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 March 31, 2011





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





For the transition period from _____ to _____





STW RESOURCES HOLDING CORP.


(Exact Name of Registrant as Specified in Its Charter)





Nevada

000-51430

20-3678799(State or Other Jurisdiction

of Incorporation or

Organization)

(Commission File No.)

(I.R.S. Employer

Identification No.)





619 West Texas Ave,Suite 126

Midland Texas, 79701

(432-686-7777)(Address of Principal Executive

Offices)

(Registrant’s telephone number)





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)     Yes o           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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x(Do not check if a smaller reporting company)









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


Yes o    No x





As of May 16 , 2011, there were 44,236,849 shares of the Company’s common stock, par value $0.001 per share issued and outstanding.







STWRESOURCES HOLDING CORP.


FORM 10-Q





TABLE OF CONTENTS





PAGEPART IITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
1ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
12ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
19ITEM 4.
CONTROLS AND PROCEDURES
19PART IIITEM 1.
LEGAL PROCEEDINGS
20ITEM 1A.
RISK FACTORS
20ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
20ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
20ITEM 4.
REMOVED AND RESERVED
20ITEM 5.
OTHER INFORMATION
20ITEM 6.
EXHIBITS
20SIGNATURES




-i-
 Table of Contents


PART I — FINANCIAL INFORMATION


Item 1. Financial Statements




STWRESOURCES HOLDING CORP.(A Development Stage Company)Consolidated Balance SheetsMarch 31,


December 31,2011


2010( Unaudited)


( Audited)AssetsCurrent assetsCash and cash equivalents

$
28,317


$
6,696Deferred financing costs


16,334



36,662Deposits


25,425



25,425Other current assets


13,623



24,872Total current assets


83,699



93,655Property and equipment, net of accumulateddepreciation of $7,089 and $6,433


58,770



59,425Total Assets

$
142,469


$
153,080Liabilities and Shareholders' EquityCurrent liabilitiesAccounts payable

$
897,780


$
782,141Accrued expenses


20,591



16,342Accrued interest


481,249



388,081Notes payable - current, net of $95,430 and $95,840 ofunamortized discount, respectively


3,734,068



3,519,110Total current liabilities


5,133,688



4,705,674Note payable - non-current


-



139,548Shareholders' equity (deficit)Preferred stock, par value $.001 per share,Authorized 10,000,000 shares, Issued 0 shares atMarch 31, 2011 and 0 shares at December 31, 2010


-



-Common stock, par value $.001 per share, Authorized100,000,000 shares, Issued 43,836,849 shares atMarch 31, 2011, and 43,836,849 shares at December 31, 2010


43,836



43,836Paid-in capital


11,529,547



11,448,270Deficit accumulated during the development stage


(16,564,602
)


(16,184,248
)Total shareholders' deficit


(4,991,219
)


(4,692,142
)Total Liabilities and Shareholders' Defecit

$
142,469


$
153,080




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





-1-
 Table of Contents




STWRESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)


Inception(January 28, 2008)ThroughMarch 31,

2011


March 31,

2010


March 31,

2011


December 31, 2010Revenues

$
-

$
-

$
34,000


$
34,000Cost of Sales

-


-


35,355



35,355-


-


(1,355
)


(1,355
)ExpensesGeneral and administrativeSalaries and benefits

11,317


12,859


2,770,746



2,759,429Professional fees

133,500


657,296


3,855,538



3,722,038Stock-based compensation

-


112,500


1,146,293



1,146,293Travel

1,582


3,372


347,105



345,523Other

40,378


3,324


814,598



774,220Total general and administrative

186,777


789,351


8,934,280



8,747,503Operating loss

(186,777
)

(789,351
)

(8,935,635
)


(8,748,858
)Other expenseLoss on disposition of asset

-


-


5,329,624



5,329,624Interest, net

193,577


532,557


2,299,343



2,105,766Total other expense

193,577


532,557


7,628,967



7,435,390Loss before income taxes

(380,354
)

(1,321,908
)

(16,564,602
)


(16,184,248
)Income taxes

-


-


-



-Net loss

$
(380,354
)
$
(1,321,908
)
$
(16,564,602
)

$
(16,184,248
)Basic and Diluted Loss Per Share
$
(.01
)
$
(0.04
)Number of Common Shares used in Basic and Diluted Loss Per share

43,836,849


32,501,487




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





-2-
 Table of Contents




STWRESOURCES HOLDING CORP.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)


Inception(January 28, 2008)throughMarch 31,


March 31,


March 31,2011


2010


2011Cash flows from operating activitiesNet (loss)

$
(380,354
)

$
(1,321,908
)


(16,564,602
)Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation


655



655



38,550Write-off of project pilot costs


-



-



14,960Amortization of debt issue costs


102,015



116,553



945,476Fair value of common shares attached to notes payable


-



-



75,709Notes payable issued for deferred compensation


-



-



1,123,851Stock-based compensation


-



112,500



1,146,293Fair value of equity issued for consulting services


-



560,416



2,019,339Loss on disposition of equipment


-



-



5,341,148Fair value of common shares issued as a donation


-



-



50,000Changes in operating assets and liabilities:(Increase) decrease in prepaid expenses and other






-current assets


11,249



(1,266
)


(49,173
)Increase in accounts payable and accrued expenses


213,056



336,727



2,281,467Net cash used in operating activities


(53,379
)


(196,323
)


(3,576,982
)Cash flows from investing activitiesAcquisition of property and equipment


-



-



(4,986,876
)Sale of equipment


-



-



64,500Net cash used in investing activities


-



-



(4,922,376
)Cash flows from financing activitiesIssuance of notes payable


75,000



225,000



3,435,019Repayment of notes payable


-



-



(1,308,808
)Debt issue costs


-



(27,000
)


(385,179
)Equity issuances, net


-



-



6,786,643Net cash provided by financing activities


75,000



198,000



8,527,675Net increase (decrease) in cash and cash equivalents


21,621



1,677



28,317Cash at beginning of period


6,696



11,621



-Cash at end of period

$
28,317


$
13,298


$
28,317Supplemental cash flow information:Cash paid for interest

$
-


$
-


$
35,320Non-cash investing and financing activities:Non-cash capital expenditures

$
-


$
-



13,534,242
  The accompanying notes are an integral part of these unaudited consolidated financial statements.


-3-
 Table of Contents




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, is 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 were 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, Inc. ("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 Second 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 were 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, STW Resources merged with and into an acquisition subsidiary, 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.





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 STW Resources control the majority of our outstanding voting common stock of the Company 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.




-4-
 Table of Contents


STW Resources Holding Corp. is the surviving and continuing entity and the historical financials following the reverse merger transaction are those of STW Resources.   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.


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.




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 related to substantial doubt about the Company's ability to continue.  The Company from Inception (January 28, 2008) through March 31, 2011, has not had any significant revenues.  The Company has no significant operating history as of March 31, 2011, has accumulated losses of $16.6 million and negative cash flow from operations of $3.6 million since inception. From Inception (January 28, 2008) through March 31, 2011, management has raised equity and debt financing of $10.2 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 consolidated 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.





Basis of Presentation




The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.  The accompanying consolidated financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation.  All such adjustments are of normal recurring nature.  Certain reclassifications have been made to prior periods presented to conform with current period presentation.





Principles of Consolidation





These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, STW Resources, Inc. Intercompany transactions and balances have been eliminated upon consolidation.




-5-
 Table of Contents


Use of Estimates
 
 The preparation of consolidated 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 consolidated 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 Company accounts for stock-based compensation under the fair value recognition provisions of the Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 718 “Compensation-Stock Compensation.”





There were no grants of employee stock options during the period from January 28, 2008 (date of inception) through March 31, 2011.




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 the quarters ended March 31, 2011 and 2010, no potentially dilutive securities were included in the calculation of diluted earnings per share as their impact would have been anti-dilutive.





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.




-6-
 Table of Contents


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.




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




2.
Property and Equipment





For the three months ended March 31, 2011 and 2010, the Company recognized total depreciation expense of $655 related to computer equipment, vehicles and furniture and fixtures which carry useful lives ranging from three to five years.





As discussed in Note 1, on August 31, 2010 the Company entered into a settlement agreement with GE Water to terminate the purchase order and related teaming agreements to construct a water reclamation unit.  As of March 31, 2011 and December 31, 2010, the only balance recorded related to the water reclamation unit was the note payable to GE Water in the amount of $1,302,500, see Note 4.




3.
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 March 31, 2011, 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 consolidated financial statements.


-7-
 Table of Contents




4.
Notes Payable





The Company’s notes payable at March 31, 2011 and December 31, 2010, consisted of the following:




March 31,


December 31,Name

2011


201012% 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



705,000Total  12% Convertible Notes


2,172,903



2,172,903GE Note


1,302,500



1,302,500Deferred Compensation Notes


279,095



279,095Other Financing


75,000



-Unamortized debt discount


(95,430
)


(95,840
)Total Notes Payable


3,734,068



3,658,658Less: Current Portion


(3,734,068
)


(3,519,110
)Total Long Term Notes Payable

$
-


$
139,548
  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.




-8-
 Table of Contents





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.




January 2009 Bridge Notes




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





January 14, 2009 Bridge Note




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




2009 12% Convertible Notes




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




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 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.




-9-
 Table of Contents




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 year ended December 31, 2010, $1,467,903 face value of these notes matured.   The Company received six month extensions for these notes. During the year ended December 31, 2010 the Company granted an additional 706,451 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. During the three months ended March 31, 2011, the Company granted an additional 682,701 warrants in consideration for additional three and six month extensions on these notes.




Using the Black Scholes pricing model, with volatility of 0% to 209%,  a risk-free interest rate ranging from 0.81% to 1.37%, and a 0% dividend yield, the warrants were determined to have a fair value of $62,626 for the warrants issued during 2010 and $103,089, for the warrants issued as of March 31, 2011, 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.




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 December  31, 2010, the Company had issued a total of $705,000 face value of its 12% Convertible Notes for cash.




In connection with the issuance of the 2010 12% Convertible Notes, the Company had issued 1,410,000 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 ranging from 0.81% to 1.65%, 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 of 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.  Pursuant to the note agreements, monthly installment payments were to begin on January 1, 2011.  As of March 31, 2011 the Company was in arrears $48,843 for the monthly installment payments.




-10-
 Table of Contents


GE Financing




On August 31, 2010, the Company entered into a Settlement Agreement pursuant to which GE Water 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 Water under the Purchase Order, the Company shall pay GE Water $1,400,000 pursuant to the GE 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 GE Note, the Company has thirteen months to pay off the GE Note plus all accrued interest thereon.  In addition, upon the consummation of certain debt or equity financings following the execution of the GE Note, the Company shall pay GE Water thirty percent (30%) of the gross proceeds of any equity investments in or loans to the Company or any affiliated entity until the GE Note is paid in full, including all accrued interest thereon. In December 2010 the Company made a principal payment in the amount of $97,500.  (See Note 1)




Other Financings




On March 17th, 2011, the Company entered into a note payable with an unaccredited investor for issuance of a 10% promissory note, in the principle amount of $75,000.  The notes mature in 90 days with interest due at maturity.  Interest accrues at 10% per annum.




For the three months ended March 31, 2011 the total interest costs incurred were $16,861.  There was no interest capitalized in 2011 or 2010.




5.
Related Party Transactions 
 Viewpoint is an advisor to the Company that provides investment banking and related services to the Company. In connection with the Company’s capital raising activities, the Company had incurred, as of March 31, 2010, a total of $1,020,287 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 406,296 warrants to purchase shares of the Company’s Common Stock on the same terms as the warrants issued with the 2009 and 2010 12% Convertible Notes.
  During the three months ended March 31, 2011, the Company incurred $22,500 in fees and expenses payable to Viewpoint, pursuant to the terms of its arrangement with Viewpoint.
  At March 31, 2011 and December 31, 2010, the Company had a balance due to Viewpoint of $161,727 and $139,227 respectively, recorded in accounts payable.




6.
Subsequent Events





On April 17, 2011 the Company entered into a binding letter of intent (the “LOI”) to purchase a group of three privately held limited liability companies (the “Transaction”).   The Transaction currently contemplates that the acquisition will be comprised of two different parts: (a) an asset purchase of JNC Energy Systems, LLC, a Texas limited liability company (“JNC”) and (b) a purchase of membership interests of Green Line Power LLC, a Texas limited liability company (“GLP”) and TexRep7, LLC, a Delaware limited liability company, d/b/a/ Saturn Power (“REP” and together with JNC and GLP, the “Power Co”).  In connection with the acquisition of JNC, the Company has agreed to pay, at closing of the Transaction, JNC’s outstanding loan with West Texas State Bank.




The purchase price to be paid by the Company for Power Co will be paid as follows: $450,000 in cash, 3,000,000 shares of the Company’s common stock, and a note in the aggregate principal amount of $90,000, payable 13 months from the date of issuance, accruing simple interest at 12 month LIBOR at closing plus 2%, and payable at maturity.




The Transaction is subject to the execution of definitive agreements and will be contingent on a number of customary closing conditions, including the Company’s securing adequate financing of at least $1.3 million, completion of satisfactory due diligence and financial audits, and securing various required consents and approvals.




GLP and REP have contracts with ERCOT (grid operator & manages the deregulated industry) and ONCOR (regulated electric distribution and transmission), respectively. The acquisition of JNC includes all generation assets and know-how related to the manufacture of its generator units and their installation / interconnection with the grid as well as contracts with producers to provide fuel and space for the JNC generators at the producer's wellheads or the location necessary to perform operations.






-11-
 Table of Contents





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 term sheet expired on May 5, 2011, the Company does not anticipate renewing this term sheet.




Item2.
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. and its subsidiaries ("we", "us", "our", or the “Company”) consolidated audited 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-K 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 included herein,  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 17, 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.  Pursuant to the Merger Agreement, STW Resources was merged into the Acquisition Sub resulting in an exchange of all of the issued and outstanding shares of STW Resources for shares of the Company on a one for one basis. At such time, STW Resources became a wholly owned subsidiary of the Company.





On February 9, 2010, the Court entered an order confirming the Second 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 were 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, 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.  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.




-12-
 Table of Contents




Considering that, following the merger, the shareholders of STW Resources control the majority of our outstanding voting common stock and we effectively succeeded our otherwise minimal operations to those that are theirs.  STW Resources 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 STW Resources securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, we have not recognized any goodwill or other intangible assets in connection with this reverse merger transaction. STW Resources is the surviving and continuing entities and the historical financials following the reverse merger transaction will be those of STW Resources.  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 Resources 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.
  Recent Developments





On April 17, 2011, the Company entered into a binding letter of intent (the “LOI”) to purchase a group of three privately held limited liability companies (the “Transaction”) owned by Clayton Fowler (“Fowler”), Lee Maddox (“Maddox”) and James R. Phillips (“Phillips” and collectively with Fowler and Maddox, the “Member Owners”).  The Transaction currently contemplates that the acquisition will be comprised of two different parts: (a) an asset purchase of JNC Energy Systems, LLC, a Texas limited liability company (“JNC”) and (b) a purchase of membership interests of Green Line Power LLC, a Texas limited liability company (“GLP”) and TexRep7, LLC, a Delaware limited liability company , d/b/a/ Saturn Power (“REP” and together with JNC and GLP, the “Power Co”).  In connection with the acquisition of JNC, the Company has agreed to pay, at closing of the Transaction, JNC’s outstanding loan with West Texas State Bank.




The purchase price to be paid by the Company for Power Co will be paid as follows: $450,000 in cash, 3,000,000 shares of the Company’s common stock, and a note in the aggregate principal amount of $90,000, payable 13 months from the date of issuance, accruing simple interest at 12 month LIBOR at closing plus 2%, and  payable at maturity.




At closing of the Transaction, Power Co's Member Owners will have the ability to nominate two (2) additional members to the Company’s Board of Directors, subject to approval by the Company’s board of directors.  Furthermore, upon closing of the Transaction, Clayton Fowler and Lee Maddox will join the Company’s management team.




The Transaction is subject to the execution of definitive agreements and will be contingent on a number of customary closing conditions, including the Company’s securing adequate financing of at least $1.3 million, completion of satisfactory due diligence and financial audits, and securing various required consents and approvals. Both the Company’s board of directors and Power Co’s members have approved the transaction and the Company and Power Co have begun the due diligence process and to draft and negotiate the definitive agreements.  The parties intend to use commercially reasonable efforts to close the transaction in the second quarter of 2011 however there can be no assurance that definitive agreement with respect to the proposed acquisition will be reached on such terms, or at all.




GLP and REP have contracts with ERCOT (grid operator & manages the deregulated industry) and ONCOR (regulated electric distribution and transmission), respectively. The acquisition of JNC includes all generation assets and know-how related to the manufacture of its generator units and their installation / interconnection with the grid as well as contracts with producers to provide fuel and space for the JNC generators at the producer's wellheads or the location necessary to perform operations.




Results of Operations





Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010





Revenue





The Company did not generate revenue for the three months ended March 31, 2011 and 2010.




-13-
 Table of Contents





Expenses
 
 Our expenses for the three months ended March 31, 2011 were $380,354, and consisted of payroll and payroll taxes ($11,317), legal and professional fees ($133,500), interest expense ($193,577), and ($41,960)  in other administrative expenses including travel to the prospective sites. Our expenses for the three months ended March 31, 2010 were $1,321,908, and consisted of payroll and payroll taxes ($12,859), legal and professional fees ($657,296), stock based compensation ($112,500), interest expense ($532,557), and ($6,696)  in other administrative expenses including travel to the prospective sites.  The reason for the decrease in comparing the three months ended March 31, 2011 to the corresponding period for 2010 was mainly due to the decrease in interest expense on the GE evaporator as a result of the settlement, and a decrease in professional fees which occurred last year in part as a result of  the Company becoming public.




Net loss





Net loss for the three months ended March 31, 2011 and 2010 was $380,354 and $1,321,908, respectively. The reason for the decrease  in the three months ended March 31, 2011 to the corresponding period for 2010 was mainly due to the decrease in interest expense on the GE evaporator as a result of the settlement, and a decrease in professional fees which occurred last year in part as a result of  the Company becoming public.





Liquidity and Capital Resources





As of March 31, 2011, we had current assets of $83,699 including cash of $28,317, and current liabilities of $5,133,688.  As of December 31, 2010, we had current assets of $93,655 including cash of $6,696, and current liabilities of $4,705,674.





Operating Activities





Our operating activities from continuing operations resulted in a net cash used by operations of $53,379 for the three months ended March 31, 2011 compared to net cash used by operations of $196,323 for the three months ended March 31, 2010.  The net cash used by operations for the three months ended March 31, 2011 reflects a net loss of $380,354 offset by depreciation of $655, amortization of debt issue costs of $102,015,  accounts payable and other accrued expenses of $213,056 and other minor factors.  The net cash used by operations for the three months ended March 31, 2010 reflects a net loss of $1,321,908 offset by depreciation of $655, amortization of debt issue costs of $116,553, stock based compensation of $112,500 the fair value of equity issued for services of $560,416,  accounts payable and other accrued expenses of $336,727 and other minor factors.





Investing Activities





Our investing activities were $0 for the three months ended  March 31, 2011 and March 31, 2010.





Financing Activities





Our financing activities resulted in a cash inflow of $75,000 for the three months ended March 31, 2011 and $198,000 for the three months ended March 31, 2010, which represents issuances of notes payable.





Going Concern





The Company from Inception (January 28, 2008) through March 31, 2011, has not had any significant revenues.  The Company has no significant operating history as of March 31, 2011, has accumulated losses of $16.6 million and negative cash flow from operations of $3.6 million since inception. From Inception (January 28, 2008) through March 31, 2011, management has raised net equity and debt financing of $10.2 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.




-14-
 Table of Contents




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 consolidated 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.


Notes Payable





In January 2009 the Company 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.





In March 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 2008 September Bridge Note and advancing an additional $50,000.





In April 2009 the Company commenced an offering of its 12% Convertible Notes (“2009 12% Convertible Notes”).  The convertible notes bear interest at 12% and are convertible at the option of the shareholder into shares of the Company’s common stock.  Through December 31, 2009 the Company had issued a total of $740,000 face value of its 2009 12% Convertible Notes for cash.





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, 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, and were issued $279,095 principal amount 10% notes maturing in 36 months ( the “Deferred Compensation Notes”).  The forgiveness of the $323,735 was recorded as a reduction of salary expense.





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 December 31, 2010, the Company had issued a total of $705,000 face value of its 12% Convertible Notes for cash.





In connection with the issuance of the 2010 12% Convertible Notes, the Company had issued 1,410,000 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 ranging from 0.81% to 1.65% 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.





Equity Issuances





On January 28, 2008, the Company issued 8,100,000 shares of Common Stock at $0.0001 per share for total consideration of $81.





In April 2008, the Company designated the Series A Preferred Stock, with a par value of $0.0001 per share, and authorized the issuance of 100 shares to the Company’s Chairman and Chief Executive Officer.  In addition, the Company issued 5,980,000 shares of Common Stock at $0.0445 per share for total consideration of $266,110.   The Company then commenced a unit offering (the “$2.00 Unit Offering”) whereby each unit consisted of one share of the Company’s Common Stock and a warrant to acquire one and one-half share of the Company’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.  As of December 31, 2008, the Company had sold an aggregate of 3,467,500 units for gross proceeds of $6.9 million.




-15-
 Table of Contents


The Company 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 the Company’s Common Stock at that date.
 
 In connection with the April 2008 Notes, the Company issued a total of 275,000 shares of Common Stock which 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.  Upon the extension of the April 2008 Notes in June 2008, the Company 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, the Company 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 the Company’s Common Stock at that date.
 
 In connection with the CEO Bridge Note, the Company 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 the Company’s Common Stock at that date.


On September 30, 2009, the Company issued 200,000 shares of common stock as a donation to a private foundation, which were valued at an aggregated $50,000 based upon the estimated fair market value of the company’s stock at that date.





On December 31, 2009, the Company issued 3,379,024 shares of common stock in connection with the Employee Deferred Compensation Convertible Notes.





On December 8, 2010, the  Company entered into a subscription agreement with accredited investors pursuant to which the Company sold 1,300,000 units (each a “Unit” and collectively, the “Units”), each Unit consisting of one share of our common stock, par value $0.001 per share (the “Common Stock”) and a warrant to purchase one share of our Common Stock (each a “Warrant” and collectively, the “Warrants”) for total aggregate consideration of $325,000.  The Warrants shall be exercisable for a period of two years from the date of issuance at an initial exercise price of $0.50.





Stock Based Compensation





Since Inception (January 28, 2008), the Company issued 7.6 million shares of the Company’s Common Stock to directors, employees and certain consultants.  As of March 31, 2011, 400,000 of these shares have been forfeited.   During the period from Inception (January 28, 2008) through March 31, 2011, the Company recognized $1,146,293 in compensation cost associated with the issuance of these shares.  For the three months ended March 31, 2011 and 2010 the Company recognized compensation expense of $0 and $112,500 respectively.  At March 31, 2011, the Company had no remaining compensation cost to be recognized related to these issuances.





Warrants





As of March 31, 2011, the Company had 17,281,353 warrants outstanding to acquire the Company’s Common Stock.  As of  March 31, 2010 the Company had 13,521,733 warrants outstanding to acquire the Company’s Common Stock.





Presently, due to the lack of revenue we are not able to meet our operating and capital expenses. The success of our ability to continue as a going concern is dependent upon successful permitting of our sites, obtaining customers for water reclamation services, and maintaining a break even or profitable level of operations. We have incurred operating losses since inception, and this is likely to continue through the third quarter of 2011.





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





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




-16-
 Table of Contents





Credit Facility
 
 Presently we have no revolving Credit Facility established.  If needed, it will be necessary to establish a line of credit and it will need to be on favorable terms.
 
 Off-Balance Sheet Arrangements
 
 The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.




Contractual Obligations and Commitments





The following table is a summary of contractual cash obligations for the periods indicated that existed as of March 31, 2011, and is based on information appearing in the notes to Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q:





Total

Less than

1 Year
1-2 Years
3-5 Years
More than

5 Years12% Convertible Notes

$
2,077,473


$
2,077,473

$
-
$
-
$
-GE Note


1,302,500



1,302,500


-

-

-Deferred Compensation Note


279,095



279,095


-

-

-Other Financing


75,000



75,000


-

-

-Total obligations

$
3,734,068


$
3,734,068

$
-
$
-
$
-





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 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.  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.




-17-
 Table of Contents




Principles of Consolidation
 
 The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany balances and transactions.
  Use of Estimates
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.




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.
  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.




-18-
 Table of Contents


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 March 31, 2011.  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 the three months ended March 31, 2011 and 2010, no potentially dilutive securities were included in the calculation of diluted earnings per share as their impact would have been anti-dilutive.
  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.


-19-
 Table of Contents


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.
  Item3.  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.





Item4.  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.





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 March 31, 2011, 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 March 31, 2011, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




-20-
 Table of Contents





PARTII – 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





None.





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


-21-
 Table of Contents




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: May 17, 2011
By:
/s/ Stanley T. WeinerStanley T. WeinerPresident and Chief Executive Officer

(Principal Executive and Financial Officer)