Nuverra Environmental Solutions, Inc. - FORM 10-K/A

Attached files

file	filename
EX-23.1 - CONSENT OF GHP HORWATH, P.C. - Nuverra Environmental Solutions, Inc.	dex231.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Nuverra Environmental Solutions, Inc.	dex312.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - Nuverra Environmental Solutions, Inc.	dex322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Nuverra Environmental Solutions, Inc.	dex311.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - Nuverra Environmental Solutions, Inc.	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended: December 31, 2009

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

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, CA		92211
(Address of principal executive offices)		(Zip Code)

(760) 341-3606

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Units		New York Stock Exchange
Common Stock, $0.001 par value		New York Stock Exchange
Common Stock Purchase Warrants		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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):


Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company ¨

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

As of June 30, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $377,503,624 based on the closing sale price on such date as reported on the New York Stock Exchange. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s common stock as of March 10, 2010 was 108,750,650.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders to be held on May 7, 2010 are incorporated by reference into Part III, Items 10-13 of this Annual Report on Form 10-K.

Explanatory Note

The Registrant is filing this Amendment No. 1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“Form 10-K”) to (i) include the audited financial statements of China Water and Drinks, Inc. and subsidiaries (“China Water”), the Registrant’s predecessor, for the period from January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007; (ii) amend Item 6 in order to include the selected financial data for China Water for the relevant periods; (iii) amend Item 7 in order to provide information regarding the results of operations and liquidity of the Registrant’s predecessor and to eliminate the Registrant’s discussion of combined results on an operating basis for the Registrant and Registrant’s predecessor; (iv) amend Item 9A in order to include additional information regarding the material weaknesses identified as well as the Remediation Measures of Material Weaknesses in the Registrant’s Report on Internal Control Over Financial Reporting; (v) amend Note 2, “Summary of Significant Accounting Policies”, contained in the notes to Heckmann Corporation and subsidiaries’ audited financial statements to include additional narrative relating to accounts receivable and revenue recognition; (vi) amend Note 12, “Commitments and Contingencies”, contained in the notes to Heckmann Corporation and subsidiaries’ audited financial statements to include additional narrative relating to litigation, and (vii) restate the December 31, 2009 financial statements to correct the accounting for contingent consideration and revise Note 3 to include narrative relating to the restatement.

Because the Registrant has amended the Form 10-K as described above, a currently-dated consent from GHP Horwath, P.C. has been provided, which is required to be filed by the SEC pursuant to Item 601(b)(23) of Regulation S-K.

Pursuant to the rules of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rule 12b-15, the Registrant has also amended the Form 10-K to provide currently-dated certifications from the Registrant’s chief executive officer and chief financial officer, as required by Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted under Section 302 of the Sarbanes-Oxley Act of 2002, and Section 1350 of Title 18 of the United States Code, as adopted under Section 906 of the Sarbanes-Oxley Act of 2002.

Except for the items mentioned above, the elimination of an outdated Risk Factor and other conforming changes to incorporate responses to address comments from the staff of the Securities and Exchange Commission (the “Staff”) in connection with the Staff’s regular periodic review of the Registrant’s SEC filings, this Amendment No. 1 does not amend the Registrant’s previously filed Form 10-K and only includes the items mentioned above.

References to “our”, “the Company’s” or the “Successor Company’s” consolidated financial statements or financial information or notes thereto refer to those of Heckmann Corporation. References to China Water’s or the “Predecessor Company’s” consolidated financial statements or financial information or notes thereto refer to those of China Water & Drinks, Inc.

HECKMANN CORPORATION

TABLE OF CONTENTS


		Page
Part I
Item 1.	Business		2
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		22
Item 2.	Properties		23
Item 3.	Legal Proceedings		24
Item 4.	Reserved		24

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		25
Item 6.	Selected Financial Data		27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		43
Item 8.	Financial Statements and Supplementary Data		43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		43
Item 9A.	Controls and Procedures		44
Item 9B.	Other Information		49

Part III
Item 10.	Directors, Executive Officers and Corporate Governance		50
Item 11.	Executive Compensation		50
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
Item 13.	Certain Relationships and Related Transactions, and Director Independence		50
Item 14.	Principal Accounting Fees and Services		50

Part IV
Item 15.	Exhibits, Financial Statement Schedules		51

Signatures			52
Exhibit Index

LOGO

Forward-Looking Statements

This Annual 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, continuing fallout from the recent crisis in worldwide financial markets, international, national and local economic conditions, organic growth plans, 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 this Annual Report, 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 Annual 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.

Periodic Reporting and Financial Information

Our units, common stock and warrants are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and each are listed and trade on the New York Stock Exchange (“NYSE”) under the symbols HEK.U, HEK, and HEK.WS, respectively. We have compliance and reporting obligations, including the requirement that we file annual and quarterly reports with the Securities and Exchange Commission (“SEC”), and comply with the NYSE’s listing policies and procedures. In accordance with the requirements of the Exchange Act, this Annual Report contains financial statements audited and reported on by our independent registered public accounting firm.

Where You Can Find Additional Information About Us

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also maintain an internet site at http://www.heckmanncorp.com where you can find our filings with the SEC in the Investor Relations area of the site.

HECKMANN CORPORATION

PART I

Item 1.

Business

Heckmann Corporation (NYSE: HEK) is 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, which, as of the date of this report, we refer to as domestic and international. Our domestic segment presently includes our water disposal, treatment, and pipeline transport facilities in Texas and Louisiana operated by our wholly-owned subsidiary Heckmann Water Resources Corporation (“HWR”); 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 HEK Water Solutions, LLC (“HWS”); and our minority interest investment in water infrastructure solutions and pipeline supplier Underground Solutions, Inc. (OTC: UGSI) (“UGSI’). Our international segment presently includes our bottled water business operated by our wholly-owned subsidiary China Water and Drinks, Inc., (“China Water”) and our minority investment in China Bottles, Inc., a bottling equipment manufacturer. As of December 31, 2009, we had approximately $136 million in cash and cash equivalents as well as approximately $113 million of certificates of deposit and marketable securities 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 initial public offering (“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, subsequently consolidated its subsidiaries and affiliate entities, and now operate its eight bottled water facilities in the People’s Republic of China (“China”) with Coca-Cola and its subcontractors located in China, which we collectively refer to as “Coca-Cola China,” as our largest customer.

On July 1, 2009, we purchased all of 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 January 30, 2010, we completed our 50-mile water transport pipeline. At full capacity, 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 9, 2010, we announced a joint venture with Energy Transfer Partners, L.P. (NYSE: ETP). The joint venture is a 50/50 partnership and will operate under the name Energy Transfer Water Solutions, JV, LLC, a joint venture of Heckmann Corporation and Energy Transfer. It will develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and potentially 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 Heckmann Water Solutions, LLC (“HWS”).

Our Corporate Structure

As of the date of this report, our organizational structure, excluding subsidiaries of China Water and HWR, is as follows:

LOGO

We have two operating segments, which as of the date of this report, we refer to as domestic and international. Financial information regarding each segment and the geographic areas in which we do business is available in Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K.

Our Domestic Segment

Our domestic segment presently includes the businesses of our subsidiaries HWR and HWS, and our strategic minority investment in UGSI.

Through HWR, we own and operate a network of water disposal, treatment, and pipeline transport facilities in Texas and Louisiana, including our recently completed 50-mile pipeline. HWR serves oil and natural gas exploration and production companies seeking to dispose of complex water flows including flowback water, frac fluids, and produced brine waters generated in their oil and gas operations. HWR does this in two ways. First, we directly connect customers from their field operations to our pipeline. Second, we provide terminal facilities where producers and independent truckers can deliver water to us for processing. All water is then treated and subsequently disposed of into our network of disposal wells.

Through HWS and our recently announced joint venture with Energy Transfer, L.P., we intend to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and potentially 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 managed through HWS. The joint venture is designed to accomplish this by laying water transport pipelines alongside natural gas pipelines which may transport water in both directions—complex or fluid laden water from oil and natural gas drilling fields to treatment and disposal facilities, and fresh and/or remediated water to oil and natural gas drilling fields. Where applicable, our joint venture projects may also extend water transport and treatment services to mining companies and coal and electric utilities.

Our investment in UGSI is a strategic complement to HWR and HWS. Both are a potential customer of UGSI’s patented flexible fusion pipeline products and their fusion processes, technologies, and field know-how, which we believe are emerging as a leading product line for long-life pipeline installations.

The Convergence of Water and Energy, Market Opportunities & Competition

In North America, through HWR and HWS we are entering the water infrastructure and the oil and natural gas service sectors. Both are very large industry sectors comprised of competitors with longer industry tenure and

greater resources than us. Our strategy is to participate in the newly emerging subsector that is experiencing a convergence of water and energy expertise and technologies that will provide the commercial solutions rapidly being demanded by oil and gas producers, mining companies, and utilities. Specifically, through HWR and HWS we are building products and service solutions for dealing with expanding complex water flows anticipated by increased exploration in unconventional shale gas fields. These large discoveries, known as Shale Plays (e.g. Marcellus Shale, Haynesville Shale, Barnett Shale, Eagle Ford Shale, Fayetteville Shale) refer to previously inaccessible or non-economical depth formations in the earth’s crust now being exploited by advances in drilling technology that utilize high water pressure methods (or hydraulic fracturing) combined with proppant fluids (sand grains or microscopic beads) to crack open and exploit new perforation depths and fissures to extract large quantities of natural gas, oil, and other hydrocarbon condensates. Complex water flows represent the largest waste stream from these methods of hydrocarbon exploration and production. The energy industry creates daily water production volumes 2.5 times greater than oil volumes, making it vital to deal effectively and efficiently with produced water volumes at the surface. The market for produced water management and handling is estimated at $9.8 billion dollars over the next five years, and the market for produced water treatment systems is estimated at $4.3 billion dollars over the same period, according to “The Produced Water Gamechanger Report 2010-2014,” an industry report of OTM Consulting and energy business analysts, Douglas-Westwood, as cited in a March 2010 article of Water Online Newsletter Magazine.

Our International Segment

Our international segment presently includes the business of our subsidiary China Water and its operating entities, and our minority investment in China Bottles, a bottling equipment manufacturer.

Through China Water, we produce bottled water products at facilities in the cities of X’ian (Shaanxi Province), Guangzhou (Guangdong Province), Changchun (Jilin Province), Feixian (Shandong Province), Nanning (Guangxi Province), Changsha (Hunan Province), and Harbin (Heilongjiang Province).

Our production plants have two types of production lines: one type produces hand-held sized (330 milliliters to 1.5 liters) bottled water (“Small Bottles”) and the other produces carboy-sized (11.4 to 18.9 liters, or 3 to 5 gallons) bottled water (“Carboy Bottles”). We produce a variety of bottled water products including natural mineral water, spring water, purified water, flavored water and oxygenated water.

We market our bottled water products in China using the brand names “Darcunk” (which translates to “Absolutely Pure”) and “Grand Canyon.” We also supply bottled water products to beverage companies and servicing companies, which we refer to as OEM customers, including Coca-Cola China, as well as Uni-President and Jian Li Bao. In addition, we provide private label bottled water products to companies in the service industry, such as hotels and casinos.

In 2009, we produced approximately 405 million Small Bottles and 3 million Carboy Bottles of bottled water products. We currently market and sell our bottled water products in multiple regions of China, including Beijing, Guangdong Province, Guangxi Province, Shandong Province, Heilongjiang Province, Jilin Province, Shanxi Province, Shaanxi Province, Gansu Province, Liaoning Province, Anhui Province, Sichuan Province, Hebei Province, Hunan Province and Macau.

The Bottled Water Industry in China

In China, consumption of bottled water has overtaken consumption of carbonated sweet drinks and China is one of the largest potential national markets for bottled water sales.

Although China is fast growing and represents one of the largest potential national markets for bottled water, consumption per person is still among the lowest in the world. According to Beverage Marketing Corporation, a consulting and market research firm, China’s bottled water consumption per capita represents less than one-half of the global per capita average, and only 11% of the per capita average of the top 20 national markets by volume.

In China, the competitive landscape is shaped by two layers of companies: branding companies and production companies. The first layer consists of those companies that have marketing, distribution and branding capabilities. The second layer consists of those companies that actually produce bottled water. Although some branding companies also build plants themselves, we believe they still need production companies to address their production gaps and fill in the locations where their facilities do not cover. Because the China market is so large, we believe that no single branding company can cover all locations with their own plants.

In 2010, we believe that our water business in China will be influenced by the following factors:

•

Growth and evolution of China’s bottled water industry. The bottled water industry in China is in a process of continuous growth, consolidation, and development. With the growth in demand and addition of new industry participants offering new and varied bottled water products, the Chinese bottled water industry is poised for continued growth and consolidation.

•

Health consciousness of Chinese individuals. We believe that Chinese citizens are becoming increasingly health conscious. Given concerns with the quality and hygiene standards of available drinking water in China, we believe that consumers will increasingly purchase and consume bottled drinking water, teas, and juices that have been purified and treated to afford consumers greater health benefits.

•

Growing middle class in China. According to research by McKinsey Global Institute, a market research firm, by 2011, the middle class in China will number more than 350 million people, representing more than 50% of the urban population. This group is likely to possess increased spending power and a desire and ability to consume products, including bottled water, teas, and juices.

•

Demand for greater product mix offerings. Consumers are demanding specialty bottled water, tea, and juice products, such as flavored waters and nutrient-enriched water products. We believe that bottled water producers that have the resources to offer to consumers a variety of specialty water products will prosper.

Our Competitive Strengths in the Chinese Bottled Water Business

We believe that the following key competitive strengths enable us to compete effectively in China:

•

Strong Long-Term Relationship with Well Known Global Brands. We have maintained stable and trusted long-term relationships with several globally recognized beverage companies and original equipment manufacturers involved in the bottled water production businesses in China, including Coca-Cola China, Uni-President and Jian Li Bao. We have expanded our own production capacity in order to leverage and capitalize upon Coca-Cola’s business plans in China.

•

Top Tier Production Capability and Quality Control. As a long-term supplier to Coca-Cola China and other well known beverage companies, we are required to comply with their production requirements and rigid quality control standards. We have implemented these high standards in all of our manufacturing facilities. Our plants are audited by independent assessors for compliance with our customers’ procedures, quality control requirements and hygiene standards.

•

Production Cost Advantages. The majority of our production processes are standardized and fully automated. We believe increased automation will increase production yields and efficiency as well as reduce labor costs and minimize the impact of any labor shortages.

•

Established Distribution Network. We sell our bottled water products through an extensive distribution network of local and regional distributors, which help us establish a presence in each regional market we serve. We have maintained a stable long-term relationship with the majority of our distributors.

Our International and Domestic Customers

For the year ended December 31, 2009, our total sales to our top five customers and distributors among both international and domestic segments is shown in the table below:


Top Five Customers/Distributors	Year Ended December 31, 2009
Coca Cola China (OEM/Private Label)		57	%
Bai Chuan (distributor)		6	%
Tang Xia (distributor)		2	%
El Paso		2	%
Shi Pai (distributor)		2	%

Percentage of total sales to top five customers/distributors		69	%

In the year ended December 31, 2009, approximately 63% of sales in China and 57% of our total sales were made to Coca-Cola China. Coca-Cola China resells our bottled water products. We believe that our relationship with Coca-Cola China provides consistent sales and credibility for us in our target markets. However, not all arrangements with Coca-Cola China impose minimum purchase commitments upon Coca-Cola China, nor are they all exclusive. If Coca-Cola China discontinues or reduces purchases and we are unable to generate replacement sales from new and existing customers, our revenue and net income would decline considerably. Also, because the margins on our sales to Coca-Cola China are generally lower than on our sales to other customers and through distributors, if sales to Coca-Cola China increase as a percentage of overall sales, then our margins would decline.

Our International Segment’s Sales Network of Distributors

In China, we market and sell our bottled water products to distributors that sell our bottled water products to end users under our own brands, and OEM and private label customers, which include major global drink and beverage companies such as Coca-Cola China, Uni-President and Jian Li Bao, which usually sell our bottled water products under their brand or brands. For the year ended December 31, 2009 approximately 21% of our revenue was derived from sales of our bottled water products to consumers directly under our own brands, and 79% of our revenue was derived from sales of our bottled water products to OEM and private label customers such as Coca-Cola China, which represented the largest customer for our OEM and private label sales.

Raw Materials and Principal Suppliers

The main raw materials for our international segment’s products are water, which is obtained from local municipal water systems and streams, lakes and wells, and PET (polyethylene terephthalate) bottling materials, such as PET plastic materials and containers, caps, oil byproducts and packaging materials. PET bottling materials account for a significant percentage of our product costs and are subject to a high degree of price volatility caused by the supply and demand, as well the price of oil. Our domestic segment does not have any material raw materials needs.

For the year ended December 31, 2009, our top five suppliers of raw materials are shown in the table below:


Top Five Suppliers	Raw Material Supplied		Year Ended December 31, 2009
Zhuhai Fuhongmao		PET plastic material		26	%
Foshan Expanding Industry Trade		PET plastic material		22	%
Shunde Yong Hui Plastic Products Co. Ltd.		PET plastic material		13	%
Liao Yang Chemical		PET plastic material		7	%
Zhongfu		PET plastic material		5	%

Percentage of total purchases from top five suppliers				73	%

Competition

The bottled water industry in China is highly fragmented, consisting of several large Chinese and international competitors and a number of smaller local and regional manufacturers. We primarily compete with Chinese bottled water producers, including Hangzhou Wahaha Group, Nongfu Spring Company Ltd., and Guandong Robust Corp. In addition to local Chinese producers, we compete with global beverage companies and brands including Nestle S.A., the leading company in the global bottled water market, as well as Coca-Cola, C’est Bon, Danone, Tingyi Master Kong, and Uni-President. Many of these competitors have substantially greater resources in China than we have and pose significant competition to us. Nevertheless, we believe that we can compete effectively in our markets given the fragmentation of the market, the heavily regional aspect of bottled water in China, our strong brand recognition and established distributorships and customer relationships, and our strong balance sheet, which may allow us to seize on appropriately valued acquisition and new facilities manufacturing opportunities without accessing credit markets. We also believe that we can effectively compete based on price, quality and hygiene standards.

The water treatment and produced water handling industries, even if nascent in respect of competing for customers in the expanding oil and gas shale fields, are serviced by many large international and domestic competitors including GE Water, Siemens, Veolia, Schlumberger, Baker-Hughes, BJ Services, Key Energy Services, and Basic Energy Services. We believe we can compete effectively in the emerging subsector of water handling and closed loop treatment, recycling, and reuse as a result of our strong balance sheet, water industry experience, water transport pipeline experience, and industry alliances.

Seasonality and Commodity Fluctuations

Our sales in China are subject to seasonality factors. We typically experience higher sales of bottled water in the summer time in coastal cities while sales remain constant throughout the entire year in some inland cities. In general, our sales are higher in the second and third quarters of the year when the weather is hot and dry, and lower in the first and fourth quarters when the weather is cold and wet. 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.

Our domestic water handling sales are subject to seasonality factors and the fluctuation of commodity futures. Extreme weather has historically reduced our total handling volumes because a portion of the water we receive is delivered via overland trucking, although we expect that, going forward, extreme weather will have less of an impact on our sales as we accept a greater portion of our total water deliveries directly into pipelines connected to the operational sites of customers. We are negatively leveraged to fluctuating natural gas prices in the sense that our customers could alter drilling and capital expense plans if long term futures turned down substantially. We are favorably leveraged to oil and diesel prices in the sense that our pipeline displaces water transport by trucks when diesel prices rise and fuel surcharges influence our customers to consider pipeline transport.

Government Regulation

Our China operations are heavily regulated. Like other bottled water manufacturers within China, we are subject to compliance with China’s food hygiene, tax, licensing, and environmental laws and regulations. Our domestic operations are subject to environmental laws and regulations.

Food and Hygiene Regulatory System of China. The Food Hygiene Law sets out the hygiene standards for the production of bottled water, water additives, water packaging and containers, and the prescribed contents of water packaging labels. It also stipulates hygiene requirements in respect of premises, facilities and equipment for the production, transport and sale of bottled water.

China’s Ministry of Health is responsible for the regulation and supervision of bottled water hygiene in China. The Food Hygiene Law requires all enterprises proposing to be involved in bottled water production and processing to obtain a hygiene license from the relevant local department of the Ministry of Health before they can register their enterprise with the relevant Local Administration for Industry and Commerce, which is responsible for issuing business licenses. Enterprises cannot begin bottled water production and processing activities without first obtaining a hygiene license.

Regulation of Production in China. China’s Administration of Production Licenses for Industrial Products requires us to maintain a production license for manufacturing bottled water products. Spot tests and product inspection, as well as periodic supervisory inspections are conducted. To date, we have passed spot tests and product inspections, but have yet to be selected for any supervisory inspections.

Environmental Protection Laws and Regulations. The environmental protection laws of the United States and China establish a basic legal framework for environmental protection. The environmental protection laws of the individual states where we operate pipelines and disposal wells also represent a regulatory framework requiring compliance. In Texas, we are also subject to rules and regulations promulgated by the Texas Railroad Commission and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water quality.

Government authorities can impose various types of penalties on persons or enterprises who are in violation of environmental and water quality laws depending on the circumstances and extent of pollution or surface and subsurface impact. Penalties can include issuing a warning notice, imposing fines, setting a time limit for rectification, suspending production, ordering, reinstallation and operation of environmental protection facilities that have been dismantled or left unused, imposing administrative sanctions against management in charge, or ordering the termination and closure of enterprises or institutions conducting such operations.

We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and China. We have completed the required environmental assessments and, where applicable, our environmental assessment reports have been approved by the local environmental administration or authority. Also, we have installed the necessary environmental protection equipment, adopted advanced environmental protection technologies, established responsibility systems for environmental protection, and reported to and registered with the relevant local environmental protection departments.

Employees

As of December 31, 2009, we had 1,074 full-time employees, of which 358 were executive, managerial, sales, general administrative and accounting staff, and 716 were manufacturing and field workers. We also hire temporary manufacturing workers in China to supplement our manufacturing capabilities during periods of high demand. None of our employees are under collective bargaining agreements. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.

Item 1A.

Risk Factors

You should carefully consider the following risk factors, together with all of the other information included in this Annual Report. We are subject to a number of risks. The market price of our common stock and warrants could decline due to any of the risks discussed below, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information included in this Annual Report, including our financial statements and accompanying notes. We face risks common to newly acquired or newly built operations in the United States. Separately, because we operate in China, we are subject to legal and regulatory environments that differ in many respects from those of the United States. Our business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below.

Risks Related to Our Company

We are involved in litigation with Xu Hong Bin, China Water’s former president and chairman, related to our intended cancellation of approximately 5.3 million shares of our common stock held by Xu, the outcome of which cannot be predicted with certainty.

As more fully described in Part I, Item 3—Legal Proceedings, of this Annual Report, Xu Hong Bin has filed a lawsuit against us claiming that our intended cancellation of his shares is a breach of an escrow resolution and transition agreement that we entered into with him. We filed a vigorous countersuit expanding our claims against Xu and seeking recovery of not only the stock at issue, but also cash paid to Xu in connection with our acquisition of China Water and cash misappropriated by Xu. Although we believe that we will prevail in our countersuit, no assurance can be given that the outcome of the litigation will be in our favor or, in the event that it is, that a court will award us the full amount of damages that we are seeking. Also, we may determine that it is in the best interests of the Company to settle our claims against Xu for less than the amount of damages we are seeking in our countersuit. The resolution of this litigation could have a material effect on our financial condition.

A business strategy of making acquisitions subjects us to all of the risks inherent in identifying, acquiring and operating newly acquired businesses.

We face all the risks associated with such a strategy, including, but not limited to:

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the potential disruption of our existing businesses, including the diversion of management attention and the redeployment of resources;

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entering new markets or industries in which we have limited prior experience;

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failure to identify in due diligence key issues specific to the businesses we seek to acquire or the industries or other environments in which they operate, or, failure to protect against contingent liabilities arising from those issues;

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difficulties in integrating, aligning and coordinating organizations which will likely be geographically separated and may involve diverse business operations and corporate cultures;

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difficulties in integrating and retaining key management, sales, research and development, production and other personnel;

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difficulties in incorporating the acquired business into our organization;

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the potential loss of customers, distributors or suppliers;

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difficulties in integrating or expanding information technology systems and other business processes to accommodate the acquired businesses;

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risks associated with integrating financial reporting and internal control systems;

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the potential for future impairments of goodwill if the acquired business does not perform as expected;

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the inability to obtain necessary government approvals for the acquisition, if any; and

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successfully operating the acquired business.

If we cannot overcome these challenges, we may not realize actual benefits from past and future acquisitions, which will impair our overall business results. If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.

The process of targeting, selecting, acquiring, and operating newly acquired businesses is time consuming and potentially expensive. We may be unable to identify other suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all.

If we use stock as consideration, this would have a dilutive effect on existing stockholders. If we use cash, this would reduce our liquidity and impact our financial flexibility. We may seek debt financing for particular acquisitions, which may not be available on commercially reasonable terms, or at all.

Future charges due to possible impairments of acquired assets may have a material adverse effect on our financial condition and results of operations.

A portion of our assets is comprised of goodwill and other intangible assets, which may be subject to future impairment that would result in financial statement write-offs. Goodwill and other intangible assets represent approximately 10% of our total assets at December 31, 2009. If there is a material change in our business operations or prospects, the value of the intangible assets we have acquired or may acquire in the future could decrease significantly. On an ongoing basis and at least annually, we will evaluate, partially based on discounted expected future cash flows, whether the carrying value of such intangible assets may no longer be recoverable, in which case a charge to earnings may be necessary. Any future determination requiring the write-off of a significant portion of unamortized intangible assets, although not requiring any additional cash outlay, could have a material adverse effect on our financial condition, results of operations and stock price.

Fallout from the global financial crisis could have a negative impact on our results of operations.

Overall consumption was reduced following the global financial and credit crisis, and we expect continued cautious spending in 2010 relating to consumer consumption of bottled water products in China, and consumer and industrial consumption of natural gas in the United States. Our international operations could be impacted in 2010 as a result of cautious spending or if Chinese consumer consumption is flat or lower than estimated. Our domestic operations could be impacted if consumer and industrial consumption of natural gas is reduced to the point of causing our energy customers to reduce drilling and exploration expenditures and thereby reduce their demand for our water handling services. Separately, the global financial and credit crisis has negatively impacted returns on our cash and investments, and we expect this to continue through 2010.

We do not believe that the estimates provided to us by China Water in connection with our acquisition will be achieved in 2010.

During our due diligence investigation of China Water in connection with its acquisition by us, we were presented with estimated levels of pro forma annualized revenue and net income that China Water could achieve by the end of 2008 and forward. This forward-looking information pre-dated the worldwide crisis in financial and credit markets and was based on our review of internal financial projections prepared by China Water, general due diligence, and anticipated benefits from plant expansions and acquisitions. Also, after taking over, we discovered financial irregularities, misdirected funds, receivables overstatements, deposit overstatements, and operating and accounting deficiencies that caused us to take substantial impairment charges to goodwill, write downs of purported acquisition deposits, receivables reserve adjustments, and write offs of receivables. We expect that our revenues and net income for 2010 will be lower than we originally forecast. The consequences of this determination could include a decline in our stock price.

We are subject to litigation risks, which may be costly to defend and the outcome of which is uncertain.

All industries, including those businesses in our domestic and international segments, are subject to legal claims. As a public company we are particularly susceptible to securities and derivative lawsuits. These claims may be costly to defend and divert the attention of our management and our resources in general. Defense and settlement costs can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding could have a material effect on our business, financial condition, results of operations or cash flows.

Our ability to succeed will largely depend upon the efforts of our directors and officers, and in particular our chief executive officer, Mr. Richard J. Heckmann. The loss of Mr. Heckmann could affect our ability to operate.

Our ability to succeed is largely dependent upon the efforts of our officers and directors, especially Mr. Heckmann, our Chairman and Chief Executive Officer. Even though we believe that our success depends on the continued services of Mr. Heckmann, we have not entered into an employment agreement with Mr. Heckmann, nor obtained “key man” life insurance. Accordingly, we cannot be sure that Mr. Heckmann will remain with the company for the immediate or foreseeable future. In addition, though Mr. Heckmann has expressed a commitment of his full time to our success, he is not required to commit any specified amount of time to the company’s affairs and, as a result, he may have conflicts of interest in allocating management time among various business activities, including identifying more potential business acquisitions and monitoring the related due diligence and closing process. The loss of the services of Mr. Heckmann or any other of our other executive officers and directors could have a material adverse effect on our ability to successfully achieve our business objectives.

There are material weaknesses in our internal control over financial reporting that could cause investors to lose confidence in our reported financial information and thereby cause a decline in our stock price.

We inherited, and have undertaken to fix and remediate certain previously reported and currently reported weaknesses in China Water’s internal controls over financial reporting. See “Item 9A. Controls and Procedures.”

We continue efforts toward remediation of China Water’s control deficiencies. However, if we are unable to address these or other material weaknesses in our internal control over financial reporting, this might result in errors in our financial statements that could result in a restatement of our financial statements, cause us to fail to meet our reporting deadlines, and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

Changes to the fair market or carrying value of our investments in China Bottles, Inc. and UGSI could affect the value of our investment and any potential recordable income from the investments, which could result in a substantial write down.

We own 48% of the outstanding equity of China Bottles, Inc. (“China Bottles”), a manufacturer of bottling equipment and provider of contract manufacturing and finished product services. At December 31, 2009, our investment in China Bottles totaled $4.0 million, and our ability to estimate the market value of our shares of China Bottles common stock is limited to management’s estimate only since China Bottles is no longer providing data to the Over-the-Counter Bulletin Board or similar system for observable market value.

We own 7% of UGSI, a supplier of water infrastructure pipeline products. In 2009, through two separate purchases, we acquired shares of their common and convertible preferred stock for a total investment of $7.2 million dollars. At December 31, 2009, the market value of our shares was approximately $12.4 million (based on the closing market price on the Over-the-Counter Bulletin Board).

China Bottles has a significant insider ownership, the observable market price of UGSI’s stock has been volatile, and there is no liquidity in either stock. Changes to the fair market or carrying value of our investment in China Bottles or UGSI could affect the value of our investments and any potential recordable income from the investments, which could result in a substantial write down.

Risks Related to our Domestic Segment’s Business Operations

We have operated our recently acquired water disposal and pipeline business for just two quarters, and we may not achieve all the benefits anticipated.

On July 1, 2009, we purchased the assets underlying the business of HWR. The purchase could subject us to a number of risks and uncertainties, including, but not limited to, geopolitical events affecting the expansion plans of our customers, domestic political issues affecting the energy industry generally such as energy and tax legislation unfavorable to our customers that directly influences their capital expenditure and exploration plans, fluctuations in commodity prices that impact our customers’ expansion plans, near term integration and management challenges typical to acquisitions, and unforeseen interruptions in our newly operational pipeline. We have operated HWR’s business for just two quarters and continue to evaluate and determine the risks to which it is subject and therefore we can offer no assurance that we will achieve all the benefits anticipated.

Our new pipeline operations and expansion plans could be delayed.

We recently constructed a new pipeline and we are expanding our existing disposal capacity in order to accommodate much greater volumes of disposed water. Construction of our new pipeline in the Haynesville Play was substantially completed on January 30, 2010. Successful consistent operation could be impacted by inclement weather, land use and right of way disputes, equipment breakdowns, delays common to start up of complex construction and engineering equipment and systems, pipe, and measurement devices, installation interruptions, and operational safety, testing and troubleshooting of interdependent systems. Although we believe we have allocated all the necessary resources to insure consistent operation, any unforeseen interruptions could delay or negatively impact the realization of our business plans and have a material impact on our anticipated new pipeline revenues.

Our initial anticipated revenue from new pipeline operations is currently from three principal customers.

HWR has pre-sold approximately 46% of our new pipeline capacity to three principal customers under multi-year contracts with guaranteed minimum volumes and guaranteed minimum prices that reflect early adoption rates. These customers (Exco Production Company, El Paso E&P Company, and Encana Oil & Gas USA Inc.) are large, well capitalized public companies that we anticipate doing business with for the full term of these contracts. Even so, any unforeseen reduction or interruption concerning the operations of these initial principal customers that results in reduced water volume deliveries to us, or their refusal to make the minimum contractually agreed payments, could have a material impact on our initial anticipated pipeline revenues. Separately, we intend to sell the remaining 54% of the pipeline capacity over time to a larger group of customers under a combination of short and long term volume guarantees and at differing prices. If we do not sell the remaining capacity as soon as it is available, or if we sell it at rates different than anticipated, there could be a material impact on our anticipated new pipeline revenues.

A portion of our domestic business will be operated through a joint venture in which our rights to control business decisions are limited.

A portion of our domestic business going forward will be generated through Energy Transfer Water Solutions JV, LLC, our joint venture with Energy Transfer Partners, L.P. (“ETP”) in which we hold a 50% ownership interest. We have less control over business decisions affecting this joint venture than we have in our

wholly-owned businesses. In particular, we generally cannot act on major business initiatives for Energy Transfer Water Solutions JV, LLC without the consent of ETP. As a result, for this joint venture to operate efficiently, we and ETP must be in agreement on strategic, operational, funding and other matters. There is a significant risk that, as a result of differing views and priorities, there will be occasions when we do not agree on various matters related to the operation of the joint venture which could result in delays or changes in operations that could materially harm our prospects or even lead to dissolution of the joint venture.

Our joint venture has not commenced operations.

On February 9, 2010, we announced a joint venture with ETP to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and potentially other areas within the states of New York, Pennsylvania, Ohio, West Virginia, Virginia, Tennessee, Kentucky, Texas and Louisiana. The joint venture is designed to accomplish this by laying water transport pipelines alongside natural gas pipelines which may transport water in both directions—complex or fluid laden water from oil and natural gas drilling fields to treatment and disposal facilities, and fresh and/or remediated water to oil and natural gas drilling fields. Where applicable, our joint venture projects may also extend water transport and treatment services to mining companies and coal and electric utilities.

Our joint venture has not commenced operations and does not have any agreements with any customers. The process of identifying a new potential customer, negotiating and entering into a services agreement, and constructing related pipelines and treatment and disposal facilities will require a significant investment of time and capital. If we are unable to complete this process efficiently, we may not achieve our goals for our joint venture and the price of our stock could decline.

Any interruption in our services due to pipeline breakdowns or necessary maintenance could impair our financial performance and negatively affect our brand.

Our current and future water transport pipelines are susceptible to breakdown and require ongoing maintenance. We may experience difficulties in maintaining the operation of our pipelines, thereby causing downtime and delays. Any interruption in our services due to pipeline breakdowns or necessary maintenance could reduce sales revenues and earnings. If there are interruptions, even if only temporary, our business and reputation could be severely harmed.

Our domestic segment’s operations may fluctuate due to seasonality and commodity fluctuations.

Changes to the existing environmental laws and regulations governing the transport and disposal of produced water may cause us to incur additional costs that could have an adverse impact on our financial position, and we may not be able to comply with such laws and regulations.

Our domestic segment operations are subject to federal and state environmental laws and regulations. If we fail to comply with these laws and regulations, we could face substantial fines, suspension of operations and loss of necessary permits. There can be no assurance that we will be able to comply with such laws and regulations. There also can be no assurance that there will not be changes to existing laws or regulations, compliance with which may cause us to incur significant additional costs that we cannot pass on to customers through higher prices.

Risks Related to Our International Segment’s Business Operations

We face risks associated with recent acquisitions by China Water and if we fail to successfully integrate these acquired businesses our operating results will be negatively affected.

Within the past three years, our China Water subsidiary acquired outright control or a controlling interest in several businesses through acquisition. The ongoing process of integrating these businesses is distracting, time consuming, expensive, and requires continuous optimization and allocation of resources. Geographic distance between business operations, the compatibility of the technologies and operations being integrated, and combining disparate corporate cultures also present significant challenges. The acquired businesses also have different standards, controls, contracts, procedures, and policies, making it difficult to implement and harmonize company-wide financial, accounting, billing, information, and other systems. Continuing the successful integration of the recently acquired companies will require us to integrate and retain key management and other personnel, incorporate the acquired products or capabilities into our product offerings from an engineering, sales and marketing perspective, coordinate research and development efforts, integrate and support pre-existing supplier, distribution and customer relationships, and combine or centralize back office accounting, order processing, purchasing, and support functions. China Water’s focus on integrating operations may also distract attention from China Water’s day-to-day business and may disrupt key research and development, marketing, or sales efforts. If China Water cannot overcome these challenges, we may not realize actual benefits from past and future acquisitions, which will impair our overall business results.

Part of our strategy for China Water involves the development of new products and if we fail to timely develop new products or incorrectly gauge the potential market for new products, our financial results may suffer.

We are developing new bottled water products, such as flavored water, juices, teas, oxygenated water and nutrient-enriched bottled water products that could become new sources of revenue for us in the future and help us to diversify our revenue base. Part of our future development efforts will be focused on expanding our product offerings. If we fail to timely develop new products or if we miscalculate market demand for new products in development, we may not be able to grow our sales revenue sufficiently to outpace our product development expenses.

The revenues of our China business are highly concentrated in a single customer, Coca-Cola China, and we would be harmed if Coca-Cola China reduces its orders.

In the year ended December 31, 2009, approximately 63% of sales in China and 57% of our total sales were made to Coca-Cola China. Coca-Cola China resells our bottled water products. We believe that our relationship with Coca-Cola China provides consistent sales and credibility for us in our target markets. However, the arrangements with Coca-Cola China do not impose minimum purchase commitments upon Coca-Cola China, and they are not exclusive. If Coca-Cola China discontinues or reduces purchases and we are unable to generate replacement sales from new and existing customers, our revenue and net income would decline considerably. Also, because the margins on our sales to Coca-Cola China are generally lower than on our sales to other customers and through distributors, if sales to Coca-Cola China increase as a percentage of overall sales, then our margins would decline.

We face increasing competition which may negatively impact our market share and profit margins.

The bottled water industry in China is highly competitive, and we anticipate it will become even more competitive in the future. We compete with domestic Chinese bottled water producers including Hangzhou Wahaha Group, Nongfu Spring Company Ltd., and Guangdong Robust Corp., and with global beverage companies and brands including Nestle S.A, Coca-Cola, C’est Bon, Danone, Tingyi Master Kong, and Uni-President. Some of our competitors have been in business longer, some have substantially greater financial and other resources, and some are better established in their markets. Some may also benefit from raw material sources or production facilities that are closer to their markets, thereby giving them a competitive advantage in terms of cost and proximity to consumers.

Currently, there are several thousand water brands in China, including those offered by domestic and foreign-invested enterprises. Our ability to compete against these enterprises will depend on our continuing ability to leverage our brand recognition and to distinguish our products by providing quality products at reasonable prices that appeal to wide consumer tastes and preferences.

Some of our competitors may provide products comparable or superior to ours, or adapt more quickly to consumer trends or changing market requirements. Significant consolidation among our competitors is also possible. Increased competition may lead our competitors to substantially increase their advertising expenditures and promotional activities or to engage in irrational or predatory pricing behavior. Third parties may actively engage in activities, whether legal or illegal, designed to undermine our brand name and product quality or to influence consumer confidence in our products. These activities may result in price reductions, reduced margins, and loss of market share, any of which could have a material adverse effect on our profit margins. As a result, we may not be able to compete effectively against current and future competitors.

Any interruption in our production could impair our financial performance and negatively affect our brand.

We produce bottled water products at eight facilities in China. Our manufacturing operations are complicated and integrated, involving the coordination of sourcing of water and other raw materials from third parties, internal production processes, and external distribution processes. While these operations are modified on a regular basis in an effort to improve manufacturing and distribution efficiency and flexibility, we may experience difficulties in coordinating the various aspects of our manufacturing processes, thereby causing downtime and delays. We may encounter interruptions in our manufacturing processes due to events beyond our control, such as fires, explosions, labor disturbances or violent weather conditions. Any interruptions in production could reduce sales revenue and earnings. If there are interruptions at any of our production facilities, even if only temporary, or delays in delivery times to our customers, our business and reputation could be severely harmed. Any significant delays in deliveries to our distributors or customers could also lead to increased returns or cancellations and cause us to lose future sales.

Limitations on or the unavailability of natural resources or energy resources needed to operate our business in China would impair our profitability.

In order to produce our bottled water products in China, we need a readily available supply of water and electricity. We depend mainly on municipal water supplies to provide the water used in our products and on regulated electric companies to provide us with the electricity needed for our production facilities. In the year ended December 31, 2009 approximately 66% of our water was sourced from municipal water supplies and the remaining 34% was sourced from ground water. It is possible that municipal governments could put usage limits on these water resources in situations when water reserves for their cities are low or curtail electricity usage when the demand for energy resources is high relative to supply. Our business operations, income, and profits would be highly impaired if such limits are imposed.

Increases in raw material prices that we are unable to pass on to our customers would reduce profit margins.

The principal raw materials used in our production, including water, bottled water containers, caps and packaging materials, are subject to a high degree of price volatility caused by external conditions. In particular, the PET we use to manufacture our bottles is petroleum based, and therefore subject to significant price fluctuations. In the year ended December 31, 2009 PET accounted for approximately 52% of our cost of goods sold. Oil prices have fluctuated at record velocity in recent years and the prices we pay for oil products and other raw materials may escalate in the future. Price changes to our raw materials may result in unexpected increases in production, packaging, and distribution costs, and we may be unable to increase the prices of our products to offset these increased costs. If so, we would suffer a reduction in our profit margins.

Any difficulties or delays in delivery or poor handling by distributors and third party transport operators may affect our sales and damage our reputation.

In China, we sell our own brands of bottled water through distributors. In the year ended December 31, 2009, our three largest distributors accounted for approximately 10% of total sales. The delivery of our products by distributors to retailers could be delayed or interrupted in the case of unforeseen events and disruptions that occur for various reasons beyond our control, including poor handling by distributors or third party transport operators, transportation bottlenecks, natural disasters, and labor strikes. Poor handling by distributors and third-party transport operators could also result in damage to our products. If our products are not delivered to retailers on time, or are delivered damaged, we could lose business and our reputation could be harmed.

We may ineffectively allocate and balance the supply of our bottled water products among our distribution channels.

We market and sell our bottled water products to distributors that sell them to end users under our own brands, to major global drink and beverage companies, and to other corporations, hotels, and casinos on a private label basis. Like any other manufacturer or producer of products, we have limited production capacity and there are times when we are resource and capacity constrained. As our production capacity reaches its limit, it becomes more difficult for us to produce, balance, and allocate our bottled water products for sales through our various distribution and sales channels.

If we fail to strike an appropriate balance in producing and delivering our products for sale through our network of sales and distribution channels, we may be unsuccessful in meeting the relative demands of our distributors and the consumer market, which would hurt our sales, reputation, and relationships with distributors and customers.

Our products may become subject to recall in the event of defects or other performance related issues.

Our bottled water products have never been the subject of an open recall. However, like many other bottled water producers in China, we are at risk for product recall costs if a product is recalled due to a known or suspected contamination or other health or performance related defect. Costs typically include the cost of the product being replaced, the cost of the recall borne by our distributors, and the cost of removing our products from the market. If a recall decision is made, we will need to estimate the cost of the recall and record a charge to earnings. In making this estimate, judgment is required as to the quantity or volume to be recalled, the total cost of the recall campaign, and the ultimate negotiated sharing of the cost between us and our customers. Excessive recall costs or our failure to adequately estimate these costs may negatively affect our operating results. Recalls could also create reputational damage that materially affects our business.

Our results of operations may fluctuate due to seasonality.

Sales can 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.

Changes to the existing environmental and food and hygiene laws and regulations in China may cause us to incur additional costs that could have an adverse impact on our financial position, and we may not be able to comply with such laws and regulations.

As a China based bottled water producer, we are subject to the environmental and food and hygiene laws and regulations of China. If we fail to comply with these laws and regulations, we could face substantial fines,

suspension of operations by China’s government, loss of necessary licenses and, in the case of serious noncompliance with China’s food and hygiene laws, we and our management may be subject to criminal proceedings. There can be no assurance that we will be able to comply with such laws or regulations. There can also be no assurance that the Chinese government will not change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant additional costs that we cannot pass on to customers through higher prices.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of China’s government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct operations and generate a portion of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects will be affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

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the higher level of government involvement in commercial activities;

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the early stage of development of the market-oriented sector of the economy;

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the rapid growth rate;

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the higher level of control over foreign exchange; and

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the allocation of resources.

As China’s economy has been transitioning from a planned economy to a more market-oriented economy, China’s government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall Chinese economy, they may also have a negative effect on our China business.

Although China’s government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, China’s government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand for China Water’s products and consequently have a material adverse effect on our business and prospects.

Uncertainties with respect to China’s legal system could limit the legal protections available to the Company and its stockholders.

We conduct business through China Water’s operating subsidiaries in China. China Water’s operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. China’s legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new Chinese laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since China’s legal system continues to evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us and our stockholders. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

China’s government exerts substantial influence over the manner in which we must conduct our business activities.

China’s government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in China’s laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that China Water’s bottled water production operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which China Water operates may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require the Company to divest itself of any interest it then holds in Chinese properties or joint ventures.

Past or future violations of complicated Chinese regulations governing merger and acquisition activity involving domestic Chinese companies could materially adversely affect our business.

Our past and any future acquisitions of Chinese operating companies are subject to complicated Chinese regulations governing merger and acquisition activity. On August 8, 2006, six Chinese regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a Chinese company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the Chinese parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, business combination transactions in China became significantly more complicated, time consuming and expensive.

In October 2005, China’s State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 requires Chinese residents to register with an applicable branch of SAFE before establishing or acquiring control over an offshore special purpose company for the purpose of engaging in an equity financing outside of China that is supported by domestic Chinese assets originally held by those residents. Following the issuance of Circular 75, SAFE issued internal implementing guidelines for Circular 75 in June 2007. These implementing guidelines, known as Notice 106, effectively expanded the reach of Circular 75 by:

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purporting to regulate the establishment or acquisition of control by Chinese residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership;

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adding requirements relating to the source of the Chinese resident’s funds used to establish or acquire the offshore entity;

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regulating the use of existing offshore entities for offshore financings;

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purporting to regulate situations in which an offshore entity establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China;

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making the domestic affiliate of the offshore entity responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds; and

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requiring that the registrant establish that all foreign exchange transactions undertaken by the offshore entity and its affiliates were in compliance with applicable laws and regulations.

No assurance can be given that our stockholders who are Chinese residents as defined in Circular 75, and who owned China Water or any of its China based subsidiaries prior to our acquisition of China Water, have fully complied with, and will continue to comply with, all applicable registration and approval requirements of Circular 75 in connection with their equity interests in the Company and the Company’s acquisition of equity interests in its China based subsidiaries by virtue of our acquisition of China Water. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to the Company following the China Water acquisition, we cannot predict how it will affect our business operations or future strategies. For example, the ability of our present and prospective China subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our Chinese resident beneficial holders. In addition, such Chinese residents may not always be able to complete the necessary registration procedures required by Circular 75. We have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. If our Chinese stockholders or the Chinese stockholders of the target companies we acquired in the past or acquire in the future fail to comply with Circular 75, if SAFE requires it, they may be subject to fines or legal sanctions, and Chinese authorities could restrict our investment activities in China, limit our subsidiaries’ ability to make distributions or pay dividends, or even unwind the transaction and revoke the right of our subsidiaries to do business in China.

If our Chinese stockholders or the Chinese stockholders of the target companies we acquired in the past or acquire in the future fail to obtain any required Chinese governmental approvals in connection with our acquisition of such companies, they may be subject to fines or legal sanctions, and Chinese authorities could restrict our investment activities in China, limit our subsidiaries’ ability to make distributions or pay dividends, or even unwind the transaction and revoke the right of our subsidiaries to do business in China.

China Water’s business will suffer if it loses its land use rights.

There is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives. Land use rights can be obtained from the government for a period up to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land transfer fee. China Water holds land use rights for some of its occupied properties and leases property from third parties that it believes have proper land use rights, but no assurance can be given that these land use rights will be renewed or that China Water’s lessors will maintain their land use rights. If China Water or any of its lessors lose their land use right certificates, China Water may lose production facilities that would be difficult or impossible to replace. Should it have to relocate, China Water’s workforce may be unable or unwilling to work in the new location and its operations will be disrupted during the relocation. The relocation or loss of facilities could cause China Water to lose sales and/or increase its costs of production, which would negatively impact our financial results.

Any failure to fully comply with China’s labor laws could cause potential liability.

Companies operating in China must comply with a variety of labor laws. Certain of these labor laws require Chinese companies to have an executed labor contract with employees and make certain pension, housing, and other welfare-oriented payments. For a period of time in 2007, most of China Water’s operating subsidiaries failed to have in place effective labor contracts with each of their employees and failed to make related payments in violation of applicable Chinese labor laws. In 2008, China Water took corrective actions by entering into the required labor contracts and made the payments as required under China’s labor laws. Although China Water

believes these actions are sufficient to ensure that it is currently in compliance with applicable Chinese labor laws and are the appropriate remediative measures, no assurance can be given that China’s governmental authorities will concur with such a view and will not impose additional penalties.

Accounting laws in China mandate accounting practices which may not be consistent with United States generally accepted accounting principles and therefore our financials and their interpretation involve uncertainties.

China’s accounting laws require an annual “statutory audit” to be performed in accordance with China’s accounting standards and the books of foreign invested enterprises to be maintained in accordance with Chinese accounting laws. These Chinese accounting practices may not be consistent with United States generally accepted accounting principles, or GAAP. Article 14 of China’s Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities. China Water’s China based operating subsidiaries are all considered wholly foreign-owned enterprises and, as such, must maintain financial statements in accordance with Chinese accounting practices in order to meet its filing obligations under China’s Wholly Foreign-Owned Enterprise Law. The translation of these financial statements from the requirements of China to United States GAAP requires interpretation and exercise of judgment. This may increase costs, cause inaccuracies or misstatements that could negatively impact our ability to get a clean audit opinion in the United States or may lead to fines by certain governmental bodies, which would negatively impact our financial performance and/or stock price.

Restrictions on currency exchange may limit our ability to receive and use sales revenue effectively.

Substantially all of our international segment sales revenue and expenses is denominated in RMB. Under Chinese law, the RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, China Water’s China based operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to the Company, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant Chinese government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our international segment future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.

Foreign exchange transactions by China operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with Chinese government authorities, including SAFE. In particular, if our China operating subsidiaries borrow foreign currency through loans from the Company or other foreign lenders, these loans must be registered with SAFE, and if the Company finances the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect China Water’s ability to obtain foreign exchange through debt or equity financing.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our common stock is indirectly affected by the foreign exchange rate between United States dollars and RMB and between those currencies and other currencies in which sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB, 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. Fluctuations in the exchange rate will also affect the relative value of any dividend China Water may issue to the Company that will be exchanged into United States dollars and earnings from, and the value of, any United States dollar-denominated investments we make in the future.

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 Chinese authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by China’s exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Currently, some of China Water’s raw materials and major equipment are imported. In the event that the United States dollar or other currencies appreciate against RMB, costs of such materials and equipment will increase. If China Water cannot pass-through the resulting cost increases on to its customers, profitability and operating results will suffer.

Risks Related to Our Common Stock

Our stockholders would experience substantial dilution in their investment as a result of subsequent exercises of outstanding warrants and the issuance of additional shares of common stock.

We have approximately 70.8 million shares subject to outstanding warrants, the exercise of which will dilute the investment of our existing stockholders. We may also issue shares in future acquisitions that would also be dilutive.

Our stock price could be affected because a substantial number of shares of our common stock will be available for sale in the future.

As of March 10, 2010, we had 108,750,650 shares of our common stock outstanding, all of which have been listed for trading according to the rules of the New York Stock Exchange. We had outstanding, as of March 10, 2010, 68.1 million public warrants and 2.7 million private warrants to acquire an additional approximately 70.8 million shares of our common stock. The public warrants are exerciseable at a strike price of $6.00 through November 9, 2011 and we are required to reserve sufficient common stock to support actual exercise. If a significant number of our warrants are exercised for shares of our common stock, our stock price could decline due to the increase in our number of common shares outstanding.

Our stock price may be volatile, which could result in substantial losses for investors in our securities.

The stock markets in general and the markets for stock of companies with significant operations in China in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

The market price of our common stock may also fluctuate significantly in response to the following factors, some of which are beyond our control:

•

variations in our quarterly operating results;

•

changes in securities analysts’ estimates of our financial performance;

•

changes in market valuations of similar companies;

•

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new products or product enhancements;

•

loss of a major customer or failure to complete significant transactions; and

•

additions or departures of key personnel.

The trading price of our common stock since our IPO has ranged from a high of $10.44 on the New York Stock Exchange on September 3, 2008 to a low of $3.38 on July 10, 2009. The last reported price of our common stock on the New York Stock Exchange on March 10, 2010 was $6.19 per share.

We currently do not intend to pay any dividends on our common stock.

We currently do not intend to pay any dividends on our common stock. While we may declare dividends at some point in the future, we cannot assure you that you will ever receive cash dividends as a result of ownership of our common stock and any gains from investment in our common stock may only come from increases in our stock prices, if any.

We are subject to anti-takeover effects of certain charter and bylaw provisions and Delaware law, as well as of our substantial insider ownership.

We have provisions in our certificate of incorporation and bylaws that:

•

make it more difficult for a third party to acquire control of us, and discourage a third party from attempting to acquire control of us;

•

may limit the price some investors are willing to pay for our common stock;

•

enable us to issue preferred stock without a vote of our stockholders or other stockholder action;

•

provide for a classified Board of Directors (the “Board”) and regulate nominations for the Board;

•

make it more difficult for stockholders to take certain corporate actions; and

•

may delay or prevent a change of control.

These and other provisions of our charter documents, certain provisions of Delaware law and our substantial insider ownership could delay or make more difficult certain types of transactions involving a change of control of the Company or our management. As a result, the price of our common stock may be adversely affected.

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties

We lease our executive offices in Palm Desert, California, and additional office space in Hong Kong and Tyler, Texas. We have extra capacity in Hong Kong and are currently subleasing excess space to a third party. We also lease warehouses and production facilities in China. We own one office space in Joaquin, Texas and one land use right in China. The following table summarizes our current land use right, owned property and leases:


Address	Leased/Owned	Expires
No. 2 Zhu Ji Road, Ji Shan Village, Zhu Ji Street, Dong Pu, Tian He District, Guangzhou, Guangdong Province, China	Leased	2012

449 Kao Shan Village, Economic and Technology Development District, Changchun, Jilin Province, China	Leased	2011

Dong Jiu Road South, Shang Ye County, Feixian, Shandong Province, China	Land Use Right	2023

District 9, Ke Yuan Xi Shi Road, Nanning, Guangxi Province, China	Leased	2011

Zhuan Qiao Xi, Bei Er Cun Road, Sha He Zen, Chang Ping District, Beijing, China	Leased	2012

No. 1848 Yuan Da San Road, Huang Hua Zhen, Changsha, China	Leased	2012

1/F, Block A, Dong Feng Industrial Park, Zhu Cun Dong Huan Road, Guangzhou, Guangdong Province, China	Leased	2010

Ju Ji Warehouse, Tu Bei Industrial Park, Zhu Cun Dong Huan Road, Guangzhou, Guangdong Province, China	Leased	2010

Changchun Taoda, #204 of Block one, #205 of Block 15, Caizheng Small Town, Jingkai District, Changchun, Jilin Province, China	Leased	2010

#314, No. 10, Yongan Garden, Liwan Road, Guangzhou, Guangdong Province, China	Leased	2010

No. 1 Building, 1/F of No. 2 Buiding, Dormitory Building, Huazhou Road 82, Haizhu District, Guangzhou, Guangdong Province, China	Leased	2011

Harbin Taoda, No. 9 Tielu Street, Lalin Town, Wu Chang City, Heilongjiang, Harbin, China	Leased	2011

China Water Investment Management, 2/F., Block 2, No. 2005, Hong Mei Road, Shanghai, China	Leased	2014

China Water Investment Management, No. 7 West Axis, West Warehouse Building, Puning Road, Tangwan Village, Minxing District, Shanghai, China	Leased	2011

China Water Investment Management, Unit 405, 4/F., SenBen Plaza, 567 Tianyaoqiao Road, Xuhui District, Shanghai, China	Leased	2010

China Water Investment Management, Unit 7B06, No. 1915 North Jing, Sichuan, Shanghai, China	Leased	2011

Olympic Forward Trading, Units 3, 5 and 6, 12A/F., One Peking, No. 1 Peking Road, Tsimshatsui, Kowloon, Hong Kong	Leased	2011

210 South Broadway, Tyler, Texas	Leased	2010

202 CR 37, Joaquin, Texas	Owned	N/A

75080 Frank Sinatra Drive, Palm Desert, California	Leased	2010

There is no private ownership of land in China and all land ownership is held by the government of China, its agencies and collectives. Land use rights can be obtained from the government for a period of up to 70 years,

and are typically renewable. Land use rights can be transferred upon approval of the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land transfer fee. We have received the necessary land use right certificates for the facilities in the table above for which it is indicated that we possess a land use right, and we believe that the lessors of our leased properties in China have similarly obtained appropriate land use right certificates. Once the land use rights expire, the properties will be acquired by the Chinese government under China’s laws.

For the year ended December 31, 2009, the total cost associated with our properties, land use rights, and leased properties was approximately $1,442,000.

Item 3.

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 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. The Court ruled that evidentiary questions of fraud and the voidabilty of contract 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 has 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.

In a companion action also filed in the Delaware Court of Chancery, Xu is seeking an order for legal fee expense reimbursement as a former director for now having to defend against our countersuit. On December 29, 2009, the Court ruled that reasonable conditions set by our Board of Directors must be met before Xu is entitled to any expense reimbursement, including the condition that Xu provide an irrevocable $1,000,000 letter of credit in favor of the Company should Xu ultimately not be entitled to reimbursement. As of March 10, 2010, Xu had not posted the letter of credit and the Company has not advanced any monies for legal fee expense reimbursement.

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 4.

Reserved.

HECKMANN CORPORATION

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our units, which consist of one share of our common stock and one warrant to purchase a share of our common stock, trade on the New York Stock Exchange under the symbol “HEK.U.” Our common stock trades separately on the New York Stock Exchange under the symbol “HEK.” Certain of our warrants trade separately on the New York Stock Exchange under the symbol “HEK.WS.” Each public warrant entitles the holder to purchase from us one share of our common stock at an exercise price of $6.00. These public warrants will expire on November 9, 2011, or earlier upon redemption.

The following table sets forth, for the calendar quarters indicated, the high and low closing sale prices for our units, common stock and publicly traded warrants, respectively, as reported on the American Stock Exchange through May 22, 2008 and the New York Stock Exchange since May 23, 2008.


	Common Stock				Warrants				Units
	High		Low		High		Low		High		Low
2008
First Quarter	$	7.45	$	7.26	$	0.79	$	0.60	$	8.16	$	7.935
Second Quarter	$	10.09	$	7.37	$	3.70	$	0.58	$	13.89	$	7.92
Third Quarter	$	10.44	$	8.04	$	4.35	$	1.87	$	15.08	$	10.85
Fourth Quarter	$	8.36	$	5.35	$	2.60	$	0.95	$	11.50	$	6.65

2009
First Quarter	$	6.31	$	4.31	$	1.48	$	0.60	$	7.75	$	5.20
Second Quarter	$	5.27	$	3.75	$	0.95	$	0.55	$	6.00	$	4.70
Third Quarter	$	4.75	$	3.38	$	0.59	$	0.35	$	5.50	$	5.00
Fourth Quarter	$	5.10	$	4.17	$	0.93	$	0.50	$	6.42	$	4.99

Holders

As of March 10, 2010, our common stock was held by approximately 3,650 record holders.

Dividends

We have not paid any dividends on our common stock to date. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.

Performance Graph

The following graphs compare the cumulative total return for our common stock from November 20, 2007, the date our common stock first became separately tradable, through December 31, 2009 with the comparable cumulative return of two indices, the S&P 500 Index and the Dow Jones Industrial Average Index. The graphs assume $100 invested on November 20, 2007 in our common stock and $100 invested at that same time in each of the two indices.

LOGO

Item 6.

Selected Financial Data

The following table summarizes the relevant financial data for our business and should be read in conjunction with our consolidated financial statements, and the notes and schedules related thereto, which are included in this Annual Report on Form 10-K/A. The following discussion includes the operating results of China Water since October 30, 2008 and the operating results of HWR since July 1, 2009, the date HWR acquired all of the assets of Greer Exploration Corporation and the Silversword Partnerships, and all of the membership interests of Charis Partners, LLC. Prior to our October 30, 2008 acquisition of China Water, Heckmann Corporation (the “Successor Company) was a blank check company with no operations. Accordingly, the results of operations included for the period from January 1, 2008 through October 29, 2008 and the year ended December 31, 2007 represent the operating results of China Water (the “Predecessor Company)” only.

Income Statement Data

Predecessor Company


In thousands, except share and per share data	January 1, 2008 to October 29, 2008			Year ended December 31, 2007			Year ended December 31, 2006		Year ended December 31, 2005
Net sales	$	9,757		$	53,332		$	35,700	$	27,680
Gross profit		1,689			18,413			9,079		8,014
Operating expenses		112,532			57,546			3,101		1,045
Other income (expense), net		(11,969	)		1,894			285		—
Loss from continuing operations before income taxes		(122,208	)		(37,163	)		6,263		6,969
Income tax benefit		—			31			—		—
Income (loss) from continuing operations		(122,208	)		(37,132	)		6,263		6,969
Income from discontinued operations		1,208			610			—		—
Net (loss) income	$	(121,000	)	$	(36,522	)		6,263		6,969
Net (loss) income per share—basic and diluted:
(Loss) income from continuing operations	$	(1.29	)	$	(0.48	)	$	0.10	$	0.12
Income from discontinued operations		0.01			0.01			—		—
Weighted average shares outstanding—basic and diluted		94,521,000			77,772,000			59,872,000		59,872,000


Successor Company In thousands, except share and per share data	Year ended December 31, 2009			Year ended December 31, 2008			For the Period 29-May-07 (Inception) through December 31, 2007
Net sales	$	35,975		$	10,507		$	—
Gross profit		9,241			3,260			—
Operating expenses		408,754			3,907			169
Other income (expense), net		3,973			(10,383	)		2,486
(Benefit) provision for income taxes		(2	)		3,710			1,171
Net (loss) income		(395,538	)		(14,740	)		1,146
Net (loss) income attributable to the Company		(395,395	)		(14,917	)		1,146
Net (loss) income per share:
Basic and diluted		(3.61	)		(0.20	)		0.03
Weighted average shares outstanding
Basic and diluted		109,575,057			74,853,651			25,305,415


Balance Sheet Data (Successor Company)
In thousands, except share and per share data	December 31, 2009		December 31, 2008		December 31, 2007
	(Restated) (a)
Total current assets	$	176,091	$	333,668	$	430,647
Total assets		364,989		763,093		430,647
Total current liabilities		43,227		14,483		20,838
Total liabilities		51,846		16,489		20,838
Common stock, subject to possible redemption, 16,235,039 shares at $7.91 per share (b)		—		—		128,419
Deferred interest income attributable to common stock subject to possible redemption (net of taxes of $182)		—		—		265
Noncontrolling interest		2,162		2,845		—
Total equity of the Company		310,981		743,759		281,125

(a)	Refer to Note 3—“Business Acquisitions” of our consolidated financial statements included in this Annual Report on Form 10-K/A.

(b)

These shares were redeemable because they were issued in our IPO and, under the terms of our IPO prospectus, their holders had the right to vote against our acquisition of China Water and exercise their right to convert these shares into cash. Of the 16,235,039 shares of our common stock that were subject to possible redemption, only 1,021,695 shares were redeemed.

Item 7.

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

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K/A.

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 rock formations containing oil and gas located in the eastern United States, and northwest Louisiana and northeast Texas respectively, which we maintain through our wholly-owned subsidiary HWS, and (c) our minority interest investment in water infrastructure solutions and pipeline supplier UGSI (OTC: UGSI). Our international group presently includes (a) our bottled water business operated by our wholly-owned subsidiary China Water and (b) our minority investment in China Bottles, a bottling equipment manufacturer.

The Company was incorporated in Delaware on May 29, 2007, and is headquartered in Palm Desert, California. We began 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.

With the proceeds raised from these offerings, and issuance of additional common stock, on October 30, 2008, we completed our acquisition of China Water, and now operate its eight bottled water facilities in China, with Coca Cola China as our largest customer.

On July 1, 2009, through our subsidiary HWR, we purchased a water disposal business serving customers in the oil and gas industry. On January 30, 2010, we completed a 50-mile water transport pipeline and treatment facility network in the Haynesville Shale field that was in process at the time of acquisition. It is designed to treat and dispose of up to 100,000 barrels of water per day and is supported by a network of deep injection disposal wells. 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 9, 2010, we announced a joint venture with Energy Transfer Partners, L.P. The joint venture is a 50/50 partnership and will operate under the name Energy Transfer Water Solutions, JV, LLC. It will develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and potentially 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.

As of December 31, 2009, we had approximately $136 million in cash and cash equivalents as well as approximately $113 million of certificates of deposit and marketable securities 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.

Operations Overview

China Water

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, and oxygenated water.

China Water has the capacity to produce up to 1.1 billion bottles of water annually in China. 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 “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.

As of December 31, 2009, we had operated our China Water subsidiary for fourteen months. Based upon our recent operating results, and evaluations performed by our management team at China Water and our management team at Heckmann Corporation, we believe the following:

•

The business we acquired in China currently is not as strong as we had anticipated. Sales for the year ended December 31, 2009, were disappointing and we have adjusted sales materially downward for 2008 from amounts previously reported by China Water’s pre-acquisition management team.

•

The global water business remains an excellent long-term business opportunity, and China represents one of the most sizable and rapidly growing markets within this industry.

•

Our relationship with Coca-Cola in China is strong, and we have completed construction of a new facility near Xi’An, Shaanxi Province, to serve Coca-Cola in this market.

HWR

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 frac fluid and saltwater that results from

drilling and gas production 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 disposal wells. The agreements provide that, upon connection of the new 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 an amount per barrel as a disposal fee. In addition, HWR currently has agreements with approximately 15 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.

As of December 31, 2009, we had operated our HWR subsidiary for six months. Based upon our recent operating results, and evaluations performed by our management team, we believe the following:

•

Construction of HWR’s 50-mile pipeline into the Haynesville Shale in east Texas and northwest Louisiana is complete and began commercial operations in January 2010.

•

HWR’s existing business is operating profitably and has contributed gross profit to our consolidated operating results.

•

HWR has firm multi-year disposal contracts for approximately 46% of current capacity for the new Haynesville pipeline and is seeking customers to improve capacity utilization.

•

HWR will continue to explore expansion and acquisition opportunities.

Results of Operations Overview

Basis of Presentation

We had no material operations prior to its acquisition of China Water on October 30, 2008. Accordingly, China Water is considered our predecessor prior to that date, and the financial statements of China Water and the following discussion of the results of operations and cash flows are included herein on that basis. Specifically, set forth below is a discussion that compares our results of operations for the year ended December 31, 2009 (which included our China Water and HWR operations from their respective dates of acquisition) with China Water’s historical results of operations for the period from January 1, 2008 to October 29, 2008, when we acquired it. In addition, the following includes a comparative discussion of China Water’s historical results of operations for the period from January 1, 2008 to October 29, 2008, with its operations for the year ended December 31, 2007.

Material Factors Affecting Results

The discussion of results of operations below reflects material changes in the year to year revenues for the China Water business, and significant write offs of assets, including goodwill, associated with this acquisition. The following provides a historical perspective on these events and the factors that led to these results.

China Water was presented to us as a growth story—a rapidly growing company in a key consumer market operating in a fast growing international economy. Reflecting this growth story, in the year prior to the acquisition, investment funds sponsored by the Pinnacle Group and others invested approximately $26 million, net of offering costs, into China Water, for it to expand its production capacity for its primary customer, Coca Cola, as well as its other customers. This expansion led to China Water recording increased revenues of $53 million for the year ended December 31, 2007. In the first quarter of 2008, China Water received an additional

cash investment of approximately $44 million, net of offering costs, from the sale of 5% secured convertible notes to funds managed by Pinnacle Group, Goldman Sachs and others. These proceeds were used to finance three acquisitions during 2008, as well as plant expansions. According to China Water’s prior management, China Water reported revenues for the six months ended June 30, 2008 of approximately $48 million. In addition, according to China Water’s prior management, revenues for the ten month period ended October 29, 2008 were over $85 million.

In connection with the acquisition of China Water, we engaged the services of an international financial services firm to represent the Company in the transaction and perform financial due diligence. The Company also engaged an outside independent registered public accounting firm to perform tax related due diligence, utilized the Company’s internal financial staff to obtain confirmations of accounts receivable, and authorized the Company’s General Counsel to coordinate legal due diligence.

Following the acquisition, we engaged our independent registered public accounting firm to conduct an audit of China Water for the period from January 1, 2008 to October 29, 2008, the date of the acquisition. As a result of the audit, China Water’s revenues for 2008 were materially reduced from those reported by prior China Water management, to $9.8 million for the audited period from January 1, 2008 to October 29, 2008 (which includes a reduction in revenues of approximately $10.8 as a result of our decision to account for the ShenYang Aixin factory as discontinued operations in the predecessor periods).

During the first half of 2009, we became concerned about China Water’s operating metrics, which appeared to have been particularly adversely affected by the global economic downturn of the last half of 2008. In addition, as China Water sought to collect accounts receivable in 2009 from sales recorded in 2008, we learned that a high percentage of customers had gone out of business, lacked the cash or access to financing to pay China Water or otherwise had failed to pay as required.

During this period, the Company entered into an agreement with Xu Hong Bin, the former President and Chairman of China Water, in which he resigned as the President and Chairman and agreed to materially reduce the consideration paid or payable to him in connection with the acquisition. He subsequently resigned from our Board of Directors as well. The Company is currently in litigation with the former President of China Water over attempts to further reduce the consideration paid or payable to him (See Item 3. Legal Proceedings). The Company also negotiated a reduction in consideration payable to Chen Xinghua, a former officer of China Water.

In 2009 we evaluated the goodwill recorded on acquisition, and reduced it from an initial estimate of approximately $315.3 million we recorded in 2008 to $6.3 million (See Note 3—Business Acquisitions to our consolidated financial statements included in this Annual Report on Form 10-K/A), reflecting (1) a reduction of approximately $28.0 million relating to the Chen Xinghua settlement agreement mentioned above, (2) an increase of approximately $42.4 million from adjusting certain acquired assets and assumed liabilities to recoverable amounts at the date of acquisition, (3) an increase of approximately $34.7 million from finalizing the valuations related to the purchase price allocation and (4) approximately $357.5 million related to non-cash impairment charges. In connection with finalizing the Company’s purchase price allocation related to China Water, the Company corrected the allocation of its purchase price related to certain tangible assets and assumed liabilities by $42.4 million. Pursuant to Staff Accounting Bulletin (SAB) 99, Materiality, (SAB 99), and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the quantitative and qualitative aspects of these corrections and determined the corrections were not material, as there was no impact on the Company’s results of operations or cash flow statements for the year ended December 31, 2008, or for the periods reported within the Company’s quarterly Form 10-Q filings for 2009.

In conjunction with the reduction in goodwill associated with the acquisition of China Water, we also reduced the carrying value of its investment in another company, China Bottles, by $8.9 million. Our initial valuation of China Water’s 48% equity investment in China Bottles was based on the results of a preliminary

valuation conducted by us and our independent valuation advisors. That valuation was based primarily on estimated projected future operating results anticipated for China Bottles using a discounted cash flow model. As of the date of the filing of our 2008 Form 10-K, the purchase price allocation for China Water, including its 48% equity investment in China Bottles, was not yet considered final due to, among other things, the lateness in the year of the our consummating the China Water acquisition which closed on October 30, 2008. In conjunction with our finalizing the purchase price allocation of China Water during the third quarter of 2009, which included the valuation of our investment in China Bottles, we determined that the forecasted operating income used in the initial valuation of our investment in China Bottles was unrealistic, and therefore could not support the initial valuation of the investment. A subsequent forecast of the operating results of the China Bottles business, based in part on nine month actual operating results for the business, yielded a decline in the China Bottles business which we determined was other than temporary and not recoverable. The impact of this write down decreased the overall net asset value of the China Water assets acquired, effectively increasing the goodwill impairment charge recorded by us in the third quarter of 2009.

Capacity utilization at China Water for the year ended December 31, 2009, was approximately 37%. We began to monitor factory utilization on January 1, 2009, subsequent to the acquisition of China Water. As factory utilization improves, we expect that there would be a corresponding positive impact on our results from operations and cash flows. On the other hand, any future decrease in factory utilization would result in a negative impact on our results from operations and cash flows from operations.

During the latter half of 2009, the Company focused on stabilizing the China Water business under new management, and completing the water pipeline in formation that it purchased to serve US oil and gas operators. The Company believes it is now positioned for growth and expansion.

Results of Operations for the Year Ended December 31, 2009 Compared to China Water’s historical results of operations for the period from January 1, 2008 to October 29, 2008


(in thousands)	Year Ended December 31, 2009			China Water January 1, 2008 to October 29, 2008
Net sales	$	35,975		$	9,757
Cost of goods sold		26,734			8,068

Gross profit		9,241			1,689
Operating expenses		408,754			112,532

Loss from operations		(399,513	)		(110,843	)
Interest income (expense), net		3,928			(15,466	)
Minority interest		—			(144	)
Income from equity method investment		47			4,260
Other expense, net		(2	)		(15	)

Loss before income taxes		(395,540	)		(122,208	)
Income tax benefit		(2	)		—

Loss from continuing operations		(395,538	)		(122,208	)
Income from discontinued operations		—			1,208

Net loss	$	(395,538	)	$	(121,000	)

Net Sales

Net sales for the year ended December 31, 2009 were $36.0 million, which represents $32.2 million of sales of bottled water made by our China Water subsidiary and $3.8 million of revenues from our water disposal operations, as compared to $9.8 million for the period from January 1, 2008 to October 29, 2008 all of which was

generated from sales of bottled water by our China Water subsidiary. Revenues for the twelve months ended December 31, 2009 were significantly greater than the $9.8 million in revenues recorded for the period from January 1, 2008 to October 29, 2008, reflecting (i) the acquisition by China Water of three new plants in 2008 and the inclusion of their results of operations for the full year (which totaled $12.0 million in 2009 versus $1.8 million during the period from January 1, 2008 to October 29, 2008), (ii) stabilization of the China Water business under new management, and (iii) contributions from the water disposal business acquired in 2009. Revenues for our bottled water business are primarily volume related as product sales prices and product mix did not change substantially during the periods presented. In addition, during the year ended December 31, 2009 we deconsolidated the ShenYang Aixin factory (see Note 4—Deconsolidation to our consolidated financial statements included in this Annual Report on Form 10-K/A). With revenues of approximately $10.8 million, the results of operations of the ShenYang Aixin factory were material to the predecessor operations, and therefore are being presented as discontinued operations for the predecessor periods. Revenues for the ShenYang Aixin factory were not material to the successor operations (approximately $0.8 million), and therefore are included in the successor period revenues.

Cost of Goods Sold and Gross Profit

The cost of goods sold for the year ended December 31, 2009 was $26.7 million, resulting in total gross profit of $9.2 million, or 25.7% of sales. Gross profit of $7.5 million, or 23.4%, was attributable to bottled water sales and a gross profit of $1.7 million, or 45.0%, was attributable to water disposal revenues. Cost of goods sold for the period from January 1, 2008 to October 29, 2008 was $8.1 million, resulting in total gross profit of $1.7 million, or 17.3% of sales, all of which was attributable to sales of bottled water by the Company’s China Water subsidiary. Cost of goods sold for the three acquisitions consummated by China Water prior to the Company’s acquisition of China Water totaled approximately $7.9 million resulting in gross profit of approximately $4.1 million or 34.2% for the year ended December 31, 2009. Cost of goods sold and gross profits for the Grand Canyon factory for the ten months ended October 29, 2008 were approximately $1.3 (27.8% of sales) and $0.5 million, respectively. Also included in cost of sales for the year ended December 31, 2009 were approximately $0.8 million of non-cash charges to write off $0.3 million of assets at the Beijing factory and $0.5 million for additions to the inventory reserve.

Operating Expenses

Operating expenses for the year ended December 31, 2009 totaled $408.8 million, compared to $112.5 million for the period from January 1, 2008 to October 29, 2008. The operating expenses for the year ended December 31, 2009 included a $357.5 million non-cash goodwill impairment charge based upon finalizing our goodwill impairment analysis as of September 30, 2009 (see Note 3—Business Acquisitions to our consolidated financial statements included in this Annual Report on Form 10-K/A). In addition, we recorded impairments to the carrying value of our fixed assets of approximately $6.8 million for the year ended December 31, 2009 primarily related to exiting the Beijing factory, acquired by China Water prior to October 30, 2008, and writing off $2.2 million of Beijing factory leasehold improvements and $3.8 million of write-offs resulting from termination of construction in progress at the Changchun and Shandong factories.

General and administrative expenses for the year ended December 31, 2009 were $41.3 million which included approximately $2.0 million of stock based compensation and amortization expense of approximately $2.6 million. Also included in general and administrative expense for the year ended December 31, 2009 are approximately $5.3 million of expenses relating to the deconsolidation of ShenYang Aixin (see Note 4—Deconsolidation to our consolidated financial statements included in this Annual Report on Form 10-K/A). General and administrative expense also includes a $4.5 million expense for reimbursements made to Xu Hong Bin, the former president and chairman of China Water, that were previously capitalized, a $9.3 million expense to write off bad debts, a $3.9 million expense to write off other assets, and provisions for liabilities of $1.3 million.

In addition, during the first quarter of 2009, we adopted the Financial Accounting Standard Board’s (“FASB”) revised authoritative guidance for business combinations, which requires that acquisition related costs

be expensed in the period in which the costs are incurred. This differs from previous accounting treatment in which acquisition related expenses were included as part of the purchase price of an acquired company. We incurred approximately $0.2 million in acquisition related costs in connection with our acquisition by HWR of our saltwater disposal and transport business in the year ended December 31, 2009, with no comparable expense during the same period in 2008.

General and administrative expenses for the period from January 1, 2008 to October 29, 2008 were $112.0 million and primarily included approximately $46.6 million of stock-based compensation pursuant to a make good escrow agreement entered into in connection with an equity financing transaction consummated by China Water in 2007 and approximately $42.4 million from adjusting certain acquired assets and assumed liabilities to recoverable amounts as of October 29, 2008 (see Note 3—Business Acquisitions to our consolidated financial statements included in this Annual Report on form 10-K/A).

Loss from Operations

Loss from operations was $399.5 million and $110.8 million for the year ended December 31, 2009 and the period from January 1, 2008 to October 29, 2008, respectively, as a result of the $357.5 million non-cash goodwill impairment charge and the other items mentioned above.

Interest Income, net

During the year ended December 31, 2009, we recorded interest income on invested funds of approximately $3.9 million. There were no corresponding invested funds for the period from January 1, 2008 to October 29, 2008. Interest expense for China Water of approximately $15.5 million for the period from January 1, 2008 to October 29, 2008 was primarily attributable to approximately $12.0 million of beneficial conversion feature amortization and approximately $2.1 million of interest on 5% convertible notes payable. There were no amounts recorded for beneficial conversion or interest expense for the year ended December 31, 2009.

Income from Equity Method Investment

During the year ended December 31, 2009, we recorded approximately $47,000 of equity income from China Water’s 48% equity method investment in China Bottles, Inc. Subsequent to management and its independent valuation advisor finalizing the report on the fair value of our investment in China Bottles, Inc., the 48% equity investment was written down to $4.0 million. During the period from January 1, 2008 to October 29, 2008 approximately $4.3 million was recorded as income from the equity method investment.

Other Expense, net

We recorded other expense of approximately $2,000 for the year ended December 31, 2009 primarily related to a $0.5 million restructuring reserve to exit the Beijing factory offset by other income at China Water from the sale of pre-form plastic bottles. During the period from January 1, 2008 to October 29, 2008 approximately $15,000 was recorded as other expense.

Income Taxes

The income tax benefit for the year ended December 31, 2009 was $2,000. No provision or benefit for income taxes was recorded in the period from January 1, 2008 to October 29, 2008.

Income from discontinued operations

During the year ended December 31, 2009, we deconsolidated the ShenYang Aixin factory. The results of operations of the ShenYang Aixin factory were material to the predecessor operations, and therefore are being presented as discontinued operations for the predecessor operations for the predecessor periods. During the

period from January 1, 2008 to October 29, 2008, we recorded approximately $1.2 million of income from this discontinued operation. This discontinued operation was not material to the results of operations for the successor period.

Net loss

Our net loss for the year ended December 31, 2009 was $395.5 million compared to $121.0 million for the period from January 1, 2008 to October 29, 2008. The change relates primarily to the $357.5 million non-cash goodwill impairment loss and other items mentioned above.

Results of Operations for China Water for the period January 1, 2008 to October 29, 2008 compared to the year ended December 31, 2007


(in thousands)	January 1, 2008 to October 29, 2008			Year ended December 31, 2007
Net sales	$	9,757		$	53,332
Cost of goods sold		8,068			34,919

Gross profit		1,689			18,413
Operating expenses		112,532			57,546

Loss from operations		(110,843	)		(39,133	)
Interest expense		(15,466	)		—
Minority interest		(144	)		—
Income from equity method investment		4,260			1,797
Other income (expense), net		(15	)		173

Loss before income taxes		(122,208	)		(37,163	)
Income tax benefit		—			31

Loss from continuing operations		(122,208	)		(37,132	)
Income from discontinued operations		1,208			610

Net loss	$	(121,000	)	$	(36,522	)

Net Sales

Net sales for the period from January 1, 2008 to October 29, 2008 were $9.8 million, which represents a decline of $43.5 million from sales of $53.3 million for the year ended December 31, 2007. Sales for the ShenYang Aixin factory were approximately $10.8 million for the period from January 1, 2008 to October 29, 2008. We reclassified the results of operations for that factory to discontinued operations subsequent to the September 2009 deconsolidation of that business in the predecessor periods (which was acquired in December 2007). Had the results of operations for ShenYang not been reclassified to discontinued operations, the comparable sales for the period from January 1, 2008 to October 29, 2008 would have totaled approximately $20.6 million as compared to $56.7 million for the year ended December 31, 2007. China Water’s operating metrics were adversely affected by the global economic downturn of the last half of 2008. In addition, as China Water sought to collect accounts receivable, the Company determined that a high percentage of customers had either gone out of business, lacked the cash or access to financing necessary to pay China Water, or otherwise failed to pay as required.

Cost of Goods Sold and Gross Profit

The cost of goods sold for the period January 1, 2008 to October 29, 2008 was $8.1 million, resulting in total gross profit of $1.7 million, or 17.3% of sales. Gross profit of $18.4 million, or 34.5%, was attributable to bottled water sales for the year ended December 31, 2007. The lower gross profit was attributable to the decline in sales mentioned above.

Operating Expenses

Operating expenses for the period from January 1, 2008 to October 29, 2008 totaled $112.5 million, compared to $57.5 million for the year ended December 31, 2007

General and administrative expense for the period from January 1, 2008 to October 29, 2008 included approximately $46.6 million of stock based compensation pursuant to a make good escrow agreement entered into in connection with an equity financing transaction consummated by China Water in 2007, and approximately $42.4 million from adjusting certain acquired assets and assumed liabilities to recoverable amounts as of October 29, 2008 (see Note 3—Business Acquisitions to our consolidated financial statements included in this Annual Report on Form 10-K/A). General and administrative expense for the year ended December 31, 2007 included approximately $56.0 million of stock based compensation expense relating to the equity financing transaction mentioned above.

Loss from Operations

The loss from operations was $110.8 million and $39.1 million for the period from January 1, 2008 to October 29, 2008 and year ended December 31, 2007, respectively, as a result of the items mentioned above.

Interest Expense

During the period from January 1, 2008 to October 29, 2008 interest expense of approximately $15.5 million was primarily attributable to approximately $12.0 million of beneficial conversion feature amortization and approximately $2.1 million of interest on 5% convertible notes payable. No corresponding amounts were recorded for the year ended December 31, 2007 as China Water had no significant debt outstanding during this period.

Income from Equity Method Investment

During the period from January 1, 2008 to October 29, 2008 approximately $4.3 million of equity income was recorded from China Water’s 48% equity interest in China Bottles, a bottle blowing equipment manufacturer. During the year ended December 31, 2007 approximately $1.8 million was recorded as equity income from this equity method investment.

Other Income (Expense), net

We recorded other income of approximately $15,000 for the period from January 1, 2008 to October 29, 2008 compared to approximately $0.2 million for the year ended December 31, 2007.

Income Taxes

The income tax benefit for the year ended December 31, 2007 was $31,000. No provision for income taxes was recorded in the period from January 1, 2008 to October 29, 2008.

Income from discontinued operations

During the period from January 1, 2008 to October 29, 2008, approximately $1.2 million of income was recorded from the ShenYang Aixin factory. During the year ended December 31, 2007 approximately $0.6 million of income was recorded from the discontinued operation.

Net loss

Net loss for the period from January 1, 2008 to October 29, 2008 was $121.0 million compared to $36.5 million for the year ended December 31, 2007. The change relates primarily to the items mentioned above, in

which China Water recorded approximately $105.2 million in non-cash operating expenses compared to approximately $55.1 million for the year ended December 31, 2007.

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 reductions in operating expenses, and the impact of integration on our productivity. We had cash and cash equivalents of approximately $136.1 million and approximately $113.2 million of certificates of deposit and marketable securities on our balance sheet as of December 31, 2009.

Our primary strategy is to grow by expansion and acquisition. The Company believes that its cash, cash equivalents and investments will be sufficient to fund operations, facilitate plant expansions and complete any acquisitions it may undertake for the foreseeable future.

Investments in Marketable Securities

Our investments in marketable securities are high grade corporate notes and US Government securities that are purchased in accordance with our investment policy. Our investment policy allows us to invest and reinvest in United States government securities having a maturity of five years or less, other obligations of U.S. government agencies and instrumentalities, including government sponsored enterprises, commercial paper, corporate notes and bonds, short term instruments that are direct obligations of issuers, long term instruments that are direct obligations of issuers, and municipal notes and bonds with a maturity of two years or less. We avoid investments in mortgage backed securities, collateralized mortgage obligations, auction rate securities, collateralized debt obligations, credit default swaps and similar high risk and/or exotic instruments. Our investment policy is maintained and supervised by our management. Any decisions regarding the size of individual investments or their composition are made only in compliance with our investment policy with the intent to yield higher obtainable returns with the understanding that the investment may need to be liquidated in the near term to consummate strategic business combinations.

China Bottles, Inc. Investment

We own 48% of the outstanding equity of China Bottles, a manufacturer of bottling equipment and provider of contract manufacturing and finished product services. At December 31, 2009, our investment in China Bottles totaled $4.0 million. For the year ended December 31, 2009 we recorded equity income of $47,000 and $4.3 million for the period from January 1, 2008 to October 29, 2008 based on the interim financial reports received from China Bottles’ management. China Bottles has a significant insider ownership and there is no liquidity in the stock. Subsequent to management and its independent valuation advisor finalizing the report on the fair value of our investment in China Bottles, the 48% equity investment was written down to $4.0 million.

Cash Flows for Year Ended December 31, 2009 compared to the period from January 1, 2008 to October 29, 2008.

Net cash used in operating activities was $6.0 million for the year ended December 31, 2009 compared to $15.7 million for the period from January 1, 2008 to October 29, 2008. The increase was largely due to lower working capital and a full year of operations in 2009.

Net cash used in investing activities was $122.8 million for the year ended December 31, 2009 compared to $37.3 million for the period from January 1, 2008 to October 29, 2008. The increase was primarily attributable to higher spending for additions to fixed assets year over year of $30.9 million, approximately $7.2 million used to purchase 7% of UGSI (see Note 5—Investments to our consolidated financial statements included in this Annual

Report on Form 10-K/A), $16.6 million used to consummate HWR’s acquisition of our saltwater disposal and transport business (See Note 3—Business Acquisitions to our consolidated financial statements included in this Annual Report on Form 10-K/A), $148.2 million to invest in high grade corporate notes net of $85.2 million received from the sale of securities, offset by approximately $22.1 million spent by China Water on acquisitions in the period from January 1, 2008 to October 29, 2008 and increases to deposits for acquisitions of approximately $10.8 million.

Net cash used in financing activities was $16.7 million for the year ended December 31, 2009 compared to net cash provided by financing activities of $43.9 million in the period January 1, 2008 to October 29, 2008. Net cash used in financing activities in 2009 was primarily attributable to $4.4 million used by management under the discretionary program to buy back, at fair value determined by the open market, 6,166,696 previously issued warrants, $14.0 million used to purchase 13,032,100 shares from Xu Hong Bin, and $2.0 million borrowed under a China Water revolving credit facility with $0.3 million of repayments made during 2009. Cash provided by financing activities in the period from January 1, 2008 to October 29, 2008 was primarily attributable to $44.1 million of cash proceeds obtained from China Water’s issuance of 5% convertible notes in January 2008.

Cash Flows for period from January 1, 2008 to October 29, 2008 compared to the Year Ended December 31, 2007

Net cash used in operating activities was $15.7 million for the period from January 1, 2008 to October 29, 2008 compared to $0.8 million of cash provided by operations for the year ended December 31, 2007. The decrease was primarily attributable to losses generated by business operations after deducting non-cash charges as a result of the decrease in sales.

Net cash used in investing activities was $37.3 million for the period from January 1, 2008 to October 29, 2008 compared to $17.8 million for the year ended December 31, 2007. The increase was primarily attributable to $2.8 million of additional purchases of property plant and equipment, additional cash payments period over period of $8.2 million for the acquisition of new businesses, and additional deposits for potential acquisitions made period over period of $8.0 million.

Net cash provided by financing activities was $43.9 million for the period from January 1, 2008 to October 29, 2008 compared to $26.0 million for the year ended December 31, 2007. The increase was due to net proceeds received of $44 million from China Water’s issuance of 5% convertible notes in January 2008, compared to $26.4 million of proceeds received from China Water’s issuance of Series A Preferred Stock in 2007.

Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 31, 2009 and the timing and effect that these commitments are expected to have on our liquidity and capital requirements in future periods. We expect to fund other commitments primarily with operating cash flows generated in the normal course of business.


Payments Due by Period
	Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years		Total
	(Amounts in Thousands)
Debt obligations	$	1,837	$	—	$	—	$	—	$	1,837
Quarterly obligation under purchase agreement (Note 3)		700		1,050		—		—		1,750
Operating lease obligations		1,919		1,768		4		—		3,691

Total	$	4,456	$	2,818	$	4	$	—	$	7,278

Off Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”

Recent Accounting Pronouncements

Adopted Accounting Standards

Effective January 1, 2009, we implemented the Financial Accounting Standard Board’s (“FASB”) revised authoritative guidance for business combinations. This revised guidance requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. Previously, post-acquisition adjustments related to business combination deferred tax asset valuation allowances and liabilities for uncertain tax positions were generally required to be recorded as an increase or decrease to goodwill. The revised guidance does not permit this accounting and, generally, requires any such changes to be recorded in current period income tax expense. Thus, all changes to valuation allowances and liabilities for uncertain tax positions established in acquisition accounting, regardless of the guidance used to initially account for the business combination, will be recognized in current period income tax expense. We accounted for its acquisition of the Salt Water Disposal business on July 1, 2009 and Harbin Taoda on April 11, 2009 in accordance with this guidance (Note 3). Therefore, the adoption of the revised guidance had an impact on our consolidated financial statements for the year ended December 31, 2009. The nature and magnitude of the specific effects in future periods will depend upon the nature, terms and size of the acquisitions consummated after the authoritative guidance’s effective date of January 1, 2009.

Effective January 1, 2009, we adopted the revised authoritative guidance for the accounting treatment afforded preacquisition contingencies in a business combination. Under the revised guidance, an acquirer is required to recognize at fair value an “asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the liability can be determined during the measurement period.” If the acquisition-date fair value cannot be determined, the acquirer must apply the authoritative guidance used to evaluate contingencies to determine whether the contingency should be recognized as of the acquisition date or after the acquisition date. The adoption of the revised guidance will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions consummated after the authoritative guidance’s effective date of January 1, 2009.

Effective January 1, 2009, we implemented the FASB’s revised authoritative guidance for consolidation, which addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of the revised guidance impacted the Company’s consolidated financial statements, and resulted in the Company reclassifying financial statement line items within its consolidated balance sheets, statements of operations, and statements of stockholders equity for prior periods to conform to this standard.

Effective January 1, 2009, we adopted the FASB’s revised authoritative guidance which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Effective April 1, 2009, we adopted FASB’s revised authoritative guidance for fair value measurements which clarifies the measurement of fair value in a market that is not active, and is effective as of the issue date, including application to prior periods for which financial statements have not been issued. We also adopted additional authoritative guidance for determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (financial and nonfinancial) and which requires enhanced disclosures. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Effective April 1, 2009, we adopted authoritative guidance which provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. The adoption of this guidance, which applies to investments in debt securities, did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2009, the FASB approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and impacts our financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of our financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

Recently Issued Accounting Standards

In June 2009, the FASB issued 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. This guidance is effective for years beginning January 1, 2010. We are currently evaluating the impact the adoption will have on its consolidated financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the most significant judgments and estimates in the preparation of our financial statements, including the following:

Basis of Consolidation

The consolidated financial statements of the Company and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the United States, China, and Hong Kong, with a

majority of those balances maintained in US dollars. Balances at financial institutions or Chinese state-owned banks are not covered by insurance. The Company has not experienced any historical losses in such accounts and believes that the risk of any loss is minimal. A majority of the funds held in the United States are invested in one or more institutional money market funds.

Accounts Receivable and Allowance for Doubtful Accounts

Substantially all of our receivables are related to providing bottled water products. Accounts receivable are reduced by an allowance for amounts that could become uncollectible in the future. Our estimate for allowance for doubtful accounts is based upon management’s assessment of expected net collections. Due to the continuing changes in the economy, it is possible that management’s estimates could change in the near term, which could have an impact on our financial position, results of operations, and cash flows.

Goodwill

Goodwill is tested annually for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that impairment may have occurred. The impairment analysis for goodwill includes a comparison of our carrying value of our investment (including goodwill) to our estimated fair value. If the fair value does not exceed its carrying value, then an additional analysis will be performed to allocate the fair value to all assets and liabilities as if it had been acquired in a business combination and the fair value was its purchase price. If the fair value of our identifiable assets and liabilities is less than the carrying value of recorded goodwill, an impairment charge is recorded for the difference. During the year ended December 31, 2009, impairment losses were recorded as a result of this analysis; see Note 3 to the financial statements for further discussion.

Stock-Based Compensation

The estimated fair value of share-based awards exchanged for employee and non-employee director services are expensed over the requisite service period. Option awards issued to non-employees (excluding non-employee directors) are recorded at their fair value as determined in accordance with authoritative guidance, and are periodically revalued as the options vest and are recognized as expense over the related service period.

For purposes of calculating stock-based compensation, we estimate the fair value of stock options and shares issued under the Equity Incentive Plan using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and interest rates. Stock-based compensation related to stock options is recognized and amortized on an accelerated basis in accordance with authoritative guidance. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, we may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference.

Revenue Recognition

We recognize revenues in accordance with Staff Accounting Bulletin No. 104 and, accordingly, all of the following criteria must exist for revenues to be recognized: pervasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed and determinable; and collectibility is reasonably assured. The majority of our revenue results from sales contracts with direct customers and revenues are generated upon shipment of the goods.

All finished products for bottled water sales are delivered to customers directly from plant locations throughout the PRC. Finished product relating to the saltwater disposal and transport business consist of delivery of saltwater, via independent truck haulers, through a water transport pipeline at the disposal wells or at saltwater storage facilities. Certain customers, limited to those under contract with us to utilize the pipeline, have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Fixed fees relate to disposal rates are generally based on a fixed fee per barrel of disposal water. Revenue is recognized based on the number of barrels disposed upon delivery. However, as the pipeline was not in commercial operations as of December 31, 2009, there were no revenues recognized in 2009 from these contracts. Saltwater disposal and transport revenues recognized in 2009 related solely to delivery of saltwater to the disposal and storage facilities via independent truck haulers, for which customers are not under fixed fee contracts.

Foreign Currency Translation

The functional currency of the Company’s operating subsidiaries is the RMB, which is not freely convertible into foreign currencies. We maintain our consolidated financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the translations. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

The impact in actual US Dollars that foreign currency translation had on our balance sheets, statements of comprehensive loss and statements of changes in equity for the periods presented was $31,000 in 2009 and $(1,000) in 2008, as reported in the line item “Foreign currency translation loss” within other comprehensive loss in the statements of changes in equity for the respective periods presented. The impact that foreign currency translation had on our statements of cash flows was $(101,000) in 2009 and $91,000 in 2008, as reported in the line item “Effect of change in foreign exchange rate on cash and cash equivalents” in the statements of cash flows for the respective periods.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures for contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

Income Taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2009 due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future.

Item 7A.

Quantitative and Qualitative Disclosure 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.

Certain Company Operations are in Foreign Countries

Our international segment 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 Company and China Water subsidiary operations 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 December 31, 2009, the fair value of our portfolio would decline approximately $1.1 million.

Item 8.

Financial Statements and Supplementary Data

The financial statements and supplementary data required by Regulation S-X are included in Part IV, Item 15 of this Annual Report on Form 10-K/A.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

In 2009, there were no disagreements with accountants on accounting and financial disclosures.

Item 9A.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual 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), performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in our reports filed with the 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 below in “Management’s Report on Internal Control over Financial Reporting.” Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2009 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 December 31, 2009.

(b) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, a Company’s principal executive and principal financial officers and effected by a Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, or US GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and the circumvention or overriding of controls, such that internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.

Management, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. Management excluded from this assessment two businesses that we acquired in 2009 because it was not possible to conduct an assessment of the two acquired businesses’ internal control over financial reporting in the

period between the consummation date and the date of management’s assessment. With respect to excluding these companies, we are required to (1) formally note that management is excluding these acquired businesses from management’s report on internal control over financial reporting; (2) clearly identify the acquired businesses excluded and have indicated the significances of the acquired businesses in our consolidated financial statements; and (3) disclose material changes, if any, to our internal control over financial reporting due to the acquisition of these businesses. We have excluded Harbin Taoda (“Harbin”), a subsidiary of China Water, and HWR, from our assessment of internal control over financial reporting as of December 31, 2009 because Harbin and the assets underlying the business of HWR were acquired on April 1, 2009 and July 1, 2009, respectively, and qualified under current SEC interpretive guidance for exclusion from our assessment of internal control over financial reporting. Harbin and HWR’s financial statements constitute 7% and 18%, respectively, of our total assets, 11% and 13% respectively of total revenues, and less than 1% of net loss of our consolidated financial statements amounts, as of and for the year ended December 31, 2009. In assessing the effectiveness of our internal controls over financial reporting as of December 31, 2009, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we determined that, for the reasons disclosed below, as of December 31, 2009, our internal controls over financial reporting were not effective based on those criteria.

GHP Horwath P.C. (“GHP”), our independent registered public accounting firm, has performed an audit of the effectiveness of our company’s internal control over financial reporting as of December 31, 2009, and, as part of its audit, has issued its attestation report on the effectiveness of our company’s internal control over financial reporting herein as of December 31, 2009. GHP’s attestation report is included in this Annual Report on Form 10-K/A under Item 9A(d). This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The material weaknesses indentified are isolated to China Water’s internal controls over financial reporting as of December 31, 2009, however, are pervasive in nature and extend to each of China Water’s operating subsidiaries. Decentralized management in China combined with inadequate headcount in the accounting and finance department led to our local PRC businesses operating autonomously, which increased the risk of management override, noncompliance with corporate policies and untimely preparation and filing of our financial statements. These conditions contributed to the following material weaknesses in internal control over financial reporting:

•

ineffective supervision and monitoring of the financial statement close, preparation and review processes;

•

ineffective procedures relating to the identification, documentation and review of various account reconciliations and related supporting documentation;

•

ineffective procedures relating to the safeguarding of assets against unauthorized or improper use; and

•

insufficient control consciousness (tone at the top) within the China Water organization.

Remediation Measures of Material Weaknesses

We announced our proposed business combination with China Water on May 20, 2008 and consummated that business combination on October 30, 2008. Until the consummation of such business combination, we were a blank check company. As a blank check company, our activities were limited to managing the working capital funds outside of the trust account, in which a substantial portion of our IPO proceeds were held prior to consummating the China Water acquisition and related expenses associated with our efforts to identify a target business and consummate a business combination. China Water’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007. Based on that evaluation, China Water’s management concluded that its internal control over financial reporting was not effective as of December 31, 2007 due to the existence of several material weaknesses.

The material weaknesses in China Water’s internal controls over financial reporting as of December 31, 2007 related to:

•

Its failure to maintain effective internal controls over the financial closing process to ensure the accurate and timely preparation of local financial statements and financial data which is necessary for preparation of consolidated financial statements due to an insufficient complement of local financial and accounting staff with knowledge of local accounting and US GAAP financial reporting rules to support the size of the company’s then current organizational structure. During the course of the preparation of December 31, 2007 consolidated financial statements, China Water discovered accounting errors in some of its transactions, and management subsequently reevaluated the transactions and recorded the necessary period-end adjustments. These adjustments reflected a material weakness in China Water’s internal controls over accounting and financial reporting. This restatement reflected a material weakness in China Water’s policies and procedures related to its review of complex accounting transactions; and

•

Its failure to adequately design and operate internal controls in a manner to effectively support the requirements of the financial reporting and period-end close process, including the proper cut-off of revenues and expenses and the proper accounting for value added taxes, due to the aggregate deficiencies in internal control activities.

Prior to the consummation of our business combination with China Water, its chief financial officer resigned. In conjunction with the consummation of the business combination on October 30, 2008, China Water’s audit committee and its chief executive officer resigned their positions. As a result of the turnover in China Water’s senior management and audit committee and China Water’s inability to make a management assessment of its internal controls, as well as the fact that the acquisition of China Water occurred during the fourth quarter of 2008, our Chief Executive Officer and Chief Financial Officer determined that it was impractical for our Company to make an assessment of China Water’s internal controls as of December 31, 2008. The control deficiencies discussed above continued into 2008 and 2009. Part of our efforts to remediate these control deficiencies included the selection of an enterprise resource management system (the “ERP System”) from Oracle to replace our existing financial reporting and information systems at China Water. The implementation of the ERP System as part of our overall remediation plans is intended to address the material weaknesses outlined above. The Company believes that the implementation of an ERP system will greatly enhance China Water’s internal control over financial reporting. Under the integrated ERP System, China Water management will be better able to monitor and review the financial reporting process through enhanced insight into the financial data of its operating business units as a further step to remediating the identified material weaknesses. This enhanced insight is a key benefit of the integrated ERP System. China Water management should be better able to improve the accuracy and timeliness of financial information through a systematic, consistent program of financial oversight.

Over the next twelve months, we were anticipating being in the process of implementing this system, including testing the system in a controlled environment, training our personnel in the use of the system and documenting and testing the control environment in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Our planned “go-live” date for the new system was October 1, 2009. However, due to the work performed to finalize the allocation of the China Water purchase price and the subsequent goodwill impairment charges that we encountered in the first and third quarters of 2009, we experienced delays in integrating the ERP System. As a result of these delays we elected to postpone implementation of the ERP System until after the end of the fiscal year ended December 31, 2009 as we did not believe it would be prudent to implement the new system so close to our fiscal year-end. We have made a substantial investment to ensure that the ERP System will provide effective internal control over financial reporting, and we have evaluated our controls that are not intended to change with the implementation of the ERP System. Because we initially anticipated that the “go-live” date of the ERP System would be prior to December 31, 2009, we did not, however, fully evaluate the effectiveness of the existing controls that were to be replaced by the ERP System. With the delay in implementing the ERP System, we did not have sufficient time to fully document, test and remediate

(where applicable) those controls that we previously planned to replace prior to December 31, 2009. As a result, we believe our inability to fully test the legacy China Water internal controls over financial reporting contributes to the material weaknesses in our internal control over financial reporting. Not being able to test the remediated controls in a manner that would enable us to conclude that such controls are effective have caused management to conclude that, as of December 31, 2009, our internal controls over financial reporting were not effective.

In connection with our acquisition of China Water, we began to address the internal control weaknesses as described above. 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 Vice President of Finance for our China Water subsidiary was appointed, effective June 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 re-emphasized to our employees our Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics sets the tone at the top regarding the Company’s expectation of how our China Water employees are expected to conduct themselves in the conduct of company business and will assist the Company in holding its employees accountable for their actions. The Company believes that it is important to implement and emphasize these standards as a further step to remediating the material weakness relating to the safeguarding of assets against unauthorized or improper use.

•

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.

Our management does not believe that the material weaknesses discussed above had a material effect on our financial condition or results of operations or caused our financial statements as of and for the year ended December 31, 2009 to contain a material misstatement.

(c) Changes in Internal Controls over Financial Reporting

Except as described above, there were no changes in our internal control over financial reporting, during the fiscal quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(d) Audit Report of the Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Heckmann Corporation

We have audited Heckmann Corporation and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control over financial reporting based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include two business acquisitions which were completed during 2009 because it was not possible to conduct an assessment of the acquired businesses’ internal control over financial reporting in the period between the acquisition date and the date of management’s assessment. The two businesses’ comprise 25%, 24%, and less than 1% of total assets, total revenue and net loss, respectively, included in the consolidated financial statements of Heckmann Corporation as of December 31, 2009 and for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of these two acquired businesses.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or

interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified related to the Company’s subsidiary, China Water and Drinks, Inc., including ineffective supervision and monitoring of the financial statement close, preparation and review processes; ineffective procedures relating to the identification, documentation and review of various account reconciliations and related supporting documentation necessary to prepare financial statements in accordance with US GAAP; ineffective procedures relating to the safeguarding of assets against unauthorized or improper use; and insufficient control consciousness (tone at the top) within the China Water organization. These material weaknesses are discussed in Management’s Report on Internal Control over Financial Reporting.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of December 31, 2009 and 2008 and for each of the years ended December 31, 2009 and 2008, and for the period from May 29, 2007 (inception) through December 31, 2007, and this report does not affect our report on such consolidated financial statements.

In our opinion, because of the effects of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company did not maintain effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO.

We have also audited, in accordance with the standards of the PCAOB, the consolidated financial statements of the Company as of December 31, 2009 and 2008 and for each of the years ended December 31, 2009 and 2008, and for the period from May 29, 2007 (inception) through December 31, 2007, and our report dated March 11, 2010 expressed an unqualified opinion on those consolidated financial statements.

/s/ GHP Horwath, P.C.

Denver, Colorado

March 11, 2010

Item 9B.

Other Information

None.

HECKMANN CORPORATION

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference from our proxy statement to be filed pursuant to Regulation 14A within 120 days after our year ended December 31, 2009 in connection with our 2009 Annual Meeting of Stockholders (“Proxy Statement”).

Item 11.

Executive Compensation

The information required by this item is incorporated by reference from our Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference from our Proxy Statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference from our Proxy Statement.

Item 14.

Principal Accounting Fees and Services

The information required by this item is incorporated by reference from our Proxy Statement.

HECKMANN CORPORATION

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a)	The following documents are filed as part of this Annual Report on Form 10-K/A:

(1)

Audited Consolidated Financial Statements


Heckmann Corporation

Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations			F-4
Consolidated Statements of Comprehensive (Loss) Income			F-5
Consolidated Statements of Changes in Equity			F-6
Consolidated Statements of Cash Flows			F-8
Notes to Consolidated Financial Statements			F-10

China Water and Drinks Inc.

Report of Independent Registered Public Accounting Firm			F-39
Consolidated Statements of Operations and Comprehensive Loss			F-40
Consolidated Statements of Cash Flows			F-41
Consolidated Statements of Stockholders’ Equity			F-42
Notes to Consolidated Financial Statements			F-43

(2)

Financial Statement Schedules

All financial statement schedules have been omitted since they are not required, not applicable, or the information is otherwise included in the audited consolidated financial statements.

(b)	The Exhibit Index is included following the audited consolidated financial statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.


	HECKMANN CORPORATION

Date: March 14, 2011	By:	/S/ RICHARD J. HECKMANN
	Name:	Richard J. Heckmann
	Title:	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Date: March 14, 2011	By:	/S/ RICHARD J. HECKMANN
	Name:	Richard J. Heckmann
	Title:	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: March 14, 2011	By:	/S/ BRIAN R. ANDERSON
	Name:	Brian R. Anderson
	Title:	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: March 14, 2011	By:	/S/ LOU HOLTZ
	Name:	Lou Holtz
	Title:	Director

Date: March 14, 2011	By:	/S/ DR. ALFRED E. OSBORNE, JR.
	Name:	Dr. Alfred E. Osborne, Jr.
	Title:	Director

Date: March 14, 2011	By:	/S/ DAN QUAYLE
	Name:	Dan Quayle
	Title:	Director

Date: March 14, 2011	By:	/S/ ANDREW D. SEIDEL
	Name:	Andrew D. Seidel
	Title:	Director

Date: March 14, 2011	By:	/S/ EDWARD A. BARKETT
	Name:	Edward A. Barkett
	Title:	Director

Index to Financial Statements


Heckmann Corporation	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Comprehensive (Loss) Income		F-5
Consolidated Statements of Changes in Equity		F-6
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-10


China Water and Drinks Inc.	Page
Report of Independent Registered Public Accounting Firm		F-39
Consolidated Statements of Operations and Comprehensive Loss		F-40
Consolidated Statements of Cash Flows		F-41
Consolidated Statements of Stockholders’ Equity		F-42
Notes to Consolidated Financial Statements		F-43

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Heckmann Corporation

We have audited the accompanying consolidated balance sheets of Heckmann Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2009 and 2008, and for the period from May 29, 2007 (inception) through December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heckmann Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years ended December 31, 2009 and 2008, and for the period from May 29, 2007 (inception) through December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2010 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.

As discussed in Note 3 to the consolidated financial statements, the Company has restated its financial statements as of December 31, 2009 to correct the accounting for contingent consideration relating to a 2009 business acquisition.

As discussed in Notes 2 and 3 to the consolidated financial statements, during 2009 the provisions of new accounting standards relating to business combinations and noncontrolling interests were adopted.

/s/ GHP Horwath, P.C.

Denver, Colorado

March 11, 2010 (March 14, 2011 as to the effects of the restatement discussed in Note 3)

F-2

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)


	December 31,
	2009			2008
	(Restated Note 3)
ASSETS
Current Assets
Cash and cash equivalents	$	136,050		$	281,683
Certificates of deposit		10,513			10,000
Marketable securities		16,020			—
Accounts receivable, net of allowance of $946 and $10,601 at December 31, 2009 and 2008, respectively		5,873			26,460
Inventory, net		2,896			2,241
Prepaid expenses		865			8,842
Other receivables		3,596			1,548
Due from related party		—			1,381
Income tax receivable		—			969
Other current assets		278			544

Total current assets		176,091			333,668

Property, plant and equipment, net		53,520			15,901
Marketable securities		86,638			38,717
Deposits for acquisitions		—			16,608
Investment in unconsolidated equity investee		4,047			12,964
Investment in UGSI		7,182			—
Intangible assets, net		23,507			29,879
Goodwill		13,598			315,018
Other		406			338

TOTAL ASSETS	$	364,989		$	763,093

LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	19,501		$	9,550
Deferred revenues		3,003			1,209
Accrued expenses		17,675			2,208
Current portion of long term debt		1,398			36
Income taxes payable		—			440
Due to related parties		1,472			963
Deferred income taxes		178			77

Total current liabilities		43,227			14,483
Acquisition consideration payable		1,910			1,910
Long-term debt, less current portion		439			96
Other long term liabilities		6,270			—

Commitments and contingencies
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 and 250,000,000 shares authorized at December 31, 2009 and 2008, respectively: 125,282,740 shares issued and 108,750,650 shares outstanding at December 31, 2009; 126,606,323 shares issued and 110,074,223 outstanding as of December 31, 2008		124			126
Additional paid-in capital		738,190			757,720
Purchased warrants		(4,810	)		(405	)
Treasury stock		(14,000	)		—
Accumulated other comprehensive income		643			89
(Accumulated deficit) retained earnings		(409,166	)		(13,771	)

Total Equity of the Company		310,981			743,759

Noncontrolling interests		2,162			2,845

TOTAL EQUITY		313,143			746,604

TOTAL LIABILITIES AND EQUITY	$	364,989		$	763,093

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

F-3

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share data)


	Year ended December 31,						May 29, 2007 (inception) through December 31, 2007
	2009			2008			May 29, 2007 (inception) through December 31, 2007
Revenue	$	35,975		$	10,507		$	—
Cost of goods sold		26,734			7,247			—

Gross profit		9,241			3,260			—
Operating expenses:
Selling and marketing expenses		3,141			322			—
General and administrative expenses		41,287			3,585			169
Goodwill impairment		357,545			—			—
Fixed asset impairment		6,781			—			—

Total operating expenses		408,754			3,907			169

Loss from operations		(399,513	)		(647	)		(169	)
Interest income, net		3,928			10,940			2,486
Acquisition costs		—			(21,153	)		—
Income from equity method investment		47			4			—
Other, net		(2	)		(174	)		—

(Loss) income before income taxes		(395,540	)		(11,030	)		2,317
Income tax (benefit) expense		(2	)		3,710			1,171

Net (loss) income		(395,538	)		(14,740	)		1,146
Net income (loss) attributable to noncontrolling interest		143			(177	)		—

Net (loss) income attributable to the Company		(395,395	)		(14,917	)		1,146
Deferred interest income, net of taxes, attributable to common stock subject to possible redemption		—			265			(265	)

Net (loss) income attributable to common stockholders	$	(395,395	)	$	(14,652	)	$	881

Net (loss) earnings attributable to common stockholders per share:
Basic and diluted	$	(3.61	)	$	(0.20	)	$	0.03

Weighted average number of shares outstanding:
Basic and diluted		109,575,057			74,853,651			25,305,415

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

F-4

Heckmann Corporation

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)


	Year ended December 31,
	2009			2008			2007
Net (loss) income attributable to common stockholders	$	(395,395	)	$	(14,652	)	$	881
Add back: comprehensive (loss) income attributable to the noncontrolling interest		(143	)		177			—
Deferred interest income, net of taxes, attributable to common stockholders subject to possible redemption		—			(265	)		265

Net (loss) income		(395,538	)		(14,740	)		1,146
Other comprehensive income, net of tax:
Foreign currency translation gain		31			(1	)		—
Unrealized gain on available-for-sale securities		523			90			—

Total other comprehensive income, net of tax		554			89			—

Comprehensive (loss) income, net of tax		(394,984	)		(14,651	)		1,146
Comprehensive loss (income) attributable to noncontrolling interest		143			(177	)		—

Comprehensive (loss) income attributable to the Company	$	(394,841	)	$	(14,828	)	$	1,146

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

F-5

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the period from May 29, 2007 (inception) through December 31, 2009

(In thousands, except share data)


	Total			Common Stock						Additional Paid-In Capital			Purchased Warrants					Treasury Stock				Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income			Non-controlling Interests
	Total			Shares			Amount			Additional Paid-In Capital			Number		Amount			Shares		Amount		Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income			Non-controlling Interests
Balance at May 29, 2007 (inception)		—			—			—			—			—		—			—				—			—			—
Initial capital from founding stockholders’	$	72			14,375,000		$	14		$	58					—					—					—			—
Sale of 54,116,800 units, net of underwriters’ discount and offering expenses (including 16,235,039 shares subject to possible redemption)		401,595			54,116,800			54			401,541					—					—					—			—
Sale of private placement warrants		7,000									7,000					—					—					—			—
Net proceeds subject to possible redemption of 16,235,039 shares		(128,419	)								(128,419	)				—					—					—			—
Redemption of founding stockholders’ shares		(4	)		(845,000	)		(1	)		(3	)				—					—					—			—
Net income		1,146																				$	1,146						—
Deferred interest income, net of taxes, attributable to common stock subject to possible redemption		(265	)																				(265	)					—


Balance at December 31, 2007		281,125			67,646,800			67			280,177			—		—			—		—		881			—			—
Repurchase of shares from dissenting stockholders, net of tax		(8,119	)		(1,021,695	)		(1	)		(8,118	)																	—
Deferred interest income, net of taxes, attributable to common stock subject to possible redemption		265																					265						—
Issuance of common stock related to the China Water and Drinks Inc. acquisition, net of offering costs (including 16,532,100 shares issued and held in escrow see Note 3)		359,971			59,981,218			60			357,243																		2,668
Common stock previously subject to possible redemption		128,418									128,418																		—
Purchase of warrants		(405	)											405,400	$	(405	)												—
Comprehensive loss:
Net (loss) income		(14,740	)																				(14,917	)					177
Unrealized gains from available for sale securities		90																							$	90			—
Foreign currency translation loss		(1	)																							(1	)		—

Comprehensive loss		(14,651	)																										—

F-6

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity—(Continued)

For the period from May 29, 2007 (inception) through December 31, 2009

(In thousands, except share data)


	Total			Common Stock						Additional Paid-In Capital			Purchased Warrants					Treasury Stock					Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income		Non-controlling Interests
	Total			Shares			Amount			Additional Paid-In Capital			Number		Amount			Shares		Amount			Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income		Non-controlling Interests
	(Restated Note 3)									(Restated Note 3)
Balance at December 31, 2008		746,604			126,606,323			126			757,720			405,400		(405	)		—		—			(13,771	)		89		2,845
Purchase of treasury stock		(14,000	)																13,032,098	$	(14,000	)							—
3,361,000 common shares canceled in connection with Settlement and Release Agreement (Note 12)		(28,031	)		(3,361,000	)		(3	)		(28,028	)		—		—			—		—			—			—		—
1,576,577 common shares issued in connection with the Charis/Greer/Silversword acquisition (Note 3)		6,101			1,576,577			1			6,100			—		—			—					—			—		—
Issuance of stock to employees and consultants (Note 10)		1,567			260,840			—			1,567			—		—			—					—			—		—
Purchase of warrants		(4,405	)		—			—			—			6,166,696		(4,405	)		—					—			—		—
Noncontrolling interest in acquired company (Note 3)		672			—			—			—			—		—			—		—			—			—		672
Deconsolidation of Shen Yang Aixin (Note 4)		(1,212	)		—			—			—			—		—			—		—			—			—		(1,212	)
Issuance of 200,000 common shares in connection with Settlement and Release Agreement (Note 12)		831			200,000						831			—		—			—					—			—		—
Comprehensive loss:
Net loss		(395,538	)		—			—			—			—		—			—		—			(395,395	)		—		(143	)
Unrealized gains from available for sale securities		523			—			—			—			—		—			—		—			—			523		—
Foreign currency translation loss		31			—			—			—			—		—			—		—			—			31		—

Comprehensive loss		(394,984	)

Balance at December 31, 2009	$	313,143			125,282,740		$	124		$	738,190			6,572,096	$	(4,810	)		13,032,098	$	(14,000	)	$	(409,166	)	$	643	$	2,162

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

F-7

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)


	For the year ended December 31,						May 29, 2007 (inception) through December 31, 2007
	2009			2008			May 29, 2007 (inception) through December 31, 2007
Operating activities
Net (loss) income	$	(395,538	)	$	(14,740	)	$	1,146
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Interest earned on cash and cash equivalents held in trust		—			(1,256	)		(1,489	)
Deferred taxes		—			312			(72	)
Depreciation		2,674			212			—
Amortization		2,576			397			—
Stock-based compensation		2,894			—			—
Goodwill impairment		357,545			—			—
Write off of other assets		3,933			—			—
Impairment of property, plant and equipment		6,781			—			—
Loss on deconsolidation of Shen Yang (Note 4)		5,341			—			—
Bad debt expense		9,346			—			—
Provision for obsolete inventory		837			—			—
Restructuring costs		540			—			—
Income from equity method investment		(47	)		(4	)		—
Other		79			(3	)		—
Changes in operating assets and liabilities, net of business acquisitions and purchase price adjustments (Note 3):
Accounts receivable		(8,098	)		(2,116	)		—
Inventory		(1,362	)		95			—
Deposits		494			(147	)		—
Other receivables		9			(1,497	)		—
Prepaid expenses		(1,451	)		2,291			(142	)
Accounts payable and accrued expenses		7,943			(1,934	)		113
Deferred revenues		(878	)		694
Acquisition consideration payable		—			(1,060	)		—
Due to related parties		1,277			858			—
Income tax payable		114			(1,381	)		—
Other assets		(1,057	)		—			1,243

Net cash (used in) provided by operating activities		(6,048	)		(19,279	)		799

Investing activities
Payments made in connection with acquisition of China Water (Note 3)		—			(48,337	)		—
Payments made in connection with HWR acquisition, no cash acquired (Note 3)		(16,566	)		—			—
Cash paid for equity investment		(7,182	)		—			—
Payments made in connection with Harbin acquisition, net of cash acquired of $168 (Note 3)		(1,193	)		—			—
Purchase of available-for-sale securities		(148,194	)		(38,501	)		—
Proceeds from sale of available-for-sale securities		85,153			—			—
Purchase of certificates of deposit		—			(10,000	)		—
Purchase of property plant and equipment		(34,802	)		(1,109	)		—
Cash released from trust account		—			403,215			—
Cash held in trust account		—			—			(428,071	)

Net cash (used in) provided by investing activities		(122,784	)		305,268			(428,071	)

F-8

HECKMANN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows—(Continued)

(In thousands)


	For the year ended December 31,						May 29, 2007 (inception) through December 31, 2007
	2009			2008			May 29, 2007 (inception) through December 31, 2007
Financing activities
Payment on long term debt agreements		(278	)		(5	)		—
Borrowings under revolving credit facility		1,983			—			—
Cash paid to repurchase warrants		(4,405	)		(405	)		—
Cash paid to purchase treasury stock		(14,000	)		—			—
Cash paid for equity offering costs		—			(4,859	)		—
Proceeds from note to stockholder		—			—			258
Repayment of note to stockholder		—			—			(258	)
Proceeds from public offering, net		—			—			421,077
Proceeds from issuance of warrants		—			—			7,000
Proceeds from issuance of securities to initial stockholders, net		—			—			67

Net cash (used in) provided by financing activities		(16,700	)		(5,269	)		428,144

Net (decrease) increase in cash		(145,532	)		280,720			872
Cash and cash equivalents—beginning of period		281,683			872			—
Effect of change in foreign exchange rate on cash and cash equivalents		(101	)		91			—

Cash and cash equivalents—end of period	$	136,050		$	281,683		$	872

Non-cash investing and financing activities
Deferred underwriting discounts and commissions paid from Trust account	$	—		$	(19,482	)	$	19,482
Redemption of founding stockholders’ shares	$	—		$	—		$	4
Repurchase of shares from dissenting shareholders paid from Trust account	$	—		$	(8,119	)
Supplemental cash flow information:
Cash paid for interest	$	(17	)	$	—		$	4
Cash paid for income taxes	$	(143	)	$	(5,377	)	$	—

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

F-9

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization and Nature of Business Operations

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 eight 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 (Note 3).

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. 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”) (Note 3).

Effective with the July 1, 2009 acquisition of the Saltwater Disposal and Transport Business, the Company has two reportable segments, which as of December 31, 2009 were referred to as China Water and HWR.

Note 2—Summary of 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.

F-10

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equity Method Investments

Investee entities in which the Company can exercise significant influence, but not control, are accounted for under the equity method of accounting. Whether the Company exercises significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the company’s board of directors and an ownership level of, generally, 20% to 50% of the voting securities of the company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments of the company. Under the equity method of accounting, the Company’s share of the earnings or losses of these companies is included in the equity income (loss) section of the consolidated statements of operations. A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. The Company holds a 48% equity investment in China Bottles Inc. (“China Bottles”) (formerly Hutton Holdings Corporation) through its subsidiary China Water.

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 are accounted for under the equity method and the Company’s income or loss on these investments is recorded in non-operating income or expense.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include revenue recognition, allowance for doubtful accounts, valuation of long-lived assets including identifiable intangibles and goodwill, contingencies and litigation. In the future, the Company may realize actual results that differ from the current reported estimates and if the estimates that the Company has used change in the future, such changes could have a material impact on the Company’s consolidated financial statements.

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.

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

The Company has adopted the United States dollar as its reporting currency. The financial statements of the Company’s foreign subsidiaries are translated into United States Dollars (“USD”) using year-end rates of exchange for assets and liabilities and rates of exchange that approximate the rates in effect at the transaction

F-11

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

date for revenues, expenses, gains and losses. Amounts classified in stockholders’ equity are translated at historical exchange rates. The resulting translation adjustments are not included in determining net income, but are included in foreign exchange adjustment recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity.

Translation rates applied are as follows:


	December 31, 2009		December 31, 2008
Year end RMB : USD exchange rate		6.863		6.854
Year average RMB : USD exchange rate		6.841		6.854
Year end HKD : USD exchange rate		7.755		7.750
Year average HKD : USD exchange rate		7.752		7.751

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Subsequent to December 31, 2009, the RMB foreign exchange rates continued to experience a rise against the USD. Through March 1, 2010, the RMB: USD ratio ranged from a high of 6.877 to a low of 6.771, closing at 6.797 at March 1, 2010 with an average of 6.716.

Concentrations of Customer and Supplier Risk

None of the Company’s customers comprise 10% or more of accounts receivable at December 31, 2009 or 2008.

One customer comprised 57% of revenues for the year ended December 31, 2009 and two customers comprised 12% and 10% of post-acquisition revenues for the period from October 31, 2008 through December 31, 2008, respectively. The Company did not have any customers prior to its acquisition of China Water.

The Company purchased 73% and 47% of its raw materials from five vendors during the year ended December 31, 2009 and the post-acquisition period from October 31, 2008 through December 31, 2008, respectively. The Company believes that alternative vendors could be secured without interruption to operations. The Company did not make raw materials purchases prior to its acquisition of China Water. Both of these concentrations are within the Company’s bottled water products segment.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the United States, China and Hong Kong, with a majority of those balances maintained in USD. Balances at financial institutions or PRC state-owned banks are not covered by insurance. The Company has not experienced any historical losses in such accounts and believes that the risk of any loss is minimal. A majority of the funds held in the United States are invested in one or more institutional money market funds.

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

F-12

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

comprehensive income (loss), a component of stockholders’ 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 also 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 December 31, 2009, the allowance for doubtful accounts was approximately $0.9 million. The table below sets forth (in thousands) a rollforward of the Company’s allowance for doubtful accounts for each period in which we present an audited income statement, except for the period from May 29, 2007 (inception) to December 31, 2007, as the Company did not have an allowance for doubtful accounts during that period:


	Year ended December 31,
	2009			2008
Balance at beginning of period	$	10,601		$	22
Additions: Bad debt expense		9,346			—
Additional allowance established (a)		—			10,579
Less: Write off of uncollectible accounts		(8,399	)		—
Final purchase price adjustment (b)		(10,602	)		—

Balance at end of period	$	946		$	10,601

(a)	This amount represents an additional allowance established by management in connection with the initial purchase price allocation for accounts deemed uncollectible.

(b)	This amount represents the uncollectible accounts receivable written off in connection with the final purchase price allocation adjustment made during the third quarter of 2009 that were not recoverable at the date of acquisition.

Inventories, net

Inventories consist of raw materials to produce plastic bottles, caps and labels, work in progress and finished goods, and are stated at the lower of cost or net realizable value. Cost is determined on a weighted-average cost method. Finished goods are comprised of direct materials, direct labor and a portion of overhead. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. As of December 31, 2009, gross inventories were comprised of approximately $2.6 million of raw materials, $0.5 million of work in process, and $0.6 million of finished goods. As of December 31, 2008, inventories were comprised of approximately $1.8 million of raw materials and $0.4 million of finished goods. The Company performs an analysis of slow-moving or obsolete inventory periodically and any necessary valuation reserves, which could potentially be significant, are included in the period in which the evaluations are completed. Management determined that a reserve for obsolescence of approximately $0.8 million was necessary as of December 31, 2009. No reserve for obsolescence was necessary as of December 31, 2008.

F-13

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property, Plant and Equipment, net

Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or betterments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the consolidated statement of operations. Gains or losses on the disposal of such assets are included in the consolidated statements of operations.

Depreciation is computed using the following estimated useful lives:


Buildings			20-25 years
Motor vehicles			5-10 years
Office equipment			5-10 years
Machinery and equipment			3-15 years

Goodwill and Other Intangible Assets, net

Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired (Note 3). 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 annually during the third quarter of each fiscal year.

However, based on the work performed in connection with the Company’s filing of its quarterly report on Form 10-Q for the quarterly period ended March 31, 2009, management concluded that an impairment loss was probable and could be reasonably estimated. Accordingly, effective March 31, 2009, the Company recorded a $184.0 million non-cash goodwill impairment charge, representing management’s best estimate of the impairment loss at that time. As of March 31, 2009, the purchase price allocation was not considered final, as management, along with the Company’s independent valuation advisors, were still reviewing all of the underlying assumptions and calculations used in the allocation. In October 2009, the Company finalized the assumptions and calculations used in the preliminary purchase price allocation. Management then completed the Company’s second step of its goodwill impairment test, which was begun in April 2009, as disclosed in previous Form 10-Q filings.

As a result of the completion of the second step of the goodwill impairment test, management determined that the implied fair value of goodwill was less than the carrying value of goodwill by approximately $178.5 million, which was recorded as a non-cash goodwill impairment charge in the third quarter of 2009. As of December 31, 2009, remaining goodwill of our China Water reporting unit is $6.3 million (Note 3).

The Company’s amortizable intangible assets include registered trademarks, customer relationships and distribution networks acquired in the acquisition of China Water and HWR (Note 8). These costs are being amortized using the straight-line method over a weighted average estimated useful life of approximately 14 years.

F-14

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting for the Impairment of Long-Lived Assets

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. During the third quarter of 2009, the Company determined that certain of its long-lived assets were impaired resulting in a charge to operations of approximately $6.2 million (Note 7).

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’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense related to unrecognized tax benefits recognized for the years ended December 31, 2009, 2008 or for the period from May 29, 2007 (inception) through December 31, 2007.

Retirement Benefits

PRC regulations mandate companies to contribute funds into the national retirement system managed by the government, which benefits qualified employees based on where they were born within the country. The Company records any required contribution as payroll tax expense. The Company provides no other retirement benefits to its employees. The Company recorded approximately $136,000 and $23,000 of retirement benefits expense for the year ended December 31, 2009 and the post-acquisition period from October 31, 2008, the date the Company acquired China Water, through December 31, 2008, respectively. The Company did not have any retirement benefits expense prior to its acquisition of China Water.

Revenue Recognition

Revenues are recognized when finished products are delivered 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.

All finished products for bottled water sales are delivered to customers directly from plant locations throughout the PRC. Finished product relating to the saltwater disposal and transport business consist of delivery of saltwater, via independent truck haulers, through a water transport pipeline at the disposal wells or at saltwater storage facilities. Certain customers, limited to those under contract with the Company to utilize the pipeline, have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Fixed fees relate to disposal rates are generally based on a fixed fee per barrel of disposal water. Revenue is recognized based on the number of barrels disposed upon delivery. However, as the pipeline was not in commercial operations as of

F-15

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, there were no revenues recognized in 2009 from these contracts. Saltwater disposal and transport revenues recognized in 2009 related solely to delivery of saltwater to the disposal and storage facilities via independent truck haulers, for which customers are not under fixed fee contracts

Taxes Collected From Customers and Remitted to Governmental Authorities

Revenues are recorded net of taxes collected from customers and remitted to governmental authorities.

Shipping and Handling Costs

In accordance with authoritative guidance, shipping and handling costs incurred in bringing finished products or raw materials to our warehouses are capitalized as part of inventory and relieved in cost of sales when a sale occurs. The Company does not bill customers for shipping and handling costs. Shipping and handling costs related to the movement of finished goods from the Company’s warehouses to the customer locations are reflected in selling, general and administrative expenses. Shipping and handling costs amounted to approximately $1,206,500 and $137,500 for the year ended December 31, 2009 and the post-acquisition period from October 31, 2008, the date of the Company’s acquisition of China Water, through December 31, 2008, respectively. Prior to the Company’s acquisition of China Water, its shipping and handling costs were de minimis.

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 during the period. Common equivalent shares result from the assumed exercises of outstanding warrants, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock (the “treasury stock method”). Inherently, stock warrants are deemed to be anti-dilutive when the average market price of the common stock during the period exceeds the exercise prices of the stock warrants. At December 31, 2009, 2008 and 2007, the Company’s dilutive securities include 71,493,593, 76,973,621, and 76,646,800 warrants and options exercisable for common stock. These dilutive securities have been omitted from the computation of dilutive loss per share for the years ended December 31, 2009 and 2008 because the effect would be anti-dilutive. For the period from May 29, 2007 through December 31, 2007, the dilutive securities have been omitted from the computation of dilutive income per share since their exercisability as of December 31, 2007 was contingent upon the latter of November 9, 2008 or the successful completion of a business combination. Also excluded from the computation of EPS are 3,500,000 and 16,532,100 shares held in escrow as of December 31, 2009 and 2008, respectively, pursuant to the majority stockholder consent agreement entered into on May 19, 2008, as amended, in connection with the acquisition of China Water between the Company and Mr. Xu Hong Bin. On March 13, 2009, 13,032,100 of those shares were released from escrow pursuant to an escrow resolution and transition agreement among the Company, China Water, Mr. Xu Hong Bin and his affiliate, and are subject to cancellation by the Company as of May 4, 2009 (Note 12).

For the purpose of the computation of net income per share, shares issued in connection with acquisitions that are returnable are considered contingently returnable shares and although classified as issued, are not included in the basic weighted average number of shares outstanding until all necessary conditions are met that no longer cause the shares to be contingently returnable. These contingently returnable shares are included in the diluted weighted average number of shares as of the beginning of the period in which the conditions were satisfied (or as of the date of the agreement, if later).

F-16

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restructuring and exit activities

Restructuring and exit activities generally include significant actions involving employee-related termination costs, contract termination charges and other charges associated with such actions. Employee-related termination charges are based upon distributed employment policies and substantive severance plans and are reflected in the quarter in which management approves the associated actions. Employee-related amounts for which affected employees are required to render service in order to receive benefits at their termination dates are measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods. Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured at fair value at the time the Company provides notice to the counterparty) or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. During the third quarter of 2009, management approved and committed to undertake certain restructuring actions relating to its Beijing facility. These plans were undertaken, in part, to improve the operational capabilities of China Water. Costs expected to be incurred relating to these actions primarily include employee-related termination costs of $0.1 million and contract termination costs of $0.4 million. The workforce reductions were completed as of December 31, 2009. The Company expects to recognize approximately $0.2 million subsequent to the year ended December 31, 2009.

Reclassifications and Comparability

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

Comprehensive Income

Unrealized gains and losses on the Company’s available-for-sale securities and foreign currency translation adjustments are included in comprehensive income (loss).

Fair Value of Financial Instruments

The carrying amounts of the Company’s cash and cash equivalents, certificates of deposit, marketable securities, accounts receivable, accounts payable, and customer deposits approximate fair value due to the short-term nature of these instruments. The Company’s long-term debt, secured by various properties, bears interest at rates commensurate with market rates and therefore management believes carrying values approximate fair values. 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 (Note 6).

Recently Issued Accounting Pronouncements

Adopted Accounting Standards

Effective January 1, 2009, the Company implemented the Financial Accounting Standard Board’s (“FASB”) revised authoritative guidance for business combinations. This revised guidance requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. Previously, post-acquisition adjustments related to business combination deferred tax asset valuation allowances and liabilities for uncertain tax positions were generally required to be recorded as an increase or decrease to goodwill. The revised guidance does not permit this accounting and, generally, requires any such changes to be recorded in current period income tax expense. Thus, all changes to

F-17

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

valuation allowances and liabilities for uncertain tax positions established in acquisition accounting, regardless of the guidance used to initially account for the business combination, will be recognized in current period income tax expense. The Company accounted for its acquisition of the Salt Water Disposal business on July 1, 2009 and Harbin Taoda on April 11, 2009 in accordance with this guidance (Note 3). Therefore, the adoption of the revised guidance had an impact on the Company’s consolidated financial statements for the year ended December 31, 2009. The nature and magnitude of the specific effects in future periods will depend upon the nature, terms and size of the acquisitions consummated after the authoritative guidance’s effective date of January 1, 2009.

Effective January 1, 2009, the Company adopted the revised authoritative guidance for the accounting treatment afforded preacquisition contingencies in a business combination. Under the revised guidance, an acquirer is required to recognize at fair value an “asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the liability can be determined during the measurement period.” If the acquisition-date fair value cannot be determined, the acquirer must apply the authoritative guidance used to evaluate contingencies to determine whether the contingency should be recognized as of the acquisition date or after the acquisition date. The adoption of the revised guidance will have an impact on the Company’s consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions consummated after the authoritative guidance’s effective date of January 1, 2009.

Effective January 1, 2009, the Company implemented the FASB’s revised authoritative guidance for consolidation, which addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of the revised guidance impacted the Company’s consolidated financial statements, and resulted in the Company reclassifying financial statement line items within its consolidated balance sheets, statements of operations, and statements of stockholders equity for prior periods to conform to this standard.

Effective January 1, 2009, the Company adopted the FASB’s revised authoritative guidance which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Effective April 1, 2009, the Company adopted the FASB’s revised authoritative guidance for fair value measurements which clarifies the measurement of fair value in a market that is not active, and is effective as of the issue date, including application to prior periods for which financial statements have not been issued. The Company also adopted additional authoritative guidance for determining whether a market is active or inactive and whether a transaction is distressed. This guidance is applicable to all assets and liabilities (financial and nonfinancial) and requires enhanced disclosures. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Effective April 1, 2009, the Company adopted authoritative guidance which provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. The adoption of this guidance, which applies to investments in debt securities, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

F-18

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In June 2009, the FASB approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the substance of the Company’s consolidated financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

Recently Issued Accounting Standards

In June 2009, the FASB issued 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. This guidance is effective for years beginning January 1, 2010. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

Note 3—Business Acquisitions (as restated)

Acquisition of Charis Partners, LLC, Greer Exploration Corporation, and Silversword Partnerships

On July 1, 2009 (the “Closing Date”), the Company, through HWR, completed the purchase of all the limited liability company interests of Charis Partners, LLC and all of the assets of Greer Exploration Corporation and Silversword Partnerships pursuant to an asset purchase agreement, dated April 22, 2009, for an initial payment of approximately $23 million consisting of cash totaling $17 million and the issuance of 1,576,577 shares of its common stock (valued at approximately $6.1 million based on the market price of the Company’s common stock as of July 1, 2009) to the various sellers. These assets underlie 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.

In addition to the initial payment, the Company will make quarterly cash payments of $175,000 from July 2009 through April 2012 (totaling $2,100,000) and may be obligated to make additional payments of $10 million upon the achievement of certain financial performance targets in 2010 and 2011. To the extent earned, this contingent consideration will be paid in Company common stock.

Purchase Price

The acquisition was recorded using the acquisition method of accounting in accordance with the authoritative guidance for business combinations.

The estimated purchase price was determined as follows (in thousands):


Cash paid to sellers	$	16,566
Market value of Company common stock issued on the Closing Date		6,101
Cash to be paid to sellers in quarterly installments, fair value		1,784
Acquisition consideration payable		900
Contingent consideration, due on achieving milestones		7,887

Total purchase price	$	33,238

F-19

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contingent consideration arrangement requires the Company to pay an additional amount not to exceed $10 million in common stock in the event that specified profitability targets are achieved. As of December 31, 2009, the total number of shares that would be issued under this arrangement would be approximately 2.0 million shares based on the quoted market price of the Company’s common stock. The fair value of the contingent consideration at the Closing Date was determined to be approximately $7.9 million using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the authoritative guidance for fair value measurements. (Note 6). The key assumptions in applying this approach were the discount rate and the probability assigned to the performance targets being achieved. In accordance with the authoritative guidance for business combinations, the contingent consideration is considered to be a liability and accordingly approximately $4.2 million was included in accrued liabilities and approximately $3.7 million was included in other long term liabilities as of December 31, 2009.

The allocation of the purchase price is based on management’s and its independent valuation advisors’ determination of the fair value of tangible and intangible assets acquired and liabilities assumed as of the Closing Date. The following table summarizes the allocation of the purchase price (in thousands):


	Estimated Fair Value			Estimated Useful Life
Inventory	$	1,102
Fixed Assets		6,106			Various
Customer relationships		1,741			9 years
Customer contracts		17,352			15-17 years
Disposal permits		110
Goodwill		7,259
Deferred income tax liabilities		(432	)

Total estimated initial purchase price allocation	$	33,238

The goodwill related to the acquisition was approximately $7.3 million as of December 31, 2009. Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and relates to the economies of scale expected from the acquisition. Of the $7.3 million recorded as goodwill, none is expected to be deductible for tax purposes.

The accompanying consolidated statements of operations for the year ended December 31, 2009 reflect the operating results of the HWR assets since the date of the acquisition. The amount of revenue and net income attributable to the acquisition included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2009 are approximately $3.8 million and approximately $0.9 million, respectively. For the year ended December 31, 2009, the Company’s consolidated results of operations include acquisition-related expenses of approximately $0.2 million, which are included in general and administrative expenses.

The Company has prepared the following unaudited pro forma financial statement information to compare results of the periods presented assuming the acquisition had occurred as of the beginning of each period presented. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be an indicator of the results of operations that would have actually resulted had the acquisition occurred at the beginning of each of the periods presented, or of future results of operations. Assuming the HWR acquisition occurred as of the beginning of each period presented, the pro forma unaudited results of operations would have been as follows for the years ended December 31, 2009 and 2008.

F-20

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Year ended December 31,
	2009			2008
Revenue (in thousands)	$	39,675		$	17,507
Net loss (in thousands)	$	(394,538	)	$	(12,740	)
Net income (loss) per share—basic and diluted	$	(3.60	)	$	(0.17	)

Restatement

Subsequent to the issuance of the Company’s December 31, 2009 consolidated financial statements, the Company determined that it had incorrectly reported the contingent consideration arrangement as equity as opposed to a liability. Therefore, the Company has restated the consolidated financial statements as of December 31, 2009 in this Annual Report on Form 10-K/A. The Company determined there was no significant change in the fair value of this liability from the acquisition date through December 31, 2009 and therefore this restatement had no impact on the statements of operations, comprehensive income (loss), or cash flows for the year ended December 31, 2009.

The adjustments identified in connection with the reclassification of the contingent consideration from equity to a liability resulted in a decrease in additional paid-in capital of $7,887 and the recognition of a liability of $7,887 as of December 31, 2009. Of this liability, approximately $4.2 million was classified as a current liability as it relates to the profitability target for 2010. Approximately $3.7 million relates to the profitability target for 2011 and was therefore classified as a long term liability.

Acquisition of China Water

On October 30, 2008, the Company acquired China Water via a merger transaction. The results of China Water’s operations have been included in the consolidated financial statements of the Company since that date. The aggregate purchase price was approximately $412.5 million, including approximately $45.2 million of cash, common stock valued at approximately $362.3 million and acquisition costs of approximately $5 million. The value of the Company common stock issued to effect the business combination was determined based on the five day trading range beginning two days before a material change to the terms of the China Water acquisition were agreed to and announced on September 26, 2008. The primary reasons leading to the acquisition of China Water are the growth opportunities in the consumption of bottled water in China and China Water’s well-established bottled water platform in the PRC.

In connection with the acquisition of China Water and in order to secure Mr. Xu Hong Bin’s (“the Consenting Shareholder”) obligations under the terms of a majority stockholder consent agreement entered into by the Consenting Shareholder and the Company in connection with the China Water acquisition, the Company placed 16,532,100 shares of the Company’s common stock, issued to the Consenting Shareholder, into escrow. These contingently returnable shares were excluded from the calculation of the purchase price because, as of December 31, 2008, the outcome of the representations and warranties was not determinable beyond a reasonable doubt. Under the terms of the majority shareholder consent agreement, and amendments thereto, the escrow period was originally to extend until March 30, 2010.

A preliminary allocation of the purchase price of China Water to the estimated fair values of the assets acquired and liabilities assumed was made and recorded during the period ended December 31, 2008. The preliminary allocation of the purchase price, including the evaluation and allocation to identifiable intangible assets and allocation to goodwill resulting from the acquisition, was made by the Company’s management and its independent valuation advisor.

F-21

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In the third quarter of 2009 the Company finalized the assumptions and calculations used in its preliminary purchase price allocation.

The following table summarizes the preliminary and final allocation of the fair value of the assets acquired and liabilities assumed in the acquisition of China Water, including the goodwill impairment charge of $357,545,000 recorded in the nine months ended September 30, 2009. (in thousands):


	Preliminary Purchase Price allocation at October 31, 2008		Final Purchase Price allocation at September 30, 2009
Cash	$	1,741	$	1,741
Accounts receivable, net		24,344		7,692
Inventories		2,336		2,336
Prepaid expenses		11,275		4,342
Other assets		2,489		1,263
Property plant and equipment		15,537		13,089
Deposits		16,461		1,520
Investment in equity investee		12,960		4,000
Intangible assets		30,513		7,269
Goodwill		315,260		6,341

Total assets	$	432,916	$	49,593

Accounts payable and accrued liabilities	$	13,358	$	16,036
Other liabilities		7,050		7,050

Total liabilities assumed	$	20,408	$	23,086

Total fair value of the net assets acquired	$	412,508	$	26,507

The Company’s goodwill balance and changes in the carrying amount of goodwill are as follows (in thousands):


Ending balance, December 31, 2008	$	315,018
Purchase price adjustment to record a reduction to deposits for acquisitions		10,811
Purchase price adjustment in connection with cancelling 12,027,900 shares issued in connection with the China Water acquisition		(100,313	)
Preliminary estimated impairment loss		(184,000	)
Other		(182	)

Ending balance, March 31, 2009		41,334
Adjustment in connection with cancelling 12,027,900 shares issued in connection with the China Water acquisition reflecting 3,361,000 shares actually cancelled (Note 13)		72,282
Carrying value in excess of fair value of certain acquired assets and assumed liabilities		31,618
Carrying value in excess of fair value of property plant and equipment and intangible assets		25,692
Carrying value in excess of fair value of investment in equity investee		8,960
Non-cash impairment loss		(173,545	)

Goodwill in connection with the acquisition of China Water		6,341
Goodwill recorded in connection with the acquisition of the Saltwater Disposal Business		7,257

Ending balance, December 31, 2009	$	13,598

In March 2009, the Company recorded a purchase accounting adjustment of approximately $100.0 million to reflect approximately 12.0 million shares of Company common stock previously issued in connection with its acquisition of China Water that are now subject to cancellation (although the Company intends to cancel a total of approximately 15.5 million shares of common stock issued in connection with the merger, the purchase price

F-22

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

adjustment was only affected by the cancellation of 12.0 million shares because the remaining 3.5 million shares subject to cancellation were originally excluded from the purchase price as escrowed contingently returnable shares). Consequently, the Company reduced equity by approximately $100.0 million for the value of the shares as of the date of acquisition and reduced goodwill by the same amount. In March 2009, the Company also recorded a purchase accounting adjustment of approximately $10.8 million to reduce deposits for acquisitions and increase goodwill by the same amount. The Company recorded these deposits in its initial purchase price allocation, however subsequent to the issuance of its December 31, 2008 consolidated financial statements the Company determined that these deposits were not recoverable at the date of acquisition. Based on the work performed in connection with filing of the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2009, management concluded that an impairment loss was probable and could be reasonably estimated. Accordingly, effective March 31 2009, the Company recorded a $184.0 million non-cash goodwill impairment charge, representing management’s best estimate of the impairment loss. As of March 31, 2009, the purchase price allocation was not considered final as management, along with the Company’s independent valuation advisors, were still reviewing all of the underlying assumptions and calculations used in the allocation.

In October 2009, the Company finalized the assumptions and calculations used in the preliminary purchase price allocation. In the process of finalizing the preliminary allocation management considered further declines in projected sales volumes and cash flow projections, a revised lower outlook for China Water’s operating results, and pending litigation between the Company and Xu Hong Bin (Note 12), the former President and Chairman of China Water. As a result, management determined that its initial purchase price allocation for certain acquired assets and assumed liabilities, were not recoverable at the date of acquisition. In addition, management, along with the Company’s independent valuation advisors, finalized the valuations of property, plant and equipment intangible assets, and the investment in equity investee. Accordingly, the Company reduced estimated values for certain acquired assets and assumed liabilities, property plant and equipment and intangible assets, and the investment in equitee investee by, approximately $36.6 million, $25.7 million, and $9.0 million, respectively and increased goodwill. Management then completed the Company’s second step of its goodwill impairment test, which was begun in April 2009, as disclosed in previous Form 10-Q filings. The second step of the goodwill impairment test involved determining the implied fair value of goodwill by allocating the fair value to all assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill.

Management determined that the implied fair value of goodwill was less than the carrying value of goodwill by approximately $178.5 million, which was recorded as a non-cash goodwill impairment charge in the third quarter of fiscal 2009. As of September 30, 2009, remaining goodwill of our China Water reporting unit is $6.3 million. The goodwill impairment charge was recorded in operating expenses during the third quarter of fiscal 2009.

Acquisition of Harbin Taoda Drinks, Ltd.

The Company acquired 67% of Harbin Taoda, a bottled water manufacturer located in Harbin Province, China, on April 1, 2009. The results of Harbin Taoda are included in the Company’s consolidated financial statements from the date of acquisition. The aggregate purchase price of $1.3 million consisted primarily of accounts receivable and property and equipment. There was no goodwill associated with the acquisition.

Note 4—Deconsolidation

In August 2007, Pilpol, a Hong Kong company and an indirect wholly-owned subsidiary of China Water, entered into a stock purchase agreement with Haoyang Bian, pursuant to which Mr. Bian agreed to sell to Pilpol 67% of the equity interests of ShenYang Aixin Company Limited, a company formed in accordance with the laws of the PRC (“ShenYang Aixin”). In September 2007, Shenyang Yuchinchuan Economic and Trade Limited, a company formed in accordance with the laws of the PRC (“Yuchinchuan”), became the sole equity holder of

F-23

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ShenYang Aixin. At such time, Haoyang Bian owned 90% of the equity of Yuchinchuan. In October 2007, ShenYang Aixin was converted into a Sino-foreign equity joint venture company and Pilpol and Yuchinchuan entered into a cooperative joint venture agreement (the “CJV Agreement”). In December 2007, Pilpol, Haoyang Bian and Yuchinchuan entered into an amendment to the stock purchase agreement to, among other things, memorialize the foregoing and to confirm the sale by Yuchinchuan to Pilpol of 67% of the equity interests of ShenYang Aixin.

The CJV Agreement provided Pilpol with the right to 67% of the profits of ShenYang Aixin and with financial and operational control of ShenYang Aixin’s factory, provided that such right to profits and control would expire if, by an agreed date, Pilpol had not directly purchased 67% of ShenYang Aixin. As of September 30, 2009, management made the decision not to directly purchase the interest in ShenYang Aixin and, consequently, Pilpol no longer has financial and operational control of ShenYang Aixin.

As a result, and effective September 30, 2009, the Company deconsolidated ShenYang Aixin. The deconsolidation was attributable to other than a nonreciprocal transaction and accordingly a loss of $5.3 million was recorded in the twelve months ended December 31, 2009 that represents the aggregate of the carrying amount of the noncontrolling interest and the carrying amount of ShenYang Aixin’s net assets as of the date of deconsolidation, which is included in general and administrative expenses in the statement of operations. The fair value of the retained non-controlling interest in ShenYang Aixin was determined to be zero as of the date of deconsolidation (Note 6).

Note 5—Investments

The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for sale securities as of December 31, 2009 and 2008 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
December 31, 2009
Held-to-maturity:
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

			$	101,620	$	1,092	$	54	$	102,658

December 31, 2008
Held-to-maturity:
Certificates of deposit		1	$	10,000		—		—	$	10,000

Available-for-sale:
Noncurrent:
U.S. Government Agencies		2	$	28,288	$	85		—	$	28,373
Corporate Notes		2		10,339		5				10,344

			$	38,627	$	90		—	$	38,717

F-24

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Scheduled maturities of available-for-sale and held to maturity securities as of December 31, 2009 are as follows (in thousands):


	Amortized Cost		Fair Value
2010	$	26,331	$	26,533
2011		73,251		74,122
2012		12,551		12,516

	$	112,133	$	113,171

Investment in 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.

Note 6—Fair Value Measurements

Effective January 1, 2008, the Company adopted the authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value under United States generally accepted accounting principles, and expands disclosures about fair value measurements. The Company measures certain assets at fair value and thus there was no impact on the Company’s consolidated financial statements upon adoption of the guidance, other than the additional disclosure requirements. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

•

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

•

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

•

Level 3: Unobservable inputs are used when little or no market data is available.

F-25

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2009, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value (in thousands):


	December 31, 2009		Significant Other 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		49,189		49,189		—		—
Corporate Notes		52,436		52,436		—		—
U.S. Government Securities		1,033		1,033		—		—

Total	$	113,171	$	113,171	$	—	$	—

Liabilities:
Contingent consideration (restated, Note 3)	$	7,887	$	—	$	—	$	7,887

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 are summarized below (in thousands):


	Impairment Charge		New Cost Basis		Level Used to Determine New Cost Basis
	Impairment Charge		New Cost Basis		Level 1	Level 2	Level 3
Goodwill	$	357,545	$	6,341			$	6,341
Equity method investment in ShenYang		1,212		—				—
Property, plant and equipment		6,781		—				—

The Company recognized a non-cash charge of approximately $357.5 million during the year ended December 31, 2009 related to the impairment of goodwill applicable to the acquisition of China Water. The carrying value of the asset prior to the impairment was approximately $363.9 million (including purchase price adjustments of approximately $54 million) (Note 3). The estimated fair value of the asset at December 31, 2009 is approximately $6.3 million and was based on Level 3 inputs. The fair value of the China Water assets was estimated using a discounted cash flow model, considering future anticipated revenues, operating costs, a risk adjusted discount rate, and other factors.

The Company recognized an other-than-temporary decline of $1.2 million respective of the retained non-controlling interest in ShenYang. Subsequent to the deconsolidation of ShenYang, management determined that the retained non-controlling interest was of no value and accordingly fully-impaired this asset as of September 30, 2009. This expense was included in operations for the twelve month period ended December 31, 2009.

The Company also recognized an impairment charge of $6.8 million relating primarily to construction in process of $3.8 million and property, plant and equipment associated with exiting its Beijing facility of $2.4 million. Management determined that the carrying amount of these assets could not be recovered as of September 30, 2009 and in management’s judgment these assets were fully-impaired. This expense was included in operations for the twelve month period ended December 31, 2009.

F-26

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective January 1, 2009, the Company implemented the authoritative guidance for nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. As the Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be remeasured at fair value, the adoption of this guidance did not have a material impact on the financial position or results of operations. However, it could have an impact in future periods. In addition, the Company may have additional disclosure requirements in the event it completes an acquisition or incurs asset impairment in future periods.

Note 7—Property, Plant and Equipment, net

Property, plant and equipment consist of manufacturing facilities and equipment owned and operated in China as well as the Company’s water transport pipeline in Texas and Louisiana as follows as of December 31, 2009 and 2008 (in thousands):


	Year ended December 31,
	2009		2008
At cost:
Buildings	$	4,312	$	4,409
Machinery and equipment		23,936		8,770
Motor vehicles		859		336
Office equipment		744		297

		29,851		13,812

Less: accumulated depreciation
Buildings		63		25
Machinery and equipment		2,831		157
Motor vehicles		249		10
Office equipment		130		20

		3,273		212

Construction in process		26,942		2,301

Plant and equipment, net of accumulated depreciation	$	53,520	$	15,901

Depreciation expense for the year ended December 31, 2009 and for the two months ended December 31, 2008 was approximately $2,674,000 and $212,000, respectively. Of the $2,674,000 in depreciation expense for the year ended December 31, 2009, approximately $1,986,000 was recorded in cost of goods sold and approximately $688,000 was recorded in general and administrative expense, respectively. Of the $212,000 in depreciation expense for the two months ended December 31, 2008, approximately $168,000 was recorded in cost of goods sold and approximately $44,000 was recorded in general and administrative expense, respectively.

F-27

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 8—Intangible Assets

Intangible assets consisted of the following as of December 31, 2009 and 2008 (dollars in thousands):


	Weighted- Average Amortization (in years)		Gross Carrying Amount		Accumulated Amortization			Intangible Assets, net
As of December 31, 2009:
Trade name and trademarks		20	$	3,602	$	(723	)	$	2,879
Customer relationships		7		1,928		(204	)		1,724
Distribution network		7		3,480		(2,028	)		1,452
Disposal permits		10		111		(11	)		100
Customer contracts		15-17		17,352		—			17,352

		13	$	26,473	$	(2,966	)	$	23,507

As of December 31, 2008:
Trade name and trademarks		20	$	6,020	$	(50	)	$	5,970
Customer relationships		7		2,482		(59	)		2,423
Distribution network		7		22,010		(524	)		21,486

		8	$	30,512	$	(633	)	$	29,879

Estimated amortization expense of the next five years and thereafter is as follows (in thousands):


2010	$	1,701
2011		1,701
2012		1,701
2013		1,701
2014		1,701
Thereafter		15,002

Total	$	23,507

Amortization expense for year ended December 31, 2009 and for the two months ended December 31, 2008 was $2,576,000 and $397,000, respectively.

Note 9—Note Payable to Affiliate and Related Party Transactions

In 2007, Mr. Richard J. Heckmann, Chairman of the Board and Chief Executive Officer of the Company, loaned $258,300 to the Company to fund a portion of the expenses owed to third parties. The loan accrued interest at a rate of 3.60% per year and became payable upon the consummation of the Company’s initial public offering. The note was fully repaid on November 16, 2007, including accrued interest of $4,153.

In 2007, Mr. Heckmann was also paid a monthly fee of $10,000, beginning upon the consummation of the Offering, for certain administrative services, including office space, utilities, and secretarial support. This arrangement was solely for the Company’s benefit and was not intended to provide its officers with compensation in lieu of salary. These payments ceased effective with the Company’s acquisition of China Water on October 30, 2008.

F-28

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On November 16, 2007, Heckmann Acquisition, LLC, an entity owned and controlled by Mr. Heckmann, purchased 5,000,000 sponsor warrants at a price of $1 per warrant. Subsequently, the 5,000,000 sponsor warrants held by Heckmann Acquisition, LLC were transferred to Heckmann Enterprises, Inc., an entity owned and controlled by Mr. Heckmann. In addition, on November 16, 2007, 2,000,000 sponsor warrants were sold to our directors other than Mr. Heckmann for an aggregate purchase price of $2,000,000.

During 2009 the General Manager of Harbin Toada Drinks, Ltd., loaned approximately $1.3 million to the Company to fund the purchase of new equipment for the Harbin and Changsha factories. The Company plans to repay this amount in 2010.

Note 10—Equity and Stock-Based Compensation

Founders’ Units

On June 21, 2007, the Company sold 14,375,000 units for an aggregate purchase at a price of $71,875 or $0.005 per unit, to the Company’s founders. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock. Upon the consummation of the Offering and the partial exercise of the over-allotment option by the underwriters, 845,000 units were redeemed for $4,225. Of the remaining founders’ units and net of redemption, 13,152,746 founders’ units were issued to Heckmann Acquisition, LLC.

Initial Public Offering

On November 16, 2007, the Company sold 54,116,800 units (“Units”) in its initial public offering at a price of $8.00 per Unit and received proceeds of $428,071,040, net of underwriting discounts and commissions of $10,823,360 (including $19,482,048 of deferred underwriting discounts and commissions placed in the trust account pending completion of a business combination). Each Unit consists of one share of the Company’s common stock, $.001 par value, and one redeemable common stock purchase warrant (“Warrant(s)”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $6.00 per share commencing on November 9, 2008. The Warrants will expire on November 9, 2011 or earlier upon redemption. The Company may redeem the Warrants for a redemption price of $0.01 per Warrant at any time if notice of not less than 30 days is given and the last sale price of the Company’s common stock has been at least $11.50 on 20 of the 30 trading days ending on the third day prior to the day on which notice is given. All Warrants that were issued in the Offering are still outstanding and unexercised.

In accordance with the warrant agreement related to the Warrants, the Company is required to use its best efforts to effect the registration of the shares of common stock underlying the Warrants. The Company has satisfied this obligation. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such Warrant shall not be entitled to exercise such Warrant and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the Warrants may expire unexercised and unredeemed.

Sponsors’ Warrants

Preceding the Company’s initial public offering, the initial stockholders of the Company purchased an aggregate of 7,000,000 warrants at $1.00 per warrant from the Company in a private placement offering. The warrants sold in the private placement were identical to the Warrants sold in the Company’s initial public

F-29

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

offering except that the initial stockholders’ warrants are not redeemable by the Company as long as they are held by the initial stockholders. The initial stockholders’ warrants are entitled to registration rights and the Company has satisfied its obligations with respect thereto. The 7,000,000 warrants are all still outstanding and unexercised.

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At December 31, 2009, no shares of preferred stock were outstanding.

Stock Options

In May 2009, the Company’s stockholders approved the Heckmann Corporation 2009 Equity Incentive Plan (the “2009 Plan”), under which 5,000,000 shares of common stock have been authorized for issuance. The 2009 Plan provides for the grant of 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 with up to a 10-year contractual life.

On August 13, 2009, the Company granted 520,000 common stock options under the terms of the 2009 Plan, all of which vest over a three year service period. The Company estimates the fair value of stock options granted to employees using a Black-Scholes option-pricing model. The assumptions used to estimate the fair value of stock awards granted in the year ended December 31, 2009 are as follows:


Volatility	33.9	%
Expected term (years)	4.5
Risk free interest rate	3.49	%
Expected dividend yield	0.0	%

Stock-based compensation expense is included in general and administrative expense in the statement of operations and totals approximately $136,200 for the year ended December 31, 2009.

As of December 31, 2009, there was approximately $0.9 million of unrecognized compensation expense for stock options, which is expected to be recognized over a weighted-average period of approximately 2.6 years. There were no stock options exercisable at December 31, 2009.

Following is a summary of stock option activity through December 31, 2009 under the 2009 Plan:


	Underlying Shares		Weighted Avg. Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value as of December 31, 2009
	(In thousands, except per share data)
Outstanding at December 31, 2008		—		—
Granted		520	$	3.98
Exercised		—		—
Cancelled		—		—
Outstanding at December 31, 2009		520	$	3.98		9.6	$	525,200
Exercisable at December 31, 2009		—		—		—		—
Vested or Expected to Vest at December 31, 2009		—		—		—		—

F-30

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted-average fair value of options granted in the year ended December 31, 2009 was $2.04 per share. The aggregate intrinsic value of options at December 31, 2009 is based on the Company’s closing stock price on December 31, 2009 of $4.99.

Restricted Common Stock

During the year ended December 31, 2009, approximately 600,000 shares of time-vesting restricted common stock were granted to employees at a grant date fair value of $4.20 per share and 378,330 shares vested. The Company issued 260,840 shares to its employees and consultants as the vested shares were issued net of the number of equivalent shares required to pay related payroll taxes. For the year ended December 31, 2009, the Company recorded $1,841,568 of stock based compensation related to these shares of restricted common stock resulting in an increase to equity of approximately $1.4 million net of shares withheld to pay payroll taxes. At December 31, 2009, there was approximately $363,400 of unrecognized compensation expense related to non-vested shares. This cost is expected to be recognized over a weighted average period of 1.1 years.

Stock and Warrant Repurchase Program

On October 30, 2008, the Company announced that its board of directors approved a discretionary equity buy-back plan for the repurchase of the Warrants. Under the plan, the Company may purchase Warrants in open market and in private transactions through December 31, 2009. In August 2009, the Board of Directors approved a one-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. Through December 31, 2009, no shares of the Company’s common stock were purchased. Through December 31, 2009 the Company purchased 6,572,096 warrants for cash of $4,810,000, which have been recorded in a manner similar to treasury stock using the cost method.

Note 11—Income Taxes

The Company’s provision for income taxes consists of (in thousands):


	Year ended December 31,						May 29, 2007 (inception) to December 31, 2007
	2009			2008
Current income tax expense:
Federal	$	649		$	2,242		$	1,038
State		25			740			205
Foreign		—			416			—

Total current	$	674		$	3,398		$	1,243

Deferred income tax expense:
Federal		(754	)		390			(72	)
Foreign		78			(78	)		—

Total deferred	$	(676	)	$	312		$	(72	)

Total income tax expense	$	(2	)	$	3,710		$	1,171

F-31

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The difference between the actual income tax expense and that computed by applying the United States federal income tax rate of 35% to pretax income is summarized below:


	Year ended December 31,						May 29, 2007 (inception) to December 31, 2007
	2009			2008
U.S. federal income tax		35.00	%		35.00	%		35.00	%
U.S. personal holding company tax		0.00	%		0.74	%		9.75	%
State and local income taxes net of federal Benefit		5.24	%		7.38	%		5.79	%
Unrealized loss on subsidiary		0.00	%		-5.45	%		0.00	%
Unrealized gain on foreign subsidiary		0.00	%		4.66	%		0.00	%
Foreign tax rate difference		1.23	%		0.96	%		0.00	%
Effect of tax holiday		-1.38	%		1.89	%		0.00	%
Transaction costs		-0.15	%		-76.66	%		0.00	%
Minority interest		0.00	%		-0.54	%		0.00	%
Tax-exempt interest income		0.00	%		0.93	%		0.00	%
Impairment and amortization		-36.83	%		-1.59	%		0.00	%
Valuation Allowance		-2.93	%		0.00	%		0.00	%
Other		-0.18	%		-0.42	%		0.00	%

Effective tax rate		0.00	%		-33.10	%		50.54	%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2009 and December 31, 2008 are shown below (in thousands):


	2009			2008
Deferred tax assets
Other	$	64		$	—
Reserves		4,364			—
Net operating losses		8,288			79

Total	$	12,716		$	79
Valuation Allowance		(11,809	)		—

Total deferred tax assets	$	907		$	79

Deferred tax liabilities
Prepaids	$	(79	)	$	(77	)
Fixed Assets and Intangibles		(151	)		—
Unrealized gains		(423	)		—
Contingent Payments		(432	)		—

Total deferred tax liabilities	$	(1,085	)	$	(77	)

Net deferred tax asset / (liability)	$	(178	)	$	2

The Company has domestic and foreign net operating loss carryfowards that were generated in the years ended December 31, 2009 and 2008. The net operating loss carryforwards are recorded as a deferred tax asset of approximately $8,288,000. Of this total, approximately $1,065,000 of the deferred tax asset relates to United States net operating losses that can be carried forward to December 31, 2030 and approximately $5,376,000 of the deferred tax asset relates to net operating losses that were generated in the PRC Subsidiaries and can be carried forward 5 years to the years ending December 31, 2014. Approximately $1,847,000 of the deferred tax

F-32

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

asset relates to net operating losses that were generated in the Hong Kong subsidiaries which can be carried forward indefinitely.

Currently, it is management’s intention to reinvest all the income attributable to the Company earned by its operations outside the United States of America. Determination of the amount of unrecognized tax liability related to these earning is not practicable.

Under the current laws of the BVI, dividends and capital gains arising from the Company’s investments in the BVI through BVI subsidiaries are not subject to income taxes and no withholding tax is imposed on payments of dividends by the Company.

A 17.5% Hong Kong corporate income tax has been provided in the financial statements for the Hong Kong subsidiaries.

Beginning January 1, 2008, a new Chinese Enterprise Income Tax (“EIT”) law replaced the prior laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33% rate that was applicable prior to 2008 to both DES and FIEs.

The following table displays the statutory and effective tax rates for each PRC Subsidiary. ShenYang Aixin is included because prior to its deconsolidation it was a subsidiary of the Company (Note 4):


	Expiration of Tax	Statutory Tax Rate (%) Years Ending						Effective Tax Rate (%) Years Ending
		2009			2008			2009			2008
Heckmann Corporation	N/A		35.00	%		35.00	%		-0.07	%		-33.10	%
China Water and Drinks, Inc.	N/A		35.00	%		35.00	%		-0.07	%		-33.10	%
Heckmann Water Resources Corporation	N/A		35.00	%		N/A			-0.07	%		N/A
Gain Dynasty Investments Limited	N/A		0.00	%		0.00	%		0.00	%		0.00	%
Fine Lake International Limited	N/A		0.00	%		0.00	%		0.00	%		0.00	%
Olympic Forward Trading Company Limited	N/A		17.50	%		17.50	%		0.00	%		0.00	%
Pilpol (HK) Biological Limited	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Guangdong Taoda Drink Co., Limited	FY 2007		25.00	%		25.00	%		12.50	%		12.50	%
Changchun Taoda Beverage Co., Limited	FY 2007		25.00	%		25.00	%		12.50	%		12.50	%
Shandong Olympic Forward Drink Co., Limited	FY 2007		25.00	%		25.00	%		12.50	%		12.50	%
Nanning Taoda Drink Company	FY 2007		25.00	%		25.00	%		12.50	%		12.50	%
Shen Yang Aixin Industry Co., Limited	N/A		25.00	%		25.00	%		25.00	%		25.00	%
Favor Start Investments Limited	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Prosper Focus Enterprise Ltd.	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Guangzhou Grand Canyon Pure Distilled Water Co., Ltd.	N/A		25.00	%		25.00	%		25.00	%		25.00	%
Dynamic Castle Holdings Limited	N/A		0.00	%		0.00	%		0.00	%		0.00	%
Caesar Holdings Limited	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Beijing Changchun Taoda Drink Co., Ltd.	N/A		25.00	%		25.00	%		25.00	%		25.00	%
Jewell Success Limited	N/A		0.00	%		0.00	%		0.00	%		0.00	%
Harmony Polo Development Ltd.	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Changsha Rongtai Packing Containers Co., Ltd.	N/A		25.00	%		25.00	%		25.00	%		25.00	%
China Water Drinks (H.K.) Holdings Ltd.	N/A		17.50	%		17.50	%		17.50	%		17.50	%
Harbin Taoda Drinks, Ltd.	N/A		25.00	%		25.00	%		25.00	%		25.00	%
China Water (Xian) Drinks Co. Ltd.	N/A		25.00	%		25.00	%		25.00	%		25.00	%

F-33

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company had only United States operations in 2007 with an effective tax rate of 50.5%

Note 12—Commitments and Contingencies

Operating Leases

The Company leases office and warehouse space, machinery and other equipment under noncancellable operating lease agreements which expire at various dates through 2014. These leases generally contain scheduled rent increases or escalation clauses, renewal options, or in some cases, purchase options.

Rental expense incurred for noncancellable operating leases was approximately $1,442,000 and $238,000 for year ended December 31, 2009 and the two months ended December 31, 2008, respectively.

At December 31, 2009, future minimum lease payments under operating leases are as follows (in thousands):


Year ending December 31,
2010	$	1,919
2011		1,344
2012		319
2013		105
2014		4

Total future minimum lease payments	$	3,691

Environmental Liabilities

In accordance with the requirements of the PRC’s Environmental Protection Law, the Company has installed required environmental protection equipment, adopted advanced 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.

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 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 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 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.

F-34

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. The Court ruled that evidentiary questions of fraud and the voidabilty of contract will remain for later proceedings and trial. The Court also denied Xu’s motion to dismiss the Company’s 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 has 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.

The outcome of the litigation with Xu Hong Bin is not known at this time. The Company and Xu Hong Bin each have made various claims. However, if the results of the litigation are resolved in favor of Xu Hong Bin, the remaining 3,500,000 of Xu’s contingently returnable shares will be released from escrow pursuant to the terms of the Majority Stockholder Consent Agreement more fully described in Note 3 to the attached Consolidated Financial Statements. Since these shares were excluded from the calculation of the purchase price of China Water and because the goodwill resulting from this acquisition has been substantially impaired (as previously disclosed), the issuance of these contingently returnable shares from escrow may have a significant negative impact on the Company’s consolidated financial statements if the result of the litigation was not favorable to the Company. In such hypothetical situation, the financial impact could equal 3,500,000 times the market price of our common shares on the date of such resolution. At this time, the litigation has not gone to trial, nor has the judge rendered any dispositive order in the matter.

In a companion action also filed in the Delaware Court of Chancery, Xu is seeking an order for legal fee expense reimbursement as a former director for now having to defend against the Company’s countersuit. On December 29, 2009, the Court ruled that reasonable conditions set by our Board of Directors must be met before Xu is entitled to any expense reimbursement, including the condition that Xu provide an irrevocable $900,000 letter of credit in favor of the Company should Xu ultimately not be entitled to reimbursement. As of March 10, 2010, Xu had not posted the letter of credit and the Company has not advanced any monies for legal fee expense reimbursement.

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.

F-35

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13—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. Management 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 Note 2. The Company’s two reportable segments were referred to as China Water and HWR. The HWR segment includes a network of water disposal, treatment, and pipeline transport facilities in Texas and Louisiana. As of December 31, 2009, the China Water segment includes a variety of consumer beverage products including natural mineral water, spring water, purified, flavored, and oxygenated water. Upon the establishment of the Company’s joint venture with Energy Transfer Partners, L.P. on February 9, 2010 (Note 15) the Company began referring to its China Water segment as its international segment and its HWR segment as its domestic segment which includes HWR and the joint venture.

The tables below summarize information about reported segments for 2009, 2008, and 2007 (in thousands):


	China Water		HWR		Corporate		Total
Year Ended December 31, 2009
Sales	$	32,155	$	3,820	$	—	$	35,975
Gross profit		7,521		1,720		—		9,241
Depreciation and amortization		4,544		706				5,250
Interest income		—		—		3,928		3,928
Capital expenditures		14,832		26,747		—		41,579
Investment in equity method investee		4,047		—		—		4,047
Goodwill		6,341		7,257		—		13,598
Total assets		56,541		63,996		244,452		364,989

Year Ended December 31, 2008
Sales		10,507		—		—		10,507
Gross profit		3,260		—		—		3,260
Depreciation and amortization		609		—		—		609
Interest income		—		—		10,940		10,940
Capital expenditures		1,109		—		—		1,109
Investment in equity method investee		12,964		—		—		12,964
Goodwill		315,018		—		—		315,018
Total assets		431,776		—		331,317		763,093

Year Ended December 31, 2007
Sales		—		—		—		—
Gross profit		—		—		—		—
Depreciation and amortization		—		—		—		—
Interest income		—		—		2,486		2,486
Capital expenditures		—		—		—		—
Investment in equity method investee		—		—		—		—
Goodwill		—		—		—		—
Total assets		—		—		430,647		430,647

F-36

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following information is by geographic area (in thousands):


	China		United States		Total
Year Ended December 31, 2009
Sales	$	32,155	$	3,820	$	35,975
Long-lived assets, net		20,663		32,857		53,520

Year Ended December 31, 2008
Sales		10,507		—		10,507
Long-lived assets, net		15,901		—		15,901

Note 14—Summarized Quarterly Data (unaudited)

Following is a summary of the quarterly results of operations for the years ended December 31, 2009 and 2008.


	Three Months Ended
	March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009
	Amount			Amount			Amount(2)			Amount
	(in thousands, except per share data)
Net revenues	$	7,803		$	8,277		$	11,235		$	8,660
Gross profit	$	2,612		$	2,041		$	2,247		$	2,341
Net loss	$	(186,163	)	$	(3,154	)	$	(206,298	)	$	77
Net loss per common share:
Basic and diluted	$	(1.69	)	$	(0.03	)	$	(1.89	)	$	(0.00	)

	Three Months Ended
	March 31, 2008			June 30, 2008			September 30, 2008			December 31, 2008
	Amount(1)			Amount(1)			Amount(1)			Amount
	(in thousands, except per share data)
Net revenues	$	—		$	—		$	—		$	10,507
Gross profit	$	—		$	—		$	—		$	3,260
Net income (loss)	$	2,197		$	1,497		$	1,250		$	(19,684	)
Net income (loss) per common share:
Basic and diluted	$	0.03		$	0.02		$	0.01		$	(0.26	)

(1)

The quarters ended March 31, 2008, June 30, 2008 and September 30, 2008 are not comparable to the other quarters presented in the table above. As discussed in Note 3, on October 30, 2008, the Company completed its acquisition of China Water via a merger transaction and, on July 1, 2009, the Company completed its acquisition of the assets underlying the business of HWR. The results of operations of these two businesses are included in the Company’s consolidated statements of operations from the respective acquisition dates. Prior to October 30, 2008, the Company was in the development stage.

(2)

The Company has determined that the financial statements included in its September 30, 2009 quarterly filing were misstated resulting from an immaterial error that occurred in the process of finalizing the purchase price allocation for China Water. This error resulted in an overstatement of assets of approximately $0.8 million and an overstatement of liabilities of approximately $5.0 million as of September 30, 2009. As a result, goodwill impairment and net loss previously reported in the Company’s September 30, 2009 quarterly filing for the three and nine months ended September 30, 2009 were overstated by approximately $5.0 million and $4.2 million, respectively. In addition, net loss per common share was overstated by $0.04 per share. The results included above for the three months ended September 30, 2009 have been adjusted to

F-37

HECKMANN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

correct this immaterial error. In order to assess materiality with respect to this misstatement, management applied the concepts set forth in Staff Accounting Bulletin No. 108 and determined that the correction to the prior quarter was immaterial. Accordingly, we do not intend to amend our previously filed quarterly report on Form 10-Q for this immaterial error, as the summarized quarterly data above correctly reflect the correction in this Note.

Note 15—Subsequent Events

On February 9, 2010, the Company issued a press release announcing that on February 4, 2010, its wholly-owned subsidiary HEK Water Solutions, LLC (“HEK”) 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’s 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 HEK 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 HEK.

The JV is managed by a board of directors comprised of an equal number of HEK and ETC representatives, and will be jointly funded unless HEK 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 (30%) on the capital contributions with respect to such project. All other distributions will be made on a 50-50 basis. Each of HEK and ETC has made an initial capital contribution to the JV of $50,000.

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

F-38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

China Water and Drinks Inc.

We have audited the accompanying consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity of China Water and Drinks Inc. and subsidiaries (the “Company”) for the period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of China Water and Drinks Inc. and subsidiaries for the period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, on October 30, 2008, the Company was acquired by Heckmann Corporation.

/s/ GHP Horwath, P.C.

Denver, Colorado

March 14, 2011

F-39

CHINA WATER AND DRINKS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)


	January 1, 2008 to October 29, 2008			Year Ended December 31, 2007
Revenue	$	9,757		$	53,332
Cost of goods sold		(8,068	)		(34,919	)

Gross profit		1,689			18,413
Operating expenses:
Selling and marketing expenses		(575	)		(64	)
General and administrative expenses		(111,957	)		(57,482	)

Total operating expenses		(112,532	)		(57,546	)

Loss from continuing operations		(110,843	)		(39,133	)
Other (loss) income, net		(15	)		173
Interest expense		(15,466	)		—
Minority interest		(144	)		—
Income from equity method investment		4,260			1,797

Loss from continuing operations before income taxes		(122,208	)		(37,163	)
Income tax benefit		—			31

Loss from continuing operations		(122,208	)		(37,132	)
Income from discontinued operations		1,208			610

Net loss		(121,000	)		(36,522	)
Foreign currency translation gain		1,342			1,516

Comprehensive loss	$	(119,658	)	$	(35,006	)

Net loss per share, basic and diluted:
Loss from continuing operations	$	(1.29	)	$	(0.48	)
Income from discontinued operations		0.01			0.01

Net Loss	$	(1.28	)	$	(0.47	)

Weighted average number of shares, basic and diluted		94,521			77,772

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

F-40

CHINA WATER AND DRINKS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	January 1, 2008 to October 29, 2008			Year Ended December 31, 2007
Cash flows from operating activities:
Net loss	$	(121,000	)	$	(36,522	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,684			611
Increase in obsolescence reserves for inventories		—			311
Bad debt expense		7,479			(252	)
Minority interest		144			—
Write off of non-recoverable prepaid expenses and other receivables		31,570			—
Write off of non-recoverable deposits for acquisitions		10,811			—
Income from equity method investment		(4,260	)		(1,797	)
Non-cash interest expense		12,000			—
Share based compensation		46,642			55,970
Changes in operating assets and liabilities net of business acquisitions:
Accounts receivable		2,901			(6,642	)
Due from related company		—			(8,697	)
Inventories		(2,259	)		4,516
Prepaid expenses and other receivables		104			(8,889	)
Other assets		1,620			1
Due from director		—			4,068
Deferred revenues and accrued expenses		—			(180	)
Other taxes payable		—			(1,099	)
Accounts payable		(2,535	)		(774	)
Net cash (used in) provided by operating activities by discontinued operations		(648	)		203

Net cash provided by (used in) provided by operating activities		(15,747	)		828

Cash flows from investing activities:
Purchases of property and equipment		(3,899	)		(606	)
Deposits for potential acquisitions		(10,811	)		(2,748	)
Pilpol Acquisition, net of cash acquired of $1,416		—			(3,917	)
Shenyang Aixin Acquisition, net of cash acquired of $68		—			(992	)
Cash paid for acquisition of China Bottles		—			(9,000	)
Cash paid for acquisition of Changsha, net of cash acquired of $138		(5,700	)		—
Cash paid for acquisition of Grand Canyon, net of cash acquired of $736		(16,454	)		—
Net cash used in investing activities by discontinued operations		(438	)		(534	)

Net cash used in investing activities		(37,302	)		(17,797	)

Cash flows from financing activities:
Decrease in line of credit		—			(145	)
Payments on long-term debt agreements		—			(80	)
Proceeds from issuance of Series A preferred stock, net of offering costs		—			26,358
Due to stockholders		—			(331	)
Issuance of convertible notes		44,099			—
Net cash (used in) provided by financing activities by discontinued operations		(219	)		219

Net cash provided by financing activities		43,880			26,021

Net increase (decrease) in cash and cash equivalents		(9,169	)		9,052
Cash and cash equivalents at beginning of period		10,868			1,836
Effect of change in foreign exchange rate on cash and cash equivalents		1,342			(20	)

Cash and cash equivalents at end of period	$	3,041		$	10,868

Supplemental disclosure of cash flow information:
Cash paid for interest		16			51
Non-cash investing and financing activities:
Common stock to be issued to Pilpol former-owners for acquisition		—			12,189
Payable to Shenyang owners for 66.67% acquisition		—			1,060
Common stock issued to China Bottles’ owners for acquisition		—			16,426
Transfer of Due to Directors into additional paid in capital		—			7,172

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

F-41

CHINA WATER AND DRINKS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)


	Preferred Stock						Common Stock				Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income		Total Stockholders Equity
	No. of Shares			Amount			No. of Shares		Amount		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income		Total Stockholders Equity
As of January 1, 2007		—		$	—			59,872	$	60	$	(58	)	$	6,261		$	293	$	6,556
Net loss		—			—			—		—		—			(36,522	)		—		(36,522	)
Foreign currency translation adjustment		—			—			—		—		—			—			1,516		1,516
Contribution to Additional Paid-In Capital by Directors (Note 6)		—			—			—		—		7,172			—			—		7,172
Sales of Series A convertible preferred stock, net offering costs (Note 8)		4,478			4			—		—		26,354			—			—		26,358
Issuance of common stock in connection with conversion of Series A convertible preferred stock (Note 8)		(4,478	)		(4	)		22,388		22		(18	)		—			—		—
Issuance of common stock in connection with the 48% acquisition of China Bottles Inc. (Note 3)		—			—			2,133		2		16,424			—			—		16,426
Common stock to be issued in connection with the acquisition of Pilpol (Note 4)		—			—			—		—		12,189			—			—		12,189
Share based compensation (Note 8)		—			—			—		—		55,970			—			—		55,970
Acquisition of UGODS		—			—			10,128		11		59			(96	)		—		(26	)

As of December 31, 2007		—			—			94,521		95	$	118,092			(30,357	)		1,809		89,639

Net loss		—			—			—		—		—			(121,000	)		—		(121,000	)
Beneficial conversion feature on convertible notes (Note 9)		—			—			—		—		44,000			—			—		44,000
Stock based compensation (Note 8)		—			—			—		—		46,642			—			—		46,642
Foreign currency translation adjustment		—			—			—		—		—			—			1,342		1,342

As of October 29, 2008		—		$	—			94,521	$	95	$	208,734		$	(151,357	)	$	3,151	$	60,623

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

F-42

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

NOTE 1—Organization, Description of Business and Reverse Merger

Organization and Description of Business

China Water and Drinks Inc. and subsidiaries (formerly UGODS, Inc.) (the “Company”), a Nevada Corporation, is engaged in the manufacture of bottled water products and operates bottled water production plants in five provinces in the People’s Republic of China (“PRC” or “China”)—Guangdong, Jilin, Shandong, Guangxi and Liaoning. The Company produces and markets bottled water products under the brand name “Darcunk” to distributors throughout China, and supplies bottled water products to beverage and servicing companies in the industry. The Company operates in one reportable segment in China.

On May 19, 2008, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Heckmann Corporation, a Delaware corporation (“Parent”), and Heckmann Acquisition II Corp., a Delaware corporation and the Parent’s wholly-owned subsidiary (“Acquisition Sub”). Pursuant to the terms of the Merger Agreement, the Company was merged into Acquisition Sub (the “Merger”). At the date of the Merger, each share of the Company’s common stock (“Company Common Stock”) was converted into the right to receive (i) 0.8 shares of common stock, par value $0.01 per share of the Parent, as such fraction may be adjusted in accordance with the Merger Agreement, and/or (ii) at the election of the holders of Company Common Stock, an amount in cash equal to US$5.00 per share of Company Common Stock. On May 19, 2008, the holders of a majority of the Company’s Common Stock approved the merger. On October 30, 2008, the Company consummated the merger with the Parent pursuant to the Merger Agreement.

Reverse Merger

Effective May 30, 2007, Gain Dynasty Investments Limited (“Gain Dynasty”), a China Corporation, completed a reverse merger transaction (the “Acquisition”) with UGODS, Inc., a public shell in which Gain Dynasty, merged with and into UGODS, Inc. and UGODS, Inc. acquired all the outstanding common stock of Gain Dynasty from Mr. Xu Hong Bin for 59,872,000 shares of the Company’s Common Stock. For accounting purposes, Gain Dynasty is considered the accounting acquirer. Accordingly, the reverse merger was accounted for as a recapitalization of Gain Dynasty in which the assets and liabilities of the Company have been recorded using Gain Dynasty’s historical values, and the shareholders of Gain Dynasty received approximately 86% of the post-acquisition common stock of UGODS, Inc. In addition, the historical shareholders equity of Gain Dynasty prior to the Acquisition has been retroactively restated (recapitalization) for the equivalent number of shares received in the Acquisition. The restated consolidated retained earnings of Gain Dynasty have been carried forward after the Acquisition.

NOTE 2—Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with US generally accepted accounting principles, and include the results of China Water and Drinks Inc., its wholly-owned subsidiaries, Gain Dynasty Investments Ltd. and its wholly-owned subsidiaries, Olympic Forward Trading Company Ltd., Guangdong Taoda Drink Co Ltd., Zhanjiang Taoda Drink Co Ltd., Changchun Taoda Beverage Co Ltd., Shandong Olympic Forward Drink Co Ltd; Fine Lake International Ltd. (“Fine Lake”) and its wholly-owned subsidiary, Pilpol (HK) Biological Ltd. (“Pilpol”) and its wholly-owned subsidiary, Nanning Taoda Drink Co Ltd. (“Nanning”) and its 66.67% owned subsidiaries, Shen Yang Aixin Industry Co Ltd. (“Shenyang”) and Grand Canyon. All significant inter-company transactions have been eliminated in consolidation.

F-43

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

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 October 29, 2008 and December 31, 2007, the allowance for doubtful accounts was approximately $22,000 and $22,000, respectively. The table below sets forth a rollforward of the Company’s allowance for doubtful accounts (in thousands):


	January 1, 2008 to October 29, 2008			Year ended December 31, 2007
Balance at beginning of period	$	22		$	274
Additions: Bad debt expense		7,479
Less: Write off of uncollectible accounts		(7,479	)		(252	)

Balance at end of period	$	22		$	22

Equity method investments

A loss in value of an investment that is other than a temporary decline is recognized as a charge to operations. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

The Company holds a 48% equity investment in China Bottles Inc. (“China Bottles”) (formerly Hutton Holdings Corporation) (Note 3).

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

Economic and Political Risk

The Company’s business operations are conducted in the PRC and are subject to special considerations and risks not typically associated with companies in North America and Western Europe. China’s political, economic and legal environments may influence the Company’s business, financial condition and results of operations, including adverse effects by changes in governmental policies in laws and regulations, anti-inflationary measures, and rates and methods of taxation.

F-44

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include those required by management in determining the allowance for doubtful accounts, reserve for obsolete inventory, valuation of long-lived assets including identifiable intangibles and goodwill, contingencies and litigation. In the future, the Company may realize actual results that differ from the current reported estimates and if the estimates that we have used change in the future, such changes could have a material impact on the Company’s consolidated financial statements.

Foreign Currency Translation

The functional currency of the Company’s wholly-owned PRC subsidiaries is the Chinese Renminbi Yuan, (“RMB”). RMB is not freely convertible into foreign currencies. The functional currency of the Company’s BVI and 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. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

In connection with the Acquisition, the Company adopted the United States dollar as its reporting currency. The financial statements of the Company’s foreign subsidiaries are translated into United States Dollars (“USD”) using year-end rates of exchange for assets and liabilities and rates of exchange that approximate the rates in effect at the transaction date for revenues, expenses, gains and losses. Amounts classified in stockholders’ equity are translated at historical exchange rates. The resulting translation adjustments are not included in determining net income but are included in foreign exchange adjustment recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity.

Translation rates applied during the periods were as follows:


	Period from January 1, 2008 to October 29, 2008		Year ended December 31, 2007
Average RMB: USD Exchange Rate		6.984		7.617
Average HKD: USD Exchange Rate		7.779		7.803

Earnings Per Share

F-45

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

additional weighted average common equivalent shares during the period. Common equivalent shares result from the assumed exercises of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock (the “treasury stock method”). The Company’s common equivalent shares also result from contingently issuable shares. If all of the necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares that would be issued if the contingency were passed are included in diluted EPS. Where the total aggregate amount is stated but the number of shares is not specified, the Company will use the current period end market price to calculate the equivalent shares. In addition, common equivalent shares also result from the conversion of notes payable into common stock. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Inherently, stock warrants are deemed to be anti-dilutive when the average market price of the common stock during the period exceeds the exercise prices of the stock warrants.

For the period from January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007, the effect of the conversion of outstanding options and warrants, contingently issuable shares and the conversion of debt would have been anti-dilutive.

The following table presents information regarding the potential dilutive shares for the periods presented (in thousands):


	January 1, 2008 to October 29, 2008		Year ended December 31, 2007
Stock options and warrants		2,239		2,239
Contingently issuable shares		1,524		576
Convertible debt		11,765		—

Total		15,528		2,815

Concentrations of Customer and Supplier Risk

Four customers comprised 31%, 17%, 12% and 10% of revenues for the period from January 1, 2008 to October 29, 2008. Four customers comprised 20%, 13%, 12% and 11% of revenues for the year ended December 31, 2007.

The company purchased 30% of raw materials from three vendors, 16% from two vendors and 30% from two vendors for the period from January 1, 2008 to October 28, 2008. The Company purchased 27% of raw materials from 3 vendors, 16% from 2 vendors and 34% from 2 vendors for the year ended December 31, 2007.

Accounting for Impairment of Long Lived Assets

In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or 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 property, if any, exceeds its fair market value. The Company determined that there was no impairment of long-lived assets as of October 29, 2008.

F-46

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Income Taxes

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 expected to be realized.

The Company follows guidance issued by the Financial Accounting Standards Board (“FASB”) related to the application of accounting for uncertainty in income tax positions. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalty associated with any unrecognized tax benefits, nor was any interest expense recognized for the period ended October 29, 2008 or the year ended December 31, 2007.

Retirement Benefits

PRC regulations mandate companies to contribute funds into the national retirement system managed by the government, which benefits qualified employees based on where they were born within the country. The Company records any required contribution as payroll tax expense. Very few of the Company’s employees qualify under the national retirement system. The Company provides no other retirement benefits to its employees. The Company recorded approximately $26,000 and $31,000, respectively, of retirement benefits expense for the period from January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007.

Revenue Recognition

Revenues are recognized when finished products are delivered to customers and both title and the risks and benefits of ownership are transferred, price is fixed and determinable, and collection is reasonably assured. All finished products for bottled water sales are delivered to customers directly from plant locations throughout the PRC.

Taxes Collected From Customers and Remitted to Governmental Authorities

Revenues are recorded net of taxes collected from customers and remitted to governmental authorities.

Shipping and Handling Costs

In accordance with authoritative guidance, shipping and handling costs incurred in bringing finished products or raw materials to the Company’s warehouse are capitalized as part of inventory and relieved in cost of sales when a sale occurs. The Company does not bill customers for shipping and handling costs. Shipping and handling costs related to the movement of finished goods from the Company’s warehouse to the customer locations are reflected in selling, general and administrative expenses.

F-47

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Advertising Costs

Advertising costs are expensed as incurred and amounted to approximately $25,000 and $30,000, respectively for the period from January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements.” The objective of ASC 820 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The statement is effective for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities, and is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities. The statement will be applied prospectively by the Company for any fair value measurements that arise after the date of adoption.

In February 2007, the FASB issued ASC 825, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 825 is effective for fiscal years beginning after November 15, 2007. This standard did not have an impact on the Company’s consolidated operating results and financial position upon adoption.

In December 2007, the FASB issued ASC 805, “Business Combinations.” ASC 805 changes how a reporting enterprise accounts for the acquisition of a business. ASC 805 requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. ASC 805 is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. Management is currently evaluating the impact this standard will have on the Company’s consolidated operating results and financial position upon adoption.

In December 2007, the FASB issued ASC 810, “Consolidation”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. ASC 810 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. Early adoption is not permitted. Management is currently evaluating the impact this standard will have on the Company’s consolidated operating results and financial position upon adoption.

NOTE 3—Investment in Equity Investee

On August 31, 2007, the Company purchased an aggregate of 11,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of convertible preferred stock of China Bottles. The total consideration paid for the China Bottles investment was $25,426,664, consisting of $9,000,000 in cash and 2,133,333 shares of the Company’s Common Stock valued at $7.70 per share, the quoted market price of the Company’s Common Stock on August 31, 2007.

F-48

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

The Company considered authoritative guidance in the determination of the impact of the 5,000,000 shares of convertible preferred stock on its ownership of China Bottles. US GAAP defines “in-substance” common stock as an investment where one has the risk and reward characteristics that are substantially similar to the investee’s common stock. The Company concluded that the convertible preferred stock is “in-substance” common stock, and accordingly the Company has recorded a 48% ownership in the equity of China Bottles using the equity method of accounting. Each share of convertible preferred stock was to be automatically converted into five shares of China Bottles common stock on the second business day following the effectiveness of an amendment to China Bottles’ Articles of Incorporation increasing the number of authorized shares of common stock of China Bottles from 50,000,000 to 200,000,000. This occurred on April 3, 2008.

Through three wholly-owned Chinese subsidiaries, China Bottles engages in the manufacture of beverage bottle production equipment as well as the provision of molds and bottle production services for various customers in China.

The following table summarizes the results of operations of China Bottles for the period from January 1, 2008 to October 29, 2008 and for the period from August 31, 2007 to December 31, 2007 (in thousands):


	January 1, 2008 to October 29, 2008		August 31, to December 31, 2007
Revenues	$	49,213	$	22,502
Gross profit	$	33,894	$	6,568
Net income	$	8,875	$	3,744

NOTE 4—Acquisitions

Pilpol Acquisition

On June 15, 2007 (as amended on August 15, 2007), the Company, through its wholly-owned subsidiary Fine Lake, acquired 100% of the outstanding equity of Pilpol. Pilpol owns and operates Nanning, a PRC bottled water production company located in Nanning, southern PRC. The purchase price for Pilpol was $5,332,522 in cash, as well as 1,523,578 shares of the Company’s common stock valued at $12,188,624. Initially, the shares were to be issued upon the registration of the Company’s Common Stock underlying the Company’s Series A Convertible Preferred Stock (Note 8). On August 15, 2007, the parties agreed to fix the number of shares of common stock to be issued at a future date to 1,523,578 shares of common stock.

While these subscriptions provide an obligation to issue 1,523,578 shares, they are classified as liabilities since a fixed monetary amount is known at inception. At the date the number of shares became fixed, the liability was reclassified to equity. As of December 31, 2007 and October 29, 2008, the share consideration had not yet been issued. Accordingly, the Company has recorded the fixed monetary amount of $12.2 million within stockholders equity at December 31, 2007 and October 29, 2008 as common stock to be issued.

The results of Pilpol’s operations have been included in the consolidated financial statements since the date of the acquisition.

ShenYang Aixin Acquisition and Disposition

In August 2007, Pilpol entered into a stock purchase agreement with Haoyang Bian, pursuant to which Mr. Bian agreed to sell to Pilpol 67% of the equity interests of ShenYang Aixin Company Limited, a company formed in accordance with the laws of the PRC (“ShenYang Aixin”). In September 2007, Shenyang

F-49

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Yuchinchuan Economic and Trade Limited, a company formed in accordance with the laws of the PRC (“Yuchinchuan”), became the sole equity holder of ShenYang Aixin. At such time, Mr. Bian owned 90% of the equity of Yuchinchuan. In October 2007, ShenYang Aixin was converted into a Sino-foreign equity joint venture company and Pilpol and Yuchinchuan entered into a cooperative joint venture agreement (the “CJV Agreement”). In December 2007, Pilpol, Mr. Bian and Yuchinchuan entered into an amendment to the stock purchase agreement to, among other things, memorialize the foregoing and to confirm the sale by Yuchinchuan to Pilpol of 67% of the equity interests of ShenYang Aixin. The results of operations of ShenYang Aixin have been included in the consolidated financial statements since the acquisition date.

As a result the net operating results and cash flows of ShenYang Aixin have been reported as “discontinued operations” in the accompanying consolidated financial statements.

Revenues from discontinued operations were approximately $10,776,000 and $1,074,000 for the period from January 1, 2008 to October 28, 2008 and for the period from August 24, 2007 (acquisition date) to December 31, 2007, respectively. Net income from discontinued operations was approximately $1,208,000 and $610,000 for the period from January 1, 2008 to October 28, 2008 and for the period from August 24, 2007 (acquisition date) to December 31, 2007, respectively.

Grand Canyon Acquisition

Effective June 12, 2008, the Company and Mr. Li Sui Poon (“Mr. Li”) , a Hong Kong resident, entered into an amended and restated Share Purchase Agreement (“Amendment”) primarily amending the provisions of the original agreement relating to the transaction structure for the acquisition of a majority interest in Grand Canyon. In connection with the Amendment, Mr. Li transferred his 100% ownership interest in Prosper Focus to Favor Start, a company incorporated in the British Virgin Islands and 100% owned by Mr. Li. As a result of the transfer, Favor Start became the 100% owner of Prosper Focus which in turn owns a 67% equity interest in Grand Canyon, a Sino-foreign equity joint venture company formed in accordance with the laws of the PRC.

Under the terms of the Amendment, the Company purchased from Mr. Li 100% of the issued and outstanding equity interests in Favor Start thereby becoming the indirect 100% owner of Prosper Focus and the indirect 67% owner of Grand Canyon effective as of June 12, 2008.

F-50

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

The following unaudited pro forma financial information for the period from January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007, gives effect to the above acquisitions as if they had occurred at the beginning of each respective period (excluding the acquisition of ShenYang Aixin, as it is being presented as discontinued operations as noted above):


	Historical Combined			Pro-forma Adjustment— Grand Canyon		Prof-forma Adjustment—Pilpol		Pro-forma
January 1, 2008 to October 29, 2008
Revenue	$	9,757		$	11,328		—	$	21,085
Net (loss) income	$	(121,000	)	$	1,188		—	$	(119,812	)
Basic and diluted (loss) income per share	$	(1.28	)	$	0.01		—	$	(1.27	)

Year ended December 31, 2007
Revenue	$	53,332		$	18,990	$	5,931	$	78,253
Net (loss) income	$	(36,522	)	$	2,634	$	1,734	$	(32,154	)
Basic and diluted (loss) income per share	$	(0.47	)	$	0.03	$	0.02	$	(0.42	)

NOTE 5—Income Taxes Payable

Corporate Income Taxes (“CIT”)

It is management’s intention to reinvest all the income attributable to the Company earned by its operations outside the U.S. Accordingly, no U.S. corporate income taxes are provided in these consolidated financial statements.

Under the current laws of the BVI, dividends and capital gains arising from the Company’s investments in the BVI through Gain Dynasty Investments Ltd. and Fine Lake International Ltd. are not subject to income taxes and no withholding tax is imposed on payments of dividends by the Company.

No Hong Kong corporate income tax has been provided in the consolidated financial statements, as the Company did not have any assessable profits for the Hong Kong companies (Olympic Forward Trading Co Ltd and Pilpol (HK) Biological Ltd).

All of our PRC subsidiaries are entitled to a tax exemption through the end of 2007. The Company began recognizing income tax expense, if any, for those PRC subsidiaries in 2008. The Company’s PRC subsidiaries qualify as wholly-owned foreign enterprises (“WOFEs”), and as such enjoy a 100% tax exemption (“Tax Holiday”) for the first two years after the first year of achieving profitability and a 50% tax exemption for the following three years.

A reconciliation of tax at the United States federal statutory rate to the effective income tax rate applied to the pre-tax loss from continuing operations recorded in the financial statements is as follows:


	January 1 to October 29, 2008			Year ended December 31, 2007
US federal statutory rate		34.0	%		34.0	%
Foreign tax rate difference		-1.0	%		-1.0	%
Effect of Tax Holiday/exemption		-33.0	%		-33.0	%

		—	%		—	%

F-51

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Beginning January 1, 2008, a new Chinese Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate previously applicable to both DES and FIEs.

NOTE 6—Related Party Transactions

During the year ended December 31, 2007, the Company entered into related party transactions with two entities with whom Mr. Xu Hong Bin, the Company’s President and Director, held a direct and indirect role as the entities’ legal representative for local registration purposes. During the year ended December 31, 2007, the Company received $144,000 from one of these entities to hold as a good faith deposit in connection with the entity’s pursuit of a specified business acquisition. Subsequent to December 31, 2007, this was abandoned and the Company repaid the amount to this related party.

During the year ended December 31, 2007, the Company paid $5,283,000 to a second entity for purchases of materials to be used in the Company’s water bottle production activities. The Company subsequently determined that the materials were of inferior quality and returned them to the entity.

During the fourth quarter of 2007, $7,172,000 that the Company owed to certain of its Directors was transferred to equity as contributions. No shares of the Company’s stock were issued in connection with these contributions.

The Company has informally agreed with China Bottles to provide working capital support in the form of notes payable by China Bottles to the Company. The notes yield interest to the Company at an annual interest rate equal to the market rate, mature six months after August 31, 2007 and are payable upon demand before maturity. The Hong Kong one-month risk-free market rate was approximately 3.5%; financial institutions typically charge 2-3% in addition to the base market rate. Accordingly, the interest rate was set at 6%. The Company made net advances to China Bottles of $3,414,000 during the year ended December 31, 2007.

NOTE 7—Commitments and Contingencies

Operating Leases

The Company leases office and warehouse space, machinery and other equipment under noncancellable operating lease agreements which expire at various dates through 2011. These leases generally contain scheduled rent increases or escalation clauses, renewal options, or in some cases, purchase options.

Rental expense incurred for noncancellable operating leases was $498,000 and $597,000, for the period January 1, 2008 to October 29, 2008 and for the year ended December 31, 2007, during respectively.

At October 29, 2008, future minimum lease payments under operating leases are as follows (in thousands):


Year ending December 31,
2008	$	339
2009		288
2010		133
2011		86
2012		—

Total future minimum lease payments	$	846

F-52

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Environmental Liabilities

Litigation

On May 21, 2010 an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against Heckmann Corporation and various of its directors and officers in the United States District Court for the District of Delaware (the “Class Action”). The Class Action alleges violations of United States federal securities laws in connection with the Heckmann Corporation’s acquisition of the Company in October 2008. On October 8, 2010, the court-appointed lead plaintiff filed an Amended Class Action Complaint that adds the Company as a defendant. Heckmann Corporation has filed a motion to dismiss the Amended Class Action Complaint and a reply to lead plaintiff’s opposition to the motion to dismiss. Heckmann Corporation is waiting on the ruling on the motion to dismiss the Amended Class Action Complaint.

NOTE 8—Preferred Stock and Share Sale

On May 31, 2007, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with certain investors (“the Investors”) and issued 4,477,612 shares of Series A Convertible Preferred Stock, par value $0.001 per share (“Preferred Stock”) (the “Share Sale”). Gross proceeds to the Company were $30,000,000. Each share of Preferred Stock was convertible into five shares of the Company’s Common Stock and entitled the holder to the same voting rights as holders of the Company’s Common Stock on an as converted basis. The Company received $26,358,000, net of offering costs of the Share Sale. On July 11, 2007, all 4,477,612 shares of Preferred Stock were converted into 22,388,060 shares of the Company’s Common Stock.

In connection with the Share Sale, the Investors, the Company, Mr. Xu Hong Bin, a major shareholder of the Company, the Pinnacle Fund, as agent, and Loeb & Loeb LLP , as escrow agent, entered into a Make Good Escrow Agreement (the “Make Good Escrow Agreement”) , whereby Mr. Xu Hong Bin has agreed to transfer 11,194,030 and 11,194,030 shares of the Company’s common stock owned by him to the Investors on a pro rata basis in the event that the Company does not meet certain performance targets for the years ended December 31, 2007 and 2008, respectively. The performance target for the Company’s fiscal year ended December 31, 2007 is the achievement of after-tax net income of at least $19,000,000. The performance target for the Company’s fiscal year ended December 31, 2008 is the achievement of after-tax net income of at least $30,000,000 and earnings per share of at least $0.30. The Company has achieved the target for the year ended December 31, 2007.

The agreement to release the shares from escrow upon the achievement of the 2007 after-tax net income target was presumed to be a separate compensatory arrangement between the Company and Mr. Xu Hong Bin. Accordingly, the fair value of the shares at the time they were placed into escrow ($56 million or $5.00 per share) was charged to income as stock-based compensation expense when the shares were released from escrow during the year ended December 31, 2007. Through October 30, 2008, the Company has accrued an additional $46,642,000 as stock based compensation related to this compensatory arrangement.

F-53

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

In connection with the Share Sale, certain of the Company’s shareholders have entered into Lock-Up Agreements by which each of them agreed not to transfer any of the Company’s Common Stock owned by them until the first year anniversary of the effective date of the initial registration statement filed by the Company with respect to the resale of the shares of common stock underlying the shares of Preferred Stock purchased by the Investors in the Share Sale.

In connection with the Share Sale, the Company, Mr. Xu Hong Bin, Mr. Chen Xing Hua and the Pinnacle Fund, as agent, entered into a Stock Pledge Agreement pursuant to which Mr. Xu Hong Bin and Mr. Chen Xing Hua each agreed to transfer to the Investors, on a pro rata basis, upon the demand on the Investors, 11,194,030 shares of common stock owned by such shareholders in the event that the Company did not timely file a Certificate of Amendment with the State of Nevada amending the Articles of Incorporation of the Company to increase the authorized shares of the Company’s Common Stock from 70,000,000 to not less than 150,000,000. On May 30, 2007, the Company’s Board of Directors and stockholders approved the increase in the authorized number of shares of common stock from 70,000,000 to 150,000,000 and on July 10, 2007, the Company filed the necessary amendment with the State of Nevada.

Common Stock Warrants

In conjunction with the Securities Purchase Agreement the Company issued 2,238,806 common stock warrants to the transactions placement agents to purchase a total of 2,238,806 shares of the Company’s Common Stock. The warrants, have an exercise price of $1.61 per share, are exercisable immediately and expire on August 22, 2012.

Statutory Surplus Reserve

In accordance with the PRC Company Law and the Company’s Articles of Incorporation, the Company is required to appropriate 10% of its profit after tax as reported in its PRC statutory financial statements to a statutory surplus reserve.

Appropriations to the statutory surplus reserve may cease to apply if the balance of the statutory surplus reserve has reached an amount equal to 50% of the Company’s registered capital. Surplus reserves can be used to offset prior year accumulated losses, to expand the Company’s operations or for conversion into share capital. The Company may, upon the approval by a resolution at the Annual General Meeting, convert its surplus reserve into share capital and issue new shares to existing shareholders in proportion to their original shareholdings to increase the nominal value of each share. When converting the Company’s statutory surplus reserves into share capital, the amount of such reserves remaining unconverted must not be less than 25% of the registered capital.

At October 29, 2008 and December 31, 2007, $3,346,000 of the Company’s additional paid-in capital or retained earnings (if one has a negative balance) is attributable to this reserve requirement. The Company does not plan to distribute earnings or declare dividends in the near future. However, if the Company determines future distributions are appropriate, such distributions will be subject to this reserve requirement.

NOTE 9—Convertible Notes Payable

On January 24, 2008, the Company entered into a Securities Purchase Agreement (the “2008 Securities Purchase Agreement”), with certain investors, for the purchase and sale of 5% secured convertible notes (the “Notes”) in the aggregate amount of $50,000,000 (the “Purchase Price”). The Company received proceeds of $46 million ($50 million, net of financing costs). The Notes are secured by all of the capital stock owned by the

F-54

CHINA WATER AND DRINKS INC.

Notes to the Consolidated Financial Statements—(Continued)

Period from January 1, 2008 to October 29, 2008 and the year ended December 31, 2007

Company in each of its subsidiaries (other than its subsidiaries located in the People’s Republic of China) and China Bottles.

The Notes are due three years from their issue date (the “Maturity Date”), and are convertible into shares of the Company’s Common Stock at a conversion price equal to the greater of (a) $3.00, which prices are subject to adjustment pursuant to customary anti-dilution provisions and Volume-Weighted Average Price adjustments, as described in the Notes, or (b) $4.25. The Company is to pay interest on the unconverted and then outstanding principal amount of the Notes at the rate of 5% per annum, payable quarterly in arrears, beginning on March 31, 2008, and on each date that principal is being converted into shares (as to the principal amount being converted) and on the Maturity Date.

The Company recognized the advantageous value of conversion rights attached to the convertible debt. Such rights give the debt holder the ability to convert debt into shares of common stock at a price per share that is less than the fair market value (quoted market price) of the common stock on the commitment date. This represents an embedded beneficial conversion feature which is to be valued separately upon issuance of the debt. The beneficial value was calculated based on the intrinsic value (the fair market value of the stock at the commitment date of $17.25 in excess of the conversion rate of $4.25) of the feature and was recorded as a discount to the related debt and an addition to additional paid-in-capital.

In this instance, the intrinsic value of the beneficial conversion feature was greater than the proceeds allocated to the convertible debt, which was $44 million. The amount of the discount assigned to the beneficial conversion feature was limited to the amount of proceeds allocated to the convertible debt. The discount is subsequently being amortized to interest expense over the remaining outstanding period of the related debt, which matures in January 2010 using the effective interest method.

Under the 2008 Securities Purchase Agreement, the Company was to pay interest on the unconverted and then outstanding principal amount of the Notes at the rate of 5% per annum, payable quarterly in arrears, beginning on June 30, 2008, and on each date that principal is being converted into shares (as to the principal amount being converted) and on the Maturity Date.

As security for its obligations under the Notes, upon the closing of the Notes the Company pledged all of the outstanding equity of Gain Dynasty Investments Limited (“Gain Dynasty”) and Fine Lake to Goldman Sachs International, as collateral and security agent for the holders of the Notes (the “Collateral and Security Agent”). In addition, as security for the Notes, Gain Dynasty pledged all of the outstanding equity of Olympic Forward Trading Company Limited, its Hong Kong subsidiary (“Olympic”) to the Collateral and Security Agent and Fine Lake pledged all of the outstanding equity of Pilpol to the Collateral and Security Agent.

On March 31, 2008, the Company and the Collateral and Security Agent entered into (i) a Deed of Amendment amending the 2008 Securities Purchase Agreement by and between the Company and the Collateral and Security Agent such that at all times no more than 65% of the shares held by the Company in Gain Dynasty shall be charged in favor of the Collateral and Security Agent and (ii) a Deed of Amendment amending the 2008 Securities Purchase Agreement by and between the Company and the Collateral and Security Agent such that at all times no more than 65% of the shares held by the Company in Fine Lake shall be charged in favor of Collateral and Security Agent. As consideration for this reduction in collateral, the Company executed Amendments to each of the outstanding Notes to increase the interest rate payable with respect to the Notes from 5% per annum to 7% per annum.

F-55

EXHIBIT INDEX


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 Exhibit 2.2 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.3 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.3A to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.3B to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.4 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.4A to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.5 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)


Exhibit Number		Description
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 Exhibit 2.6 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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 Exhibit 2.7 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

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)

10.1		Amended and Restated Subscription Agreement, dated October 3, 2007, by and between Heckmann Corporation and Heckmann Acquisition, LLC (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.3		Form of Investment Management Trust Agreement, by and between American Stock Transfer & Trust Company, as trustee, and Heckmann Corporation (incorporated herein by reference to Exhibit 10.3 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed September 4, 2007)

10.4		Promissory Note, dated June 4, 2007, by and between Richard J. Heckmann and Heckmann Corporation (incorporated herein by reference to Exhibit 10.4 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

10.5		Letter Agreement, dated October 3, 2007, by and between Heckmann Acquisition, LLC and Heckmann Corporation (incorporated herein by reference to Exhibit 10.5 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)


Exhibit Number		Description
10.6		Letter Agreement, dated October 3, 2007, by and between Richard J. Heckmann and Heckmann Corporation (incorporated herein by reference to Exhibit 10.6 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.7		Letter Agreement, dated October 3, 2007, by and between Lou Holtz and Heckmann Corporation (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.8		Letter Agreement, dated October 3, 2007, by and between Alfred E. Osborne, Jr. and Heckmann Corporation (incorporated herein by reference to Exhibit 10.8 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.9		Letter Agreement, dated October 3, 2007, by and between Dan Quayle and Heckmann Corporation (incorporated herein by reference to Exhibit 10.9 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.10		Form of Securities Escrow Agreement, by and between American Stock Transfer & Trust Company, as escrow agent, and Heckmann Corporation (incorporated herein by reference to Exhibit 10.10 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed September 4, 2007)

10.11		Amended and Restated Subscription Agreement, dated October 3, 2007, by and between Lou Holtz and Heckmann Corporation (incorporated herein by reference to Exhibit 10.11 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.12		Amended and Restated Subscription Agreement, dated October 3, 2007, by and between Alfred E. Osborne, Jr. and Heckmann Corporation (incorporated herein by reference to Exhibit 10.12 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.13		Amended and Restated Subscription Agreement, dated October 3, 2007, by and between Dan Quayle and Heckmann Corporation (incorporated herein by reference to Exhibit 10.13 to Amendment No. 3 to Heckmann Corporation’s Registration Statement on Form S-1 filed October 5, 2007)

10.14		Initial Unit Subscription Agreement, dated June 21, 2007, by and between Heckmann Acquisition, LLC and Heckmann Corporation (incorporated herein by reference to Exhibit 10.14 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

10.15		Initial Unit Subscription Agreement, dated June 21, 2007, by and between Lou Holtz and Heckmann Corporation (incorporated herein by reference to Exhibit 10.15 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

10.16		Initial Unit Subscription Agreement, dated June 21, 2007, by and between Alfred E. Osborne, Jr. and Heckmann Corporation (incorporated herein by reference to Exhibit 10.16 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

10.17		Initial Unit Subscription Agreement, dated June 21, 2007, by and between Dan Quayle and Heckmann Corporation (incorporated herein by reference to Exhibit 10.17 to Heckmann Corporation’s Registration Statement on Form S-1 filed June 26, 2007)

10.19		Majority Stockholder Consent Agreement, dated May 19, 2008, by and between Heckmann Corporation and Xu Hong Bin (included in Annex B to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.19A		Amendment No. 1 to Majority Stockholder Consent Agreement, dated September 19, 2008, by and between Heckmann Corporation and Xu Hong Bin (included in Annex B to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)


Exhibit Number		Description
10.19B		Amendment No. 2 to Majority Stockholder Consent Agreement, dated September 26, 2008, by and between Heckmann Corporation and Xu Hong Bin (included in Annex B to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.19C		Amendment No. 3 to Majority Stockholder Consent Agreement, dated October 30, 2008, by and among Heckmann Corporation, Xu Hong Bin and Kotex Development Limited (incorporated herein by reference to Exhibit 10.19C to Heckmann Corporation’s Current Repot on Form 8-K filed November 5, 2008)

10.20		Majority Stockholder Written Consent Agreement, dated May 19, 2008, by and between Heckmann Corporation and Chen Xing Hua (included in Annex C to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.20A		Amendment No. 1 to Majority Stockholder Consent Agreement, dated September 26, 2008, by and between Heckmann Corporation and Chen Xing Hua (included in Annex C to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.21		Undertaking Agreement, dated May 19, 2008, by and among Heckmann Corporation, China Water and Drinks, Inc. and the other signatories party thereto (included in Annex D to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.21A		Amendment No. 1 to Undertaking Agreement, dated September 26, 2008, by and among Heckmann Corporation, China Water and Drinks, Inc. and the other signatories party thereto (included in Annex D to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.22		Conversion Agreement, dated May 19, 2008, by and among Heckmann Corporation, China Water and Drinks, Inc. and the other signatories party thereto (included in Annex F to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.23		Release Agreement, dated May 19, 2008, by and among Heckmann Corporation, China Water and Drinks, Inc. and the other signatories party thereto (included in Annex E to Amendment No. 5 to Heckmann Corporation’s Registration Statement on Form S-4 filed on October 1, 2008 and incorporated herein by reference)

10.24		Executive Employment Agreement, dated October 30, 2008, by and between China Water and Drinks, Inc. and Xu Hong Bin (incorporated herein by reference to Exhibit 10.24 to Heckmann Corporation’s Current Report on Form 8-K filed November 5, 2008)**

10.25		$15 Million Bonus Plan (incorporated herein by reference to Exhibit 10.25 to Heckmann Corporation’s Current Report on Form 8-K filed November 5, 2008)**

10.26		Executive Employment Agreement, dated November 15, 2008, by and between Heckmann Corporation and Donald G. Ezzell (incorporated herein by reference to Exhibit 10.26 to Heckmann Corporation’s Current Report on Form 8-K filed December 12, 2008)**

10.27		Executive Employment Agreement, dated November 15, 2008, by and between Heckmann Corporation and Brian R. Anderson (incorporated herein by reference to Exhibit 10.27 to Heckmann Corporation’s Current Report on Form 8-K filed December 12, 2008)**

10.28		Executive Employment Agreement, dated November 15, 2008, by and between China Water and Drinks, Inc. and Jack Guo (incorporated herein by reference to Exhibit 10.28 to Heckmann Corporation’s Current Report on Form 8-K filed December 12, 2008)**


Exhibit Number		Description
10.29		Executive Employment Agreement, dated January 12, 2009, by and between Heckmann Corporation and J. John Cheng (incorporated herein by reference to Exhibit 10.29 to Heckmann Corporation’s Current Report on Form 8-K filed January 16, 2009)**

10.35		Escrow Resolution and Transition Agreement, dated March 13, 2009, by and among Heckmann Corporation, Xu Hong Bin and Kotex Development Limited (incorporated herein by reference to Exhibit 10.35 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

10.36		Contract, dated March 11, 2009, by and between Coca-Cola Bottlers Manufacturing (Dongguan) Co. Ltd. and China Water and Drinks, Inc.† (incorporated herein by reference to Exhibit 10.36 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 16, 2009)

10.38†		Agreement for Firm Disposal of Saltwater between Charis Partners LLC and Exco Production Company, L.P., dated September 3, 2008 (incorporated herein by reference to Exhibit 10.38 to Heckmann Corporation’s Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2009, filed January 6, 2010)

10.39†		Agreement for Firm Disposal of Saltwater between Charis Partners, LLC and El Paso E&P Company, L.P., dated July 8, 2008. (incorporated by reference to Exhibit 10.39 to Heckmann Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 9, 2009)

10.40†		Agreement for Firm Disposal of Saltwater between Heckmann Water Resources Corporation and Encana Oil & Gas (USA) Inc., dated September 21, 2009 (incorporated by reference to Exhibit 10.40 to Heckmann Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 9, 2009)

10.41		Form of Salt Water Disposal Agreement (incorporated by reference to Exhibit 10.41 to Heckmann Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 9, 2009)

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 herein by reference to Exhibit 10.42 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, 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)


Exhibit Number		Description
14.1		Code of Ethics (incorporated herein by reference to Exhibit 14.1 to Amendment No. 2 to Heckmann Corporation’s Registration Statement on Form S-1 filed September 4, 2007)

21.1		Subsidiaries of Heckmann Corporation (incorporated herein by reference to Exhibit 21.1 to Heckmann Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed March 11, 2010)

23.1		Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm*

31.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith.

**	Management or compensatory plan or agreement.

†

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.

Nuverra Environmental Solutions, Inc. - FORM 10-K/A - March 14, 2011

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