Debt

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Note 2.Debt

The Company’s debt at March 31, 2012 and December 31, 2011, consisted of the following:

	March 31,			December 31,
Name	2012 (Unaudited)			2011 (Audited)
14% Convertible Notes	$	2,481,235		$	2,481,235
12% Convertible Notes:
Cash issuances of 2009 Notes		90,000			90,000
Cash issuances of 2010 Notes		325,000			325,000
Total  12% Convertible Notes		415,000			415,000
GE Note		2,100,000			2,100,000
Deferred Compensation Notes		279,095			279,095
Revenue Participation Notes		165,000			-
Other Short-term debt		152,906			164,693
Unamortized debt discount		(52,504	)		(60,380	)
Total Debt		5,540,732			5,379,643
Less: Current Portion		(2,947,001	)		(2,958,788	)
Total Long Term Debt	$	2,593,731		$	2,420,855

Revenue Participation Notes

During February 2012, the Company issued to certain accredited investors (the “Investors”) revenue participation interest notes with a principal amount of $165,000 (the “March 2012 Notes”). These March 2012 Notes mature on January 31, 2017 and carry an interest rate of 12%. Principal and interest payments shall come solely from the Investors share of the revenue participation fees from water processing contracts related to brackish and/or produced water. The Investors shall receive 50% of the net revenues from such contracts until such time as they have received two times their investment amount and 10% of the net revenues thereafter until such time as they have received an additional $295,000 at which time the March 2012 Notes are retired in full. The Investors received warrants to purchase 165,000 shares of the Company’s common stock. These warrants have an exercise price of $0.20, are immediately exercisable and a two year maturity. The Company incurred cash fees of $16,500 which is recorded as a loan origination fee and is included in prepaid expenses in the accompanying condensed consolidated balance sheet and will be amortized to interest expense, and issued 16,500 warrants under the same terms as those received by the Investors. As of March 31, 2012, the Company has not generated revenue in connection with these March 2012 Notes.

The Company valued the warrants using the Black-Scholes option pricing model, using the following variables: annual dividend yield of 0%; expected life of 2 years; risk free rate of return of 0.33%; expected volatility of 100%. As the value of the warrants was not significant, the Company did not allocate any portion of the debt proceeds to the warrants, however, the warrants are included in the derivative liability account each reporting period as the Company has insufficient authorized shares to settle outstanding contracts (see Note 3).

Other Short-term Debt

September 1, 2011, the Company entered into a note modification with a holder (the "Holder") of $100,000 of the 2010 12% Convertible Notes that had previously matured. The agreement called for the Company to issue 2,000,000 shares (the "Shares") of the Company's common stock to the Holder who will sell these shares for which the proceeds will be used to reduce the Company's note to the Holder. The Company has the right to settle the $160,900 liability in cash at any time and reclaim any remaining Shares provided to the Holder. The Company may be required to issue additional shares of its common stock to the Holder if the Holder's sales proceeds from selling the Shares is less than the $160,900 note plus accrued interest payable.

During the current period, the Holder sold the 2,000,000 shares held at December 31, 2011 for cash consideration in the amount of $11,787, which was recorded as a reduction of the note amount owed as of March 31, 2012 and recorded a loss of $8,213 related to the change in fair value of the 2,000,000 shares during the three months ended March 31, 2012 in the accompanying condensed consolidated statement of operations. The Company issued the Holder an additional 3,000,000 shares during the period ended March 31, 2012 to be used to pay off the note balance when such shares are sold. As of March 31, 2012, the Holder held the 3,000,000 shares issued during the current period (see Note 4). On October 16, 2012, the Company renegotiated the terms of the notes which was in default at March 31, 2012. Under the new terms of the note, the Company is required to make principal payments of $15,000 in October and November 2012 and $20,000 for each of the remaining months, through May 2013, plus interest of 12%. The principal balance on October 16, 2012 was approximately $150,000. The Company has reported the balance on such note as current due to the history of the Company not being able to make the monthly principal payments and due to the note being due in May 2013.  The Company is current in its payments under the amended note.

GE Ionics Settlement Agreement

On or about May 22, 2008, STWR 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 Parties entered into a Settlement Agreement (the “GE Settlement Agreement”) pursuant to which GE permitted the Company to substitute for STWR as to all rights and obligations under the Purchase Order (including the Original Debt) and Teaming Agreement, and such that to fully discharge STWR financial obligations to GE under the Purchase Order, the Company shall pay GE $1,400,000.00 pursuant to a senior promissory note (the “GE Note”). The GE Note bore interest at a rate of the WSJ Prime Rate (as published daily in the Wall Street Journal) plus two percent (2%) per annum. Under the terms of the GE Note, the Company had thirteen (13) months to pay off the GE Note plus all accrued interest.  In addition, upon the consummation and closing of a debt or equity financing following the execution of the GE Note, the Company shall pay GE thirty percent (30%) of any and all tranches (“Tranches” being defined as the cash receipts of the proceeds of any equity investments in or loans to the Company or any affiliated entity by third parties, but excluding any conversions of pre-existing debt to equity by any of the Company’s then current convertible note holders or creditors) until the GE Note is paid in full, including all accrued interest.  On September 29, 2011, the Parties agreed to extend the maturity date of the GE Note from September 30, 2011 to October 30, 2011.

On October 30, 2011, the Parties entered into an amendment to the GE Settlement Agreement, effective October 1, 2011, pursuant to which, among other things, the Parties agreed as follows: (i) the Company will have until September 1, 2013 to pay GE $2,100,000 plus interest accrued after October 1, 2011 under the GE Note in accordance with its terms, (ii) upon the consummation and closing of a debt or equity financing following the execution of the GE Note, the Company shall pay GE thirty percent (30%) of any and all tranches (“Tranches” being defined as the cash receipts of the proceeds of any equity investments in or loans to the Company or any affiliated entity by third parties, but excluding any conversions of pre-existing debt to equity by any of the Company’s then current convertible note holders or creditors) until the GE Note is paid in full, including all accrued interest, provided the Company shall not be obligated to pay GE upon, among other things, the following: (a) short term commercial paper of $200,000 or less, up to a cumulative maximum of $500,000 through December 31, 2012, (b) commercial equipment leasing whereby GE is taking a secured interest in the purchased equipment, (c) proceeds from project, lease and equipment funding to any subsidiary of the Company provided the Company does not receive any proceeds of such funding and (d) a one-time general exception for $1,500,000 of new equity financing of the Company, (iii) the Company shall begin making a regular series of installment payments as follows: (a) $10,000 per month beginning on January 1, 2012, and (b) $15,000 per month beginning on June 1, 2012 through the maturity date of the GE Note and (iv) the Company shall be able to prepay the GE Note, without interest, on or before the maturity date.

On May 7, 2012, GE informed the Company that it had failed to may 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.  

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.  While GE has not accelerated any amounts that are due and payable under the GE Note, as a result of the notice of default, as of the date hereof, the GE Note could become immediately due and payable.  The Company is currently working with GE on making arrangements to honor its obligations under the GE Note, however, there can be no assurance that any such arrangements will ever materialize or be permissible or sufficient to cover any or all of the obligations under the GE Note.

TCA Loan

On May 11, 2010, the Company entered into a subscription agreement with TCA Global Credit Master Fund LP (“TCA”) pursuant to which TCA purchased a 12% convertible note for an aggregate purchase price of $100,000 (the “TCA Note”).  The TCA Note bore interest at a rate of 12% per annum and matured one year from the date of issuance.  The TCA Note was convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).    On May 6, 2011, the Company and TCA agreed to extend the maturity date of the Note from May 6, 2011 until August 11, 2011.

On September 1, 2011, the Company and TCA entered into a loan repayment agreement (the “Repayment Agreement”) with TCA pursuant to which the Company agreed to pay TCA a $45,000 extension fee, plus $15,900 of accrued interest, in consideration for TCA not calling the TCA Note, and resulted in the total aggregate principal amount that is due and payable to TCA to be equal to $160,900, which shall continue to bear interest at 12% per annum (the “Owed Amount”). In connection with the Repayment Agreement, the Company agreed to issue TCA 2,000,000 shares of the Company's common stock (the "Shares")  to repay the Owed Amount which TCA shall be able to sell and use the proceeds to pay down the Owed Amount.  If the Owed Amount is not satisfied by the sale of the Shares, upon request from TCA, the Company must issue TCA additional shares of the Company’s common stock.  The Company has the right to settle the Owed Amount in cash at any time and reclaim any remaining Shares provided to the Holder. On August 19, 2012, TCA informed the Company that it is in default and demanded repayment of the Owed Amount (the “DefaultEffective October 16, 2012, the Company and TCA entered into a settlement agreement (the “TCA Settlement Agreement”) pursuant to which the Company agreed to pay $146,686.46 plus accrued but unpaid interest at a rate of twelve percent (12%) per annum as well as legal fees in the amount of $3,000 arising from the Default (the “TCA Settlement Amount”) as follows: (i) $15,000 to be paid on October 18, 2012, (ii) $15,000 to be paid on or before November 1, 2012, (iii) five (5) equal installments of $20,000 to be paid beginning on December 1, 2012 and continuing on the first day of each month thereafter, (iv) $11,686.46 in principal and $9,067.93 of interest to be paid on or prior to May 1, 2013 and (v) $3,000 for legal fees to be paid on May 1, 2013.  Under the settlement Agreement, if STW is late on any installment, it has ten days after notice from TCA to make a cure payment.  To date, all payments under the Settlement Agreement have been timely made under the regular payment date or within the allowed cure period.

August 2010 Loans

On August 13, 2010, the Company entered into subscription agreements with two investors (the “August Investors”) pursuant to which the August Investors each purchased a 12% convertible note for an aggregate purchase price of $25,000 (the “August 2010 Notes”).  The August 2010 Notes bore interest at a rate of 12% per annum and matured one year from the date of issuance.  The August 2010 Notes were convertible, at any time at the option of the holder, into shares of the Company’s common stock, at an initial conversion price of $0.25 per share (the “Conversion Price”).    On March 2, 2012, the August Investors informed the Company that it is in default and demanded repayment under the August 2010 Notes.  As a result of the notice of default, as of the date hereof, the August 2010 Notes are immediately due and payable.  On December 7, 2012, the Company and the August 2010 Investors agreed that beginning December 1, 2012, the Company would make a monthly payment of $350 to each investor, provided that either party will have the right to terminate the agreement upon 30 days notice.  While the Company is currently working with the August Investors to honor its obligations under the August 2010 Notes, however, there can be no assurance that any such arrangements will ever materialize or be permissible or sufficient to cover any or all of the obligations under the August 2010 Notes.