SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q





ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





For Quarterly Period Ended September 30, 2009





or





o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from           to





Commission File Number 000-51430





WoozyFly, Inc.


(Exact name of registrant issuer as specified in its charter)





Nevada

20-3768799(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)244 Fifth Avenue, Suite 1878, New York, NY, 10001(Address of principal executive offices, including zip code)Registrant’s phone number, including area code    (646) 594-8669





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 ý     NO o





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


Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Smaller reporting company ý





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.





Class

Outstanding at October 28, 2009Common Stock, $.001 par value

17,610,672




















WOOZYFLY, INC.





INDEX





PART I
FINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTS:Condensed Consolidated Balance Sheets — September 30, 2009 (Unaudited) and December 31, 2008Condensed Consolidated Statements of  Operations (Unaudited) — Three and nine months ended September 30, 2009 and 2008Condensed Consolidated Statements of Cash Flows (Unaudited) —Three and nine months ended September 30, 2009 and 2008Notes to Condensed Consolidated Financial StatementsITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4.
CONTROLS AND PROCEDURESPART II
OTHER INFORMATION











PART I - FINANCIAL INFORMATION





ITEM I — FINANCIAL STATEMENTS





WOOZYFLY, INC. AND SUBSIDIARY


(Debtor-in-Possession)


CONDENSED CONSOLIDATED BALANCE SHEETS





September 30,


December 31,2009


2008ASSETS

(Unaudited)CURRENT ASSETSCash and cash equivalents

$
1,996


$
37,842TOTAL CURRENT ASSETS


1,996



37,842TOTAL ASSETS

$
1,996


$
37,842LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIES:Debtor-in-possession debt facility

$
55,000


$
-Accounts payable


9,500



-Accrued interest


2,083



-TOTAL CURRENT LIABILITIES


66,583



-Pre-petition liabilities subject to compromise


162,624



76,925Pre-petition accrued interest


85,465



48,120Pre-petition notes payable


1,697,507



1,697,507TOTAL LIABILITIES


1,945,596



1,822,552STOCKHOLDERS' EQUITY/(DEFICIT):Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued andoutstanding, no rights or privileges designated


-



-Common stock, $0.001 par value, 100,000,000 shares authorized, 17,610,672 issued and outstanding at September 30, 2009 and December 31, 2008


17,610



17,610Additional paid in capital


2,248,604



2,248,604Accumulated deficit


(4,276,397
)


(4,050,924
)Total stockholders' deficit


(2,010,183
)


(1,784,710
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
1,996


$
37,842





See accompanying notes to the condensed consolidated financial statements.














WOOZYFLY, INC.


(Debtor-in-Possession)


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


Three Months Ended September 30,


Nine months Ended September 30,2009


2008


2009


2008REVENUES

$
—


$
—


$
—


$
—COST OF SALES


—



—



—



—GROSS PROFIT


—



—



—



—OPERATING EXPENSESSelling, general and administrative expenses


15,299



—



106,255



—LOSS FROM OPERATIONS


(15,299
)


—



(106,255
)


—Interest expense and other, net


(1,189
)


—



(36,775
)


—Loss from continuing operations


(16,488
)






(143,030
)Loss from discontinued operations


—



(761,929
)


(225,471
)


(2,330,806
)NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

$
(16,488
)

$
(761,929
)

$
(225,471
)

$
(2,330,806
)NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted

$
(0.00
)

$
(0.05
)

$
(0.00
)

$
(0.18
)WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted


17,610,672



15,910,363



17,610,672



13,223,454





See accompanying notes to the condensed consolidated financial statements.











WOOZYFLY, INC.


(Debtor-in-Possession)


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine months Ended September 30,2009


2008CASH FLOWS FROM OPERATING ACTIVITIES:Loss from continuing operations

$
(143,032
)

$
—Adjustments to reconcile net loss to net cash provided by operating activities:Pre-petition accrued interest


37,345



—Pre-petition accounts payable


40,010



—Changes in operating assets and liabilities:Accrued interest


2,083



—Accounts payable


9,500



—Net cash provided by operating activities from continuing operations


(54,094
)


—Net cash used in operating activities from discontinued operations


(36,752
)


(2,073,046
)Net cash used in operating activities


(90,846
)


(2,073,046
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of note payable


55,000



1,547,507Net proceeds from issuance of note payable


—



347,876Net cash provided by financing activities


55,000



1,895,383NET (DECREASE) IN CASH AND CASH EQUIVALENTS


(35,846
)


(177,663
)CASH AND CASH EQUIVALENTS, Beginning of period


37,842



288,903CASH AND CASH EQUIVALENTS, End of period

$
1,996


$
111,240





Nine months Ended September 30,2009

2008SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash received/(paid) during the period for:Interest

$
—


$
—Income taxes

$
—


$
—SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONSNone





See accompanying notes to the condensed consolidated financial statements.











WOOZYFLY, INC.


(Debtor-in-Possession)


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Current Operations and Background— Woozyfly, Inc. and its subsidiary, which are collectively referred to as “Woozyfly,” “Company,” “we,” “us,” or “our,” unless the context otherwise requires.  Woozyfly,
Inc. was organized September 11, 2003 (Date of Inception) under the laws of the State of Nevada, as GPP Diversified, Inc.  The business of the Company was to sell pet products via the Internet.





The Company was initially authorized to issue 25,000,000 shares of its no par value common stock.  On November 9, 2005, the Company amended its articles of incorporation to increase its authorized capital to 100,000,000 shares with a par value of $0.001.  Concurrently, the Company changed its name from GPP Diversifed, Inc. to Pet
Express Supplies, Inc.





On July 28, 2008, Pet Express Supply, Inc. entered into an Exchange Agreement with each of the shareholders of CJ Vision Enterprises, Inc., a Delaware corporation doing business as Woozyfly.com, pursuant to which (i) the Company's shareholder contributed back to the Company's treasury all but 700,000 issued and outstanding shares of the Company's
common stocks, and (ii) Pet Express Supply, Inc. purchased from the shareholders of CJ Vision Enterprises, Inc. all issued and outstanding shares of CJ Vision Enterprises, Inc.’s, common stock, preferred stock and warrants to purchase CJ Vision Enterprises, Inc. stock, in consideration for the issuance of 13,410,672 shares of common stock of Pet Express Supply, Inc. and, to one of the shareholders of CJ Vision Enterprises, Inc., warrants to purchase 3,776,544 shares of common stock of Pet Express. The Share
Exchange resulted in a change in control of Pet Express Supply, Inc. with the shareholders of CJ Vision Enterprises, Inc. owning 13,410,672 shares of common stock of Pet Express Supply, Inc. out of a total of 17,610,672 issued and outstanding shares after giving effect to the Share Exchange.  Also, the shareholders of CJ Vision Enterprises, Inc. were elected directors of Pet Express Supply, Inc. and appointed as its executive officers.  As a result of the Exchange Agreement, (i)
CJ Vision Enterprises, Inc. became a wholly-owned subsidiary of Pet Express Supply, Inc. and (ii) Pet Express Supply, Inc. succeeded to the business of CJVE as its sole business.  Following the closing of the above transactions, Pet Express Supply, Inc. changed its corporate name to Woozyfly, Inc. effectuated a 6:1 stock split.





On January 15, 2009, the Company ceased operations.  Since ceasing operations, we have been seeking to restructure the Company’s capitalization in order to find suitable candidates for a business combination with a private company.  We have been unsuccessful in this attempt.  We have a substantial amount
of secured and unsecured debt. Failure to settle this debt has caused us to petition for bankruptcy protection.





On May 12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court ”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code ”).
The Chapter 11 case is being administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP) (the “Chapter 11 Case”). The Debtor will continue to operate its business as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.





In connection with the Chapter 11 Case, the Debtor filed a motion seeking Bankruptcy Court approval of (a) an arrangement pursuant to which the Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor prior to the Petition
Date, and has agreed to advance $100,000 as a DIP Loan to the Company, $35,000 of which was already lent to the Debtor in order to enable it to file the chapter 11 petition.  The Court has approved an initial disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the remaining $30,000 is subject to further Court determination. David Skriloff, the Company’s former Chairman of the Board is the portfolio manager for Lender. Lender is also a creditor and stockholder of the Company. Proceeds
of the loans under the DIP Credit Agreement will be used by the Debtor for working capital and other general corporate purposes of the Debtors and for the costs of administration of the Chapter 11 Case. The arrangement for the use of the DIP Loan contains certain financial and other covenants and certain events of default. On June 16, 2009, the court issued an order granting the motion and authorized the Debtor to utilize up to $35,000 on an interim basis and possibly up too $100,000 under the DIP Loan.
Concurrent with the filing of Chapter 11, David Skriloff and Kellis Veach resigned from the Board of Directors.








The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due June 30, 2011 ("Convertible Notes". As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic
stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.





On August 28, 2009, we entered into a Letter of Intent (“Agreement”) with STW Resources, Inc. (“Acquiree”).  Pursuant to the Agreement, there would be a one for one exchange of the Acquiror’s shares of common stock and securities for all of the issued and outstanding voting capital stock of Acquiree.
At such time, the Acquiree would merge into a wholly owned subsidiary of Acquiror.  The objective of our discussions has been the execution and consummation, as soon as feasible and subject to the Bankruptcy Court Approval, of a formal agreement between Acquiror and Acquiree (the "Acquisition Agreement").





Basis of Presentation and Principles of Consolidation — The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany transactions have been
eliminated in consolidation.





We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in statements prepared in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.





The accompanying unaudited condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments unless otherwise disclosed) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three and nine month periods ended
September 30, 2009 and 2008.  The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.





The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 materially from those estimates.





The accompanying consolidated financial statements for the prior period contain certain reclassifications to conform to the presentation used in the current period.  The reclassifications had no impact on stockholders’ equity, working capital, gross profit or net loss.





Going Concern—The ability of the Company to continue as a going concern is dependent upon, among other things, (i) the Company’s
ability to comply with the terms and conditions of its DIP financing; (ii) the ability of the Company to maintain adequate cash on hand; (iii) the ability of the Company to generate cash from operations; (iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; (v) the ability of the Company to find a merger candidate; (vi) the cost and outcome of the reorganization process; (vii) the Company’s ability to
obtain alternative financing; and (viii) the Company’s ability to achieve profitability.  Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.  The Company is currently evaluating various courses of action to address the issues the Company is facing.  There can be no assurance that any of these efforts will be successful.





The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings.  In particular, the financial statements do not purport to show (i) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (ii) as
to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (iii) as to shareowners’ equity accounts, the effect of any changes that may be made in our capitalization; or (iv) as to operations, the effect of any changes that may be made to our business.








In accordance with accounting principles generally accepted in the United States (“GAAP”), we have applied American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code, in preparing the consolidated financial statements.  SOP 90-7 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings are recorded
in reorganization items on the accompanying Condensed Consolidated Statements of Operations.  In addition, pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the Condensed Consolidated Balance Sheet at September 30, 2009 in “pre-petition liabilities subject to compromise”.  These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if
they may be settled for lesser amounts.





As a result of the Bankruptcy Filing, realization of assets and liquidation of liabilities are subject to uncertainty.  While operating as a debtor-in-possession under the protection of Chapter 11, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the Debtors may sell or otherwise dispose
of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.  Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated financial statements.  Our historical consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.





The potential adverse publicity associated with the Bankruptcy Filing and the resulting uncertainty regarding the Company’s future prospects may hinder the Company’s ongoing business activities and its ability to operate, fund and execute its business plan by impairing relations with existing and potential customers; negatively
impacting the ability of the Company to attract, retain and compensate key executives and employees and to retain employees generally; limiting the Company’s ability to obtain trade credit; and impairing present and future relationships with vendors and service providers.





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





Cash and Cash Equivalents— We consider investments with original maturities of 90 days or less to be cash equivalents.





Income Taxes—We record income taxes in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”  The
standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities.  Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.





Stock-Based Compensation—On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which was issued in December 2004. SFAS 123(R) revises SFAS No. 123, “Accounting for Stock Based
Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS 123(R) requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award. SFAS 123(R) also requires measurement of the cost of employee services received in exchange for an award. SFAS 123(R) also amends
SFAS No. 95, “Statement of Cash Flows,” to require the excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows. The Company adopted SFAS 123(R) using the modified prospective method. Accordingly, prior period amounts have not been restated. Under this application, the Company recorded the cumulative effect of compensation expense for the unvested portion of previously granted awards that remain outstanding at
the date of adoption and recorded compensation expense for all awards granted after the date of adoption.








SFAS 123(R) provides that income tax effects of share-based payments are recognized in the financial statements for those awards that will normally result in tax deduction under existing law. Under current U.S. federal tax law, the Company would receive a compensation expense deduction related to non-qualified stock options only when those
options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement. The Company does not recognize a tax benefit for compensation expense related to incentive stock options unless the underlying shares are disposed in a disqualifying disposition.





Net Income (Loss) Per Share— The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period.  Common equivalent shares related to stock options and warrants have been excluded from the computation of basic and diluted earnings per share for the quarters ended September 30, 2009 and 2008 because their effect
is anti-dilutive.





Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash.  The Company maintains its cash with high credit quality financial
institutions; at times, such balances with any one financial institution may exceed FDIC insured limits.





Financial Instruments — Our financial instruments consist of cash, accounts payable, and notes payable.  The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities.





NOTE 2 - NOTE PAYABLE.





Pre-petition Debt





Convertible Notes





On July 25, 2008, Woozyfly, Inc. entered into a Loan and Security Agreement (the "Loan Agreement") providing for the issuance to several accredited investors by Woozyfly, Inc. of its 6% Convertible Notes due June 30, 2011 ("Convertible Notes"). Pursuant to the Loan Agreement an aggregate principal amount of $1,400,000 of Convertible Notes
have been issued; all but $150,000 in aggregate principal amount of such Convertible Notes were issued in the third quarter. An aggregate principal amount of $350,000 of such Convertible Notes were issued pursuant to the Exchange Agreement dated July 25, 2008 to Corporation Communication Network, Inc., Lynn Cole Capital, and MKM Opportunity Master Fund, LP in exchange for convertible notes issued in the same principal amount to such investors by C J Vision Enterprises, Inc. The entire principal amount under the
Convertible Notes plus all accrued and unpaid interest is due on June 30, 2011. Interest is payable on the last day of each calendar quarter, commencing September 30, 2008. Woozyfly, Inc. may make interest payments in cash, or at its option through the reduction of the conversion price discussed below.





The Convertible Notes may be converted at a time, at the option of the holder, into shares of common stock of Woozyfly, Inc. at $0.67 per share. The conversion price is subject to adjustment in event Woozyfly, Inc. issues shares (or securities convertible into shares) at a price that is lower than the then applicable conversion price.





Woozyfly, Inc. has the right to force conversion of the entire outstanding principal amount (or a portion thereof), provided, generally that there is then an effective registration statement in effect with the respect to the shares issuable upon conversion of the Convertible Notes, the trading price of Woozyfly, Inc.'s common stock is greater
than $1.17 and the average daily trading volume for the preceding 15 trading days exceeds 50,000.





The Convertible Notes are subject to mandatory prepayment by Woozyfly, Inc. in the event of a financing, and the proceeds of such financing exceed $4,000,000, in which case all of the proceeds of such financing(s) in excess of $4,000,000 must be used to prepay the Convertible Notes, with the holders of Convertible Notes receiving a proportionate
share of such proceeds.








In connection with the issuance of the Convertible Notes, Woozyfly, Inc. granted to the investors five-year warrants to purchase an aggregate of 1,602,066 shares of common stock of Woozyfly, Inc. at $0.75 per share. We valued these warrants at zero.  The warrants contain cashless exercise provisions that enable the holder to
exercise the warrants without paying additional consideration and to receive a reduced number of shares in accordance with a formula set forth in the warrant.





Exchange Notes





Pursuant to the Exchange Agreement, Woozyfly, Inc. issued to two accredited investors (assignees of Peter Newman) an aggregate principal amount of $297,504.00 of 6% Promissory Notes due June 30, 2009 ("Exchange Notes") in exchange for a convertible note issued to Peter Newman in the same principal amount by C J Vision Enterprises, Inc. The
principal and accrued interest are payable on the maturity date, June 30, 2009.





One of the Exchange Notes, in an aggregate principal amount of $36,000, is subject to mandatory prepayment by Woozyfly, Inc. when at least. $800,000 has been raised by Woozyfly, Inc. in connection with the issuance of Convertible Notes pursuant to the Loan Agreement (the "Funding"). That condition has been met, and consequently, such Exchange
Note is immediately prepayable.





The other Exchange Note, in an aggregate principal amount of $261,504, is subject to mandatory prepayment by Woozyfly, Inc. as follows: (i) if more than $2,000,000 is raised in the Funding, 50% of the aggregate amount of the Funding that was not introduced by MKM Capital, any present or former affiliate of MKM or its principals, or any officer
or director of Woozyfly, Inc., shall be applied to prepayment of such Exchange Note, up to a maximum prepayment amount equal to the excess of the total amount raised in the Funding over $2,000,000; and (ii) the balance of unpaid principal and interest is mandatorily prepayable from the first amounts in excess of $3,000,000 raised in the Funding or in any subsequent financing by Woozyfly, Inc.





The Convertible Notes and the Exchange Notes rank senior to all current and future indebtedness of Woozyfly, Inc. and are secured by substantially all of the assets of Woozyfly, Inc.





The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due June 30, 2011 ("Convertible Notes". As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic
stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.





Interest expense in 2009 includes interest on our pre-petition Convertible Notes and Exchange Notes up to the date of our bankruptcy filing and interest on our post-petition DIP Facility.  Because we do not believe that interest on our Convertible Notes and Exchange Notes will be allowed as a claim past the Petition Date, we discontinued
recognizing interest expense on our Notes as of that date.   Contractual interest amounts disclosed in our Condensed Consolidated Statement of Operations reflects the cost of borrowings without regard to what the Bankruptcy Court may allow as a claim.





Debtor-in-possession Debt Facility





In connection with the Chapter 11 Case, the Debtor filed a motion seeking Bankruptcy Court approval of (a) an arrangement pursuant to which the Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor prior to the Petition
Date, and has agreed to advance $100,000 as a DIP Loan to the Company, $35,000 of which was already lent to the Debtor in order to enable it to file the chapter 11 petition.  The Court has approved an initial disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the remaining $30,000 is subject to further Court determination. David Skriloff, the Company’s Chairman of the Board is the portfolio manager for Lender. Lender is also a creditor and stockholder of the Company. Proceeds
of the loans under the DIP Credit Agreement will be used by the Debtor for working capital and other general corporate purposes of the Debtors and for the costs of administration of the Chapter 11 Case. The arrangement for the use of the DIP Loan contains certain financial and other covenants and certain events of default. On June16, 2009, the court issued an order granting the motion and authorized the Debtor to utilize up to $35,000 on an interim basis and possibly up too $100,000 under the DIP Loan. As
of September 30, 2009, MKM has lent us $55,000 under the DIP Loan.








NOTE 3 - WARRANTS





We have 5,378,610 warrants issued and outstanding at September 30, 2009.The following summarizes pricing and term information for warrants issued to investors which are outstanding as of September 30, 2009:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding at December 31, 2008

Weighted Average Remaining Contractual
Life

Weighted Average Exercise Price

Number Exercisable at December 31, 2008

Weighted Average Exercise Price$0.01


3,776,544


3.75


$0.01


3,776,544


$0.01$0.75


1,602,066


3.75


$0.75


1,602,066


$0.75





NOTE 4 - STOCK OPTION PLANS





We have issued non-plan options to various employees, directors and consults.  We believe these options have no value.  The Board of directors administers the options grants, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each
option.





The Company has elected to adopt the detailed method provided in SFAS No. 123(R) for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash
Flows of the income tax effects of employee stock-based compensation awards that are outstanding upon the adoption of SFAS No. 123(R).





The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model.  The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant.  The risk free interest rate is based upon
market yields for United States Treasury debt securities at a 7-year constant maturity.  Dividend rates are based on the Company’s dividend history.  The stock volatility factor is based on the last 60 days of market prices prior to the grant date.  The expected life of an option grant is based on management’s estimate.  The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis
over the vesting period of each stock option award.





The following summarizes pricing and term information for options issued to employees and directors which are outstanding as of September 30, 2009:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding at December 31, 2008

Weighted Average Remaining Contractual
Life

Weighted Average Exercise Price

Number Exercisable at December 31, 2008

Weighted Average Exercise Price$0.67


606,000


4.00


$0.67


606,000


$0.67





During the quarter ended September 30, 2009, the Company we issued no options.  We have 606,000 options issued and outstanding at September 30, 2009.





Balance at December 31, 2007


-Issued


4,177,002Expired


3,571,002Balance at December 31, 2008


606,000Issued


-Expired


-Balance at September 30, 2009


606,000








NOTE 5 – EARNINGS PER SHARE





The following table sets forth common stock equivalents (potential common stock) for the quarters ended September 30, 2009 and 2008 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:





Quarters Ended September 30,2009


2008Weighted average common stock equivalents:Stock options


606,000



-Warrants


5,378,610



-





NOTE 6 – CONCENTRATION OF CREDIT RISK





We maintain our cash balances in various financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation up to $250,000, per financial institution.  As of September 30, 2009, our deposits did not exceed insured amounts.  We have not
experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash.





NOTE 7 – REORGANIZATION ITEMS





SOP 90-7 requires separate disclosure of reorganization items such as realized gains and losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing the Debtors under Chapter 11. 
The Debtors’ reorganization items for the three and nine months ended September 30, 2009 consist of the following:





Three months
ended


Nine months
endedSeptember 30,2009


2009Provision for rejected executory contracts and leases

$
-


$
-Professional fees directly related to reorganization (a)


14,974



84,474Other (b)


325



650Total reorganization items

$
15,299


$
85,124







(a)           Professional fees directly related to the reorganization include post—petition fees associated with advisors to the Debtors, the statutory committee of unsecured creditors and certain secured creditors. Professional fees are estimated by the Debtors and will be reconciled to actual invoices when received.





(b)           Represents United States Trustee Fees








NOTE 8 – PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE





Pre-petition liabilities subject to compromise refers to unsecured obligations that will be accounted for under a plan of reorganization.  Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 liabilities are stayed.  SOP 90-7 requires pre-petition liabilities that are subject to compromise to be reported at
the amounts expected to be allowed, even if they may be settled for lesser amounts.  These liabilities represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any potential collateral securing the claims, proofs of claim, or other events. 
Pre-petition liabilities subject to compromise also include certain items that may be assumed under the plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  At hearings held in June 2009, the Court granted final approval of many of the Debtors’ First Day Motions covering, among other things, insurance, business operations, certain tax matters, cash management, utilities, case management and retention of professionals.  Obligations
associated with these matters are not classified as pre-petition liabilities subject to compromise.





In accordance with SOP 90-7, debt issuance costs associated with borrowing classified as pre-petition liabilities subject to compromise should be viewed as valuation adjustments to the related debt.  When the debt has become an allowed claim and the allowed claim differs from the net carrying amount of the debt, the recorded amount should
be adjusted to the amount of the allowed claim (thereby adjusting existing debt issuance costs to the extent necessary to report the debt at this allowed amount).  Through September 30, 2009, the Bankruptcy Court had not classified any of the Debtors’ outstanding debt as allowed claims. Therefore, the Company has classified the Debtors’ Notes as “pre-petition liabilities subject to compromise” on the Condensed Consolidated Balance
Sheet.  The Company may be required to expense these amounts or a portion thereof upon determination of the allowed claim by the Bankruptcy Court.





The Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to the Debtors’ operations with the approval of the Bankruptcy Court and may reject additional agreements in the future.  Damages resulting from rejection of executory contracts and unexpired leases are generally treated as general
unsecured claims and will be classified as “pre-petition liabilities subject to compromise”.  Holders of pre-petition claims (excluding governmental claims) are required to file proofs of claims by the “general bar date”, which is September 8, 2009.  A bar date is the date by which certain claims against the Debtors must be filed if the claimants wish to receive any distribution in the Chapter 11 cases.  Creditors have been notified of the general bar date and the requirement
to file a proof of claim with the Bankruptcy Court.  Differences between liability amounts estimated by the Debtors and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claim.  The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of reorganization.  Accordingly, the ultimate amount or treatment of such liabilities is not determinable
at this time.





Pre-petition liabilities subject to compromise consist of the following:





September 30,
2009Secured notes payable

$
1,697,507Pre-petition accounts payable

162,624Accrued interest on Notes

85,465Total pre-petition liabilities subject to compromise

$
1,945,596





Pre-petition liabilities subject to compromise include trade accounts payable related to pre-petition purchases.  As a result, the Company’s cash flows from operations were favorably affected by the stay of payment related to these accounts payable.  Accrued interest represents amounts due on the Notes as of the Petition Date. 
No interest has been accrued on the Notes subsequent to the Petition Date because such amounts are not expected to become part of an allowed claim.











ITEM 2 .  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2008 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and other information contained in such Form 10-K.  The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements included elsewhere in this Form 10-Q.





The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”  These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. These statements are not guarantees of future performance and involve risks,
uncertainties and requirements that are difficult to predict or are beyond our control.  Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements.  Forward-looking statements reflect management’s current expectations and are inherently uncertain.  We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended December 31, 2008
in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this report.





Overview





Woozyfly, Inc. was organized September 11, 2003 (Date of Inception) under the laws of the State of Nevada, as GPP Diversified, Inc.  The business of the Company was to sell pet products via the Internet.





The Company was initially authorized to issue 25,000,000 shares of its no par value common stock.  On November 9, 2005, the Company amended its articles of incorporation to increase its authorized capital to 100,000,000 shares with a par value of $0.001.  Concurrently, the Company changed its name from GPP Diversifed, Inc. to Pet
Express Supplies, Inc.





On July 28, 2008, Pet Express Supply, Inc. entered into an Exchange Agreement with each of the shareholders of CJ Vision Enterprises, Inc., a Delaware corporation doing business as Woozyfly.com, pursuant to which (i) the Company's shareholder contributed back to the Company's treasury all but 700,000 issued and outstanding shares of the Company's
common stocks, and (ii) Pet Express Supply, Inc. purchased from the shareholders of CJ Vision Enterprises, Inc. all issued and outstanding shares of CJ Vision Enterprises, Inc.’s, common stock, preferred stock and warrants to purchase CJ Vision Enterprises, Inc. stock, in consideration for the issuance of 13,410,672 shares of common stock of Pet Express Supply, Inc. and, to one of the shareholders of CJ Vision Enterprises, Inc., warrants to purchase 3,776,544 shares of common stock of Pet Express. The Share
Exchange resulted in a change in control of Pet Express Supply, Inc. with the shareholders of CJ Vision Enterprises, Inc. owning 13,410,672 shares of common stock of Pet Express Supply, Inc. out of a total of 17,610,672 issued and outstanding shares after giving effect to the Share Exchange.  Also, the shareholders of CJ Vision Enterprises, Inc. were elected directors of Pet Express Supply, Inc. and appointed as its executive officers.  As a result of the Exchange Agreement, (i)
CJ Vision Enterprises, Inc. became a wholly-owned subsidiary of Pet Express Supply, Inc. and (ii) Pet Express Supply, Inc. succeeded to the business of CJVE as its sole business.  Following the closing of the above transactions, Pet Express Supply, Inc. changed its corporate name to Woozyfly, Inc. effectuated a 6:1 stock split.








On January 15, 2009, the Company ceased operations.  Since ceasing operations, we have been seeking to restructure the Company’s capitalization in order to find suitable candidates for a business combination with a private company.  We have been unsuccessful in this attempt.  We have a substantial amount
of secured and unsecured debt. Failure to settle this debt has caused us to petition for bankruptcy protection.





On May 12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York (the “ Bankruptcy Court ”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code ”).
The Chapter 11 case is being administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP) (the “ Chapter 11 Case ”). The Debtor will continue to operate its business as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.





In connection with the Chapter 11 Case, the Debtor filed a motion seeking Bankruptcy Court approval of (a) an arrangement pursuant to which the Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor prior to the Petition
Date, and has agreed to advance $100,000 as a DIP Loan to the Company, $35,000 of which was already lent to the Debtor in order to enable it to file the chapter 11 petition.  The Court has approved an initial disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the remaining $30,000 is subject to further Court determination. David Skriloff, the Company’s Chairman of the Board is the portfolio manager for Lender. Lender is also a creditor and stockholder of the Company. Proceeds
of the loans under the DIP Credit Agreement will be used by the Debtor for working capital and other general corporate purposes of the Debtors and for the costs of administration of the Chapter 11 Case. The arrangement for the use of the DIP Loan contains certain financial and other covenants and certain events of default. On June16, 2009, the court issued an order granting the motion and authorized the Debtor to utilize up to $35,000 on an interim basis and possibly up too $100,000 under the DIP Loan.





The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due September 30, 2011 ("Convertible Notes". As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic
stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.





On August 28, 2009, we entered into an Agreement STW Resources, Inc.  Pursuant to the Agreement, there would be a one for one exchange of the Acquiror’s shares of common stock and securities for all of the issued and outstanding voting capital stock of Acquiree. At such time, the Acquiree would merge into a wholly owned
subsidiary of Acquiror.  The objective of our discussions has been the execution and consummation, as soon as feasible and subject to the Bankruptcy Court Approval, of a formal agreement between Acquiror and Acquiree.





Going Concern Matters





The ability of the Company to continue as a going concern is dependent upon, among other things, (i) the Company’s ability to comply with the terms and conditions of its DIP financing; (ii) the ability of the Company to maintain adequate cash on hand; (iii) the ability of the Company to generate cash from operations;
(iv) the ability of the Company to obtain confirmation of and to consummate a plan of reorganization under the Bankruptcy Code; (v) the ability of the Company to find a suitable merger candidate; (vi) the cost and outcome of the reorganization process; (vii) the Company’s ability to obtain alternative financing; and (viii) the Company’s ability to achieve profitability.  Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s
ability to continue as a going concern.  The Company is currently evaluating various courses of action to address the issues the Company is facing.  There can be no assurance that any of these efforts will be successful.





The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings.  In particular, the financial statements do not purport to show (i) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (ii) as
to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (iii) as to shareowners’ equity accounts, the effect of any changes that may be made in our capitalization; or (iv) as to operations, the effect of any changes that may be made to our business.








In accordance with accounting principles generally accepted in the United States (“GAAP”), we have applied American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code, in preparing the consolidated financial statements.  SOP 90-7 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings are recorded
in reorganization items on the accompanying Condensed Consolidated Statements of Operations.  In addition, pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the Condensed Consolidated Balance Sheet at September 30, 2009 in “pre-petition liabilities subject to compromise”.  These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if
they may be settled for lesser amounts.





As a result of the Bankruptcy Filing, realization of assets and liquidation of liabilities are subject to uncertainty.  While operating as a debtor-in-possession under the protection of Chapter 11, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the Debtors may sell or otherwise dispose
of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.  Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated financial statements.  Our historical consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.





The potential adverse publicity associated with the Bankruptcy Filing and the resulting uncertainty regarding the Company’s future prospects may hinder the Company’s ongoing business activities and its ability to operate, fund and execute its business plan by impairing relations with existing and potential customers; negatively
impacting the ability of the Company to attract, retain and compensate key executives and employees and to retain employees generally; limiting the Company’s ability to obtain trade credit; and impairing present and future relationships with vendors and service providers.





Results of Operations





For the Three Months Ended September 30, 2009 and 2008





Selling, General and Administrative Expenses





Selling, general and administrative expenses were $15,299 and zero for the three months ended September 30, 2009 and 2008, respectively.





Interest Income, Interest Expense and Other





Interest expense and other, net was $1,189 and zero for the three months ended September 30, 2009 and 2008, respectively, an increase in expense of $12,777.  The increase is principally due to increased debt.





Discontinued Operations




Loss from discontinued operations was $zero and $761,929 for the three months ended September 30, 2009 and 2008, respectively. The decrease in expenses of $761,929 was related to the cessation of operations on January 15, 2009





For the Nine months Ended September 30, 2009 and 2008





Selling, General and Administrative Expenses





Selling, general and administrative expenses were $106,255 and zero for the nine months ended September 30, 2009 and 2008, respectively.





Interest Income, Interest Expense and Other





Interest expense and other, net was $36,775 and zero for the nine months ended September 30, 2009 and 2008, respectively, an increase in expense of $36,775.  The increase is principally due to increased debt.





Discontinued Operations




Loss from discontinued operations was $225,471 and $2,330,806 for the nine months ended September 30, 2009 and 2008, respectively.








Bankruptcy





As described in more detail elsewhere in this Form 10-Q, Woozyfly filed voluntary petitions under Chapter 11 of the Bankruptcy Code on May 12, 2009.  No assurance can be provided as to what values, if any, will be ascribed in Woozyfly’s bankruptcy proceedings to the pre-petition liabilities, common stock and other securities. 
Accordingly, caution should be exercised with respect to existing and future investments in any of these liabilities or securities.





In order to successfully exit Chapter 11 bankruptcy, Woozyfly will need to propose, and obtain confirmation by the Bankruptcy Court of a plan of reorganization that satisfies the requirements of the Bankruptcy Code.  A plan of reorganization could, among other things, resolve Woozyfly’s pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for corporate governance subsequent to exit from bankruptcy.  Although Woozyfly expects to file a reorganization plan that provides for emergence from Chapter 11 bankruptcy some time in the future, there can be no assurance that a reorganization plan will be proposed by Woozyfly or confirmed by the Bankruptcy Court, or that any such plan will be consummated.





The Company has incurred and will continue to incur significant costs associated with the reorganization.  The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company’s results of operations.





Liquidity and Capital Resources





Overview and Outlook





As a result of our Bankruptcy Filing and the circumstances leading to our Bankruptcy Filing as described elsewhere in this report, we face uncertainty regarding the adequacy of our liquidity and capital resources and have limited access to financing.  The Bankruptcy Filing constituted an event of default under our pre-petition secured
revolving credit facility and the indenture governing our Notes, and the debt obligations under those agreements became automatically and immediately due and payable, subject to the automatic stay provisions of Section 362 of the Bankruptcy Code.





During the pendency of the Bankruptcy Cases, we expect that our primary sources of liquidity will be cash flows from borrowings under our DIP Facility.  In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with the Bankruptcy Filing and
expect that we will continue to incur significant professional fees and costs.  We cannot assure you that the amounts of cash available from operations, together with our DIP Facility, will be sufficient to fund our operations, including operations during the period until such time as we are able to propose a plan of reorganization that will receive the requisite acceptance by creditors and be confirmed by the Bankruptcy Court.  Our long-term liquidity requirements and the adequacy of our capital resources
are difficult to predict at this time and ultimately cannot be determined until a plan of reorganization has been developed and is confirmed by the Bankruptcy Court.





Funds available under our DIP Facility are expected to be sufficient to fund operations of our business through the end of 2009.  However, funds available under our DIP Facility cannot be used for capital expenditures beyond those permitted in our DIP Facility budget, absent consent from the post-petition lenders and modification of
the DIP Facility budget.





Sources of Liquidity





Net cash used in operating activities was $90,846 and $2,073,046 in the nine months ended September 30, 2009 and 2008, respectively.  The decrease of $1,982,200 was due to the cessation of operations on January 15, 2009 offset by the expenses incurred in the shutting down of previous
activities and preparation for bankruptcy.





Net cash provided by financing activities was $55,000 and $1,895,383 in the nine months ended September 30, 2009 and 2008, respectively.  The decrease was due to amounts a fundraising in consummated in July 2008 offset by amounts borrowed under the DIP Credit Facility








We suffered recurring losses from operations and have an accumulated deficit of $4,276,397 at September 30, 2009.  Currently, we are a non-operating public company. We are seeking out suitable candidates for a business combination with a private company.  We anticipate that our
existing cash and cash equivalents will not be sufficient to fund our business needs.   Our ability to continue may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses in connection with seeking a suitable transaction. Since the ceasing operations, we have been seeking to restructure the Company’s capitalization in order to find suitable candidates for a business combination with a private company.  We have been unsuccessful in
this attempt.





On May 12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York (the “ Bankruptcy Court ”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code ”).
The Chapter 11 case is being administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP) (the “ Chapter 11 Case ”). The Debtor will continue to operate its business as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.





In connection with the Chapter 11 Case, the Debtor filed a motion seeking Bankruptcy Court approval of (a) an arrangement pursuant to which the Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor prior to the Petition
Date, and has agreed to advance $100,000 as a DIP Loan to the Company, $35,000 of which was already lent to the Debtor in order to enable it to file the chapter 11 petition.  The Court has approved an initial disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the remaining $30,000 is subject to further Court determination. David Skriloff, the Company’s Chairman of the Board is the portfolio manager for Lender. Lender is also a creditor and stockholder of the Company. Proceeds
of the loans under the DIP Credit Agreement will be used by the Debtor for working capital and other general corporate purposes of the Debtors and for the costs of administration of the Chapter 11 Case. The arrangement for the use of the DIP Loan contains certain financial and other covenants and certain events of default. On June16, 2009, the court issued an order granting the motion and authorized the Debtor to utilize up to $35,000 on an interim basis and possibly up too $100,000 under the DIP Loan.





The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due June 30, 2011 ("Convertible Notes". As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic
stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.





As of September 30, 2009, the Debtors are in compliance with the terms of the DIP Facility.





Inflation and Seasonality





Inflation has not been material to us during the past five years. Seasonality has not been material to us.





Recent Accounting Pronouncements





None





Off-Balance Sheet Arrangements– We have no off-balance sheet arrangements.








ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





A smaller reporting company is not required to provide the information required by this Item.





ITEM 4 - CONTROLS AND PROCEDURES





EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted 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 interim President, who serves as our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.





Our interim President reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 240.13a-15(e) or 15d-15(e)) of the Exchange Act Rule 13a-15 as of the end of the period covered by this report.  Based upon this evaluation, our interim President concluded that, as
of the end of such period, our disclosure controls and procedures are effective as of the end of the quarter covered by this Form 10-Q.





CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.  There were no changes in the Company’s internal control over financial reporting that occurred during the quarter or nine months ended September 30, 2009 that have materially affected, or that
are reasonably likely to materially affect, the Company’s internal control over financial reporting.








PART II - OTHER INFORMATION





ITEM 1. Legal Proceedings





On May 12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code ”).
The Chapter 11 case is being administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP) (the “Chapter 11 Case”). The Debtor will continue to operate its business as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.





ITEM 1A. Risk Factors





The Company included in its Annual Report on Form 10-K as of December 31, 2008 and in its Quarterly Report on Form 10-Q for the three months ended March 31, 2009 a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (“Risk Factors”). 
There have been no material changes to the risk factors previously disclosed.





ITEM 3. Defaults Upon Senior Securities





The filing of the Chapter 11 Case constituted an event of default or otherwise triggered repayment obligations under the Company's 6% Secured Convertible Notes due June 30, 2011 ("Convertible Notes". As a result, all indebtedness outstanding under these facilities and the notes became automatically due and payable, subject to an automatic
stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law.





ITEM 6.

Exhibits31
Certification of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.32
Certification of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





WOOZYFLY, INC.Date: October 28, 2009
/s/  ERIC STOPPENHAGENName: Eric StoppenhagenTitle: Interim President














EXHIBIT INDEX





Exhibit

Description31

Certification of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.32

Certification of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.