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EX-99.3 - STW RESOURCES HOLDING CORP. | v179624_ex99-3.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): February 12, 2010
STW
RESOURCES HOLDING CORP.
(Exact
name of registrant as specified in its charter)
Nevada
|
000-51430
|
20-3678799
|
(State
or Other Jurisdiction of Incorporation)
|
(Commission
File Number)
|
(IRS
Employer Identification Number)
|
619 West
Texas Avenue, Suite 126, Midland, Texas 79701
(Address
of principal executive offices) (zip code)
432-686-7777
(Registrant's
telephone number, including area code)
Stephen
M. Fleming, Esq.
Law
Offices of Stephen M. Fleming PLLC
49 Front
Street, Suite 206
Rockville
Centre, New York 11570
Phone:
(516) 833-5034
Fax:
(516) 977-1209
STW
GLOBAL, INC.
(Former
name of registrant, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
[ ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form
8-K and other reports filed by STW Resources Holding Corp. (f/k/a Woozyfly Inc.
and STW Global, Inc.) (“Woozyfly”, “STW Holding” or the “Company”) from time to
time with the Securities and Exchange Commission (collectively the "Filings")
contain or may contain forward looking statements and information that are based
upon beliefs of, and information currently available to, the Company's
management as well as estimates and assumptions made by the Company's
management. When used in the filings the words "anticipate", "believe",
"estimate", "expect", "future", "intend", "plan" or the negative of these terms
and similar expressions as they relate to the Company’s or Company’s management
identify forward looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
risks, uncertainties, assumptions and other factors (including the risks
contained in the section of this report entitled "Risk Factors") relating to the
Company’s industry, the Company’s operations and results of operations and any
businesses that may be acquired by the Company. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
Although
the Company’s management believes that the expectations reflected in the forward
looking statements are reasonable, the Company cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results. The following discussion should be read in
conjunction with the Company's financial statements and the related notes filed
with this Form 8-K.
In this
Form 8-K, references to "we," "our," "us," the "Company," “STW Holding”, "Woozy"
or "Woozyfly" refer to STW Resources Holding Corp. (f/k/a Woozyfly Inc. and STW
Global, Inc.), a Nevada corporation.
Item
2.01 Completion of Acquisition or Disposition of Assets.
Woozyfly,
Inc. was organized September 11, 2003 (Date of Inception) under the laws of the
State of Nevada, as GPP Diversified, Inc. The business of the Company was
to sell pet products via the Internet. We were initially authorized to
issue 25,000,000 shares of its no par value common stock. On November 9,
2005, we amended our articles of incorporation to increase our authorized
capital to 100,000,000 shares with a par value of $0.001. Concurrently, we
changed our name from GPP Diversified, Inc. to Pet Express Supplies, Inc.
On July 28, 2008, Pet Express Supply, Inc. entered into an Exchange
Agreement with each of the shareholders of CJ Vision Enterprises, Inc., a
Delaware corporation doing business as Woozyfly.com, pursuant to which we
changed our corporate name to Woozyfly, Inc. , authorized the issuance of
10,000,000 blank check preferred shares and effectuated a 6:1 stock
split. On January 15, 2009, we ceased operations.
On May
12, 2009, Woozyfly filed a voluntary petition in the United States Bankruptcy
Court for the Southern District of New York (the “Bankruptcy Court”) seeking
reorganization relief under the provisions of Chapter 11 of Title 11 of the
United States Code (the “Bankruptcy Code”). The Chapter 11 case is being
administered under the caption In re Woozyfly, Inc. Case No. 09-13022 (JMP)
(the “Chapter 11 Case”). Woozyfly continued to operate its business as
debtor in possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. In connection with the Chapter 11 Case,
the Bankruptcy Court approved the arrangement pursuant to which MKM Opportunity
Master Fund Ltd agreed to provide a DIP loan in the amount up to $100,000 (the
“DIP Loan”).
The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes"). As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.
On
January 21, 2010, we 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. (“Acquiree” or “STW”) and certain
shareholders of STW controlling a majority of the issued and outstanding shares
of STW. Pursuant to the Merger Agreement, STW merged into
the Acquisition Sub resulting in an exchange of all of the issued and
outstanding shares of STW for shares of the Company on a one for one basis. At
such time, STW will become a wholly owned subsidiary of the
Company.
On
February 9, 2010, the Court entered an order confirming the Seconded Amended
Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger
was approved. It is expected that the Plan will be effective
February 19, 2010 (the “Effective Date”). The
principal
provisions of the Plan are as follows:
·
|
MKM,
the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000
shares of preferred stock;
|
·
|
the
holders of the Convertible Notes shall receive 1,760,000 shares of common
stock;
|
·
|
general
unsecured claims shall received 100,000 shares of common stock;
and
|
·
|
the
Company’s equity interest shall be extinguished and
cancelled.
|
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2 -
On
February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged
with and into Acquisition Sub, which became a wholly-owned subsidiary of the
Company (the “Merger”). In consideration for the Merger and STW
becoming a wholly-owned subsidiary of the Company, the Company issued an
aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to
the shareholders of STW at the closing of the merger and all derivative
securities of STW as of the Merger became derivative securities of Woozyfly
including options and warrants to acquire 12,613,002 shares of common stock at
an exercise price ranging from $3.00 to $8.00 with an exercise period ranging
from July 31, 2011 through November 12, 2014 and convertible debentures in the
principal amount of $1,467,903 with a conversion price of $0.25 and maturity
dates ranging from April 24, 2010 through November 12, 2010.
Considering
that, following the merger, the shareholders of STW control the majority of our
outstanding voting common stock and we effectively succeeded our otherwise
minimal operations to those that are theirs, STW 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 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 is the surviving and continuing entities and the
historical financials following the reverse merger transaction will be those of
STW. We were a "shell company" (as such term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended) immediately prior to our
acquisition of STW pursuant to the terms of the Merger Agreement. As
a result of such acquisition, our operations our 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.
STW
Overview
STW,
based in Houston, Texas, provides customized water reclamation
services. STW’s core expertise is an understanding of water chemistry
and its application to the analysis and remediation of complex water reclamation
issues. STW provides a complete solution throughout all phases of a water
reclamation project including analysis, design, evaluation, implementation and
operations.
STW’s
expertise is applicable to several market segments including:
·
|
Gas
shale hydro-fracturing flowback;
|
·
|
Oil
and gas produced water;
|
·
|
acid
mine drainage (“AMD”);
|
·
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desalination;
|
·
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brackish
water; and
|
·
|
municipal
waste water.
|
Understanding
water chemistry is the foundation of STW’s expertise. STW will provide detailed
chemical analysis of the input stream and of the process output that conforms to
the various environmental and legal requirements. STW becomes an integral part
of the water management process and provides a customized solution that
encompasses analysis, design and operations including pretreatment and
transportation. Simultaneously, STW evaluates the economic impact of
this process to the customer. These processes will use technologies that fit our
customer’s need: fixed, mobile or portable; evaporation, reverse-osmosis or
membrane technology, and any necessary pre-treatment, crystallization and
post-treatment. STW will also supervise construction, testing, and operation of
these systems. Our keystone is determining and optimizing the most appropriate
technology to effectively and economically address our customers’ particular
requirements. As an independent solutions provider STW is
manufacturer-agnostic and is committed to the use of the right technology
demanded by the design process.
Market
Opportunities
Gas shale fracturing
flowback water
STW is
actively pursuing opportunities in all the major shale formations in the United
States. The initial focus, in this sector, is the Marcellus Shale in
Pennsylvania. Presently, we believe there are about 800 producing
wells, the majority being simple vertical wells, and over sixty new wells in
Pennsylvania are being drilled each month. Most of the new wells
being drilled are horizontal, requiring about 3.5 million gallons of water per
well. There are 28 producers in the Marcellus, with the four largest
being Range Resources, Chesapeake Energy, Atlas Energy Resources and Seneca
Resources.
Unconventional
tight gas shales such as Marcellus require millions of gallons of fresh water to
drill and stimulate a new well. The water returns during the fracture
flowback (“frac”) and production (“production”) with salts or TDS at levels
unfit for human consumption. This flowback or produced water is
typically disposed of through various means such as controlled dilution to a
river, or lost from the ecosystem by injection into disposal
wells. STW will target the frac water market in the tight gas
formations first, and approach the produced water market for coal bed methane
and oil and gas production subsequently.
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3 -
Oil and
gas reservoirs are usually found in porous rocks, which also contain
saltwater. Cross linked gel fracture fluids with high “proppant”
loading (additives that prop open fissures in the geological formation caused by
hydraulic fracturing) have been utilized to fracture these zones in order to
gain permeability, allowing the oil and gas to flow to the well
bore. The unconventional shale formations have been common knowledge
for decades, but the cost of gas production was always considered to be
uneconomical. The wells were drilled and fractured with the same
crossed linked system as discussed above.
All of
the wells were vertical and required stimulation about every three years with a
new fracture. Around 2001, the “slick water fracture” technique was
developed. This change required larger volumes of fresh water (1.2 million
gallons per fracture on a vertical well) to be used in the fracturing process, a
friction reducing polymer additive, and low concentrations of a proppant in the
hydraulic fracture fluid. Wells using this modified technique now can
economically produce gas for over eight years without
re-stimulation. The fresh water is believed to dissolve salts from
the shale over time and open up the natural fractures and fissures in the rock,
allowing more gas to be produced. In 2003, horizontal drilling rigs
were brought into the Barnett Shale and the slick water fracture volume
increased from one to eight plus million gallons per well. The slick
water fracture technique has become the standard for all of the shale formations
for stimulation of the wells.
This map
illustrates the location of the major shale formations that are discussed
below:
The Marcellus
Shale
The
Marcellus Shale formation, located in the Appalachian regions of Pennsylvania,
New York and West Virginia, is the major focus of the Company. The
Marcellus covers the largest land mass of any of the known shale zones to date,
and it is located close to the densely populated north-eastern corridor of the
United States. The water returns from the slick water fracture
contain significantly higher TDS levels than the Barnett Shale and also include,
in certain cases, extremely high levels of calcium, barium, strontium and
chloride ions.
At
approximately 200,000 parts per million in TDS, the produced water from these
regions is nearly seven times the salinity of the ocean. The most
common practice utilized by the gas production industry in Pennsylvania for the
disposal of waste water streams produced by gas wells is to remove the oil, some
of the heavy metals and simply discharge this water to the rivers and
streams. The volume of water used in the gas well fracture process
has grown substantially over recent years with growth in both the absolute
number of active wells and with increased volumes of water in each
well. STW believes that today, the initial daily returns of one
Marcellus fracture well often exceed the volume of thousands of older oil and
gas wells.
While
there are about 800 Marcellus gas wells in operation in the Marcellus shale
formation today, gas producers in the region are primarily engaged in
exploratory drilling process activities. The northern portion of the
state reportedly has some of the best geological formations for gas production,
but drilling activity has been curtailed as a result of limited water supply and
limited capacity to dispose of waste water. Because of economic
considerations in local communities, the investment of several billion dollars
by producers in lease acquisition for drilling purposes, and proximity to high
population areas, management believes that drilling activity utilizing hydraulic
fracturing methods will increase significantly in the future.
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4 -
The
Marcellus Shale Formation is believed to be approximately 30 million plus acres
in size. In comparison, the Barnett Shale Formation is approximately 2 million
acres in size and approximately 140 million barrels of produced water are
disposed of in deep disposal wells annually. Each one of the stationary systems
proposed by STW will be able to process approximately 23,000 barrels of water
per day, and the mobile systems will be capable of processing 1,700 barrels per
day. This is therefore a high priority focus for STW.
With the
mountainous terrain in the Appalachian region, STW believes mobile or portable
evaporation units may provide a key part of the solution in this market by
helping gas producers minimize trucking in and out of production locations and
their neighboring communities. These systems may also be airlifted in
and out of drilling locations. Central evaporation and crystallization would
then be required to handle the remaining water and residual
brine. The central plants would also be equipped to generate calcium
chloride and sodium chloride salts. The sodium chloride would be
processed as rock salt for use in de-icing highways for public
safety. As discussed above, revenue from these salts would impact the
overall cost of reclamation, reinforcing the Company’s competitiveness in the
region.
The Fayetteville
Shale
Producers
in Arkansas’ Fayetteville Shale face similar problems as those operating in the
Marcellus, as there are very limited brine disposal options. Most
disposal wells in the Fayetteville shale are located near Ft. Smith; over a
three hour drive from most of the producing gas wells. Although new disposal
wells are being permitted and are under evaluation in the Conway area, gas
producers remain uncertain as to whether the permitted volumes for these brine
injection wells will be sufficient for current and future production
needs.
The
fracture system typically utilizes 50,000 to 65,000 barrels, or 2.0 to 2.8
million gallons of water. These wells typically flow back 1,000 to 1,500 bpd of
contaminated frac water for the first few days and then decline to under 100 bpd
for the next three months before finally declining to a rate of five bpd or
less. All of this flowback water is disposed of at land farms and
disposal wells. Recently the land farms have come under scrutiny due
to claims that these operations fail to comply with applicable regulations and
laws. Several land farm operations have been shut down because of
contamination of the areas surrounding these operations, significantly raising
the cost of disposal to the producers.
Water
quality varies with the location of the wells and can range from approximately
20,000 mg/l TDS for wells in the Searcy area to over 70,000 mg/l TDS for wells
in the northern and western portionsf. The Company believes water
reclamation coupled with deep well injection could provide a very cost effective
solution to producers in the Fayetteville zone. The lower TDS in this
shale, relative to other shales, would allow water recovery at rates in excess
of 90% at 20,000 mg/l TDS, and 75% at TDS levels of approximately 70,000
mg/l. These rates will dramatically reduce trucking cost to disposal
wells, and will provide fresh water for new wells or other applications such as
steam generation.
As part
of the STW’s strategy in this region, the Company is actively seeking to educate
gas producers on the advantages of water reclamation.
The Barnett
Shale
As
discussed above, the Barnett Shale, located in central and west-central Texas,
was the first shale formation to be developed with production starting nearly 25
years ago. In 2009, drilling activity was flat in the Barnett Shale
at current gas prices. A large influence for this leveling is the
increasing activity in the other gas formation such as the Haynesville,
Fayetteville and Marcellus.
The Piceance
Basin
The
conventional frac process in the Piceance has been to incorporate the typically
low TDS flowback and produced waters as fracture fluids in new
wells. Previously, drilling has been completed throughout the year;
however, several producers only fracture in the summer months. For
these producers, excess water produced in the winter required storage in surface
containment facilities that created substantial environmental
risk. Treatment of this water prior to storage addressed this risk
and resulted in a seasonally high demand for water reclamation during winter
months.
Today,
producers in the Piceance Basin are generally slowing down drilling activity
while natural gas prices remain depressed. Whatever produced water is
currently generated is being hauled to other states for disposal.
Eagleford
ShaleFormation
The
Eagleford Shale is a recently discovered formation located in South
Texas. Several experimental wells have been completed and to date
appear to be very profitable. This area has limited supplies of fresh
water, leading the Company to believe water reclamation will be a required
solution in order for producers to access a sufficient supply of frac water in
this market. Production of natural gas has been reported at levels in excess of
10 million cubic feet (“Mcf”) per day, and hundreds of barrels of condensate at
some of the wells. The Company expects to intensify its efforts to address this
market opportunity.
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5 -
The Haynesville
Shale
This
shale formation covers the northern half of Louisiana, southern Arkansas and
extends into northeastern Texas. It is the highest pressure zone of
all the shale formations discovered to date. Most of the wells are
horizontal, utilize the slick water fracture system, and each require about 6.5
million gallons of water. Production of natural gas has been reported
at levels in excess of 25 million cubic feet (“Mcf”) per day at some of the
wells in the Haynesville shale formation.
Once
production starts at typical gas wells in this region, a surge of water
production occurs for a few days before water production declines to ten bpd or
less. There appears to be sufficient disposal well capacity in the
Haynesville to handle present production needs. The Company believes
that more disposal wells are being added in southern Arkansas and northeastern
Texas as needed. STW believes that Legislators in Louisiana are
currently reviewing policies on disposal wells and may alter these to increase
the deep injection well disposal capacity.
The
Cotton Valley zone actually produces most of the water in the
area. It has a TDS content of over 200,000 mg/l and therefore does
not lend itself to economical water reclamation. Crystallization
would be required, which is more expensive and would generate a salt cake that
is not required in the area. Consequently, this region is not a
high priority market for STW at this time.
Produced Water
Shale
zones are typically dry geological formations devoid of any formation or connate
water, and hence the fracture flowback water comprises most of water that
returns following gas production. Outside of shale formations, where
most gas and oil production occurs, there is typically a reservoir of connate
water in the production zone that generates “produced” water. Produced water is
primarily salty water trapped in the reservoir rock and brought up along with
oil and/or gas during production, and is the most common oil field
waste. The quality of produced water varies significantly in
different parts of the world depending on the geology of the underlying
formation.
In a
large number of the oil fields in the USA, secondary or tertiary means of
handling produced water storage, such as water floods and steam floods, are
typically utilized. These are operations where the produced water is used to
maintain reservoir pressure, prevent subsidence, and sweep the zone to remove
the oil. Most of these water floods utilize a fresh water source as a supply so
that sufficient volumes are available. As these fields age, less water is
required for the flood, so excess contaminated brines concentrate and require
disposal. As this water could be reclaimed with Thermal Evaporative
Technologies, STW believes that the market for reclaiming produced water outside
the shale reclamation projects represents a considerable opportunity for the
Company.
Texas is
the largest oil and gas production state in the nation and the produced water is
unfit for use, poses a threat to the environment and is typically injected into
deep injection wells. In accordance with Texas Railroad Commission regulations,
water placed in these disposal wells is rendered permanently unavailable for
re-use or consumption. The reclaimed water would available for many beneficial
uses, including agricultural and environmental applications, as well as re-use
in hydraulic fracturing operations. Deep injection well practices in every gas
and oil producing region in the world pose the same detrimental environmental
and resource conservation issues. The water reclamation products and
services offered by the Company could provide a significant part of the solution
to all constituencies concerned.
In the
steam floods of California, a large portion of the water is recycled through the
water treatment facility and converted back to steam. There are some
fields that there is excess water in the millions of gallons per day that is low
in TDS and could very economically be converted back to environmentally usable
water.
Acid mine drainage
(AMD)
AMD is
another sensitive environmental issue in the Appalachian Mountain
regions. We believe it has impaired more than 4,600 miles of
waterways in Pennsylvania alone. Drainage from old abandoned coal mines is
acidic, and insoluble metal oxides precipitate when the drainage enters a river,
lake or stream, damaging the marine ecosystem. The AMD discharge from a single
mine or coal tailing pile can range from 10 to more than 10,000 gallons per
minute. In just one example, the Lackawanna River in northeastern Pennsylvania
is being contaminated from at least seven monitored AMD locations with estimated
peak flow of 40 million gallons per day. STW has identified the state of
Pennsylvania as a customer for AMD purification and the
Marcellus producers (eg Range Resources, Chesapeake Energy, Atlas Energy
Resouces and Seneca Resources) as potential customers for the resultant
reclaimed water.
Acid Mine
Drainage is the number one environmental water issue throughout most of the
Appalachian Mountains. Coal was one of the largest industries in the
region. Unproductive and unprofitable mines were abandoned. Over time a large
number of these mining companies have gone out of business leaving the residual
“dirty coal” and the water flowing from the mines as a responsibility of the
states and federal government. Dirty coal is the coal that lies near
the edge of the main coal seam and contains a high concentration of
dirt.
As the
mines fill up with water overtime, the excess water flows out. Due to
contact with the minerals contained in the dirt, coal, salts and gases, the
water tends to become acidic. This lower pH tends to dissolve more
ions or salts such as iron, aluminum, calcium, and
sulfate. Iron and other metals upon oxidation form
insoluble salts such as iron oxide or rust. Once the acid mine
drainage enters a river, lake or stream, the water precipitates these metal
oxides. This forms an impervious film on the bed of the water
destroying the marine ecosystem.
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6 -
The
Pennsylvania Department of Environmental Protection (“DEP”) typically constructs
passive treatment plants that require large acreage, where the process is
oxidation in large lagoons allowing the solids to precipitate and altering the
pH level by adding certain chemicals such as lime. The water leaving
these systems will support the growth of plants and animals. This
process is inherently more time-consuming and expensive, and because of the land
requirements, not suitable for all locations.
STW can
provide AMD treatment using a specially-designed mobile unit and sell the
processed AMD to the producers. The state will retain ownership of
the AMD, with STW having ownership rights to the processed water.
STW’s
mobile AMD unit can handle about 250 gpm or about 360,000 gallons per
day. This mobile unit provides the same functionality as the current
passive system, but in minutes compared to weeks and months and with a much
smaller footprint. The state may provide incentives in the form of grants and/or
subsidies that cover the cost of AMD processing. The DEP has permits
in place for the disposal of the filter-pressed sludge. STW is also reviewing
all of the present passive system flow-rates and water quality for potential use
as supply water to producers.
Brackish
Water
World-wide,
there are brackish water zones that contain large volumes of
water. The water contains dissolved salts in the 0.5 to 2% (5,000 to
20,000 mg/l TDS) range and hence unfit for human use. This water can
be treated to reduce the TDS below 500 mg/l or 0.05% TDS making the water fit
for human consumption. Factors such as decreasing supplies of fresh ground and
surface water, increased competition for surface water resources, and changes in
population/demand centers are driving the need for brackish water for water
supply. STW’s potential customers are private companies and
municipalities serving fast growing metropolitan areas where demand for water is
outpacing the available supply. For example, aquifers in the Texas
Gulf Coast contain a large volume of brackish water (less than 10,000 ppm TDS)
that, with desalinization, will help meet increasing demand in the
region.
Legislative and
Regulatory:
Progressively
tighter regulations are demanding a thorough review of the entire water-use
cycle in industrial applications with the ultimate goal of encouraging and/or
mandating reclamation and re-use of water. STW works closely with Federal, State
and local regulators and environmental agencies to share our expertise and
knowledge on this complex issue and discuss our views on potential
solutions. The Company’s intimate knowledge of this process is a key
tool to assist their customers to better understand the legislative and
regulatory elements related to water management and advise them of various
alternatives
Process
STW’s
process is predicated upon a thorough understanding of the customer’s water
needs and related issues. This understanding is developed through a series of
interactive discussions with the customer. The next phase is data gathering and
analysis. STW collects samples at various locations and at different time
intervals which are then tested at independent laboratories and analyzed by STW.
Based upon this analysis, STW would recommend a solution using the most
appropriate technologies and negotiate the acquisition and financing of these
technologies as well as contracts with engineering procurement construction
(“EPC”). Finally, STW oversees the EPC process and operates the
facility.
STW’s
process is based upon a fundamental understanding of the core issue and
developing an appropriate solution using our experience and expertise. It
includes sampling and testing, analysis, design and as required by customers,
implementation and operation. Some of the steps involved are described
below:
·
|
The
inlet water quality must be determined and measurement of Total Dissolved
Solids (TDS), hardness, barium, strontium, bromine, sulfate and
hydrocarbon concentrations are critical.
|
·
|
Multiple
samples over time are taken to ensure consistency and accuracy of inlet
water quality measurement.
|
·
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An
understanding and analysis of potential uses for the reclaimed
water.
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·
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A
site inspection to determine the various vessels needed such as tanks,
pumps, pits, truck off loading racks, and engineering testing of the
land.
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·
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An
analysis of fluid volumes and their variability over
time.
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·
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Length
of time the water needs to be reclaimed at this site.
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·
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Determination
of appropriate technology: fixed or mobile, evaporation, reverse osmosis
or other.
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·
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Permitting
as needed
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·
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An
investigation of the handling of the concentrated brines and any other
residue from the reclamation process.
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·
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Disposal
options on the residue including potential use of the
by-products.
|
Technology
STW has
developed relationships with a number of manufacturers that offer best-of-class
technologies applicable to its customer base. These technologies include thermal
evaporation, membrane technology and reverse osmosis and are available as fixed
or mobile units with varying capacities. Various pre and post-treatment options
are available as necessary including crystallizers that process very high TDS
(>150,000 mg/l).
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7 -
Thermal
Evaporation: This process is capable of handling waters that contain up
to 150,000 mg/l TDS, with fresh water recovery rates from 50 to 90% or
greater depending on inlet water quality. The recovered fresh water, or
“distillate”, is highly purified water from the evaporative process and has
multiple re-use applications. It is particularly applicable in the gas shale and
oil production facilities for reclaiming frac and produced waters.
The
technology is scalable and can be deployed as mobile units that can process
72,000 gallons per day (“gpd”), or as portable units that can process 216,000
gpd, or as fixed central units capable of processing up to 2,880,000
gpd.
Residual
brine concentrate can, depending on local conditions and producer’s priorities,
either be disposed off in deep injection wells or be treated further through a
Crystallizer that reduces it into distillate and commercially valuable salt
residuals.
Reverse
Osmosis: Waters that are below 34,000 mg/l of total dissolved solids and
contain low levels of barium, strontium, bromine, and sulfate can be reclaimed
through a reverse osmosis unit (RO). Reverse osmosis is the process
of forcing a solvent from a region of high solute concentration through a
semi-permeable membrane to a region of low solute concentration by applying a
pressure in excess of the osmotic pressure. The membranes used for
reverse osmosis are generally designed to allow only water to pass through while
preventing the passage of solutes (such as salt ions). This process
is best known for its use in desalination (removing the salt from sea water to
get fresh water), but it has also been used to purify fresh water for medical,
industrial and domestic applications. Recovery rates for seawater to drinking
water are about 50%.
A stream
of concentrated brine or higher TDS is the by-product. This brine can
be properly disposed of or utilized as a feed solution to a brine concentrator
or crystallizer. The latter ensures higher quality water with lower TDS levels
for industrial Uses.
Most
oilfield waters cannot be processed through an RO membrane since they contain
barium, strontium, or bromine. The barium and strontium are very large molecules
and they plug the membrane and create damage or permanent fouling of the
membrane. Bromine and other such halogens react with the membrane and
destroy its integrity. There are few oil field waters that could be
processed through this technology but a thorough study is required to ensure
success. STW Resources will utilize this technology where the water
chemistry can be processed through RO membranes.
Membrane
Bioreactor: A Membrane BioReactor (“MBR”) is a combination of
biological and ultrafiltration technologies. The biological area
provides the same process utilized in all sewage treatment
facilities. Bacteria are maintained in an aerobic condition which
cause decay in all of the organic materials contained in the water, and
oxidizing these organic materials into low molecular weight acids, usually
acetic acid. Maintaining the bacteria in an oxygen rich environment
prevents mutatation or growth of any anaerobic bacteria, which would produce
inorganic acids such as hydrogen sulfide.
A filter
membrane removes the water fraction from the unit. The membrane
provides filtration in the 0.01 microns or lower range which is sufficient
enough to remove viruses, bacteria, and other colloidal
materials. The water exiting the units is potable water and safe for
human consumption.
Marketing &
Sales
STW’s
business proposition is to provide comprehensive, necessary water treatment
solutions. We work closely with our customers to evaluate their water treatment
needs, understand how these may change over time, assess the regulatory and
economic factors and then design an optimal solution. As illustrated
in the chart to the right, STW offers a broad array of technical solutions
coupled with a service suite and financial structuring options that provide our
customers with the ability to obtain a turnkey solution to their waste water
disposal challenges.
Gas
Shales: Most of the natural gas producers in each of the shale formations
are already well known to the Company. STW personnel have developed
many, and in some cases, long standing relationships with key personnel
responsible for well completion and remedial operations at each gas
producer. STW monitors production plans at the producer level, the
acreage acquisitions at the shale formations and trends that relate to the
demand for water reclamation by region. In addition, the Company
maintains detailed databases that monitor drilling permits, rig counts and other
key statistics that forecast gas production rates by geography. These
activities allow the Company to anticipate demand for its services and to
prioritize its sales calling effort on those producers for whom fresh water
supply is an issue or where shale water disposal pose the greatest
challenges.
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8 -
The
foundation of the Company’s sales strategy is to become an integral part of its
customer’s water management function. This involves identifying and
finding solutions to customer needs through a multi–step, consultative
approach:
·
|
Evaluate
drilling program and production expansion
plans.
|
·
|
Identify
and define fracture water supply needs and waste brine generation
levels.
|
·
|
Study
the flowback water volumes and chemistry over
time.
|
·
|
Generate
economic models jointly with producers, with full consideration of all
costs of obtaining, utilizing, and disposing of the
water.
|
·
|
Evaluate
various water reclamation options, from equipment to logistics,
and develop financial models for all the
options.
|
·
|
Provide
a customized presentation comparing present practices to all of the
options of water reclamation available to the customer, for buy-in to the
best scenarios.
|
·
|
Jointly
develop a presentation of the best scenarios for water management (present
and future) for use by upper management. Support the
presentation as required.
|
·
|
Review
and determine optimal system design, location and financial
structure.
|
·
|
Develop
a time line for water reclamation
implementation.
|
·
|
Execute
definitive off-take and/or other agreements satisfactory to all
parties.
|
STW is
able to facilitate this part of the sales process through its detailed knowledge
of the gas production process and economics, shale formation geology, frac water
chemistry, well completion techniques and logistics and regional regulatory
landscapes. This expertise reduces the time required during the evaluative stage
of the sales process and fosters a positive working relationship with our
customers. STW then works together with its manufacturing partners to
complete the technical solution, develop ancillary system requirements (balance
of plant) evaluate cost and operating data, model the financial performance of
the system and define remaining project parameters and an installation
timeline.
Water
reclamation is a new paradigm for natural gas producers. Educating them about
the economic, environmental and political benefits is key to long-term
adoption.
Some of
the issues that operators are facing currently in the Marcellus Shale
are:
·
|
Water
consumption and usage restrictions on the Susquehanna River are very
restrictive.
|
·
|
There
are only 8 deep injection wells in Pennsylvania, all of which are already
at or close to capacity. New deep wells are being drilled, but the
permitting process and actual drilling costs are proving to be
expensive.
|
·
|
Trucking
costs from $3.10 to over $10 / barrel, and generate a number of complaints
about truck traffic, noise and the associated wear and tear on the roads.
The cost to dispose of the water into the commercial disposal wells is
$1.50 to $3.00 per barrel in addition to the trucking
costs.
|
·
|
Reclaimed
water will not require a consumption permit for use, as it has already
been consumed once. Trucks can bring brine to the Water
Reclamation facility and return with fresh water for the next
fracture.
|
·
|
The
crystallization process will produce rock salt that meets the requirements
of ASTM Standards for road salt. PennDOT purchases between 600,000 and
1,000,000 tons of road salt each year and local municipalities purchase an
additional 500,000 tons. An STW 1 million gal/day facility will produce
approximately 88,500 to 106,000 tons of rock salt per
year.
|
·
|
By
2011 any new permits for disposal to the rivers will require total
dissolved solids (TDS) removal.
|
At this
time, in the Marcellus Shale, only a couple of operators have the necessary
scale for a captive facility. Most operators are still in the exploratory
drilling stage, with single wells being drilled over a wide region.
Based on
the geographical mountainous terrain, the producers are constructing the well
sites on the higher elevations so that they do not interfere with the
agricultural and cattle ranch business conducted in the valleys. In a
large number of examples a multiple well pad is constructed and then the wells
are directional drilled and completed in the Marcellus. One central
water pit is permitted to hold the drilling and fracture water. As
the fracture is conducted, the flowback and produced water is presently trucked
to an approved disposal facility. In some cases the producers are
recycling some of the early low TDS flowback water by filtration and then
blending into the new fresh water. All of the fresh water utilized by
all of the wells must be trucked to the site and then all of the flowback and
produced water is trucked away.
STW would
locate mobile evaporation equipment at the well site. The flowback
water would be processed and the distilled water generated would be placed into
the fracture water pit. The residual brine from the evaporation
process would be trucked to an approved disposal facility or taken to a STW
central crystallizer. The crystallizer would provide additional fresh
water that could be trucked (2 way freight) back to the fracture
pit. About 98% of the available water from the residual brine or the
high TDS produced water would be recovered. Additional bi-products of
sodium chloride for use in Highway deicing and a solution of calcium chloride
would be generated.
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9 -
Competition
In the
oil and gas industry, current fracturing and produced water disposal methods –
deep injection wells and surface water disposal – represent the Company’s
greatest source of competition.
Brine Discharge / Deep
Injection Wells
In many
gas shale fields, disposal through a deep injection well offers a cost-effective
(though environmentally questionable) alternative to water reclamation. If
suitable geology exists, high TDS flowback waters can be disposed by injection
into a deep discharge brine well. There are operative brine discharge
wells in each of the major shale formations, particularly in the Barnett shale
formation in Texas where many empty oil wells are converted for brine discharge
use. There are only eight such discharge wells in the state of
Pennsylvania. Management believes these are presently operating at close to
capacity.
Surface Water
Disposal
Similarly,
surface water disposal facilities (rivers, streams and drainage creeks) offer a
competitive alternative to water reclamation. At river discharge
facilities, flowback and produced waters are treated to remove naturally
occurring radioactive materials, some suspended solids and well completion
chemicals before discharge. Dissolved salts are not removed and
therefore are added to surface water systems where they degrade water quality,
pollute the environment and disrupt wildlife habits. Many states have
taken action to reduce or eliminate altogether the availability of surface water
disposal for gas well waste water streams.
In the
Marcellus shale, there are several treatment facilities that remove only the oil
and heavy metals, then discharge the water to certain rivers (where permitted),
and range in size from 20,000 to 200,000 gallons per day. The treatment
does not remove salts, so the waters that are being discharged into the river
system retain high TDS contamination levels. In April of 2009, the
Pennsylvania DEP regulated this type of treatment by limiting it to existing
permitted facilities only through January 2011, at which time treatment to
remove the TDS (salts) will have to be implemented.
The
following companies provide pre-discharge brine treatment
solutions:
The
Company accepts flowback and produced waters from gas producers operating in the
Marcellus and other regions in Pennsylvania, removes the oil, heavy metals, and
discharges the water to certain rivers in Pennsylvania. Advanced Waste
operates one discharge facility in the western part of the Pennsylvania. Sunbury
operates an experimental river discharge site in conjunction with the
Pennsylvania Department of Environmental Protection. Sunbury’s primary
business is the operation of waste coal fired power plants, and it has obtained
a permit to discharge significant volumes of contaminated water into certain
rivers in Pennsylvania. Acid Mine Drainage is presently processed through
large acreage passive systems. These systems provide oxidation
followed by a long settling time for the heavy metals to precipitate and
possibly some pH adjustment before the water enters the river or
stream. There are several companies that construct such facilities
under contract with the governmental agency. At this time there is no
one that provides mobile AMD processing.
Legal
Proceedings
Except
for the current dispute with GE Water & Process Technologies (“GE Water”),
we are currently not a party to any legal or administrative proceedings and are
not aware of any pending or threatened legal or administrative proceedings
against us in all material aspects. We may from time to time become a party to
various legal or administrative proceedings arising in the ordinary course of
our business.
STW
entered into a Memorandum of Understanding with GE Water, a unit of General
Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take
agreements with oil and gas operators for the deployment of multiple water
reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian
Basin. STW and GE Water formalized their relationship on May 22,
2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”),
which superseded the MOU. The Teaming Agreement was drafted in
accordance with the terms of the MOU and provides greater certainty as to each
party’s responsibilities and as to the process of entering into agreements with
and providing services to customers. The Teaming Agreement sets forth
the terms and conditions that will govern STW and GE Water relationship when STW
is successful in selling its services to an identified prospect.
In April
2008, STW entered into a purchase order with GE Water (“Purchase Order”), for
the purchase of a modularized produced water evaporator system (the “Evaporator
System”) capable of processing approximately 720,000 gallons per
day. The total commitment under the Purchase Order was $14.5 million,
to be paid over eight installments. As of September 30, 2009, STW 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. STW is currently in arrears on the remaining $1.2
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 $1.5 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
$998,000, through September 30, 2009, totaled $9.0 million. In
addition, pursuant to the terms of the Purchase Order, STW is required to post a
letter of credit securing the balance of the payments due under the Purchase
Order, totaling $1.9 million, which STW has not yet done. Finally, in
April 2009, STW 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 STW to additional payments totaling
approximately $1.2 million.
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10 -
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 STW a six month additional grace period, through
February 13, 2010. At the end of the additional six month grace
period, if STW has not met its obligations, GE Water represented that it would
meet with STW to determine the state of the investment market and grant or not
grant an additional grace period, as necessary. If, after February
13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water
could foreclose on the Evaporator System, resulting in the loss of payments
advanced to date by STW and future use of the Evaporator System under
construction.
On
October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW
that GE was canceling STW’s Purchase Order due to STW’s inability to pay the
current amounts due. GE Water also demanded a “termination” payment
of $750,000. In the same letter, GE Water unilaterally announced it
was cancelling the Teaming Agreement citing GE Water’s belief that STW was
insolvent. GE Water prefaced its cancellation of the Purchase Order
and Teaming Agreement on a failure of GE Water and STW to renegotiate a
substitute Teaming Agreement. On October 8, 2009, STW responded to GE
Water in writing rejecting GE Water’s unilateral termination of the Purchase
Order and Teaming Agreements, among other things including that GE Water had the
contractual requirement to arbitrate certain of the disputed matters raised by
GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW
management and GE Water, GE Water expressed continued interest in working with
STW by providing technical support and a willingness to resolve their
differences, pending the results of STW’s merger and capital raise in
February2010.
Number of
Employees
Other
than our directors and officers, presently we have one employee including one
full time employee.
Property
Our
principal offices are located at 619 West Texas Avenue, Suite 126, Midland,
Texas 79701, which includes 1,250 square feet in office
space. We pay $1,200 per month in rent and our lease is month to
month.
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11 -
RISK
FACTORS
Our limited operating history makes
it difficult for us to evaluate our future business prospects and make decisions
based on those estimates of our future performance .
We did
not begin operations of our business until February 2008. We have a
limited operating history and have generated limited revenue. As a
consequence, it is difficult, if not impossible, to forecast our future results
based upon our historical data. Reliance on the historical results may not
be representative of the results we will achieve, particularly in our combined
form. Because of the uncertainties related to our lack of historical
operations, we may be hindered in our ability to anticipate and timely adapt to
increases or decreases in revenues or expenses. If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable
or incur losses, which may result in a decline in our stock
price.
STW’s
results of operations have not resulted in profitability and we may not be able
to achieve profitability going forward.
STW
incurred a net loss amounting to $6,770,882 for the period from inception
(January 28, 2008) through December 31, 2009. In addition, as of
December 31, 2009, STW has liabilities of $11,859,024. If we incur additional
significant operating losses, our stock price, may decline, perhaps
significantly.
Our
management is developing plans to alleviate the negative trends and conditions
described above. Our business plan is speculative and unproven. There
is no assurance that we will be successful in executing our business plan or
that even if we successfully implement our business plan, that we will be able
to curtail our losses now or in the future. Further, as we are a new
enterprise, we expect that net losses will continue and our working capital
deficiency will exacerbate.
We
depend upon key personnel and need additional personnel.
Our
success depends on the continuing services of Stanley Weiner, our chief
executive officer and director. The loss of Mr. Weiner could have a
material and adverse effect on our business operations. Additionally,
the success of the Company’s operations will largely depend upon its ability to
successfully attract and maintain competent and qualified key management
personnel. As with any company with limited resources, there can be no guaranty
that the Company will be able to attract such individuals or that the presence
of such individuals will necessarily translate into profitability for the
Company. Our inability to attract and retain key personnel may
materially and adversely affect our business operations.
We
must effectively manage the growth of our operations, or our company will
suffer.
To manage
our growth, we believe we must continue to implement and improve our operational
and marketing departments. We may not have adequately evaluated the costs and
risks associated with this expansion, and our systems, procedures, and controls
may not be adequate to support our operations. In addition, our management may
not be able to achieve the rapid execution necessary to successfully offer our
products and services and implement our business plan on a profitable basis. The
success of our future operating activities will also depend upon our ability to
expand our support system to meet the demands of our growing business. Any
failure by our management to effectively anticipate, implement, and manage
changes required to sustain our growth would have a material adverse effect on
our business, financial condition, and results of operations.
Our
business requires substantial capital, and if we are unable to maintain adequate
financing sources our profitability and financial condition will suffer and
jeopardize our ability to continue operations.
We
require substantial capital to support our operations. If we are
unable to maintain adequate financing or other sources of capital are not
available, we could be forced to suspend, curtail or reduce our operations,
which could harm our revenues, profitability, financial condition and business
prospects.
Regulatory
requirements may have a negative impact upon our business.
While our
services are subject to substantial regulation under federal, state, and local
laws, we believe that the services are materially in compliance with all
applicable laws. However, to the extent the laws change, if we introduce new
services in the future or if we commence working in a new area, some or all of
our services may not comply with applicable federal, state, or local laws.
Further, certain federal, state, and local laws and industrial standards
currently regulate electrical and electronics equipment. Although standards for
electric vehicles are not yet generally available or accepted as industry
standards, our products may become subject to federal, state, and local
regulation in the future. Compliance with this regulation could be burdensome,
time consuming, and expensive.
Our
automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and various state boards, and compliance certification is required
for each new model year. The cost of these compliance activities and the delays
and risks associated with obtaining approval can be substantial. The risks,
delays, and expenses incurred in connection with such compliance could be
substantial.
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12 -
Risks
associated with the collection, treatment and disposal of wastewater may impose
significant costs.
Our
wastewater collection, treatment and disposal operations of our subsidiaries are
subject to substantial regulation and involve significant environmental risks.
If collection systems fail, overflow or do not operate properly, untreated
wastewater or other contaminants could spill onto nearby properties or into
nearby streams and rivers, causing damage to persons or property, injury to
aquatic life and economic damages, which may not be recoverable in
rates. Liabilities resulting from such damage could adversely and
materially affect our business, results of operations and financial condition.
Moreover, in the event that we are deemed liable for any damage caused by
overflow, our losses might not be covered by insurance policies, and such losses
may make it difficult for us to secure insurance in the future at acceptable
rates.
If
the Company is unable to reach an agreement with GE, GE will retain possession
of the Evaporator System and retain all payments made to GE to date, which would
significantly reduce the overall value of the Company and may result in the
Company ceasing operations.
STW
entered into a Memorandum of Understanding with GE Water, a unit of General
Electric Company, dated February 14, 2008 (“MOU”) to jointly develop off-take
agreements with oil and gas operators for the deployment of multiple water
reclamation systems throughout Texas, Arkansas, Louisiana and the Appalachian
Basin. STW and GE Water formalized their relationship on May 22,
2008, by entering into a definitive Teaming Agreement (“Teaming Agreement”),
which superseded the MOU. The Teaming Agreement was drafted in
accordance with the terms of the MOU and provides greater certainty as to each
party’s responsibilities and as to the process of entering into agreements with
and providing services to customers. The Teaming Agreement sets forth
the terms and conditions that will govern STW and GE Water relationship when STW
is successful in selling its services to an identified prospect.
In April
2008, STW entered into a purchase order with GE Water (“Purchase Order”), for
the purchase of a modularized produced water evaporator system (the “Evaporator
System”) capable of processing approximately 720,000 gallons per
day. The total commitment under the Purchase Order was $14.5 million,
to be paid over eight installments. As of September 30, 2009, STW 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. STW is currently in arrears on the remaining $1.2
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 $1.5 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
$998,000, through September 30, 2009, totaled $9.0 million. In
addition, pursuant to the terms of the Purchase Order, STW is required to post a
letter of credit securing the balance of the payments due under the Purchase
Order, totaling $1.9 million, which STW has not yet done. Finally, in
April 2009, STW 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 STW to additional payments totaling
approximately $1.2 million.
On
January 12, 2009, GE Water sent a notice of default with respect to the past due
payments on the Evaporator System, and the required posting of the letter of
credit, as set forth under the Purchase Order, with a requirement that such
default be cured within 30 days from the date of the notices. GE
Water took no further action with respect to the notice of default until
August 13, 2009.
On August
13, 2009, GE Water provided STW a six month additional grace period, through
February 13, 2010. At the end of the additional six month grace
period, if STW has not met its obligations, GE Water represented that it would
meet with STW to determine the state of the investment market and grant or not
grant an additional grace period, as necessary. If, after February
13, 2010, GE Water elected to not extend STW’s payment obligations, GE Water
could foreclose on the Evaporator System, resulting in the loss of payments
advanced to date by STW and future use of the Evaporator System under
construction.
On
October 1, 2009, GE Water sent a letter to STW unilaterally announcing to STW
that GE was canceling STW’s Purchase Order due to STW’s inability to pay the
current amounts due. GE Water also demanded a “termination” payment
of $750,000. In the same letter, GE Water unilaterally announced it
was cancelling the Teaming Agreement citing GE Water’s belief that STW was
insolvent. GE Water prefaced its cancellation of the Purchase Order
and Teaming Agreement on a failure of GE Water and STW to renegotiate a
substitute Teaming Agreement. On October 8, 2009, STW responded to GE
Water in writing rejecting GE Water’s unilateral termination of the Purchase
Order and Teaming Agreements, among other things including that GE Water had the
contractual requirement to arbitrate certain of the disputed matters raised by
GE Water’s October 1, 2009 letter. In discussions in December 2009 between STW
management and GE Water, GE Water expressed continued interest in working with
STW by providing technical support and a willingness to resolve their
differences, pending the results of STW’s merger and capital raise in January
2010.
If the
Company is unable to reach an agreement with GE Water whereby STW is again able
to proceed with the Purchase Order and the Teaming Agreement, the Company would
lose its rights to the Evaporator System (this is currently the Company’s only
significant asset), which could result in the Company ceasing operations and, in
turn, would result in a complete loss of your investment.
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13 -
We
will require significant capital requirements for equipment, commercialization
and overall success.
We will
require additional financing for our operations, to purchase equipment and to
establish a customer base. We anticipate that we will require a
minimum of $10.0 to $15.0 million in additional capital over the next six months
to pursue our business plan. We cannot assure you that we will obtain
any additional financing through any other means. Additional
financing may not be available to us on acceptable terms, if at
all. Unless we raise additional financing, we will not have
sufficient funds to complete the purchase of equipment and commercialization of
our services.
Our
additional financing requirements could result in dilution to existing
stockholders.
We will
require additional financings obtained through one or more transactions which
effectively dilute the ownership interests of holders of our Common
Stock. We have the authority to issue additional shares of Common
Stock and Preferred Stock as well as additional classes or series of ownership
interests or debt obligations which may be convertible into any class or series
of ownership interests in the Company. The Company is authorized to
issue 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock. Such securities may be issued without the approval or other
consent of the holders of the Common Stock.
A
small number of existing shareholders own a significant amount of our Common
Stock, which could limit your ability to influence the outcome of any
shareholder vote.
Our
executive officers, directors and shareholders holding in excess of 5% of our
issued and outstanding shares, beneficially own over31.9% of our Common Stock,
before giving effect to the Offering. Under our Articles of Incorporation and
Nevada law, the vote of a majority of the shares outstanding is generally
required to approve most shareholder action. As a result, these
individuals will be able to significantly influence the outcome of shareholder
votes for the foreseeable future, including votes concerning the election of
directors, amendments to our Articles of Incorporation or proposed mergers or
other significant corporate transactions.
We
face competition.
We face
competition from existing companies in reclamation of oil and gas waste water
space that provide similar services to the Company’s. Our competitors
may have longer operating histories, greater name recognition, broader customer
relationships and industry alliances and substantially greater financial,
technical and marketing resources than we do. Our competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of our
confidential information to third parties, as well as agreements that provide
for disclosure and assignment to us of all rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, such agreements can be difficult and costly to
enforce. Although we generally seek to enter into these types of
agreements with our consultants, advisors and research collaborators, to the
extent that such parties apply or independently develop intellectual property in
connection with any of our projects, disputes may arise concerning allocation of
the related proprietary rights. If a dispute were to arise
enforcement of our rights could be costly and the result
unpredictable. In addition, we also rely on trade secrets and
proprietary know-how that we seek to protect, in part, through confidentiality
agreements with our employees, consultants, advisors or others.
Despite
the protective measures we employ, we still face the risk that: agreements may
be breached; agreements may not provide adequate remedies for the applicable
type of breach; our trade secrets or proprietary know-how may otherwise become
known; our competitors may independently develop similar technology; or our
competitors may independently discover our proprietary information and trade
secrets.
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our
common stock
We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
Our
stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.
The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity securities. The market
price of our common stock could change in ways that may or may not be related to
our business, our industry or our operating performance and financial condition.
In addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. We have experienced significant
volatility in the price of our stock over the past few years. We cannot assure
you that the market price of our common stock will not fluctuate or decline
significantly in the future. In addition, the stock markets in general can
experience considerable price and volume fluctuations.
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14 -
We
have not voluntary implemented various corporate governance measures, in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflict of interest and similar
matters.
Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or the NASDAQ Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors' independence, audit committee oversight, and the adoption of a code
of ethics. While we intend to adopt certain corporate governance measures such
as a code of ethics and established an audit committee, Nominating and Corporate
Governance Committee, and Compensation Committee of our board of directors, we presently do not have any
independent directors. We intend to expand our board membership in future
periods to include independent directors. It is possible that if we were to have
independent directors on our board, stockholders would benefit from somewhat
greater assurances that internal corporate decisions were being made by
disinterested directors and that policies had been implemented to define
responsible conduct. For example, in the absence of audit, nominating and
compensation committees comprised of at least a majority of independent
directors, decisions concerning matters such as compensation packages to our
senior officers and recommendations for director nominees may be made by our
sole director who has an interest in the outcome of the matters being decided.
Prospective investors should bear in mind our current lack of both corporate
governance measures and independent directors in formulating their investment
decisions.
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring smaller reporting
companies, such as our company, to include a report of management on the
company's internal controls over financial reporting in their annual reports for
fiscal years ending on or after December 15, 2007. We will be
required to include the management report in the annual report for the year
ending December 31, 2009. In addition, for our fiscal year ending December 31,
2009 the independent registered public accounting firm auditing our financial
statements must also attest to and report on management's assessment of the
effectiveness of our internal controls over financial reporting as well as the
operating effectiveness of our internal controls. In the event we are unable to
receive a positive attestation from our independent auditors with respect to our
internal controls, investors and others may lose confidence in the reliability
of our financial statements and our ability to obtain financing as needed could
suffer.
If
a public market for our common stock develops, trading will be limited under the
SEC’s penny stock regulations, which will adversely affect the liquidity of our
common stock.
The
trading price of our common stock is less than $5.00 per share and, as a result,
our common stock is considered a "penny stock," and trading in our common stock
would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under
this rule, broker/dealers who recommend low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements. Generally, the broker/dealer must make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction.
SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few broker or dealers are likely to undertake
these compliance activities. In addition to the applicability of the penny stock rules, other risks associated
with trading in penny stocks could also be price fluctuations and the lack of a
liquid market. An active and liquid market in our common stock may never develop
due to these factors.
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15 -
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Forward
Looking Statements
Some of
the statements contained in this Form 8-K that are not historical facts are
"forward-looking statements" which can be identified by the use of terminology
such as "estimates," "projects," "plans," "believes," "expects," "anticipates,"
"intends," or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Form 8-K, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
|
Our
ability to attract and retain
management;
|
|
Our
ability to raise capital when needed and on acceptable terms and
conditions;
|
|
The
intensity of competition;
|
|
General
economic conditions;
|
|
Changes
in regulations and our ability obtain permits from jurisdictions in which
we operate; and
|
|
The
extent to which the market for water reclamation services exists and the
pace at which it may grow if at all.
|
All
written and oral forward-looking statements made in connection with this Form
8-K that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
Our Plan
of Operation should be read in conjunction with our financial statements
included herein.
Overview
On
January 21, 2010, Woozyfly 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”) and certain shareholders
of STW controlling a majority of the issued and outstanding shares of
STW. Pursuant to the Merger Agreement, STW will be merged into the
Acquisition Sub resulting in an exchange of all of the issued and outstanding
shares of STW for shares of the Company on a one for one basis. At such time,
STW will become a wholly owned subsidiary of the Company. The Merger
Agreement is subject to the Bankruptcy Court confirmation as well as standard
closing conditions.
On
February 9, 2010, the Court entered an order confirming the Seconded Amended
Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger
was approved. It is expected that the Plan will be effective
February 19, 2010 (the “Effective Date”). The
principal
provisions of the Plan are as follows:
·
|
MKM,
the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000
shares of preferred stock;
|
·
|
the
holders of the Convertible Notes shall receive 1,760,000 shares of common
stock;
|
·
|
general
unsecured claims shall received 100,000 shares of common stock;
and
|
·
|
the
Company’s equity interest shall be extinguished and
cancelled.
|
On
February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged
with and into Acquisition Sub, which became a wholly-owned subsidiary of the
Company (the “Merger”). In consideration for the Merger and STW
becoming a wholly-owned subsidiary of the Company, the Company issued an
aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to
the shareholders of STW at the closing of the merger and all derivative
securities of STW as of the Merger became derivative securities of Woozyfly
including options and warrants to acquire 12,613,002 shares of common stock at
an exercise price ranging from $3.00 to $8.00 with an exercise period ranging
from July 31, 2011 through November 12, 2014 and convertible debentures in the
principal amount of $1,467,903 with a conversion price of $0.25 and maturity
dates ranging from April 24, 2010 through November 12, 2010.
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16 -
Considering
that, following the merger, the shareholders of STW control the majority of our
outstanding voting common stock and we effectively succeeded our otherwise
minimal operations to those that are theirs, STW 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 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 is the surviving and continuing entities and the
historical financials following the reverse merger transaction will be those of
STW. We were a "shell company" (as such term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended) immediately prior to our
acquisition of STW pursuant to the terms of the Merger Agreement. As
a result of such acquisition, our operations our 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.
Results
of Operations
Twelve
Months Ended December 31, 2009 Compared to Twelve Months Ended December 31, 2008
Revenue. Revenue generated for the twelve months ended December
31, 2009 and
2008 was $34,000
and $0 respectively. Revenue for 2009 was
generated in conjunction with a test of its technology for a potential
customer.
Expenses. Our expenses for the
twelve months ended December 31, 2009 were $4,125,669, and consisted of payroll and
payroll taxes ($1,654,659), legal and professional
fees ($873,050), stock based
compensation
($600,300) and
($404,032) in other administrative expenses
including travel to the prospective sites. Our expenses for
the twelve months ended December 31, 2008 were $2,525,763 and consisted of payroll and
payroll taxes ($1,023,433), legal and professional
fees ($714,865), stock based
compensation
($233,493) and ($553,972) in other administrative
expenses. The
reason for the increase in comparing the twelve months ended December 31, 2008 to the same period for
2009 was
due to
increased in activity in evaluating the water
reclamation market and to the company’s process for permitting sites in
Pennsylvania which included the hiring of additional
employees.
Net
loss. Net loss for the twelve months ended December 31, 2009 and 2008 were
$4,124,314 and $2,646,568,
respectively.
Year Ended December 31,
2009
Revenue. Revenue generated for 2009 was $34,000. It was
generated in
conjunction with a test of its technology for a potential customer.
Expenses. Our expenses for the
twelve months ended December 31, 2009 were $4,125,669, and consisted of payroll and
payroll taxes ($1,654,659), legal and professional
fees ($873,050), stock based
compensation
($600,300) and
($404,032) in other administrative expenses
including travel to the prospective sites.
Net
loss. Net loss
for the year ended December 31, 2009
was
$4,124,314 .
Liquidity and Capital
Resources
As of December 31, 2008, we
had current assets of $69,751 including cash of
$17,639 and current liabilities of
$5,720,104. As of
December
31, 2009, we had
current assets of $112,480 including cash of
$11,621 and current liabilities of
$11,579,929.
Operating
Activities
Our operating activities from
continuing operations resulted in a net cash used by operations of $1,044,108 for the twelve months ended December 31, 2009 compared to net cash
used by operations of $1,716,338 for the
twelve months
ended December 31,
2008. The net cash used by operations for the twelve months ended
December 31, 2009 reflects a net loss of $4,124,314 offset by depreciation of
$21,633, amortization of debt issue
costs of $415,780, notes payable issued for
deferred compensation of $1,123,851, stock based compensation of $600,300 and
the fair value of equity issued for services of $353,983, account payables and other accrued expenses
of $432,930 and
other minor factors. The net cash used by operations for the
twelve months ended December 31, 2008 reflects a net loss of
$2,646,568 offset by depreciation of
$13,640, stock based compensation of
$233,493, and
account payables
and other accrued expenses of $629,714 and other minor
factors.
Investing
Activities
Our investing activities
resulted in a net cash outflow of $3,387 for the
twelve months
ended December
31, 2009
compared to a net cash outflow of $4,918,989 for the twelve months ended December 31, 2008. Cash used
in investing activities principally represents acquisition of property and
equipment offset
by proceeds from the sale of assets.
Financing
Activities
Our financing activities
resulted in a cash inflow of $1,041,477 for the twelve months ended December 31, 2009 and $6,652,966 for the twelve
months ended December 31, 2008, which represents both issuances of notes
payable and sales of equity by the company.
Notes
Payable
In April 2008 the company
issued promissory notes (“April 2008 Notes”) totaling $1,100,000 bearing
interest at 10%. These notes were repaid in full in June
2008.
In
September 2008 the Company entered into a securities purchase agreement for the
issuance of a 12% promissory note (“2008 September Bridge Note”) in the
principal amount of $125,000.
In
December 2008 the Company entered into a securities purchase agreement with the
Chairman and Chief Executive Officer for the issuance of a 10% promissory note
(“CEO Bridge Note”) in the principal amount of $75,000.
During
2008 the Company also entered into various vehicle and insurance financing
contracts. The amount outstanding at December 31, 2009 was
$3,712.
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 to 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.
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.
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. 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
$1.4 million during the twelve months ended December 31, 2009. At
December 31, 2009, the Company had no remaining compensation cost to be
recognized related to these issuances.
Warrants
As of
December 31, 2008, the Company had 5,739,900 warrants outstanding to acquire the
Company’s Common Stock. As of December 31, 2009 the Company had
15,814,744 warrants outstanding to acquire the Company’s Common
Stock.
Presently,
due to the lack of revenue we are not able to meet our operating and capital
expenses. The success of our ability to continue as a going concern is dependent
upon successful permitting of our sites obtaining customers for water
reclamation services, and maintaining a break even or profitable level of
operations. We have incurred operating losses since inception, and this is
likely to continue through the third quarter of 2010.
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, all
phases 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.
Commitments
The
Company 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. The Company 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 Company and GE Water relationship when the company 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.
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.
Critical
Accounting Policies and Estimates
The
following accounting principles and practices of STW (the Company) are set forth
to facilitate the understanding of data presented in the consolidated financial
statements:
Nature of
operations
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 Acid Mine Drainage polluted
water problems in the northeastern United States, and brackish aquifer
reclamation for reuse.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Property and
depreciation
Property
and equipment are recorded at cost and depreciation is provided using the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the
lesser of the life of the lease or the estimated useful life of the
asset.
Expenditures
for major additions or improvements, which extend the useful lives of assets,
are capitalized. Minor replacements, maintenance and repairs, which
do not improve or extend the lives of the assets, are charged to operations as
incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current
operations.
Income
taxes
The
Company follows ASC Topic 740, “Income Taxes” for recording the provision for
income taxes. Deferred tax assets and liabilities are computed based
upon the difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or
settled. Deferred income tax expenses or benefits are based on the
changes in the asset or liability during each period. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized. Future changes in such valuation allowance are included
in the provision for deferred income taxes in the period of
change. Deferred income taxes may arise from temporary differences
resulting from income and expense items reported for financial accounting and
tax purposes in different periods. Deferred taxes are classified as
current or non-current, depending on the classification of assets and
liabilities to which they relate. Deferred taxes arising from
temporary differences that are not related to an asset or liability are
classified as current or non-current depending on the periods in which the
temporary differences are expected to reverse.
At
Inception (January 28, 2008), the Company implemented the accounting guidance
for uncertainty in income taxes using the provisions of ASC Topic 740 ,which is
intended to clarify the accounting for income taxes prescribing a minimum
recognition threshold for a tax provision before being recognized in the
consolidated financial statements. c also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As a result, the
Company has concluded that it does not have any unrecognized tax benefits or any
additional tax liabilities after applying this guidance. The adoption
of this guidance therefore had no impact on the Company’s consolidated financial
statements.
Concentrations
Financial
instruments that potentially subject 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.
Subsequent
events
STW
evaluates events and transactions occurring subsequent to the date of the
financial statements for matters requiring recognition or disclosure in the
financial statements. The accompanying financial statements consider events
through March 31, 2010.
MANAGEMENT
Executive
Officers and Directors
Below are
the names and certain information regarding STW’s executive officers and
directors following the acquisition of STW.
Name
|
Age
|
Position
|
||
Stanley
Weiner
|
56
|
Chief
Executive Officer, President, Chief Financial Officer and Chairman of
the Board of Directors
|
||
Marty
Walter
Joseph
O’Neill
Hon
Bill Carter
Paul
DiFrancesco
D.
Grant Seabolt, Jr.
|
51
64
80
46
55
|
Vice
President of Field Operations
Director
Director
Director
Secretary
|
Background
of Executive Officers and Directors
Stanley
Weiner, Director, Chief Executive Officer and Chief Financial
Officer
Stanley
T. Weiner, a 30 year veteran of the oil and gas industry, has explored, drilled
and operated oil and gas properties in the United States and in South America.
Previously, Mr. Weiner served as president and CEO of Molecular Solutions, LLC,
and was founder and CEO of Weiner Investments Inc, and American Crude Oil,
Inc.
Marty
Walter, Vice President of Field Operations
Marty
Walter has 25 years of experience in the specialty chemical, petrochemical, and
cryogenics industries in the areas of operations, safety, environmental,
customer service and logistics. Prior to joining STW Resources, Mr.
Walter was the Operations Manager for NuCo2, Inc. Prior to that, he
was a manager for Distribution and Office Services for Betz Energy Chemicals,
and Assistant Plant Manager for Betz Laboratories.
Joseph
O’Neill, Director
Joseph I.
O’Neill III has close to 40 years of experience in the oil and gas
industry. He currently serves as Managing Partner of O’Neill
Properties, a highly regarded Midland, Texas oil and gas
producer. Mr. O’Neill is the Chairman of the Board of Texas Oil &
Gas Association and is a Director of the Petroleum Club of
Midland. He has served on the boards of numerous industries, civic,
academic, political and charitable institutions. He is a graduate of
Notre Dame University and formerly on the Board of Directors and a past
President of the Notre Dame Alumni Association.
The
Hon. Bill Carter, Director
The Hon.
Bill Carter is a former Member of the Texas House of Representatives (1984-2003)
and is former Chairman of the Texas Public Safety Committee. In
addition to receiving the 1997 American Legislative Exchange Council Legislator
of the Year Award, Mr. Carter has received numerous state and national awards,
including Outstanding Legislator Award from the Texas Chiropractic Association,
the Legislative Excellence Award from the Texas Head Injury Association, the
Greater Dallas Crime Commission Crime Fighter of the Year, the Outstanding
Legislator in Texas from the Texas Association of Regional Councils, and the
Presidential Achievement Award from President Ronald Reagan.
Paul
DiFrancesco, Director
Paul C.
DiFrancesco has over twenty years of experience in the financial
sector. Mr. DiFrancesco is currently a Partner at Viewpoint
Securities, LLC a registered broker-dealer that provides investment banking
services to emerging growth companies. In 2001, Mr. DiFrancesco
co-founded and is currently the President of Decision Capital Management,
LLC. Prior to co-founding Decision, Mr. DiFrancesco was Senior
Managing Director of Preferred Capital Markets in San
Francisco. During Mr. DiFrancesco's tenure, Preferred Capital Markets
was named by Fortune Magazine several years running, as one of the top 100
fastest growing private companies. In 1995, Mr. DiFrancesco joined
Apodaca-Johnston Investment Group as Managing Director and as a member of the
Investment Committee. In 1990, Mr. DiFrancesco joined Torrey Pines
Securities, where he built and managed the trading desk.
Officers
are elected annually by the Board of Directors (subject to the terms of any
employment agreement), at its annual meeting, to hold such office until an
officer’s successor has been duly appointed and qualified, unless an officer
sooner dies, resigns or is removed by the Board.
-
22 -
Executive
Compensation
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
(5)
Stock
Awards
($)
|
(6)
Stock
Options
($)
|
Non-equity
Incentive
Plan
Compensation
($)
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Gene
Brock, President (1)
|
2008
|
$334,000
|
$13,350
|
$347,350
|
||||||||||||||||||||||||||||||
2007
|
$0
|
|||||||||||||||||||||||||||||||||
Stanley
T Weiner, CEO Chairman
|
2008
|
$221,000
|
$89,000
|
$310,000
|
||||||||||||||||||||||||||||||
2007
|
$0
|
|||||||||||||||||||||||||||||||||
G.
Wade Stubblefield , CFO (1)
|
2008
|
$109,083
|
$25,312
|
$134,395
|
||||||||||||||||||||||||||||||
2007
|
$0
|
|||||||||||||||||||||||||||||||||
Marty
Walter , V P Operations
|
2008
|
$102,500
|
$13,500
|
$116,000
|
||||||||||||||||||||||||||||||
2007
|
$0
|
*Date of
Inception January 8, 2008
(1) Have
resigned as executive officers of the Company.
Outstanding
Equity Awards at Fiscal Year-End
STW does
not have any outstanding equity awards.
DIRECTOR
COMPENSATION
STW has
not paid any fees to its directors.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of March 31, 2010 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of the Company’s executive
officers and directors; and (iii) the Company’s directors and executive officers
as a group. Except as otherwise indicated, each of the stockholders listed below
has sole voting and investment power over the shares beneficially
owned.
Name
of Beneficial Owner (1)
|
Common
Stock
Beneficially
Owned
|
Percentage
of
Common
Stock (2)
|
||||||
Stanley
Weiner*
|
7,354,003
|
20.79%
|
||||||
Marty
Walter*
|
1,154,625
|
3.26%
|
||||||
D.
Grant Seabolt, Jr., Esq.*
|
1,405,550
|
3.97%
|
||||||
Paul
Difrancesco*
|
3,369,537
|
9.52%
|
||||||
Joseph O’Neil
*
|
200,000
|
0.57%
|
||||||
Hon. Bill Carter*
All officers and directors as a
group (6 persons)
|
268,000
13,751,715
|
0.76%
38.87%
|
*Executive
officer and/or director of the Company.
-
23 -
**
Less than 1%
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o STW
Resources, Inc., 619 West Texas Avenue, Suite 126, Midland,
Texas 79701.
|
(2)
|
Applicable
percentage ownership is based on 35,378,099 shares of common stock
outstanding as of March 31, 2010, together with securities exercisable or
convertible into shares of common stock within 60 days of February 12,
2010 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to
securities. Shares of common stock that are currently
exercisable or exercisable within 60 days of March 31, 2010 are deemed to
be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
|
-
24 -
DESCRIPTION
OF SECURITIES
The
Company’s authorized capital stock consists of 100,000,000 shares of common
stock at a par value of $0.001 per share and 10,000,000 shares of preferred
stock at a par value of $0.001 per share. As of February 12, 2009,
there are 28,728,075 shares of the Company’s common stock issued and
outstanding that are held by approximately 65 stockholders of record and
2,140,000 shares of preferred stock issued and outstanding held by one
shareholder.
Holders
of the Company’s common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do
not have cumulative voting rights. Therefore, holders of a majority
of the shares of common stock voting for the election of directors can elect all
of the directors. Holders of the Company’s common stock representing
a majority of the voting power of the Company’s capital stock issued,
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of stockholders. A
vote by the holders of a majority of the Company’s outstanding shares is
required to effectuate certain fundamental corporate changes such as
liquidation, merger or an amendment to the Company’s articles of
incorporation.
Holders
of the Company’s common stock are entitled to share in all dividends that the
board of directors, in its discretion, declares from legally available
funds. In the event of liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock. The
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
The
shares of our common stock have been historically qouted on the OTC Bulletin
Board under the symbol “WZYFQ”. As a result of the Bankruptcy, our
common stock will be extinguished and we expect that our shares of common stock
will cease trading or being quoted on the OTCBB. We expect to have a
registered broker dealer file an application to have our shares quoted on the
OTCBB.
The
following table sets forth, for the fiscal quarters indicated, the high and low
sale price for our common stock, as reported on the OTC Bulletin
Board.
Quarterly
period
|
High
|
Low
|
||||||
Fiscal
year ended December 31, 2008:
|
||||||||
Third
Quarter
|
$
|
5.25
|
$
|
0.88
|
||||
Fourth
Quarter
|
$
|
0.88
|
$
|
0.15
|
||||
Fiscal
year ended December 31, 2009:
|
||||||||
First
Quarter
|
$
|
0.15
|
$
|
0.15
|
||||
Second
Quarter
|
$
|
0.15
|
$
|
0.15
|
||||
Third
Quarter
|
$
|
0.15
|
$
|
0.15
|
||||
Fourth
Quarter
|
$
|
0.15
|
$
|
0.15
|
Prior to
the third quarter, our stock was not actively traded.
Holders
of our Common Stock
As of
February 12, 2010, there were approximately 65 stockholders of record of our
common stock.
Dividends
The
Company has never declared or paid any cash dividends on its common stock. The
Company currently intends to retain future earnings, if any, to finance the
expansion of its business. As a result, the Company does not anticipate paying
any cash dividends in the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
Company does not have an authorized equity compensation
plan.
-
25 -
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Company’s directors and executive officers are indemnified as provided by the
Nevada Corporation law and its Bylaws. These provisions state that the Company’s
directors may cause the Company to indemnify a director or former director
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, actually and reasonably incurred by him as a
result of him acting as a director. The indemnification of costs can include an
amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of the Company’s board of directors and is
subject to the Securities and Exchange Commission’s policy regarding
indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, The Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
Item
3.02 Unregistered Sales of Equity Securities.
On
February 12, 2009, pursuant to the terms of the Merger Agreement, STW merged
with and into Acquisition Sub, which became a wholly-owned subsidiary of the
Company (the “Merger”). In consideration for the Merger and STW
becoming a wholly-owned subsidiary of the Company, the Company issued an
aggregate of 26,543,075 (the “STW Acquisition Shares”) shares of common stock to
the shareholders of STW at the closing of the merger and all derivative
securities of STW as of the Merger became derivative securities of Woozyfly
including options and warrants to acquire 12,613,002 shares of common stock at
an exercise price ranging from $3.00 to $8.00 with an exercise period ranging
from July 31, 2011 through November 12, 2014 and convertible debentures in the
principal amount of $1,467,903 with a conversion price of $0.25 and maturity
dates ranging from April 24, 2010 through November 12, 2010.
This
issuance of these above securities is exempt from the registration requirements
under Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 as
promulgated under Regulation D.
On
February 9, 2010, the Court entered an order confirming the Seconded Amended
Plan of Reorganization (the “Plan”) pursuant to which the Plan and the Merger
was approved. It is expected that the Plan will be effective
February 19, 2010 (the “Effective Date”). The
principal
provisions of the Plan are as follows:
·
|
MKM,
the DIP Lender, shall receive 400,000 shares of common stock and 2,140,000
shares of preferred stock;
|
·
|
the
holders of the Convertible Notes shall receive 1,760,000 shares of common
stock;
|
·
|
general
unsecured claims shall received 100,000 shares of common stock;
and
|
·
|
the
Company’s equity interest shall be extinguished and
cancelled.
|
The offer
and sale of the above securities pursuant to the Plan and the Confirmation Order
was exempt from registration under the Securities Act of 1933, as amended,
pursuant to section 1145(a) of the Bankruptcy
Code. Section 1145(a) of the Bankruptcy
Code generally exempts from such registration requirements the issuance of securities if the following conditions are
satisfied: (i) the securities are issued or sold under a Chapter 11 plan by (a)
a debtor, (b) one of its affiliates participating in a joint plan with the
debtor or (c) a successor to a debtor under the plan and (ii) the securities are
issued entirely in exchange for a claim against or interest in the debtor or
such affiliate, or are issued principally in such exchange and partly for cash
or property.
Item
3.03 Material Modification to
Rights of Security holders
The
information set forth in Item 1.01 and Item 3.02 of this Current Report on Form
8-K is incorporated by reference into this Item 3.03.
Item
5.01 Changes in Control of Registrant.
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.01.
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.02.
Item
5.06 Change in Shell Company Status.
As a
result of the consummation of the acquisition of STW described in Item 1.01
of this Current Report on Form 8-K, we are no longer a shell corporation as that
term is defined in Rule 405 of the Securities Act and Rule 12b-2 of
the Exchange Act.
-
26 -
Item
9.01 Financial Statements and Exhibits
Financial
Statements of Business Acquired
(a) Filed
herewith are the following:
Audited
financial statements of STW Resources, Inc. as of December 31, 2008 (See Exhibit
99.2)
Audited
financial statements STW Resources, Inc. as of December 31, 2009 (See Exhibit
99.3)
(b) Pro
Forma Financial Information
Not
Applicable
(c) Shell
Company Transactions
Not
Applicable
(d) Exhibits
Exhibit
No.
|
Description
|
|
3.1
3.2
3.3
10.1
|
Certificate
of Amendment to the Certificate of Incorporation – March 1, 2010
(3)
Articles
of Merger between STW Acquisition, Inc. and STW Resources, Inc.
(2)
Articles
of Merger filed with the State of Nevada on March 3, 2010 (4)
Agreement
and Plan of Merger for proposed merger between Woozyfly, Inc., Merger Sub,
and STW Resources, Inc. dated January 17, 2010. (1)
|
|
21.1
|
List
of Subsidiaries (2)
|
|
99.1
|
Order
Confirming the Second Amended Plan of Reorganization of Woozyfly, Inc.
(2)
|
|
99.2
|
Audited
financial statements of STW Resources, Inc. as of December 31, 2008
(2)
|
|
99.3
|
Audited
financial statements STW Resources, Inc. as of December 31,
2009
|
|
(1) Incorporated
by reference to the Form 8-K Current Report filed with the Securities and
Exchange Commission on January 26, 2010.
(2) Incorporated
by reference to the Form 8-K Current Report filed with the Securities and
Exchange Commission on February 19, 2010.
(3) Incorporated
by reference to the Form 8-K Current Report filed with the Securities and
Exchange Commission on March 2, 2010.
(4) Incorporated
by reference to the Form 8-K Current Report filed with the Securities and
Exchange Commission on March 9, 2010.
-
27 -
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
STW
Resources Holding Corp.
|
|||
Dated:
March 31, 2010
|
By:
|
/s/ Stanley
Weiner
|
|
Name:
Stanley Weiner
|
|||
Title:
Chief Executive Officer and Chairman of the Board of
Directors
|
|||
-
28 -