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 September 30, 2010





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





For the
transition period from _____ to _____





STW RESOURCES HOLDING
CORP.


(Exact
Name of Registrant as Specified in Its Charter)





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





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





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





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





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





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





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


Yes  ̈    No
x





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







STW
RESOURCES HOLDING CORP.


FORM
10-Q




TABLE
OF CONTENTS




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




2


PART
I — FINANCIAL INFORMATION


Item 1.
Financial Statements




STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Balance Sheets
 
 September 30,
                                      
                                      
                                      December 31,2010
                                      
                                      
                                      2009(
      Unaudited)
                                      
                                      
                                      (
      Audited)AssetsCurrent
      assetsCash
      and cash equivalents
                                      
                                      $
                                      43,531
                                      
                                      
                                      $
                                      11,621Other
      current assets
                                      
                                      
                                      20,738
                                      
                                      
                                      
                                      11,631Deposits
                                      
                                      
                                      25,000
                                      
                                      
                                      
                                      425Deferred
      finance costs
                                      
                                      
                                      62,302
                                      
                                      
                                      
                                      88,803Total
      current assets
                                      
                                      
                                      151,571
                                      
                                      
                                      
                                      112,480Property
      and equipment, net of accumulated depreciation of $5,778 and
      $3,812
                                      
                                      
                                      60,081
                                      
                                      
                                      
                                      14,055,034Total Assets
                                      
                                      $
                                      211,652
                                      
                                      
                                      $
                                      14,167,514Liabilities
      and Shareholders' EquityCurrent
      liabilitiesAccounts
      payable
                                      
                                      $
                                      848,506
                                      
                                      
                                      $
                                      10,092,547Accrued
      expenses
                                      
                                      
                                      7,209
                                      
                                      
                                      
                                      42,464Accrued
      interest
                                      
                                      
                                      298,228
                                      
                                      
                                      
                                      109,146Notes
      payable - current, net of $86,365 and $135,843 of unamortized
      discount
                                      
                                      
                                      3,494,450
                                      
                                      
                                      
                                      1,335,772Total
      current liabilities
                                      
                                      
                                      4,648,393
                                      
                                      
                                      
                                      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 atSeptember
      30, 2010 and 0 shares at December 31, 2009
                                      
                                      
                                      2,140
                                      
                                      
                                      
                                      -Common
      stock, par value $.001 per share, Authorized100,000,000
      shares, Issued 36,282,266 shares atSeptember
      30, 2010, and 30,418,099 at December 31, 2009
                                      
                                      
                                      36,285
                                      
                                      
                                      
                                      30,418Paid-in
      capital
                                      
                                      
                                      10,084,515
                                      
                                      
                                      
                                      9,048,954Deficit
      accumulated during the development stage
                                      
                                      
                                      (14,838,776
                                      )
                                      
                                      
                                      (6,770,882
                                      )Total
      shareholders' equity
                                      
                                      
                                      (4,715,836
                                      )
                                      
                                      
                                      2,308,490Total Liabilities and Shareholders'
      Equity
                                      
                                      $
                                      211,652
                                      
                                      
                                      $
                                      14,167,514
  The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
 
 3
  STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Operations
 (Unaudited)
 
 Three Months
                                      Ended September 30,
                                    
                                    
                                    Three Months
                                      Ended September 30,
                                    
                                    
                                    Nine Months
                                      Ended September
                                      30,
                                    
                                    
                                    Nine MonthsEndedSeptember 30,
                                    
                                    
                                    Inception (January 28, 2008)
                                      through September 30,2010</f
      ont>
                                    
                                    
                                    2009</f
      ont>
                                    
                                    
                                    2010</f
      ont>
                                    
                                    
                                    2009</f
      ont>
                                    
                                    
                                    2010</f
      ont>Revenues
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    34,000
                                    
                                    
                                    $
                                    34,000Cost
      of Sales
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    35,355
                                    
                                    
                                    
                                    35,355-
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,355
                                    )
                                    
                                    
                                    (1,355
                                    )ExpensesGeneral
      and administrativeSalaries
      and benefits
                                    
                                    
                                    27,345
                                    
                                    
                                    
                                    402,413
                                    
                                    
                                    
                                    62,803
                                    
                                    
                                    
                                    1,634,830
                                    
                                    
                                    
                                    2,740,895Professional
      fees
                                    
                                    
                                    305,195
                                    
                                    
                                    
                                    142,195
                                    
                                    
                                    
                                    1,218,388
                                    
                                    
                                    
                                    779,124
                                    
                                    
                                    
                                    2,806,302Stock-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    112,500
                                    
                                    
                                    
                                    600,300
                                    
                                    
                                    
                                    946,293Travel
                                    
                                    
                                    5,220
                                    
                                    
                                    
                                    20,480
                                    
                                    
                                    
                                    13,830
                                    
                                    
                                    
                                    73,378
                                    
                                    
                                    
                                    339,331Other
                                    
                                    
                                    67,973
                                    
                                    
                                    
                                    53,101
                                    
                                    
                                    
                                    107,623
                                    
                                    
                                    
                                    158,848
                                    
                                    
                                    
                                    740,126Total
      general and administrative
                                    
                                    
                                    405,733
                                    
                                    
                                    
                                    618,189
                                    
                                    
                                    
                                    1,515,144
                                    
                                    
                                    
                                    3,246,480
                                    
                                    
                                    
                                    7,572,947Operating
      loss
                                    
                                    
                                    (405,733
                                    )
                                    
                                    
                                    (618,189
                                    )
                                    
                                    
                                    (1,515,144
                                    )
                                    
                                    
                                    (3,247,835
                                    )
                                    
                                    
                                    (7,574,302
                                    )Other
      expenseLoss
      on Disposition of Asset
                                    
                                    
                                    5,329,624
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,329,624
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,329,624Interest,
      net
                                    
                                    
                                    163,848
                                    
                                    
                                    
                                    105,016
                                    
                                    
                                    
                                    1,223,126
                                    
                                    
                                    
                                    416,097
                                    
                                    
                                    
                                    1,934,850Total
      other expense
                                    
                                    
                                    5,493,472
                                    
                                    
                                    
                                    105,016
                                    
                                    
                                    
                                    6,552,750
                                    
                                    
                                    
                                    416,097
                                    
                                    
                                    
                                    7,264,474Loss
      before income taxes
                                    
                                    
                                    (5,899,205
                                    )
                                    
                                    
                                    (723,205
                                    )
                                    
                                    
                                    (8,067,894
                                    )
                                    
                                    
                                    (3,663,932
                                    )
                                    
                                    
                                    (14,838,776
                                    )Income
      taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net
      loss
                                    
                                    $
                                    (5,899,205
                                    )
                                    
                                    $
                                    (723,205
                                    )
                                    
                                    $
                                    (8,067,894
                                    )
                                    
                                    $
                                    (3,663,932
                                    )
                                    
                                    $
                                    (14,838,776
                                    )Basic
      and Diluted Loss Per Share
                                    
                                    $
                                    (0.16
                                    )
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (0.23
                                    )
                                    
                                    $
                                    (0.14
                                    )Number
      of Common Shares used inBasic and Diluted Loss Per
      share
                                    
                                    
                                    36,077,284
                                    
                                    
                                    
                                    25,682,840
                                    
                                    
                                    
                                    34,975,431
                                    
                                    
                                    
                                    25,682,840
  The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
 
 4
  STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Cash Flows
 (Unaudited)
 
 InceptionFor the
                            
                            
                            For the
                            
                            
                            (January 28, 2008)Nine Months Ended
                            
                            
                            Nine Months Ended
                            
                            
                            throughSeptember 30,
                            
                            
                            September 30,
                            
                            
                            September 30,2010
                            
                            
                            2009
                            
                            
                            2010Cash
      flows from operating activitiesNet
      (loss)
                            
                            $
                            (8,067,894
                            )
                            
                            $
                            (3,663,932
                            )
                            
                            $
                            (14,838,776
                            )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                            
                            
                            1,966
                            
                            
                            
                            20,360
                            
                            
                            
                            37,239Write-off
      of project pilot costs
                            
                            
                            -
                            
                            
                            
                            14,960
                            
                            
                            
                            14,960Amortization
      of debt issue costs
                            
                            
                            303,102
                            
                            
                            
                            303,545
                            
                            
                            
                            773,982Fair
      value of common shares attached to notes payable
                            
                            
                            -
                            
                            
                            
                            25,314
                            
                            
                            
                            75,709Notes
      payable issued for deferred compensation
                            
                            
                            -
                            
                            
                            
                            800,436
                            
                            
                            
                            1,123,851Stock-based
      compensation
                            
                            
                            112,500
                            
                            
                            
                            600,300
                            
                            
                            
                            946,293Fair
      value of equity issued for consulting services
                            
                            
                            788,545
                            
                            
                            
                            273,983
                            
                            
                            
                            1,190,696Loss
      on disposition of equipment
                            
                            
                            5,329,624
                            
                            
                            
                            7,449
                            
                            
                            
                            5,341,148Fair
      value of common shares issued as a donation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            50,000Changes
      in operating assets and liabilities:(Increase)
      decrease in prepaid expenses and othercurrent
      assets
                            
                            
                            (33,682
                            )
                            
                            
                            32,189
                            
                            
                            
                            (55,863
                            )Increase
      in accounts payable and accrued expenses
                            
                            
                            973,149
                            
                            
                            
                            674,210
                            
                            
                            
                            2,035,793Net
      cash used in operating activities
                            
                            
                            (592,690
                            )
                            
                            
                            (911,186
                            )
                            
                            
                            (3,304,968
                            )Cash
      flows from investing activitiesAcquisition
      of property and equipment
                            
                            
                            -
                            
                            
                            
                            (67,887
                            )
                            
                            
                            (4,986,876
                            )Sale
      of equipment
                            
                            
                            -
                            
                            
                            
                            64,500
                            
                            
                            
                            64,500Net
      cash used in investing activities
                            
                            
                            -
                            
                            
                            
                            (3,387
                            )
                            
                            
                            (4,922,376
                            )Cash
      flows from financing activitiesIssuance
      of notes payable
                            
                            
                            709,200
                            
                            
                            
                            1,150,000
                            
                            
                            
                            3,360,019Repayment
      of notes payable
                            
                            
                            -
                            
                            
                            
                            (94,269
                            )
                            
                            
                            (1,207,108
                            )Debt
      issue costs
                            
                            
                            (84,600
                            )
                            
                            
                            (176,200
                            )
                            
                            
                            (385,179
                            )Equity
      issuances, net
                            
                            
                            -
                            
                            
                            
                            93,057
                            
                            
                            
                            6,503,143Net
      cash provided by financing activities
                            
                            
                            624,600
                            
                            
                            
                            972,588
                            
                            
                            
                            8,270,875Net
      increase( decrease) in cash and cash equivalents
                            
                            
                            31,910
                            
                            
                            
                            58,015
                            
                            
                            
                            43,531Cash
      at beginning of period
                            
                            
                            11,621
                            
                            
                            
                            17,639
                            
                            
                            
                            -Cash
      at end of period
                            
                            $
                            43,531
                            
                            
                            $
                            75,654
                            
                            
                            $
                            43,531Supplemental
      cash flow information:Cash
      paid for interest
                            
                            $
                            -
                            
                            
                            $
                            8,006
                            
                            
                            $
                            29,403Non-cash
      investing and financing activities:Non-cash
      capital expenditures
                            
                            $
                            -
                            
                            
                            $
                            4,006,006
                            
                            
                            $
                            9,194,416
 The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
  5
  STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Shareholders' Equity
 (Unaudited)
  Deficit
      AccumulatedPreferred
      Stock
                        
                        
                        Common
      Stock
                        
                        
                        Paid-in
                        
                        
                        During
      theShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Development
      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.
  6
 
 STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Shareholders' Equity
 (Unaudited)
 (Continued)
  January
      14, 2009, issuance of common stock in connection with note
      payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    50
                                    
                                    
                                    
                                    13,450
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    13,500January
      30, 2009, issuance of common stock in connection with September 29,
      2008note 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,
      2008note payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    31,250
                                    
                                    
                                    
                                    31
                                    
                                    
                                    
                                    8,406
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,437March
      24, 2009, issuance of common stock in connection with September 29,
      2008note 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
                                    
                                    
                                    $
                                    (6,770,882
                                    )
                                    
                                    $
                                    2,308,486
 The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
 
 7
 STW
RESOURCES HOLDING CORP.
 (A
Development Stage Company)
 Consolidated
Statements of Shareholders' Equity
 (Unaudited)
 (Continued)
  DeficitAccumulatedPreferred Stock
                        
                        
                        Common Stock
                        
                        
                        Paid-in
                        
                        
                        During theShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Development Stage
                        
                        
                        TotalWarrants
      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
                        )
                        
                        
                        (31,780
                        )
                        
                        
                        (9,398,133
                        )
                        
                        
                        -
                        
                        
                        
                        (9,429,913
                        )WoozyFly,
      Inc. common stock acquired in exchange
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31,780,004
                        
                        
                        
                        31,780
                        
                        
                        
                        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
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        132,460
                        
                        
                        
                        -
                        
                        
                        
                        132,460Shares
      issued for professional services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,792,262
                        
                        
                        
                        1,796
                        
                        
                        
                        446,272
                        
                        
                        
                        -
                        
                        
                        
                        448,068Shares
      issued for stock compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        450,000
                        
                        
                        
                        450
                        
                        
                        
                        112,050
                        
                        
                        
                        -
                        
                        
                        
                        112,500Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,067,894
                        )
                        
                        
                        (8,067,894
                        )Total
      Shareholders' Equity, September 30, 2010
                        
                        
                        2,140,000
                        
                        
                        $
                        2,140
                        
                        
                        
                        36,282,266
                        
                        
                        $
                        36,285
                        
                        
                        $
                        10,084,515
                        
                        
                        $
                        (14,838,776
                        )
                        
                        $
                        (4,715,836
                        )
 
 The
accompanying notes are an integral part of these consolidated unaudited
financial statements.
 
 8
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.
                Organization,
      Nature of Activities and Basis of
Presentation
 
 STW
Resources Holding Corp., (“STW” or the “Company”) is a development stage
corporation formed to utilize state of the art water reclamation technologies to
reclaim fresh water from highly contaminated oil and gas hydraulic fracture
flow-back salt water that is produced in conjunction with the production of oil
and gas.  STW has been working to establish contracts with oil and gas
operators for the deployment of multiple water reclamation systems throughout
Texas, Arkansas, Louisiana and the Appalachian Basin of Pennsylvania and West
Virginia.  STW, in conjunction with energy producers, operators,
various state agencies and legislators, are working to create an efficient and
economical solution to this complex problem.  The Company is also
evaluating the deployment of similar technology in the municipal wastewater
industry.
 
 The
Company’s operations are located in the United States of America and the
principal executive offices are located at 619 W. Texas Ave Ste 126, Midland, TX
79701.
 
 Effective
January 17, 2010, the Company, through a Shareholder Consent of a majority of
its shareholders, entered into an Agreement and Plan of Merger (“Merger
Agreement”) with WoozyFly, Inc. ("WoozyFly"), a corporation incorporated under
the laws of Nevada and its common shares are quoted on the Over-the-Counter
Bulletin Board under the symbol "WZYFQ", whereby a subsidiary of WoozyFly would
merge with and into the Company, with the Company continuing as the surviving
corporation.  WoozyFly, Inc. filed for Chapter 11 bankruptcy
protection and the bankruptcy court approved a plan pursuant to which WoozyFly,
through a subsidiary, acquired STW Resources in a one for one exchange of
31,780,004 shares of common stock and securities of WoozyFly for all of the
issued and outstanding voting capital stock of the Company, which allowed
WoozyFly to exit bankruptcy.
 
 On
February 9, 2010, the Court entered an order confirming the Seconded Amended
Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger
was approved.  The Plan was effective February 19, 2010 (the
“Effective Date”). The principal provisions of the Plan are as
follows:
 
 ·
              MKM,
      the DIP Lender, received 400,000 shares of common stock and 2,140,000
      shares of preferred stock;
 ·
              the
      holders of the Convertible Notes received 1,760,000 shares of common
      stock;
 ·
              general
      unsecured claims received 100,000 shares of common stock;
    and
 ·
              the
      Company’s equity interest was extinguished and
  cancelled.
 
 On
February 12, 2010, pursuant to the terms of the Merger Agreement, the Company
merged with and into an acquisition subsidiary, which became a wholly-owned
subsidiary of the Company (the “Merger”).  In consideration for the
Merger and the Company becoming a wholly-owned subsidiary of Woozyfly, Woozyfly
issued an aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of
common stock to the shareholders of the Company at the closing of the merger and
all derivative securities of the Company as of the Merger became derivative
securities of Woozyfly including options and warrants to acquire 12,613,002
shares of common stock at an exercise price ranging from $3.00 to $8.00 with an
exercise period ranging from July 31, 2011 through November 12, 2014 and
convertible debentures in the principal amount of $1,467,903 with a conversion
price of $0.25 and maturity dates ranging from April 24, 2010 through November
12, 2010.
  9
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The par
value of the exchanged shares changed from .00001 to .001.  All share
amounts presented throughout this document reflect this change in par
value.
 
 Considering
that, following the merger, the shareholders of the Company control the majority
of our outstanding voting common stock and effectively succeeded our otherwise
minimal operations to those that are theirs, the Company is considered the
accounting acquirer in this reverse-merger transaction.  A reverse-merger
transaction is considered, and accounted for as, a capital transaction in
substance; it is equivalent to the issuance of the Company’s securities for our
net monetary assets, which are deminimus, accompanied by a recapitalization.
Accordingly, the Company has not recognized any goodwill or other intangible
assets in connection with this reverse merger transaction.
 
 Effective March 1, 2010, Woozyfly, Inc. changed
its name to STW Global, Inc. in accordance with the Bankruptcy
proceeding.   On March 3, 2010, the Company changed its name to STW
Resources Holding Corp.  The name change was accomplished by merging a
wholly owned subsidiary of the Company into the Company resulting in the Company
being the surviving Company and changing the name of the
Company.
 
 STW
Resources Holding Corp. is the surviving and continuing entity and the
historical financials following the reverse merger transaction will be those of
STW.   We were a "shell company" (as such term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior
to our acquisition of STW pursuant to the terms of the Merger
Agreement.  As a result of such acquisition, our operations are now
focused on the provision of customized water reclamation
services.  Consequently, we believe that acquisition has caused us to
cease to be a shell company as we no longer have nominal
operations.
 
 Basis
of Presentation
 
 STW has
prepared the accompanying unaudited consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) instructions to
Form 10-Q and Item 310(b) of regulation S-K. These financial statements should
be read together with the financial statements and notes in the Company’s 2009
audited financial statements included in the Company’s Form 8-K filed with the
SEC on April 1, 2010.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The accompanying financial statements reflect all
adjustments and disclosures, which, in the Company’s opinion, are necessary for
fair presentation. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily indicative of
the results of the entire year.
 
 Status
of Relationship with GE Water & Process Technologies
 
 On August
31, 2010, the Company entered into a settlement agreement with GE Water &
Process Technologies (“GE Water”) to terminate the purchase order and related
teaming agreements to construct a water reclamation unit.  The terms
of the settlement agreement include GE Water retaining the water reclamation
unit, forgiveness of the Company’s liability to GE Water associated with the
water reclamation unit, and established a $1,400,000 note payable (“GE Note”) to
GE Water.  The GE Note bears interest at the WSJ prime rate plus 2%
which is payable  at maturity and matures at the sooner of 13 months
or the Company shall pay to GE Water 30% of each future debt or equity offering
of the Company until the note is paid in full.
  10
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Pursuant
to the terms of the settlement agreement, the Company recorded a $5,329,624 loss
on disposition of asset as a result of the write off of $13,992,988 of work in
process and capitalized interest on the evaporator system from GE Water,
$10,063,364 of accounts payable and accrued interest, as well as recording
$1,400,000 of notes payable.
 
 Going
Concern
 
 These
Consolidated Financial Statements have been prepared on a going concern
basis.  The Company from Inception (January 28, 2008) through
September 30, 2010, has not had any significant revenues.  The Company
has no significant operating history as of September 30, 2010, has accumulated
losses of $14.8 million and negative cash flow from operations of $3.3 million
since inception. From Inception (January 28, 2008) through September
30, 2010, management has raised net equity and debt financing of $8.3 million to
fund operations and to provide working capital.  However, there is no
assurance that in the future such financing will be available to meet the
Company’s needs.
 
 Management
has undertaken steps as part of a plan to improve operations with the goal of
sustaining our operations for the next twelve months and
beyond.  These steps include (a) raising additional capital and/or
obtaining financing; (b) executing contracts with oil and gas operators and
municipal utility districts; and (c) controlling overhead and
expenses.  There can be no assurance that the Company can successfully
accomplish these steps and it is uncertain that the Company will achieve a
profitable level of operations and obtain additional financing.  There
can be no assurance that any additional financing will be available to the
Company on satisfactory terms and conditions, if at all.
 
 In the
event the Company is unable to continue as a going concern, the Company may
elect or be required to seek protection from its creditors by filing a voluntary
petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy.  To date, management has not considered this alternative,
nor does management view it as a likely occurrence.
 
 The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the possible
inability of the Company to continue as a going concern.
  Principles
of Consolidation
  The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of intercompany balances and
transactions.
  11
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents include cash in banks and financial instruments with an
original maturity of three months or less at the date of purchase.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to concentration of credit risk
consist of cash.  From time to time, the Company has cash in its bank
accounts in excess of federally insured limits.
 
 The
Company anticipates entering into long-term, fixed-price contracts for its
services with select oil and gas producers and municipal
utilities.  The Company will control credit risk related to accounts
receivable through credit approvals, credit limits and monitoring
procedures.
 
 Fair
Value of Financial Instruments
 
 The fair
value of cash, accounts payable, accrued expenses and notes payable, including
amounts due to and from related parties, approximate carrying values because of
the short-term maturity of these instruments.
 
 Stock
Based Compensation
 
 The
Financial Accounting Standards Board Accounting Standard Codification (ASC)
Topic 718 “Compensation-Stock Compensation” requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values.  Pro-forma disclosure is
no longer an alternative.  The effective date for the Company’s
application of ASC Topic 718 was January 28, 2008 (date of
inception).
  There
were no grants of employee options during the period from January 28, 2008 (date
of inception) through September 30, 2010.  There were no unvested
options outstanding as of the date of the Company’s adoption of ASC Topic
718.
 
 Basic
and Diluted Loss per Share
 
 The
Company’s basic earnings per share (EPS) amounts have been computed based on the
weighted-average number of shares of Common Stock outstanding for the period.
Diluted EPS reflects the potential dilution, using the treasury stock method,
which could occur if the above dilutive securities were exercised. As the
Company realized a net loss for each of the three months and nine months ended
September 30, 2010 and 2009, no potentially dilutive securities were included in
the calculation of diluted earnings per share as their impact would have been
anti-dilutive.
  12
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Property and
Equipment
  Property
and equipment are recorded at cost and depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
 Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the
asset.
  Expenditures
for major additions or improvements, which extend the useful lives of assets,
are capitalized.  Minor replacements, maintenance and repairs, which do not
improve or extend the lives of the assets, are charged to operations as
incurred.  Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current
operations.
 
 Impairment
of Long-Lived Assets
  The
Company follows ASC Topic 360, “Property, Plant and Equipment”, which requires
that long-lived assets held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Events relating to recoverability
may include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period.  The Company evaluates the recoverability of
long-lived assets based upon undiscounted cash flows.  Should
impairment in value be indicated, the carrying value of the long-lived assets
will be adjusted, based on estimates of future discounted cash flows resulting
from the use and ultimate disposition of the asset.  ASC Topic 360
also requires assets to be disposed of be reported at the lower of the carrying
amount or the fair value less disposal costs.
  Segment
reporting
  The
Company operates as a single segment and will evaluate additional segment
disclosure requirements as it expands its operations.
  Income
taxes
  The
Company follows ASC Topic 740, “Income Taxes” for recording the provision for
income taxes.  Deferred tax assets and liabilities are computed based
upon the difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or
settled.  Deferred income tax expenses or benefits are based on the
changes in the asset or liability during each period.  If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized.  Future changes in such valuation allowance are included
in the provision for deferred income taxes in the period of
change.  Deferred income taxes may arise from temporary differences
resulting from income and expense items reported for financial accounting and
tax purposes in different periods.  Deferred taxes are classified as
current or non-current, depending on the classification of assets and
liabilities to which they relate.  Deferred taxes arising from
temporary differences that are not related to an asset or liability are
classified as current or non-current depending on the periods in which the
temporary differences are expected to reverse.
  13
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 At
Inception (January 28, 2008), the Company implemented the accounting guidance
for uncertainty in income taxes using the provisions of ASC Topic 740 ,which is
intended to clarify the accounting for income taxes prescribing a minimum
recognition threshold for a tax provision before being recognized in the
consolidated financial statements. This guidance also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition.  As a result, the
Company has concluded that it does not have any unrecognized tax benefits or any
additional tax liabilities after applying this guidance.  The adoption
of this guidance therefore had no impact on the Company’s consolidated financial
statements.
 
 2.
                Joint
      Venture
 
 On August
5, 2010, the Company entered into a Joint Venture Agreement (the “JV Agreement”)
with Aqua Verde, LLC (“AV”). Pursuant to the JV Agreement, STW and AV agreed to
collectively work together through the joint venture to procure water
reclamation contracts with natural gas drilling companies in the states of
Colorado and Texas. In addition, AV shall assign all of its existing master
services agreements and master services contracts to the joint
venture.
 
 The joint
venture is named Water Reclamation Partners, LLC, and is owned 51% by the
Company and 49% by AV, with the Company having exclusive control and management
of the business of the joint venture. In addition, a steering committee was
established for the purpose of managing and directing the joint pursuits of the
joint venture, and is comprised of two representatives from the Company and two
representatives of AV.  As of September 30, 2010, there have been no
operations within the joint venture, and AV has not contributed the master
services contracts to the joint venture, therefore the joint venture had no
impact on the current financial statements.
 
 3.
                Notes
      Payable
 
 The
Company’s notes payable at September 30, 2010 and December 31, 2009, consisted
of the following:
  14
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 September 30,
                            
                            
                            December 31,Name
                            
                            2010
                            
                            
                            200912%
      Convertible Notes:Conversion
      of outstanding bridge notes
                            
                            $
                            727,903
                            
                            
                            $
                            727,903Cash
      issuances of 2009 Notes
                            
                            
                            740,000
                            
                            
                            
                            740,000Cash
      issuances of 2010 Notes
                            
                            
                            705,000
                            
                            
                            
                            -GE
      Note
                            
                            
                            1,400,000
                            
                            
                            
                            -Total
      2009 12% Convertible Notes
                            
                            
                            3,572,903
                            
                            
                            
                            1,467,903Deferred
      Compensation Notes
                            
                            
                            279,095
                            
                            
                            
                            279,095Other
      Financing
                            
                            
                            7,912
                            
                            
                            
                            3,712Unamortized
      debt discount
                            
                            
                            (86,365
                            )
                            
                            
                            (135,843
                            )Total
      Notes Payable
                            
                            
                            3,773,545
                            
                            
                            
                            1,614,867Less:
      Current Portion
                            
                            
                            (3,494,450
                            )
                            
                            
                            (1,335,772
                            )Total
      Long Term Notes Payable
                            
                            $
                            279,095
                            
                            
                            $
                            279,095
 
 April
2008 Notes
 
 In April
2008, the Company issued promissory notes (the “April 2008 Notes”) totaling $1.1
million.   Each note bore interest at a rate of 10% per
annum.  Principal and accrued but unpaid interest on each note was
payable in full on June 1, 2008.  Pursuant to the terms of the April
2008 Notes, the Company was also required to issue one-quarter (0.25) share of
Common Stock for each dollar of principal amount advanced.  A total of
275,000 shares of Common Stock were issued and were valued at an aggregate of
$12,238, based upon the price of the Company’s shares of Common Stock issued
under the most recent private placement offering prior to the issuance of the
April 2008 Notes.  This value was recorded as a discount to the notes
and amortized to interest expense using the effective interest rate method over
the term of the notes.  The Company also incurred $55,100 of debt
issue costs.  This cost was amortized to interest expense using the
effective interest rate method over the term of the notes.
 
 On June
1, 2008, the Company requested and obtained temporary waivers of repayment of
the April 2008 Notes until the closing of additional equity
funding.  In consideration for such extension, the Company issued to
each note holder an additional 0.375 share of Common Stock for each dollar of
principal advanced.  A total of 41,325 additional shares of Common
Stock were issued.  These additional shares of Common Stock were
valued at an aggregate of $11,157, based on the estimated fair value of the
Company’s Common Stock at that date.  This amount was recorded as a
discount to the April 2008 Notes and amortized to interest expense using the
effective interest rate method over the term of the notes.
 
 The April
2008 Notes were repaid in full during June 2008.
  15
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 September
2008 Bridge Note and March 2009 Bridge Note
 
 On
September 29, 2008, the Company entered into a securities purchase agreement
with an accredited investor (the “September 2008 Bridge Investor”) providing for
the issuance by the Company to the September 2008 Bridge Investor of its 12%
promissory note in the principal amount of $125,000 (the "September 2008 Bridge
Note").  In addition to the September 2008 Bridge Note, the September
2008 Bridge Investor also received 62,500 shares of common stock of the
Company.  These shares of Common Stock were valued at an aggregate of
$16,875, based on the estimated fair value of the Company’s Common Stock at that
date.  This amount was recorded as a discount to the September 2008
Bridge Note and was amortized to interest expense using the effective interest
rate method over the term of the notes.  The September 2008 Bridge
Note matured on December 28, 2008.  Interest associated with this note
was 12% per annum, payable on the maturity date.  In the event that
all amounts due under the note were not paid by the maturity date, the Company
was required to issue an additional 31,250 shares to the September 2008 Bridge
Investor every 30 days that any amounts remain outstanding on the
note.
 
 On March
24, 2009, the Company entered into a securities purchase agreement with the
September 2008 Bridge Investor providing for the rollover of the $125,000
principal amount outstanding under the September 2008 Bridge Note and the
advancing of an additional $50,000 (the “March 2009 Bridge
Note”).  Pursuant to the terms of the September 2008 Bridge Note, the
Company issued penalty shares, totaling 93,750 additional shares of the
Company’s Common Stock, to the September 2008 Bridge Investor.  These
shares of Common Stock were valued at an aggregate of $25,314, based on the
estimated fair value of the Company’s Common Stock at that date.  This
amount was recorded as a discount to the September 2008 Bridge Note and was
amortized to interest expense using the effective interest rate method over the
term of the note.  In addition to the March 2009 Bridge Note, the
September 2008 Bridge Investor also received an additional 200,000 shares of
common stock of the Company.  These shares of Common Stock were valued
at an aggregate of $54,000, based on the estimated fair value of the Company’s
Common Stock at that date.  This amount was recorded as a discount to
the March 2009 Bridge Note and was amortized to interest expense using the
effective interest rate method over the term of the note.  The
September 2008 Bridge Investor was also entitled to a $15,000 financing fee
payable at maturity.  This fee was accrued as a discount to the March
2009 Bridge Note and was amortized to interest expense using the effective
interest rate method over the term of the note.  The March 2009 Bridge
Note matured on the earlier of 90 days from closing or upon closing of a private
placement by the Company, with net proceeds to the Company of at least $1.0
million.  Interest associated with this note was 12% per annum,
payable on the maturity date.   In the event that all amounts due
under the note are not paid by the maturity date, the Company was required to
issue an additional 40,000 shares to the September 2008 Bridge Investor every 30
days that any amounts remain outstanding on the note.  See the 2009
12% Convertible Notes disclosure for the conversion of this note.
 
 CEO
Bridge Note
 
 On
December 29, 2008, the Company entered into a securities purchase agreement with
the Company’s then Chairman and Chief Executive Officer for the issuance by the
Company of its 10% promissory note in the principal amount of $75,000 (the "CEO
Bridge Note").  In addition to the CEO Bridge Note, the CEO also
received 37,500 shares of Common Stock of the Company.  These shares
of Common Stock were valued at an aggregate of $10,125, based on the estimated
fair value of the Company’s Common Stock at that date.  This amount
was recorded as a discount to the CEO Bridge Note and was amortized to interest
expense using the effective interest rate method over the term of the
note.  The CEO Bridge Note matured on March 29,
2009.  Interest associated with the CEO Bridge Note was 10% per annum,
payable on the maturity date. See the 2009 12% Convertible Notes disclosure for
the conversion of this note.
  16
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 January
2009 Bridge Notes
 
 On
January 2, 2009, and January 6, 2009, the Company entered into securities
purchase agreements with two accredited investors (the “January 2009 Bridge
Investors”) for the issuance by the Company of a 10% promissory note in the
principal amount of $25,000 to each of the January 2009 Bridge Investors (the
"January 2009 Bridge Notes").  In addition to the January 2009 Bridge
Notes, the January 2009 Bridge Investors also each received 12,500 shares of
Common Stock of the Company.  These shares of Common Stock were valued
at an aggregate of $6,750, based on the estimated fair value of the Company’s
Common Stock at that date.  This amount was recorded as a discount to
the January 2009 Bridge Notes and was amortized to interest expense using the
effective interest rate method over the term of the notes.  The
January 2009 Bridge Notes matured on the earlier of 90 days from closing or upon
closing of a private placement by the Company.  Interest associated
with the January 2009 Bridge Notes was 10% per annum, payable on the maturity
date. See the 2009 12% Convertible Notes disclosure for the conversion of this
note.
 
 January
14, 2009 Bridge Note
 
 On
January 14, 2009, the Company entered into a bridge loan letter agreement and a
securities purchase agreement with an accredited investor (the “January 14, 2009
Bridge Investor”) for the issuance by the Company of a 15% promissory note in
the principal amount of $400,000 to the January 14, 2009 Bridge Investors (the
"January 14, 2009 Bridge Note").  In addition to the January 14, 2009
Bridge Notes, the January 14, 2009 Bridge Investors also received 50,000 shares
of Common Stock of the Company.  These shares of Common Stock were
valued at $13,500, based on the estimated fair value of the Company’s Common
Stock at that date.  This amount was recorded as a discount to the
January 14, 2009 Bridge Note and was amortized to interest expense using the
effective interest rate method over the term of the notes.   In
connection with entering into the bridge loan letter agreement, the Company also
issued warrants to acquire 480,000 shares of the Company’s Common Stock and paid
$40,000 in fees.  The warrants are exercisable for a period of five
years at an exercise price of $3.00 per share.  Using the Black
Scholes pricing model, with volatility of 100%,  a risk-free interest
rate of 1.5% and a 0% dividend yield, the warrants were determined to have a
fair value of $48,168, with such value recorded as a discount to the January 14,
2009 Bridge Note and to additional paid-in capital.  This discount,
along with the $40,000 in fees, was amortized using the effective interest rate
method over the term of the indebtedness.  The January 14, 2009 Bridge
Note matured 90 days from closing.  Interest associated with the
January 14, 2009 Bridge Note was 15% per annum, payable on the maturity
date.  See the 2009 12% Convertible Notes disclosure for the
conversion of this note.
  17
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 2009
12% Convertible Notes
 
 In April
2009, the Company commenced an offering of its 12% Convertible Notes (the “2009
12% Convertible Notes”).  Each 2009 12% Convertible Note is
convertible, at any time at the option of the holder, into shares of the
Company’s common stock, at an initial conversion price of $0.25 per share (the
“Conversion Price”).   The 2009 12% Convertible Notes bear
interest at 12% per annum and mature 12 months from the date of
issuance.  For each 2009 12% Convertible Note purchased, each investor
received a warrant  to purchase up to such number of shares of the
Company’s common stock equal to one-half of the face amount of the 2009 12%
Convertible Note divided by the Conversion Price.  The warrants are
exercisable for a period of five years from the date of issuance at an exercise
price of $3.00 per share.  Through December 31, 2009, the
Company had issued a total of $740,000 face value of its 12% Convertible Notes
for cash.
 
 In April
2009, the holders of the CEO Bridge Note, the January 2009 Bridge Notes, the
January 14, 2009 Bridge Note and the March 2009 Bridge Note agreed to convert
the $700,000 total of their outstanding notes, plus accrued interest of $12,903
and deferred fees of $15,000, into the 2009 12% Convertible Notes.
 
 Using the
Black Scholes pricing model, with volatility of 100%,  a risk-free
interest rate of 0.81% and a 0% dividend yield, the warrants were determined to
have a fair value of $23,245, with such value recorded as a discount to the 2010
12% Convertible Notes and to additional paid-in capital.  This
discount will be amortized using the effective interest rate method over the
term of the indebtedness.
 
 In
connection with the issuance of the 2009 12% Convertible Notes, the Company had
issued 2,935,805 Warrants to acquire the Company’s common stock to investors and
an additional 352,296 Warrants to acquire the Company’s common stock to
Viewpoint, all on the terms set forth above.  Using the Black Scholes
pricing model, with volatility of 100%,  a risk-free interest rate of
1.5% and a 0% dividend yield, the warrants were determined to have a fair value
of $295,572, with such value recorded as a discount to the 2009 12% Convertible
Notes and to additional paid-in capital.  This discount will be
amortized using the effective interest rate method over the term of the
indebtedness.
 
 During
the third quarter of 2010, $540,000 face value of these notes
matured.  The Company received six month extensions for these
notes.  During October and November 2010 the Company granted an
additional 262,500 warrants in consideration for extensions. The warrants are
exercisable for a period of five years from the date of issuance at an exercise
price of $3.00 per share.
 
 2010
12% Convertible Notes
 
 In
January 2010, the Company commenced an offering of its 12% Convertible Notes
(the “2010 12% Convertible Notes”).  Each 2010 12% Convertible Note is
convertible, at any time at the option of the holder, into shares of the
Company’s common stock, at an initial conversion price of $0.25 per share (the
“Conversion Price”).   The 2010 12% Convertible Notes bear
interest at 12% per annum and mature 12 months from the date of
issuance.  For each 2010 12% Convertible Note purchased, each investor
received a warrant  to purchase up to such number of shares of the
Company’s common stock equal to one-half of the face amount of the 2010 12%
Convertible Note divided by the Conversion Price.  The warrants are
exercisable for a period of five years from the date of issuance at an exercise
price of $3.00 per share.  Through September  30, 2010, the
Company had issued a total of $705,000 face value of its 12% Convertible Notes
for cash.
  18
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 In
connection with the issuance of the 2010 12% Convertible Notes, the Company had
issued 1,472,500 Warrants to acquire the Company’s common stock to investors and
an additional 169,200 Warrants to acquire the Company’s common stock to the
agent, all on the terms set forth above.  Using the Black Scholes
pricing model, with volatility of 100%,  a risk-free interest rate of
0.81% and a 0% dividend yield, the warrants were determined to have a fair value
of $140,942, with such value recorded as a discount to the 2010 12% Convertible
Notes and to additional paid-in capital.  This discount will be
amortized using the effective interest rate method over the term of the
indebtedness.
 
 Deferred
Compensation Notes
 
 Beginning
in February 2009, the Company had been unable to meet its contractual employment
related obligations and has been accruing, as a component of accrued expenses,
past due salaries to its employees and, as a component of accounts payable,
severance payments payable to its former Chief Executive Officer and fees due
its in-house counsel.  Through December 31, 2009, the Company, in
partial satisfaction of these past due amounts, had issued $1,071,333 principal
amount of 12% convertible notes (the “Deferred Compensation Convertible Notes”)
on the basis of $2.00 of Deferred Compensation Convertible Note face value for
each $1.00 of compensation deferred.  Each Deferred Compensation
Convertible Note is convertible, at any time at the option of the holder, into
shares of the Company’s common stock, at an initial conversion price of $0.25
per share (the “Conversion Price”).  On December 31, 2009, there was
$1,071,333 of the Deferred Compensation Convertible Notes outstanding plus
related accrued interest of $48,530 under these notes, in addition to accrued
salaries of $327,713 recorded (collectively the“ Deferred Compensation
Liabilities”).
 
 On
December 31, 2009, the Company entered into a new agreement (the “Deferred
Compensation Note Agreement”) with holders of the Deferred Compensation
Convertible Notes, who were also owed the accrued salaries of
$327,713.  Pursuant to the terms of the Deferred Compensation Note
Agreement and in settlement of the Deferred Compensation Liabilities,
liabilities of $323,735 were forgiven, the Company converted liabilities of
$844,746 to 3,379,024 shares of the Company’s common stock, using a conversion
price of $0.25, which approximated the fair value of the Company’s common stock
at that date, and $279,095 principal amount 10% notes maturing in 36 months were
issued (the “Deferred Compensation Notes”).  The forgiveness of the
$323,735 was recorded as a reduction of salary expense.
 
 Other
Financings
 
 On August
31, 2010, the Company entered into a Settlement Agreement pursuant to which GE
permitted the Company to substitute for STW Resources as to all rights and
obligations under the Purchase Order (including the Original Debt) and Teaming
Agreement, and such that to fully discharge STW Resources’ financial obligations
to GE under the Purchase Order, the Company shall pay GE $1,400,000 pursuant to
a senior promissory note (the “Note”). The Note bears interest at a rate of the
WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent
(2%) per annum.  Under the terms of the Note, the Company has thirteen
months to pay off the Note plus all accrued interest thereon.  In
addition, upon the consummation of a debt or equity financing following the
execution of the Note, the Company shall pay GE thirty percent (30%) of the
gross proceeds of any equity investments in or loans to the Company or any
affiliated entity until the Note is paid in full, including all accrued interest
thereon. ( See Note 1)
  19
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 During
the nine months ended September 30, 2010 and 2009, the total interest costs
incurred were $1.2 million and $1.4 million, respectively.  There was
no interest capitalized in 2010.  The 2009 balance includes $ 1.0
million in capitalized interest.
 
 4.
                Capital
      Stock
 
 Preferred
Stock
 
 The
Company has authorized 10,000,000 shares of Preferred Stock with a par value of
$ .001 per share.  On February 21, 2010, pursuant to the Merger
Agreement, the Company issued 2,140,000 shares of convertible preferred
stock.
 
 Common
Stock
 
 The
Company has authorized 100,000,000 shares of Common Stock with a par value of
$.001.
 
 On
February 12, 2010, pursuant to the terms of the Merger Agreement, STW merged
with and into Acquisition Sub, which became a wholly-owned subsidiary of the
Company (the “Merger”).  In consideration for the Merger and STW
becoming a wholly-owned subsidiary of the Company, the Company issued an
aggregate of 31,780,004 (the “STW Acquisition Shares”) shares of .001 par value
common stock to the shareholders of STW at the closing of the merger and all
derivative securities of STW as of the Merger became derivative securities of
Woozyfly, including options and warrants to acquire 12,613,002 shares of common
stock at an exercise price ranging from $3.00 to $8.00, with an exercise period
ranging from July 31, 2011 through November 12, 2014 and convertible debentures
in the principal amount of $1,467,903 with a conversion price of $0.25 and
maturity dates ranging from April 24, 2010 through November 12,
2010.
 
 Additionally,
MKM, the DIP Lender, received 400,000 shares of common stock and 2,140,000
shares of preferred stock, the holders of the Convertible Notes received
1,760,000 shares of common stock, general unsecured claims received 100,000
shares of common stock.  An adjustment was made through additional
paid in capital to reflect the issuance of these shares as the Merger was
treated as a reverse merger and a capitalization transaction for accounting
purposes.
 
 For the
nine months ended September 30, 2010, the company issued 3,154,167 shares of
common stock which were valued at an aggregate of $788,545, based upon the
estimated fair value of the Company’s common stock at that date, for consulting
services rendered to the Company.
  20
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Total
Dilutive Securities
 
 As of
September 30, 2010, the Company had the following dilutive securities to acquire
the Company’s Common Stock outstanding:
 
 Number ofUnderlying
                            
                            
                            ExerciseSecurity
                            
                            Common Shares
                            
                            
                            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
                            
                            
                            4,929,801
                            
                            
                            $
                            3.00
                            
                            
                            2014-2015Convertible
      common stock associated with 2009 12% notes
                            
                            
                            499,617
                            
                            
                            $
                            0.25
                            
                            
                            2010-2011Convertible
      common stock associated with 2010 12% notes
                            
                            
                            184,822
                            
                            
                            $
                            0.25
                            
                            
                            2010-201114,939,140
 
 5.
                Stock-Based
      Compensation
 
 Since
Inception (January 28, 2008), the Company issued 6.8 million shares of the
Company’s Common Stock to directors, employees and certain consultants. As of
September 30, 2010, 400,000 of these shares have been forfeited.  The
following table sets forth the number of shares outstanding, the fair value at
date of issue and the period over which the shares vest:
  21
  STW
RESOURCES HOLDING CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Number of
                        
                        
                        FairShares
                        
                        
                        Value per
                        
                        VestingDate
                        
                        Issued
                        
                        
                        Share
                        
                        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
                        
                        Immediate6,800,000Less:
      forfeitures
                        
                        
                        (400,000
                        )6,400,000(a) These
      shares vested upon the earlier of (i) the initial public offering of the
      Company's common shares, (ii) the involuntary termination of the employee
      after December 31, 2008 or (iii) upon consent of the Company's Board of
      Directors.
 
 6.
                Related
      Party Transactions
 
 In
connection with the Company’s capital raising activities, the Company had
incurred, as of September 30, 2010, a total of $1.1 million in fees and expenses
payable to Viewpoint and issued, pursuant to the terms of its arrangement with
Viewpoint, 2,200,000 shares of Common Stock and 366,600 warrants to purchase one
and one-half shares of the Company’s Common Stock on the same terms as the
warrants issued in the $2.00 Unit Offering and 521,496 warrants to purchase
shares of the Company’s Common Stock on the same terms as the warrants issued
with the 2009 and 2010 12% Convertible Notes.  At September 30, 2010,
the Company had a balance due Viewpoint of $156,964 recorded in accounts
payable.
 
 7.
                Subsequent
      Events
 
 On May 5,
2010, the Company executed a term sheet with Kodiak Capital Group, LLC
(“Kodiak”) for a $5 million perpetual non-binding cumulative 15% preferred stock
investment.  The investment carries a cumulative preferred dividend
accruing at 15% annually.  The capital will be drawn by the Company
based on a mutually agreed upon working capital schedule.  The
commitment term is for one year.  As of November 15, 2010 the company
was in the process of completing its Preferred Share Agreement with
Kodiak.
 
 During
November 2010, the Company received six month extensions on the $540,000 face
value of the 2009 12% Notes which matured during the third
quarter.  During October and November 2010 the Company granted an
additional 262,500 warrants in consideration for extensions. (see Note
5)
  22




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




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





Overview




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




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




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





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




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


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


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


23


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





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




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




Recent
Developments




GE
Ionics, Inc. Settlement Agreement and Senior Promissory Note




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




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




Joint
Venture with Aqua Verde, LLC




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




Results
of Operations




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




Revenue.No revenuewasgeneratedfor thethree months ended September
30, 2010 and 2009respectively.




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


24




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





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





Revenue. $0 and $34,000 in
revenuewasgeneratedfor thenine months ended September
30, 2010 and 2009respectively.




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




Net
loss.Net loss for theninemonths endedSeptember 30,
2010and 2009
were $8,067,894and $3,663,932,
respectively.




Liquidity
and Capital Resources




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




Operating
Activities




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




Investing
Activities




Our investing activities
resulted in a net cash outflow of $0 for theninemonths endedSeptember 30,
2010compared to
a net cash outflow of $3,387for theninemonths endedSeptember 30, 2009.




Financing
Activities




Our financing activities
resulted in a cash inflow of $624,600for theninemonths endedSeptember 30,
2010and
$972,588for theninemonths endedSeptember 30, 2009, which represents both
issuances of notes payablein 2010 and issuances of
notes payableand sales of equity bythe Company in
2009.


25




Notes
Payable




September
2008 Bridge Note and March 2009 Bridge Note




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





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





CEO
Bridge Note





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





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


26




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





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




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




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





Equity
Issuances




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




Equity
Issuances-Acquiree





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





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


27




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





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





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





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




Stock Based
Compensation





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





Total
Dilutive Securities





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





Going
Concern





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




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




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


28





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




Future
Cash Commitments




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




Off-Balance
Sheet Arrangements





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




Commitments





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





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





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


29




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





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




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




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




Critical
Accounting Policies and Estimates





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





Nature of
operations





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





Use of
estimates





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


30




Property and
depreciation





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





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




Income
taxes





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





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





Concentrations





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





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





Item
3.  Quantitative and Qualitative Disclosures About Market
Risks




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




Item
4.  Controls and Procedures




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


31




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




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




PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings





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





Item
1A.  Risk Factors.





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





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





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





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


32




Item
3.  Defaults upon Senior Securities





None.





Item
4.  Removed and Reserved





Not
applicable.





Item
5.  Other Information





None.





Item
6.  Exhibits





Exhibit No.
              
              Description31.1
              
              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 Principal Financial Officer
      pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




33


SIGNATURES





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





STW
      RESOURCES HOLDING CORP(Registrant)Date: November
      22, 2010
                By:
                /s/ Stanley T
WeinerStanley
      T WeinerPresident
      and Chief Executive Officer (PrincipalExecutive
      and Financial Officer)




34