company issued penalty shares, totaling 93,750 additional shares of the Company’s Common Stock, to the September 2008 Bridge Investor.  These shares of Common Stock were valued at an aggregate of $25,314, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  In addition to the March 2009 Bridge Note, the September 2008 Bridge Investor also received an additional 200,000 shares of common stock of the Company.  These shares of Common Stock were valued at an aggregate of $54,000, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The September 2008 Bridge Investor was also entitled to a $15,000 financing fee payable at maturity.  This fee was accrued as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The March 2009 Bridge Note matured on the earlier of 90 days from closing or upon closing of a private placement by the Company, with net proceeds to the Company of at least $1.0 million.  Interest associated with this note was 12% per annum, payable on the maturity date.   In the event that all amounts due under the note are not paid by the maturity date, the Company was required to issue an additional 40,000 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.  See the 2009 12% Convertible Notes disclosure for the conversion of this note.

CEO Bridge Note

On December 29, 2008, the Company entered into a securities purchase agreement with the Company’s then Chairman and Chief Executive Officer for the issuance by the Company of its 10% promissory note in the principal amount of $75,000 (the "CEO Bridge Note").  In addition to the CEO Bridge Note, the CEO also received 37,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $10,125, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the CEO Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The CEO Bridge Note matured on March 29, 2009.  Interest associated with the CEO Bridge Note was 10% per annum, payable on the maturity date. See the 2009 12% Convertible Notes disclosure for the conversion of this note.

16

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

January 2009 Bridge Notes

On January 2, 2009, and January 6, 2009, the Company entered into securities purchase agreements with two accredited investors (the “January 2009 Bridge Investors”) for the issuance by the Company of a 10% promissory note in the principal amount of $25,000 to each of the January 2009 Bridge Investors (the "January 2009 Bridge Notes").  In addition to the January 2009 Bridge Notes, the January 2009 Bridge Investors also each received 12,500 shares of Common Stock of the Company.  These shares of Common Stock were valued at an aggregate of $6,750, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 2009 Bridge Notes and was amortized to interest expense using the effective interest rate method over the term of the notes.  The January 2009 Bridge Notes matured on the earlier of 90 days from closing or upon closing of a private placement by the Company.  Interest associated with the January 2009 Bridge Notes was 10% per annum, payable on the maturity date. See the 2009 12% Convertible Notes disclosure for the conversion of this note.

January 14, 2009 Bridge Note

On January 14, 2009, the Company entered into a bridge loan letter agreement and a securities purchase agreement with an accredited investor (the “January 14, 2009 Bridge Investor”) for the issuance by the Company of a 15% promissory note in the principal amount of $400,000 to the January 14, 2009 Bridge Investors (the "January 14, 2009 Bridge Note").  In addition to the January 14, 2009 Bridge Notes, the January 14, 2009 Bridge Investors also received 50,000 shares of Common Stock of the Company.  These shares of Common Stock were valued at $13,500, based on the estimated fair value of the Company’s Common Stock at that date.  This amount was recorded as a discount to the January 14, 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the notes.   In connection with entering into the bridge loan letter agreement, the Company also issued warrants to acquire 480,000 shares of the Company’s Common Stock and paid $40,000 in fees.  The warrants are exercisable for a period of five years at an exercise price of $3.00 per share.  Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 1.5% and a 0% dividend yield, the warrants were determined to have a fair value of $48,168, with such value recorded as a discount to the January 14, 2009 Bridge Note and to additional paid-in capital.  This discount, along with the $40,000 in fees, was amortized using the effective interest rate method over the term of the indebtedness.  The January 14, 2009 Bridge Note matured 90 days from closing.  Interest associated with the January 14, 2009 Bridge Note was 15% per annum, payable on the maturity date.  See the 2009 12% Convertible Notes disclosure for the conversion of this note.

17

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2009 12% Convertible Notes

In April 2009, the Company commenced an offering of its 12% Convertible Notes (the “2009 12% Convertible Notes”).  Each 2009 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The 2009 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.  For each 2009 12% Convertible Note purchased, each investor received a warrant  to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2009 12% Convertible Note divided by the Conversion Price.  The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.  Through December 31, 2009, the Company had issued a total of $740,000 face value of its 12% Convertible Notes for cash.

In April 2009, the holders of the CEO Bridge Note, the January 2009 Bridge Notes, the January 14, 2009 Bridge Note and the March 2009 Bridge Note agreed to convert the $700,000 total of their outstanding notes, plus accrued interest of $12,903 and deferred fees of $15,000, into the 2009 12% Convertible Notes.

Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 0.81% and a 0% dividend yield, the warrants were determined to have a fair value of $23,245, with such value recorded as a discount to the 2010 12% Convertible Notes and to additional paid-in capital.  This discount will be amortized using the effective interest rate method over the term of the indebtedness.

In connection with the issuance of the 2009 12% Convertible Notes, the Company had issued 2,935,805 Warrants to acquire the Company’s common stock to investors and an additional 352,296 Warrants to acquire the Company’s common stock to Viewpoint, all on the terms set forth above.  Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 1.5% and a 0% dividend yield, the warrants were determined to have a fair value of $295,572, with such value recorded as a discount to the 2009 12% Convertible Notes and to additional paid-in capital.  This discount will be amortized using the effective interest rate method over the term of the indebtedness.

During the third quarter of 2010, $540,000 face value of these notes matured.  The Company received six month extensions for these notes.  During October and November 2010 the Company granted an additional 262,500 warrants in consideration for extensions. The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.

2010 12% Convertible Notes

In January 2010, the Company commenced an offering of its 12% Convertible Notes (the “2010 12% Convertible Notes”).  Each 2010 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The 2010 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.  For each 2010 12% Convertible Note purchased, each investor received a warrant  to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2010 12% Convertible Note divided by the Conversion Price.  The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.  Through September  30, 2010, the Company had issued a total of $705,000 face value of its 12% Convertible Notes for cash.

18

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In connection with the issuance of the 2010 12% Convertible Notes, the Company had issued 1,472,500 Warrants to acquire the Company’s common stock to investors and an additional 169,200 Warrants to acquire the Company’s common stock to the agent, all on the terms set forth above.  Using the Black Scholes pricing model, with volatility of 100%,  a risk-free interest rate of 0.81% and a 0% dividend yield, the warrants were determined to have a fair value of $140,942, with such value recorded as a discount to the 2010 12% Convertible Notes and to additional paid-in capital.  This discount will be amortized using the effective interest rate method over the term of the indebtedness.

Deferred Compensation Notes

Beginning in February 2009, the Company had been unable to meet its contractual employment related obligations and has been accruing, as a component of accrued expenses, past due salaries to its employees and, as a component of accounts payable, severance payments payable to its former Chief Executive Officer and fees due its in-house counsel.  Through December 31, 2009, the Company, in partial satisfaction of these past due amounts, had issued $1,071,333 principal amount of 12% convertible notes (the “Deferred Compensation Convertible Notes”) on the basis of $2.00 of Deferred Compensation Convertible Note face value for each $1.00 of compensation deferred.  Each Deferred Compensation Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).  On December 31, 2009, there was $1,071,333 of the Deferred Compensation Convertible Notes outstanding plus related accrued interest of $48,530 under these notes, in addition to accrued salaries of $327,713 recorded (collectively the“ Deferred Compensation Liabilities”).

On December 31, 2009, the Company entered into a new agreement (the “Deferred Compensation Note Agreement”) with holders of the Deferred Compensation Convertible Notes, who were also owed the accrued salaries of $327,713.  Pursuant to the terms of the Deferred Compensation Note Agreement and in settlement of the Deferred Compensation Liabilities, liabilities of $323,735 were forgiven, the Company converted liabilities of $844,746 to 3,379,024 shares of the Company’s common stock, using a conversion price of $0.25, which approximated the fair value of the Company’s common stock at that date, and $279,095 principal amount 10% notes maturing in 36 months were issued (the “Deferred Compensation Notes”).  The forgiveness of the $323,735 was recorded as a reduction of salary expense.

Other Financings

On August 31, 2010, the Company entered into a Settlement Agreement pursuant to which GE permitted the Company to substitute for STW Resources as to all rights and obligations under the Purchase Order (including the Original Debt) and Teaming Agreement, and such that to fully discharge STW Resources’ financial obligations to GE under the Purchase Order, the Company shall pay GE $1,400,000 pursuant to a senior promissory note (the “Note”). The Note bears interest at a rate of the WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent (2%) per annum.  Under the terms of the Note, the Company has thirteen months to pay off the Note plus all accrued interest thereon.  In addition, upon the consummation of a debt or equity financing following the execution of the Note, the Company shall pay GE thirty percent (30%) of the gross proceeds of any equity investments in or loans to the Company or any affiliated entity until the Note is paid in full, including all accrued interest thereon. ( See Note 1)

19

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the nine months ended September 30, 2010 and 2009, the total interest costs incurred were $1.2 million and $1.4 million, respectively.  There was no interest capitalized in 2010.  The 2009 balance includes $ 1.0 million in capitalized interest.

4. Capital Stock

Preferred Stock

The Company has authorized 10,000,000 shares of Preferred Stock with a par value of $ .001 per share.  On February 21, 2010, pursuant to the Merger Agreement, the Company issued 2,140,000 shares of convertible preferred stock.

Common Stock

The Company has authorized 100,000,000 shares of Common Stock with a par value of $.001.

On February 12, 2010, pursuant to the terms of the Merger Agreement, STW merged with and into Acquisition Sub, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and STW becoming a wholly-owned subsidiary of the Company, the Company issued an aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of .001 par value common stock to the shareholders of STW at the closing of the merger and all derivative securities of STW as of the Merger became derivative securities of Woozyfly, including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00, with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

Additionally, MKM, the DIP Lender, received 400,000 shares of common stock and 2,140,000 shares of preferred stock, the holders of the Convertible Notes received 1,760,000 shares of common stock, general unsecured claims received 100,000 shares of common stock.  An adjustment was made through additional paid in capital to reflect the issuance of these shares as the Merger was treated as a reverse merger and a capitalization transaction for accounting purposes.

For the nine months ended September 30, 2010, the company issued 3,154,167 shares of common stock which were valued at an aggregate of $788,545, based upon the estimated fair value of the Company’s common stock at that date, for consulting services rendered to the Company.

20

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Total Dilutive Securities

As of September 30, 2010, the Company had the following dilutive securities to acquire the Company’s Common Stock outstanding:

	Number of
	Underlying		Exercise
Security	Common Shares		Price		Term
Warrants associated with the $2.00 Unit Offering		5,844,900	$	3.00	2011 - 2012
Warrants issued for Professional Services		1,500,000	$	4.00	2014
Warrant associated with the January 14, 2009 Bridge Note		480,000	$	3.00	2014
Warrant associated with the acquisition of the Company's Preferred Shares oustanding		1,500,000	$	8.00	2014
Warrants associated with the 12% Convertible Notes		4,929,801	$	3.00	2014-2015
Convertible common stock associated with 2009 12% notes		499,617	$	0.25	2010-2011
Convertible common stock associated with 2010 12% notes		184,822	$	0.25	2010-2011
		14,939,140

5. Stock-Based Compensation

Since Inception (January 28, 2008), the Company issued 6.8 million shares of the Company’s Common Stock to directors, employees and certain consultants. As of September 30, 2010, 400,000 of these shares have been forfeited.  The following table sets forth the number of shares outstanding, the fair value at date of issue and the period over which the shares vest:

21

STW RESOURCES HOLDING CORP.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Number of			Fair
	Shares			Value per		Vesting
Date	Issued			Share		Period
April 22, 2008		2,550,000		$	0.0445	Immediate
April 22, 2008		350,000		$	0.0445	six months
May 8, 2008		100,000		$	0.0445	Immediate
May 19, 2008		1,300,000		$	0.0445	Immediate
October 1, 2008		50,000		$	0.27	Immediate
June 1, 2008		250,000		$	0.27	(a)
February 10, 2009		800,000		$	0.27	Immediate
May 31, 2009		200,000		$	0.27	Immediate
June 1, 2009		150,000		$	0.25	Immediate
June 15, 2009		600,000		$	0.25	Immediate
March 31, 2010		450,000		$	0.25	Immediate
		6,800,000
Less: forfeitures		(400,000	)
		6,400,000
(a) These shares vested upon the earlier of (i) the initial public offering of the Company's common shares, (ii) the involuntary termination of the employee after December 31, 2008 or (iii) upon consent of the Company's Board of Directors.

6. Related Party Transactions

In connection with the Company’s capital raising activities, the Company had incurred, as of September 30, 2010, a total of $1.1 million in fees and expenses payable to Viewpoint and issued, pursuant to the terms of its arrangement with Viewpoint, 2,200,000 shares of Common Stock and 366,600 warrants to purchase one and one-half shares of the Company’s Common Stock on the same terms as the warrants issued in the $2.00 Unit Offering and 521,496 warrants to purchase shares of the Company’s Common Stock on the same terms as the warrants issued with the 2009 and 2010 12% Convertible Notes.  At September 30, 2010, the Company had a balance due Viewpoint of $156,964 recorded in accounts payable.

7. Subsequent Events

On May 5, 2010, the Company executed a term sheet with Kodiak Capital Group, LLC (“Kodiak”) for a $5 million perpetual non-binding cumulative 15% preferred stock investment.  The investment carries a cumulative preferred dividend accruing at 15% annually.  The capital will be drawn by the Company based on a mutually agreed upon working capital schedule.  The commitment term is for one year.  As of November 15, 2010 the company was in the process of completing its Preferred Share Agreement with Kodiak.

During November 2010, the Company received six month extensions on the $540,000 face value of the 2009 12% Notes which matured during the third quarter.  During October and November 2010 the Company granted an additional 262,500 warrants in consideration for extensions. (see Note 5)

22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with STW Resources Holding Corp. (f/k/a/ Woozyfly, Inc.) (the “Company”) consolidated unaudited financial statements and the notes thereto contained elsewhere in this report.    Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q that does not consist of historical facts, are "forward-looking statements."  Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance.  The statements involve factors, risks and uncertainties including those discussed in the “Risk Factors” section found in the Company’s Super 8-K on Form 8-K, filed with the Securities and Exchange Commission on February 19, 2010, as amended on April 1, 2010 and October 13, 2010, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements.  Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control.  Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.  The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

The Company is a development stage corporation formed to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil and gas.  The Company has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West Virginia.  The Company, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  The Company is also evaluating the deployment of similar technology in the municipal wastewater industry.

The Company’s operations are located at 619 W. Texas Ave Ste 126, Midland, TX 79701.

On January 21, 2010, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with STW Acquisition, Inc. (“Acquisition Sub”), a wholly owned subsidiary of the Company, STW Resources, Inc. (“STW Resources”) and certain shareholders of STW Resources controlling a majority of the issued and outstanding shares of STW Resources.  On February 12, 2010, pursuant to the terms of the Merger Agreement, STW Resources merged with and into Acquisition Sub, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and STW Resources becoming a wholly-owned subsidiary of the Company, the Company issued an aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of common stock to the shareholders of STW Resources at the closing of the merger and all derivative securities of STW Resources as of the Merger became derivative securities of the Company including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

On February 9, 2010, the Court entered an order confirming the Seconded Amended Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger was approved.  The Plan was effective February 19, 2010 (the “Effective Date”). The principal provisions of the Plan are as follows:

· MKM, the DIP Lender, received 400,000 shares of common stock and 2,140,000 shares of preferred stock;

· the holders of the Convertible Notes received 1,760,000 shares of common stock;

· general unsecured claims received 100,000 shares of common stock; and

23

· the Company’s equity interest was extinguished and cancelled.

On March 3, 2010, the Company changed its name to STW Resources Holding Corp.   The name change was accomplished by merging a wholly owned subsidiary of the Company into the Company resulting in the Company being the surviving Company and changing the name of the Company to STW Resources Holding Corp.

Prior to the Merger, the Company was a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of STW Resources pursuant to the terms of the Merger Agreement.  As a result of such acquisition, the Company’s operations are now focused on the provision of customized water reclamation services. 

Recent Developments

GE Ionics, Inc. Settlement Agreement and Senior Promissory Note

On or about May 22, 2008 STW Resources, Inc., a predecessor company of the Company (“STW Resources”) entered into a Teaming Agreement, as amended, with GE Ionics, Inc., a Massachusetts corporation (“GE”) (STW Resources and GE are collectively referred to as the “Parties”). On or about April 4, 2008 STW Resources, Inc. and GE entered into a Purchase Order (the “Purchase Order”), pursuant to which there was due and unpaid a debt by STW Resources to GE in the amount of $11,239,437 as of August 31 2010,  (the “Original Debt”).

On August 31, 2010, the Parties entered into a Settlement Agreement pursuant to which GE permitted the Company to substitute for STW Resources as to all rights and obligations under the Purchase Order (including the Original Debt) and Teaming Agreement, and such that to fully discharge STW Resources’ financial obligations to GE under the Purchase Order, the Company shall pay GE $1,400,000 pursuant to a senior promissory note (the “Note”). The Note bears interest at a rate of the WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent (2%) per annum.  Under the terms of the Note, the Company has thirteen months to pay off the Note plus all accrued interest thereon.  In addition, upon the consummation of a debt or equity financing following the execution of the Note, the Company shall pay GE thirty percent (30%) of the gross proceeds of any equity investments in or loans to the Company or any affiliated entity until the Note is paid in full, including all accrued interest thereon.

Joint Venture with Aqua Verde, LLC

On August 5, 2010, the Company entered into a Joint Venture Agreement (the “JV Agreement”) with Aqua Verde, LLC (“AV”). Pursuant to the JV Agreement, the Company and AV agreed to collectively work together through the joint venture to procure water reclamation contracts with natural gas drilling companies in the states of Colorado and Texas. In addition, AV shall assign all of its existing master services agreements and master services contracts to the joint venture. The joint venture shall be named Water Reclamation Partners, LLC, and shall be owned 51% by the Company and 49% by AV, with the Company having exclusive control and management of the business of the joint venture. In addition, a steering committee shall be established for the purpose of managing and directing the joint pursuits of the joint venture, and shall be comprised of two representatives from the Company and two representatives of AV.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenue. No revenue was generated for the three months ended September 30, 2010 and 2009 respectively.

Expenses.Our expenses for the three months ended September 30, 2010 were $5,899,205, and consisted of a loss of ($5,329,624) on the sale of the GE Evaporator unit,  salaries and benefits ($27,345), professional fees ($305,195), interest expense ($163,848), and ($73,193)  in other administrative expenses including travel to the prospective sites.  Our expenses for the three months ended September 30, 2009 were $723,205 and consisted of salaries and benefits ($402,413), professional fees ($142,195), interest expense ($105,016), and ($73,581)  in other administrative expenses. The reason for the decrease (excluding the loss due on the sale to GE) in comparing the three months ended September 30, 2010 to the same period for 2009 was due to the fact that the Company refocused operations on the Company’s process for permitting sites in Pennsylvania. The Company decreased its operations from six employees to one employee during this process.  Once the permits are obtained, of which there is no guarantee, the Company expects to hire additional employees to commence its operations.

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Net loss.Net loss for the three months ended September 30, 2010 and 2009 were $5,899,205 and $723,205, respectively.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenue. $0 and $34,000 in revenue was generated for the nine months ended September 30, 2010 and 2009 respectively.  

Expenses.Our expenses for the nine months ended September 30, 2010 were $8,067,894, and consisted of a loss of ($5,329,624) on the sale of the GE Evaporator unit, salaries and benefits ($62,803), legal and professional fees ($1,218,388), stock based compensation ($112,500), interest expense ($1,223,126), and ($121,453)  in other administrative expenses including travel to the prospective sites.  Our expenses for the nine months ended September 30, 2009 were $3,663,932 and consisted of salaries and benefits ($1,634,830), legal and professional fees ($779,124), stock based compensation ($600,300), interest expense ($416,097), and ($232,226)  in other administrative expenses.  The reason for the decrease (excluding the loss due on the sale to GE) in comparing the nine months ended September 30, 2010 to the same period for 2009 was due to the fact that the Company refocused operations on the Company’s process for permitting sites in Pennsylvania. The Company decreased its operations from six employees to one employee during this process.  Once the permits are obtained, of which there is no guarantee, the Company expects to hire additional employees to commence its operations.

Net loss.Net loss for the nine months ended September 30, 2010 and 2009 were $8,067,894 and $3,663,932, respectively.

Liquidity and Capital Resources

As of September 30, 2010, we had current assets of $151,571, including cash of $43,531, and current liabilities of $4,648,393.   As of December 31, 2009, we had current assets of $112,480, including cash of $11,621, and current liabilities of $11,579,929.

Operating Activities

Our operating activities resulted in a net cash used by operations of $592,690 for the nine months ended September 30, 2010 compared to net cash used by operations of $911,186 for the nine months ended September 30, 2009.  The net cash used by operations for the nine months ended September 30, 2010 reflects a net loss of  $8,067,894 offset by depreciation of $1,966, amortization of debt issue costs of $303,102, stock based compensation $112,500 the fair value of equity issued for services of $788,545, account payables and other accrued expenses of $973,149 and other minor factors. The net cash used by operations for the nine months ended September 30, 2009 reflects a net loss of $3,663,932 offset by depreciation of $20,360, stock based compensation of $600,300, notes payable issued for deferred compensation of $800,436, amortization of debt issue costs of $303,545, fair value of equity issued for consulting services of  $273,983 and account payables and other accrued expenses of $674,210 and other minor factors.

Investing Activities

Our investing activities resulted in a net cash outflow of $0 for the nine months ended September 30, 2010 compared to a net cash outflow of $3,387 for the nine months ended September 30, 2009.

Financing Activities

Our financing activities resulted in a cash inflow of $624,600 for the nine months ended September 30, 2010 and $972,588 for the nine months ended September 30, 2009, which represents both issuances of notes payable in 2010 and issuances of notes payable and sales of equity by the Company in 2009.

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Notes Payable

September 2008 Bridge Note and March 2009 Bridge Note

On September 29, 2008, the Company entered into a securities purchase agreement with an accredited investor (the “September 2008 Bridge Investor”) providing for the issuance by the Company to the September 2008 Bridge Investor of its 12% promissory note in the principal amount of $125,000 (the "September 2008 Bridge Note").  In addition to the September 2008 Bridge Note, the September 2008 Bridge Investor also received 62,500 shares of common stock of the Company.  These shares of common stock were valued at an aggregate of $16,875, based on the estimated fair value of the Company’s common stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the notes.  The September 2008 Bridge Note matured on December 28, 2008.  Interest associated with this note was 12% per annum, payable on the maturity date.  In the event that all amounts due under the note were not paid by the maturity date, the Company was required to issue an additional 31,250 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.

On March 24, 2009, the Company entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the September 2008 Bridge Note and the advancing of an additional $50,000 (the “March 2009 Bridge Note”).  Pursuant to the terms of the September 2008 Bridge Note, the Company issued penalty shares, totaling 93,750 additional shares of the Company’s common stock, to the September 2008 Bridge Investor.  These shares of Common stock were valued at an aggregate of $25,314, based on the estimated fair value of the Company’s common stock at that date.  This amount was recorded as a discount to the September 2008 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  In addition to the March 2009 Bridge Note, the September 2008 Bridge Investor also received an additional 200,000 shares of common stock of the Company.  These shares of Common stock were valued at an aggregate of $54,000, based on the estimated fair value of the Company’s Common stock at that date.  This amount was recorded as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The September 2008 Bridge Investor was also entitled to a $15,000 financing fee payable at maturity.  This fee was accrued as a discount to the March 2009 Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The March 2009 Bridge Note matured on the earlier of 90 days from closing or upon closing of a private placement by the Company, with net proceeds to the Company of at least $1.0 million.  Interest associated with this note was 12% per annum, payable on the maturity date.  In the event that all amounts due under the note are not paid by the maturity date, the Company was required to issue an additional 40,000 shares to the September 2008 Bridge Investor every 30 days that any amounts remain outstanding on the note.  See the 2009 12% Convertible Notes disclosure for the conversion of this note.

CEO Bridge Note

On December 29, 2008, the Company entered into a securities purchase agreement with the Company’s then Chairman and Chief Executive Officer for the issuance by the Company of its 10% promissory note in the principal amount of $75,000 (the "CEO Bridge Note").  In addition to the CEO Bridge Note, the CEO also received 37,500 shares of Common stock of the Company.  These shares of common stock were valued at an aggregate of $10,125, based on the estimated fair value of the Company’s Common stock at that date.  This amount was recorded as a discount to the CEO Bridge Note and was amortized to interest expense using the effective interest rate method over the term of the note.  The CEO Bridge Note matured on March 29, 2009.  Interest associated with the CEO Bridge Note was 10% per annum, payable on the maturity date. See the 2009 12% Convertible Notes disclosure for the conversion of this note.

In January 2009, STW entered into a securities purchase agreement for the issuance of a 10% promissory note (“January 2009 Bridge Note”) in the principal amount of $50,000.  In addition, the Company entered into a securities purchase agreement for the issuance of a 15% promissory note in the principal amount of $400,000.

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In March 2009, STW entered into a securities purchase agreement with the September 2008 Bridge Investor providing for the rollover of the $125,000 principal amount outstanding under the 2008 September Bridge Note and advancing an additional $50,000.

In April 2009, STW commenced an offering of its 12% Convertible Notes (“2009 12% Convertible Notes”).  Each 2009 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).   The 2009 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance.  For each 2009 12% Convertible Note purchased, each investor received a warrant  to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2009 12% Convertible Note divided by the Conversion Price.  The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.    Through September 30, 2010, the Company issued a total of $740,000 face value of its 12% Convertible Notes for cash.

During the third quarter of 2010, $540,000 face value of these notes matured.  The Company received six month extensions for these notes.  During October and November, 2010 the Company granted an additional 262,500 warrants in consideration for extensions. The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share.

In January 2010, the Company commenced an offering of its 12% Convertible Notes (the “2010 12% Convertible Notes”). Each 2010 12% Convertible Note is convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”). The 2010 12% Convertible Notes bear interest at 12% per annum and mature 12 months from the date of issuance. For each 2010 12% Convertible Note purchased, each investor received a warrant to purchase up to such number of shares of the Company’s common stock equal to one-half of the face amount of the 2010 12% Convertible Note divided by the Conversion Price. The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $3.00 per share. Through September 30, 2010, the Company had issued a total of $705,000 face value of its 12% Convertible Notes for cash.

Equity Issuances

On February 12, 2010, pursuant to the terms of the Merger Agreement, the Company merged with and into an acquisition subsidiary, which became a wholly-owned subsidiary of the Company (the “Merger”).  In consideration for the Merger and the Company becoming a wholly-owned subsidiary, the Company issued an aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of common stock to the shareholders of the Company at the closing of the merger.  The par value of the exchanged shares changed from .00001 to .001.  All equity presentations have been revised accordingly. Additionally, all derivative securities of the Company as of the Merger became derivative securities of the Company, including options and warrants to acquire 12,613,002 shares of common stock at an exercise price ranging from $3.00 to $8.00 with an exercise period ranging from July 31, 2011 through November 12, 2014 and convertible debentures in the principal amount of $1,467,903 with a conversion price of $0.25 and maturity dates ranging from April 24, 2010 through November 12, 2010.

Equity Issuances-Acquiree

On January 28, 2008, STW issued 8,100,000 shares of Common stock at $0.001 per share for total consideration of $81.

In April 2008, STW designated the Series A Preferred Stock, with a par value of $0.001 per share, and authorized the issuance of 100 shares to STW’s Chairman and Chief Executive Officer.  In addition, STW issued 5,980,000 shares of Common stock at $0.0445 per share for total consideration of $266,110.  STW then commenced a unit offering (the “$2.00 Unit Offering”) whereby each unit consisted of one share of STW’s Common stock and a warrant to acquire one and one-half shares of STW’s Common stock as follows: (i) 0.5 shares at an exercise price equal to $3.00 per share, (ii) 0.5 shares at an exercise price equal to $4.00 per share, and (iii) 0.5 shares at an exercise price equal to $8.00 per share. Each Warrant is exercisable for three years from date of issue.

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STW also issued 700,000 Common Shares for investment banking compensation associated with this offering.  These shares were valued at an aggregate of $98,800, based on the estimated fair value of STW’s Common stock at that date.

In connection with the April 2008 Notes, STW issued a total of 275,000 shares of Common stock which were valued at an aggregate of $12,238, based upon the price of STW’s shares of Common stock issued under the most recent private placement offering prior to the issuance of the April 2008 Notes.  Upon the extension of the April 2008 Notes in June 2008, STW issued a total of 41,325 additional shares of Common stock.  These additional shares of Common stock were valued at an aggregate of $11,157, based on the estimated fair value of the Company’s Common stock at that date.

In connection with the September 2008 Bridge Note, STW issued a total of 62,500 shares of Common stock which were valued at an aggregate of $16,875, based upon the estimated fair value of STW’s Common stock at that date.

In connection with the CEO Bridge Note, STW issued a total of 37,500 shares of Common stock which were valued at an aggregate of $10,125, based upon the estimated fair value of STW’s Common stock at that date.

Stock Based Compensation

Since Inception (January 28, 2008), STW issued 6.8 million shares of its Common stock to directors, employees and certain consultants.  As of September 30, 2010, 400,000 of these shares have been forfeited.   During the period from Inception (January 28, 2008) through December 31, 2009, STW recognized $833,793 in compensation cost associated with the issuance of these shares and recognized an additional $112,500 during the nine months ended September 30, 2010.  At September 30, 2010, STW had no remaining compensation cost to be recognized related to these issuances.

Total Dilutive Securities

The Company’s basic earnings per share (EPS) amounts have been computed based on the weighted-average number of shares of Common stock outstanding for the period. Diluted EPS reflects the potential dilution, using the treasury stock method, which could occur if the above dilutive securities were exercised. As the Company realized a net loss for each of the three and nine months ended September 30, 2010 and 2009, no potentially dilutive securities were included in the calculation of diluted earnings per share as their impact would have been anti-dilutive. As of September 30, 2010, and September 30, 2009, the Company had 14,939,140 and 21,124,754 dilutive securities to acquire the Company’s Common stock outstanding respectively.

Going Concern

The Company from Inception (January 28, 2008) through September 30, 2010, has not had any significant revenues.  The Company has no significant operating history as of September 30, 2010, has accumulated losses of $14,838,776 and negative cash flow from operations of $3,304,968 since inception. From Inception (January 28, 2008) through September 30, 2010, management has raised equity and debt financing of $ 8.3 million to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond.  These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with oil and gas operators and municipal utility districts; and (c) controlling overhead and expenses.  There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing.  There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.

In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.  To date, management has not considered this alternative, nor does management view it as a likely occurrence.

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The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

Future Cash Commitments

We intend to seek funding for our capital needs through the issuance of debt, preferred stock, equity, loan guarantees, or a combination of these types of instruments. We may also seek to obtain financing through private placement or a public offering, a consequence of which could include the sale or issuance of stock to third parties. We cannot be certain that we will be able to obtain financing on terms acceptable to us or at all.  In such case, we may be required to curtail or cease operations, liquidate or sell assets, modify our current plans for product development, and other research and development activities, or extend the time frame over which these activities will take place, or pursue other actions that would adversely affect future operations.

Off-Balance Sheet Arrangements

STW does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on STW's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Commitments

STW entered into a Memorandum of Understanding with GE Water & Process Technologies (“GE Water”), a unit of General Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take agreements with oil and gas operators for the deployment of multiple water reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian Basin.  STW and GE Water formalized their relationship on May 22, 2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”), which superseded the MOU.  The Teaming Agreement was drafted in accordance with the terms of the MOU and provides greater certainty as to each party’s responsibilities and as to the process of entering into agreements with and providing services to customers.  The Teaming Agreement sets forth the terms and conditions that will govern STW and GE Water relationship when STW is successful in selling its services to an identified prospect.

In April 2008, STW entered into a purchase order with GE Water (“Purchase Order”), for the purchase of a modularized produced water evaporator system (the “Evaporator System”) capable of processing approximately 720,000 gallons per day.  The total commitment under the Purchase Order was $14.5 million, to be paid over eight installments.  As of June 30, 2010, the Company has paid a total of approximately $4.7 million.  Included in this total is $300,000 of its $1.5 million second installment payment which was due at the end of June 2008.  The Company is currently in arrears on the remaining $1.1 million under the second installment payment and is also in arrears in its third installment payment of $3.6 million which was due on November 28, 2008, the fourth installment payment of $1.4 million which was due on February 27, 2009, and the fifth installment payment of $1.8 million which was due on August 28, 2009.  The total of all amounts invoiced and unpaid, including accrued interest of approximately $2.1 million, through June 30, 2010, totaled $10.1 million.  In addition, pursuant to the terms of the Purchase Order, the Company is required to post a letter of credit securing the balance of the payments due under the Purchase Order, totaling $1.9 million, which the Company has not yet done.  Finally, in April 2009, the Company issued a change order to the Purchase Order to increase the overall processing capacity to approximately one million gallons per day.  This change order obligated the Company to additional payments totaling approximately $1.2 million.

On January 12, 2009, GE Water sent a notice of default with respect to the past due payments on the Evaporator System, and the required posting of the letter of credit, as set forth under the Purchase Order, with a requirement that such default be cured within 30 days from the date of the notices.  GE Water took no further action with respect to the notice of default until August 13, 2009.

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On August 13, 2009, GE Water provided STW a six month additional grace period, through February 13, 2010.  At the end of the additional six month grace period, if STW has not met its obligations, GE Water represented that it would meet with STW to determine the state of the investment market and grant or not grant an additional grace period, as necessary.  If, after February 13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water could foreclose on the Evaporator System, resulting in the loss of payments advanced to date by STW and future use of the Evaporator System under construction.

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling STW’s Purchase Order due to STW’s inability to pay the current amounts due.  GE Water also demanded a “termination” payment of $750,000.  In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent.  GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement.  On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. 

On August 31, 2010, the Parties entered into a Settlement Agreement pursuant to which GE permitted the Company to substitute for STW Resources, Inc. as to all rights and obligations under the Purchase Order (including the Original Debt) and Teaming Agreement, and such that to fully discharge STW Resources, Inc.’s financial obligations to GE under the Purchase Order, the Company shall pay GE $1.4 million pursuant to a senior promissory note (the “Note”). The Note bears interest at a rate of the WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent (2%) per annum. The Note matures September 30, 2011.

Under the terms of the Note, and upon the consummation and closing of a debt or equity financing following the execution of the Note, STW shall pay GE thirty percent of any and all tranches (“Tranches” being defined as the cash receipts of the proceeds of any equity investments in or loans to the Company or any affiliated entity by third parties, but excluding any conversions of pre-existing debt to equity by any of the Company’s then current convertible note holders or creditors) until the Note is paid in full, including all accrued interest.

Critical Accounting Policies and Estimates

The following accounting principles and practices of STW are set forth to facilitate the understanding of data presented in the consolidated financial statements:

Nature of operations

The Company is a development stage  corporation formed to utilize state of the art water reclamation technologies to reclaim fresh water from highly contaminated oil and gas hydraulic fracture flow-back salt water that is produced in conjunction with the production of oil and gas.  The Company has been working to establish contracts with oil and gas operators for the deployment of multiple water reclamation systems with a focus in Pennsylvania.  The Company, in conjunction with energy producers, operators, various state agencies and legislators, are working to create an efficient and economical solution to this complex problem.  STW is also evaluating the deployment of similar technology in the municipal wastewater industry, the Acid Mine Drainage polluted water problems in the northeastern United States, and brackish aquifer reclamation for reuse.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

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Property and depreciation

Property and equipment are recorded at cost and depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.

Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized.  Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations as incurred.  Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current operations.

Income taxes

The Company follows ASC Topic 740, “Income Taxes” for recording the provision for income taxes.  Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.  Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

At Inception (January 28, 2008), the Company implemented the accounting guidance for uncertainty in income taxes using the provisions of ASC Topic 740 ,which is intended to clarify the accounting for income taxes prescribing a minimum recognition threshold for a tax provision before being recognized in the consolidated financial statements. This guidance also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As a result, the Company has concluded that it does not have any unrecognized tax benefits or any additional tax liabilities after applying this guidance.  The adoption of this guidance therefore had no impact on the Company’s consolidated financial statements.

Concentrations

Financial instruments that potentially subject STW to concentration of credit risk consist of cash.  From time to time, STW has cash in its bank accounts in excess of federally insured limits.

STW anticipates entering into long-term, fixed-price contracts for its services with select oil and gas producers and municipal utilities.  STW will control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

Since we are a company that qualifies as a “smaller reporting company,” as defined under Rule 12b-2, we are not required to provide the information required by this Item 3.

Item 4.  Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 

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We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September  30, 2010, the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, the Company may become a party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business.  The Company is not involved currently in legal proceedings that could reasonably be expected to have a material adverse affect on its business, prospects, financial condition or results of operations.  The Company may become involved in material legal proceedings in the future.

Item 1A.  Risk Factors.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On August, 31, 2010, the Company closed a best-efforts private placement for which it received gross proceeds of $705,000 (the “Offering”). The private placement was issued pursuant to a 12% Convertible Note (the “Convertible Note”) that mature 1 year from the issuance date. The holders of the Convertible Note may convert the principal portion of the Convertible Note and accrued interest on such portion, until such time as the Convertible Note is fully paid, at a conversion price of $0.25. In connection with the Offering, each subscriber received a warrant to purchase such number of shares of common of the Company equal to one-half of the aggregate face amount of their Convertible Note divided by the conversion price of the Convertible Note.  The Company claims an exemption from the registration requirements of the Securities Act of 1933, as amended, (the “Securities Act”) for the private placement of the above-referenced Securities pursuant to Regulation D promulgated under the Securities Act, as amended, and Section 4(2) thereunder. The Investors had access to sufficient information regarding the Company so as to make an informed investment decision. In addition, the Company had a reasonable basis to believe that each purchaser had the requisite sophistication to make an investment in the Company's Securities.

On August 31, 2010, we entered into a Settlement Agreement pursuant to which GE permitted the Company to substitute for STW Resources as to all rights and obligations under the Purchase Order (including the Original Debt) and Teaming Agreement, and such that to fully discharge STW Resources’ financial obligations to GE under the Purchase Order, the Company shall pay GE $1,400,000 pursuant to a senior promissory note (the “Note”). The Note bears interest at a rate of the WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent (2%) per annum. Under the terms of the Note, the Company has thirteen months to pay off the Note plus all accrued interest thereon.  In addition, upon the consummation of a debt or equity financing following the execution of the Note, the Company shall pay GE thirty percent (30%) of the gross proceeds of any equity investments in or loans to the Company or any affiliated entity until the Note is paid in full, including all accrued interest thereon.  The securities were issued upon reliance of an exemption provided under Section 4(2) of the Securities Act.

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Item 3.  Defaults upon Senior Securities

None.

Item 4.  Removed and Reserved

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit No.	Description
31.1	Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Principal Executive Officer and Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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 of the undersigned thereunto duly authorized

		STW RESOURCES HOLDING CORP
		(Registrant)
Date: November 22, 2010	By:	/s/ Stanley T Weiner
		Stanley T Weiner
		President and Chief Executive Officer (Principal
		Executive and Financial Officer)

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