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EX-32.1 - EXHIBIT 32.1 - STW RESOURCES HOLDING CORP.ex32-1.htm



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

For the transition period from _____ to _____

STW RESOURCES HOLDING CORP.
(Exact Name of Registrant as Specified in Its Charter)

Nevada
000-51430
20-3678799
(State or Other Jurisdiction
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  x          No o

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

Large accelerated filer o
Accelerated filer o   
Non-accelerated filer o
Smaller reporting company 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 September 22, 2011, there were 44,636,849 shares of the Company’s common stock, par value $0.001 per share issued and outstanding.

 
 
STW RESOURCES HOLDING CORP.
FORM 10-Q
 
TABLE OF CONTENTS
 
 
 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
 
STW RESOURCES HOLDING CORP.
           
(A Development Stage Company)
           
Consolidated Balance Sheets
           
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
( Unaudited)
   
( Audited)
 
Assets
           
             
Current assets
           
Cash and cash equivalents
  $ 4,889     $ 6,696  
Deferred financing costs
    4,196       36,662  
Deposits     425       25,425  
Other current assets
    14,035       24,872  
Total current assets
    23,545       93,655  
                 
Property and equipment, net of accumulated depreciation of $7,548 and $6,433
    58,310       59,425  
                 
Total Assets
  $ 81,855     $ 153,080  
                 
Liabilities and Shareholders' Equity (Deficit)
               
                 
 Current liabilities
               
Accounts payable
  $ 966,923     $ 782,141  
Accrued expenses
    18,341       16,342  
Accrued interest
    588,073       388,081  
Notes payable - current, net of $50,252 and $95,840 of unamortized discount, respectively
    3,824,846       3,519,110  
Total current liabilities
    5,398,183       4,705,674  
                 
Note payable - non-current
    -       139,548  
                 
Shareholders' equity (deficit)
               
Preferred stock, par value $.001 per share, Authorized 10,000,000 shares, Issued 0 at June 30, 2011 and 0 shares at December 31, 2010
    -       -  
Common stock, par value $.001 per share, Authorized 100,000,000 shares, Issued 44,236,849 shares at June 30, 2011, and 43,836,849 at December 31, 2010
    44,241       43,836  
Paid-in capital
    11,617,309       11,448,270  
Deficit accumulated during the development stage
    (16,977,878 )     (16,184,248 )
Total shareholders' deficit
    (5,316,328 )     (4,692,142 )
                 
Total Liabilities and Shareholders' Deficit
  $ 81,855     $ 153,080  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
STW RESOURCES HOLDING CORP.
(A Development Stage Company)
Consolidated Statements of Operations
     
Three Months Ended June 30,
   
Three Months Ended June 30,
   
Six Months Ended June 30,
   
Six Months Ended June 30,
    Inception (January 28, 2008) through June 30,  
        2011       2010       2011       2010       2011  
                                           
Revenues
  $ -     $ -     $ -     $ -     $ 34,000  
                                           
Cost of Sales
    -       -       -       -       35,355  
        -       -       -       -       (1,355 )
                                           
Expenses
                                       
 
General and administrative
                                       
 
Salaries and benefits
    -       22,599       11,317       35,458       2,770,746  
 
Professional fees
    169,809       255,898       303,309       913,193       4,025,347  
 
Stock-based compensation
    -       -       -       112,500       1,146,293  
 
Travel
    -       5,238       1,582       8,610       347,105  
 
Other
    45,204       36,326       85,582       39,650       859,802  
 
Total general and administrative
    215,013       320,061       401,790       1,109,411       9,149,293  
Operating loss
    (215,013 )     (320,061 )     (401,790 )     (1,109,411 )     (9,150,648 )
                                           
Other expense
                                       
 
Loss on disposition of asset
    -       -       -       -       5,329,624  
 
Interest, net
    198,263       526,722       391,840       1,059,278       2,497,606  
 
Total other expense
    198,263       526,722       391,840       1,059,278       7,827,230  
                                           
Loss before income taxes
    (413,276 )     (846,783 )     (793,630 )     (2,168,689 )     (16,977,878 )
                                           
Income taxes
    -       -       -       -       -  
                                           
Net loss
  $ (413,276 )   $ (846,783 )   $ (793,630 )   $ (2,168,689 )   $ (16,977,878 )
                                           
Basic and Diluted Loss Per Share
  $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.06 )        
 
                                       
Number of Common Shares used in
Basic and Diluted Loss Per share
    44,067,960       34,219,154       43,952,405       34,219,154          
                                           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
 
-2-

 
STW RESOURCES HOLDING CORP.
                 
(A Development Stage Company)
                 
Consolidated Statements of Cash Flows
                 
(Unaudited)
                 
   
For the
Six Months Ended
   
For the
Six Months Ended
   
Inception
(January 28, 2008)
through
 
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
 
                   
Cash flows from operating activities
                 
Net (loss)
  $ (793,630 )   $ (2,168,689 )   $ (16,977,878 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation
    1,115       1,310       39,010  
Write-off of project pilot costs
    -       -       14,960  
Amortization of debt issue costs
    195,498       219,377       1,038,959  
Fair value of common shares attached to notes payable
    -       -       75,709  
Notes payable issued for deferred compensation
    -       -       1,123,851  
Stock-based compensation
    -       112,500       1,146,293  
Fair value of equity issued for consulting services
    52,000       641,665       2,071,339  
Loss on disposition of equipment
    -       -       5,341,148  
Fair value of common shares issued as a donation
    -       -       50,000  
Changes in operating assets and liabilities:
                       
(Increase) decrease in prepaid expenses and other current assets
    35,837       (34,514 )     (24,585 )
Increase in accounts payable and accrued expenses
    386,773       884,737       2,455,184  
Net cash used in operating activities
    (122,407 )     (343,614 )     (3,646,010 )
                         
Cash flows from investing activities
                       
Acquisition of property and equipment
    -       -       (4,986,876 )
Sale of equipment
    -       -       64,500  
Net cash used in investing activities
    -       -       (4,922,376 )
                         
Cash flows from financing activities
                       
Issuance of notes payable
    120,600       379,200       3,480,619  
Repayment of notes payable
    -       -       (1,308,808 )
Debt issue costs
    -       (45,000 )     (385,179 )
Equity issuances, net
    -       -       6,786,643  
Net cash provided by financing activities
    120,600       334,200       8,573,275  
                         
Net increase (decrease) in cash and cash equivalents
    (1,807 )     (9,414 )     4,889  
                         
Cash at beginning of period
    6,696       11,621       -  
Cash at end of period
  $ 4,889     $ 2,207     $ 4,889  
                         
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
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.

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 June 30, 2011, has not had any significant revenues.  The Company has no significant operating history as of June 30, 2011, has accumulated losses of $16.9 million and negative cash flow from operations of $3.6 million since inception. From Inception (January 28, 2008) through June 30, 2011, management has raised net equity and debt financing of $10.3 million to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

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

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

The accompanying 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.

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 June 30, 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 three and six months periods ended June 30, 2011 and 2010, no potentially dilutive securities were included in the calculation of diluted loss 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.

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 six months ended June 30, 2011 and 2010, the Company recognized total depreciation expense of $1,115 and $1,310 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 June 30, 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 June 30, 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.


4.  
Notes Payable

The Company’s notes payable at June 30, 2011 and December 31, 2010, consisted of the following:

   
June 30,
   
December 31,
 
Name
 
2011
   
2010
 
             
 12% Convertible Notes:
           
Conversion of outstanding bridge notes
    727,903       727,903  
Cash issuances of 2009 Notes
    740,000       740,000  
Cash issuances of 2010 Notes
    705,000       705,000  
    Total  12% Convertible Notes
    2,172,903       2,172,903  
                 
GE Note
    1,302,500       1,302,500  
Deferred Compensation Notes
    279,095       279,095  
                 
Other Financing
    120,600       -  
                 
Unamortized debt discount
    (50,252 )     (95,840 )
                 
   Total Notes Payable
    3,824,846       3,658,658  
Less: Current Portion
    (3,824,846 )     (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.

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.

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 six months ended June 30, 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 of  0.81% , 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 June 30, 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.

During the six months ended June 30, 2011, $225,000 face value of these notes matured.  The Company received six month extensions for these notes.  During the six months ended June 30, 2011, the Company granted an additional 112,500 warrants in consideration for additional six month extensions on these notes.  Using the Black Scholes pricing model, with a volatility of 254%, a risk free interest rate of 0.94% and a 0% dividend yield, the warrants were determined to have a fair value of $14,351, 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 June 30, 2011 the Company was in arrears $118,615 for the monthly installment payments.

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 principal amount of $75,000.  The note matures in 90 days with interest due at maturity.  Interest accrues at 10% per annum.
 
On May 11th, 2011, the Company entered into a note payable with an unaccredited investor for issuance of a promissory note, in the principal amount of $50,000.  The note matures in 60 days.  The note carried an interest expense of $600 and financing fees of $4,400.

For the six months ended June 30, 2011 and 2010 the total interest costs incurred were $391,840 and $1,059,278.  There was no interest capitalized in 2011 or 2010.

For debt that has matured as of June 30, 2011 or will mature in the short term, the Company is working with the debt holders to extend or come to an agreeable remedy.

5.  
Capital Stock

For the six months ended June 30, 2011, the company issued 400,000 shares of common stock which were valued at an aggregate of $52,000, based upon the estimated fair value of the Company’s common stock at that date, for consulting services rendered to the Company.
 
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, and the Company does not anticipate renewing this term sheet.  As a result, the $25,000 deposit paid to Kodiak upon executing the term sheet was expensed during the quarter ended June 30, 2011 and is included in other expenses.

 
Total Dilutive Securities
 
As of June 30, 2011, the Company had the following dilutive securities to acquire the Company’s Common Stock outstanding:
 
Security
 
Number of Underlying Common Shares
   
Exercise Price
   
Term
 
Warrants associated with the $2.00 Unit Offering
    1,948,300     $ 0.30       2013  
                         
Warrants associated with the $2.00 Unit Offering
    1,948,300     $ 0.60       2013  
                         
Warrants associated with the $2.00 Unit Offering
    1,948,300     $ 1.20       2013  
                         
Warrants issued for Professional Services
    1,500,000     $ 4.00       2014  
                         
Warrants associated with the January 14, 2009 Bridge Note
    480,000     $ 3.00       2014  
                         
Warrants associated with the acquisition of the Company's Preferred Shares oustanding
    1,500,000     $ 8.00       2014  
                         
Warrants associated with the 12% Convertible Notes
    6,368,953     $ 3.00       2014-2015  
                         
Convertible common stock associatedwith 2009 12% notes
    7,344,660     $ 0.25       2010-2011  
                         
Convertible common stock associated with 2010 12% notes
    3,186,733     $ 0.25       2010-2011  
                         
Warrants associated with the 2010  Unit Offering
    1,430,000     $ 0.50       2012  
                         
      27,655,246                  
 
In July of 2011, the Company re-set the exercise prices for the warrants associated with the $2.00 unit offering from $3.00 /$5.00/$8.00 to $0.30/$0.60/$1.20, respectively, and the Company extended the termination dates by two years.  These changes are reflected in the table above.

 
6.  
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  June 30, 2011, a total of $1,163,810 in fees and expenses payable to Viewpoint and issued, pursuant to the terms of its arrangement with Viewpoint, 3,200,000 shares of Common Stock and 366,600 warrants to purchase one and one-half shares of the Company’s Common Stock on the same terms as the warrants issued in the $2.00 Unit Offering and 521,496 warrants to purchase shares of the Company’s Common Stock on the same terms as the warrants issued with the 2009 and 2010 12% Convertible Notes.  
 
During the six months ended June 30, 2011, the Company incurred $45,000 in fees and expenses payable to Viewpoint, pursuant to the terms of its arrangement with Viewpoint.
 
At June 30, 2011 and December 31, 2010, the Company had a balance due to Viewpoint of $184,227 and $139,227 respectively, recorded in accounts payable.
 
7.  
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.  As of June 30, 2011 the terms of the definitive agreements are in process.
 
On September 15, 2011 the company received short term bridge financing in the amount of $50,000.   The terms of this financing are pending.

During the 3rd quarter, the Company issued an additional 400,000 shares to a service provider in exchange for service rendered until December 31, 2011.

 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following information should be read in conjunction with STW Resources Holding Corp. 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-Q that does not consist of historical facts, are "forward-looking statements."  Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance.  The statements involve factors, risks and uncertainties including those discussed in the “Risk Factors” section 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, except as otherwise required by law.
 
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.

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 third 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.
 
The acquisition will allow the company to add an operation with a pre-proven, revenue producing business model.  In addition, it provides significant cross-marketing opportunities, as the generation business requires calls upon oil and gas producers for purchase of their stranded gas.  Those same producers are also good prospects for the Company's water reclamation and treatment services.

Results of Operations

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
 
Revenue
 
The Company did not generate revenue for the three months ended June 30, 2011 and 2010.

Expenses
 
Our expenses for the three months ended June 30, 2011 were $413,276, and consisted of  legal and professional fees ($169,809), interest expense ($198,263), and ($45,204)  in other administrative expenses. Our expenses for the three months ended June 30, 2010 were $846,783, and consisted of payroll and payroll taxes ($22,599), legal and professional fees ($255,898), interest expense ($526,722), and ($41,564)  in other administrative expenses including travel to the prospective sites.  The reason for the decrease in comparing the three months ended June 30, 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.
 
Net loss
 
Net loss for the three months ended June 30, 2011 and 2010 was $413,276 and $846,783, respectively. The reason for the decrease in the three months ended June 30, 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.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
 
Revenue
 
The Company did not generate revenue for the six months ended June 30, 2011 and 2010.

Expenses
 
Our expenses for the six months ended June 30, 2011 were $793,630, and consisted of payroll and payroll taxes ($11,317), legal and professional fees ($303,309), interest expense ($391,840), and ($87,164)  in other administrative expenses including travel to the prospective sites. Our expenses for the six months ended June 30, 2010 were $2,168,689, and consisted of payroll and payroll taxes ($35,458), legal and professional fees ($913,193), stock based compensation ($112,500), interest expense ($1,059,278), and ($48,260)  in other administrative expenses including travel to the prospective sites.  The reason for the decrease in comparing the six months ended June 30, 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 six months ended June 30, 2011 and 2010 was $793,630 and $2,168,689, respectively. The reason for the decrease in the six months ended June 30, 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 June 30, 2011, we had current assets of $23,545 including cash of $4,889, and current liabilities of $5,398,183.  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 $122,407 for the six months ended June 30, 2011 compared to net cash used by operations of $343,614 for the six months ended June 30, 2010.   The net cash used by operations for the six months ended June 30, 2011 reflects a net loss of $793,630 offset by depreciation of $1,115, amortization of debt issue costs of $195,498, fair value of equity issued for services $52,000,  accounts payable and other accrued expenses of $386,773 and other minor factors.    The net cash used by operations for the six months ended June 30, 2010 reflects a net loss of  $2,168,689 offset by depreciation of $1,310, amortization of debt issue costs of $219,377, stock based compensation $112,500, the fair value of equity issued for services of $641,665,  account payables and other accrued expenses of $884,737 and other minor factors. 

Investing Activities
 
Our investing activities were $0 for the six months ended June 30, 2011 and June 30, 2010.  
 
Financing Activities
 
Our financing activities resulted in a cash inflow of $120,600 for the six months ended June 30, 2011 and $334,200 for the six months ended June 30, 2010, which represents issuances of notes payable, less the related debt issuance costs.

Going Concern

The Company from Inception (January 28, 2008) through June 30, 2011, has not had any significant revenues.  The Company has no significant operating history as of June 30, 2011, has accumulated losses of $16.9 million and negative cash flow from operations of $3.6 million since inception. From Inception (January 28, 2008) through June 30, 2011, management has raised net equity and debt financing of $10.3 million to fund operations and to provide working capital.  However, there is no assurance that in the future such financing will be available to meet the Company’s needs.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond.  These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with oil and gas operators and municipal utility districts; and (c) controlling overhead and expenses.  There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing.  There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.
 
 
In the event the Company is unable to continue as a going concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.  To date, management has not considered this alternative, nor does management view it as a likely occurrence.

The accompanying 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.  
 
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 June 30, 2011, 400,000 of these shares have been forfeited.   During the period from Inception (January 28, 2008) through June 30, 2011, the Company recognized $1,146,293 in compensation cost associated with the issuance of these shares.  For the six months ended June 30, 2011 and 2010 the Company recognized compensation expense of $0 and $112,500 respectively.  At June 30, 2011, the Company had no remaining compensation cost to be recognized related to these issuances.

 
Warrants
 
As of June 30, 2011, the Company had 17,123,853 warrants outstanding to acquire the Company’s Common Stock.  As of  June 30, 2010 the Company had 14,099,939 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 fourth 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.
 
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 June 30, 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 years
Conversion of outstanding bridge notes
    727,903       727,903            
Cash issuances of 2009 Notes
    740,000       740,000            
Cash issuances of 2010 Notes
    705,000       705,000            
      Total 12% Convertible Notes
    2,172,903       2,172,903            
       Less Unamortized Discount
    (50,252 )     (50,252 )          
GE Note
    1,302,500       1,302,500            
Deferred Compensation Notes
    279,095       279,095       -      
Other Financings
    120,600       120,600              
     Total Commitments related to Notes Payable
    3,824,846       3,824,846       -      
 
 
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.
 
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.

 
Fair Value of Financial Instruments

The fair value of cash, accounts payable, accrued expenses and notes payable, including amounts due to and from related parties, approximate carrying values because of the short-term maturity of these instruments.
 
Stock Based Compensation

The Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 718 “Compensation-Stock Compensation” requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro-forma disclosure is no longer an alternative.  The effective date for the Company’s application of ASC Topic 718 was January 28, 2008 (date of inception).
 
There were no grants of employee options during the period from January 28, 2008 (date of inception) through June 30, 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 six months ended June 30, 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.

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.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risks

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

Item 4.  Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the "Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  
 
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 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 six months ended June 30, 2011, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors.

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

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

       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.    Description
     
31.1   Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   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
     
101.INS
 
XBRL Instance Document*
     
101.SCH
 
XBRL Taxonomy Extension Schema Document*
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
 
*  Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 

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: September 23, 2011
By:  
/s/ Stanley T. Weiner
 
 
Stanley T. Weiner
 
 
President and Chief Executive Officer
(Principal Executive and Financial Officer)