UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
OR
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from_____ to _____
 
STW RESOURCES HOLDING CORP
 
(Exact Name of Registrant as Specified in Charter)
 
Nevada
  
000-52654
  
26-1945743
(State or Other Jurisdiction of Incorporation)
  
(Commission File No.)
  
(I.R.S. Employer Identification No.)
3424 South County Road 1192
Midland, Texas 79706
      
 
(432) 686-7777
(Address of Principal Executive Offices)
      
(Registrant’s Telephone Number)
 
(Former name and address, if changed since last report)

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

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

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

Large accelerated filer     [  ]
Accelerated filer     [  ]
Non-accelerated filer     [  ]
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]
 
As of November 24, 2015, there were 35,844,548 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

 
 
 

 
   
Page
  
PART I
FINANCIAL INFORMATION
    
       
1
  
       
 
1
  
 
2
  
 
3
  
 
4
  
 
6
  
       
32
  
       
39
  
       
PART II
OTHER INFORMATION
    
       
40
  
       
42
  
       
43
  
       
44
  

 
i
 

PART I
ITEM 1. FINANCIAL STATEMENTS
STW Resources Holding Corp
     
September 30,
2015
    
December 31,
2014
  
ASSETS
  
(Unaudited)
        
Current Assets
            
Cash
  
$
--
    
$
137,524
  
Accounts receivable, trade, net
    
1,612,968
      
3,493,918
  
Accounts receivable from related parties
    
--
      
7,980
  
Deferred project costs
    
1,416,423
      
480,000
  
Prepaid expenses and other current assets
    
462,082
      
329,475
  
Assets of discontinued operations
    
--
      
1,078,142
  
 
Total Current Assets
    
3,491,473
      
5,527,039
  
Long Term Assets
                
Property and equipment, net
    
949,386
      
1,203,082
  
TOTAL ASSETS
  
$
4,440,859
    
$
6,730,121
  
LIABILITIES AND STOCKHOLDERS' DEFICIT
                
Current Liabilities
                
Book overdraft
  
$
671,037
    
$
--
  
Accounts payable
    
3,055,185
      
3,467,690
  
Payable to related parties:
                
Black Pearl Energy, LLC
    
167,286
      
1,276,588
  
Crown Financial, LLC
    
1,345,855
      
2,034,810
  
Dufrane Nuclear, Inc.
    
47,767
      
--
  
Accrued compensation – officers
    
1,013,380
      
873,380
  
Current portion of notes payable, net of discounts, including $1,595,672 and $1,077,235 payable to related parties, respectively
    
7,627,546
      
5,869,484
  
Sales and payroll taxes payable
    
2,475,066
      
2,197,768
  
Insurance premium finance contract payable
    
186,044
      
208,271
  
Accrued expenses and interest
    
2,508,728
      
1,727,734
  
Deferred revenue
    
1,404,668
      
680,000
  
Accrued compensation
    
401,366
      
495,934
  
Accrued board compensation
    
254,531
      
496,067
  
Fees payable in common stock
    
1,289,891
      
2,783,711
  
Stock subscriptions payable
    
117,000
      
27,000
  
Liabilities of discontinued operations
    
1,059,168
      
2,584,164
  
Derivative liability
    
22,701
      
802,340
  
 
Total Current Liabilities
    
23,647,219
      
25,524,941
  
Notes payable, net of discount and current portion, $540,919 and $623,159 payable to related parties, respectively
    
2,616,282
      
2,093,217
  
Total Liabilities
    
26,263,501
      
27,618,158
  
Commitments and contingencies (Note 9)
                
Stockholders' Deficit
                
Preferred stock, par value $0.001 per share, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
    
-- 
      
-- 
  
Common stock; $0.001 par value; 191,666,667 shares authorized, 35,844,548 and 28,194,953 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
    
35,847
      
28,197
  
Additional paid in capital
    
24,242,826
      
18,383,411
  
Accumulated deficit
    
(45,749,846
)
    
(39,112,171
)
Total Stockholders' Deficit of STW Resources Holding Corp.
    
(21,471,173
)
    
(20,700,563
)
Non-controlling interest in subsidiary
    
(351,469
)
    
(187,474
)
Total Stockholders’ Deficit
    
(21,822,642
)
    
(20,888,037
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  
$
4,440,859
    
$
6,730,121
  

See accompanying notes which are an integral part of these unaudited condensed consolidated financial statements.


STW Resources Holding Corp
For the three and nine month periods ended September 30, 2015 and 2014 (Unaudited)

   
For the Three Months Ended
September 30,
    
For the Nine Months Ended
September 30,
  
   
2015
    
2014
    
2015
    
2014
  
Revenues:
                                
   Water treatment services
  
$
1,063,219
    
$
162,846
    
$
1,330,989
    
$
172,897
  
   Energy and construction services
    
2,844,351
      
3,100,205
      
7,362,094
      
8,258,119
  
   Related parties services revenue
    
--
      
56,232
      
354
      
91,370
  
Net revenues
    
3,907,570
      
3,319,283
      
8,693,437
      
8,522,386
  
                                 
Cost of revenues
    
2,775,727
      
2,765,557
      
5,780,712
      
7,873,837
  
Gross Profit
    
1,131,843
      
553,726
      
2,912,725
      
648,549
  
                                 
Operating expenses
                                
   Research and development
    
--
      
--
      
7,435
      
151,955
  
   Sales and marketing
    
50,400
      
163,547
      
316,260
      
379,362
  
   General and administrative
    
2,693,622
      
3,205,399
      
6,986,042
      
7,740,510
  
   Depreciation and amortization
    
48,240
      
25,748
      
119,548
      
47,291
  
Total operating expenses
    
2,792,262
      
3,394,694
      
7,429,285
      
8,319,118
  
                                 
Loss from operations
    
(1,660,419
)
    
(2,840,968
)
    
(4,516,560
)
    
(7,670,569
)
                                 
Interest expense, including related party interest of $42,730 and $9,796 for the three months ended September 30, 2015 and 2014, respectively, and $113,128 and $29,389 for the nine months ended September 30, 2015 and 2014, respectively.
    
(833,126
)
    
(491,913
)
    
(3,428,867
)
    
(1,353,529
)
Change in derivative liability
    
260,461
      
(834,930
)
    
1,887,670
      
(1,278,466
)
Loss from continuing operations
  
$
(2,233,084
)
  
$
(4,167,811
)
  
$
(6,057,757
)
  
$
(10,302,564
)
Loss from operations of discontinued entities
    
(10,524
)
    
(1,141,849
)
    
(743,913
 )     
(1,505,616
 ) 
Net Loss
    
(2,243,608
 )     
(5,309,660
)
    
(6,801,670
 )     
(11,808,180
)
Share of net income (loss) of subsidiary attributable to non-controlling interest
    
(2,615
)
    
(135,366
)
    
(163,995
)
    
(166,294
)
Net Loss of STW Resources Holding Corp.
  
$
(2,240,993
)
  
$
(5,174,294
)
  
$
(6,637,675
)
  
$
(11,641,886
)
                                 
Loss per common share – basic and diluted
  
$
(0.06
)
  
$
(0.19
)
  
$
(0.21
)
  
$
(0.49
)
Weighted average shares outstanding – basic and diluted
    
35,753,309
      
27,006,992
      
32,160,646
      
23,657,068
  

See accompanying notes which are an integral part of these unaudited condensed consolidated financial statements.


STW Resources Holding Corp
For the nine months ended September 30, 2015

   
Common Stock
$0.001 Par
        
   
Number
    
Amount
    
Additional
Paid In Capital
    
Accumulated
Deficit
    
Non- Controlling Interest
    
Stockholders’
Deficit
  
Balance, December 31, 2014
    
28,194,953
    
$
28,197
    
$
18,383,411
    
$
(39,112,171
)
  
$
(187,474
)
  
$
(20,888,037
)
Shares issued to employees from fees payable in common stock
    
2,548,334
      
2,549
      
1,819,477
                      
1,822,026
  
Shares issued to consultants from fees payable in common stock
    
2,152,456
      
2,153
      
1,682,193
                      
1,684,346
  
Shares issued as board of director fees
    
908,658
      
909
      
674,091
                      
675,000
  
Shares issued for subscriptions stock payable
    
15,385
      
15
      
9,985
                      
10,000
  
Shares issued upon conversion of notes payable and accrued interest
    
276,391
      
276
      
355,684
                      
355,960
  
Shares issued in connection with the 2015 Transfer Agreements as origination fees
    
525,000
      
525
      
420,475
                      
421,000
  
Shares issued for financing fees
    
700,000
      
700
      
319,769
                      
320,469
  
Shares issued per Salttech & Black Pearl Energy Agreements
    
523,371
      
523
      
305,182
                      
305,705
  
Value of warrants issued as debt issuance costs
                    
272,559
                      
272,559
  
Net loss for the period
                            
(6,637,675
)
    
(163,995
)
    
(6,801,670
)
Balance, September 30, 2015
    
35,844,548
    
$
35,847
    
$
24,242,826
    
$
(45,749,846
)
  
$
(351,469
)
  
$
(21,822,642
)

See accompanying notes which are an integral part of these unaudited condensed consolidated financial statements.
 

STW Resources Holding Corp
For the nine month periods ended September 30, 2015 and 2014
 
   
Nine Month Periods Ended
September 30:
  
   
2015
    
2014
  
Cash flows from operating activities – continuing operations
            
Net loss of STW Resources Holding Corp
  
$
(6,057,757
)
  
$
(10,302,564
)
Adjustments to reconcile net loss to net cash used in operating activities
                
   Depreciation
    
119,548
      
47,291
  
   Change in fair value of derivative liability
    
(1,887,670
)
    
1,278,466
  
   Financing costs of notes payable
    
412,590
      
42,594
  
   Change in fair value of debt instruments converted to equity
    
--
      
(272,980
)
   Amortization of discount and debt issuance costs
    
1,773,640
      
137,902
  
   Share-based compensation
    
2,714,684
      
3,486,606
  
Changes in working capital:
                
   (Increase) Decrease in accounts receivable
    
1,880,950
      
(885,391
)
   (Increase) Decrease in deferred project costs
    
(936,423
)
    
--
  
   (Increase) Decrease in prepaid expenses and other current assets
    
(132,607
)
    
(448,145
)
   Increase (Decrease) in accounts payable
    
247,664
      
1,792,032
  
   Increase (Decrease) in sales and payroll taxes payable
    
789,142
      
1,773,511
  
   Increase (Decrease) in deferred revenue
    
724,668
      
--
  
   Increase (Decrease) in accrued expenses and interest
    
804,188
      
--
  
   Increase (Decrease) in accrued compensation
    
(81,405
)
    
230,219
  
   Increase (Decrease) in accrued board compensation
    
433,464
      
--
  
    Net cash provided by/used in operating activities
    
804,676
      
(3,120,459
)
Cash flows from investing activities – continuing operations
                
   Purchase of equipment, net of equipment loans
    
(170,035
)
    
(470,689
)
    Net cash used in investing activities
    
(170,035
)
    
(470,689
)
Cash flows from financing activities – continuing operations
                
   Book overdraft
    
671,037
      
--
  
   Stock subscriptions payable
    
100,000
      
--
  
   Related party accounts receivables
    
7,980
      
(14,236
)
   Related party accounts payables, credit facilities, notes, and advances
    
(755,688
)
    
1,435,493
  
   Increase (Decrease) in insurance premium finance contract payable
    
(22,227
)
    
362,256
  
   Proceeds from notes payable
    
2,629,000
      
364,137
  
   Principal payments of notes payable
    
(1,752,438
)
    
(197,369
)
   Proceeds from issuance of common stock
    
--
      
1,221,500
  
   Debt issuance costs
    
(146,000
)
    
--
  
    Net cash provided by financing activities – continuing operations
    
731,664
      
3,171,781
  
Net increase in cash – continuing operations
    
1,366,305
      
(419,367
)
Cash flows from operating activities – discontinued operations
            
Net loss
  
$
(743,913
)
  
$
(1,505,616
)
Adjustments to reconcile net loss to net cash used in operating activities
                
   Depreciation of discontinued entities
    
18,681
      
134,989
  
   Loss on disposition of property and equipment of discontinued entities
    
114,809
      
39,861
  
Changes in working capital:
                
   (Increase) Decrease in assets of discontinued operations
    
1,184,584
      
(553,217
)
   Increase (Decrease) in liabilities of discontinued operations
    
(2,005,981
)
    
2,686,566
  
    Net cash (used)/provided by operating activities – discontinued operations
    
(1,431,820
)
    
802,583
  
Cash flows from investing activities – discontinued operations
                
Cash flows from financing activities – discontinued operations
                
   Principal payments of notes payable of discontinued entities
    
(72,009
)
    
(74,753
)
    Net cash provided by financing activities – discontinued operations
    
(72,009
)
    
(74,753
)
Net decrease in cash – discontinued operations
    
(1,503,829
)
    
727,830
  
Net increase (decrease) in cash
    
(137,524
)
    
308,463
  
Cash at beginning of period
    
137,524
      
4,699
  
Cash at end of period
  
$
--
    
$
313,162
  

 (Continued)

 
 
-4-

STW Resources Holding Corp
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine month periods ended September 30, 2015 and 2014

Supplemental cash flow information:
            
Cash paid for interest
  
$
105,557
    
$
19,803
  
Cash paid for income taxes
  
$
--
    
$
--
  
                 
Non-cash investing and financing activities:
                
Shares issued from common stock subscriptions payable
  
$
10,000
    
$
160,000
  
Value of shares issued to employees as compensation
  
$
1,822,026
    
$
1,011,375
  
Value of shares issued to consultants
  
$
1,684,346
    
$
775,575
  
Value of shares issued as board fees
  
$
675,000
    
$
558,157
  
Value of shares issued in connection with extension of notes payable
  
$
--
    
$
68,616
  
Value of shares issued in payment of accrued PIK interest
  
$
--
    
$
540,777
  
Value of shares issued upon conversion of notes payable and accrued interest
  
$
355,960
    
$
1,588,074
  
Shares issued for 2015 Transfer Agreement origination fees
  
$
421,000
    
$
--
  
Shares issued for Financing Fees
  
$
320,469
    
$
--
  
Value of shares issued as charitable contributions
  
$
--
    
$
110,000
  
Shares issued per Salttech & Black Pearl Energy Agreements
  
$
305,705
    
$
--
  
Value of warrants issued as debt issuance costs
  
$
272,559
    
$
--
  
Value of conversion feature of JMJ convertible note payable
  
$
--
    
$
50,000
  
Value of derivative associated with convertible note payable
  
$
--
    
$
715,981
  

See accompanying notes which are an integral part of these unaudited condensed consolidated financial statements.

 
 
-5-

STW Resources Holding Corp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Nine Month Periods Ended September 30, 2015 and 2014


Basis of presentation

The accompanying condensed consolidated financial statements of STW Resources Holding Corp and its subsidiaries (“STW,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2015, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K for such year as filed on April 3, 2015. During the nine months ended September 30, 2015, the Company decided to shut down the operations of its Energy and Oilfield businesses. Accordingly, some information included in our form 10-K may not be comparable to the information included in this form 10-Q. The December 31, 2014 condensed consolidated balance sheet was derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for such year as filed on April 3, 2015, see Reclassifications below.

History of the Company

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

The Company’s operations are located in the United States of America and the principal executive offices are located at 3424 South County Road 1192, Midland, Texas 79706.

Consolidation policy

The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2015, include the accounts of the STW Resources Holding Corp and its wholly owned subsidiaries: STW Water Process & Technologies LLC and STW Pipeline Maintenance & Construction, LLC. The condensed consolidated financial statements for the three and nine months ended September 30, 2014, include STW Resources Holding Corp and STW Pipeline Maintenance & Construction, LLC as STW Water Process & Technologies LLC was not established prior to the quarterly period ended September 30, 2014. All significant intercompany transactions and balances have been eliminated in consolidation.

STW Oilfield Construction LLC and the Company’s 75% owned subsidiary STW Energy, LLC have been reported as discontinued operations.

The Company also consolidates any variable interest entities (VIEs), of which it is the primary beneficiary, as defined. The Company does not have any VIEs that need to be consolidated at this time. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of accounting.

 
 
-6-

Reclassifications

Certain reclassifications were made to the prior period condensed consolidated financial statements to conform to the current period presentation. There was no change to the previously reported net loss. Additionally, the financial statements for September 30, 2014, and December 31, 2014 have been revised for the discontinued operations (See Note 8).
 
Non-Controlling interest

On June 25, 2013, the Company invested in a limited liability company (“LLC”) by obtaining a 75% interest in STW Energy Services, LLC (“STW Energy”). The non-controlling interest in STW Energy is held by Crown Financial, LLC, a Texas Limited Liability Company (“Crown” or “Crown Financial”). As of December 31, 2014, $2,500 was recorded as the equity of the non-controlling interest in our consolidated balance sheet representing the third-party investment in STW Energy, with a cumulative net loss attributable to non-controlling interests of $187,474 for the year ended December 31, 2014. During the three and nine month period ended September 30, 2015, a net loss attributable to the non-controlling interest of $5,615 and $163,995, respectively, was incurred. As of September 30, 2015, the net deficit interest in the subsidiary held by the non-controlling interest is $351,471

Going Concern

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $45,749,846 as of September 30, 2015, and as of that date was delinquent in payment of $2,475,066 of sales and payroll taxes. As of September 30, 2015, $6,493,616 of notes payable were in default. Since its inception in January 2008 through September 30, 2015, management had raised equity and debt financing of approximately $23,000,000 to fund operations and provide working capital. The cash resources of the Company are insufficient to meet its planned business objectives without additional financing. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with oil and gas operators and municipal utility districts; and (c) controlling overhead and expenses.

There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if any at all.

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

Use of Estimates

Condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable, the valuation of long lived assets, the assumptions used to calculate its derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts consists primarily of receivables from oil & gas services fees. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, and once these receivables are determined to be uncollectible, they are written off either against an existing allowance account or as a direct charge to the condensed consolidated statement of operations. As of September 30, 2015 and December 31, 2014, the allowances for doubtful accounts were $40,390 and $6,773, respectively.

 
 
-7-

Loan Discounts

The Company amortizes loan discounts over the term of the loan using the effective interest method.

Concentration of Credit Risk

A financial instrument that potentially subjects the Company to concentration of credit risk is cash. The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with limits to $250,000 per owner per institution. At September 30, 2015, there were no account balances per institution that would have exceeded the $250,000 insurance limit.

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.

As of September 30, 2015, three vendors accounted for 15%, 8% and 5% of total accounts payable. During the three months ended September 30, 2015, three vendors accounted for 55%, 9%, and 5% of total purchases. During the nine months ended September 30, 2015, three vendors accounted for 59%, 13%, and 7% of total purchases. As of December 31, 2014, three vendors accounted for 20% of total accounts payable. During the year ended December 31, 2014, two vendors accounted for 69% of total purchases.

As of September 30, 2015, three customers accounted for 45%, 34% and 7% of accounts receivable. During the three months ended September 30, 2015, three customers accounted for 67%, 19% and 6% of net revenues. During the nine months ended September 30, 2015, three customers accounted for 71%, 12% and 7% of net revenues. As of December 31, 2014, three customers accounted for 43%, 11% and 3% of accounts receivable. During the year ended December 31, 2014, three customers accounted for 39%, 11% and 7% of total revenues.

Fair Value of Financial Instruments

“Fair value” is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s financial instruments consist of cash, accounts receivable, notes payable, accounts payable, accrued expenses and derivative liabilities. The carrying value for all such instruments except convertible notes payable and derivative liabilities approximates fair value due to the short-term nature of the instruments. Our derivative liabilities are recorded at fair value (see Note 5).

We determine the fair value of our financial instruments based on a three-level hierarchy for fair value measurements under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s use of assumptions to external and internal information. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair-value hierarchy:

Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical securities. Currently, we do not have any items classified as Level 1.

Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. Currently, we do not have any items classified as Level 2.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. We use the Black-Scholes-Merton option pricing model (“Black-Scholes”) to determine the fair value of the financial instruments.

If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.

 
 
-8-

Our derivative liabilities consist of embedded conversion features on debt, price protection features on warrants, and are classified as Level 3 liabilities. We use Black-Scholes to determine the fair value of these instruments (see Note 5).

Management has used the simplified Black Scholes model to estimate fair value of derivative instruments. Management believes that as a result of the relatively short term nature of the warrants and convertibility features, a lattice model would not result in a materially different valuation.

The following table presents certain financial instruments measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2015 and December 31, 2014.

   
Level 1
    
Level 2
    
Level 3
  
Total
  
Fair value of Derivative Liability at September 30, 2015
  
$
--
    
$
--
    
$
22,701
    
$
22,701
  
Fair value of Derivative Liability at December 31, 2014
  
$
--
    
$
--
    
$
802,340
    
$
802,340
  
 
Accounting for Derivatives Liabilities

The Company evaluates stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. Financial instruments classified as a derivative instrument are marked-to-market at each balance sheet date and recorded as an asset or a liability with the change in fair value adjusted through the statement of operations in other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification to a liability are recorded at the fair value of the instrument on the reclassification date.

Certain of the Company’s embedded conversion features on debt, with anti-dilution provisions, and price protection features on outstanding common stock warrants are treated as derivatives for accounting purposes. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset or liability. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants and embedded conversion features as derivative liabilities contracts using the Black-Scholes model (see Note 5).

Equity Instruments Issued to Non-Employees for Acquiring Goods or Services

Issuances of the Company’s common stock for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a “performance commitment” which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.

Long-lived Assets and Intangible Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.

The Company had no such asset impairments during the nine months ending September 30, 2015 or 2014. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services under development will continue. Either of these could result in future impairment of long-lived assets.

 
 
-9-

Revenue Recognition

Services Revenues from Master Services Agreements

During the year ended December 31, 2014, the Company entered into Master Services Agreements (“MSA”) with several major oil & gas companies. These MSAs authorize the Company to provide a range of oil & gas support services including oilfield site construction and maintenance, pipeline maintenance, oil rig cleaning, site preparation, energy support services, and other oil & gas support services. The Company bills these customers pursuant to purchase orders issued under the MSAs. The revenues billed include hourly labor fees and equipment usage fees. The Company recognized revenues from these contracts as the services are performed under the customer purchase orders and no further performance obligations exist, generally in the form of a customer approval. During the three and nine months ended September 30, 2015, the Company recognized $2,844,351 and $7,362,448, respectively of revenues from these services contracts, which included zero and $354, respectively of revenues from related parties. During the three and nine months ending September 30, 2014, the Company realized revenue of $3,156,437 and $8,349,489, respectively from services contracts, which included $56,232 and $91,370, respectively of the service revenue was from related parties.

Contract Revenue and Cost Recognition on Engineering and Design Services
 
During the nine month period ended September 30, 2015, the Company completed a contract to design, build and deliver custom design, engineering and construction of the Horizon City Municipal Utility District Reverse Osmosis (RO) Concentrator facility to Horizon City, Texas. As of December 31, 2014, the Company reported deferred revenue of none and deferred costs of $136,898 related to this contract. Total revenues of $934,558 and costs of $713,464 were recognized during the nine month period ended September 30, 2015, upon completion of the contract and acceptance of the concentrator facility.

The Company recognizes revenue on a contract once the services or products are delivered or completed and accepted by the customer. This is based on a thorough analysis of the written contract. Revenues from these contracts are recognized when the customer has passed credit tests and collection is reasonable assured and amounts are fixed and determinable.

Business Segments

The Company has three reportable segments, (1) water reclamation services, (2) oil & gas services and (3) corporate operations. Segment information is reported in Note 10.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset in the future. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any reduction in the valuation allowance will be included in income in the year of the change in estimate.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its condensed consolidated balance sheets at September 30, 2015 and December 31, 2014, respectively.

Common Stock and Common Stock Warrants Issued to Employees

The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to recognize the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes option pricing model to calculate the fair value of any equity instruments on the grant date.

At September 30, 2015 and December 31, 2014, the Company had no grants of employee common stock options or warrants outstanding.

 
 
-10-

Loss per Share

The basic net loss per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares during the period. The diluted net loss per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive shares arising from debt or equity instruments. Diluted net loss per share is the same as basic net loss per share due to the lack of dilutive items. As of September 30, 2015 and December 31, 2014, the Company had 17,793,525 and 14,442,977 shares issuable upon conversion or exercise, respectively, which have been excluded as their effect is anti-dilutive.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:

Computer equipment and software
3 years
Furniture
3 years
Tools, equipment, and vehicles
3-5 years
Leasehold improvements
remaining life of lease
 
Stock Subscriptions Payable

The initial balance of stock subscriptions payable as of December 31, 2014, was $27,000 representing 41,539 shares to be issued. During the three and nine months ended September 30, 2015, zero and $10,000, respectively of these stock subscriptions payable were issued representing zero and 15,385, respectively shares of common stock. In the second quarter the Company received $100,000 in proceeds for additional common stock to be issued. The remaining balance of stock subscriptions payable as of September 30, 2015, is $117,000 representing 126,154 shares to be issued.

Fees Payable in Common Stock

During the three and nine months ended September 30, 2015, the Company agreed to issue a net of 5,738,834 and 8,315,430 shares, respectively, valued at $1,242,436 and $2,985,686 in payment of performance bonuses, employment signing bonuses, consulting fees, and interest. During the three and nine months ended September 30, 2015, the Company issued an aggregate of 605,500 and 6,200,552 shares, respectively, of its common stock, valued at $144,069 and $4,106,421, respectively, in payment of performance bonuses, employment signing bonuses, consulting fees, and interest which left a remaining balance in fees payable in common stock of $1,289,894, or 5,474,640 shares.
 
Payroll tax liabilities

As of September 30, 2015, the Company reported $2,475,066 of sales and payroll taxes payable. The payroll taxes payable includes $935,000 of estimated IRS trust fund penalties as of September 30, 2015 and December 31, 2015. These penalties have not been assessed by the IRS.

On July 22, 2015, the Company entered into an installment agreement with the IRS for the payment of $80,000 monthly on its past payroll taxes. It’s the Company’s understanding from conversations with the IRS collections division that provided the Company makes all of its installment payments timely, the IRS will not assess the 100% trust fund tax penalty. If the Company were to default on its installment payment agreement, the IRS may assess an additional $750,000 of trust fund penalties.
 
Recently Issued Accounting Standards

Recent accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
 
 
-11-
 
 
NOTE 2 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 
September 30,
2015
    
December 31,
2014
  
Office furniture and equipment
$
29,467
    
$
29,467
  
Tools and yard equipment
  
673,942
      
621,995
  
Vehicles and construction equipment
  
477,187
      
635,220
  
Facilities and leasehold improvements
  
15,933
      
15,933
  
Total, cost
  
1,196,529
      
1,302,615
  
Accumulated Depreciation and Amortization
  
(247,143
)
    
(99,533
)
Property and equipment, net
$
949,386
    
$
1,203,082
  

Depreciation and amortization expense for the three and nine month periods ended September 30, 2015 were $48,240 and $119,548, respectively. Depreciation and amortization expense for both the three and nine month periods ended September 30, 2014 were $25,748 and $47,291, respectively.

NOTE 3 – RECEIVABLE FROM FACTOR, NET OF UNAPPLIED CUSTOMER CREDITS

Accounts Purchase Agreement – Crown Financial, LLC

On June 21, 2013, STW Energy entered into an Accounts Purchase Agreement (the “Accounts Purchase Agreement”) with Crown Financial, LLC (“Crown Financial”) under the Texas Finance Code, pursuant to which Crown Financial might, at its sole discretion, purchase certain of the STW Energy’s eligible accounts receivable. Upon any acquisition of an account receivable, Crown would advance to STW Energy up to 80% of the face amount of the account receivable; provided however, that based upon when each invoice gets paid, Crown should pay STW Energy on the related invoice less fess and prior advances. Each account receivable purchased by Crown would be subject to a discount fee of 1.5% of the gross face amount of such purchased account for each 30 day period (or part thereof) the purchased account remains unpaid. Crown would generally have full recourse against STW Energy in the event of nonpayment of any such purchased account.

The Accounts Purchase Agreement contains covenants that are customary for agreements of this type and appoints Crown as attorney in fact for various activities associated with the purchased accounts receivable, including opening STW Energy’s mail, endorsing its name on related notes and payments, and filing liens against related third parties. The failure to satisfy covenants under the Accounts Purchase Agreement or the occurrence of other specified events that constitute an event of default could result in the acceleration of the repayment obligations of the Company or Crown enforcing its rights under the Security Agreement and take possession of the collateral. The Accounts Purchase Agreement contains provisions relating to events of default that are customary for agreements of this type. As of the date of this report there were no accounts in default.

The Accounts Purchase Agreement shall remain valid until terminated by either party upon 30 days written notice. The Accounts Purchase Agreement is secured by a security interest in substantially all of STW Energy’s assets pursuant to the terms of a Security Agreement. As of September 30, 2015 and December 31, 2014, respectively, there were no accounts receivables subject to recourse due to nonpayment of the purchased accounts.

 
 
-12-
 
 
NOTE 4 – NOTES PAYABLE

The Company’s notes payable at September 30, 2015 and December 31, 2014, consisted of the following:
 
   
September 30,
    
December 31,
  
Name
  
2015
    
2014
  
             
14% convertible notes
  
$
2,296,342
    
$
2,296,342
  
12% convertible notes
    
100,000
      
100,000
  
2015 transfer agreements
    
290,000
      
--
  
GE Ionics note
    
2,100,000
      
2,100,000
  
Deferred compensation notes
    
279,095
      
279,095
  
STW Resources revenue participation notes
    
764,500
      
764,500
  
Dufrane note payable
    
545,879
      
725,000
  
Black Pearl note payable
    
777,096
      
--
  
Other short-term debt
    
55,000
      
55,000
  
2015 Q2 short term financing
    
486,000
      
--
  
2015 Q3 ST Loans
    
606,000
      
--
  
Viewpoint Securities
    
191,469
      
--
  
Capital lease obligations
    
24,184
      
30,437
  
STW Resources revenue participation notes – Upton project
    
1,607,000
      
1,573,000
  
Crown Financial note
    
570,306
      
702,698
  
Equipment finance contracts
    
46,569
      
110,000
  
Discontinued operations L/T debt
    
--
      
(752,441
)
Total notes payable
    
10,739,440
      
7,983,631
  
   Less: current portion
    
(8,123,158
)
    
(5,890,414
)
Net long term portion notes payable
  
$
2,616,282
    
$
2,093,217
  
                 
Current portion notes payable
  
$
8,123,158
    
$
5,890,414
  
Less items as follows:
                
   Unamortized loan discounts and loan fees
    
453,343
      
20,930
  
Discontinued operations
    
42,269
      
--
  
Total current portion of notes payable, net of discounts
  
$
7,627,546
    
$
5,869,484
  
 
 
 
-13-
 
14% Convertible Notes

As of September 30, 2015 and December 31, 2014, the aggregate principal balances of the 14% convertible notes were $2,296,342 and $2,296,342, respectively. During the nine month period ended September 30, 2015, the Company had no activity on these notes. As of September 30, 2015, the total of outstanding 14% convertible notes was $2,296,342 of which $2,264,800 matured on or before September 30, 2015 and were in default, however, as of November 24, 2015, none of the note holders have declared the notes in default. The 14% convertible notes are convertible into 6,445,866 shares of the Company’s common stock. During the nine month period ended September 30, 2014, the Company converted principal and accrued interest of $983,437 in exchange for 1,648,267 shares of the Company’s common stock. The Company also issued 2,628 shares for the extension of a note valued at $3,628. The value of the stock issued was $812,607 resulting in additional interest expense of $214,234 upon the conversion of convertible debt. During the three month period ended September 30, 2014, the Company converted principal and accrued interest of $9,568 in exchange for 19,933 shares of the Company’s common stock. Additionally, the Company issued 2,628 shares for the extension of a note valued at $3,628. The value of the stock issued was $31,270 resulting in additional interest expense of $21,702. As September 30, 2014, the total of outstanding 14% convertible notes is $2,326,517 of which $488,210 matured on or before September 30, 2014 and is in default, however, as of December 22, 2014, none of the note holders have declared the notes in default.
 
As of September 30, 2015 and December 31, 2014, $171,892 of the 14% convertible notes is payable to related parties.

12% Convertible Notes

Between April 2009 and November 2010, the Company issued a series of 12% convertible notes payable to accredited investors that matured on November 30, 2011 and are currently in default. At September 30, 2015, the remaining balance was $100,000. In connection with the issuance of the 12% convertible notes, the Company also issued 273,583 warrants to purchase common stock at an exercise price of $0.12 per share that expire at various dates through 2015. The 12% convertible notes are convertible into 1,485,303 shares of the Company’s common stock.

During the three and nine months ended September 30, 2015, the Company has had no activity on the 12% convertible notes. The notes are currently in default, however, as of November 24, 2015, the note holders have not declared the notes in default. During the nine months ended September 30, 2014, the Company issued 1,137,417 shares of its common stock valued at $614,205 in payment of $225,000 of principal and $116,225 accrued interest (total of $341,225). The conversion of these notes payable and accrued interest for common stock resulted in a non-cash charge of $272,980 to the derivative liability upon the conversion of convertible debt. During the three months ended September 30, 2014, there was no activity.

Other Short-Term Debt

On January 1, 2014, the Company issued a $30,000 short term note to an investor, MKM Capital. The note bears interest at 8% and matured on January 1, 2015. The balance of the note payable as of September 30, 2015 and December 31, 2014, was $30,000. It is currently in default, however, as of November 24, 2015, MKM capital has not declared the note in default.

In September 2014, the Company entered into short term loan agreements with seven accredited investors for short term notes of $145,000 to be used to sustain daily operating activities. The notes matured in October 2014 with a 5% transaction fee at maturity and the lenders were entitled to receive 18% interest if the notes were not paid at maturity. As additional consideration for the loan, the Company agreed to issue the lenders an aggregate of 171,667 shares of common stock. These shares were included in the "Fees Payable in Common Stock" and were expensed as interest in the current period. As of September 30, 2015 and December 31, 2014, all but $25,000 of the delinquent loans had been repaid, but as of November 24, 2015, the remaining lender has not declared a default on the payment of his note.

GE Ionics

On August 31, 2010, the Company entered into a Settlement Agreement with GE Ionics (“GE”) relating to a $2,100,000 note payable that was amended on October 30, 2011 (“GE Note”). On May 7, 2012, GE informed the Company that the Company had failed to make any required installment payment that was due and payable under the GE Note and that the Company’s failure to make any such installment payment(s) constituted an event of default under the GE Note. Pursuant to the terms of the GE Note, upon the occurrence of an event of default for any reason whatsoever, GE shall, among other things, have the right to (a) cure such defaults, with the result that all costs and expenses incurred or paid by GE in effecting such cure shall bear interest at the highest rate permitted by law, and shall be payable upon demand; and (b) accelerate the maturity of the GE Note and demand the immediate payment thereof, without presentment, demand, protest or other notice of any kind. Upon an event of default under the GE Note, GE shall be entitled to, among other things (i) the principal amount of the GE Note along with any interest accrued but unpaid thereon and (ii) any and all expenses (including attorney’s fees and expenses) incurred in connection with the collection and enforcement of any rights under the GE Note.

 
 
-14-

Under the terms of the GE note, interest at the rate of WSJ prime plus 2% is due on the note, upon default, interest is due at the maximum legal rate which is 10% in the state of Texas. The note matured on September 1, 2013, and is in default. Interest on the note through December 31, 2014, has been accrued pursuant to the terms of the note through May 6, 2012, interest upon default on May 7, 2012, has been accrued at the maximum default rate in the state of Texas which is 10%.

As of the date hereof, the Company has not repaid any principal or accrued but unpaid interest that has become due and payable under the GE Note.

On May 22, 2013, GE Ionics, Inc. ("GE") filed a lawsuit against STW in the Supreme Court of the State of New York, County of New York, Index No. 651832/2013 (the "GE Lawsuit"). Although the lawsuit arises out of STW's obligations to GE under its Settlement Agreement with GE entered into on August 31, 2010, upon which STW owed GE $2.1 million plus interest. GE elected to forgo suit on the settlement amount and sued STW for the original debt of $11,239,437, plus interest and attorneys' fees (the "Original Debt"). STW filed its Answer asserting that it is entitled to and shall pursue all of its available legal and equitable defenses to the Original Debt, inasmuch as GE had, among other things, failed to discount the Original Debt sued upon by the amounts that it recovered through re-use and re-sale of the equipment it fabricated for STW. Management has not accrued the original amount of the debt because Management has determined the probability of recovery is remote. The lawsuit is currently in the discovery phase of litigation and the parties are actively exploring settlement. (See Note 9)

Deferred Compensation Notes

As of September 30, 2015, and December 31, 2014, the Company had a balance of $279,095 and $279,095 payable under deferred compensation, non-interest bearing, notes to its former Chief Executive Officer and its in house counsel. The notes matured on December 31, 2012, and the notes are in default, however, as of November 24, 2015, none of the note holders have declared the notes in default.

Revenue Participation Notes

As of September 30, 2015 and December 31, 2014, the Company had an outstanding balance of $764,500 and $764,500, respectively, of Revenue Participation Notes comprised as follows:

   
September 30,
    
December 31,
  
Name
  
2015
    
2014
  
2012 Revenue Participation Notes
  
$
165,000
    
$
165,000
  
2013 Revenue Participation Notes - STW Resources Salt Water Remediation
    
302,500
      
302,500
  
2013 Revenue Participation Notes - STW Energy
    
182,000
      
182,000
  
2013 Convertible Revenue Participation Notes - STW Pipeline
    
115,000
      
115,000
  
Total revenue participation notes
  
$
764,500
    
$
764,500
  

These notes are more fully described in the notes to the consolidated financial statements for the year ended December 31, 2014, which were included in the Company’s Annual Report on Form 10-K as filed with the SEC on April 3, 2015.

2014 Revenue Participation Notes – STW Resources Upton Project

On September 30, 2014, the Company issued its first note for the new Upton Project. The financing is a senior secured master note (“Master Note”) with a 15% coupon and a maturity of 18 months. According to the terms of the Master Note, the Company should pay interest only in the first three months of the issuance, and commencing on the fourth month of the issuance, the Company should pay equal monthly payment of principal and accrued interest through the maturity date of the Master Note with revenue participation interest. Additionally, the Master Note carries 5% royalty to be distributed based on pro rata ownership by investors in the Master Note. Payments for principal and interest will come solely from the revenue participation fees from water processing contracts related to brackish water. This Agreement, including but not limited to the revenue sharing arrangement, is applicable to the brackish water processing facility being built with the proceeds of the Master Note. As of September 30, 2015, the total principal amount of this financing was $1,607,000. At September 30, 2015, $819,752 of the principal payments was in default. As of the date of this Report, the investors have not declared a default on the payment of the Master Note.

 
 
-15-

Note payable to Crown Financial, LLC, a related party

On June 26, 2013, STW Energy Services, LLC entered into a loan agreement with Crown Financial, LLC for a $1.0 million loan facility to purchase machinery and equipment for STW Energy Services. Crown Financial, LLC is a related party in that it holds a 25% non-controlling interest in our subsidiary: STW Energy Services, LLC. The note matures on June 25, 2016, and bears interest at 15%. Commencing November 1, 2013, monthly principal and interest payments are due on the note over a thirty-three month period. The note is secured by all assets of STW Energy Services. LLC. As of September 30, 2015 and December 31, 2014, the Company had drawn down $570,306 and $702,698, respectively, of this loan facility. This loan is part of the discontinued operations.

Black Pearl Energy, LLC, a related party

On March 19, 2014, we entered into a Line of Credit Agreement (the "Credit Agreement") with Black Pearl Energy, LLC ("Black Pearl"), an entity controlled by the Company’s former CEO, Stan Weiner, former COO, Lee Maddox, and one of our directors and General Counsel, Grant Seabolt. Pursuant to the Credit Agreement, Black Pearl issued us a $2,000,000 line of credit, of which $1,054,944 had been advanced as of December 31, 2014. The credit was issued in the form of a promissory note (the "Note"). On February 26, 2015, the open balance of the credit line and accrued interest were converted into a note payable, described in more details in the Black Pearl note payable herein below, and the credit line was dissolved.

On February 26, 2015, the Company negotiated an extension on the note payable to Black Pearl for the outstanding balance of $1,079,944 plus $105,363 of accrued interest under the Credit Agreement. The note is to be paid on a monthly basis of $12,000 per month for 48 months and the rest of the payment will become due in February 2019. On March 5, 2015, the note was revised to consolidate the receivables and the payable and reduced the principal and accrued interest to approximately $805,863 and $67,000, respectively. Additionally, we would issue 75,000 shares of common stock to Black Pearl to cure the default and 131,704 shares of common stock in consideration of the extension. These stock awards were accrued as fees payable in common stock when the awards were vested.

As of September 30, 2015 and December 31, 2014, the Company had $777,096 of related party notes payables and zero, respectively, to Black Pearl.

Dufrane Nuclear, Inc., a related party

As of September 30, 2015 and December 31, 2014, the Company has a related party note payable of $545,879 and $725,000, respectively, to Dufrane Nuclear, Inc. a company controlled by Mr. Joshua Brooks, the Company’s Former Chief Operating Officer. During the nine months ended September 30, 2015 and 2014, the Company made payments on the note of $179,121 and zero, respectively, in principal. Dufrane declared the note in default and brought suit on the note (See Legal Proceedings).

2015 Transfer Agreement Convertible Notes Payable

During the nine months ended September 30, 2015, the Company issued $1,375,000 of convertible transfer agreements to four (4) accredited investors. The transfer agreements bear interest at 5% and mature at various dates through October 17, 2015. During the nine months ended September 30, 2015, the Company paid principal of $1,085,000 and interest of $20,539. One of the notes is in default in the amount of $15,000, however, as of November 24, 2015, the note holder has not declared the note in default The remaining transfer agreements are convertible, including accrued interest, into 476,201 shares at a conversion price of $0.65 per share. In the event of default, the transfer agreements are convertible at a price equal to the lower of (a) $0.65 or (b) 60% multiplied by the lowest closing trade price of the common shares for the ten (10) trading days immediately prior to the applicable conversion date.

The conversion feature of the 2015 transfer agreements meet the definition of a derivative due to the reset provision to occur upon the issuance of equity based instruments at below $0.65 per share or upon default of the notes and is accounted for as a derivative liability. The Company has determined the value of the conversion feature upon default of this note using the Black-Scholes pricing model to be $1,108,030 as of the date of issuance, of which $479,877 was recorded as a financing cost in the condensed consolidated statement of operations and $628,153 was recorded as a loan discount. In connection with these transfer agreements, the Company issued 525,000 shares of its common stock to the investors valued at $470,500. The Company also incurred third party loan fees of $151,347 on these notes. The value of the conversion feature of $628,153 and $746,847 will be amortized as interest expense over the term of the note under the straight line method, which we believe approximates the effective interest method due to their short term nature. The effective interest rate of these transfer agreements was determined to be 102.5%.

 
 
-16-

2015 Short Term Financing

In the second quarter of 2015, the Company obtained short term loans from three qualified investors totaling $450,000. As part of the short term loans, one investor was given a discount on two notes totaling $73,500 and awarded 650,000 shares of common stock at various prices valued at $340,000 plus 4,000,000 shares, to be issued only in the event of a default, valued at $1,600,000. Another investor was awarded 100,000 shares of common stock at various prices valued at $80,000 plus 500,000 warrants at an exercise price of $0.59 per share. These costs in excess of the stated value were written off as current expenses due to the short term nature of the loans and others were deferred and will be expensed over the life of the short term loans as interest expense.

For the nine months ended September 30, 2015 and 2014, interest expense on all notes payable (including related parties in Note 6) described above was $3,329,083 and $1,564,896, respectively, which included $1,276,056 and $137,902, respectively, of amortization of debt discount and debt issuance costs.

Viewpoint Securities

On July 07, 2015, STW and Viewpoint signed a “Payment and Standstill Agreement, wherein the parties agreed that the total Arbitration Award with interest totaled $228,170.92, that Viewpoint would not seek post Award attorneys’ fees from STW, and that so long as STW made bi-weekly payments of $2,000.00, beginning on July 10, 2015, Viewpoint would stay any efforts to collect on the Arbitration Award, and when fully paid, would fully release STW from the Arbitration Award. The Company has made all scheduled payments to date. The balance on September 30, 2015 and December 31, 2014 was $191,469 and zero, respectively.

NOTE 5 - DERIVATIVE LIABILITY

We apply the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

From time to time, the Company has issued notes with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives, or there were insufficient shares to satisfy the exercise of the instruments.

Management has used the simplified Black Scholes model to estimate fair value of derivative instruments. Management believes that as a result of the relatively short term nature of the warrants and convertibility features, a lattice model would not result in a materially different valuation.

During the first quarter of 2015, the Company computed a historical volatility of 315% using daily pricing observations for recent periods. We applied a historical volatility rate of 315% during the period ended September 30, 2015, and future periods, since the Company exited its development stage and commenced commercial operations. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these embedded conversion features.

We currently have no reason to believe that future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion features. The risk-free interest rate is based on one-year to five-year U.S. Treasury securities consistent with the remaining term of the warrants and embedded conversion features.

 
 
-17-

The following table presents our warrants and embedded conversion options which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of September 30, 2015 and December 31, 2014:

   
For the nine months ended September 30,
2015
  
For the year ended
December 31,
2014
Annual dividend yield
    
0
%
    
0
%
Expected life (years)
    
0.01
      
0.47 - 0.60
  
Risk-free interest rate
    
0.11
%
    
0.11% - 0.25
%
Expected volatility
    
315
%
    
735
%

   
September 30,
2015
    
December 31,
2014
  
Embedded conversion features
  
$
22,701
    
$
751,439
  
Warrants
    
--
      
50,901
  
   
$
22,701
    
$
802,340
  
 
The following table presents the changes in fair value of our warrants and embedded conversion features measured at fair value on a recurring basis for each reporting period-end.

   
For the nine months ended
September 30, 2015
    
For the year ended
December 31, 2014
  
Balance beginning
   $ 802,340     $ 1,630,985  
Value of derivative liability associated with JMJ note payable
     --       42,592  
Value of derivative liability attributable to conversion feature of transfer agreements
     1,108,030       --  
Value of derivative liability attributable to conversion of notes payable and accrued interest
     --       (694,149 )
Change in derivative liability associated with conversion of notes payable and accrued interest
     --       (272,980 )
Change in fair value
     (1,887,669 )     95,892  
Balance ending
   $ 22,701     $ 802,340  

The increase in fair value of the derivative liability is largely attributable to the derivative liability associated with the conversion feature of the transfer agreement convertible notes payable. The change in the fair value of the derivative liability is attributable to the expiration of some of the warrants that were outstanding.

NOTE 6 – RELATED PARTY TRANSACTIONS

Officers’ Compensation
 
During the nine months ended September 30, 2015 and 2014, we incurred $132,500 and $112,500, respectively, in officers’ compensation due to our Director, former Chairman, and former CEO, Mr. Stanley Weiner. During the three month periods ended September 30, 2015 and 2014, we incurred $45,000 and $37,500, respectively, in officers’ compensation. During the nine months ended September 30, 2015 and 2014, Mr. Weiner was paid $22,500 and zero, respectively. During the three months ended September 30, 2015 and 2014 Mr. Weiner was paid $22,500 and zero, respectively. As of September 30, 2015 and December 31, 2014, the balances of $478,083 and $413,083, respectively, were payable to Mr. Weiner for his compensation.

During the nine months ended September 30, 2015 and 2014, we incurred zero and $75,000, respectively, in officers’ compensation due to one of our former Directors and former Chief Operating Officer, Mr. Lee Maddox. During the three months ended September 30, 2015 and 2014, we incurred zero and zero, respectively, in officers’ compensation due to Mr. Maddox. During the nine months ended September 30, 2015 and 2014, the Company paid Mr. Maddox $5,000 and zero, respectively. As of September 30, 2015 and December 31, 2014, the balances of $175,500 and $220,500, respectively, were payable to Mr. Maddox for his compensation. In addition $40,000 of the note payable was shifted to Accounts Payable and is still open.

 
 
-18-

During the nine months ended September 30, 2015 and 2014, we incurred $96,000 and zero, respectively, in officers’ compensation due to one of our Directors and Officer, Mr. Paul DiFrancesco. During the three months ended September 30, 2015 and 2014, we incurred $36,000 and zero, respectively, in officers’ compensation due to Mr. DiFrancesco. During the nine months ended September 30, 2015 and 2014, the Company paid Mr. DiFrancesco $57,500 and zero, respectively. As of September 30, 2015 and December 31, 2014, the balances of $38,500 and zero, respectively, were payable to Mr. DiFrancesco for his salary.

During the nine months ended September 30, 2015 and 2014, we incurred $71,500 and $67,500, respectively, in general counsel services fees expense with Seabolt Law Group Mr. Grant Seabolt. During the three months ended September 30, 2015 and 2014, we incurred $24,000 and $22,500, respectively, in general counsel services fees expense with Seabolt Law Group, a firm owned by our Director and General Counsel, Mr. Seabolt. During the nine months ended September 30, 2015 and 2014, the Company paid Mr. Seabolt $21,000 and $22,500, respectively. As of September 30, 2015 and December 31, 2014, the balances of $230,297 and $166,083, respectively, were payable to Seabolt Law Group for their services.

On December 22, 2014, the Company entered into a settlement agreement and a $725,000 note payable to Dufrane. Under the terms of the settlement agreement, the 333,333 shares of common stock payable was cancelled and $180,000 of accrued officers’ compensation payable were discharged leaving a balance of accrued officers’ compensation of $60,000 as of December 31, 2014. There has been no additional activity during the nine months ending September 30, 2015. The balance in the accrued officer’s compensations for our former COO, Mr. Brooks, was $60,000 at both September 30, 2015 and December 31, 2014.

During nine months ended September 30, 2015 and 2014, we incurred $178,093 and $369,983, respectively, in CFO, audit preparation, tax, and SEC compliance services fees expense with Miranda CFO Services, Inc. and Miranda & Associates Mr. Robert J. Miranda. During three months ended September 30, 2015 and 2014, we incurred $71,657 and $70,000, respectively, in CFO, audit preparation, tax, and SEC compliance services fees expense with Miranda CFO Services, Inc. and Miranda & Associates, a Professional Accountancy Corporation, firms owned by our Chief Financial Officer, Mr. Miranda. As of September 30, 2015 and December 31, 2014, the balances of $97,863 and $219,271, respectively, were payable to Miranda & Associates for these services.

During nine month periods ended September 30, 2015 and 2014, we incurred $150,000 and $150,000, respectively, in officers’ salary due to the President of our wholly-owned subsidiary, STW Pipeline Maintenance & Construction, LLC, Mr. Jennings. During three month periods ended September 30, 2015 and 2014, we incurred $50,000 and $50,000, respectively, in officers’ salary due to Mr. Jennings. During the nine month period ended September 30, 2014, we incurred with Mr. Jennings a signing bonus comprised of 50,000 shares of the Company’s common stock valued at $21,000. As of September 30, 2015 and December 31, 2014, the balance of zero and $121,000, was payable to Mr. Jennings for the value of signing bonuses due under his employment agreement. These stock awards were accrued as fees payable in common stock the awards are vested.

During nine month periods ended September 30, 2015 and 2014, we incurred $150,000 and $50,000, respectively, in officers’ salary due to the President of our wholly-owned subsidiary, STW Water Process and Technologies, LLC, Mr. Murphy. During three month periods ended September 30, 2015 and 2014, we incurred $50,000 and $50,000, respectively, in officers’ salary due to Mr. Murphy. In the second quarter of 2014, we incurred with Mr. Murphy a signing bonus comprised of 333,333 shares of the Company’s common stock valued at $200,000. As of September 30, 2015 and December 31, 2014, the balance of zero and $200,000, was payable to Mr. Murphy for the value of signing bonuses due under his employment agreement. These stock awards were accrued as fees payable in common stock the awards are vested.

Board and Advisory Board Compensation

Directors are expected to timely and fully participate in all regular and special board meetings, and all meetings of committees that they serve on. In December 2011, the Board voted to authorize the issuance of shares in lieu of cash compensation for past services.

Pursuant to the Director Agreements, the Company compensates each of the directors through the initial grant of 33,333 shares of common stock and the payment of a cash fee equal to $1,000 plus travel expenses for each board meeting attended, and $75,000 per year as compensation for serving on our board of directors.

For the nine months ended September 30, 2015 and 2014, the Company incurred director fees of $479,531 and $468,750, respectively. During the nine months ended September 30, 2015 and 2014, the Company issued 908,658 and 930,261 shares of its common stock in payment of director fees, valued at $675,000 and $558,167, respectively. For the three months ended September 30, 2015 and 2014, the Company incurred director fees of $254,531 and $131,250, respectively. During the three months ended September 30, 2015 and 2014, the Company issued zero and zero shares of its common stock in payment of these fees, valued at zero and zero, respectively. As of September 30, 2015 and December 31, 2014, the Company has accrued compensation due to its directors (both current and former) of $254,531 and $402,317, respectively.

 
 
-19-

Related Party Notes Payable

For a more complete discussion of the notes to Black Pearl Energy, LLC and Dufrane Nuclear see Note 4 – Notes Payable.

Related Party Sales

During the nine months ended September 30, 2015 and 2014, the Company had related party sales of $354 and $143,378, respectively. During three months ended September 30, 2015 and 2014, the Company had related party sales of zero and $66,000, respectively. Related party sales are a combination of sales to three companies, Black Pearl Energy, LLC, Dufrane Construction, and Dufrane Nuclear Shielding Inc.

Factoring Agreement with Crown Financial, LLC

On January 13, 2014, STW Resource Holding Corp entered into an accounts receivable factoring facility (the “Factoring Facility”) with Crown Financial, LLC ("Crown"), pursuant to an Account Purchase Agreement (the “Factoring Agreement”). The Factoring Agreement is secured through a Security Agreement between the Company, two of our subsidiaries: STW Pipeline Maintenance & Construction, LLC and STW Oilfield Construction, LLC (collectively, the "Subsidiaries") and Crown, by all of the instruments, accounts, contracts and rights to the payment of money, all general intangibles and all equipment of the Company and the Subsidiaries. The Factoring Facility includes a loan in the amount of $4,000,000. Although our former Chief Operating Officer, Lee Maddox, personally guaranteed our full and prompt performance of all of our obligations, representations, warranties and covenants under the Factoring Agreement, pursuant to a Guaranty Agreement for and in consideration of Crown issuing us the Factoring Facility, such guaranty was terminated when Mr. Maddox resigned as our COO in July 2014, pursuant to the terms of the related Termination Agreement.

The Factoring Facility shall continue until terminated by either party upon 30 days written notice. Under the terms of the Factoring Agreement, Crown may, at its sole discretion, purchase certain of the Company’s eligible accounts receivable. Upon any acquisition of an account receivable, Crown will advance to the Company up to 80% of the face amount of the account receivable (the "Purchase Price"); although Crown maintains the right to propose a change in that rate, which we can accept in writing, orally or by accepting funding based on such changed rate. Additionally, based upon when each invoice gets paid, Crown shall pay us a rebate percentage of between 0-18% of the related invoice. Crown will generally have full recourse against us in the event of nonpayment of any such purchased account. Crown has the discretion to also accept a substitute invoice from us for uncollected invoices; if such substitute invoice is not accepted, we will be obligated to pay Crown the Purchase Price of such uncollected invoice plus interest at the maximum lawful interest rate per annum, minus any payments made on the invoice.

The Factoring Agreement contains covenants that are customary for agreements of this type and appoints Crown as attorney in fact for various activities associated with the purchased accounts receivable, including opening our mail, endorsing our name on related notes and payments, and filing liens against related third parties. The failure to satisfy covenants under the Factoring Agreement or the occurrence of other specified events that constitute an event of default could result in the acceleration of our repayment obligations or Crown enforcing its rights under the Security Agreement and taking possession of the collateral. The Factoring Agreement contains provisions relating to events of default that are customary for agreements of this type.

As of September 30, 2015 and December 31, 2014, the Company had a related party payable of $1,345,855 and $2,034,810, respectively to Crown Financial.

NOTE 7 – STOCKHOLDERS’ DEFICIT

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001 per share. As of September 30, 2015, no preferred shares were issued or outstanding and the Company does not currently have any plans to issue any preferred shares

Common Stock

The Company is authorized to issue up to 191,666,667 shares of common stock with a par value of $0.001 per share. During the nine months ended September 30, 2015, the Company issued common shares as follows:

On January 15, 2015, the Company issued 62,500 shares of common stock to an investor, at a per share price of $1.56, in payment of interest on a short term loan for a value of $97,500 and an additional 170,000 shares of common stock, at a per share price of $1.40 to a consultant for services valued at $238,000.

 
 
-20-

On January 27, 2015, the Company issued 281,167 shares of common stock, at various per share prices, valued at $209,825 to 19 employees for signing bonuses and continued service to the company.

On January 28, 2015, the Company issued 158,335 shares of common stock, at various per share prices, to 7 investors valued at $225,128 in payment of interest on 7 short term loans.

In the first week of February 2015, the Company issued 378,334 shares of common stock, at various per share prices, valued at $344,100 to 4 employees pursuant to their employment contracts.

On February 3, 2015, the Company issued 15,385 shares of common stock, at a per share price of $0.65, to an accredited investor based on a unit offering at $0.65 per unit, increasing capital of the Company by $10,000.

On February 3, 2015, the Company issued 100,000 shares of common stock, at a per share price of $0.68, to an accredited investor for $68,000 in loan origination fees.

On February 6, 2015, the Company issued 150,001 shares of fully vested common stock, at various per share prices, to 3 consultants valued at $119,500 in payment of services rendered in 2014, previously accrued, and the renewal of a 2015 contract.

On February 6, 2015, the Company issued 225,000 shares of common stock, at various per share prices, to 3 accredited investors for $187,000 in loan origination fees.

On February 17, 2015, the Company issued 100,000 shares of common stock, at a per share price of $0.81, to an accredited investor for $81,000 in loan origination fees.

On February 18, 2015, the Company issued 184,975 shares of common stock to an investment group, at a per share price of $0.65, valued at $120,233 for services rendered in procuring investors for the company.

On February 19, 2015, the Company issued 100,000 shares of common stock, at a per share price of $0.85, to an accredited investor for $85,000 in loan origination fees.

On February 23, 2015, the Company issued 562,500 shares of common stock to 6 directors, at a per share price of $0.80, valued at $450,000 for services rendered in prior year(s).

On February 24, 2015, the Company issued 100,000 shares of common stock, at a per share price of $0.65, to a consultant for services valued at $65,000.

On February 27, 2015, pursuant to the January 8, 2015 Board of Director’s Minutes, a total of 900,000 shares were issued by the Company to 1 employee and 2 consultants for services performed in 2014. They were issued at a per share price of $0.80 per common share at a total value of $720,000.

On May 14, 2015, the Company issued 341,667 shares of common stock to two consultants valued at $230,501.

On May 15, 2015, the Company issued 26,000 shares of common stock to two consultants valued at $18,610.

On May 18, 2015, the Company issued 206,667 shares of common stock to two consultants valued at $155,000.
 
On June 12, 2015, the Company issued 500,000 shares of its common stock and warrants to purchase up to 500,000 shares of the Company’s common stock at $0.59 per share to an accreditor investor who provided the Company with a $385,000 original issue discount bridge note, which yielded net proceeds of $350,000 to the Company. The shares were valued at $280,000.

On June 26, 2015 the Company issued 800,000 shares of common stock to six employees for accrued signing bonuses valued at $677,000. The Company also issued 183,334 shares of common stock to two consultants valued at $137,501.

On June 30, 2015 the Company issued 333,333 shares of common stock to one employee for an accrued signing bonus valued at $200,000. The Company issued 578,927 shares of common stock valued at $339,039 to satisfy an obligation to Salttech, its contracts with Black Pearl Energy, and a financial obligation to an investor. The Company also issued 346,158 shares of common stock to members of the Board of Directors valued at $225,000. Additionally, the Company issued 239,812 shares of common stock to two consultants valued at $167,500.

On July 9, 2015, the company issued 355,500 shares of common stock to 43 employees as performance bonuses. The stock was valued at $0.20 per share and totaled $71,100.

 
 
-21-

On July 22, 2015, the Company issued 200,000 shares of common stock to an investor as part of the financing agreement. The shares were valued at an average of $0.21 per share and totaled $40,469.

On July 28, 2015, the company issued 50,000 shares of common stock in payment of fees owed to a consultant for service rendered. The shares were valued at $0.65 per share and totaled $32,500.

As of September 30, 2015, the Company had the following securities outstanding which gives the holder the right to acquire the Company’s common stock outstanding:

   
Number of
        
   
Underlying
        
   
Common
  
Exercise
    
Security
  
Shares
  
Price
  
Expire
Warrants associated with 2013 Revenue Participation Notes
    
78,788
  
1.80
  
2015
Warrants issued with 2013 Unit Share Offerings
    
333,333
  
1.20
  
2015
Warrants issued with 2014 Unit Share Offerings
    
2,328,542
  
1.20 – 1.50
  
2016
Warrants issued with 2013 and 2014 Unit Share Offerings
    
20,770
  
1.50
  
2017
Warrants issued with 2015 Q2 Financing
    
500,000
  
0.59
  
2017
Sub-total of Warrants outstanding
    
3,261,433
        
Common stock associated with the 12% Convertible Notes plus accrued interest
    
1,485,303
  
0.12
  
N/A
Common stock associated with Pipeline Convertible Revenue Participation notes
    
169,306
  
0.72
  
N/A
Common stock associated with 14% convertible notes plus accrued interest
    
6,445,866
  
0.48
  
N/A
Common stock associated with 2015 Transfer Agreements
    
476,201
  
0. 65
  
N/A
Common stock associated with 2015 Q3 Financing
    
354,622
        
Common stock associated with 2014 Unit Share Offerings
    
126,154
  
various
  
N/A
Common stock payable as fees
    
5,474,640
  
various
  
N/A
 Total
    
17,793,525
        

Warrants

A summary of the Company’s warrant activity and related information during the nine months ended September 30, 2015 follows:

 
Number of Shares
  
Weighted- Average Exercise
Price
  
Remaining Contractual Life (Years)
    
Aggregate Intrinsic Value
Outstanding at January 1, 2015
  
3,634,350
  
$
1.27
  
1.18
  
$
851,313
Issued
  
500,000
    
0.59
  
2.00
      
Exercised
  
--
                
Forfeited
  
--
                
Cancelled
  
--
                
Expired
  
(872,917
)
  
1.12
          
Outstanding at September 30, 2015
  
3,261,433
  
$
1.21
  
0.77
  
$
763,563
Exercisable
  
3,261,433
  
$
1.21
  
0.77
  
$
763,563

 
 
-22-
 
NOTE 8 – DISCONTINUED OPERATIONS

During the three months ended September 30, 2015, the Company discontinued the operations of STW Energy, LLC and STW Oilfield Construction, LLC. These business units have ceased operations and the Company is in process of disposing of assets and settling liabilities. Because of continued losses, the Company made the decision to close STW Energy, LLC and STW Oilfield Construction, LLC. In the three month period ending September 30, 2015, the company sold or transferred all remaining fixed assets to STW Pipeline Maintenance & Construction, LLC and incurred a loss on the sale of assets of $114,000. No further significant losses are expected.

A summary of assets and liabilities of the discontinued operations is as follows:

 
 
   
September 30,
2015
    
December 31,
2014
  
Carrying amounts of major classes of assets included as part of discontinued operations:  
(Unaudited)
        
Cash
   $ --     $ 3,550  
Accounts receivable, trade, net
     --       216,262  
Accounts receivable from related parties
             511,809  
Prepaid expenses and other current assets
     --       111,604  
 
Total Current Assets
     --       843,225  
Long Term Assets
                
Property and equipment, net     --       234,917  
Total major classes of assets of the discontinued operations.   $ --     $ 1,078,142  

Carrying amounts of major classes of liabilities included as part of discontinued operations:
Book overdraft
   $ 62,442     $ 17,445  
Accounts Payable
     406,256       1,055,575  
Payable to related parties:
                
   Black Pearl Energy, LLC
     --       94,717  
   Crown Financial, LLC
     --       685  
Current portion of notes payable, net of discounts
     42,269       752,441  
Sales and payroll taxes payable
     511,844       474,075  
Accrued expenses and interest
     23,194       41,383  
Accrued compensation     13,163       147,843  
Total major classes of liabilities of the discontinued operations.   $ 1,059,168     $ 2,584,164  

Loss from discontinued operations is as follows:

   
Nine Month Periods Ended September 30:
  
   
2015
    
2014
  
Major classes of line items constituting pre-tax loss from operation of discontinued operations:            
Revenues   $ 504,699     $ 5,488,122  
Cost of revenues     (703,312 )     (5,274,669 )
Operating expenses     (309,874 )     (1,467,841 )
Interest expense     (120,617 )     (211,367 )
Loss on the sale of fixed assets     (114,809 )     (39,861 )
Total loss from operation of discontinued operations   $ (743,913 )   $ (1,505,616 )
 
 
 
-23-


   
Three Month Periods Ended September 30:
  
   
2015
    
2014
  
Major classes of line items constituting pre-tax loss from operation of discontinued operations:            
Revenues   $ -     $ 1,477,097  
Cost of revenues     15,791       (1,925,650 )
Operating expenses     11,941       (525,957 )
Interest expense     (38,256 )     (127,478 )
Loss on the sale of fixed assets     -       (39,861 )
Total loss from operation of discontinued operations   $ (10,524 )   $ (1,141,849 )
 
NOTE 9 – COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leased its office facilities under an operating lease that commenced on October 1, 2013 and expires on September 30, 2020. The lease calls for monthly payments of $9,750, plus payment by the Company of all operating expenses, insurance and taxes on the property. The Company has an option until September 30, 2016, to purchase the land and building for $825,500.

During 2014, the Company entered into a capital lease of a modular office trailer. The lease contract calls for forty eight (48) monthly payments of $593 with a purchase option at the end of the lease. The Company determined the value of the capital lease to be $23,300 with an implicit interest rate in the lease of 10%. In July of 2014, the Company entered into a lease for a commercial ice machine with Executive Leasing, Inc. The lease contract calls for Thirty six (36) monthly payments of $505 with a purchase option at the end of the lease. The Company determined the value of the capital lease to be $14,854 with an implicit interest rate in the lease of 12%. As of September 30, 2015 and December 31, 2014, the principal balances on these capital leases totaled $24,184 and $30,438, respectively.

Future minimum lease payments under the capital lease and operating lease as of September 30, 2015, are as follows:

 
Years ending December 31:
  
Capital Lease
    
Operating Lease
    
Totals
  
2015
  
$
15,094
    
$
29,250
    
$
44,344
  
2016
    
6,060
      
117,000
      
123,060
  
2017
    
3,030
      
117,000
      
120,030
  
2018
    
--
      
117,000
      
117,000
  
Thereafter
    
-- 
      
204,750
      
204,750
  
Total minimum lease payments
    
24,184
      
585,000
      
609,184
  
Less interest
    
1,082
                  
Capital lease obligation
    
23,102
                  
Less current portion
    
14,850
                  
Long-term capital lease obligation
  
$
8,252
                  

During the nine months ended September 30, 2015 and 2014, rental expense for all property, including equipment rentals cost of sales, and equipment operating leases was $1,024,094 and $1,697,060, respectively, which includes over $890,000 and $1,565,000, respectively, of equipment rental used on projects and reflected in cost of revenues. Related party rental expense during the nine months ended September 30, 2015 and 2014, was $41,111 and $298,991, respectively.

During the three months ended September 30, 2015 and 2014, rental expense for all property, including equipment rentals cost of sales, and equipment operating leases was $287,567 and $620,133, respectively, which includes over $238,000 and $549,000, respectively, of equipment rental used on projects and reflected in cost of revenues. Related party rental expense during the three months ended September 30, 2015 and 2014, was a credit of $58,944 and $127,064, respectively.

 
 
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Product Purchase and Manufacturing License Agreement

On June 20, 2014, the Company entered into an exclusive product purchase and manufacturing license agreement with Salttech B.V (“Salttech”), a company based in the Netherlands. The agreement provides exclusive rights to purchase Salttech’s DyVaR devices which are used to remove salinity from brackish/brine water streams. The agreement grants to the Company exclusive United States rights to purchase these products for use in the municipal and oil & gas industries. The agreement also grants to the Company the right of first refusal for this technology in North America.

The initial term of the agreement is for five years and is renewable automatically for five years and every five year period unless terminated by written notice of the parties at least three months before the termination date.

The initial royalty for the first year of the agreement was $324,000, payable quarterly beginning with the calendar quarter starting July 1, 2014 as follows: Q3 2014 $60,000, Q4 2014 $60,000, Q1 2015 $100,000 and Q2 2015 $104,000. The Company also agreed to pay a continuing royalty of $240,000 per year for years 2-5, plus 3% of the invoice price of any products sold by the Company under the agreement. The Company also agreed to issue 66,667 shares of its common stock in consideration of this agreement. These stock awards were accrued as fees payable in common stock as the awards are vested and was settled upon the issuance of the shares in June 2015. During the three and nine months ended September 30, 2015, the company paid zero and $204,000, respectively in royalties to Salttech.

As of September 30, 2015, the minimum royalty obligation payable under this agreement is as follows:

 
 
Years ending December 31:
  
Minimum Royalty Obligation
  
2015
  
$
140,000
  
2016
    
240,000
  
2017
    
240,000
  
2018
    
240,000
  
Thereafter
    
120,000
  
Total minimum lease payments
  
$
980,000
  

Indemnities and Guarantees

In addition to the indemnification provisions contained in the Company’s charter documents, the Company will generally enter into separate indemnification agreements with the Company’s directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.

Employment Agreements

STW Pipeline Maintenance & Construction, LLC, has an employment agreement with Adam Jennings that expired on September 22, 2014, but is renewable by mutual consent of the Company and Mr. Jennings. The employment agreement for Mr. Jennings has been renewed.

Stanley T. Weiner is employed as Chairman and former CEO for a three year term effective February 1, 2015. His base salary is $15,000 monthly ($180,000 annually) during the first year of employment, $22,000 monthly ($264,000 annually) during the second year of employment, and $29,000 monthly ($348,000 annually) during the third year of employment. He may be awarded an annual discretionary bonus up to 100% of his previous nine month salary, and a signing bonus of 400,000 fully vested shares of the Company’s common stock. He will also be awarded quarterly bonuses equal to 50,000 shares of the Company’s common stock. After the initial three years he would also receive a twelve month severance award in the event of termination. If there is a change in control of the Company the severance would be twenty-four months if terminated. Mr. Weiner resigned as CEO on October 26, 2015.

 
 
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Paul DiFrancesco is employed as Head of Finance for a three year term effective February 1, 2015. His base salary is $12,000 monthly ($144,000 annually) during the first year of employment, $16,000 monthly ($192,000 annually) during the second year of employment, and $16,000 monthly ($192,000 annually) during the third year of employment. He could be rewarded an annual discretionary bonus up to 100% of his previous nine month salary, and a signing bonus of 300,000 fully vested shares of the Company’s common stock. He will also be awarded quarterly bonuses equal to 50,000 shares of the Company’s common stock. After the initial three years he would also receive a twelve month severance award in the event of termination. If there is a change in control of the Company the severance would be twenty-four months if terminated.

Grant Seabolt is employed as General Counsel and Corporate Secretary for a three year term effective February 1, 2015. His base salary is $8,000 monthly ($96,000 annually) during the first year of employment, $9,500 monthly ($114,000 annually) during the second year of employment, and $9,500 monthly ($114,000 annually) during the third year of employment. He could be awarded an annual discretionary bonus up to 100% of his previous nine month salary, and a signing bonus of 200,000 fully vested shares of the Company’s common stock. He will be awarded quarterly bonuses equal to 25,000 shares of the Company’s common stock. After the initial three years he would also receive a twelve month severance award in the event of termination. If there is a change in control of the Company the severance would be twenty-four months if terminated.

Contingencies

The Company is subject to various claims and contingencies in the normal course of business that arise from litigation, business transactions, or employee-related matters. The Company establishes reserves when it believes a loss is probable and is able to estimate its potential exposure. For reasonably possible loss contingencies, the Company discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of our pending actions is generally not yet determinable, the Company does not believe the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on its business, financial position, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. All items, whereby the Company agrees with the amount of the claim, have been recorded in the current period and are reflected in accounts payable.

GE Ionics, Inc. Lawsuit. On May 22, 2013, GE Ionics, Inc. ("GE") filed a lawsuit against STW in the Supreme Court of the State of New York, County of New York, Index No. 651832/2013 (the "GE Lawsuit"). Although the lawsuit arises out of STW's obligations to GE under its Settlement Agreement with GE entered into on August 31, 2010, upon which STW owed GE $2.1 million plus interest. GE elected to forgo suit on the settlement amount and sued STW for the original debt of $11,239,437, plus interest and attorneys' fees (the "Original Debt"). STW filed its Answer asserting that it is entitled to and shall pursue all of its available legal and equitable defenses to the Original Debt, inasmuch as GE had, among other things, failed to discount the Original Debt sued upon by the amounts that it recovered through re-use and re-sale of the equipment it fabricated for STW. Management has not accrued the original amount of the debt because Management has determined the probability of recovery is remote. The lawsuit is currently in the discovery phase of litigation and the parties are actively exploring settlement.

Sichenzia and Ross Lawsuit. On June 13, 2014, Sichenzia Ross Friedman Ference LLP filed a lawsuit against the Company in the Supreme Court of New York, County of New York, Index No. 155843/2013, seeking $80,036.22 in legal fees and expenses from the Company. The legal fees and expenses related to Sichenzia Ross’ representation of the Company on SEC matters. On October 8, 2014, the Parties entered into a Settlement Agreement whereby the Company agreed to pay Sichenzia Ross $80,036.22 on or before November 28, 2014 or within three business days of the Company closing its current round of financing. The agreement to pay was secured by the Company providing Sichenzia Ross an “Affidavit of Judgment by Confession” in the amount of $80,036.22 to be filed only if the Company failed to pay the $80,036.22 by the due date, plus a five day cure period ending on December 03, 2014. On December 10, 2014, Sichenzia Ross filed the Judgment by Confession with the Court. The Judgment remains unsatisfied.

Bob J. Johnson & Associates Lawsuit. Since June 30, 2014, there has been one lawsuit filed on July 14, 2014 against the Company’s subsidiary, STW Water Process & Technologies, LLC (“STW Water”), Bob J. Johnson & Associates, Inc. (BJJA) v. Alan Murphy and STW Water & Process Technologies, LLC, Case No. CV50473 in the 238th District Court of Midland County, Texas (the “BJJA Lawsuit”). BJJA sought to enforce an allegedly enforceable covenant not to compete and a confidentiality agreement signed by Alan Murphy, STW Water’s recently hired President, who was a former vice president and employee of BJJA. On July 14, 2014, BJJA obtained a TRO against Alan Murphy, STW Water and those associated with the Defendants, which, by the Company’s ownership of STW Water, included the Company. The TRO temporarily prohibited the Company, STW Water and Alan Murphy from contacting two key customers of STW and STW Water, Pioneer Energy Resources and the City of St. Stockton, Texas. On July 28, 2014, the Court held a temporary injunction hearing, which resulted in the TRO being dissolved and the Court refusing to further enjoin STW, STW Water or Alan Murphy from competing with BJJA. The case is still on the docket and BJJA has sought some initial discovery from the Company; however, the Company’s counsel is confident that it will not go forward to a trial on the merits, thereby precluding any appreciable risk of a permanent injunction. The Company continues to vigorously defend this lawsuit and Management does not expect to incur any liability beyond its costs of defense.

 
 
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Arbitration Judgment

Viewpoint Securities, LLC Arbitration. On or about July 9, 2012, the Company and Stan Weiner, the Company's chief executive officer, received a demand for arbitration with the American Arbitration Association. The demand was filed by Viewpoint Securities LLC ("VP") who entered into an engagement agreement, dated March 9, 2008 (as amended on March 9, 2008, November 10, 2008, January 1, 2009, February 5, 2010, and December 1, 2010), with STW whereby the Company retained VP to act as its financial and capital markets advisor regarding equity and debt introduced by VP to the Company. The demand alleged breach of contract, breach of the covenant of good faith and fair dealings, negligence prayer for commissions and expenses incurred by VP in its efforts to provide introductions and attempt to provide financing to the Company from March 9, 2008 through February 2, 2012, the date of termination of the Agreement. VP seeks, among other things, $216,217 and a warrant to purchase 566,667 shares of the Company's common stock, payment of a $15,000 promissory note plus 3+ years of interest at 12%, attorneys' fees of $18,000 and costs of arbitration for filing fees and hearing fees. The Company believed it had valid defenses and contested these claims vigorously. On August 18, 2012, VP dismissed Stan Weiner from the claim with prejudice. A final arbitration hearing was held on February 3, 2014. On April 1, 2014, the Arbitrator issued an Award in favor of Viewpoint for $196,727.77 on Viewpoint's claim for $216,217 in fees and expenses, plus $5,541.46 in arbitration hearing fees and expenses; interest shall accrue at the rate of 10% per annum on any unpaid portion of the award commending April 1, 2014. The Arbitrator denied Viewpoint's claims related to the Company's warrants, a $15,000 promissory note plus 12% interest and for $18,000 in attorneys' fees. The Award was final on April 01, 2014, and on October 28, 2014, Viewpoint filed a lawsuit in San Diego County, California Superior Court seeking to enforce its Arbitration Award in Case No. 37-2014-00036027-CU-PA-CTL.  On December 08, 2014, the Company filed a Motion to Dismiss the enforcement action due to Viewpoint having forfeited its corporate rights in California due to non-payment of California corporate taxes, and that motion is still pending before the Court. Subsequent to June 30, 2015, on July 07, 2015, STW and Viewpoint signed a “Payment and Standstill Agreement, wherein the parties agreed that the total Arbitration Award with interest totaled $228,170.92, that Viewpoint would not seek post Award attorneys’ fees from STW, and that so long as STW made bi-weekly payments of $2,000, beginning on July 10, 2015, Viewpoint would stay any efforts to collect on the Arbitration Award, and when fully paid, would fully release STW from the Arbitration Award. The Company has made all scheduled payments to date.

United Drilling, Inc. Lawsuit. On May 06, 2015, United Drilling, Inc. filed a lawsuit against STW and Case Drilling and Pump Service, LLC pending in the District Court of the 83rd Judicial District in Pecos County, Texas, styled United Drilling, Inc. v. STW Resources Holding Corp. et al., Cause No. P-7405-83-CV (the “United Lawsuit”). United Drilling provided water well drilling services as a subcontractor to Case Drilling in the amount alleged to be $1,577,883.33 related to Case Drilling providing drilling services to STW Water Process & Technologies, LLC (a wholly owned subsidiary of STW) for Capitan Reef Test Well No. 1, located in Pecos County, Texas (the “Test Well”). Case Drilling did not pay United Drilling; therefore, United Drilling filed the United Lawsuit to attempt to foreclose on an alleged statutory lien on STW’s water lease with the City of Fort Stockton, Texas, on which the Test Well was located. United seeks any monies owed by STW to Case Drilling for the Test Well to be paid to United Drilling. STW has asserted that it had a “turn-key” contract with Case Drilling, which required Case Drilling to deliver a producing water well, which it did not. Accordingly, STW alleges that since it owed nothing to Case Drilling, correspondingly, it owes nothing to United Drilling. In addition to STW filing its Answer and Affirmative Defenses to United Drilling’s claims, it has also filed a counterclaim against United Drilling for wrongfully placing a lien on STW’s Fort Stockton water lease, in that United Drilling’s is not justified as there are no amounts owed by the Company to Case Drilling from which United Drilling could collect for some or all of its subcontractor invoices. STW has also cross-claimed Case Drilling for breach of contract and indemnity related to Case Drilling’s alleged failure to pay its subcontractor, United Drilling. STW and United Drilling have participated in substantive settlement discussions and have a definitive settlement agreement prepared awaiting execution. Based on the Company’s counsel’s legal opinions regarding the invalidity of United Drilling’s lien, the Company does not expect to incur any substantial liability from this matter.

Dufrane Nuclear Shielding, Inc. Counterclaims. On July 16, 2015, Dufrane Nuclear Shielding, Inc., Dufrane Construction, LLC and Joshua C. Brooks filed a counterclaim against STW and its subsidiaries in Case No. CV-50864, pending in the 238th District Court of Midland County, Texas, styled STW Resources Holding Corp., et al. v. Felipe Sanchez, et al. (the “Dufrane Counterclaims”). Dufrane is suing STW over a $725,000 promissory note and an equipment rental agreement, and Joshua C. Brooks is suing STW alleging he was not released from certain guaranty obligations with equipment providers. STW and its subsidiaries filed a general denial and the parties have been working together on an agreed accounting of payments made and the allocations of those payments, with a view towards settling the Dufrane Counterclaims.

 
 
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Seaboard International, Inc. Lawsuit. On July 07, 2015, Seaboard International, Inc. filed a lawsuit against STW and Case Drilling and Pump Service, LLC pending in the District Court of the 112th Judicial District in Pecos County, Texas, styled Seaboard International, Inc. v. Case Drilling & Pump, LLC, et al., Cause No. P-11813-112-CV (the “Seaboard Lawsuit”). Seaboard provided water well drilling services as a subcontractor to Case Drilling in the amount alleged to be $80,685.01related to Case Drilling providing drilling services to STW Water Process & Technologies, LLC (a wholly owned subsidiary of STW) for Capitan Reef Test Well No. 1, located in Pecos County, Texas (the “Test Well”). Case Drilling did not pay Seaboard; therefore, Seaboard filed the Seaboard Lawsuit to attempt to foreclose on an alleged statutory lien on STW’s water lease with the City of Fort Stockton, Texas, on which the Test Well was located. Seaboard seeks any monies owed by STW to Case Drilling for the Test Well to be paid to United Drilling. STW has asserted that it had a “turn-key” contract with Case Drilling, which required Case Drilling to deliver a producing water well, which it did not. Accordingly, STW alleges that since it owed nothing to Case Drilling, correspondingly, it owes noting to Seaboard. In addition to STW filing its Answer and Affirmative Defenses to United Drilling’s claims, it has also filed a counterclaim against Seaboard for wrongfully placing a lien on STW’s Fort Stockton water lease, in that Seaboard’s lien is not justified as there are no amounts owed by the Company to Case Drilling from which Seaboard could collect for some or all of its subcontractor invoices. STW has also cross-claimed Case Drilling for breach of contract and indemnity related to Case Drilling’s alleged failure to pay its subcontractor, Seaboard. Based on the Company’s counsel’s legal opinions regarding the invalidity of Seaboard’s lien, the Company does not expect to incur any substantial liability from this matter.

Lonestar West Enterprises. LLC Lawsuit. On September 18, 2015, Lonestar West Enterprises, LLC filed a lawsuit against STW in the 141st District Court of Tarrant County, Texas, styled Lonestar West Enterprises, LLC v. STW Resources Holding Corp., Cause No. 141-281104-15 (the “Lonestar Lawsuit”). It is believed that Lonestar provided services to STW’s subsidiary, STW Oilfield Services, which ceased operations. Lonestar seeks $26,550 plus attorneys’ fees. STW has filed a general denial and is still investigating the matter.

NOTE 10 – SEGMENT INFORMATION

We have three reportable segments, (1) water reclamation services, (2) oil & gas services, and (3) corporate overhead, as described herein.

Water reclamation services

The Company plans to provide 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 supplies, analysis, design, evaluation, implementation and operations.

Oil and Gas Services

Our subsidiary, STW Pipeline Maintenance & Construction, LLC, offers a wide a range of oilfield, pipeline construction, maintenance and support services. We employ qualified laborers with years of experience in the oil patch, and Supervisor/Sales people with particular oil patch knowledge in the Permian and Delaware Basins of West Texas, Eastern New Mexico, and in the Eagle Ford of South Texas.

Corporate Operations

Corporate operations expenses include senior management salaries and benefits, accounting and finance, legal, business development, and other general corporate operating expenses.

The accounting policies for the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The following is a list of methodologies that we use for segment reporting that differ from our external reporting:
 
●
Liabilities including accounts payable, notes payable, and other liabilities are managed at the corporate level and not included in segment operations.
●
Interest expense and change in derivative liabilities are managed at the corporate level and not included in segment operations.

 
 
-28-
 
Segment Operations

   
Nine months ended September 30, 2015
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Revenues
  
$
1,330,989
    
$
7,362,448
    
$
--
    
$
8,693,437
  
Costs of revenues
    
1,106,402
      
4,674,310
      
--
      
5,780,712
  
Operating expenses
    
1,296,028
      
1,545,986
      
4,587,271
      
7,429,285
  
Other income (expense)
    
 --
      
--
      
(1,541,197
)
    
(1,541,197
)
Segment income (loss)
  
$
(1,071,441
)
  
$
1,142,152
    
$
(6,128,468
)
  
$
(6,057,757
)

   
Three months ended September 30, 2015
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Revenues
  
$
1,063,219
    
$
2,844,351
    
$
--
    
$
3,907,570
  
Costs of revenues
    
834,439
      
1,941,288
      
--
      
2,775,727
  
Operating expenses
    
364,303
      
506,339
      
1,921,620
      
2,792,262
  
Other income (expense)
    
 --
      
--
      
(572,665
)
    
(572,665
)
Segment income (loss)
  
$
(135,523
)
  
$
396,724
    
$
(2,494,285
)
  
$
(2,233,084
)

   
Nine months ended September 30, 2014
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Revenues
   $ 172,897     $ 8,349,489     $ --     $ 8,522,386  
Costs of revenues
    
134,458
      
7,739,379
      
--
      
7,873,837
  
Operating expenses
    
598,208
      
1,603,876
      
6,117,034
      
8,319,118
  
Other income (expense)
    
 --
      
 --
      
(2,631,994
)
    
(2,631,994
)
Segment income (loss)
  
$
(559,769
)
  
$
(993,766
)
  
$
(8,749,028
)
  
$
(10,302,563
)

   
Three months ended September 30, 2014
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Revenues
  
$
162,846
    
$
3,156,437
    
$
--
    
$
3,319,283
  
Costs of revenues
    
134,458
      
2,631,099
      
--
      
2,765,557
  
Operating expenses
    
378,623
      
597,186
      
2,418,884
      
3,394,693
  
Other income (expense)
    
 --
      
 --
      
(1,326,843
)
    
(1,326,843
)
Segment income (loss)
  
$
(350,235
)
  
$
(71,848
)
  
$
(3,745,727
)
  
$
(4,167,810
)
 
Segment Assets

   
September 30, 2015
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Current Assets
  
$
1,644,260
    
$
1,548,042
    
$
253,312
    
$
3,445,614
  
Fixed assets
    
478,204
      
416,647
      
54,535
      
949,386
  
Other assets
    
--
      
--
      
--
      
--
  
Segment Assets
  
$
2,122,464
    
$
1,964,689
    
$
304,847
    
$
4,395,000
  
 
 
 
-29-


   
December 31, 2014
        
   
Water Reclamation
    
Oil & Gas Services
    
Corporate Operations
    
Consolidated Totals
  
Current Assets
  
$
1,369,434
    
$
2,831,798
    
$
1,325,807
    
$
5,527,039
  
Fixed assets
    
837,602
      
289,302
      
76,178
      
1,203,082
  
Segment Assets
  
$
2,207,036
    
$
3,121,100
    
$
1,401,985
    
$
6,730,121
  

NOTE 11 – SUBSEQUENT EVENTS

Shares Issued

On October 15, 2015, the company issued a total of 510,000 shares of common stock to 3 accredited lenders. The company issued 120,000 shares of common stock to the first accredited lender in payment for the extension on a note payable. The shares were valued at $0.07 per share for a total of $8,400. The second accredited lender was issued 40,000 shares of common stock in payment for the extension on a note payable and 100,000 shares of common stock in conjunction with their SPA. The shares were valued at $0.07 per share for a total of $9,800. The third accredited lender was issued 250,000 shares of common stock in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.18 per share for a total of $45,000.

On October 22, 2015, the company issued 225,000 shares of common stock to an accredited lender in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.33 per share for a total of $74,250.

On October 27, 2015, an accredited lender converted $30,000 of a note payable and the company issued 364,964 shares of common stock. The shares were valued at approximately $0.08 per share.

A consultant converted outstanding billing for service in the amount of $75,000. On November 2, 2015, the Company issued 50,000 shares of common stock and the remaining shares 50,000 shares of common stock were issued on November 4, 2015. The shares were valued at approximately $0.75 per share.

On November 5, 2015, the company issued 225,000 shares of common stock to an accredited lender in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.14 per share for a total of $31,500.

On November 6, 2015, an accredited lender converted $30,000 of a note payable and the company issued 454,545 shares of common stock. The shares were valued at approximately $0.06 per share.

Other Events

Stock repurchase: In October and November 2015, the Company repurchased a nominal amount of shares from some of the employees of the Company.

New Loans: In October and November 2015, the Company entered into 2 new loans from accredited lenders. These are continuation under the terms of the original loans in the third quarter and are to be used fund the day to day running of the Company.

In the October 9, 2015 meeting of the Board of Directors the following items were approved; the issuance of 125,000 shares of the Corporation’s restricted common stock to Crown Financial, LLC under a new consulting agreement for management of the accounts receivable and cash management, the increase in salary of Adam Jennings of up to $300,000 and stock of up to 750,000 shares of the Corporation’s restricted common stock, that the Company would seek a third party buyer for the Company’s interest in STW Pipeline, that the Company would authorize up to 1,500,000 shares of the Corporation’s restricted common stock for sales agents in locating a buyer for STW Pipeline, the issuance of 300,000 shares of the Corporation’s restricted common stock for consulting efforts, and that Paul DiFrancesco and Stanley Weiner be issued 2,000,000 shares of the Corporation’s restricted common stock for their efforts on behalf of the Company during 2015.

 
 
-30-

In the October 26, 2015 meeting of the Board of Directors the following items were approved; Stanley Weiner resigned as Chief Executive Officer, President, and Chairman of the Board as well as the positions of CEO, President, and/or Manager of the limited company subsidiaries of the Corporation, Alan Murphy assumed those positions with the exception of the CEO & President of STW Pipeline, which was assumed by Adam Jennings, Mr. Weiner was awarded his rights to severance per his employment contract and his Change in Control Agreement, the Royalty Water Sale Percentages to Executive Personnel were realigned to include Alan Murphy on an equal basis, a date of January 27, 2015 was set for the annual shareholder meeting, and it was resolved to explore alternative methods of satisfying the Dufrane note payable.

In the November 12, 2015 meeting or the Board of Directors the following items were approved; the company interred into a contract with Roth Capital Partners, LLC and that they be issued 250,000 shares of the Corporation’s restricted common stock as part of the initial engagement fee, that the shares of the Corporation’s restricted common stock be issued to McCallan and Crown as per the prior approvals, and that the Company inter into a contract with Ludlow Capital, Inc. for media consulting service for which they will be issued 200,000 shares of the Corporation’s restricted common stock.

Resignation and appointment of Chief Executive Officer

On October 26, 2015, Mr. Stanley Weiner submitted his resignation as Chief Executive Officer, President and Chairman of the Board of Directors of STW Resources Holding Corp. (the “Company”), as well as resignation as Chief Executive Officer, President and/or any executive positions of any of the subsidiaries of the Company, including STW Water Process & Technologies, LLC (and any of its project oriented special purpose entity limited liability companies) and STW Pipeline Maintenance & Construction, LLC. Mr. Weiner’s resignations from various positions with the Company and its subsidiaries were effective immediately. Mr. Weiner’s resignation did not result from any disagreement regarding any matter related to the Company’s operations, policies or practices. As of the date of this report, Mr. Weiner’s only position with the Company is a member on the Board of Directors of the Company.

On the same day, the Company accepted Mr. Weiner’s resignations and simultaneously appointed Mr. Alan Murphy as the Company’s Chief Executive Officer, President and Chairman of the Board of Directors.

Mr. Murphy is 58 years of age and does not maintain a familial relationship with any of the Company's other officers or directors. Mr. Murphy is currently the President of STW Water Process & Technologies, LLC, one of the Company’s subsidiaries. As a water industry expert, he brings the Company 20+ years of extensive industry experience with various municipal, industrial and commercial water & wastewater treatment facilities in consulting, design, engineering, procurement, operations, management and complete project oversight & construction throughout State of Texas.

 
 
-31-

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

The following information should be read in conjunction with STW Resources Holding Corp. and its subsidiaries ("we", "us", "our", or the “Company”) condensed consolidated unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. 

Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; and advances in technology that can reduce the demand for the Company's products. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. 

Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the “Risk Factors” section of our annual report on Form 10-K.

The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

The Company was formed for the deployment of multiple water reclamation systems throughout Texas 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 by oil and gas operators. The Company, in conjunction with energy producers, operators, various state agencies and legislators, is working to create an efficient and economical solution to this complex problem. The Company is also evaluating the deployment of similar technology in the municipal wastewater industry.

Plan of Operations

Due to our recurring net losses and negative cash flows from operations and negative working capital, substantial doubt exists about our ability to continue as a going concern exists.

For the next twelve months, we plan to focus our operation on providing water reclamation services to oil and gas producers and other commercial ventures in Texas. Water reclamation services include treating brackish water for use in fracking operations, landscaping and other commercial applications and reclaiming produced water. During fiscal 2014 and the quarter ended September 30, 2015, we earned most of our revenue through our subsidiary, STW Pipeline Maintenance & Construction, LLC and while we continue to benefit from our ownership of that entity, we shall continue to focus on successfully implementing our water reclamation services.

As discussed further in the Liquidity and Capital Resources section herein below, we have limited funds to support our operations. Our continuation as a going concern subsequent to September 30, 2015, is dependent on our ability to obtain additional financing to fund the continued operation of our business model for a long enough period to achieve profitable operations. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital.

 
 
-32-

The downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek additional financing. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations. 

Three months ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

Our revenue, operating expenses and net loss from operations for the three month period ended September 30, 2015 as compared to the three month period ended September 30, 2014, were as follows – some balances on the prior period’s combined financial statements have been reclassified to conform to the current period presentation:

   
Three Months Ended September 30:
              
   
2015
    
2014
    
Change
    
% Change
Increase (Decrease)
  
NET REVENUES
  
$
3,907,570
    
$
3,319,283
    
$
588,287
      
17.7
%
COSTS OF REVENUES
    
2,775,727
      
2,765,557
      
10,170
      
0.4
%
Gross Profit
    
1,131,843
      
553,726
      
578,117
      
104.4
%
OPERATING EXPENSES:
                                
Research & development
    
--
      
--
      
--
      
0.0
%
Sales and marketing
    
50,400
      
163,547
      
(113,147
)
    
-69.2
%
General and administrative
    
2,693,622
      
3,205,399
      
(511,777
)
    
-16.0
%
Depreciation
    
48,240
      
25,748
      
22,492
      
87.4
%
Total operating expenses
    
2,792,262
      
3,394,694
      
(602,432
)
    
-17.7
%
Loss from operations
    
1,660,419
 
    
(2,840,968
)
    
1,180,549
      
41.6
%
   Interest expense
    
(833,126
)
    
(491,913
)
    
(341,213
)
    
69.4
%
   Change in derivative liability
    
260,461
      
(834,930
)
    
1,095,391
      
-131.2
%
Loss from continuing operations
    
(2,233,084
)
    
(4,167,811
)
    
1,934,727
      
-46.4
%
   Loss from operations of discontinued entities
    
(10,524
)
    
(1,141,849
)
    
1,131,325
      
-99.1
%
Loss after discontinued operations
    
(2,243,608
)
    
(5,309,660
)
    
3,066,052
      
-57.7
%
   Share of net loss of subsidiary attributable to non-controlling interest
    
(2,615
)
    
(135,366
)
    
(132,751
)
    
-98.1
%
Net Loss
  
$
(2,240,993
)
  
$
(5,174,294
)
  
$
2,933,301
      
-56.7
%

Net Revenues: During the three months ended September 30, 2015, we realized $1,063,219 of revenues from our water reclamation business segment and $2,844,351 of revenues from our oil & gas services business segment. During the three months ended September 30, 2014, we realized $162,846 in revenues from our water reclamation business segment and $3,156,437 from our oil & gas services business segment. The increase in total revenues of $588,287 during the three months ended September 30, 2015 as compared to the same period in 2014 was mainly caused by the completion of the Horizon City water reclamation services contract that generated $934,558 in revenues from our water reclamation services business segment.

Cost of Revenues: Total costs of revenues for the three months ended September 30, 2015 had an increase of $10,170. Costs of revenues during the three months ended September 30, 2015 and 2014, are comprised of labor, fringe benefits, equipment rental, and other costs of providing water reclamation and oil & gas services.

Gross Profit: During the three months ended September 30, 2015, we realized a gross profit of $1,131,843 from our water reclamation and oil & gas services business segments compared to a gross profit of $553,726 realized during the three months ended September 30, 2014, an increase of $578,117 or 104.4%. The increased gross profit is attributable to our increased revenue in water reclamation business segment and an improvement in our gross profit margins of our oil & gas business segment during the three months ended September 30, 2015.

 
 
-33-

Sales and marketing expenses: Sales and marketing expenses decreased by $113,146 or 69.2% to $50,400 for the three months ended September 30, 2015 from $163,546 for the three months ended September 30, 2014. The decrease in sales and marketing expenses are attributable to decreased sales expenses of our oil & gas services business segment from the execution of management initiatives to cut costs.

General and Administrative Expense: General and administrative expenses decreased by $511,777 or 16.0% to $2,693,622 for the three months ended September 30, 2015 from $3,205,399 for the three months ended September 30, 2014. Our general and administrative expenses for the three months ended September 30, 2015 consisted of professional fees of $184,512, insurance of $6,719, management fees of $214,311, salaries and wages of $1,422,816, director fees of $130,417, and other general & administrative expenses of $734,847, for a total of $2,693,622. Our general and administrative expenses for the three months ended September 30, 2014 consisted of professional fees of $256,729, insurance of $104,014, penalties of $19,523, salaries & wages of $400,122, management fees of $255,649, director fees of $131,250, and other general & administrative expenses of $2,038,112 for a total of $3,205.399.

The primary reasons for the decrease in General and Administrative Expense during the three months ended September 30, 2015 compared to the corresponding period for 2014 was a combination of a decrease of $19,513 in penalties, a decrease of $41,338 in management fees, a decrease of $72,217 in professional fees, a decrease of $97,295 in insurance, a decrease of $833 in board compensation, an increase of $1,022,694 in salaries & wages, and a net decrease of $1,303,275 in other general & administrative expenses. During the three month periods ended September 30, 2015 and 2014, non-cash stock based compensation expenses relating to consulting and other fees included in general and administrative expenses were $462,221 and $1,331,761, respectively.

Interest Expense: Interest expense increased by $341,213 to $833,126 for the three month period ended September 30, 2015 from $491,913 for the three month period ended September 30, 2014. The increase is due to additional interest expenses incurred on additional debt financing incurred by us since September 30, 2014 and additional loan fees and loan discount amortization incurred in new financings during the three months ended September 30, 2015.

Change in derivative liability: During the three month period ended September 30, 2015, we recorded a $260,461 decrease in the fair value of the derivative liability from June 30, 2015. During the three month period ended September 30, 2014, we recorded a $834,930 increase in the derivative liability from June 30, 2014, a difference of $1,095,391 between the three months ended September 30, 2015 and 2014. The decrease in the derivative liability during the three months ended September 30, 2015 is largely attributable to a decrease in the value of shares from $0.37 at June 30, 2015 to $0.23 at September 30, 2015. The increase in the derivative liability during the three months ended September 30, 2014 is attributable to the reduction of the remaining term of outstanding warrants, offset by the effect of increased share values as of September 30, 2014.

Net Loss from continuing operations: Net loss from continuing operations decreased by $1,934,727, or 46.4%, to a net loss of $2,233,084 for the three month period ended September 30, 2015 from a net loss of $4,167,810 for the three month period ended September 30, 2014. This net loss reflects the increased revenues with improved gross margin, less increased operating expenses and change in derivative liability discussed above.

Non-controlling interest in Net Loss: During the three months ended September 30, 2015 and 2014, we reported $2,615 and $135,366 loss, respectively, as the non-controlling interest in the net loss or income of our STW Energy Services, LLC subsidiary. This non-controlling interest in the net loss represents of a 25% non-controlling interest in the net loss of STW Energy Services, LLC, and a subsidiary company.

Income (loss) from discontinued operations: Loss from discontinued operations decreased by $1,131,325 to a Loss from discontinued operations of $10,524 from $1,141,849 for the three months ended September 30, 2014.

 
 
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Nine months ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

Our revenue, operating expenses and net loss from operations for the nine month period ended September 30, 2015 as compared to the nine month period ended September 30, 2014, were as follows – some balances on the prior period’s combined financial statements have been reclassified to conform to the current period presentation:

 
Nine Months Ended
September 30:
            
 
2015
    
2014
    
Change
  
% Change
Increase (Decrease)
  
NET REVENUES $ 8,693,437     $ 8,522,386     $ 171,051   2.0 %
COSTS OF REVENUES
  
5,780,712
      
7,873,837
      
(2,093,125
)
-26.6
%
Gross Profit
  
2,912,725
      
648,549
      
2,264,176
  
349.1
%
OPERATING EXPENSES:
                          
Research & development
  
7,435
      
151,955
      
(144,520
)
-95.1
%
Sales and marketing
  
316,260
      
379,362
      
(63,102
)
-16.6
%
General and administrative
  
6,986,042
      
7,740,510
      
(754,468
)
-9.7
%
Depreciation
  
119,548
      
47,291
      
72,257
  
152.8
%
Total operating expenses
  
7,429,285
      
8,319,118
      
(889,833
)
-10.7
%
Loss from operations
  
(4,516,560
)
    
(7,670,569
)
    
3,154,009
  
41.1
%
   Interest expense
  
(3,428,867
)
    
(1,353,529
)
    
(2,075,338
)
-153.3
%
   Change in derivative liability
  
1,887,670
      
(1,278,466
)
    
3,166,136
  
-247.7
%
Loss from continuing operations
  
(6,057,757
)
    
(10,302,564
)
    
4,244,807
  
-41.2
%
   Loss from operations of discontinued entities
  
(743,913
)
    
(1,505,616
)
    
761,703
 
50.6
%
Loss after discontinued operations
  
(6,801,670
)
    
(11,808,180
)
    
5,006,510
  
-42.4
%
   Share of net loss of subsidiary attributable to non-controlling interest
  
(163,995
)
    
(166,294
)
    
2,299
  
1.4
%
Net Loss
$
(6,637,675
)
  
$
(11,641,886
)
  
$
5,004,211
  
-43.0
%


Net Revenues: During the nine months ended September 30, 2015, we realized $1,330,989 from our water reclamation business segment and $7,362,448 of revenues from our oil & gas services business segment, including $354 of revenues from a related party. During the nine months ended September 30, 2014, we realized $172,897 in revenues from our water reclamation business segment and $8,349,489 from our oil & gas services business segment, including $91,370 of revenues from related parties. The $171,051 net increase in revenues between the nine months ended September 30, 2015 and September 30, 2014 is comprised of a $1,158,092 increase in revenues from our water reclamation business segment, net of a $987,041 decrease in revenues from our oil & gas services business segment. The increase in water reclamation revenues during the nine months ended September 30, 2015 is attributable the completion of the Horizon City contract that realized $934,558 of revenues and increased operational activities in this business segment as compared to start-up activities in this business segment during the three months ended September 30, 2014. The decrease in revenues from our oil & gas services business segment is attributable to our initiatives to focus on more profitable customer projects during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.

Cost of Revenues: Total costs of revenues for the nine months ended September 30, 2015 were $5,780,712 as compared to $7,873,837 for the nine months ended September 30, 2014, a decrease of $2,093,125 or 26.6%. The decrease in costs of revenue is attributable to our focus on more profitable customer projects during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Costs of revenues as a percentage of revenues were 66% during the nine months ended September 30, 2015 as compared to 92% during the nine months ended September 30, 2014. Costs of revenues during the three months ended September 30, 2015 and 2014, are comprised of labor, fringe benefits, equipment rental, and other costs of providing water reclamation and oil & gas services.

Gross Profit: During the nine months ended September 30, 2015, we realized a gross profit of $2,912,725 from our water reclamation and oil & gas services business segments compared to a gross profit of $648,549 realized during the nine months ended September 30, 2014, a net increase in gross profit of $2,264,176 or 349.1%. During the nine months ended September 30, 2014, our water reclamation business had recently commenced operations but had limited revenues. The improvement in our gross profit is attributable to our focus on more profitable customer projects during the nine months ended September 30, 2015 that yielded a gross profit as a percentage of revenues of 34% as compared 8% during the nine months ended September 30, 2014.

 
 
-35-

Research and development expenses: Research and development expenses decreased by $144,520 or 95.1% to $7,435 for the nine months ended September 30, 2015 from $151,955 for the nine months ended September 30, 2014. The decrease in research and development expenses is attributable to our water reclamation business segment that was in development during the nine months ended September 30, 2014 and is fully operational during the nine months ended September 30, 2015.

Sales and marketing expenses: Sales and marketing expenses decreased by $63,102 or 16.6% to $316,260 for the nine months ended September 30, 2015 from $379,362 for the nine months ended September 30, 2014. The decrease in sales and marketing expenses are attributable to decreased revenues from our oil & gas business segment which reduced sales related expenses.

General and Administrative Expense: General and administrative expenses decreased $754,468 or 9.7% to $6,986,042 for the nine months ended September 30, 2015 from $7,740,510 for the nine months ended September 30, 2014. Our general and administrative expenses for the nine months ended September 30, 2015 consisted professional fees of $491,199, insurance of $131,372, management fees of $598,136, salaries and wages of $3,489,749, penalties of $377, and board of director fees of $355,417, and other general & administrative expenses of $1,919,792, for a total of $6,986,042. Our general and administrative expenses for the nine months ended September 30, 2014 consisted professional fees of $565,332, consulting fees of $179,154, insurance of $186,841, penalties of $826,522, salaries & wages of $1,197,105, management fees of $1,247,752, board of director fees of $468,750, and other general & administrative expenses of $3,069,054 for a total of $7,740,510.

The primary reasons for the decrease in comparing the nine months ended September 30, 2015 to the corresponding period for 2014 was due largely to an $826,522 decrease in penalties, $649,616 decrease in management fees, $179,054 decrease in consulting fees, offset by a $2,292,694 increase in salaries & wages and a net of $1,391,970 decrease in other general & administrative expenses. During the three month periods ended September 30, 2015 and 2014, non-cash stock based compensation expenses relating to consulting and other fees included in general and administrative expenses were $3,365,450 and $1,655,444, respectively.

Interest Expense: Interest expense increased by $2,075,338 to $3,428,867 for the nine month period ended September 30, 2015 from $1,353,529 for the nine month period ended September 30, 2014. The increase is due to additional interest expenses incurred on additional debt financing incurred by us since September 30, 2014 and additional loan fees and loan discount amortization incurred in new financings during the nine months ended September 30, 2015.

Change in derivative liability: During the nine month period ended September 30, 2015, we recorded a $1,887,670 decrease in the fair value of the derivative liability from January 1, 2015. During the nine month period ended September 30, 2014, we recorded a $1,278,466 increase in the derivative liability from January 1, 2015, a net difference of $3,166,136 between the nine months ended September 30, 2015 and 2014. The increase in the derivative liability during the nine months ended September 30, 2015 is attributable to an increase of $1,108,030 related to the conversion feature of short term notes, reduced by a $1,887,669 decrease in the value of the derivative liability as of September 30, 2015, which is largely attributable to a decrease in the value of shares from $0.84 at December 31, 2014 to $0.23 at September 30, 2015. The increase in the derivative liability during the nine months ended September 30, 2014 is attributable to the reduction of the remaining term of outstanding warrants, offset by the effect of increased share values as of September 30, 2014.

Non-controlling interest in Net Loss: During the nine months ended September 30, 2015 and 2014, we reported net losses of $163,995 and $166,294, respectively, as the non-controlling interest in the net loss of our STW Energy Services, LLC subsidiary. This non-controlling interest in the net loss represents of a 25% non-controlling interest in the net loss of STW Energy Services, LLC, and a subsidiary company.

Net Loss from continuing operations: Net loss from continuing operations decreased by $4,244,807, or 41.2%, to a net loss of $6,057,757 for the nine month period ended September 30, 2015 from a net loss of $10,302,563 for the nine month period ended September 30, 2014. This net loss reflects the increased revenues with improved gross margin, less increased operating expenses and change in derivative liability discussed above.

Net loss from discontinued operations: Net loss from discontinued operations decreased by $761,703 to a net loss of $743,913 from a net loss of $1,505,616 for the nine months ended September 30, 2014.

 
 
-36-

Liquidity, Capital Resources, and Management Plans

Our condensed consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the consolidated financial statements, we incurred a net loss of $6,637,675 during the nine months ended September 30, 2015, and losses are expected to continue in the near term. The accumulated deficit since inception was $45,749,846 at September 30, 2015 (Refer to Note 7 for our discussion of stockholder deficit.) We have been funding our operations through private loans and the sale of common stock in private placement transactions. (Refer to Note 4 and Note 7 in the condensed consolidated financial statements for our discussion of notes payable and shares issued, respectively.) Our cash resources are insufficient to meet our planned business objectives without additional financing. These and other factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern.

Management anticipates that significant additional expenditures will be necessary to develop and expand our oil & gas services and water reclamation services business units before significant positive operating cash flows can be achieved. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At September 30, 2015, we had no cash on hand. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with oil and gas operators and municipal utility districts; and (c) controlling overhead and expenses. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all. As of the date of this Report, we have not entered into any formal agreements regarding the above.

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

The downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek additional financing. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Cash, total current assets, total assets, total current liabilities and total liabilities as of September 30, 2015 as compared to December 31, 2014, were as follows:

   
September 30,
2015
    
December 31,
2014
  
Cash
  
$
--
    
$
137,524
  
Total current assets
  
$
3,491,473
    
$
5,527,039
  
Total assets
  
$
4,440,859
    
$
6,730,121
  
Total current liabilities
  
$
23,647,219
    
$
25,524,941
  
Total liabilities
  
$
26,263,501
    
$
27,618,158
  

At September 30, 2015, we had a working capital deficit of $20,155,746 compared to a working capital deficit of $19,997,902 at December 31, 2014. Current liabilities decreased to $23,647,219 at September 30, 2015 from $25,524,941 at December 31, 2014, primarily as a result of the completion of a large job and moving the ‘Deferred Revenue’ to 'Sales’.

 
 
-37-

Our operating activities from continuing operations provided net cash of $804,676 for the nine months ended September 30, 2015 compared to net cash used in continuing operations of $3,120,459 for the nine months ended September 30, 2014. The net cash from continuing operations for the nine months ended September 30, 2015, reflects a net loss of $6,057,757, decreased by $3,132,792 in non-cash charges and by $3,729,641 net decrease in the working capital accounts. The net cash used in continuing operations for the nine months ended September 30, 2014 reflects a net loss of $10,302,563, decreased by $4,719,879 in non-cash charges and by $2,462,226 net decrease in the working capital accounts.

Our investing activities from continuing operations used cash of $170,035 and $470,689 for the nine months ended September 30, 2015 and September 30, 2014, respectively. Our investing activities from continuing operations for the nine months ended September 30, 2015 and 2014 are attributable to purchases of equipment, net of related equipment loans.

Our financing activities from continuing operations provided cash of $731,664 for the nine months ended September 30, 2015, which is comprised of book overdraft of $671,037, proceeds of stock subscriptions of $100,000, decrease of $7,980 in related party receivables, repayment of $755,688 of related party payables, decrease in insurance premium finance contract of $22,227, proceeds of $2,629,000 from notes payable, the repayment of $1,752,439 of notes payable, and debt issuance costs of $146,000. Our financing activities from continuing operations resulted in cash inflow of $3,171,781 for the nine months ended September 30, 2014, which is represented by $0 of book overdraft, increase of $14,236 in related party receivables, a net increase in related party accounts payable of $1,435,494, increase in the insurance premium financing of $362,256, the repayment of $197,369 of notes payable, proceeds from notes payable of $364,137, and proceeds from the issuance of common stock of $1,221,500.

Our operating activities from discontinued operations used net cash of $1,431,820 for the nine months ended September 30, 2015 compared to net cash provided by discontinued operations of $802,583 for the nine months ended September 30, 2014. The net cash used in discontinued operations for the nine months ended September 30, 2015, reflects a net loss of $743,913, decreased by $133,490 in non-cash charges and by $821,397 net decrease in the working capital accounts. The net cash used in discontinued operations for the nine months ended September 30, 2014 reflects a net loss of $1,505,616, decreased by $174,850 in non-cash charges and by $2,133,349 increase in the working capital accounts.

Our financing activities from discontinued operations used cash of $72,009 and $74,753 for the nine months ended September 30, 2015 and 2014, respectively, which are comprised of the repayment of notes payable.

Credit Facility

On March 19, 2014, we entered into a Line of Credit Agreement (the "Credit Agreement") with Black Pearl Energy, LLC ("Black Pearl"), an entity controlled by Stan Weiner and Lee Maddox, the Company’s former Chief Executive Officer and former Chief Operating Officer, respectively, and one of our directors: Grant Seabolt. Pursuant to the Credit Agreement, Black Pearl issued us a $2,000,000 line of credit, approximately $1,010,000 of which has already been advanced to us; the credit was issued in the form of a promissory note (the "Note"). We were to pay back all advanced funds on or before August 1, 2014, although such date would be extended to September 30, 2014 if we did not receive gross proceeds of no less than $6,000,000 resulting from either or both of: (a) the consummation of one or more private placements of debt or equity securities, not including the funds received pursuant to the Credit Agreement; or (b) the filing of a registration statement on Form S-1 with the Securities and Exchange Commission (“ SEC ”) for a public offering of our securities. Interest accrues at 11% per annum. To further induce Black Pearl to issue us the line of credit, we agreed to issue them 250,000 restricted shares of our common stock (after which, Black Pearl will own 250,000 (1%) of our common stock) and a $25,000 transaction fee to be paid on the final closing date of the credit line. In the first quarter of 2015 all of this debt was rolled into a related party note.

On February 26, 2015, we negotiated an extension on the note payable to Black Pearl Energy, a Related Party, and established the balance at $1,079,944 plus $105,363 in interest due. The note is to be paid on a monthly basis of $12,000 per month for 48 months and a balloon payment in February of 2019. On March 5, 2015, the note was revised to consolidate the receivables and the payable and net the note down to $805,863 and reduce the interest due to approximately $67,000.

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.

 
 
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Critical Accounting Policies and Estimates

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2014, for disclosures regarding the Company's critical accounting policies and estimates, as well as updates further disclosed in our interim financial statements as described in this Form 10-Q.


Evaluation of Disclosure Controls and Procedures

As of the end of our fiscal quarter ended September 30, 2015, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon those evaluations, management concluded that our disclosure controls and procedures were not effective as of September 30, 2015, to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Going forward from this filing, the Company intends to work on re-establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

During the quarter covered by this Report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. No remediation has been made in this quarter.

 
 
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Part II – Other Information


From time to time, the Company may become a party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business. The Company is involved currently in legal proceedings described below that could reasonably be expected to have a material adverse effect on its business, prospects, financial condition or results of operations. The Company may become involved in other material legal proceedings in the future.

GE Ionics, Inc. Lawsuit. On May 22, 2013, GE Ionics, Inc. ("GE") filed a lawsuit against STW in the Supreme Court of the State of New York, County of New York, Index No. 651832/2013 (the "GE Lawsuit"). Although the lawsuit arises out of STW's obligations to GE under its Settlement Agreement with GE entered into on August 31, 2010, upon which STW owed GE $2.1 million plus interest. GE elected to forgo suit on the settlement amount and sued STW for the original debt of $11,239,437, plus interest and attorneys' fees (the "Original Debt"). STW filed its Answer asserting that it is entitled to and shall pursue all of its available legal and equitable defenses to the Original Debt, inasmuch as GE had, among other things, failed to discount the Original Debt sued upon by the amounts that it recovered through re-use and re-sale of the equipment it fabricated for STW. Management has not accrued the original amount of the debt because Management has determined the probability of recovery is remote. The lawsuit is currently in the discovery phase of litigation and the parties are actively exploring settlement.

Sichenzia and Ross Lawsuit. On June 13, 2014, Sichenzia Ross Friedman Ference LLP filed a lawsuit against the Company in the Supreme Court of New York, County of New York, Index No. 155843/2013, seeking $80,036.22 in legal fees and expenses from the Company. The legal fees and expenses related to Sichenzia Ross’ representation of the Company on SEC matters. On October 8, 2014, the Parties entered into a Settlement Agreement whereby the Company agreed to pay Sichenzia Ross $80,036.22 on or before November 28, 2014 or within three business days of the Company closing its current round of financing. The agreement to pay was secured by the Company providing Sichenzia Ross an “Affidavit of Judgment by Confession” in the amount of $80,036.22 to be filed only if the Company failed to pay the $80,036.22 by the due date, plus a five day cure period ending on December 03, 2014. On December 10, 2014, Sichenzia Ross filed the Judgment by Confession with the Court. The Judgment remains unsatisfied.

Bob J. Johnson & Associates Lawsuit. Since June 30, 2014, there has been one lawsuit filed on July 14, 2014 against the Company’s subsidiary, STW Water Process & Technologies, LLC (“STW Water”), Bob J. Johnson & Associates, Inc. (BJJA) v. Alan Murphy and STW Water & Process Technologies, LLC, Case No. CV50473 in the 238th District Court of Midland County, Texas (the “BJJA Lawsuit”). BJJA sought to enforce an allegedly enforceable covenant not to compete and a confidentiality agreement signed by Alan Murphy, STW Water’s recently hired President, who was a former vice president and employee of BJJA. On July 14, 2014, BJJA obtained a TRO against Alan Murphy, STW Water and those associated with the Defendants, which, by the Company’s ownership of STW Water, included the Company. The TRO temporarily prohibited the Company, STW Water and Alan Murphy from contacting two key customers of STW and STW Water, Pioneer Energy Resources and the City of St. Stockton, Texas. On July 28, 2014, the Court held a temporary injunction hearing, which resulted in the TRO being dissolved and the Court refusing to further enjoin STW, STW Water or Alan Murphy from competing with BJJA. The case is still on the docket and BJJA has sought some initial discovery from the Company; however, the Company’s counsel is confident that it will not go forward to a trial on the merits, thereby precluding any appreciable risk of a permanent injunction. The Company continues to vigorously defend this lawsuit and Management does not expect to incur any liability beyond its costs of defense.

 
 
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Viewpoint Securities, LLC Arbitration. On or about July 9, 2012, the Company and Stan Weiner, the Company's chief executive officer, received a demand for arbitration with the American Arbitration Association. The demand was filed by Viewpoint Securities LLC ("VP") who entered into an engagement agreement, dated March 9, 2008 (as amended on March 9, 2008, November 10, 2008, January 1, 2009, February 5, 2010, and December 1, 2010), with STW whereby the Company retained VP to act as its financial and capital markets advisor regarding equity and debt introduced by VP to the Company. The demand alleged breach of contract, breach of the covenant of good faith and fair dealings, negligence prayer for commissions and expenses incurred by VP in its efforts to provide introductions and attempt to provide financing to the Company from March 9, 2008 through February 2, 2012, the date of termination of the Agreement. VP seeks, among other things, $216,217 and a warrant to purchase 566,667 shares of the Company's common stock, payment of a $15,000 promissory note plus 3+ years of interest at 12%, attorneys' fees of $18,000 and costs of arbitration for filing fees and hearing fees. The Company believed it had valid defenses and contested these claims vigorously. On August 18, 2012, VP dismissed Stan Weiner from the claim with prejudice. A final arbitration hearing was held on February 3, 2014. On April 1, 2014, the Arbitrator issued an Award in favor of Viewpoint for $196,727.77 on Viewpoint's claim for $216,217 in fees and expenses, plus $5,541.46 in arbitration hearing fees and expenses; interest shall accrue at the rate of 10% per annum on any unpaid portion of the award commending April 1, 2014. The Arbitrator denied Viewpoint's claims related to the Company's warrants, a $15,000 promissory note plus 12% interest and for $18,000 in attorneys' fees. The Award was final on April 01, 2014, and on October 28, 2014, Viewpoint filed a lawsuit in San Diego County, California Superior Court seeking to enforce its Arbitration Award in Case No. 37-2014-00036027-CU-PA-CTL.  On December 08, 2014, the Company filed a Motion to Dismiss the enforcement action due to Viewpoint having forfeited its corporate rights in California due to non-payment of California corporate taxes, and that motion is still pending before the Court. Subsequent to June 30, 2015, on July 07, 2015, STW and Viewpoint signed a “Payment and Standstill Agreement, wherein the parties agreed that the total Arbitration Award with interest totaled $228,170.92, that Viewpoint would not seek post Award attorneys’ fees from STW, and that so long as STW made bi-weekly payments of $2,000, beginning on July 10, 2015, Viewpoint would stay any efforts to collect on the Arbitration Award, and when fully paid, would fully release STW from the Arbitration Award. The Company has made all scheduled payments to date.

United Drilling, Inc. Lawsuit. On May 06, 2015, United Drilling, Inc. filed a lawsuit against STW and Case Drilling and Pump Service, LLC pending in the District Court of the 83rd Judicial District in Pecos County, Texas, styled United Drilling, Inc. v. STW Resources Holding Corp. et al., Cause No. P-7405-83-CV (the “United Lawsuit”). United Drilling provided water well drilling services as a subcontractor to Case Drilling in the amount alleged to be $1,577,883.33 related to Case Drilling providing drilling services to STW Water Process & Technologies, LLC (a wholly owned subsidiary of STW) for Capitan Reef Test Well No. 1, located in Pecos County, Texas (the “Test Well”). Case Drilling did not pay United Drilling; therefore, United Drilling filed the United Lawsuit to attempt to foreclose on an alleged statutory lien on STW’s water lease with the City of Fort Stockton, Texas, on which the Test Well was located. United seeks any monies owed by STW to Case Drilling for the Test Well to be paid to United Drilling. STW has asserted that it had a “turn-key” contract with Case Drilling, which required Case Drilling to deliver a producing water well, which it did not. Accordingly, STW alleges that since it owed nothing to Case Drilling, correspondingly, it owes nothing to United Drilling. In addition to STW filing its Answer and Affirmative Defenses to United Drilling’s claims, it has also filed a counterclaim against United Drilling for wrongfully placing a lien on STW’s Fort Stockton water lease, in that United Drilling’s is not justified as there are no amounts owed by the Company to Case Drilling from which United Drilling could collect for some or all of its subcontractor invoices. STW has also cross-claimed Case Drilling for breach of contract and indemnity related to Case Drilling’s alleged failure to pay its subcontractor, United Drilling. STW and United Drilling have participated in substantive settlement discussions and have a definitive settlement agreement prepared awaiting execution. Based on the Company’s counsel’s legal opinions regarding the invalidity of United Drilling’s lien, the Company does not expect to incur any substantial liability from this matter.

 
 
-41-

Dufrane Nuclear Shielding, Inc. Counterclaims. On July 16, 2015, Dufrane Nuclear Shielding, Inc., Dufrane Construction, LLC and Joshua C. Brooks filed a counterclaim against STW and its subsidiaries in Case No. CV-50864, pending in the 238th District Court of Midland County, Texas, styled STW Resources Holding Corp., et al. v. Felipe Sanchez, et al. (the “Dufrane Counterclaims”). Dufrane is suing STW over a $725,000 promissory note and an equipment rental agreement, and Joshua C. Brooks is suing STW alleging he was not released from certain guaranty obligations with equipment providers. STW and its subsidiaries filed a general denial and the parties have been working together on an agreed accounting of payments made and the allocations of those payments, with a view towards settling the Dufrane Counterclaims.

Seaboard International, Inc. Lawsuit. On July 07, 2015, Seaboard International, Inc. filed a lawsuit against STW and Case Drilling and Pump Service, LLC pending in the District Court of the 112th Judicial District in Pecos County, Texas, styled Seaboard International, Inc. v. Case Drilling & Pump, LLC, et al., Cause No. P-11813-112-CV (the “Seaboard Lawsuit”). Seaboard provided water well drilling services as a subcontractor to Case Drilling in the amount alleged to be $80,685.01 related to Case Drilling providing drilling services to STW Water Process & Technologies, LLC (a wholly owned subsidiary of STW) for Capitan Reef Test Well No. 1, located in Pecos County, Texas (the “Test Well”). Case Drilling did not pay Seaboard; therefore, Seaboard filed the Seaboard Lawsuit to attempt to foreclose on an alleged statutory lien on STW’s water lease with the City of Fort Stockton, Texas, on which the Test Well was located. Seaboard seeks any monies owed by STW to Case Drilling for the Test Well to be paid to United Drilling. STW has asserted that it had a “turn-key” contract with Case Drilling, which required Case Drilling to deliver a producing water well, which it did not. Accordingly, STW alleges that since it owed nothing to Case Drilling, correspondingly, it owes noting to Seaboard. In addition to STW filing its Answer and Affirmative Defenses to United Drilling’s claims, it has also filed a counterclaim against Seaboard for wrongfully placing a lien on STW’s Fort Stockton water lease, in that Seaboard’s lien is not justified as there are no amounts owed by the Company to Case Drilling from which Seaboard could collect for some or all of its subcontractor invoices. STW has also cross-claimed Case Drilling for breach of contract and indemnity related to Case Drilling’s alleged failure to pay its subcontractor, Seaboard. Based on the Company’s counsel’s legal opinions regarding the invalidity of Seaboard’s lien, the Company does not expect to incur any substantial liability from this matter.

Lonestar West Enterprises. LLC Lawsuit. On September 18, 2015, Lonestar West Enterprises, LLC filed a lawsuit against STW in the 141st District Court of Tarrant County, Texas, styled Lonestar West Enterprises, LLC v. STW Resources Holding Corp., Cause No. 141-281104-15 (the “Lonestar Lawsuit”). It is believed that Lonestar provided services to STW’s subsidiary, STW Oilfield Services, which ceased operations. Lonestar seeks $26,550 plus attorneys’ fees. STW has filed a general denial and is still investigating the matter.


We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item. Please refer to our Form 10-K filed with the SEC on April 3, 2015 under item 1.A Risk Factors.


The Company has authorized issuance of up to 191,666,667 shares of common stock with a par value of $0.001 per share.

Information on any and all equity securities we have sold during the period covered by this Report that were not registered under the Securities Act of 1933, as amended is set forth below:

On July 9, 2015, the company issued 355,500 shares of common stock to 43 employees as performance bonuses. The stock was valued at $0.20 per share and totaled $71,100.

On July 22, 2015, the Company issued 200,000 shares of common stock to an investor as part of the financing agreement. The shares were valued at an average of $0.21 per share and totaled $40,469.

On July 28, 2015, the company issued 50,000 shares of common stock in payment of fees owed to a consultant for service rendered. The shares were valued at $0.65 per share and totaled $32,500.

 
 
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On October 15, 2015, the company issued a total of 510,000 shares of common stock to 3 accredited lenders. The company issued 120,000 shares of common stock to the first accredited lender in payment for the extension on a note payable. The shares were valued at $0.07 per share for a total of $8,400. The second accredited lender was issued 40,000 shares of common stock in payment for the extension on a note payable and 100,000 shares of common stock in conjunction with their SPA. The shares were valued at $0.07 per share for a total of $9,800. The third accredited lender was issued 250,000 shares of common stock in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.18 per share for a total of $45,000.

On October 22, 2015, the company issued 225,000 shares of common stock to an accredited lender in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.33 per share for a total of $74,250.

On October 27, 2015, an accredited lender converted $30,000 of a note payable and the company issued 364,964 shares of common stock. The shares were valued at approximately $0.08 per share.

A consultant converted outstanding billing for service in the amount of $75,000. On November 2, 2015, the Company issued 50,000 shares of common stock and the remaining shares 50,000 shares of common stock were issued on November 4, 2015. The shares were valued at approximately $0.75 per share.

On November 5, 2015, the company issued 225,000 shares of common stock to an accredited lender in payment of loan fees that were accrued in the Fees Payable in Common Stock. The shares were valued at $0.14 per share for a total of $31,500.

On November 6, 2015, an accredited lender converted $30,000 of a note payable and the company issued 454,545 shares of common stock. The shares were valued at approximately $0.06 per share.

All of the transactions listed above were made pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(a)(2) of the Securities Act for sales not involving a public offering or Rule 506(b) of Regulation D promulgated by the SEC. The securities issued have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.


GE Ionics Settlement Agreement

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

On August 31, 2010, the Company entered into a Settlement Agreement relating to a $2,100,000 note payable that was amended on October 30, 2011. On May 7, 2012, GE informed the Company that it had failed to make any required installment payment that was due and payable under the GE Note and that the Company’s failure to make any such installment payment(s) constituted an Event of Default under the GE Note. Pursuant to the terms of the GE Note, upon the occurrence of an Event of Default for any reason whatsoever, GE shall, among other things, have the right to (a) cure such defaults, with the result that all costs and expenses incurred or paid by GE in effecting such cure shall bear interest at the highest rate permitted by law, and shall be payable upon demand; and (b) accelerate the maturity of the GE Note and demand the immediate payment thereof, without presentment, demand, protest or other notice of any kind. Upon an event of default under the GE Note, GE shall be entitled to, among other things (i) the principal amount of the GE Note along with any interest accrued but unpaid thereon and (ii) any and all expenses (including attorney’s fees and expenses) incurred in connection with the collection and enforcement of any rights under the GE Note.

 
 
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Under the terms of the August 31, 2010 note, interest at the rate of WSJ prime plus 2% is due on the note, upon default, interest is due at the maximum legal rate which is 10% in the state of Texas. The note matured on September 1, 2013, and is in default. Interest on the note through December 31, 2014, has been accrued pursuant to the terms of the note through May 6, 2012, interest upon default on May 7, 2012, has been accrued at the maximum default rate in the state of Texas which is 10%.

As of the date hereof, the Company has not repaid any principal or accrued but unpaid interest that has become due and payable under the GE Note.

On May 22, 2013, GE filed a lawsuit against STW in the Supreme Court of the State of New York, County of New York, Index No. 651832/2013 (the “GE Lawsuit”). Although the lawsuit arises out of STW’s obligations to GE under its Settlement Agreement with GE, upon which STW owed GE $2.1 million plus interest, GE has elected to forgo suit on the settlement amount and sue STW for the original debt of $11,239,437, plus interest and attorneys’ fees (the “Original Debt”). As such, STW filed its Answer and asserted that it is entitled to and shall pursue all of its available legal and equitable defenses to the Original Debt, inasmuch as GE has, among other things, failed to discount the Original Debt sued upon by the amounts that it recovered through re-use and re-sale of the equipment it fabricated for STW. Management has not accrued the original amount of the debt because the probability of recovery is remote.


none

 
 
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Item 6. Exhibits
EXHIBIT INDEX
Exhibit No.
  
Description
2.1
  
Order Confirming the Second Amended Plan of Re-organization of Woozyfly, Inc. (4)
2.2
  
Agreement and Plan of Merger for proposed merger between Woozyfly, Inc. Merger Sub, and STW Resources, Inc. dated January 17, 2010 (3)
3.1
  
Articles of Incorporation (1)
3.2
  
Certificate of Amendment to the Articles of Incorporation (2)
3.3
  
Certificate of Amendment to the Articles of Incorporation – March 1, 2010 (5)
3.4
  
Articles of Merger between STW Acquisition, Inc. and STW Resources, Inc. (4)
3.5
  
Articles of Merger filed with the State of Nevada on March 3, 2010 (6)
4.1
  
Form of 12% Convertible Note dated August 31, 2010 (8)
4.2
  
Form of Warrant dated August 31, 2010 (8)
4.3
  
Form of Promissory Note dated August 31, 2010 (9)
4.4
  
Form of Warrant for December 2010 Financing (10)
4.5
  
Extension of Note, by and between STW Resources Holding Corp. and GE Ionics, Inc., dated October 28, 2011 (11)
4.6
  
Amended and Restated Note effective October 1, 2011 in favor of GE Ionics, Inc. (11)
4.7
  
Form of November 2011 Warrant (13)
4.8
  
Note Exchange Form of New Note (15)
4.9
  
Note Exchange Form of New Warrant (15)
4.10
  
Form of May 2012 Warrant (16)
10.1
  
Form of securities Purchase Agreement dated August 31, 2010 (6)
10.2
  
Form of Escrow Agreement by and between the Company, Viewpoint, and TD Bank, N.A. dated March 31, 2010 (8)
10.4
  
Form of Settlement Agreement by and between STW Resources Holding Corp and GE Ionics, Inc., dated August 31, 2010 (9)
10.5
  
Form of Subscription Agreement for December 2010 Financing (10)
10.6
  
Letter of Intent dated April 17, 2011 (12)
10.7
  
Amendments to Settlement Agreement dated October 30, 2011, by and between STW Resources Holding Corp. and GE Ionics, Inc. (11)
10.8
  
Form of November 2011 Subscription Agreement (13)
10.9
  
Note Exchange Cover Letter (15)
10.10
  
Note exchange Subscription Agreement Form (15)
10.11
  
Master Note Agreement with Revenue Participation Subscription Package (15)
10.12
  
Form of May 2012 Subscription Agreement (16)
10.13
  
Executive Long Term Agreement between the Company and Stanley Weiner (17)
10.14
  
Executive Long Term Agreement between the Company and Paul DiFrancesco as Head of Finance (17)
10.15
  
Executive Long Term Agreements between the Company and Grant Seabolt as General Counsel and Corporate Secretary (17)
16.1
  
Letter from Weaver & Martin LLC (7)
16.2
  
Letter from Weaver and Tidwell, LLP (14)
31.1
  
Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
  
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
  
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
  
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
-45-
 
(1)
Incorporated by reference to the Registration Statement on Form SB-2, previously filed with the Securities and Exchange Commission on September 26, 2006.
(2)
Incorporated by reference to the Registrant’s Definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission on September 4, 2008.
(3)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 26, 2010.
(4)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 19, 2010.
(5)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on March 2, 2010.
(6)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on March 9, 2010.
(7)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on April 5, 2010.
(8)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 16, 2010.
(9)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 22, 2010.
(10)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 10, 2010.
(11)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 3, 2011.
(12)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on April 26, 2011.
(13)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 23, 2011.
(14)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 2, 2012.
(15)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on April 10, 2012.
(16)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 11, 2012.
(17)
Incorporated by reference to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 3, 2015.
 
 
 
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SIGNATURES

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

 
STW RESOURCES HOLDING CORP
  
 
(Registrant)
  
     
Date: November 24, 2015
By: /s/ Alan Murphy
  
 
Alan Murphy
  
 
President and Chief Executive Officer
(Principal Executive Officer)
  
   
Date: November 24, 2015
By: /s/ Robert J. Miranda
  
 
Robert J. Miranda
  
 
Vice President and Chief Financial Officer
(Principal Accounting Officer)
  
 
-47-


Exhibit 31.1

Chief Executive Officer Certification (Section 302)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
I, Alan Murphy, certify that:
 
(1) I have reviewed this quarterly report on Form 10-Q of STW Resources Holding Corp., (Registrant).
 
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
(3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
(4) The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 (b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 (c) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information ; and
 
 (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
 
Date: November 24, 2015
 
By:
/s/ Alan Murphy
  
   
Alan Murphy
  
   
Chief Executive Officer
  
 



Exhibit 31.2

Chief Financial Officer Certification (Section 302)
 
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
I, Robert J. Miranda, certify that:
 
(1) I have reviewed this quarterly report on Form 10-Q of STW Resources Holding Corp., (Registrant).
 
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
(3) Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
(4) The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 (b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 (c) disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information ; and
 
 (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
 
Date: November 24, 2015
 
By:
/s/ Robert J. Miranda
  
   
Robert J. Miranda
  
   
Chief Financial Officer
  




Exhibit 32.1

CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of STW Resources Holding Corp. (the "Company") on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report") I, Alan Murphy, President and CEO of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

(1)            The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)            The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 24, 2015
 
By:           /s/ Alan Murphy
Alan Murphy,
President, Principal Executive Officer & CEO

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.


Exhibit 32.2

CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of STW Resources Holding Corp. (the "Company") on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report") I, Robert J. Miranda, CFO of the Company, certify, pursuant to 18 USC section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

(1)            The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)            The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 24, 2015

By:           /s/ Robert J. Miranda
Robert J. Miranda,
Principal Financial Officer/Chief Financial Officer


This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.