Nuverra Environmental Solutions, Inc. - FORM 10-Q

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EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - Nuverra Environmental Solutions, Inc.	dex321.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Nuverra Environmental Solutions, Inc.	dex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Nuverra Environmental Solutions, Inc.	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2010

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

For the transition period from to .

Commission File Number: 001-33816

HECKMANN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

26-0287117

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

75080 Frank Sinatra Drive, Palm Desert, California 92211

(760) 341-3606

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of July 30, 2010 was 108,899,985.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION		1
Item 1.	Unaudited Consolidated Financial Statements	1
	Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009	1
	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009	2
	Unaudited Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2010 and 2009	3
	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	4
	Unaudited Consolidated Statements of Equity for the six months ended June 30, 2010	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION		25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Reserved	26
Item 5.	Other Information	26
Item 6.	Exhibits	27

HECKMANN CORPORATION

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Heckmann Corporation

Consolidated Balance Sheets

(In thousands, except share data)


	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	118,854		$	136,050
Certificates of deposit		10,513			10,513
Marketable securities		54,925			16,020
Accounts receivable, net		7,392			5,873
Inventories, net		2,402			2,896
Prepaid expenses and other receivables		1,979			4,461
Refundable income tax		2,844			—
Other current assets		281			278

Total current assets		199,190			176,091
Property, plant and equipment, net		56,466			53,520
Marketable securities		50,245			86,638
Equity investments		7,232			11,229
Intangible assets, net		22,703			23,507
Goodwill		13,598			13,598
Other		448			406

Total assets	$	349,882		$	364,989

Liabilities and equity
Current liabilities:
Accounts payable	$	20,270		$	19,501
Deferred revenue		522			946
Accrued expenses		17,911			13,443
Current portion of long term debt		1,850			1,398
Due to related parties		503			1,472
Deferred income taxes		—			178

Total current liabilities		41,056			36,938
Acquisition consideration payable		1,910			1,910
Long-term debt, net of current portion		—			439
Other long term liabilities		4,293			4,672
Equity:
Preferred stock, $0.001 par value: 1,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value: 500,000,000 shares authorized, 125,432,075 shares issued and 108,899,985 shares outstanding at June 30, 2010 and 125,282,740 shares issued and 108,750,650 shares outstanding at December 31, 2009		124			124
Additional paid-in capital		746,580			746,077
Purchased warrants		(5,533	)		(4,810	)
Treasury stock		(14,000	)		(14,000	)
Accumulated other comprehensive income		167			643
Accumulated deficit		(426,195	)		(409,166	)

Total equity of Heckmann Corporation		301,143			318,868
Noncontrolling interest		1,480			2,162

Total equity		302,623			321,030

Total liabilities and equity	$	349,882		$	364,989

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

Heckmann Corporation

Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Revenue	$	11,626		$	8,277		$	20,231		$	16,080
Cost of goods sold		8,647			6,236			15,469			11,427

Gross profit		2,979			2,041			4,762			4,653
Operating expenses:
Selling and marketing		797			1,020			1,306			1,427
General and administrative		4,717			5,534			7,523			10,924
Pipeline start-up and commissioning (Note 2)		13,005			—			13,005			—
Goodwill impairment (Note 2)		—			—			—			184,000

Total operating expenses		18,519			6,554			21,834			196,351

Loss from operations		(15,540	)		(4,513	)		(17,072	)		(191,698	)
Interest income, net		624			972			1,368			2,185
Income (loss) from equity method investment		(4,098	)		364			(4,048	)		335
Other, net		(306	)		75			25			281

Loss before income taxes		(19,320	)		(3,102	)		(19,727	)		(188,897	)
Income tax benefit (expense)		2,580			(52	)		2,722			(420	)

Net loss		(16,740	)		(3,154	)		(17,005	)		(189,317	)
Net income attributable to the noncontrolling interest		(61	)		(18	)		(24	)		(155	)

Net loss attributable to common stockholders	$	(16,801	)	$	(3,172	)	$	(17,029	)	$	(189,472	)

Net loss per common share attributable to the Company’s common stockholders
Basic and diluted	$	(0.15	)	$	(0.03	)	$	(0.16	)	$	(1.72	)

Weighted average shares outstanding :
Basic and diluted		108,873,868			110,223,277			108,944,922			110,149,587

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

Heckmann Corporation

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Net loss attributable to common stockholders	$	(16,801	)	$	(3,172	)	$	(17,029	)	$	(189,472	)
Add back: net income attributable to the noncontrolling interest		61			18			24			155

Net loss		(16,740	)		(3,154	)		(17,005	)		(189,317	)

Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)		(51	)		—			(84	)		71
Reclassification of net gains from sales of available-for-sale securities included in earnings		—			—			(311	)		—
Unrealized gain (loss) on available-for-sale securities		(165	)		547			(81	)		156

Total other comprehensive income (loss), net of tax		(216	)		547			(476	)		227

Comprehensive loss, net of tax		(16,956	)		(2,607	)		(17,481	)		(189,090	)
Net income attributable to the noncontrolling interest		(61	)		(18	)		(24	)		(155	)

Comprehensive loss attributable to the Company	$	(17,017	)	$	(2,625	)	$	(17,505	)	$	(189,245	)

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

Heckmann Corporation

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six months ended June 30,
	2010			2009
Operating activities
Net loss	$	(17,005	)	$	(189,317	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		2,032			783
Amortization		812			2,138
Bad debt expense		194			2,000
Goodwill impairment (Note 2)		—			184,000
Stock-based compensation		437			1,684
Loss (gain) from equity method investment (Note 5)		4,048			(335	)
Loss on Harbin rescission (Note 9)		1,576			—
Loss on disposal of property plant and equipment		708			—
Other		486			80
Changes in operating assets and liabilities, net of Harbin rescission (2010) and purchase price adjustments (2009):
Accounts receivable		(3,055	)		(5,247	)
Inventories		22			(4,515	)
Prepaid expenses and other receivables		2,229			1,031
Refundable income tax		(2,743	)		—
Accounts payable and accrued expenses		11,341			(1,814	)
Deferred revenue		(844	)		(179	)
Deposits		(5	)		20
Other assets		(855	)		(120	)
Due to related party		(74	)		—
VAT and income taxes payable		34			787

Net cash used in operating activities		(662	)		(9,004	)

Investing activities
Purchases of available-for-sale securities		(71,048	)		(97,516	)
Proceeds from sale and maturity of available-for-sale securities		67,429			54,744
Cash paid for equity investments		—			(6,801	)
Restricted cash, for equipment purchase		—			(2,000	)
Payments made in connection with Harbin acquisition		—			(1,193	)
Purchases of property and equipment		(13,248	)		(4,593	)
Investment in joint venture		(50	)		—
Cash receipts from sale of assets held for sale		—			289

Net cash used in investing activities		(16,917	)		(57,070	)

Financing activities
Payment on long-term debt agreements		(1,603	)		(132	)
Borrowings under revolving credit facility		2,486			—
Cash proceeds from exercise of warrants		66			—
Proceeds from notes payable		98			—
Cash paid to repurchase warrants		(723	)		(4,405	)
Cash paid to purchase treasury stock		—			(14,000	)

Net cash provided by (used in) financing activities		324			(18,537	)

Net decrease in cash and cash equivalents		(17,255	)		(84,611	)
Effect of change in foreign currency exchange rate on cash and cash equivalents		59			31
Cash and cash equivalents at beginning of period		136,050			281,683

Cash and cash equivalents at end of period	$	118,854		$	197,103

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

Heckmann Corporation

Consolidated Statements of Equity

Six months ended June 30, 2010

(Unaudited)

(In thousands, except share data)


				Heckmann Corporation Shareholders
	Total			Common Stock			Additional Paid-In Capital		Treasury Stock				Purchased Warrants				Accumulated Deficit			Accumulated other Comprehensive Income			Noncontrolling Interest
	Total			Shares	Amount		Additional Paid-In Capital		Shares	Amount			Warrants	Amount			Accumulated Deficit			Accumulated other Comprehensive Income			Noncontrolling Interest
Balance at January 1, 2010	$	321,030		125,282,740	$	124	$	746,077	13,032,098	$	(14,000	)	6,572,096	$	(4,810	)	$	(409,166	)	$	643		$	2,162
Stock based compensation (Note 7)		437		138,335				437
Exercise of warrants for cash		66		11,000				66
Purchase of warrants for cash		(723	)										1,543,000		(723	)
Divestiture of Harbin (Note 9)		(706	)																					(706	)
Comprehensive loss:
Net loss		(17,005	)															(17,029	)					24
Other comprehensive loss, net of tax:
Reclassification of net gains from sales of available-for-sale securities included in earnings		(311	)																		(311	)
Unrealized gain on available for sale securities		(81	)																		(81	)
Foreign currency translation loss		(84	)																		(84	)

Other comprehensive loss		(476	)

Comprehensive loss		(17,481	)

Balance at June 30, 2010	$	302,623		125,432,075	$	124	$	746,580	13,032,098	$	(14,000	)	8,115,096	$	(5,533	)	$	(426,195	)	$	167		$	1,480

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

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Basis of Presentation

Heckmann Corporation (the “Company”) was incorporated in Delaware on May 29, 2007 as a blank check company whose objective was to acquire, through a merger, stock exchange, asset acquisition, reorganization or similar business combination, one or more operating businesses. On May 19, 2008, Heckmann Corporation and Heckmann Acquisition II Corp., a Delaware corporation and the Company’s wholly-owned subsidiary (“Acquisition Sub”), entered into an agreement and plan of merger and reorganization with China Water and Drinks, Inc., a Nevada corporation (“China Water”). China Water and subsidiaries is engaged in the manufacture of bottled water products and operates seven bottled water production plants in the People’s Republic of China (“PRC” or “China”). China Water produces and markets bottled water products under the brand name “Darcunk” and “Grand Canyon” to distributors throughout China, and supplies bottled water products to beverage and servicing companies in the industry. On October 30, 2008, the Company and Acquisition Sub completed the acquisition of China Water pursuant to a merger agreement, as amended, with Acquisition Sub remaining as the surviving entity. Substantially all activities through October 30, 2008 related to the Company’s formation, initial public offering (the “Offering”) and efforts to identify prospective target businesses. Prior to October 30, 2008 the Company was in the development stage. For accounting purposes the acquisition has been treated as a business purchase combination, with the results of China Water included in the consolidated financial statements subsequent to the acquisition date.

On July 1, 2009, the Company’s wholly-owned subsidiary, Heckmann Water Resources Corporation, a Texas corporation (“HWR”), completed the purchase of the limited liability company interests of Charis Partners, LLC, a Texas limited liability company, and substantially all of the assets of Greer Exploration Corporation, a Louisiana corporation, and Silversword Partnerships, each a Texas limited partnership, pursuant to an asset purchase agreement dated April 22, 2009, and consummated July 1, 2009. The business acquired under the agreement is a multi-modal saltwater disposal, treatment and pipeline transportation business in Texas and Louisiana serving customers seeking to dispose of saltwater and frac fluid generated in their oil and gas operations (the “Saltwater Disposal and Transport Business”).

Effective with the July 1, 2009 acquisition of the Saltwater Disposal and Transport Business by HWR, and the February 2010 establishment of Heckmann Water Solutions, LLC (“HWS”) the Company has two reportable segments, which as of June 30, 2010 are referred to as international (China Water) and domestic (HWR and HWS).

The accompanying consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission. These statements include all normal reoccurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the Company’s 2009 Annual Report on Form 10-K.

Note 2 — Summary of Selected Significant Accounting Policies

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions, and profits are eliminated in consolidation.

Economic and Political - Risks A significant portion of the Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

Seasonality - China Water sales are subject to seasonal factors. Typically, China Water experiences higher sales of bottled water in the summer time in coastal cities while sales remain constant throughout the entire year in some inland cities. China Water’s sales can also fluctuate throughout the year for a number of other reasons, including the timing of advertising and promotional campaigns, and unforeseen circumstances, such as production interruptions.

Accounting Estimates - The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information; however, actual results could differ materially from those estimates.

Earnings Per Share - Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercises of outstanding warrants and options, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock, commonly referred to as the treasury stock method. Inherently, stock warrants and options are deemed to be dilutive when the average market price of the common stock during the period exceeds the exercise prices of the stock warrants and options. At June 30, 2010 and 2009, the Company’s dilutive securities include 69,821,258 and 71,588,593 warrants and options exercisable for common stock, respectively. Dilutive securities have been omitted from the computation of weighted average dilutive shares outstanding for the three and six months ended June 30, 2010 and 2009 because the effect was anti-dilutive. Also excluded from the computation of EPS are 3,500,000 shares previously held in escrow pursuant to the majority stockholder consent agreement, entered into on May 19, 2008, as amended, between the Company and Xu Hong Bin. Those shares were released from escrow on March 13, 2009 pursuant to an escrow resolution and transition agreement among the Company, China Water, Xu Hong Bin and his affiliate, have not been delivered and are subject to cancellation by the Company as of May 4, 2009.

Marketable Securities - All of the Company’s investments in marketable securities are classified as available-for-sale. These marketable securities are stated at fair value with any unrealized gains or losses recorded in accumulated other comprehensive income (loss), a component of equity, until realized. Other-than-temporary declines in market value from original cost are included in the current year’s operations. In determining whether an other-than-temporary decline in the market value has occurred, our Company considers the duration that, and extent to which, fair value of the investment is below its cost. Realized gains and losses are calculated based on specific identification to the individual securities involved with the resulting gains and losses included in non-operating income and expense on the consolidated statements of operations.

Accounts Receivable, net - Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. The Company provides an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. The Company writes off trade receivables when they become uncollectible. As of June 30, 2010 and December 31, 2009, the allowance for doubtful accounts was approximately $1.1 million and $0.9 million, respectively.

Equity Investments - Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Equity investments in companies over which the Company has the ability to exercise significant influence but does not hold a controlling interest were accounted for under the equity method and the Company’s income or loss on these investments is recorded in non-operating income or expense.

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Authoritative guidance requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. The Company performs its impairment analysis annually during the third quarter of each year. In March 2009 the Company recorded a $184.0 million non-cash goodwill impairment charge representing management’s best estimate of an impairment loss in connection with its acquisition of China Water (see Note 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). There was no impairment charge recorded in the three or six months ended June 30, 2010.

Accounting for the Impairment of Long-Lived Assets other than Goodwill - In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Company’s amortizable intangible assets include registered trademarks, customer relationships, distribution networks, and customer contracts acquired in the acquisitions of China Water and the Saltwater Disposal and Transport Business. These costs are being amortized using the straight-line method over a weighted average estimated useful life of approximately 13 years.

Fair Value of Financial Instruments - The carrying amounts of the Company’s cash equivalents, accounts receivable, accounts payable and debt approximate fair value due to the short-term nature of these instruments. The fair value of amounts due from and to related parties is not practicable to estimate due to the related party nature of the underlying transactions.

Revenue Recognition - Revenues are recognized when finished products are delivered or services are rendered to customers and all of the following have occurred: (i) both title and the risks and benefits of ownership are transferred; (ii) persuasive evidence of an arrangement with the customer exists; (iii) the price is fixed and determinable; and (iv) collection is reasonably assured.

Income taxes - Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that will more likely than not be realized.

The Company is subject to taxation in China, the United States, California, Texas, and Louisiana taxing jurisdictions. The Company’s tax returns since inception are subject to examination by those tax authorities. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2010, the Company had no interest or penalties accrued for uncertain tax positions.

Foreign Currency Translation - The functional currency of the Company’s PRC subsidiaries is the Chinese Renminbi, (“RMB”). The RMB is not freely convertible into foreign currencies. The functional currency of the Company’s BVI subsidiary and its Hong Kong subsidiaries is the Hong Kong Dollar (“HKD”). The Company’s PRC, BVI and Hong Kong subsidiaries’ financial statements are maintained in their functional currency.

Property, Plant and Equipment and Repair and Maintenance Costs - Property plant and equipment is recorded at its original cost of construction or fair value of assets purchased. Expenditures that extend the useful life or increase the expected output of property, plant and equipment, as well as major improvements are capitalized. Repair and maintenance costs are expensed as incurred. Subsequent to the completion of the 50-mile pipeline in February 2010, HWR incurred significant costs for pipeline start up, commissioning, and pipeline integrity testing. As a result, during the three and six months ended June 30, 2010 the Company recorded start up and commissioning expenses of approximately $13 million within operations.

Reclassifications and Comparability - Certain reclassifications have been made to prior periods’ consolidated financial statements in order to conform them to the current period’s presentation.

Recently Issued Accounting Pronouncements

Consolidation of Variable Interest Entities – Amended

Effective January 1, 2010, the Company adopted the revised authoritative guidance that, among other things, requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”), which amends previous guidance for consideration of related party relationships in the determination of the primary beneficiary of a VIE, amends certain guidance for determining whether an entity is a VIE, requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE, and requires enhanced disclosures about an enterprise’s involvement with a VIE. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Fair Value Measurements Disclosures

Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board (“FASB”) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information related to purchases, sales, issuances, and settlements information to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance, however, adoption of the updated guidance did not have an impact on the Company’s consolidated results of operations or financial position.

Multiple Deliverable Revenue Arrangements

deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for the Company in the first quarter of 2011. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.

Note 3 — Investments

The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for sale securities as of June 30, 2010 and December 31, 2009 are as follows (in thousands):


	Contractual Maturity (in years)	Amortized Cost		Gross Unrealized Holding				Fair Value
	Contractual Maturity (in years)	Amortized Cost		Gains		Losses		Fair Value
June 30, 2010
Certificates of deposit	1	$	10,513		—	—		$	10,513

Available-for-sale:
Current:
U.S. Government Agencies	1	$	16,097	$	15	—		$	16,112
Corporate Notes	1		38,685		195	(67	)		38,813

			54,782		210	(67	)		54,925

Noncurrent:
U.S. Government Agencies	2-3		36,571		52	(4	)		36,619
U.S. Government Securities	2-3		1,017		18	—			1,035
Corporate Notes	2-3		12,433		178	(20	)		12,591

			50,021		248	(24	)		50,245

Total		$	104,803	$	458	(91	)	$	105,170


	Contractual Maturity (in years)	Amortized Cost		Gross Unrealized Holding					Fair Value
	Contractual Maturity (in years)	Amortized Cost		Gains		Losses			Fair Value
December 31, 2009
Certificates of deposit	1	$	10,513		—		—		$	10,513

Available-for-sale:
Current:
U.S. Government Agencies	1	$	605	$	1		—		$	606
Corporate Notes	1		15,213		201		—			15,414

			15,818		202		—			16,020

Noncurrent:
U.S. Government Agencies	2-3		48,570		67	$	(54	)		48,583
U.S. Government Securities	2-3		1,023		10		—			1,033
Corporate Notes	2-3		36,209		813					37,022

			85,802		890		(54	)		86,638

Total		$	101,620	$	1,092	$	(54	)	$	102,658

Note 4 — Fair Value Measurements

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2010, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability (in thousands):


			Fair Value Measurements at June 30, 2010 Using
	Total		Significant Observable Inputs (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Certificates of deposit	$	10,513	$	10,513	$	—	$	—
U.S. Government Agencies		52,731		52,731		—		—
Corporate Notes		51,404		51,404		—		—
U.S. Government Securities		1,035		1,035		—		—

Total	$	115,683	$	115,683	$	—	$	—

In addition to the Company’s assets and liabilities that are measured at fair value on a recurring basis, the Company is required, by generally accepted accounting principles in the United States, to record certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. Assets measured at fair value on a nonrecurring basis as of June 30, 2010 are summarized below (in thousands):


	Fair Value Measurement Using						New Cost Basis		Impairment Charge
	Level 1		Level 2		Level 3		New Cost Basis		Impairment Charge
Investment — China Bottles, Inc. (Note 5)	$	—	$	—	$	—	$	—	$	4,097

During the three and six months ended June 30, 2010, the Company recorded an impairment charge of approximately $4,097,000 related to its equity investment in China Bottles, Inc. (“China Bottles”), as the decrease in fair value of the investment was deemed to be other than temporary. This expense is included in “Income (loss) from equity method investment” in the consolidated statements of operations for the three and six months ended June 30, 2010. Equity method investments are measured at fair value on a nonrecurring basis when deemed necessary, using observable inputs such as trading prices of the stock as well as using discounted cash flows, incorporating adjusted available market discount rate information and the Company’s estimates for liquidity risk.

Note 5 — Equity Investments

Underground Solutions, Inc.

On May 6, 2009, the Company purchased approximately 7% of the equity of Underground Solutions, Inc., (“UGSI”), a water infrastructure and pipeline supplier located in Poway, California for approximately $6.8 million in cash. On December 10, 2009, the Company purchased 1.0 million preferred shares of UGSI for approximately $0.4 million in cash. Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Accordingly, this investment is accounted for under the cost method. The Chief Executive Officer of UGSI serves as a member of the Board of Directors of the Company.

Energy Transfer Water Solutions, JV LLC

On February 4, 2010, the Company’s wholly-owned subsidiary HWS entered into a limited liability company agreement with ETC Water Solutions, LLC (“ETC”), a wholly-owned subsidiary of Energy Transfer Partners, L.P. (NYSE: ETP), that established a 50-50 joint venture, Energy Transfer Water Solutions, JV LLC (the “JV”), to develop solutions for the transportation and treatment of produced water, frac fluids and other types of discharged waters generated in the Marcellus Shale oil and natural gas fields throughout Pennsylvania, New York, West Virginia, Virginia, Kentucky, Tennessee, and Ohio, and in the Haynesville Shale in Louisiana and Texas (the “Agreement”).

The Company’s HWS subsidiary will, under a separate operations and reimbursement agreement with the JV, build and operate all water processing and treatment facilities owned by the joint venture. ETC will, under a separate operations and reimbursement agreement with the JV, build and operate all pipeline facilities used to transport produced water, frac fluids and other types of discharged waters to the water processing and treatment facilities operated by HWS.

The JV is managed by a board of directors comprised of an equal number of HWS and ETC representatives, and will be jointly funded unless HWS or ETC opt not to consent to a project, in which case, if the other party elects to proceed on a unilateral basis, it will be entitled to a pre-tax, unlevered internal rate of return of thirty percent on the capital contributions with respect to such project. All other distributions will be made on a 50-50 basis. In February 2010, each of HWS and ETC made an initial capital contribution to the JV of $50,000, and each of HWS and ETC agreed to a first year contribution of $450,000 toward an initial operating budget of $900,000.

The Agreement is subject to usual and customary transfer restrictions, and the obligations of HWS and ETC under both the Agreement and the respective operations and reimbursement agreements are guaranteed by the Company in the case of HWS, and Energy Transfer Partners, L.P., in the case of ETC, pursuant to guaranty agreements.

China Bottles

During the three months ended June 30, 2010 there was a significant decline in the observable market price of China Bottles, the Company’s 48% owned equity investment. Additionally, during the three months ended June 30, 2010 the Company noted a significant decline in the China Bottles business which impacted the financial results of the equity investment. As a result of these events management believes that the Company will not be able to recover the carrying amount of the investment and that China Bottles does not have the ability to sustain an earnings capacity that would justify the carrying amount of the investment. Therefore, the Company concluded that the decline in the value of the equity investment was other than temporary. The Company conducts its equity investment impairment analyses in accordance with Accounting Standards Codification (“ASC”) 323, “Investments-Equity Method and Joint Ventures.” ASC 323 requires the Company to record an impairment charge for a decrease in value of an investment when the decline in the investment is considered to be other than temporary. Accordingly the Company recorded a $4.1 million non-cash impairment charge within “Income (loss) from equity method investment” in the consolidated statements of operations for the three and six months ended June 30, 2010 to fully impair the carrying amount of its equity investment in China Bottles.

Note 6 — Income Taxes

The difference between the actual income tax (benefit) expense and that computed by applying the U.S. federal income tax rate of 35% to pretax income for the three and six months ended June 30, 2010 and 2009 is summarized below:


	Three Months Ended June 30,				Six months Ended June 30,
	2010		2009		2010		2009
United States federal income tax rate	(35.0	)%	(35.0	)%	(35.0	)%	(35.0	)%
State and local income taxes, net of federal benefit	(1.2	)	(5.7	)	(1.2	)	(5.7	)
Foreign tax rate difference	4.1		19.6		3.8		0.4
Effect of tax holiday	2.6		(9.5	)	2.6		(0.1	)
Valuation allowance	13.8		36.7		13.8		0.6
Goodwill impairment	—		—		—		40.0
Other	2.3		(4.4	)	2.2		—

Effective income tax rate	(13.4	)%	1.7	%	(13.8	)%	0.2	%

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to offset the related deductions and loss carryforwards within the applicable carryforward period, as well as the existence of operating losses on tax credit carrybacks. During the three and six months ended June 30, 2010 the Company recognized an income tax benefit of approximately $2.8 million for tax credit carrybacks. The Company is subject to taxation in the various federal, state and province, county, municipal, and local taxing jurisdictions where it has operations in the United States and China. The Company’s tax returns since inception are subject to examination by United States federal and state, and PRC tax authorities. Additionally, the Company’s value added tax reports are subject to routine review by PRC tax authorities.

Note 7 — Stock-Based Compensation

The Company grants stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to employees, directors, consultants and advisors of the Company in accordance with the Heckmann Corporation 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan authorizes the issuance of up to 5,000,000 shares of common stock.

Stock Options

The Company estimates the fair value of stock options granted to employees using a Black-Scholes option-pricing model. No stock options were granted during the three or six months ended June 30, 2010. Stock-based compensation cost related to stock options granted in August 2009, all of which is included in general and administrative expense in the statement of operations, totaled $88,100 and $175,300 for the three and six months ended June 30, 2010, respectively.

Restricted Common Stock

For the three and six months ended June 30, 2010, the Company recorded $97,800 and $262,000, respectively, of stock-based compensation expense to its employees and consultants related to shares of restricted common stock granted in May 2009. The Company recorded approximately $1.7 million of stock-based compensation expense to its employees and consultants in the three and six months ended June 30, 2009. During the three months ended June 30, 2010, 138,335 shares of common stock were issued pursuant to the 2009 Plan.

Stock and Warrant Repurchase Program

In August 2009, the Board of Directors approved a 1-year extension of the Company’s discretionary equity buy-back plan and an expansion of the plan to include common stock. Under the broadened plan, the Company may purchase warrants and up to 20 million shares of the Company’s common stock in open market and private transactions through December 31, 2010, at times and in amounts as management deems appropriate, subject to applicable securities laws. During the three and six months ended June 30, 2010, 1,543,000 warrants were purchased by the Company for $723,000 in cash (the market price for the public warrants). No common shares were purchased in the three or six months ended June 30, 2010.

Note 8 — Commitments and Contingencies

Environmental Liabilities

In accordance with the requirements of the PRC’s Environmental Protection Law, the Company has installed required environmental protection equipment, adopted environmental protection technologies, established responsibility systems for environmental protection, and has reported to and registered with the relevant local environmental protection departments. The Company has complied with the relevant regulations and has never paid a fee for the excessive discharge of pollutants. Management believes that there are no unrecorded liabilities in connection with the Company’s compliance with environment laws and regulations.

The Company also complies with the environmental protection laws and regulatory framework of the United States and the individual states where it operates water gathering pipelines and salt water disposal wells. The Company has installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and has established reporting and responsibility protocols for environmental protection and reporting to relevant local environmental protection departments. In Texas and Louisiana, the Company is subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, and the Louisiana Department of Environmental Quality, all of which are designed to protect the environment and monitor compliance with water quality. Management believes the Company is in material compliance with all applicable environmental protection laws and regulations in the United States, Texas, and Louisiana.

Litigation

On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively “Xu”), filed a lawsuit in the Delaware Court of Chancery (the “Court”) making various claims against the Company and its directors and executive officers. Xu’s lawsuit makes claims allegedly arising out of the Company’s intended cancellation of approximately 5.3 million shares of Company common stock held by Xu. Xu claims that the Company’s intended cancellation of his 5.3 million shares is a breach of the general release in an escrow resolution and transition agreement that the Company entered into with him, which was filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. On June 8, 2009, the Court denied Xu’s request for expedited scheduling but indicated that pending resolution of the Xu litigation the Company may not cancel the 5.3 million Xu shares at issue. On June 22, 2009, the Company filed a vigorous answer and countersuit expanding its claims against Xu and seeking recovery of not only the stock at issue, but also cash paid to Xu, and cash the Company believes was misappropriated by Xu. The Company’s affirmative defenses and its countersuit contend that the general release in the escrow resolution and transition agreement is infected with fraud and therefore voidable.

In response to the Company’s affirmative defenses and countersuit, Xu tried to circumvent the emerging evidence with a technical motion for partial judgment. It failed. On October 26, 2009, the Court denied Xu’s motion. Xu also asked the Court for an order of specific performance of the general release provisions of the escrow resolution and transition agreement. That also failed. The Court rejected Xu’s arguments as premature, and ruled that evidentiary questions of fraud and the voidabilty of the transition agreement will remain for later proceedings and trial. The Court also denied Xu’s motion to dismiss our counterclaims for his breach of the fiduciary duties of care and loyalty as a member of the Company’s Board of Directors. Although the Company’s fraud defenses and countersuit for breach of fiduciary duties remains, the Court trimmed the pleadings by dismissing the Company’s counterclaims for contract breach and conversion. The Company’s evidence of Xu’s wrongdoing raises serious issues for trial. The Company’s countersuit for Xu’s breach of fiduciary duties and its affirmative defenses to his claims are going forward. In light of the pending litigation, disputed shares will continue to be included in the Company’s outstanding shares until the litigation is finally resolved. Based on statements by Xu during recent discovery proceedings, the Company believes that Xu, together with one of the holders of the noncontrolling interest in China Water’s subsidiary Harbin Taoda Drinks (“Harbin”), were parties to certain loan agreements that were not disclosed to the Company in connection with its acquisition of China Water or in China Water’s SEC filings prior to such acquisition, and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. Further, Xu’s recent deposition suggests, in the Company’s view, significant noncompliance with the discovery process. As a result the Company is seeking to suspend further discovery until there is full compliance.

In Xu’s companion case for legal fee expense reimbursement as a former director under the indemnity provisions of the Company’s bylaws and certificate of incorporation, Xu recently complied with the conditions set by the Company’s Board of Directors and the Court mandate that he provide an irrevocable bonded and collateralized $1,000,000 letter of credit in favor of the Company. As a result, requests for expense reimbursement are secured, and, upon submission to the Company and/or approval by the Court, as applicable, the Company may issue reimbursement payments.

On May 28, 2010, Ng Tak Kau, a former officer of China Water that was also part of the selling insiders group that includes Xu, filed a lawsuit in the Delaware Court of Chancery making various claims against the Company and its directors and executive officers. Ng’s lawsuit makes claims allegedly arising out of the Company’s intended cancellation of 4.08 million shares of Company common stock potentially issuable to Ng in connection with the Company’s acquisition of China Water. Ng contends that the Company’s intended cancellation of his 4.08 million shares is unwarranted and a breach of agreements entered into in connection with the acquisition. On July 13, 2010, the Company filed an answer denying all allegations and also a countersuit for fraud and fraudulent inducement. To date, there has been no further activity by Ng toward discovery or prosecution of the case.

On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware (the “Class Action”). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded to the Class Action by filing a motion to transfer and consolidate the Delaware action to California. The motion to transfer is presently pending for decision, after which the Company intends to file a motion to dismiss. On May 21, 2010, Westfield Retirement Board, also purporting to act on behalf of shareholders, filed a virtually identical class action lawsuit in the United States District for the Central District of California. On July 26, 2010, Westfield filed a request to voluntarily dismiss that case.

The outcome of the above litigation could have a material adverse effect on the Company’s consolidated financial statements.

Cancellation of Common Shares

Previously, the Company initiated cancellation of 15,527,900 common shares that were issued to former China Water management and insiders, and approximately 1.5 million shares underlying warrants issuable to them in connection with the acquisition of China Water. As part of that initiative, on July 18, 2009, the Company entered into a Settlement and Release Agreement with China Water’s former Chief Executive Officer, Chen Xinghua, resulting in the cancellation of 3,361,000 shares. In consideration for Mr. Chen’s entering into and fully performing the agreement, on August 31, 2009, pursuant to the terms of the Settlement and Release Agreement, the Company issued 200,000 restricted shares of common stock to Mr. Chen. The shares issued under the settlement agreement are subject to a two-year lock up. The Company is continuing its share cancellation and recovery initiative and may seek to take other actions against the remaining former insiders of China Water.

In addition, the Company is subject to claims and litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty.

Note 9 — Rescission of Prior Business Combination

On April 1, 2009 the Company acquired 67% of Harbin, a bottled water manufacturer located in the northern city of Harbin (Heilongjiang Province), in the Peoples Republic of China. The agreement to purchase Harbin provided the Company with financial and operational control of Harbin’s business subsequent to payment of the aggregate purchase price. In June 2010, the holders of the noncontrolling 33% of Harbin claimed that, on the basis of an undisclosed loan agreement that the Company believes was arranged prior to the Company’s acquisition of China Water and conflicting purchase price agreements that were submitted to the Chinese government, the full purchase price for the business was not paid. Based on statements by former China Water president Xu Hong Bin during recent discovery proceedings (see Note 8), the Company believes that Xu, together with one of the holders of the

noncontrolling interest in Harbin, were parties to certain loan agreements that were not disclosed to the Company in connection with its acquisition of China Water or in China Water’s SEC filings prior to such acquisition and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. The Company was subsequently barred from access to factory operations and records, and demands for additional purchase price consideration were made on the Company by the noncontrolling shareholders. On June 1, 2010, management made the decision not to pay additional consideration for its interest in Harbin and, consequently rescinded the prior business combination resulting, in substance, in a nonmonetary distribution of the net assets of Harbin to the former owners. As a result, and effective June 1, 2010, the Company divested itself of the assets, liabilities and operations of Harbin and recorded a loss of $1.6 million in general and administrative expense in the consolidated statements of operations for the three and six months ended June 30, 2010 representing the aggregate of the carrying amount of the noncontrolling interest and the carrying amount of Harbin’s net assets as of the June 1, 2010.

Note 10 — Segments

The Company’s reporting segments have been determined based on the nature of the products and/or services offered to customers or the nature of their function in the organization. The Company evaluates performance based on the operating income contributed by each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The tables below summarize information about reported segments (in thousands):


	China Water			HWR			Corporate			Total
Three Months Ended June 30, 2010
Sales	$	9,153		$	2,473		$	—		$	11,626
Gross profit		2,269			710			—			2,979
Loss before income taxes		(5,819	)		(12,885	)		(616	)		(19,320	)
Additions to fixed assets		237			2,697			—			2,934

Three Months Ended June 30, 2009
Sales		8,277			—			—			8,277
Gross profit		2,041			—			—			2,041
Loss before income taxes		(1,326	)		—			(1,776	)		(3,102	)
Additions to fixed assets		1,101			—			—			1,101

Six Months Ended June 30, 2010
Sales		15,663			4,568			—			20,231
Gross profit		3,607			1,155			—			4,762
Loss before income taxes		(6,250	)		(12,836	)		(641	)		(19,727	)
Additions to fixed assets		654			7,121			—			7,775
Goodwill		6,341			7,257			—			13,598
Total assets		48,337			69,074			232,471			349,882

Six Months Ended June 30, 2009
Sales		16,080			—			—			16,080
Gross profit		4,653			—			—			4,653
Loss before income taxes		(187,342	)		—			(1,555	)		(188,897	)
Additions to fixed assets		4,593			—			—			4,593

Year Ended December 31, 2009
Goodwill		6,341			7,257			—			13,598
Total assets		56,541			63,996			244,452			364,989

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain Terms

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, the terms “the Company,” “we,” “us” and “our” refer to the combined company, which is Heckmann Corporation and its subsidiaries, including China Water and Drinks, Inc. and its affiliated entities (“China Water”), acquired October 30, 2008, and Heckmann Water Resources Corporation (“HWR”) established July 1, 2009, and Heckmann Water Solutions, LLC (HWS”) established February 4, 2010.

Special Note About Forward-Looking Statements

This Quarterly Report contains statements that are forward-looking and, as such, are not historical facts. Rather, these statements constitute projections, forecasts and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements use words such as “believe,” “expect,” “should,” “strive,” “plan,” “intend,” “estimate,” “anticipate” or similar expressions. When the Company discusses its strategies or plans, it is making projections, forecasts or forward-looking statements. Actual results and stockholders’ value will be affected by a variety of risks and factors, including, without limitation, the recent crisis in worldwide financial markets, international, national and local economic conditions, merger, acquisition and business combination risks, financing risks, geo-political risks, and acts of terror or war. Many of the risks and factors that will determine these results and stockholder values are beyond the Company’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. You should carefully read the risk factor disclosure contained in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009, where many of the important factors currently known to management that could cause actual results to differ materially from those in our forward-looking statements are discussed.

All such forward-looking statements speak only as of the date of this Quarterly Report. The Company is under no obligation to, nor does it intend to, release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Company Overview

We are a holding company that was created to buy operating businesses, and our focus is on buying and building companies in the water sector. We have two operating segments: (1) domestic and (2) international. Our domestic segment presently includes (a) our water disposal, treatment, and pipeline transport facilities in Texas and Louisiana operated by our wholly-owned subsidiary HWR, (b) our joint venture with Energy Transfer Partners, L.P., to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, operated through our wholly-owned subsidiary HWS, and (c) our minority interest investment in water infrastructure solutions and pipeline supplier UGSI. (OTC: UGSI). Our international segment presently includes our bottled water business operated by our wholly-owned subsidiary China Water. As of June 30, 2010, we had approximately $235 million in invested cash and cash equivalents on our balance sheet. In 2010, we plan to continue building the businesses in our domestic and international segments, and we will also make additional acquisitions as we find attractive long-term opportunities for our stockholders.

Headquartered in Palm Desert, California, the Company was incorporated in Delaware on May 29, 2007. We began our corporate existence as a blank check development stage company. On November 16, 2007, we completed an IPO of 54,116,800 units (each consisting of one share of common stock and one warrant exercisable for an additional share of common stock), including 4,116,800 units issued pursuant to the partial exercise of the underwriters’ over-allotment option, and received net proceeds of approximately $421 million. On the same date, we also completed a private placement of warrants to our founders at an aggregate purchase price of $7 million, or $1.00 per warrant.

On October 30, 2008, we completed our acquisition of China Water, consolidated its subsidiaries and affiliate entities, and now operate its seven bottled water facilities in China with Coca-Cola China as our largest customer.

On July 1, 2009, we purchased of all the assets of Greer Exploration Corporation and the Silversword Partnerships, and all the membership interests of Charis Partners, LLC. The assets of these entities were consolidated into HWR together with the capital and operating resources necessary to build a pipeline and network of disposal wells and terminal facilities. HWR now operates a multi-modal water disposal, treatment and pipeline transportation business in Texas and Louisiana serving customers seeking to dispose of complex water flows including flowback water, frac fluids, and produced brine waters generated in their oil and gas operations. On February 2010, we completed our 50-mile water transport pipeline and treatment facility network in the Haynesville Shale field. It is designed to treat and dispose up to 100,000 barrels of water per day and is supported by a network of deep injection disposal wells.

On February 4, 2010, we announced a joint venture with Energy Transfer Partners, L.P. The joint venture is a 50/50 partnership and operates under the name Energy Transfer Water Solutions, JV, LLC (“ETWS”). ETWS is in the process of developing water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and intends to develop similar solutions in other areas within the states of New York, Pennsylvania, Ohio, West Virginia, Virginia, Tennessee, Kentucky, Texas, and Louisiana. Our 50% interest in the joint venture is held through HWS.

Operations Overview

China Water produces bottled water products at facilities throughout China. China Water uses two types of production lines, one which produces hand-held sized (330 milliliters to 1.5 liters) bottled water (“Small Bottles”) and the other which produces carboy-sized (11.4 to 18.9 liters, or 3 to 5 gallons) bottled water (“Carboy Bottles”). China Water produces a variety of bottled water products including purified water, mineralized water, oxygenated water, juiced drinks, and fruit flavored drinks.

China Water supplies bottled water products to beverage companies and servicing companies, including Coca-Cola China, Uni-President and Jian Li Bao. China Water also markets its bottled water products in China using the brand names “Darcunk” (which means “Absolutely Pure”) and “Grand Canyon.” In addition, China Water provides private label bottled products to companies in the service industry, such as hotels and casinos.

HWR’s saltwater disposal and transport business presently includes eight disposal wells and approximately 50 miles of interconnecting pipeline which, at full capacity, is capable of disposing of approximately 100,000 barrels of saltwater and frac fluid each day. HWR enters into saltwater disposal agreements with oil and gas producers and independent trucking companies that need to dispose of saltwater and frac fluid used in drilling operations. HWR accepts trucking company deliveries of saltwater, condensate, and

frac fluid at its filtration terminals, and takes delivery of saltwater and frac fluid directly into its filtration facilities and pipeline network from the oil and gas wells of area operators. The saltwater and frac fluid is pumped through the pipeline and into deep injection disposal wells. HWR is in the process of expanding its operations to include up to four additional disposal wells and several miles of new interconnecting pipeline, which, when completed and operating at full capacity, will raise HWR’s daily receiving and disposal capacity to approximately 120,000 barrels.

HWR currently has multi-year forward contracts with three principal customers, pursuant to which HWR has installed pipeline connecting these customers’ oil and gas wells to HWR’s network of disposal wells. The agreements provide that, upon connection to the pipeline, the customers will have an obligation to dispose of a minimum firm quantity of saltwater and frac fluid into HWR’s network and, in return, HWR will receive fixed fee payments. In addition, HWR currently has agreements and spot market terminal arrangements with approximately 25 other customers, pursuant to which these customers have the right, but not the obligation, to dispose of saltwater and frac fluid into HWR’s network and are obligated to make payments to HWR based upon the volume of saltwater and frac fluid actually delivered.

Initial completion of the HWR 50-mile pipeline system occurred in February 2010 and for the period ending June 30, 2010, HWR incurred significant operating costs for pipeline start up, commissioning, repairs, upgrades, replacements, and pipeline integrity testing. Integrity testing, assessment and hydraulic calibration of all of our pipeline and connected terminal assets will continue as deemed necessary to ensure continued safe and reliable operation.

ETWS intends to operate on a build, own, and operate business model and began start up operations in February 2010. In conjunction with ETWS, HWS provides turnkey sourcing, engineering, design and operation of integrated water gathering and management systems for the oil, gas, coal mining, and utility sector. The joint venture bids for large scale water infrastructure gathering and transit solutions for complex waters, specialized disposal, treatment, recycle and reuse systems, in field mobile filtration systems, and terminals and treatment facilities for receipt and processing of various waters.

In February 2010, each of HWS and ETC made an initial capital contribution to ETWS, and each of HWS and ETC agreed to a first year operating budget which is largely dedicated to strategic and economic planning, engineering, regulatory analysis, permitting, project cost assessment and bidding, and customer acquisition. Through June 30, 2010, at the invitation of several potential customers active in the oil, gas, coal mining, and utility sectors the joint venture has provided specific project proposals and we believe these proposals will produce meaningful contract awards during the second half of 2010.

Subsequent to June 30, 2010, ETWS entered into letters of intent for the acquisition of three separate businesses that operate strategically located water treatment and disposal plants serving oil and gas producers in the Marcellus Shale fields in Pennsylvania. These three companies have long operating histories, seasoned management teams, and a significant installed customer base, and we believe that if definitive agreements are reached, each will produce accretive earnings for the joint venture shortly after the target closing date of September 30, 2010.

Our balance sheet remains strong and we continue to actively evaluate potential acquisitions.

The following discussion includes the operating results of China Water and the operating results of HWR since July 1, 2009, the acquisition date of the business.

Results of Operations for the Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009


	Three Months Ended June 30,
	2010			2009
	(unaudited)			(unaudited)
Revenue	$	11,626		$	8,277
Cost of goods sold		8,647			6,236

Gross profit		2,979			2,041
Operating expenses:
Selling and marketing expenses		797			1,020
General and administrative expenses		4,717			5,534
Pipeline start-up and commissioning		13,005			—

Total operating expenses		18,519			6,554

Loss from operations		(15,540	)		(4,513	)
Interest income, net		624			972
Income (loss) from equity method investment		(4,098	)		364
Other, net		(306	)		75

Loss before income taxes		(19,320	)		(3,102	)
Income tax benefit (expense)		2,580			(52	)

Net loss	$	(16,740	)	$	(3,154	)

Net Sales

Our net sales for the three months ended June 30, 2010 were $11.6 million, which represents $9.1 million of sales of bottled water and $2.5 million of revenues from water disposal compared to $8.3 million for the three months ended June 30, 2009, all of which represents sales of bottled water. Sales for the three months ended June 30, 2010 included approximately $1.0 million of bottled drink sales from the Xi’an facility, which started production in March 2010, and for sales of the Howmax line of private-label fruit beverage products. Sales for the three months ended June 30, 2009 included approximately $0.2 million of bottled water sales from the Beijing and Shen Yang Aixin factories. In September 2009 the Company announced the restructuring of the Beijing factory and the deconsolidation of the Shen Yang Aixin factory (see Notes 2 and 4 in our Annual Report on Form 10-K for the year ended December 31, 2009). Accordingly there are no sales reported in the three months ended June 30, 2010 for either Beijing or Shen Yang Aixin. Effective June 1, 2010 the Company divested itself of the Harbin facility (Note 9). Sales for the Harbin facility were approximately $1.7 million for the three months ended June 30, 2009 and approximately $1.1 million for the two months ended May 31, 2010.

Cost of Goods Sold

The cost of goods sold for the three months ended June 30, 2010, including approximately $1.1 million of depreciation expense, was $8.6 million, resulting in total gross profit of approximately $3.0 million, or 25.6% of net sales. Gross profit from bottled water sales was $2.3 million, or 24.8% of net sales. Gross profit of $0.7 million, or 28.7%, was attributable to HWR’s water disposal revenues. The cost of goods sold for the three months ended June 30, 2009, including approximately $0.4 million of depreciation expense, was $6.2 million, resulting in total gross profit of $2.0 million, or 24.7% of net sales.

Operating Expenses

Operating expenses for the three months ended June 30, 2010 totaled $18.5 million, compared to $6.6 million for the three months ended June 30, 2009.

General and administrative expenses for the three months ended June 30, 2010 were $4.7 million and includes approximately $0.2 million of stock-based compensation and amortization expense of approximately $0.4 million. Also included in general and administrative expense are approximately $1.6 million of expenses relating to undertaking the rescission of the Harbin business acquisition (Note 9). General and administrative expenses for the three months ended June 30, 2009 were $5.5 million and includes approximately $1.1 million of amortization expense and $1.7 million of stock-based compensation expense.

Also included in operating expense are pipeline start-up and commissioning costs of approximately $13.0 million resulting from anomalies in certain segments of the Haynesville pipeline. Accordingly, we reduced the operating pressures below normal operating pressures as we performed additional testing procedures and remediated the anomalies. The pressure reductions and shutdowns that were undertaken to remediate anomalies reduced throughput and adversely impacted our operating costs and revenues during the three months ended June 30, 2010.

Loss from Operations

We had operating losses of $15.5 million and $4.5 million for the three months ended June 30, 2010 and 2009, respectively, as a result of the items mentioned above.

Interest Income, net

During the three months ended June 30, 2010, we recorded interest income, net of $0.6 million compared to $1.0 million for the three months ended June 30, 2009. The decrease was due to lower interest rates for invested funds and lower investment balances in the three months ended June 30, 2010 when compared to the same 2009 period.

Income (Loss) from Equity Method Investment

During the three months ended June 30, 2010, we recorded $4.1 million impairment expense from our 48% equity method investment in China Bottles (Note 5), compared to $0.4 million of equity income during the three months ended June 30, 2009.

Other Income (Expense), net

We recorded other expense, net, of $0.3 million and other income, net, of $0.1 million for the three months ended June 30, 2010 and 2009, respectively. The decrease was primarily due to costs associated with exiting a lease for office space in Hong Kong.

Income Taxes

The Company expects to utilize the deferred tax asset generated from operating losses recorded in the three months ended June 30, 2010 by carrying back the amount to offset prior year’s taxable income, and accordingly has recorded an income tax benefit for the three months ended June 30, 2010 of approximately $2.6 million compared with a $52,000 income tax expense for the three months ended June 30, 2009.

Net Loss

Our net loss for the three months ended June 30, 2010 was approximately $16.7 million compared to a net loss of $3.2 million for the three months ended June 30, 2009, as a result of the items mentioned above.

Results of Operations for the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009


	Six Months Ended June 30,
	2010			2009
	(unaudited)			(unaudited)
Revenue	$	20,231		$	16,080
Cost of goods sold		15,469			11,427

Gross profit		4,762			4,653
Operating expenses:
Selling and marketing expenses		1,306			1,427
General and administrative expenses		7,523			10,924
Goodwill impairment		—			184,000
Pipeline start-up and commissioning		13,005			—

Total operating expenses		21,834			196,351

Loss from operations		(17,072	)		(191,698	)
Interest income, net		1,368			2,185
Income (loss) from equity method investment		(4,048	)		335
Other, net		25			281

Loss before income taxes		(19,727	)		(188,897	)
Income tax benefit (expense)		2,722			(420	)

Net loss	$	(17,005	)	$	(189,317	)

Net Sales

Our net sales for the six months ended June 30, 2010 were $20.2 million, which represents $15.7 million of sales of bottled water and $4.5 million of revenues from water disposal compared to $16.1 million for the six months ended June 30, 2009, all of which represents sales of bottled water. Sales for the six months ended June 30, 2010 included approximately $1.1 million of bottled drink sales from the Xi’an facility, which started production in March 2010, and for sales of the Howmax line of private label fruit beverage products. Bottled water sales for the six months ended June 30, 2009 included approximately $0.9 million of sales from the Beijing and Shen Yang Aixin factories. In September 2009 the Company announced the restructuring of the Beijing factory and the deconsolidation of the Shen Yang Aixin factory (see Notes 2 and 4 in our Annual Report on Form 10-K for the year ended December 31, 2009). Accordingly, there are no sales reported in the six months ended June 30, 2010 for either Beijing or Shen Yang Aixin. Effective June 1, 2010 the Company has divested itself of the Harbin facility (Note 9). Sales for the Harbin facility were approximately $2.5 million for the period January 1 to May 31, 2010 with no reported sales in June 2010, and $1.7 million for the six months ended June 30, 2009.

Cost of Goods Sold

The cost of goods sold for the six months ended June 30, 2010, including approximately $2.0 million of depreciation expense, was $15.5 million, resulting in total gross profit of $4.8 million, or 23.5% of net sales. Gross profit from bottled water sales was $3.6 million, or 23.0% of net sales. Gross profit of $1.2 million, or 25.3%, was attributable to HWR’s water disposal revenues. The cost of goods sold for the six months ended June 30, 2009, including approximately $0.8 million of depreciation expense, was $11.4 million, resulting in total gross profit of $4.7 million, or 28.9% of net sales.

Operating Expenses

Operating expenses for the six months ended June 30, 2010 totaled $21.8 million, compared to $196.4 million for the six months ended June 30, 2009. During the six months ended June 30, 2009, the Company recorded a $184.0 million non-cash goodwill impairment charge related to its acquisition of China Water (see Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2009).

General and administrative expenses for the six months ended June 30, 2010 were $7.5 million and includes approximately $0.4 million of stock-based compensation and amortization expense of approximately $0.8 million. Also included in general and administrative expense are approximately $1.6 million of expenses relating to undertaking the rescission of the Harbin business acquisition (Note 9). General and administrative expenses for the six months ended June 30, 2009 were $10.9 million and includes approximately $2.1 million of amortization expense, $1.7 million of stock-based compensation expense and approximately $2.0 million of bad debt expense.

Loss from Operations

We had operating losses of $17.1 million and $191.7 million for the six months ended June 30, 2010 and 2009, respectively, as a result of the items mentioned above.

Interest Income, net

During the six months ended June 30, 2010, we recorded interest income, net of $1.4 million compared to $2.2 million for the six months ended June 30, 2009. The decrease was due to lower interest rates for invested funds and lower investment balances in the six months ended June 30, 2010 when compared to the same 2009 period.

Income (Loss) from Equity Method Investment

During the six months ended June 30, 2010, we recorded $4.1 million impairment expense from our 48% equity method investment in China Bottles (Note 5), compared to $0.3 million of equity income during the six months ended June 30, 2009.

Other Income (Expense), net

We recorded other income of approximately $25,000 in the six months ended June 30, 2010 compared to $0.3 million for the six months ended June 30, 2009.

Income Taxes

The Company expects to utilize the deferred tax asset generated from operating losses recorded in the six months ended June 30, 2010 by carrying back the amount to offset prior years’s taxable income, and accordingly has recorded an income tax benefit for the six months ended June 30, 2010 of approximately $2.7 million compared with a $0.4 million income tax expense for the six months ended June 30, 2009.

Net Loss

Our net loss for the six months ended June 30, 2010 was approximately $17.0 million compared to a net loss of $189.3 million for the six months ended June 30, 2009. The change relates primarily to $184.0 million non-cash goodwill impairment charge recorded during the six months ended June 30, 2009 in addition to the other items mentioned above.

Liquidity and Capital Resources

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, strategic acquisitions and investments, repurchases of our securities, and lease payments. Our principal sources of liquidity are cash on hand and cash generated from operations. Cash generated from operations is a function of such factors as changes in demand for our products and services, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, and the impact of integration on our productivity. As of June 30, 2010, we had cash and cash equivalents of approximately $119 million, and approximately $116 million of short and long-term investments, for an aggregate of approximately $235 million in invested cash, cash equivalents and marketable securities.

We have budgeted capital expenditures of approximately $7 million for the remainder of 2010 for new equipment, plant expansion, pipeline construction, and similar projects. In addition, we expect to make capital contributions to the ETWS joint venture in the remainder of 2010.

We believe that our cash, cash equivalents and investments will be sufficient to fund operations, facilitate plant expansions and complete any acquisitions we may undertake for the foreseeable future.

Cash Flows for Six Months Ended June 30, 2010

Net cash used in operating activities was approximately $0.7 million for the six months ended June 30, 2010. Cash used by operating activities was primarily driven by working capital changes offset by various non-cash charges.

Net cash used in investing activities was approximately $16.9 million for the six months ended June 30, 2010. Of this amount, $67.4 million was received from the sale and maturity of securities, offset by the use of $71.0 million for investments in high grade corporate notes and the use of $13.2 million for payments on purchases of machinery and equipment.

Net cash provided by financing activities was $0.3 million for the six months ended June 30, 2010. This amount primarily represents short term borrowings made under a revolving credit facility in China.

Off-Balance Sheet Arrangements

As of June 30, 2010, we did not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

Consolidation of Variable Interest Entities – Amended

Fair Value Measurements Disclosures

reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information related to purchases, sales, issuances, and settlements information to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance, however, adoption of the updated guidance did not have an impact on the Company’s consolidated results of operations or financial position.

Multiple Deliverable Revenue Arrangements

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for the Company in the first quarter of 2011. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.

Critical Accounting Policies

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Authoritative guidance requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. The Company will perform its impairment annually during the third quarter of the fiscal year.

Accounting for the Impairment of Long-Lived Assets other than Goodwill - In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Company’s amortizable intangible assets include registered trademarks, customer relationships and distribution networks and customer contracts acquired in the acquisitions of China Water and HWR. These costs are being amortized using the straight-line method over a weighted average estimated useful life of approximately 13 years.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk

The value of the RMB against the United States dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has no longer been pegged to the United States dollar at a constant exchange rate. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate within a flexible peg range against the United States dollar in the medium to long term. Moreover, it is possible that in the future, China’s governmental authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Because substantially all of the earnings from our Chinese subsidiary are denominated in RMB, but our reporting currency is the United States dollar, fluctuations in the exchange rate between the United States dollar and the RMB will affect our balance sheet and our earnings per share in United States dollars. In addition, appreciation or depreciation in the value of the RMB relative to the United States dollar would affect our financial results reported in United States dollar terms without giving effect to any underlying change in our business or results of operations.

Inflation

Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

Company’s Operations in Foreign Countries

Our operations conducted in China are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, the operations of the Company’s China Water subsidiary are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

Interest Rates

Our exposure to market risk for changes in interest rates relates to our cash investments. Our cash investments policy emphasizes the preservation of principal over other portfolio considerations. If market interest rates increased by one percent from June 30, 2010, the fair value of our portfolio would decline approximately $0.4 million.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, our management, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the Securities and Exchange Commission (“SEC”) under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are accumulated and communicated to our management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

In making this evaluation, our Chief Executive Officer and Chief Financial Officer considered the material weaknesses of China Water discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2009, under the heading “Management’s Report on Internal Control over Financial Reporting.” Based on this evaluation, we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2010 because of the identification of material weaknesses in China Water’s internal control over financial reporting that have not yet been fully remediated and which continue to exist at June 30, 2010.

Remediation Measures of Material Weaknesses

In connection with our acquisition of China Water, we began to address its internal control weaknesses. We have implemented, or plan to implement, the measures described below under the supervision and guidance of our executive management as well as the Audit Committee of our Board of Directors.

Key elements of the remediation effort include, but are not limited to the following initiatives, which have been implemented, or are in the process of implementation as of the date of filing:

•

Implementation of the ERP System, a computer based application for the financial process, including an integrated general ledger and financial reporting system for all business centers of our China Water subsidiary.

•

A new President of our China Water subsidiary was appointed, effective January 2009.

•

A new Manager of Internal Audit for our China Water subsidiary was appointed, effective April 2009.

•

A new PRC Finance Manager for our China Water subsidiary was appointed, effective June 2009.

•

A new Manager of Information Technology for our China Water subsidiary was appointed, effective September 2009.

•

Improving the training programs for the financial accounting staff of our China Water subsidiary and recruiting qualified executive operations management for our China Water subsidiary.

•

We have adopted and emphasized to our China Water employees our Code of Business Conduct and Ethics.

•

We have established policy statements and process overviews in appropriate areas of accounting and financial reporting controls, as well as continuing to develop implementation procedures under each policy statement.

•

We have directed significant time of our Manager of Internal Audit to reviewing, testing and documenting financial controls and have used external consultants to supplement these efforts.

When implemented, management believes that these proposed controls will operate effectively for a sufficient period of time to reduce to a less than reasonably possible likelihood the possibility of a material misstatement and remediate the material weaknesses reported by both management and our independent registered public accounting firm.

The acquisition of China Water will require the development of more robust disclosure controls and procedures, which we are currently continuing to develop. In addition, management will continue to monitor, evaluate and test both the design effectiveness and the operating effectiveness of China Water’s internal controls over financial reporting, with the goal of eliminating such material weaknesses by the end of 2010.

Internal Control Over Financial Reporting

In the three months ended June 30, 2010 we have improved process overviews and implemented additional procedures and controls over customer payments in China. Management is currently in the process of completing its internal control testing on China Water’s internal controls over financial reporting and we have begun to develop the appropriate internal controls and procedures for our HWR business.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively “Xu”), filed a lawsuit in the Delaware Court of Chancery (the “Court”) making various claims against the Company and our directors and executive officers. Xu’s lawsuit makes claims allegedly arising out of our intended cancellation of approximately 5.3 million shares of Company common stock held by Xu. Xu claims that our intended cancellation of his 5.3 million shares is a breach of the general release in an escrow resolution and transition agreement that we entered into with him, which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008. On June 8, 2009, the Court denied Xu’s request for expedited scheduling but indicated that pending resolution of the Xu litigation we may not cancel the 5.3 million Xu shares at issue. On June 22, 2009, we filed a vigorous answer and countersuit expanding our claims against Xu and seeking recovery of not only the stock at issue, but also cash paid to Xu, and cash we believe was misappropriated by Xu. Our affirmative defenses and our countersuit contend that the general release in the escrow resolution and transition agreement is infected with fraud and therefore voidable.

In response to our affirmative defenses and countersuit, Xu tried to circumvent the emerging evidence with a technical motion for partial judgment. It failed. On October 26, 2009, the Court denied Xu’s motion. Xu also asked the Court for an order of specific performance of the general release provisions of the escrow resolution and transition agreement. That also failed. The Court rejected Xu’s arguments as premature, and ruled that evidentiary questions of fraud and the voidabilty of the transition agreement will remain for later proceedings and trial. The Court also denied Xu’s motion to dismiss our counterclaims for his breach of the fiduciary duties of care and loyalty as a member of the Company’s Board of Directors. Although our fraud defenses and countersuit for breach of fiduciary duties remains, the Court trimmed the pleadings by dismissing our counterclaims for contract breach and conversion. Our evidence of Xu’s wrongdoing raises serious issues for trial. Our countersuit for Xu’s breach of fiduciary duties and our affirmative defenses to his claims are going forward. In light of the pending litigation, disputed shares will continue to be included in our outstanding shares until the litigation is finally resolved. Based on statements made by Xu during recent discovery proceedings, we believe that Xu, together with one of the holders of the noncontrolling interest in China Water’s subsidiary Harbin Taoda Drinks (“Harbin”), were parties to certain loan agreements that were not disclosed to us in connection with our acquisition of China Water or in China Water’s SEC filings prior to such acquisition, and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. Further, Xu’s recent deposition suggests, in our view, significant noncompliance with the discovery process. As a result of these revelations we are seeking to suspend further discovery until there is full compliance.

In Xu’s companion case for legal fee expense reimbursement as a former director under the indemnity provisions of our bylaws and certificate of incorporation, Xu recently complied with the conditions set by our Board of Directors and the Court mandate that he provide an irrevocable bonded and collateralized $1,000,000 letter of credit in favor of the Company. As a result, requests for expense reimbursement are secured, and, upon submission to the Company and/or approval by the Court, as applicable, the Company may issue reimbursement payments.

On May 28, 2010, Ng Tak Kau, a former officer of China Water that was also part of the selling insiders group that includes Xu, filed a lawsuit in the Delaware Court of Chancery making various claims against the Company and its directors and executive officers. Ng’s lawsuit makes claims allegedly arising out of the Company’s intended cancellation of 4.08 million shares of Company common stock potentially issuable to Ng in connection with our acquisition of China Water. Ng contends that our intended cancellation of his 4.08 million shares is unwarranted and a breach of agreements entered in connection with the acquisition. On July 13, 2010, we filed an answer denying all allegations and also a countersuit for fraud and fraudulent inducement. To date, there has been no further activity by Ng toward discovery or prosecution of the case.

On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware, (the “Class Action”). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded to the Class Action by filing a motion to transfer and consolidate the Delaware action to California. The motion to transfer is presently pending for decision, after which the Company intends to file a motion to dismiss. On May 21, 2010, Westfield Retirement Board, also purporting to act on behalf of shareholders filed a virtually identical class action lawsuit in the United States District for the Central District of California. On July 26, 2010, Westfield filed a request to voluntarily dismiss that case.

The outcome of the above litigation could have a material adverse effect on our consolidated financial statements.

Separately, we are subject to claims and litigation in the ordinary course of business, the outcome of which is not material and cannot be predicted with certainty.

Item 1A.

Risk Factors.

Factors that could cause our actual results to differ materially from those in this report are any of the risks recently updated and described in our Annual Report on Form 10-K for the year ended December 31, 2009, which we filed with the SEC on March 11, 2010. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Reserved

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.


Exhibit Number		Description
2.1		Agreement and Plan of Merger and Reorganization, dated May 19, 2008, by and among Heckmann Corporation, Heckmann Acquisition II Corporation and China Water and Drinks, Inc. (included in Annex A to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

2.1A		Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated September 29, 2008, by and among Heckmann Corporation, Heckmann Acquisition II Corporation and China Water and Drinks, Inc. (included in Annex A to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

2.1B		Amendment No. 2 to Agreement and Plan of Merger and Reorganization, dated October 30, 2008, by and among Heckmann Corporation, Heckmann Acquisition II Corporation and China Water and Drinks, Inc. (incorporated herein by reference to Heckmann Corporation’s Current Report on Form 8-K filed November 5, 2008)

2.2		Amended and Restated Agreement for Share Exchange, dated May 11, 2007, by and among Ugods, Inc. (predecessor of China Water and Drinks, Inc.), Gain Dynasty Investments Limited and the shareholders of Gain Dynasty Investments Limited (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.3		Stock Purchase Agreement, dated June 15, 2007, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.3A		Amendment No. 1 to Stock Purchase Agreement, dated August 15, 2007, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.3B		Amendment No. 2 to Stock Purchase Agreement, dated July 16, 2008, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.4		Stock Purchase Agreement, dated August 24, 2007, by and among China Water and Drinks, Inc., Pilpol (HK) Biological Limited and Haoyang Bian, relating to the acquisition of Shenyang Aixin Industry Company Ltd. (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.4A		Amendment No. 1 to Stock Purchase Agreement, dated December 13, 2007, by and among China Water and Drinks, Inc., Pilpol (HK) Biological Limited and Haoyang Bian, relating to the acquisition of Shenyang Aixin Industry Company Ltd. (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.5		Amended and Restated Share Purchase Agreement, dated June 12, 2008, by and between China Water and Drinks, Inc. and Li Sui Poon, relating to the acquisition of the parent company of Guangzhou Grand Canyon Pure Distilled Water Co. Ltd. (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.6		Share Purchase Agreement, dated October 22, 2008, by and between Gain Dynasty Investments Ltd. and Yu Waiman, relating to the acquisition of the parent company of Changsha Rongtai Co., Ltd. (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.7		Share Purchase Agreement, dated October 22, 2008, by and between Gain Dynasty Investments Ltd. and Leung Yu, relating to the acquisition of the parent company of Beijing Changsheng Taoda Co., Ltd. (incorporated herein by reference to Heckmann Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008)

2.8		Asset Purchase Agreement, dated as of June 12, 2009, by and among Heckmann Corporation, Heckmann Water Resources Corporation, Charis Partners, LLC, David Melton, Chris Cooper, Craig Zips, Mike Davis, Kevin Greer, Greer Exploration Corporation, James Greer, Silversword, L.P., Silversword II, L.P., Silversword III, L.P., Silversword IV, L.P., Silversword V, L.P., Silversword VII, L.P., and Jon Hileman (incorporated herein by reference to Heckmann Corporation’s Current Report on Form 8-K filed June 12, 2009)

2.9		Amendment No. 1 to Asset Purchase Agreement, dated as of June 30, 2009, by and among Heckmann Corporation, Heckmann Water Resources Corporation, Charis Partners, LLC, David Melton, Chris Cooper, Craig Zips, Mike Davis, Kevin Greer, Greer Exploration Corporation, James Greer, Silversword, L.P., Silversword II, L.P., Silversword III, L.P., Silversword IV, L.P., Silversword V, L.P., Silversword VII, L.P., and Jon Hileman (incorporated herein by reference to Heckmann Corporation’s Current Report on Form 8-K filed June 30, 2009).


Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed September 4, 2007)

3.1A		Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Heckmann Corporation’s Current Report on Form 8-K filed November 5, 2008)

3.2		Amended and Restated Bylaws (incorporated herein by reference to Amendment No. 4 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 26, 2007)

4.1		Specimen Unit Certificate (incorporated herein by reference to Exhibit 4.1 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

4.2		Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

4.3		Specimen Warrant Certificate (incorporated herein by reference to Exhibit 4.3 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed September 4, 2007)

4.4		Form of Second Amended and Restated Warrant Agreement, by and between American Stock Transfer & Trust Company, as warrant agent, and Heckmann Corporation (incorporated herein by reference to Exhibit 4.4 to Amendment No. 6 to Heckmann Corporation’s Registration Statement on Form S-1 filed November 8, 2007)

4.5		Registration Rights Agreement, dated May 19, 2008, by and between Heckmann Corporation and the signatories party thereto (included as Annex G to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed October 1, 2008 and incorporated herein by reference)

4.6		Form of Registration Rights Agreement, by and among Heckmann Corporation and certain security holders (incorporated herein by reference to Exhibit 10.2 to Amendment No. 6 to Heckmann Corporation’s Registration Statement on Form S-1 filed November 8, 2007)

10.42†		First Supplemental and Amended Agreement for Firm Disposal of Saltwater between Heckmann Water Resources Corporation and Exco Production Company, L.P., executed February 26 2010, effective January 25, 2010 (incorporated by reference to Exhibit 10.42 to Heckmann Corporation’s Annual Report on Form 10-K filed March 11, 2010).

10.43†		Limited Liability Company Agreement of Energy Transfer Water Solutions JV, LLC by and between ETC Water Solutions, LLC and HEK Water Solutions, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.42 to Heckmann Corporation’s Current Report on Form 8-K filed February 9, 2010)

10.44†		Operations and Reimbursement Agreement by and between HEK Water Solutions, LLC and Energy Transfer Water Solutions JV, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.43 to Heckmann Corporation’s Current Report on Form 8-K filed February 9, 2010)

10.45†		Operations and Reimbursement Agreement by and between ETC Water Solutions, LLC and Energy Transfer Water Solutions JV, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.44 to Heckmann Corporation’s Current Report on Form 8-K filed February 9, 2010)

10.46		Guaranty Agreement, by Energy Transfer Partners, LP in favor of HEK Water Solutions, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.45 to Heckmann Corporation’s Current Report on Form 8-K filed February 9, 2010)

10.47		Guaranty Agreement, by Heckmann Corporation in favor of ETC Water Solutions, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.46 to Heckmann Corporation’s Current Report on Form 8-K filed February 9, 2010)

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith.

†

Certain Confidential Information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

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 by the undersigned thereunto duly authorized.


Date: August 9, 2010

/s/ RICHARD J. HECKMANN
Name:		Richard J. Heckmann
Title:		Chief Executive Officer (Principal Executive Officer)

/s/ BRIAN R. ANDERSON
Name:		Brian R. Anderson
Title:		Chief Financial Officer (Principal Financial Officer and Accounting Officer)

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