UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





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





For
the quarterly period ended June 30, 2010





oTRANSITION
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
              of
      Incorporation or
              Organization)
            
            (Commission
      File No.)
            
            (I.R.S.
      Employer
              Identification
      No.)





619
      West Texas Ave
              Suite
      126
              Midland
      Texas, 79701
            
            
            
            (432-686-7777)(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 xNo o





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 oNo o





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





Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer o
            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 o    No
x





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.





[35,694,766
outstanding at August 12, 2010]





Common
Stock, par value $0.001


(Class)









STW
RESOURCES HOLDING CORP.




TABLE
OF CONTENTS




PART
      IITEM
      1.
            
            FINANCIAL
      STATEMENTS
            2ITEM
      2.
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            23ITEM
      3.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            32ITEM
      4.
            
            CONTROLS
      AND PROCEDURES
            32PART
      IIITEM
      1.
            
            LEGAL
      PROCEEDINGS
            34ITEM
      1A.
            
            RISK
      FACTORS
            34ITEM
      2.
            
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            39ITEM
      3.
            
            DEFAULTS
      UPON SENIOR SECURITIES
            39ITEM
      4.
            
            REMOVED
      AND RESERVED
            39ITEM
      5.
            
            OTHER
      INFORMATION
            40ITEM
      6.
            
            EXHIBITS
            40SIGNATURES
            41








STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Balance Sheets
  June
      30,
                
                
                December
      31,2010
                
                
                2009(
      Unaudited)
                
                
                (
      Audited)AssetsCurrent
      assetsCash
      and cash equivalents
                
                $
                2,207
                
                
                $
                11,621Other
      current assets
                
                
                95,026
                
                
                
                100,859Total
      current assets
                
                
                97,233
                
                
                
                112,480Property
      and equipment, net of accumulated depreciation of $5,122 and
      $3,812
                
                
                14,053,724
                
                
                
                14,055,034Total
      Assets
                
                $
                14,150,957
                
                
                $
                14,167,514Liabilities
      and Shareholders' EquityCurrent
      liabilitiesAccounts
      payable
                
                $
                10,909,001
                
                
                $
                10,092,547Accrued
      expenses
                
                
                219,895
                
                
                
                151,610Notes
      payable - current, net of $83,277 and $135,843 of unamortized discount at
      June 30, 2010 and December 31, 2009
                
                
                1,767,538
                
                
                
                1,335,772Total
      current liabilities
                
                
                12,896,434
                
                
                
                11,579,929Note
      payable - non-current
                
                
                279,095
                
                
                
                279,095Shareholders'
      equityPreferred
      stock, par value $.001 per share, Authorized 10,000,000 shares, Issued
      2,140,000 at June 30, 2010 and 0 shares at December 31,
    2009
                
                
                2,140
                
                
                
                -Common
      stock, par value $.001 per share, Authorized 100,000,000 shares, Issued
      35,694,766 shares at June 30, 2010, and 30,418,099 at December 31,
      2009
                
                
                35,694
                
                
                
                30,418Paid-in
      capital
                
                
                9,877,167
                
                
                
                9,048,954Deficit
      accumulated during the development stage
                
                
                (8,939,573
                )
                
                
                (6,770,882
                )Total
      shareholders' equity
                
                
                975,428
                
                
                
                2,308,490Total
      Liabilities and Shareholders' Equity
                
                $
                14,150,957
                
                
                $
                14,167,514
  The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
  2
  STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Operations
 (Unaudited)
  Three
      Months
                  Ended
                  June
      30,
                  2010
                
                
                Three
      Months
                  Ended
                  June
      30,
                  2009
                
                
                Six
      Months
                  Ended
                  June
      30,
                  2010
                
                
                Six
      Months
                  Ended
                  June
      30,
                  2009
                
                
                Inception
                  (January
      28,
                  2008)
      through
                  June
      30,
                  2010Revenues
                
                $
                -
                
                
                $
                34,000
                
                
                $
                -
                
                
                $
                34,000
                
                
                $
                34,000Cost
      of Sales
                
                
                -
                
                
                
                35,355
                
                
                
                -
                
                
                
                35,355
                
                
                
                35,355-
                
                
                
                (1,355
                )
                
                
                -
                
                
                
                (1,355
                )
                
                
                (1,355
                )ExpensesGeneral
      and administrativeSalaries
      and benefits
                
                
                22,599
                
                
                
                565,545
                
                
                
                35,458
                
                
                
                1,232,417
                
                
                
                2,713,550Professional
      fees
                
                
                255,898
                
                
                
                92,607
                
                
                
                913,193
                
                
                
                636,929
                
                
                
                2,501,109Stock-based
      compensation
                
                
                -
                
                
                
                348,872
                
                
                
                112,500
                
                
                
                600,300
                
                
                
                946,293Travel
                
                
                5,238
                
                
                
                7,732
                
                
                
                8,610
                
                
                
                52,899
                
                
                
                334,111Other
                
                
                36,326
                
                
                
                36,857
                
                
                
                39,650
                
                
                
                105,747
                
                
                
                672,153Total
      general and administrative
                
                
                320,061
                
                
                
                1,051,612
                
                
                
                1,109,411
                
                
                
                2,628,291
                
                
                
                7,167,216Operating
      loss
                
                
                (320,061
                )
                
                
                (1,052,968
                )
                
                
                (1,109,411
                )
                
                
                (2,629,647
                )
                
                
                (7,168,571
                )Other
      expenseInterest,
      net
                
                
                526,722
                
                
                
                139,487
                
                
                
                1,059,278
                
                
                
                311,081
                
                
                
                1,771,002Total
      other expense
                
                
                526,722
                
                
                
                139,487
                
                
                
                1,059,278
                
                
                
                311,081
                
                
                
                1,771,002Loss
      before income taxes
                
                
                (846,783
                )
                
                
                (1,192,455
                )
                
                
                (2,168,689
                )
                
                
                (2,940,728
                )
                
                
                (8,939,573
                )Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (846,783
                )
                
                $
                (1,192,455
                )
                
                $
                (2,168,689
                )
                
                $
                (2,940,728
                )
                
                $
                (8,939,573
                )Basic
      and Diluted Loss Per Share
                
                $
                (0.02
                )
                
                $
                (0.05
                )
                
                $
                (0.06
                )
                
                $
                (0.12
                )Number
      of Common Shares used in Basic and Diluted Loss Per
    share
                
                
                34,219,154
                
                
                
                25,162,243
                
                
                
                34,219,154
                
                
                
                25,162,243
 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 Cash Flows
 (Unaudited)
  For
      the
                  Six
      Months Ended
                  June
      30,
                  2010
                
                
                For
      the
                  Six
      Months Ended
                  June
      30,
                  2009
                
                
                Inception
                  (January
      28,
                  2008) through
                  June
      30,
                  2010Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (2,168,689
                )
                
                $
                (2,940,728
                )
                
                $
                (8,939,571
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                1,310
                
                
                
                15,998
                
                
                
                36,583Write-off
      of project pilot costs
                
                
                -
                
                
                
                14,960
                
                
                
                14,960Amortization
      of debt issue costs
                
                
                219,377
                
                
                
                254,096
                
                
                
                690,257Fair
      value of common shares attached to notes payable
                
                
                -
                
                
                
                25,314
                
                
                
                75,709Notes
      payable issued for deferred compensation
                
                
                -
                
                
                
                501,938
                
                
                
                1,123,851Stock-based
      compensation
                
                
                112,500
                
                
                
                332,658
                
                
                
                946,293Fair
      value of equity issued for consulting services
                
                
                641,665
                
                
                
                158,388
                
                
                
                1,043,816Loss
      on sale of equipment
                
                
                -
                
                
                
                -
                
                
                
                11,524Fair
      value of common shares issued as a donation
                
                
                -
                
                
                
                -
                
                
                
                50,000Changes
      in operating assets and liabilities:(Increase)
      decrease in prepaid expenses and other current assets
                
                
                (34,514
                )
                
                
                8,704
                
                
                
                (59,227
                )Increase
      in accounts payable and accrued expenses
                
                
                884,737
                
                
                
                893,499
                
                
                
                1,947,381Net
      cash used in operating activities
                
                
                (343,614
                )
                
                
                (735,173
                )
                
                
                (3,058,424
                )Cash
      flows from investing activitiesAcquisition
      of property and equipment
                
                
                -
                
                
                
                -
                
                
                
                (4,986,876
                )Sale
      of equipment
                
                
                -
                
                
                
                -
                
                
                
                64,500Net
      cash used in investing activities
                
                
                -
                
                
                
                -
                
                
                
                (4,922,376
                )Cash
      flows from financing activitiesIssuance
      of notes payable
                
                
                379,200
                
                
                
                825,000
                
                
                
                3,030,019Repayment
      of notes payable
                
                
                -
                
                
                
                (85,201
                )
                
                
                (1,207,108
                )Debt
      issue costs
                
                
                (45,000
                )
                
                
                (98,200
                )
                
                
                (345,579
                )Equity
      issuances, net
                
                
                -
                
                
                
                93,056
                
                
                
                6,503,143Net
      cash provided by financing activities
                
                
                334,200
                
                
                
                734,655
                
                
                
                7,980,475Net
      increase( decrease) in cash and cash equivalents
                
                
                (9,414
                )
                
                
                (518
                )
                
                
                2,207Cash
      at beginning of period
                
                
                11,621
                
                
                
                17,639
                
                
                
                -Cash
      at end of period
                
                $
                2,207
                
                
                $
                17,121
                
                
                $
                2,207Supplemental
      cash flow information:Cash
      paid for interest
                
                $
                -
                
                
                $
                -
                
                
                $
                -Non-cash
      investing and financing activities:Non-cash
      capital expenditures
                
                $
                -
                
                
                $
                2,008,416
                
                
                $
                9,194,416
  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 Shareholders' Equity
 (Unaudited)
 Deficit
      AccumulatedPreferred
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    Paid-in
                    
                    
                    During
      the DevelopmentShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Stage
                    
                    
                    TotalJanuary
      28, 2008, equity offering
                    
                    
                    100
                    
                    
                    $
                    -
                    
                    
                    
                    8,100,000
                    
                    
                    $
                    8,100
                    
                    
                    $
                    (8,018
                    )
                    
                    $
                    -
                    
                    
                    $
                    81April
      1, 2008, issuance of common stock in connection with notes
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    275,000
                    
                    
                    
                    275
                    
                    
                    
                    11,963
                    
                    
                    
                    -
                    
                    
                    
                    12,238April
      9, 2008, equity offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,980,000
                    
                    
                    
                    5,980
                    
                    
                    
                    260,130
                    
                    
                    
                    -
                    
                    
                    
                    266,110April
      14, 2008, unit offering, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,167,500
                    
                    
                    
                    4,168
                    
                    
                    
                    6,139,726
                    
                    
                    
                    -
                    
                    
                    
                    6,143,894June
      1, 2008, issuance of common stock in connection with notes
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    41,325
                    
                    
                    
                    41
                    
                    
                    
                    11,116
                    
                    
                    
                    -
                    
                    
                    
                    11,157September
      29, 2008, issuance of common stock in connection with note
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    62,500
                    
                    
                    
                    63
                    
                    
                    
                    16,812
                    
                    
                    
                    -
                    
                    
                    
                    16,875December
      29, 2008, issuance of common stock in connection with note
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37,500
                    
                    
                    
                    38
                    
                    
                    
                    10,087
                    
                    
                    
                    -
                    
                    
                    
                    10,125Stock
      - based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,800,000
                    
                    
                    
                    4,800
                    
                    
                    
                    228,693
                    
                    
                    
                    -
                    
                    
                    
                    233,493Net
      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
                    )
                    
                    $
                    4,047,405April
      14, 2008, unit offering follow-on, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    570,500
                    
                    
                    
                    572
                    
                    
                    
                    92,484
                    
                    
                    
                    -
                    
                    
                    
                    93,056Non-
      Cash IssuancesJanuary
      2, 2009, issuance of common stock in connection with note
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,500
                    
                    
                    
                    12
                    
                    
                    
                    3,363
                    
                    
                    
                    -
                    
                    
                    
                    3,375January
      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.
  5
 
  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
              
              
              
              -
              
              
              
              13,500January
      30, 2009, issuance of common stock in connection with September 29, 2008
      note payable
              
              
              -
              
              
              
              -
              
              
              
              31,250
              
              
              
              31
              
              
              
              8,406
              
              
              
              -
              
              
              
              8,437February
      24, 2009, retirement of preferred shares
              
              
              (100
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -February
      28, 2009, issuance of common stock in connection with September 29, 2008
      note payable
              
              
              -
              
              
              
              -
              
              
              
              31,250
              
              
              
              31
              
              
              
              8,406
              
              
              
              -
              
              
              
              8,437March
      24, 2009, issuance of common stock in connection with September 29, 2008
      note payable
              
              
              -
              
              
              
              -
              
              
              
              31,250
              
              
              
              31
              
              
              
              8,406
              
              
              
              -
              
              
              
              8,437March
      24, 2009, issuance of common stock in connection with amendment of
      September 29, 2008 note payable
              
              
              -
              
              
              
              -
              
              
              
              200,000
              
              
              
              200
              
              
              
              53,800
              
              
              
              -
              
              
              
              54,000Warrants
      issued in connection with the 2009 Convertible Note
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              295,572
              
              
              
              -
              
              
              
              295,572Warrants
      issued for consulting services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              180,651
              
              
              
              -
              
              
              
              180,651Shares
      issued for consulting services
              
              
              -
              
              
              
              -
              
              
              
              886,000
              
              
              
              886
              
              
              
              220,614
              
              
              
              -
              
              
              
              221,500Stock
      -based compensation
              
              
              -
              
              
              
              -
              
              
              
              1,950,000
              
              
              
              1,950
              
              
              
              598,350
              
              
              
              -
              
              
              
              600,300Cancellation
      of restricted shares
              
              
              -
              
              
              
              -
              
              
              
              (400,000
              )
              
              
              (400
              )
              
              
              400
              
              
              
              -
              
              
              
              -Shares
      issued as donation
              
              
              -
              
              
              
              -
              
              
              
              200,000
              
              
              
              200
              
              
              
              49,800
              
              
              
              
              
              
              
              50,000Shares
      issued to employees in connection with deferred compensation note
      conversion
              
              
              -
              
              
              
              -
              
              
              
              3,379,024
              
              
              
              3,379
              
              
              
              841,377
              
              
              
              -
              
              
              
              844,756Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,124,314
              )
              
              
              (4,124,314
              )Total
      Shareholders' Equity, December 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              30,418,099
              
              
              $
              30,417
              
              
              $
              9,048,951
              
              
              $
              (6,770,682
              )
              
              $
              2,308,488
  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)
  Warrants
      issued in connection with the 2010 Convertible Notes pre
      merger
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,067
                  
                  
                  
                  -
                  
                  
                  
                  10,067Shares
      issued for professional services pre merger
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,361,905
                  
                  
                  
                  1,362
                  
                  
                  
                  339,115
                  
                  
                  
                  -
                  
                  
                  
                  340,477STW
      Resources, Inc. common stock exchange
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (31,780,004
                  )
                  
                  
                  (31,779
                  )
                  
                  
                  (9,398,133
                  )
                  
                  
                  -
                  
                  
                  
                  (9,429,913
                  )WoozyFly,
      Inc. common stock acquired in exchange
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,780,004
                  
                  
                  
                  31,779
                  
                  
                  
                  9,398,133
                  
                  
                  
                  -
                  
                  
                  
                  9,429,913Shares
      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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  71,397
                  
                  
                  
                  -
                  
                  
                  
                  71,397Shares
      issued for professional services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,204,762
                  
                  
                  
                  1,202
                  
                  
                  
                  299,986
                  
                  
                  
                  -
                  
                  
                  
                  301,188Shares
      issued for stock compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  450,000
                  
                  
                  
                  450
                  
                  
                  
                  112,050
                  
                  
                  
                  -
                  
                  
                  
                  112,500Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,168,689
                  )
                  
                  
                  (2,168,689
                  )Total
      Shareholders' Equity, June 30, 2010
                  
                  
                  2,140,000
                  
                  
                  $
                  2,140
                  
                  
                  
                  35,694,766
                  
                  
                  $
                  35,694
                  
                  
                  $
                  9,877,167
                  
                  
                  $
                  (8,939,573
                  )
                  
                  $
                  975,428
 The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
  7
 
 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”) 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.
  8
 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. (the
“Company”) 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 our 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 with the Company’s Form 8-K filed with the
SEC.  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
 
 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 the STW and GE Water relationship when STW is successful in
selling its services to an identified prospect.
  9
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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.
 
 On August
13, 2009, GE Water provided the Company a six month additional grace period,
through February 13, 2010.  At the end of the additional six month
grace period, if the Company has not met its obligations, GE Water represented
that it would meet with the Company 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 the Company’s payment obligations, GE Water could foreclose on the
Evaporator System, resulting in the loss of payments advanced to date by the
Company and future use of the Evaporator System under
construction.  In discussions inMarch
2010between STW
management and GE Water, GE Water expressed continued interest in working with
the Company by providing technical support and a willingness to resolve their
differences, pending the results of STW’s merger and capital raised during
the first half2010.
 
 On
October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW
that GE was canceling the Company’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.  As of August 2010, STW and GE are in
discussions regarding a potential project or sale of the
Evaporator.
  10
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Going
Concern
 
 The
Company from Inception (January 28, 2008) through June 30, 2010, has not had any
significant revenues.  The Company has no significant operating
history as of June 30, 2010, has accumulated losses of $8.9 million and negative
cash flow from operations of $3.1 million since inception and is currently in
default of amounts of $9.7 million past due to GE Water.  From
Inception (January 28, 2008) through June 30, 2010, management has
raised equity and debt financing of $8.0 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) continue to work in good faith with GE Water to perform
its obligations under the Teaming Agreement and the Purchase Order, (c)
executing contracts with oil and gas operators and municipal utility districts;
and (d) 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.
 
 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.
  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.
  11
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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 June 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 six months ended
June 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.
              Property
      and Equipment
 
 As of
June 30, 2010 and December 31, 2009, the Company’s property and equipment
consists principally of $12.6 million and $12.6 million, respectively, of
work-in-progress on the Company’s first Evaporator System from GE Water. As of
June 30, 2010 and December 31, 2009, progress payments totaling $4.7 million
have been paid-to-date and a total of $10.1 million and $9.3 million are
outstanding and included in accounts payable, respectively.  The
company did not capitalize interest accrued during the six months ended June 30,
2010.  As of December 31, 2009, the Company capitalized a total of
$1.3 million on past-due payments charged by GE Water. (See Note 1)
 
 During
the six months ended June 30, 2010 and 2009, the Company recognized total
depreciation expense $5,122 and $15,998, respectively. The depreciation expense
is primarily related to vehicles and furniture and fixtures which carry useful
lives ranging from three to five years.
 
 3.
              Accounts
      Payable and Accrued Expenses
 
 As of
June 30, 2010 and December 31, 2009, accounts payable and accrued expenses were
$11.1 and $10.2 million, respectively, related primarily to amounts due on the
Company’s first Evaporator System from GE Water, which includes accrued interest
of approximately $1.3 million. The Company did not capitalize interest for the
quarters ended June 30, 2010 or March 31, 2010 as there was no further progress
towards completion of the Evaporator System.  Also included are
various other amounts due primarily to formation costs and capital raising
activities.
 
 4.
              Notes
      Payable
 
 The
Company’s notes payable at June 30, 2010 and December 31, 2009, consisted of the
following:
 
 June
      30,
                
                
                December
      31,Name
                
                2010
                
                
                200912%
      Convertible Notes:Conversion
      of outstanding bridge notes
                
                
                727,903
                
                
                
                727,903Cash
      issuances of 2009 Notes
                
                
                740,000
                
                
                
                740,000Cash
      issuances of 2010 Notes
                
                
                375,000
                
                
                
                -Total
      2009 12% Convertible Notes
                
                
                1,842,903
                
                
                
                1,467,903Deferred
      Compensation Notes
                
                
                279,095
                
                
                
                279,095Other
      Financing
                
                
                7,912
                
                
                
                3,712Unamortized
      debt discount
                
                
                (83,277
                )
                
                
                (135,843
                )Total
      Notes Payable
                
                
                2,046,633
                
                
                
                1,614,867Less:
      Current Portion
                
                
                (1,767,538
                )
                
                
                (1,335,772
                )Total
      Long Term Notes Payable
                
                $
                279,095
                
                
                $
                279,095
  14
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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.
 
 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.
  15
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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.
 
 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.
  17
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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.
 
 During
the second quarter of 2010, $653,903 face value of these notes
matured.  The Company received six month extensions for these
notes.  During the quarter ended June 30, 2010 in consideration for
the extensions the Company issued 62,500 warrants at a value of
$5,602.  During August, 2010 the Company granted an additional 264,452
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
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, 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.
 
 Using the
Black Scholes pricing model, with volatility of 100%,  a risk-free
interest rate of 1.37% and a 0% dividend yield, the warrants were determined to
have a fair value of $5,602, 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.
 
 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 June 30, 2010, the Company had
issued a total of $375,000 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 750,000 Warrants to acquire the Company’s common stock to investors and
an additional 90,000 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
1.37% and a 0% dividend yield, the warrants were determined to have a fair value
of $75,485, 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
 
 During
the six months ended June 30, 2010 and 2009, the total interest costs incurred
were $1.1 million and $.9 million, respectively.  There was no
interest capitalized in 2010.  The 2009 balance includes $ .6 million
in capitalized interest.
 
 19
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 5.
              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
six months ended June 30, 2010, the company issued 2,566,667 shares of common
stock which were valued at an aggregate of $641,665, 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
June 30, 2010, the Company had the following dilutive securities to acquire the
Company’s Common Stock outstanding:
  Security
                
                Number
      of Underlying Common Shares
                
                
                Exercise
      Price
                
                
                TermWarrants
      associated with the $2.00 Unit Offering
                
                
                5,844,900
                
                
                $
                3.00
                
                
                2011-2012Warrants
      issued for Professional Services
                
                
                1,500,000
                
                
                $
                4.00
                
                
                2014Warrant
      associated with the January 14, 2009 Bridge Note
                
                
                480,000
                
                
                $
                3.00
                
                
                2014Warrant
      associated with the acquisition of the Company's Preferred Shares
      oustanding
                
                
                1,500,000
                
                
                $
                8.00
                
                
                2014Warrants
      associated with the 12% Convertible Notes
                
                
                4,190,601
                
                
                $
                3.00
                
                
                2014-2015Convertible
      common stock associated with 2009 12% notes
                
                
                486,395
                
                
                $
                0.25
                
                
                2010-2011Convertible
      common stock associated with 2010 12% notes
                
                
                98,043
                
                
                $
                0.25
                
                
                2010-201114,099,939
 6.
              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
June 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:
 
 Date
                
                Number
      of Shares Issued
                
                
                Fair
      Value per Share
                
                Vesting
      PeriodApril
      22, 2008
                
                
                2,550,000
                
                
                $
                0.0445
                
                ImmediateApril
      22, 2008
                
                
                350,000
                
                
                $
                0.0445
                
                six
      monthsMay
      8, 2008
                
                
                100,000
                
                
                $
                0.0445
                
                ImmediateMay
      19, 2008
                
                
                1,300,000
                
                
                $
                0.0445
                
                ImmediateOctober
      1, 2008
                
                
                50,000
                
                
                $
                0.27
                
                ImmediateJune
      1, 2008
                
                
                250,000
                
                
                $
                0.27
                
                (a)February
      10, 2009
                
                
                800,000
                
                
                $
                0.27
                
                ImmediateMay
      31, 2009
                
                
                200,000
                
                
                $
                0.27
                
                ImmediateJune
      1, 2009
                
                
                150,000
                
                
                $
                0.25
                
                ImmediateJune
      15, 2009
                
                
                600,000
                
                
                $
                0.25
                
                ImmediateMarch
      31, 2010
                
                
                450,000
                
                
                $
                0.25
                
                ImmediateTotal
                
                
                6,800,000Less
      forfeitures
                
                
                (400,000
                )Total
                
                
                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.
  21
 STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 7.
              Commitments
 
 In April
2008, the Company entered into an Equipment and Services Contract with GE Water
with respect to the purchase by the Company of an Evaporator System, along with
necessary pre-treatment facilities, capable of handling 500 gallons per minute
of oil field fractionation and/or oil field produced waste water.  The
contract price totaled $14.5 million.  The Company has made progress
payments totaling $4.7 million, with the balance of the contract price payable
upon the attainment of project milestones by GE Water over approximately 18
months. In April 2009, the Company issued a change 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.  As of August 2010, the Company
was in the process of negotiating a settlement agreement with GE
Water.  (See Note 1)
 
 8.
              Related
      Party Transactions
 
 In
connection with the Company’s capital raising activities, the Company had
incurred, as of June 30, 2010, a total of $1.0 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 442,296 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 June 30, 2010, the
Company had a balance due Viewpoint of $.2 million recorded in accounts
payable.
 
 
 9.
              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 August 10, 2010 the company
was in the process of completing its Preferred Share Agreement with
Kodiak.
 
 On August
5, 2010 the Company entered into a joint venture agreement, (the “JV”) with Aqua
Verde, LLC for the purposes of reclamation and processing of produced water from
oil and gas drilling operations from various customers.  The Company
shall operate the JV and has a membership interest of 51%.
 
 Through
August 11, 2010, the Company issued a total of $190,000 face value of its 12%
Convertible Notes for cash.
 
 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” or “STW”) 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/A, filed with the Securities and Exchange Commission on
April 1, 2010, as well as the Risk Factors set forth in this Quarterly Report,
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.





23




Overview




STW 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 at 619 W. Texas Ave Ste 126, Midland, TX
79701.




On
January 21, 2010, we 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. (“Acquiree”) and certain
shareholders of Acquiree controlling a majority of the issued and outstanding
shares of Acquiree.  On February 12, 2009, pursuant
to the terms of the Merger Agreement, Acquiree merged with and into Acquisition
Sub, which became a wholly-owned subsidiary of the Company (the
“Merger”).  In consideration for the Merger and Acquiree 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 Acquiree at the closing of the merger and all derivative
securities of Acquiree 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 United States Bankruptcy Court for the Southern
District of New York, (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 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.





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.





24




Acquiree
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
Acquiree pursuant to the terms of the Merger Agreement.  As a result
of such acquisition, our operations our 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.




Results
of Operations




Three  Months
Ended June 30, 2010 Compared to Three Months EndedJune 30,
2009




Revenue.Revenue generatedfor thethree months ended June 30,
2010 and 2009was$0 and
$34,000respectively.Revenue for 2009 was
generated in conjunction with a test of its technology for a potential
customer.





Expenses.Our expenses for thethreemonths endedJune 30, 2010were $846,780, and consisted of payroll
and payroll taxes ($22,599), legal and professional
fees ($255,898), interest expense
($526,722), and ($41,564)  in other
administrative expenses including travel to the prospective
sites.Our expenses for
thethree months
ended June 30,
2009 were $1,192,455and consisted of payroll and
payroll taxes ($565,545), legal and professional
fees ($92,607), stock based compensation
($348,872) and ($44,589)  in other
administrative expenses.  The reason for the decrease in comparing
thethreemonths
endedJune 30,
2010to the same
period for 2009 was due to the fact that the Company refocused operations on the
Company’s process for permitting sites inPennsylvania. 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 three months
endedJune 30,
2010and 2009
were $846,783and $1,192,455,
respectively.





Six  Months
Ended June 30, 2010 Compared to Six Months EndedJune 30,
2009




Revenue.Revenue generatedfor thesix months ended June 30,
2010 and 2009was$0 and
$34,000respectively.Revenue for 2009 was
generated in conjunction with a test of its technology for a potential
customer.





Expenses.Our expenses for thesixmonths endedJune 30, 2010were $2,168,689, and consisted of payroll
and payroll taxes ($35,458), legal and professional
fees ($913,193), stock based compensation
($112,500), interest expense ($1,059,278), and ($48,260)  in other
administrative expenses including travel to the prospective
sites.Our expenses for thesix months ended
June 30, 2009
were $2,939,372and consisted of payroll and
payroll taxes ($1,232,417), legal and professional
fees ($636,929), stock based compensation
($600,300) and ($158,646)  in other
administrative expenses.  The reason for the decrease in comparing thesixmonths endedJune 30, 2010to the same period for 2009
was due to the fact that the Company refocused operations on the Company’s
process for permitting sites inPennsylvania. 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 thesixmonths endedJune 30, 2010and 2009 were $2,168,689and $2,940,728,
respectively.




Liquidity
and Capital Resources




As ofJune 30, 2010, we had current assets of
$97,233, including cash of
$2,207, and current liabilities of
$12,896,434.   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 $343,614 for the
sixmonths endedJune 30,
2010compared to
net cash used by
operations of $742,627 for the six months ended June 30, 2009.  The net
cashused by
operations for the sixmonths endedJune 30, 2010reflects a net loss
of  $2,168,689 offset by depreciation of $1,310, amortizationof debt issue costs of
$219,377, stock
based compensation $112,500 the fair value of equity issued for services of
$641,665,  account payables
and other accrued expenses of $884,737and other minor
factors.   The net cash used by operations for thesix months ended June
30, 2009
reflects a net
loss of $2,940,728offset by depreciation of
$15,998, stock based compensation of
$332,658,notes payable issued for
deferred compensation of $501,938,amortization of debt issuecosts of
$42,000, fair
value of equity issued for consulting services of  $24,000 and account
payables and other accrued expenses of
$1,232,529and
other minor factors.





25




Investing
Activities




Our investing activities
resulted in a net cash outflow of $0 for thesixmonths endedJune 30, 2010compared to a net cash
outflow of $0 for thesixmonths endedJune 30, 2009.




Financing
Activities




Our financing activities
resulted in a cash inflow of $334,200for thesixmonths endedJune 30, 2010and $742,109for thesix months ended June
30, 2009, which
represents both issuances of notes payable and sales of equity by
STW.




Notes
Payable




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 of 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.




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.





26




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, STW entered into a securities purchase
agreement for the issuance of a 15% promissory note in the principal amount of
$400,000.




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
December 31, 2009, the closing date of this offering, the Company had
issued a total of $740,000 face value of its 12% Convertible Notes for
cash.





27





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 June 30, 2010, the
Company had issued a total of $375,000 face value of its 12% Convertible Notes
for cash.




Equity
Issuances




On
February 12, 2010, in consideration for the Merger and the Company becoming a
wholly-owned subsidiary, the Company issued STW Acquisition Shares to the
shareholders of the Acquiree 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 Acquiree as of the Merger became derivative securities of
the Acquiree, 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.




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.





28




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 June 30, 2010,
400,000 of these shares have been forfeited.   During the period
from Inception (January 28, 2008) through December 31, 2009, STW recognized
$946,293 in compensation cost associated with the issuance of these shares and
recognized an additional $112,500 during the six months ended June 30,
2010.  At June 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 months ended June 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
June 30, 2010, and June 30, 2009, the Company had 14,099,939 and 11,244,277
dilutive securities to acquire the Company’s Common Stock outstanding
respectively.




Going
Concern




The
Company from Inception (January 28, 2008) through June 30, 2010, has not had any
significant revenues.  The Company has no significant operating
history as of June 30, 2010, has accumulated losses of $8,939,571 and negative
cash flow from operations of $3,058,424 since inception and is currently in
default of amounts of $10.0 million past due to GE Water.  From
Inception (January 28, 2008) through June 30, 2010, management has
raised equity and debt financing of $ 7.9 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) continue to work in good faith with GE Water to perform
its obligations under the Teaming Agreement and the Purchase Order, (c)
executing contracts with oil and gas operators and municipal utility districts;
and (d) 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.





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.




Credit
Facility




The
financial requirements of our Company will be dependent upon the financial
support through credit facilities and additional sales of our equity
securities.  The issuance of additional equity securities by us may
result in a significant dilution in the equity interests of our current
shareholders. Should additional financing be needed for our continued operations
we will need to obtain it on commercially reasonable terms. If we are not able
to obtain the additional financing on a timely basis, if available at all, we
will not be able to meet our other obligations as they become due and we will be
forced to scale down or perhaps even cease our operations.





29




We can
give no assurance that we will be successful in implementing any phase, all
phases of the proposed business plan, or that we will be able to continue as a
going concern.




Presently
we have no revolving Credit Facility established.  If needed, it will
be necessary to establish a line of credit and it will need to be on favorable
terms.




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.





30




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.  As of May, 2010, STW and GE are actively
engaged in discussions regarding a potential project or sale of the
evaporator.




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.




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.





31




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.  In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





32




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 June 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 June 30, 2010, that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





33




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.





RISK
FACTORS





Our
limited operating history makes it difficult for us to evaluate our future
business prospects and make decisions based on those estimates of our future
performance.





We did
not begin operations of our business until January 2008.  We have a
limited operating history and have generated limited revenue.  As a
consequence, it is difficult, if not impossible, to forecast our future results
based upon our historical data.  Reliance on the historical results may not
be representative of the results we will achieve, particularly in our combined
form.  Because of the uncertainties related to our lack of historical
operations, we may be hindered in our ability to anticipate and timely adapt to
increases or decreases in revenues or expenses.  If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable
or incur losses, which may result in a decline in our stock price.





STW’s
results of operations have not resulted in profitability and we may not be able
to achieve profitability going forward.





STW
incurred a net loss amounting to $8,939,573 for the period from inception
(January 28, 2008) through June 30, 2010.  In addition, as
of  June 30, 2010, STW has liabilities of $13,175,529. If we incur
additional significant operating losses, our stock price, may decline, perhaps
significantly.





Our
management is developing plans to alleviate the negative trends and conditions
described above.  Our business plan is speculative and unproven. There
is no assurance that we will be successful in executing our business plan or
that even if we successfully implement our business plan, that we will be able
to curtail our losses now or in the future.  Further, as we are a new
enterprise, we expect that net losses will continue and our working capital
deficiency will exacerbate.





We
depend upon key personnel and need additional personnel.





Our
success depends on the continuing services of Stanley Weiner, our chief
executive officer and director.  The loss of Mr. Weiner could have a
material and adverse effect on our business operations.  Additionally,
the success of the Company’s operations will largely depend upon its ability to
successfully attract and maintain competent and qualified key management
personnel. As with any company with limited resources, there can be no guaranty
that the Company will be able to attract such individuals or that the presence
of such individuals will necessarily translate into profitability for the
Company.  Our inability to attract and retain key personnel may
materially and adversely affect our business operations.





We must effectively manage the growth
of our operations, or our company will suffer.





To manage
our growth, we believe we must continue to implement and improve our operational
and marketing departments. We may not have adequately evaluated the costs and
risks associated with this expansion, and our systems, procedures, and controls
may not be adequate to support our operations. In addition, our management may
not be able to achieve the rapid execution necessary to successfully offer our
products and services and implement our business plan on a profitable basis. The
success of our future operating activities will also depend upon our ability to
expand our support system to meet the demands of our growing business. Any
failure by our management to effectively anticipate, implement, and manage
changes required to sustain our growth would have a material adverse effect on
our business, financial condition, and results of operations.





34




Our
business requires substantial capital, and if we are unable to maintain adequate
financing sources our profitability and financial condition will suffer and
jeopardize our ability to continue operations.


We
require substantial capital to support our operations.  If we are
unable to maintain adequate financing or other sources of capital are not
available, we could be forced to suspend, curtail or reduce our operations,
which could harm our revenues, profitability, financial condition and business
prospects.





Regulatory
requirements may have a negative impact upon our business.





While our
services are subject to substantial regulation under federal, state, and local
laws, we believe that the services are materially in compliance with all
applicable laws. However, to the extent the laws change, if we introduce new
services in the future or if we commence working in a new area, some or all of
our services may not comply with applicable federal, state, or local laws.
  Progressively tighter regulations are demanding a thorough review of
the entire water-use cycle in industrial applications with the ultimate goal of
encouraging and/or mandating reclamation and re-use of water. STW works closely
with Federal, State and local regulators and environmental agencies to share our
expertise and knowledge on this complex issue and discuss our views on potential
solutions.  The Company’s intimate knowledge of this process is a key
tool to assist their customers to better understand the legislative and
regulatory elements related to water management and advise them of various
alternatives.  However, compliance with these regulation is burdensome,
time consuming, and expensive.  The cost of these compliance activities and
the delays and risks associated with obtaining approval can be substantial. The
risks, delays, and expenses incurred in connection with such compliance could be
substantial.





Risks
associated with the collection, treatment and disposal of wastewater may impose
significant costs.





Our
wastewater collection, treatment and disposal operations of our subsidiaries are
subject to substantial regulation and involve significant environmental risks.
If collection systems fail, overflow or do not operate properly, untreated
wastewater or other contaminants could spill onto nearby properties or into
nearby streams and rivers, causing damage to persons or property, injury to
aquatic life and economic damages, which may not be recoverable in
rates.  Liabilities resulting from such damage could adversely and
materially affect our business, results of operations and financial condition.
Moreover, in the event that we are deemed liable for any damage caused by
overflow, our losses might not be covered by insurance policies, and such losses
may make it difficult for us to secure insurance in the future at acceptable
rates.





If
the Company is unable to reach an agreement with GE, GE will retain possession
of the Evaporator System and retain all payments made to GE to date, which would
significantly reduce the overall value of the Company.





STW
entered into a Memorandum of Understanding with 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.





35




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,
STW 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.  STW 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, STW is required to post a
letter of credit securing the balance of the payments due under the Purchase
Order, totaling $1.9 million, which STW has not yet done.  Finally, in
April 2009, STW 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 STW 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.





On August
13, 2009, GE Water provided the Company a six month additional grace period,
through February 13, 2010.  At the end of the additional six month
grace period, if the Company has not met its obligations, GE Water represented
that it would meet with the Company 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 the Company’s payment obligations, GE Water could foreclose on the
Evaporator System, resulting in the loss of payments advanced to date by the
Company and future use of the Evaporator System under
construction.  In discussions inAugust2010 between STW
management and GE Water, GE Water expressed continued interest in working with
the Company by providing technical support and a willingness to resolve their
differences, pending the results of STW’s merger and capital raised during the
firsthalf2010.





On
October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW
that GE was canceling the Company’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. As of August 2010, STW and GE are in
discussions regarding a potential project or sale of the
Evaporator.





Should GE
exercise its right to foreclose upon and to re-deploy STW’s evaporator, it would
represent the loss of a significant STW capital asset.  Notwithstanding
that event, STW would not be impeded from going forward on an operational basis
with other water reclamation projects, as the capital assets and working capital
for those projects will be funded by non-GE third party sources.





We
will require significant capital requirements for equipment, commercialization
and overall success.





We will
require additional financing for our operations, to purchase equipment and to
establish a customer base.  We anticipate that we will require a
minimum of $10.0 million to $15.0 million in additional capital over the next
six months to pursue our business plan.  We cannot assure you that we
will obtain any additional financing through any other
means.  Additional financing may not be available to us on acceptable
terms, if at all.  Unless we raise additional financing, we will not
have sufficient funds to complete the purchase of equipment and
commercialization of our services.





Our
additional financing requirements could result in dilution to existing
stockholders.





We will
require additional financings obtained through one or more transactions which
effectively dilute the ownership interests of holders of our Common
Stock.  We have the authority to issue additional shares of Common
Stock and Preferred Stock as well as additional classes or series of ownership
interests or debt obligations which may be convertible into any class or series
of ownership interests in the Company.  The Company is authorized to
issue 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock.  Such securities may be issued without the approval or other
consent of the holders of the Common Stock.





36




A small
number of existing shareholders own a significant amount of our Common Stock,
which could limit your ability to influence the outcome of any shareholder
vote.





Our
executive officers, directors and shareholders holding in excess of 5% of our
issued and outstanding shares, beneficially own over 47.4% of our Common Stock,
before giving effect to the Offering. Under our Articles of Incorporation and
Nevada law, the vote of a majority of the shares outstanding is generally
required to approve most shareholder action.  As a result, these
individuals will be able to significantly influence the outcome of shareholder
votes for the foreseeable future, including votes concerning the election of
directors, amendments to our Articles of Incorporation or proposed mergers or
other significant corporate transactions.





We
face competition from existing companies in reclamation of oil and gas waste
water space that provide similar services to the Company’s.





Our
competitors may have longer operating histories, greater name recognition,
broader customer relationships and industry alliances and substantially greater
financial, technical and marketing resources than we do.  Our
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in customer requirements.





We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.





Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of our
confidential information to third parties, as well as agreements that provide
for disclosure and assignment to us of all rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, such agreements can be difficult and costly to
enforce.  Although we generally seek to enter into these types of
agreements with our consultants, advisors and research collaborators, to the
extent that such parties apply or independently develop intellectual property in
connection with any of our projects, disputes may arise concerning allocation of
the related proprietary rights.  If a dispute were to arise
enforcement of our rights could be costly and the result
unpredictable.  In addition, we also rely on trade secrets and
proprietary know-how that we seek to protect, in part, through confidentiality
agreements with our employees, consultants, advisors or others.





Despite
the protective measures we employ, we still face the risk that: agreements may
be breached; agreements may not provide adequate remedies for the applicable
type of breach; our trade secrets or proprietary know-how may otherwise become
known; our competitors may independently develop similar technology; or our
competitors may independently discover our proprietary information and trade
secrets.





We
have not paid dividends in the past and do not expect to pay dividends in the
future.





Any
return on investment may be limited to the value of our common
stock





We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.





37




Our
stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.





The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity securities. The market
price of our common stock could change in ways that may or may not be related to
our business, our industry or our operating performance and financial condition.
In addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. We have experienced significant
volatility in the price of our stock over the past few years. We cannot assure
you that the market price of our common stock will not fluctuate or decline
significantly in the future. In addition, the stock markets in general can
experience considerable price and volume fluctuations.





We
have not voluntary implemented various corporate governance measures, in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflict of interest and similar
matters.





Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or the NASDAQ Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors' independence, audit committee oversight, and the adoption of a code
of ethics. While we intend to adopt certain corporate governance measures such
as a code of ethics and establish an Audit Committee, Nominating and Corporate
Governance Committee, and Compensation Committee of our board of directors, we presently do not have any independent
directors. We intend to expand our board membership in future periods to include
independent directors. It is possible that if we were to have independent
directors on our board, stockholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
For example, in the absence of audit, nominating and compensation committees
comprised of at least a majority of independent directors, decisions concerning
matters such as compensation packages to our senior officers and recommendations
for director nominees may be made by our sole director who has an interest in
the outcome of the matters being decided. Prospective investors should bear in
mind our current lack of both corporate governance measures and independent
directors in formulating their investment decisions.





We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to
have those controls attested to by our independent auditors.





As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring smaller reporting
companies, such as our company, to include a report of management on the
company's internal controls over financial reporting in their annual reports for
fiscal years ending on or after June 15, 2010.  We will be required to
include the management report in the annual report for the year ending December
31, 2010. In addition, for our fiscal year ending December 31, 2010 the
independent registered public accounting firm auditing our financial statements
must also attest to and report on management's assessment of the effectiveness
of our internal controls over financial reporting as well as the operating
effectiveness of our internal controls. In the event we are unable to receive a
positive attestation from our independent auditors with respect to our internal
controls, investors and others may lose confidence in the reliability of our
financial statements and our ability to obtain financing as needed could
suffer.





If
a public market for our common stock develops, trading will be limited under the
SEC’s penny stock regulations, which will adversely affect the liquidity of our
common stock.





The
trading price of our common stock is less than $5.00 per share and, as a result,
our common stock is considered a "penny stock," and trading in our common stock
would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under
this rule, broker/dealers who recommend low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements. Generally, the broker/dealer must make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction.





SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few broker or dealers are likely to undertake
these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading
in penny stocks could also be price fluctuations and the lack of a liquid
market. An active and liquid market in our common stock may never develop due to
these factors.





38




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





On
January 21, 2010, the Company entered into the Merger Agreement with the
Acquisition Sub, a wholly owned subsidiary of the Company, Acquiree and
certain shareholders of Acquiree controlling a majority of the issued and
outstanding shares of Acquiree.  Pursuant to the Merger
Agreement, Acquiree was merged into the Acquisition Sub resulting in an
exchange of all of the issued and outstanding shares of Acquiree for shares
of the Company on a one for one basis. At such time, Acquiree became a
wholly owned subsidiary of the Company.





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
principal provisions of the Plan are as follows:





MKM
Opportunity Master Fund Ltd., 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 were extinguished and
  cancelled.





In
consideration for the Merger and the Acquiree becoming a wholly-owned
subsidiary of the Company, the Company issued STW Acquisition Shares
of common stock to the shareholders of the Acquiree at the closing of the
merger and all derivative securities of the Acquiree 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.





For the
six months ended June 30, 2010, the company issued 2,566,667 shares of common
stock to consultants which were valued at an aggregate of $641,665, based upon
the estimated fair value of the Company’s common stock at that date, for
consulting services rendered to the Company.





For the
six months ended June 30, 2010, the company issued 450,000 shares of common
stock to an employee, The company recognized $112,500 of compensation expense
based upon the estimated fair value of the Company’s common stock at that
date.




The above
securities were offered and issued in a private placement transaction made in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933 (the “Securities Act”) and/or Rule 506 promulgated under
the Securities Act.  The shareholders are accredited investors as
defined in Rule 501 of Regulation D promulgated under the Securities
Act.  The securities issued under the Plan were issued pursuant to the
order of a Federal Bankruptcy judge.
 Item
3.  Defaults upon Senior Securities





None.





Item
4.  Removed and Reserved





Not
applicable.




39




Item
5.  Other Information





None.





Item
6.  Exhibits





Exhibit No.
            
            Description3.1
            
            Certificate
      of Amendment to the Certificate of Incorporation – March 1, 2010
      (3)3.2
            
            Articles
      of Merger between STW Acquisition, Inc. and STW Resources, Inc.
      (2)3.3
            
            Articles
      of Merger filed with the State of Nevada on March 3, 2010
    (4)10.1
            
            Agreement
      and Plan of Merger for proposed merger between Woozyfly, Inc., Merger Sub,
      and STW Resources, Inc. dated January 17, 2010. (1)21.1
            
            List
      of Subsidiaries (2)31.1
            
            Certification
      of the Chief Executive Officer and Principal Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
            
            Certification
      of the Principal Executive Officer and Chief Financial Officer pursuant to
      U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1
            
            Order
      Confirming the Second Amended Plan of Reorganization of Woozyfly, Inc.
      (2)




(1)
            Incorporated
      by reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on January 26,
2010.




(2)
            Incorporated
      by reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on February 19,
2010.




(3)
            Incorporated
      by reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on March 2,
2010.




(4)
            Incorporated
      by reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on March 9,
2010.





40




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: August
      13, 2010
              By:
              /s/ Stanley
      T WeinerStanley
      T WeinerPrincipal
      Executive, Financialand
      Accounting Officer




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