STW RESOURCES HOLDING CORP. - FORM 8-K/A - EX-99.3

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8-K/A - STW RESOURCES HOLDING CORP.	v179624_8ka.htm

Financial Statements of

STW RESOURCES, INC.

(a Development Stage Company)

As of December 31, 2009 and 2008 and the year ended December 31, 2009, and period from Inception (January 28, 2008) through December 31, 2008 and 2009

STW RESOURCES, INC.

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
BALANCE SHEETS	2
STATEMENTS OF OPERATIONS	3
STATEMENTS OF CASH FLOWS	4
STATEMENTS OF SHAREHOLDERS’ EQUITY	5
NOTES TO FINANCIAL STATEMENTS	8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

STW Resources, Inc.

(A Development Stage Company)

We have audited the accompanying balance sheet of STW Resources, Inc. (the Company) (a development stage company) as of December 31, 2008, and the related statements of operations, shareholders’ equity and cash flows for the period from Inception (January 28, 2008) to December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STW Resources, Inc. as of December 31, 2008 and the results of its operations and its cash flows for the period from Inception (January 28, 2008) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in the development stage, has not attained profitable operations and is dependent upon obtaining adequate financing to fulfill its business activities. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Weaver and Tidwell, L.L.P.

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

November 30, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

STW Resources, Inc.

(A Development Stage Company)

We have audited the accompanying balance sheets of STW Resources, Inc. (the Company) (a Development Stage Company) as of December 31, 2009 and 2008, and the related statements of operations, shareholders’ equity and cash flows for the year end December 31, 2009 and periods from Inception (January 28, 2008) to December 31, 2008 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STW Resources, Inc. as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the year ended December 31, 2009 and periods from Inception (January 28, 2008) to December 31, 2008 and 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Weaver and Tidwell, L.L.P.

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

March 29, 2010

STW RESOURCES, INC.

(A Development Stage Company)

Balance Sheets

	December 31,			December 31,
	2009			2008

Assets

Current assets
Cash and cash equivalents	$	11,621		$	17,639
Other current assets		100,859			52,112
Total current assets		112,480			69,751

Property and equipment, net of accumulated depreciation of $3,812 and $13,640		14,055,034			9,759,939
Total Assets	$	14,167,514		$	9,829,690

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable	$	10,092,547		$	5,465,972
Accrued expenses		151,610			18,332
Notes payable - current, net of $135,843 and $0 of unamortized discount at December 31, 2009 and 2008		1,335,772			235,800
Total current liabilities		11,579,929			5,720,104

Note payable - non-current		279,095			62,181

Commitments and contingencies

Shareholders' equity
Preferred stock, par value $.00001 per share, Authorized 10,000,000 shares, Issued 0 at December 31, 2009 and 100 shares at December 31, 2008		-			-
Common stock, par value $.00001 per share, Authorized 250,000,000 shares, Issued 30,418,099 shares at December 31, 2009, and 23,463,825 at December 31, 2008		304			235
Paid-in capital		9,079,068			6,693,738
Deficit accumulated during the development stage		(6,770,882	)		(2,646,568	)
Total shareholders' equity		2,308,490			4,047,405
Total Liabilities and Shareholders' Equity	$	14,167,514		$	9,829,690

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

STW RESOURCES, INC.

(A Development Stage Company)

Statements of Operations

	Year Ended			Inception (January 28, 2008)
	December 31,			through December 31,
	2009			2008			2009

Revenues	$	34,000		$	-		$	34,000

Cost of Sales		35,355			-			35,355
		(1,355	)		-			(1,355	)

Expenses
General and administrative
Salaries and benefits		1,654,659			1,023,433			2,678,092
Professional fees		873,050			714,865			1,587,915
Stock-based compensation		600,300			233,493			833,793
Travel		76,103			249,398			325,501
Other		327,929			304,574			632,503
Total general and administrative		3,532,041			2,525,763			6,057,804
Operating loss		(3,533,396	)		(2,525,763	)		(6,059,159	)

Other expense
Interest, net		590,918			120,805			711,723
Total other expense		590,918			120,805			711,723

Loss before income taxes		(4,124,314	)		(2,646,568	)		(6,770,882	)
Income taxes		-			-			-
Net loss	$	(4,124,314	)	$	(2,646,568	)	$	(6,770,882	)

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

STW RESOURCES, INC.

(A Development Stage Company)

Statements of Cash Flows

	For the Twelve Months Ended			Inception (January 28, 2008) through
	December 31,			December 31,
	2009			2008			2009

Cash flows from operating activities
Net income (loss)	$	(4,124,314	)	$	(2,646,568	)	$	(6,770,882	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		21,633			13,640			35,273
Write-off of project pilot costs		14,960			-			14,960
Amortization of debt issue costs		415,780			55,100			470,880
Fair value of common shares attached to notes payable		25,314			50,395			75,709
Notes payable issued for deferred compensation		1,123,851			-			1,123,851
Stock-based compensation		600,300			233,493			833,793
Fair value of equity issued for consulting services		402,151			-			402,151
Loss on sale of equipment		11,524			-			11,524
Fair value of common shares issued as a donation		50,000			-			50,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other current assets		29,931			(52,112	)		(22,181	)
Increase in accounts payable and accrued expenses		432,930			629,714			1,062,644
Net cash used in operating activities		(995,940	)		(1,716,338	)		(2,172,278	)

Cash flows from investing activities
Acquisition of property and equipment		(67,887	)		(4,918,989	)		(4,986,876	)
Sale of equipment		64,500			-			64,500
Net cash used in investing activities		(3,387	)		(4,918,989	)		(4,922,376	)

Cash flows from financing activities
Issuance of notes payable		1,240,000			1,410,819			2,650,819
Repayment of notes payable		(94,268	)		(1,112,840	)		(1,207,108	)
Debt issue costs		(245,479	)		(55,100	)		(300,579	)
Equity issuances, net		93,056			6,410,087			6,503,143
Net cash provided by financing activities		993,309			6,652,966			7,646,275

Net increase (decrease) in cash and cash equivalents		(6,018	)		17,639			11,621

Cash at beginning of period		17,639			-			-
Cash at end of period	$	11,621		$	17,639		$	11,621

Supplemental cash flow information:
Cash paid for interest	$	8,323		$	21,080		$	29,403

Non-cash investing and financing activities:
Non-cash capital expenditures	$	4,339,826		$	4,854,590		$	9,194,416

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

STW RESOURCES, INC.

(A Development Stage Company)

Statements of Shareholders' Equity

											Deficit Accumulated
	Preferred Stock				Common Stock				Paid-in		During the
	Shares		Amount		Shares		Amount		Capital		Development Stage			Total

January 28, 2008, equity offering		100	$	-		8,100,000	$	81	$	-	$	-		$	81

April 1, 2008, issuance of common stock in connection with notes payable		-		-		275,000		3		12,235		-			12,238

April 9, 2008, equity offering		-		-		5,980,000		60		266,050		-			266,110

April 14, 2008, unit offering, net		-		-		4,167,500		42		6,143,852		-			6,143,894

June 1, 2008, issuance of common stock in connection with notes payable		-		-		41,325		-		11,157		-			11,157

September 29, 2008, issuance of common stock in connection with note payable		-		-		62,500		1		16,874		-			16,875

December 29, 2008, issuance of common stock in connection with note payable		-		-		37,500		-		10,125		-			10,125

Stock - based compensation		-		-		4,800,000		48		233,445		-			233,493

Net loss		-		-		-		-		-		(2,646,568	)		(2,646,568	)

Total Shareholders' Equity, December 31, 2008		100	$	-		23,463,825	$	235	$	6,693,738	$	(2,646,568	)	$	4,047,405

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

STW RESOURCES, INC.

(A Development Stage Company)

Statements of Shareholders' Equity

( Continued)

April 14, 2008, unit offering follow-on, net	-		-	570,500	6	93,050	-	93,056

January 2, 2009, issuance of common stock in connection with note payable	-		-	12,500	-	3,375	-	3,375

January 6, 2009, issuance of common stock in connection with note payable	-		-	12,500	-	3,375	-	3,375

January 14, 2009, issuance of common stock in connection with note payable	-		-	50,000	-	13,500	-	13,500

January 30, 2009, issuance of common stock in connection with September 29, 2008 note payable	-		-	31,250	-	8,438	-	8,438

February 24, 2009, retirement of preferred shares	(100	)	-	-	-	-	-	-

February 28, 2009, issuance of common stock in connection with September 29, 2008 note payable	-		-	31,250	-	8,438	-	8,438

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

STW RESOURCES, INC.

(A Development Stage Company)

Statements of Shareholders' Equity

( Continued)

March 24, 2009, issuance of common stock in connection with September 29, 2008 note payable	-		-	31,250			-			8,438		-			8,438

March 24, 2009, issuance of common stock in connection with amendment of September 29, 2008 note payable	-		-	200,000			2			53,998		-			54,000

Warrants issued in connection with the 2009 Convertible Note	-		-	-			-			295,572		-			295,572

Warrants issued for consulting services	-		-	-			-			180,651		-			180,651

Shares issued for consulting services	-		-	886,000			9			221,491		-			221,500

Stock -based compensation	-		-	1,950,000			20			600,280		-			600,300

Cancellation of restricted shares	-		-	(400,000	)		(4	)		4		-			-

Shares issued as donation	-		-	200,000			2			49,998		-			50,000

Shares issued to employees in connection with deferred compensation note conversion	-		-	3,379,024			34			844,722		-			844,756

Net loss	-		-	-			-			-		(4,124,314	)		(4,124,314	)

Total Shareholders' Equity, December 31, 2009	-	$	-	30,418,099		$	304		$	9,079,068	$	(6,770,882	)	$	2,308,490

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

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

Organization, Nature of Activities and Basis of Presentation

STW Resources, Inc. (“STW” or the “Company”) is a development stage Nevada corporation formed on January 28, 2008, 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.

Status of Relationship with GE Water & Process Technologies

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

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 December 31, 2009, 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 $1.4 million, through December 31, 2009, totaled $9.3 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.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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

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

On October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW that GE was canceling the Company’s Purchase Order due to STW’s inability to pay the current amounts due. GE Water also demanded a “termination” payment of $750,000. In the same letter, GE Water unilaterally announced it was cancelling the Teaming Agreement citing GE Water’s belief that STW was insolvent. GE Water prefaced its cancellation of the Purchase Order and Teaming Agreement on a failure of GE Water and STW to renegotiate a substitute Teaming Agreement. On October 8, 2009, STW responded to GE Water in writing rejecting GE Water’s unilateral termination of the Purchase Order and Teaming Agreements, among other things including that GE Water had the contractual requirement to arbitrate certain of the disputed matters raised by GE Water’s October 1, 2009 letter. In discussions in March 2010 between STW management and GE Water, GE Water expressed continued interest in working with the Company by providing technical support and a willingness to resolve their differences, pending the results of STW’s merger and capital raised during the first quarter 2010.

Going Concern

The Company from Inception (January 28, 2008) through December 31, 2009, has not had any significant revenues. The Company has no significant operating history as of December 31, 2009, has accumulated losses and negative cash flow from operations since inception and is currently in default of amounts past due to GE Water. From Inception (January 28, 2008) through December 31, 2009, management has raised equity and debt financing to fund operations and to provide working capital. However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

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

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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.

Summary of Significant Accounting Policies

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

As of December 31, 2009, 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).

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

There were no grants of employee options during the period from January 28, 2008 (date of inception) through December 31, 2009. There were no unvested options outstanding as of the date of the Company’s adoption of ASC Topic 718.

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 forecasted discounted 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.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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.

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles,” which has been primarily codified into ASC Topic 105, “Generally Accepted Accounting Standards.” This guidance establishes the FASB Accounting Standards Codification, which officially commenced July 1, 2009, to become the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature excluded from the Codification is considered nonauthoritative. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification does not change U.S. GAAP. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has adopted this standard for the year ending December 31, 2009. The standard has had a minimal effect on the Company’s financial statement disclosures, as all references to authoritative accounting literature are referenced in accordance with the Codification.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was primarily codified into FASB Accounting Standards Codification (ASC, also known collectively as the Codification) Topic 855, “Subsequent Events.” This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, this statement sets forth:

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; and

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

ASC Topic 855 is effective for interim or annual periods ending after June 15, 2009, and is to be applied prospectively. The Company adopted ASC Topic 855 as of June 30, 2009. We evaluated all events or transactions that occurred after December 31, 2009, up through the date these financial statements became available for issue on March 29, 2010. For further discussion about subsequent events, see Note 10 – Subsequent Events.

Property and Equipment

The Company’s property and equipment at December 31, 2009 consists principally of $12.6 million of work-in-progress on the Company’s first Evaporator System from GE Water. Progress payments totaling $4.7 million have been paid-to-date, with a total of $7.9 million outstanding at December 31, 2009, and included in accounts payable. The Company capitalized a total of $150,132 of interest on past-due payments charged by GE Water during the period from Inception (January 28, 2008) through December 31, 2008, and an additional $1.2 million during the period from January 1, 2009 through December 31, 2009, all which is outstanding at December 31, 2009, and included in accounts payable. This represents the total interest capitalized in 2008 and 2009.

The Company recognized total depreciation expense of $13,640 during the period from Inception (January 28, 2008) through December 31, 2008, and an additional $21,633 during the period from January 1, 2009 through December 31, 2009, related to vehicles and furniture and fixtures which carry useful lives ranging from three to five years.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2009, consists principally of $9.3 million related to amounts due on the Company’s first Evaporator System from GE Water, including accrued interest of approximately $1.4 million, as well as various other amounts due primarily to formation costs and capital raising activities.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

Notes Payable

The Company’s notes payable at December 31, 2009 and December 31, 2008, consisted of the following:

	December 31,			December 31,
Name	2009			2008

September 2008 Bridge Note	$	-		$	125,000
CEO Bridge Note		-			75,000
2009 12% Convertible Notes:
Conversion of outstanding bridge notes		727,903			-
Cash issuances		740,000			-
Total 2009 12% Convertible Notes		1,467,903			-

Deferred Compensation Notes		279,095			-
Other Financing		3,712			97,981
Unamortized debt discount		(135,843	)		-
Total Notes Payable		1,614,867			297,981
Less: Current Portion		(1,335,772	)		(235,800	)
Total Long Term Notes Payable	$	279,095		$	62,181

April 2008 Notes

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

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

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

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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.

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

Deferred Compensation Notes

Beginning in February 2009, the Company has 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”).

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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 at that date, 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.

Other Financings

The Company has also entered into various vehicle and insurance financing contracts with amounts outstanding totaling $97,981 as of December 31, 2008. Of this amount, $62,181 was reflected as notes payable – non-current at December 31, 2008, as the original maturity exceeded December 31, 2009. However, the entire balance of the long-term total of $62,181 was repaid in 2009.

The total interest costs incurred during 2009 and 2008 was $1,796,664 and $270,937 which include capitalized interest of $1,205,746 and $150,132 respectively.

Capital Stock

Preferred Stock

The Company has authorized 10,000,000 shares of Preferred Stock. 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 then Chairman and Chief Executive Officer. The Series A Preferred Stock provides voting rights as if each share of Series A Preferred Stock is equal to 80,000 shares of the Company’s Common Stock. The holder of Series A Preferred Stock is entitled to vote together with the holders of the Common Stock on all matters that the Common Stock is entitled to vote on.

Effective February 24, 2009, the Company acquired, and retired, from its former Chairman and Chief Executive Officer, the 100 shares of Series A Preferred Stock then outstanding, in exchange for a commitment by the Company to issue its former Chairman and Chief Executive Officer a warrant to purchase 1.5 million shares of the Company’s Common Stock at $8.00 per share, with a five-year exercise period.

Common Stock

The Company has authorized 250,000,000 shares of Common Stock.

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

On April 9, 2008, the Company issued 5,980,000 shares of Common Stock at $0.0445 per share for total consideration of $266,110.

On April 14, 2008, the Company 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. The Company incurred costs of $0.8 million in issuing the shares, resulting in net proceeds of $6.1 million. 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 January 2009, the Company issued an additional 508,000 Common Shares for investment banking compensation and 62,500 Units under its $2.00 Unit Offering, realizing gross proceeds of $125,000. The Company incurred costs of $31,944, resulting in net proceeds of $93,056.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

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. (See Note 5).

Throughout the year, the company issued 886,000 shares of common Stock which were valued at an aggregate of $221,500, based upon the estimated fair value of the Company’s Common Stock at that date, for consulting services rendered to the Company.

Warrants

In January 2009, the Company issued a warrant to acquire 1,500,000 common shares at an exercise price of $4.00 for five years for professional services for business development consultation. Using the Black Scholes pricing model, with volatility of 100%, a risk-free interest rate of 1.5% and a 0% dividend yield, the warrant was determined to have a fair value of $132,483, with such value recorded as professional fee expense and additional paid-in capital.

Total Dilutive Securities

As of December 31, 2009, the Company had the following dilutive securities to acquire the Company’s Common Stock outstanding:

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

	Number of
	Underlying		Exercise
Security	Common Shares		Price		Term

Warrants associated with the $2.00 Unit Offering		5,844,900	$	3.00	2011 - 2012
Warrants issued for Professional Services		1,500,000	$	4.00	2014
Warrant associated with the January 14, 2009 Bridge Note		480,000	$	3.00	2014
Warrant associated with the acquisition of the Company's Preferred Shares oustanding		1,500,000	$	8.00	2014
Warrants associated with the 2009 12% Convertible Notes		3,288,101	$	3.00	2014
		12,613,001

Stock-Based Compensation

Since Inception (January 28, 2008), the Company issued 6.75 million shares of the Company’s Common Stock to directors, employees and certain consultants. As of December 31, 2009, 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:

	Number of		Fair
	Shares		Value per		Vesting
Date	Issued		Share		Period

April 22, 2008		2,550,000	$	0.0445	Immediate
April 22, 2008		350,000	$	0.0445	six months
May 8, 2008		100,000	$	0.0445	Immediate
May 19, 2008		1,300,000	$	0.0445	Immediate
October 1, 2008		50,000	$	0.27	Immediate
June 1, 2008		250,000	$	0.27	(a)
February 10, 2009		800,000	$	0.27	Immediate
May 31, 2009		200,000	$	0.27	Immediate
June 1, 2009		150,000	$	0.25	Immediate
June 15, 2009		600,000	$	0.25	Immediate
		6,350,000

(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.

During the period from Inception (January 28, 2008) through December 31, 2008, the Company recognized $233,493 in compensation cost associated with the issuance of these shares and recognized an additional $600,300 million during the year ended December 31, 2009. At December 31, 2009, the Company had no remaining compensation cost to be recognized related to the issuances set forth above.

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

Commitments

In April 2008, the Company entered into an Equipment and Services Contract with GE Water with respect to the purchase by the Company of an Evaporator System, along with necessary pre-treatment facilities, capable of handling 500 gallons per minute of oil field fractionation and/or oil field produced waste water. The contract price totaled $14.5 million. The Company has made progress payments totaling $4.7 million, with the balance of the contract price payable upon the attainment of project milestones by GE Water over approximately 18 months. In April 2009, the Company issued a change order to increase the overall processing capacity to approximately one million gallons per day. This change order obligated the Company to additional payments totaling approximately $1.2 million. See Note 1.

Related Party Transactions

In connection with the Company’s issuance of the April 2008 Notes, Viewpoint Securities, LLC (“Viewpoint”), the Company’s financial and capital markets advisor and of which one of its Partners is a member of the Company’s Board of Directors, advanced the Company $100,000 (the “Viewpoint Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension. The Viewpoint Note was repaid in June 2008, along with accrued interest totaling $1,315 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5). In addition, in connection with the issuance of the April 2008 Notes, the Company incurred a placement fee to Viewpoint totaling $55,100.

In connection with the Company’s issuance of the April 2008 Notes, the Company’s then Chief Financial Officer advanced the Company $100,000 (the “CFO Note”) pursuant to the terms of the April 2008 Notes and subsequent April 2008 Notes extension. The CFO Note was repaid in June 2008, along with accrued interest totaling $1,671 and the issuance of 28,750 shares of the Company’s Common Stock (see Note 5).

In connection with the Company’s capital raising activities, the Company had incurred, as of December 31, 2009, a total of $982,787 in fees and expenses payable to Viewpoint and issued, pursuant to the terms of its arrangement with Viewpoint, 1,200,000 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 352,296 warrants to purchase shares of the Company’s Common Stock on the same terms as the warrants issued with the 2009 12% Convertible Notes. At December 31, 2009, the Company had a balance due Viewpoint of $142,787 recorded in accounts payable.

10.

Income Taxes

The Company’s net loss before income taxes totaled $4,124,314 and $2,646,568 for the year ended December 31, 2009 and period from Inception (January 28, 2008) through December 31, 2008, respectively.

The total provision for income taxes, which consist solely of U.S. Federal taxes, consist of the following:

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

			For the Period
	For the		from Inception
	Year Ended		(January 28, 2008) to
	December 31, 2009		December 31, 2008

Current taxes	$	-	$	-

Deferred taxes		-		-

Total	$	-	$	-

A reconciliation of the tax on the Company’s loss for the year before income taxes and total tax expense is shown below:

				For the Period
	For the			from Inception
	Year Ended			(January 28, 2008) to
	December 31, 2009			December 31, 2008

Income tax benefit at U.S. statutory rate	$	(1,443,510	)	$	(926,299	)

Implied interest expense associated with outstanding debt instruments		60,762			14,095

50% limitation of meals and entertainment		1,647			7,959

Increase in valuation allowance		1,381,101			904,245
	$	-		$	-

The components of net deferred tax assets and liabilities recognized are as follows:

	December 31, 2009			December 31, 2008

Deferred noncurrent tax asset:
Net operating loss carryforwards	$	1,381,101		$	930,514
Gross deferred noncurrent tax asset		1,381,101			930,514
Book-tax differences in property basis		-			(26,269	)
Valuation allowance		(1,381,101	)		(904,245	)
Deferred noncurrent tax asset		-			-

Deferred noncurrent tax liability:
Book-tax differences in property basis	$	-		$	-
Deferred noncurrent tax liability	$	-		$	-

Net noncurrent tax asset	$	-		$	-

STW RESOURCES, INC.

NOTES TO FINANCIAL STATEMENTS

11.

Subsequent Events

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 will merge with and into the Company, with the Company continuing as the surviving corporation. WoozyFly, Inc. has filed for Chapter 11 bankruptcy protection and has requested the bankruptcy court approve a plan pursuant to which WoozyFly, through a subsidiary, acquire STW Resources in a one for one exchange of 26,543,075 shares of common stock and securities of WoozyFly for all of the issued and outstanding voting capital stock of the Company, and allow WoozyFly to exit bankruptcy.

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 26,543,075 (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.

Considering that, following the merger, the shareholders of the Company control the majority of our outstanding voting common stock and we 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, we have not recognized any goodwill or other intangible assets in connection with this reverse merger transaction. STW Resources is the surviving and continuing entity and the historical financials following the reverse merger transaction will be those of STW Resources.

In the first quarter of 2010, the Company issued a total of $200,000 face value of its 12% Convertible Notes for cash.

STW RESOURCES HOLDING CORP. - FORM 8-K/A - EX-99.3 - April 1, 2010

Attached files

STW RESOURCES HOLDING CORP. Reports