Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2010
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-33816
HECKMANN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 26-0287117 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
75080 Frank Sinatra Drive, Palm Desert, California 92211
(760) 341-3606
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer of a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer x | |||||
Non-accelerated filer ¨ | Smaller reporting company ¨ | |||||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrants common stock as of July 30, 2010 was 108,899,985.
Table of Contents
Explanatory Note
The Registrant is filing this Amendment No. 1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 (Form 10-Q/A) to address comments from the staff of the Securities and Exchange Commission (the Staff) in connection with the Staffs regular periodic review of the Companys filings. As a result of comments received from the Staff, the Registrant re-evaluated its accounting for the contingent consideration agreement, which was entered into as part of its July 1, 2009 acquisition and is restating its consolidated financial statements for the fiscal period ended June 30, 2010 to make the following changes: (i) restate the consolidated financial statements; (ii) revise the Results of Operations sections in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations; and (iii) revise Note 1, Note 4, Note 6, Note 10 and Note 11 to the unaudited interim consolidated financial statements.
Pursuant to the rules of the Securities Exchange Act of 1934, as amended (the Exchange Act) Rule 12b-25, the Registrant has also amended the Form 10-Q to provide currently-dated certifications from the Registrants 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, this Amendment No. 1 does not amend the Registrants previously filed Form 10-Q, nor does it modify or update those disclosures affected by subsequent events or discoveries. It also does not affect information contained in the 10-Q which was not impacted by these restatements.
This Amendment No. 1 should be read in conjunction with the Registrants filings made with the Securities and Exchange Commission subsequent to the filing of the previously filed Form 10-Q filing, including any amendments to those filings.
Table of Contents
Table of Contents
HECKMANN CORPORATION
Item 1. | Financial Statements. |
Consolidated Balance Sheets
(In thousands, except share data)
June 30, 2010 |
December 31, 2009 |
|||||||
(Unaudited) | ||||||||
(Restated, Note 1) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 118,854 | $ | 136,050 | ||||
Certificates of deposit |
10,513 | 10,513 | ||||||
Marketable securities |
54,925 | 16,020 | ||||||
Accounts receivable, net |
7,392 | 5,873 | ||||||
Inventories, net |
2,402 | 2,896 | ||||||
Prepaid expenses and other receivables |
1,979 | 4,461 | ||||||
Refundable income tax |
2,844 | | ||||||
Other current assets |
281 | 278 | ||||||
Total current assets |
199,190 | 176,091 | ||||||
Property, plant and equipment, net |
56,466 | 53,520 | ||||||
Marketable securities |
50,245 | 86,638 | ||||||
Equity investments |
7,232 | 11,229 | ||||||
Intangible assets, net |
22,703 | 23,507 | ||||||
Goodwill |
13,598 | 13,598 | ||||||
Other |
448 | 406 | ||||||
Total assets |
$ | 349,882 | $ | 364,989 | ||||
Liabilities and equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 20,270 | $ | 19,501 | ||||
Deferred revenue |
522 | 946 | ||||||
Accrued expenses |
17,911 | 17,675 | ||||||
Current portion of long term debt |
1,850 | 1,398 | ||||||
Due to related parties |
503 | 1,472 | ||||||
Deferred income taxes |
| 178 | ||||||
Total current liabilities |
41,056 | 41,170 | ||||||
Acquisition consideration payable |
1,910 | 1,910 | ||||||
Long-term debt, net of current portion |
| 439 | ||||||
Other long term liabilities |
8,218 | 8,327 | ||||||
Equity: |
||||||||
Preferred stock, $0.001 par value: 1,000,000 shares authorized; no shares issued or outstanding |
| | ||||||
Common stock, $0.001 par value: 500,000,000 shares authorized, 125,432,075 shares issued and 108,899,985 shares outstanding at June 30, 2010 and 125,282,740 shares issued and 108,750,650 shares outstanding at December 31, 2009 |
124 | 124 | ||||||
Additional paid-in capital |
738,693 | 738,190 | ||||||
Purchased warrants |
(5,533 | ) | (4,810 | ) | ||||
Treasury stock |
(14,000 | ) | (14,000 | ) | ||||
Accumulated other comprehensive income |
167 | 643 | ||||||
Accumulated deficit |
(422,233 | ) | (409,166 | ) | ||||
Total equity of Heckmann Corporation |
297,218 | 310,981 | ||||||
Noncontrolling interest |
1,480 | 2,162 | ||||||
Total equity |
298,698 | 313,143 | ||||||
Total liabilities and equity |
$ | 349,882 | $ | 364,989 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Restated, Note 1) | (Restated, Note 1) | |||||||||||||||
Revenue |
$ | 11,626 | $ | 8,277 | $ | 20,231 | $ | 16,080 | ||||||||
Cost of goods sold |
8,647 | 6,236 | 15,469 | 11,427 | ||||||||||||
Gross profit |
2,979 | 2,041 | 4,762 | 4,653 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and marketing |
797 | 1,020 | 1,306 | 1,427 | ||||||||||||
General and administrative |
4,717 | 5,534 | 7,523 | 10,924 | ||||||||||||
Pipeline start-up and commissioning (Note 2) |
13,005 | | 13,005 | | ||||||||||||
Goodwill impairment (Note 2) |
| | | 184,000 | ||||||||||||
Total operating expenses |
18,519 | 6,554 | 21,834 | 196,351 | ||||||||||||
Loss from operations |
(15,540 | ) | (4,513 | ) | (17,072 | ) | (191,698 | ) | ||||||||
Interest income, net |
532 | 972 | 1,098 | 2,185 | ||||||||||||
Income (loss) from equity method investment |
(4,098 | ) | 364 | (4,048 | ) | 335 | ||||||||||
Other, net |
3,926 | 75 | 4,257 | 281 | ||||||||||||
Loss before income taxes |
(15,180 | ) | (3,102 | ) | (15,765 | ) | (188,897 | ) | ||||||||
Income tax benefit (expense) |
2,580 | (52 | ) | 2,722 | (420 | ) | ||||||||||
Net loss |
(12,600 | ) | (3,154 | ) | (13,043 | ) | (189,317 | ) | ||||||||
Net income attributable to the noncontrolling interest |
(61 | ) | (18 | ) | (24 | ) | (155 | ) | ||||||||
Net loss attributable to common stockholders |
$ | (12,661 | ) | $ | (3,172 | ) | $ | (13,067 | ) | $ | (189,472 | ) | ||||
Net loss per common share attributable to the Companys common stockholders |
||||||||||||||||
Basic and diluted |
$ | (0.12 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (1.72 | ) | ||||
Weighted average shares outstanding : |
||||||||||||||||
Basic and diluted |
108,873,868 | 110,223,277 | 108,944,922 | 110,149,587 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Restated, Note 1) | (Restated, Note 1) | |||||||||||||||
Net loss attributable to common stockholders |
$ | (12,661 | ) | $ | (3,172 | ) | $ | (13,067 | ) | $ | (189,472 | ) | ||||
Add back: net income attributable to the noncontrolling interest |
61 | 18 | 24 | 155 | ||||||||||||
Net loss |
(12,600 | ) | (3,154 | ) | (13,043 | ) | (189,317 | ) | ||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation gain (loss) |
(51 | ) | | (84 | ) | 71 | ||||||||||
Reclassification of net gains from sales of available-for-sale securities included in earnings |
| | (311 | ) | | |||||||||||
Unrealized gain (loss) on available-for-sale securities |
(165 | ) | 547 | (81 | ) | 156 | ||||||||||
Total other comprehensive income (loss), net of tax |
(216 | ) | 547 | (476 | ) | 227 | ||||||||||
Comprehensive loss, net of tax |
(12,816 | ) | (2,607 | ) | (13,519 | ) | (189,090 | ) | ||||||||
Net income attributable to the noncontrolling interest |
(61 | ) | (18 | ) | (24 | ) | (155 | ) | ||||||||
Comprehensive loss attributable to the Company |
$ | (12,877 | ) | $ | (2,625 | ) | $ | (13,543 | ) | $ | (189,245 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
(Restated, Note 1) | ||||||||
Operating activities |
||||||||
Net loss |
$ | (13,043 | ) | $ | (189,317 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
2,032 | 783 | ||||||
Amortization |
812 | 2,138 | ||||||
Bad debt expense |
194 | 2,000 | ||||||
Goodwill impairment (Note 2) |
| 184,000 | ||||||
Stock-based compensation |
437 | 1,684 | ||||||
Loss (gain) from equity method investment (Note 5) |
4,048 | (335 | ) | |||||
Loss on Harbin rescission (Note 9) |
1,576 | | ||||||
Loss on disposal of property plant and equipment |
708 | | ||||||
Change in fair value of contingent consideration |
(3,962 | ) | | |||||
Other |
486 | 80 | ||||||
Changes in operating assets and liabilities, net of Harbin rescission (2010) and purchase price adjustments (2009): |
||||||||
Accounts receivable |
(3,055 | ) | (5,247 | ) | ||||
Inventories |
22 | (4,515 | ) | |||||
Prepaid expenses and other receivables |
2,229 | 1,031 | ||||||
Refundable income tax |
(2,743 | ) | | |||||
Accounts payable and accrued expenses |
11,341 | (1,814 | ) | |||||
Deferred revenue |
(844 | ) | (179 | ) | ||||
Deposits |
(5 | ) | 20 | |||||
Other assets |
(855 | ) | (120 | ) | ||||
Due to related party |
(74 | ) | | |||||
VAT and income taxes payable |
34 | 787 | ||||||
Net cash used in operating activities |
(662 | ) | (9,004 | ) | ||||
Investing activities |
||||||||
Purchases of available-for-sale securities |
(71,048 | ) | (97,516 | ) | ||||
Proceeds from sale and maturity of available-for-sale securities |
67,429 | 54,744 | ||||||
Cash paid for equity investments |
| (6,801 | ) | |||||
Restricted cash, for equipment purchase |
| (2,000 | ) | |||||
Payments made in connection with Harbin acquisition |
| (1,193 | ) | |||||
Purchases of property and equipment |
(13,248 | ) | (4,593 | ) | ||||
Investment in joint venture |
(50 | ) | | |||||
Cash receipts from sale of assets held for sale |
| 289 | ||||||
Net cash used in investing activities |
(16,917 | ) | (57,070 | ) | ||||
Financing activities |
||||||||
Payment on long-term debt agreements |
(1,603 | ) | (132 | ) | ||||
Borrowings under revolving credit facility |
2,486 | | ||||||
Cash proceeds from exercise of warrants |
66 | | ||||||
Proceeds from notes payable |
98 | | ||||||
Cash paid to repurchase warrants |
(723 | ) | (4,405 | ) | ||||
Cash paid to purchase treasury stock |
| (14,000 | ) | |||||
Net cash provided by (used in) financing activities |
324 | (18,537 | ) | |||||
Net decrease in cash and cash equivalents |
(17,255 | ) | (84,611 | ) | ||||
Effect of change in foreign currency exchange rate on cash and cash equivalents |
59 | 31 | ||||||
Cash and cash equivalents at beginning of period |
136,050 | 281,683 | ||||||
Cash and cash equivalents at end of period |
$ | 118,854 | $ | 197,103 | ||||
The accompanying notes are an integral part of these consolidated financial statements
4
Table of Contents
Consolidated Statements of Equity
Six months ended June 30, 2010
(Unaudited)
(In thousands, except share data)
Heckmann Corporation Shareholders | ||||||||||||||||||||||||||||||||||||||||||||
Total | Common Stock | Additional Paid-In Capital |
Treasury Stock | Purchased Warrants |
Accumulated Deficit |
Accumulated other Comprehensive Income |
Noncontrolling Interest |
|||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Warrants | Amount | |||||||||||||||||||||||||||||||||||||||
(Restated, Note 1) | (Restated, Note 1) | (Restated, Note 1) | ||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2010 |
$ | 313,143 | 125,282,740 | $ | 124 | $ | 738,190 | 13,032,098 | $ | (14,000 | ) | 6,572,096 | $ | (4,810 | ) | $ | (409,166 | ) | $ | 643 | $ | 2,162 | ||||||||||||||||||||||
Stock based compensation (Note 7) |
437 | 138,335 | 437 | |||||||||||||||||||||||||||||||||||||||||
Exercise of warrants for cash |
66 | 11,000 | 66 | |||||||||||||||||||||||||||||||||||||||||
Purchase of warrants for cash |
(723 | ) | 1,543,000 | (723 | ) | |||||||||||||||||||||||||||||||||||||||
Divestiture of Harbin (Note 9) |
(706 | ) | (706 | ) | ||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(13,043 | ) | (13,067 | ) | 24 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||||||||||||||||||||||
Reclassification of net gains from sales of available-for-sale securities included in earnings |
(311 | ) | (311 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available for sale securities |
(81 | ) | (81 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation loss |
(84 | ) | (84 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
(476 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
(13,519 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2010 |
$ | 298,698 | 125,432,075 | $ | 124 | $ | 738,693 | 13,032,098 | $ | (14,000 | ) | 8,115,096 | $ | (5,533 | ) | $ | (422,233 | ) | $ | 167 | $ | 1,480 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
5
Table of Contents
HECKMANN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Organization and Basis of Presentation
Heckmann Corporation (the Company) was incorporated in Delaware on May 29, 2007 as a blank check company whose objective was to acquire, through a merger, stock exchange, asset acquisition, reorganization or similar business combination, one or more operating businesses. On May 19, 2008, Heckmann Corporation and Heckmann Acquisition II Corp., a Delaware corporation and the Companys wholly-owned subsidiary (Acquisition Sub), entered into an agreement and plan of merger and reorganization with China Water and Drinks, Inc., a Nevada corporation (China Water). China Water and subsidiaries is engaged in the manufacture of bottled water products and operates seven bottled water production plants in the Peoples 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 Companys formation, initial public offering (the Offering) and efforts to identify prospective target businesses. Prior to October 30, 2008 the Company was in the development stage. For accounting purposes the acquisition has been treated as a business purchase combination, with the results of China Water included in the consolidated financial statements subsequent to the acquisition date.
On July 1, 2009, the Companys wholly-owned subsidiary, Heckmann Water Resources Corporation, a Texas corporation (HWR), completed the purchase of the limited liability company interests of Charis Partners, LLC, a Texas limited liability company, and substantially all of the assets of Greer Exploration Corporation, a Louisiana corporation, and Silversword Partnerships, each a Texas limited partnership, pursuant to an asset purchase agreement dated April 22, 2009, and consummated July 1, 2009. The business acquired under the agreement is a multi-modal saltwater disposal, treatment and pipeline transportation business in Texas and Louisiana serving customers seeking to dispose of saltwater and frac fluid generated in their oil and gas operations (the Saltwater Disposal and Transport Business).
Effective with the July 1, 2009 acquisition of the Saltwater Disposal and Transport Business by HWR, and the February 2010 establishment of Heckmann Water Solutions, LLC (HWS) the Company has two reportable segments, which as of June 30, 2010 are referred to as international (China Water) and domestic (HWR and HWS).
Subsequent to the issuance of the June 30, 2010 consolidated interim financial statements, the Company determined that it had incorrectly reported the contingent consideration agreement entered into as part of its July 1, 2009 acquisition as equity as opposed to a liability. As a result, the Company amended its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the Form 10-K/A). 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.
As part of the Companys re-evaluation of the accounting for the contingent consideration agreement, the Company considered the changes in the fair value of the contingent consideration obligation at each reporting date subsequent to the acquisition based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the obligations. Accretion expense related to the increase in the net present value of the contingent liability is included in interest expense for the period. As a result of the significant costs incurred during the quarter ended June 30, 2010 for pipeline start-up, commissioning, and pipeline integrity testing as discussed in Note 2 below, management determined that the contingent consideration obligation related to the profitability target for 2010 would not be met.
The June 30, 2010 consolidated interim financial statements have been restated to reclassify the fair value of the contingent consideration from additional paid-in capital to a liability. In addition, due to the change in the fair value of the contingent consideration related to the profitability targets discussed above and the accretion of interest expense during the periods, the restatement resulted in a decrease in net loss of $4.1 million, and a decrease in basic and diluted net loss per share of $0.03 for the three months ended June 30, 2010. Net loss and basic and diluted net loss per share for the six months ended June 30, 2010 decreased by $4.0 million and $0.04, respectively. Refer to Note 11 for the effects of the restatement on each financial statement line item.
The accompanying consolidated financial statements of the Company have been prepared by management in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission. These statements include all normal reoccurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations, and cash flows. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the Companys 2009 Annual Report on Form 10-K/A.
Note 2 Summary of Selected Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions, and profits are eliminated in consolidation.
Economic and Political - Risks A significant portion of the Companys operations are conducted in the PRC. Accordingly, the Companys 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 Companys 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 Companys results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
Seasonality - China Water sales are subject to seasonal factors. Typically, China Water experiences higher sales of bottled water in the summer time in coastal cities while sales remain constant throughout the entire year in some inland cities. China Waters sales can also fluctuate throughout the year for a number of other reasons, including the timing of advertising and promotional campaigns, and unforeseen circumstances, such as production interruptions.
Accounting Estimates - The Companys consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information; however, actual results could differ materially from those estimates.
6
Table of Contents
Earnings Per Share - Basic earnings per share (EPS) excludes dilution and is computed by dividing income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercises of outstanding warrants and options, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock, commonly referred to as the treasury stock method. Inherently, stock warrants and options are deemed to be dilutive when the average market price of the common stock during the period exceeds the exercise prices of the stock warrants and options. At June 30, 2010 and 2009, the Companys dilutive securities include 69,821,258 and 71,588,593 warrants and options exercisable for common stock, respectively. Dilutive securities have been omitted from the computation of weighted average dilutive shares outstanding for the three and six months ended June 30, 2010 and 2009 because the effect was anti-dilutive. Also excluded from the computation of EPS are 3,500,000 shares previously held in escrow pursuant to the majority stockholder consent agreement, entered into on May 19, 2008, as amended, between the Company and Xu Hong Bin. Those shares were released from escrow on March 13, 2009 pursuant to an escrow resolution and transition agreement among the Company, China Water, Xu Hong Bin and his affiliate, have not been delivered and are subject to cancellation by the Company as of May 4, 2009.
Marketable Securities - All of the Companys investments in marketable securities are classified as available-for-sale. These marketable securities are stated at fair value with any unrealized gains or losses recorded in accumulated other comprehensive income (loss), a component of equity, until realized. Other-than-temporary declines in market value from original cost are included in the current years operations. In determining whether an other-than-temporary decline in the market value has occurred, our Company considers the duration that, and extent to which, fair value of the investment is below its cost. Realized gains and losses are calculated based on specific identification to the individual securities involved with the resulting gains and losses included in non-operating income and expense on the consolidated statements of operations.
Accounts Receivable, net - Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. The Company provides an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customers willingness or ability to pay, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. The Company writes off trade receivables when they become uncollectible. As of June 30, 2010 and December 31, 2009, the allowance for doubtful accounts was approximately $1.1 million and $0.9 million, respectively.
Equity Investments - Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Equity investments in companies over which the Company has the ability to exercise significant influence but does not hold a controlling interest were accounted for under the equity method and the Companys income or loss on these investments is recorded in non-operating income or expense.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Authoritative guidance requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. The Company performs its impairment analysis annually during the third quarter of each year. In March 2009 the Company recorded a $184.0 million non-cash goodwill impairment charge representing managements best estimate of an impairment loss in connection with its acquisition of China Water (see Note 3 in the Companys Annual Report on Form 10-K for the year ended December 31, 2009). There was no impairment charge recorded in the three or six months ended June 30, 2010.
Accounting for the Impairment of Long-Lived Assets other than Goodwill - In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Companys amortizable intangible assets include registered trademarks, customer relationships, distribution networks, and customer contracts acquired in the acquisitions of China Water and the Saltwater Disposal and Transport Business. These costs are being amortized using the straight-line method over a weighted average estimated useful life of approximately 13 years.
7
Table of Contents
Fair Value of Financial Instruments - The carrying amounts of the Companys cash equivalents, accounts receivable, accounts payable and debt approximate fair value due to the short-term nature of these instruments. The fair value of amounts due from and to related parties is not practicable to estimate due to the related party nature of the underlying transactions.
Revenue Recognition - Revenues are recognized when finished products are delivered or services are rendered to customers and all of the following have occurred: (i) both title and the risks and benefits of ownership are transferred; (ii) persuasive evidence of an arrangement with the customer exists; (iii) the price is fixed and determinable; and (iv) collection is reasonably assured.
Income taxes - Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company is subject to taxation in China, the United States, California, Texas, and Louisiana taxing jurisdictions. The Companys tax returns since inception are subject to examination by those tax authorities. The Companys policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2010, the Company had no interest or penalties accrued for uncertain tax positions.
Foreign Currency Translation - The functional currency of the Companys PRC subsidiaries is the Chinese Renminbi, (RMB). The RMB is not freely convertible into foreign currencies. The functional currency of the Companys BVI subsidiary and its Hong Kong subsidiaries is the Hong Kong Dollar (HKD). The Companys PRC, BVI and Hong Kong subsidiaries financial statements are maintained in their functional currency.
Property, Plant and Equipment and Repair and Maintenance Costs - Property plant and equipment is recorded at its original cost of construction or fair value of assets purchased. Expenditures that extend the useful life or increase the expected output of property, plant and equipment, as well as major improvements are capitalized. Repair and maintenance costs are expensed as incurred. Subsequent to the completion of the 50-mile pipeline in February 2010, HWR incurred significant costs for pipeline start up, commissioning, and pipeline integrity testing. As a result, during the three and six months ended June 30, 2010 the Company recorded start up and commissioning expenses of approximately $13 million within operations.
Reclassifications and Comparability - Certain reclassifications have been made to prior periods consolidated financial statements in order to conform them to the current periods presentation.
Recently Issued Accounting Pronouncements
Consolidation of Variable Interest Entities Amended
Effective January 1, 2010, the Company adopted the revised authoritative guidance that, among other things, requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (VIE), which amends previous guidance for consideration of related party relationships in the determination of the primary beneficiary of a VIE, amends certain guidance for determining whether an entity is a VIE, requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE, and requires enhanced disclosures about an enterprises involvement with a VIE. The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
Fair Value Measurements Disclosures
Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board (FASB) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information related to purchases, sales, issuances, and settlements information to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance, however, adoption of the updated guidance did not have an impact on the Companys consolidated results of operations or financial position.
Multiple Deliverable Revenue Arrangements
In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its
8
Table of Contents
deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on managements best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for the Company in the first quarter of 2011. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.
Note 3 Investments
The amortized cost, gross unrealized holding gains and losses, and fair value of held-to-maturity and available-for sale securities as of June 30, 2010 and December 31, 2009 are as follows (in thousands):
Contractual Maturity (in years) |
Amortized Cost |
Gross Unrealized Holding | Fair Value |
|||||||||||||||||
Gains | Losses | |||||||||||||||||||
June 30, 2010 |
||||||||||||||||||||
Certificates of deposit |
1 | $ | 10,513 | | | $ | 10,513 | |||||||||||||
Available-for-sale: |
||||||||||||||||||||
Current: |
||||||||||||||||||||
U.S. Government Agencies |
1 | $ | 16,097 | $ | 15 | | $ | 16,112 | ||||||||||||
Corporate Notes |
1 | 38,685 | 195 | (67 | ) | 38,813 | ||||||||||||||
54,782 | 210 | (67 | ) | 54,925 | ||||||||||||||||
Noncurrent: |
||||||||||||||||||||
U.S. Government Agencies |
2-3 | 36,571 | 52 | (4 | ) | 36,619 | ||||||||||||||
U.S. Government Securities |
2-3 | 1,017 | 18 | | 1,035 | |||||||||||||||
Corporate Notes |
2-3 | 12,433 | 178 | (20 | ) | 12,591 | ||||||||||||||
50,021 | 248 | (24 | ) | 50,245 | ||||||||||||||||
Total |
$ | 104,803 | $ | 458 | (91 | ) | $ | 105,170 | ||||||||||||
Contractual Maturity (in years) |
Amortized Cost |
Gross Unrealized Holding | Fair Value |
|||||||||||||||||
Gains | Losses | |||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||
Certificates of deposit |
1 | $ | 10,513 | | | $ | 10,513 | |||||||||||||
Available-for-sale: |
||||||||||||||||||||
Current: |
||||||||||||||||||||
U.S. Government Agencies |
1 | $ | 605 | $ | 1 | | $ | 606 | ||||||||||||
Corporate Notes |
1 | 15,213 | 201 | | 15,414 | |||||||||||||||
15,818 | 202 | | 16,020 | |||||||||||||||||
Noncurrent: |
||||||||||||||||||||
U.S. Government Agencies |
2-3 | 48,570 | 67 | $ | (54 | ) | 48,583 | |||||||||||||
U.S. Government Securities |
2-3 | 1,023 | 10 | | 1,033 | |||||||||||||||
Corporate Notes |
2-3 | 36,209 | 813 | 37,022 | ||||||||||||||||
85,802 | 890 | (54 | ) | 86,638 | ||||||||||||||||
Total |
$ | 101,620 | $ | 1,092 | $ | (54 | ) | $ | 102,658 | |||||||||||
9
Table of Contents
Note 4 Fair Value Measurements
The following table presents information about the Companys assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2010, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability (in thousands):
Fair Value Measurements at June 30, 2010 Using | ||||||||||||||||
Total | Significant Observable Inputs (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Certificates of deposit |
$ | 10,513 | $ | 10,513 | $ | | $ | | ||||||||
U.S. Government Agencies |
52,731 | 52,731 | | | ||||||||||||
Corporate Notes |
51,404 | 51,404 | | | ||||||||||||
U.S. Government Securities |
1,035 | 1,035 | | | ||||||||||||
Total |
$ | 115,683 | $ | 115,683 | $ | | $ | | ||||||||
Liabilities: |
||||||||||||||||
Contingent consideration (restated, Note 1) |
$ | 3,655 | $ | | $ | | $ | 3,655 | ||||||||
In addition to the Companys assets and liabilities that are measured at fair value on a recurring basis, the Company is required, by generally accepted accounting principles in the United States, to record certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. Assets measured at fair value on a nonrecurring basis as of June 30, 2010 are summarized below (in thousands):
Fair Value Measurement Using | New
Cost Basis |
Impairment Charge |
||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Investment China Bottles, Inc. (Note 5) |
$ | | $ | | $ | | $ | | $ | 4,097 | ||||||||||
During the three and six months ended June 30, 2010, the Company recorded an impairment charge of approximately $4,097,000 related to its equity investment in China Bottles, Inc. (China Bottles), as the decrease in fair value of the investment was deemed to be other than temporary. This expense is included in Income (loss) from equity method investment in the consolidated statements of operations for the three and six months ended June 30, 2010. Equity method investments are measured at fair value on a nonrecurring basis when deemed necessary, using observable inputs such as trading prices of the stock as well as using discounted cash flows, incorporating adjusted available market discount rate information and the Companys estimates for liquidity risk.
Note 5 Equity Investments
Underground Solutions, Inc.
On May 6, 2009, the Company purchased approximately 7% of the equity of Underground Solutions, Inc., (UGSI), a water infrastructure and pipeline supplier located in Poway, California for approximately $6.8 million in cash. On December 10, 2009, the Company purchased 1.0 million preferred shares of UGSI for approximately $0.4 million in cash. Equity investments in companies over which the Company has no ability to exercise significant influence are accounted for under the cost method. Accordingly, this investment is accounted for under the cost method. The Chief Executive Officer of UGSI serves as a member of the Board of Directors of the Company.
Energy Transfer Water Solutions, JV LLC
On February 4, 2010, the Companys wholly-owned subsidiary HWS entered into a limited liability company agreement with ETC Water Solutions, LLC (ETC), a wholly-owned subsidiary of Energy Transfer Partners, L.P. (NYSE: ETP), that established a 50-50 joint venture, Energy Transfer Water Solutions, JV LLC (the JV), to develop solutions for the transportation and treatment of produced water, frac fluids and other types of discharged waters generated in the Marcellus Shale oil and natural gas fields throughout Pennsylvania, New York, West Virginia, Virginia, Kentucky, Tennessee, and Ohio, and in the Haynesville Shale in Louisiana and Texas (the Agreement).
10
Table of Contents
The Companys HWS subsidiary will, under a separate operations and reimbursement agreement with the JV, build and operate all water processing and treatment facilities owned by the joint venture. ETC will, under a separate operations and reimbursement agreement with the JV, build and operate all pipeline facilities used to transport produced water, frac fluids and other types of discharged waters to the water processing and treatment facilities operated by HWS.
The JV is managed by a board of directors comprised of an equal number of HWS and ETC representatives, and will be jointly funded unless HWS or ETC opt not to consent to a project, in which case, if the other party elects to proceed on a unilateral basis, it will be entitled to a pre-tax, unlevered internal rate of return of thirty percent on the capital contributions with respect to such project. All other distributions will be made on a 50-50 basis. In February 2010, each of HWS and ETC made an initial capital contribution to the JV of $50,000, and each of HWS and ETC agreed to a first year contribution of $450,000 toward an initial operating budget of $900,000.
The Agreement is subject to usual and customary transfer restrictions, and the obligations of HWS and ETC under both the Agreement and the respective operations and reimbursement agreements are guaranteed by the Company in the case of HWS, and Energy Transfer Partners, L.P., in the case of ETC, pursuant to guaranty agreements.
China Bottles
During the three months ended June 30, 2010 there was a significant decline in the observable market price of China Bottles, the Companys 48% owned equity investment. Additionally, during the three months ended June 30, 2010 the Company noted a significant decline in the China Bottles business which impacted the financial results of the equity investment. As a result of these events management believes that the Company will not be able to recover the carrying amount of the investment and that China Bottles does not have the ability to sustain an earnings capacity that would justify the carrying amount of the investment. Therefore, the Company concluded that the decline in the value of the equity investment was other than temporary. The Company conducts its equity investment impairment analyses in accordance with Accounting Standards Codification (ASC) 323, Investments-Equity Method and Joint Ventures. ASC 323 requires the Company to record an impairment charge for a decrease in value of an investment when the decline in the investment is considered to be other than temporary. Accordingly the Company recorded a $4.1 million non-cash impairment charge within Income (loss) from equity method investment in the consolidated statements of operations for the three and six months ended June 30, 2010 to fully impair the carrying amount of its equity investment in China Bottles.
Note 6 Income Taxes
The difference between the actual income tax (benefit) expense and that computed by applying the U.S. federal income tax rate of 35% to pretax income for the three and six months ended June 30, 2010 and 2009 is summarized below:
Three Months Ended June 30, | Six months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(restated, Note 1) | (restated, Note 1) | |||||||||||||||
United States federal income tax rate |
(35.0 | )% | (35.0 | )% | (35.0 | )% | (35.0 | )% | ||||||||
State and local income taxes, net of federal benefit |
(1.2 | ) | (5.7 | ) | (1.2 | ) | (5.7 | ) | ||||||||
Foreign tax rate difference |
4.1 | 19.6 | 3.8 | 0.4 | ||||||||||||
Effect of tax holiday |
2.6 | (9.5 | ) | 2.6 | (0.1 | ) | ||||||||||
Valuation allowance |
13.8 | 36.7 | 13.8 | 0.6 | ||||||||||||
Change in fair value of contingent consideration |
(3.6 | ) | | (3.5 | ) | | ||||||||||
Goodwill impairment |
| | | 40.0 | ||||||||||||
Other |
2.3 | (4.4 | ) | 2.2 | | |||||||||||
Effective income tax rate |
(17.0 | )% | 1.7 | % | (17.3 | )% | 0.2 | % | ||||||||
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to offset the related deductions and loss carryforwards within the applicable carryforward period, as well as the existence of operating losses on tax credit carrybacks. During the three and six months ended June 30, 2010 the Company recognized an income tax benefit of approximately $2.8 million for tax credit carrybacks. The Company is subject to taxation in the various federal, state and province, county, municipal, and local taxing jurisdictions where it has operations in the United States and China. The Companys tax returns since inception are subject to examination by United States federal and state, and PRC tax authorities. Additionally, the Companys value added tax reports are subject to routine review by PRC tax authorities.
11
Table of Contents
Note 7 Stock-Based Compensation
The Company grants stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and units, other stock-based awards and cash-based awards to employees, directors, consultants and advisors of the Company in accordance with the Heckmann Corporation 2009 Equity Incentive Plan (the 2009 Plan). The 2009 Plan authorizes the issuance of up to 5,000,000 shares of common stock.
Stock Options
The Company estimates the fair value of stock options granted to employees using a Black-Scholes option-pricing model. No stock options were granted during the three or six months ended June 30, 2010. Stock-based compensation cost related to stock options granted in August 2009, all of which is included in general and administrative expense in the statement of operations, totaled $88,100 and $175,300 for the three and six months ended June 30, 2010, respectively.
Restricted Common Stock
For the three and six months ended June 30, 2010, the Company recorded $97,800 and $262,000, respectively, of stock-based compensation expense to its employees and consultants related to shares of restricted common stock granted in May 2009. The Company recorded approximately $1.7 million of stock-based compensation expense to its employees and consultants in the three and six months ended June 30, 2009. During the three months ended June 30, 2010, 138,335 shares of common stock were issued pursuant to the 2009 Plan.
Stock and Warrant Repurchase Program
In August 2009, the Board of Directors approved a 1-year extension of the Companys 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 Companys common stock in open market and private transactions through December 31, 2010, at times and in amounts as management deems appropriate, subject to applicable securities laws. During the three and six months ended June 30, 2010, 1,543,000 warrants were purchased by the Company for $723,000 in cash (the market price for the public warrants). No common shares were purchased in the three or six months ended June 30, 2010.
Note 8 Commitments and Contingencies
Environmental Liabilities
In accordance with the requirements of the PRCs Environmental Protection Law, the Company has installed required environmental protection equipment, adopted environmental protection technologies, established responsibility systems for environmental protection, and has reported to and registered with the relevant local environmental protection departments. The Company has complied with the relevant regulations and has never paid a fee for the excessive discharge of pollutants. Management believes that there are no unrecorded liabilities in connection with the Companys compliance with environment laws and regulations.
The Company also complies with the environmental protection laws and regulatory framework of the United States and the individual states where it operates water gathering pipelines and salt water disposal wells. The Company has installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and has established reporting and responsibility protocols for environmental protection and reporting to relevant local environmental protection departments. In Texas and Louisiana, the Company is subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, and the Louisiana Department of Environmental Quality, all of which are designed to protect the environment and monitor compliance with water quality. Management believes the Company is in material compliance with all applicable environmental protection laws and regulations in the United States, Texas, and Louisiana.
Litigation
On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively Xu), filed a lawsuit in the Delaware Court of Chancery (the Court) making various claims against the Company and its directors and executive officers. Xus lawsuit makes claims allegedly arising out of the Companys intended cancellation of approximately 5.3 million shares of Company common stock held by Xu. Xu claims that the Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2008. On June 8, 2009, the Court denied Xus request for expedited scheduling but indicated that pending resolution of the Xu litigation the Company may not cancel the 5.3 million Xu shares at issue. On June 22, 2009, the Company filed a vigorous answer and countersuit expanding its claims against Xu and seeking recovery of not only the stock at issue, but also cash paid to Xu, and cash the Company believes was misappropriated by Xu. The Companys affirmative defenses and its countersuit contend that the general release in the escrow resolution and transition agreement is infected with fraud and therefore voidable.
12
Table of Contents
In response to the Companys 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 Xus 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 Xus arguments as premature, and ruled that evidentiary questions of fraud and the voidabilty of the transition agreement will remain for later proceedings and trial. The Court also denied Xus motion to dismiss our counterclaims for his breach of the fiduciary duties of care and loyalty as a member of the Companys Board of Directors. Although the Companys fraud defenses and countersuit for breach of fiduciary duties remains, the Court trimmed the pleadings by dismissing the Companys counterclaims for contract breach and conversion. The Companys evidence of Xus wrongdoing raises serious issues for trial. The Companys countersuit for Xus 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 Companys outstanding shares until the litigation is finally resolved. Based on statements by Xu during recent discovery proceedings, the Company believes that Xu, together with one of the holders of the noncontrolling interest in China Waters subsidiary Harbin Taoda Drinks (Harbin), were parties to certain loan agreements that were not disclosed to the Company in connection with its acquisition of China Water or in China Waters SEC filings prior to such acquisition, and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. Further, Xus recent deposition suggests, in the Companys view, significant noncompliance with the discovery process. As a result the Company is seeking to suspend further discovery until there is full compliance.
In Xus companion case for legal fee expense reimbursement as a former director under the indemnity provisions of the Companys bylaws and certificate of incorporation, Xu recently complied with the conditions set by the Companys Board of Directors and the Court mandate that he provide an irrevocable bonded and collateralized $1,000,000 letter of credit in favor of the Company. As a result, requests for expense reimbursement are secured, and, upon submission to the Company and/or approval by the Court, as applicable, the Company may issue reimbursement payments.
On May 28, 2010, Ng Tak Kau, a former officer of China Water that was also part of the selling insiders group that includes Xu, filed a lawsuit in the Delaware Court of Chancery making various claims against the Company and its directors and executive officers. Ngs lawsuit makes claims allegedly arising out of the Companys intended cancellation of 4.08 million shares of Company common stock potentially issuable to Ng in connection with the Companys acquisition of China Water. Ng contends that the Companys intended cancellation of his 4.08 million shares is unwarranted and a breach of agreements entered into in connection with the acquisition. On July 13, 2010, the Company filed an answer denying all allegations and also a countersuit for fraud and fraudulent inducement. To date, there has been no further activity by Ng toward discovery or prosecution of the case.
On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware (the Class Action). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded to the Class Action by filing a motion to transfer and consolidate the Delaware action to California. The motion to transfer is presently pending for decision, after which the Company intends to file a motion to dismiss. On May 21, 2010, Westfield Retirement Board, also purporting to act on behalf of shareholders, filed a virtually identical class action lawsuit in the United States District for the Central District of California. On July 26, 2010, Westfield filed a request to voluntarily dismiss that case.
The outcome of the above litigation could have a material adverse effect on the Companys consolidated financial statements.
Cancellation of Common Shares
Previously, the Company initiated cancellation of 15,527,900 common shares that were issued to former China Water management and insiders, and approximately 1.5 million shares underlying warrants issuable to them in connection with the acquisition of China Water. As part of that initiative, on July 18, 2009, the Company entered into a Settlement and Release Agreement with China Waters former Chief Executive Officer, Chen Xinghua, resulting in the cancellation of 3,361,000 shares. In consideration for Mr. Chens entering into and fully performing the agreement, on August 31, 2009, pursuant to the terms of the Settlement and Release Agreement, the Company issued 200,000 restricted shares of common stock to Mr. Chen. The shares issued under the settlement agreement are subject to a two-year lock up. The Company is continuing its share cancellation and recovery initiative and may seek to take other actions against the remaining former insiders of China Water.
In addition, the Company is subject to claims and litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty.
Note 9 Rescission of Prior Business Combination
On April 1, 2009 the Company acquired 67% of Harbin, a bottled water manufacturer located in the northern city of Harbin (Heilongjiang Province), in the Peoples Republic of China. The agreement to purchase Harbin provided the Company with financial and operational control of Harbins business subsequent to payment of the aggregate purchase price. In June 2010, the holders of the noncontrolling 33% of Harbin claimed that, on the basis of an undisclosed loan agreement that the Company believes was arranged prior to the Companys acquisition of China Water and conflicting purchase price agreements that were submitted to the Chinese government, the full purchase price for the business was not paid. Based on statements by former China Water president Xu Hong Bin during recent discovery proceedings (see Note 8), the Company believes that Xu, together with one of the holders of the
13
Table of Contents
noncontrolling interest in Harbin, were parties to certain loan agreements that were not disclosed to the Company in connection with its acquisition of China Water or in China Waters SEC filings prior to such acquisition and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. The Company was subsequently barred from access to factory operations and records, and demands for additional purchase price consideration were made on the Company by the noncontrolling shareholders. On June 1, 2010, management made the decision not to pay additional consideration for its interest in Harbin and, consequently rescinded the prior business combination resulting, in substance, in a nonmonetary distribution of the net assets of Harbin to the former owners. As a result, and effective June 1, 2010, the Company divested itself of the assets, liabilities and operations of Harbin and recorded a loss of $1.6 million in general and administrative expense in the consolidated statements of operations for the three and six months ended June 30, 2010 representing the aggregate of the carrying amount of the noncontrolling interest and the carrying amount of Harbins net assets as of the June 1, 2010.
Note 10 Segments
The Companys reporting segments have been determined based on the nature of the products and/or services offered to customers or the nature of their function in the organization. The Company evaluates performance based on the operating income contributed by each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The tables below summarize information about reported segments (in thousands):
China Water |
HWR | Corporate | Total | |||||||||||||
Three Months Ended June 30, 2010 |
||||||||||||||||
Sales |
$ | 9,153 | $ | 2,473 | $ | | $ | 11,626 | ||||||||
Gross profit |
2,269 | 710 | | 2,979 | ||||||||||||
Loss before income taxes (restated, Note 1) |
(5,819 | ) | (8,745 | ) | (616 | ) | (15,180 | ) | ||||||||
Additions to fixed assets |
237 | 2,697 | | 2,934 | ||||||||||||
Three Months Ended June 30, 2009 |
||||||||||||||||
Sales |
8,277 | | | 8,277 | ||||||||||||
Gross profit |
2,041 | | | 2,041 | ||||||||||||
Loss before income taxes |
(1,326 | ) | | (1,776 | ) | (3,102 | ) | |||||||||
Additions to fixed assets |
1,101 | | | 1,101 | ||||||||||||
Six Months Ended June 30, 2010 |
||||||||||||||||
Sales |
15,663 | 4,568 | | 20,231 | ||||||||||||
Gross profit |
3,607 | 1,155 | | 4,762 | ||||||||||||
Loss before income taxes (restated, Note 1) |
(6,250 | ) | (8,874 | ) | (641 | ) | (15,765 | ) | ||||||||
Additions to fixed assets |
654 | 7,121 | | 7,775 | ||||||||||||
Goodwill |
6,341 | 7,257 | | 13,598 | ||||||||||||
Total assets |
48,337 | 69,074 | 232,471 | 349,882 | ||||||||||||
Six Months Ended June 30, 2009 |
||||||||||||||||
Sales |
16,080 | | | 16,080 | ||||||||||||
Gross profit |
4,653 | | | 4,653 | ||||||||||||
Loss before income taxes |
(187,342 | ) | | (1,555 | ) | (188,897 | ) | |||||||||
Additions to fixed assets |
4,593 | | | 4,593 | ||||||||||||
Year Ended December 31, 2009 |
||||||||||||||||
Goodwill |
6,341 | 7,257 | | 13,598 | ||||||||||||
Total assets |
56,541 | 63,996 | 244,452 | 364,989 |
NOTE 11 - Restatement
As discussed in Note 1, the Company restated the consolidated interim financial statements as of and for the three and six months ended June 30, 2010. The effects of the correction discussed in Note 1 from amounts previously reported are as follows (in thousands):
Balance sheet (as of June 30, 2010):
As
previously reported |
As restated | |||||||
Other long term liabilities |
$ | 4,293 | $ | 8,218 | ||||
Additional paid-in capital |
746,580 | 738,693 | ||||||
Accumulated deficit |
(426,195 | ) | (422,233 | ) | ||||
Total equity of Heckmann Corporation |
301,143 | 297,218 | ||||||
Total equity |
302,623 | 298,698 |
Statement of operations and comprehensive loss (for the three months ended June 30, 2010):
As
previously reported |
As restated | |||||||
Interest income, net |
$ | 624 | $ | 532 | ||||
Other, net |
(306 | ) | 3,926 | |||||
Loss before income taxes |
(19,320 | ) | (15,180 | ) | ||||
Net loss |
(16,740 | ) | (12,600 | ) | ||||
Net loss attributable to common stockholders |
(16,801 | ) | (12,661 | ) | ||||
Comprehensive loss, net of tax |
(16,956 | ) | (12,816 | ) | ||||
Comprehensive loss attributable to the Company |
(17,017 | ) | (12,877 | ) | ||||
Net loss per common share basic and diluted |
(0.15 | ) | (0.12 | ) |
Statement of operations and comprehensive loss (for the six months ended June 30, 2010):
As
previously reported |
As restated | |||||||
Interest income, net |
$ | 1,368 | $ | 1,098 | ||||
Other, net |
25 | 4,257 | ||||||
Loss before income taxes |
(19,727 | ) | (15,765 | ) | ||||
Net loss |
(17,005 | ) | (13,043 | ) | ||||
Net loss attributable to common stockholders |
(17,029 | ) | (13,067 | ) | ||||
Comprehensive loss, net of tax |
(17,481 | ) | (13,519 | ) | ||||
Comprehensive loss attributable to the Company |
(17,505 | ) | (13,543 | ) | ||||
Net loss per common share basic and diluted |
(0.16 | ) | (0.12 | ) |
Statement of cash flows (for the six months ended June 30, 2010):
As
previously reported |
As restated | |||||||
Net loss |
$ | (17,005 | ) | $ | (13,043 | ) | ||
Change in fair value of contingent consideration |
| (3,962 | ) |
14
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Certain Terms
In this Quarterly Report on Form 10-Q/A, unless the context indicates otherwise, the terms the Company, we, us and our refer to the combined company, which is Heckmann Corporation and its subsidiaries, including China Water and Drinks, Inc. and its affiliated entities (China Water), acquired October 30, 2008, and Heckmann Water Resources Corporation (HWR) established July 1, 2009, and Heckmann Water Solutions, LLC (HWS) established February 4, 2010.
Special Note About Forward-Looking Statements
This Quarterly Report contains statements that are forward-looking and, as such, are not historical facts. Rather, these statements constitute projections, forecasts and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements use words such as believe, expect, should, strive, plan, intend, estimate, anticipate or similar expressions. When the Company discusses its strategies or plans, it is making projections, forecasts or forward-looking statements. Actual results and stockholders value will be affected by a variety of risks and factors, including, without limitation, the recent crisis in worldwide financial markets, international, national and local economic conditions, merger, acquisition and business combination risks, financing risks, geo-political risks, and acts of terror or war. Many of the risks and factors that will determine these results and stockholder values are beyond the Companys ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. You should carefully read the risk factor disclosure contained in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009, where many of the important factors currently known to management that could cause actual results to differ materially from those in our forward-looking statements are discussed.
15
Table of Contents
All such forward-looking statements speak only as of the date of this Quarterly Report. The Company is under no obligation to, nor does it intend to, release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Companys expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Company Overview
We are a holding company that was created to buy operating businesses, and our focus is on buying and building companies in the water sector. We have two operating segments: (1) domestic and (2) international. Our domestic segment presently includes (a) our water disposal, treatment, and pipeline transport facilities in Texas and Louisiana operated by our wholly-owned subsidiary HWR, (b) our joint venture with Energy Transfer Partners, L.P., to develop water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, operated through our wholly-owned subsidiary HWS, and (c) our minority interest investment in water infrastructure solutions and pipeline supplier UGSI. (OTC: UGSI). Our international segment presently includes our bottled water business operated by our wholly-owned subsidiary China Water. As of June 30, 2010, we had approximately $235 million in invested cash and cash equivalents on our balance sheet. In 2010, we plan to continue building the businesses in our domestic and international segments, and we will also make additional acquisitions as we find attractive long-term opportunities for our stockholders.
Headquartered in Palm Desert, California, the Company was incorporated in Delaware on May 29, 2007. We began our corporate existence as a blank check development stage company. On November 16, 2007, we completed an IPO of 54,116,800 units (each consisting of one share of common stock and one warrant exercisable for an additional share of common stock), including 4,116,800 units issued pursuant to the partial exercise of the underwriters over-allotment option, and received net proceeds of approximately $421 million. On the same date, we also completed a private placement of warrants to our founders at an aggregate purchase price of $7 million, or $1.00 per warrant.
On October 30, 2008, we completed our acquisition of China Water, consolidated its subsidiaries and affiliate entities, and now operate its seven bottled water facilities in China with Coca-Cola China as our largest customer.
On July 1, 2009, we purchased of all the assets of Greer Exploration Corporation and the Silversword Partnerships, and all the membership interests of Charis Partners, LLC. The assets of these entities were consolidated into HWR together with the capital and operating resources necessary to build a pipeline and network of disposal wells and terminal facilities. HWR now operates a multi-modal water disposal, treatment and pipeline transportation business in Texas and Louisiana serving customers seeking to dispose of complex water flows including flowback water, frac fluids, and produced brine waters generated in their oil and gas operations. On February 2010, we completed our 50-mile water transport pipeline and treatment facility network in the Haynesville Shale field. It is designed to treat and dispose up to 100,000 barrels of water per day and is supported by a network of deep injection disposal wells.
On February 4, 2010, we announced a joint venture with Energy Transfer Partners, L.P. The joint venture is a 50/50 partnership and operates under the name Energy Transfer Water Solutions, JV, LLC (ETWS). ETWS is in the process of developing water pipeline infrastructure and treatment solutions for oil and gas producers in the Marcellus and Haynesville Shale fields, and intends to develop similar solutions in other areas within the states of New York, Pennsylvania, Ohio, West Virginia, Virginia, Tennessee, Kentucky, Texas, and Louisiana. Our 50% interest in the joint venture is held through HWS.
Operations Overview
China Water produces bottled water products at facilities throughout China. China Water uses two types of production lines, one which produces hand-held sized (330 milliliters to 1.5 liters) bottled water (Small Bottles) and the other which produces carboy-sized (11.4 to 18.9 liters, or 3 to 5 gallons) bottled water (Carboy Bottles). China Water produces a variety of bottled water products including purified water, mineralized water, oxygenated water, juiced drinks, and fruit flavored drinks.
China Water supplies bottled water products to beverage companies and servicing companies, including Coca-Cola China, Uni-President and Jian Li Bao. China Water also markets its bottled water products in China using the brand names Darcunk (which means Absolutely Pure) and Grand Canyon. In addition, China Water provides private label bottled products to companies in the service industry, such as hotels and casinos.
HWRs saltwater disposal and transport business presently includes eight disposal wells and approximately 50 miles of interconnecting pipeline which, at full capacity, is capable of disposing of approximately 100,000 barrels of saltwater and frac fluid each day. HWR enters into saltwater disposal agreements with oil and gas producers and independent trucking companies that need to dispose of saltwater and frac fluid used in drilling operations. HWR accepts trucking company deliveries of saltwater, condensate, and
16
Table of Contents
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 HWRs 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 HWRs network of disposal wells. The agreements provide that, upon connection to the pipeline, the customers will have an obligation to dispose of a minimum firm quantity of saltwater and frac fluid into HWRs network and, in return, HWR will receive fixed fee payments. In addition, HWR currently has agreements and spot market terminal arrangements with approximately 25 other customers, pursuant to which these customers have the right, but not the obligation, to dispose of saltwater and frac fluid into HWRs network and are obligated to make payments to HWR based upon the volume of saltwater and frac fluid actually delivered.
Initial completion of the HWR 50-mile pipeline system occurred in February 2010 and for the period ending June 30, 2010, HWR incurred significant operating costs for pipeline start up, commissioning, repairs, upgrades, replacements, and pipeline integrity testing. Integrity testing, assessment and hydraulic calibration of all of our pipeline and connected terminal assets will continue as deemed necessary to ensure continued safe and reliable operation.
ETWS intends to operate on a build, own, and operate business model and began start up operations in February 2010. In conjunction with ETWS, HWS provides turnkey sourcing, engineering, design and operation of integrated water gathering and management systems for the oil, gas, coal mining, and utility sector. The joint venture bids for large scale water infrastructure gathering and transit solutions for complex waters, specialized disposal, treatment, recycle and reuse systems, in field mobile filtration systems, and terminals and treatment facilities for receipt and processing of various waters.
In February 2010, each of HWS and ETC made an initial capital contribution to ETWS, and each of HWS and ETC agreed to a first year operating budget which is largely dedicated to strategic and economic planning, engineering, regulatory analysis, permitting, project cost assessment and bidding, and customer acquisition. Through June 30, 2010, at the invitation of several potential customers active in the oil, gas, coal mining, and utility sectors the joint venture has provided specific project proposals and we believe these proposals will produce meaningful contract awards during the second half of 2010.
Subsequent to June 30, 2010, ETWS entered into letters of intent for the acquisition of three separate businesses that operate strategically located water treatment and disposal plants serving oil and gas producers in the Marcellus Shale fields in Pennsylvania. These three companies have long operating histories, seasoned management teams, and a significant installed customer base, and we believe that if definitive agreements are reached, each will produce accretive earnings for the joint venture shortly after the target closing date of September 30, 2010.
Our balance sheet remains strong and we continue to actively evaluate potential acquisitions.
The following discussion includes the operating results of China Water and the operating results of HWR since July 1, 2009, the acquisition date of the business.
17
Table of Contents
Results of Operations for the Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009
Three Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
(Restated) | ||||||||
Revenue |
$ | 11,626 | $ | 8,277 | ||||
Cost of goods sold |
8,647 | 6,236 | ||||||
Gross profit |
2,979 | 2,041 | ||||||
Operating expenses: |
||||||||
Selling and marketing expenses |
797 | 1,020 | ||||||
General and administrative expenses |
4,717 | 5,534 | ||||||
Pipeline start-up and commissioning |
13,005 | | ||||||
Total operating expenses |
18,519 | 6,554 | ||||||
Loss from operations |
(15,540 | ) | (4,513 | ) | ||||
Interest income, net |
532 | 972 | ||||||
Income (loss) from equity method investment |
(4,098 | ) | 364 | |||||
Other, net |
3,926 | 75 | ||||||
Loss before income taxes |
(15,180 | ) | (3,102 | ) | ||||
Income tax benefit (expense) |
2,580 | (52 | ) | |||||
Net loss |
$ | (12,600 | ) | $ | (3,154 | ) | ||
Net Sales
Our net sales for the three months ended June 30, 2010 were $11.6 million, which represents $9.1 million of sales of bottled water and $2.5 million of revenues from water disposal compared to $8.3 million for the three months ended June 30, 2009, all of which represents sales of bottled water. Sales for the three months ended June 30, 2010 included approximately $1.0 million of bottled drink sales from the Xian facility, which started production in March 2010, and for sales of the Howmax line of private-label fruit beverage products. Sales for the three months ended June 30, 2009 included approximately $0.2 million of bottled water sales from the Beijing and Shen Yang Aixin factories. In September 2009 the Company announced the restructuring of the Beijing factory and the deconsolidation of the Shen Yang Aixin factory (see Notes 2 and 4 in our Annual Report on Form 10-K for the year ended December 31, 2009). Accordingly there are no sales reported in the three months ended June 30, 2010 for either Beijing or Shen Yang Aixin. Effective June 1, 2010 the Company divested itself of the Harbin facility (Note 9). Sales for the Harbin facility were approximately $1.7 million for the three months ended June 30, 2009 and approximately $1.1 million for the two months ended May 31, 2010.
Cost of Goods Sold
The cost of goods sold for the three months ended June 30, 2010, including approximately $1.1 million of depreciation expense, was $8.6 million, resulting in total gross profit of approximately $3.0 million, or 25.6% of net sales. Gross profit from bottled water sales was $2.3 million, or 24.8% of net sales. Gross profit of $0.7 million, or 28.7%, was attributable to HWRs water disposal revenues. The cost of goods sold for the three months ended June 30, 2009, including approximately $0.4 million of depreciation expense, was $6.2 million, resulting in total gross profit of $2.0 million, or 24.7% of net sales.
Operating Expenses
Operating expenses for the three months ended June 30, 2010 totaled $18.5 million, compared to $6.6 million for the three months ended June 30, 2009.
General and administrative expenses for the three months ended June 30, 2010 were $4.7 million and includes approximately $0.2 million of stock-based compensation and amortization expense of approximately $0.4 million. Also included in general and administrative expense are approximately $1.6 million of expenses relating to undertaking the rescission of the Harbin business acquisition (Note 9). General and administrative expenses for the three months ended June 30, 2009 were $5.5 million and includes approximately $1.1 million of amortization expense and $1.7 million of stock-based compensation expense.
Also included in operating expense are pipeline start-up and commissioning costs of approximately $13.0 million resulting from anomalies in certain segments of the Haynesville pipeline. Accordingly, we reduced the operating pressures below normal operating pressures as we performed additional testing procedures and remediated the anomalies. The pressure reductions and shutdowns that were undertaken to remediate anomalies reduced throughput and adversely impacted our operating costs and revenues during the three months ended June 30, 2010.
Loss from Operations
We had operating losses of $15.5 million and $4.5 million for the three months ended June 30, 2010 and 2009, respectively, as a result of the items mentioned above.
Interest Income, net
During the three months ended June 30, 2010, we recorded interest income, net of $0.5 million compared to $1.0 million for the three months ended June 30, 2009. The decrease was due to lower interest rates for invested funds and lower investment balances in the three months ended June 30, 2010 when compared to the same 2009 period.
18
Table of Contents
Income (Loss) from Equity Method Investment
During the three months ended June 30, 2010, we recorded $4.1 million impairment expense from our 48% equity method investment in China Bottles (Note 5), compared to $0.4 million of equity income during the three months ended June 30, 2009.
Other Income (Expense), net
We recorded other income, net, of $3.9 million and other income, net, of $0.1 million for the three months ended June 30, 2010 and 2009, respectively. The increase was primarily due to the changes in fair value of contingent consideration associated with the performance basic earn-out related to the Charis acquisition. As a result of pipeline start-up and commissioning expenses incurred in the three months ended June 30, 2010, management determined that the earn-out obligation related to the profitability target for 2010 would not be met.
Income Taxes
The Company expects to utilize the deferred tax asset generated from operating losses recorded in the three months ended June 30, 2010 by carrying back the amount to offset prior years taxable income, and accordingly has recorded an income tax benefit for the three months ended June 30, 2010 of approximately $2.6 million compared with a $52,000 income tax expense for the three months ended June 30, 2009.
Net Loss
Our net loss for the three months ended June 30, 2010 was approximately $12.6 million compared to a net loss of $3.2 million for the three months ended June 30, 2009, as a result of the items mentioned above.
Results of Operations for the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
(Restated) | ||||||||
Revenue |
$ | 20,231 | $ | 16,080 | ||||
Cost of goods sold |
15,469 | 11,427 | ||||||
Gross profit |
4,762 | 4,653 | ||||||
Operating expenses: |
||||||||
Selling and marketing expenses |
1,306 | 1,427 | ||||||
General and administrative expenses |
7,523 | 10,924 | ||||||
Goodwill impairment |
| 184,000 | ||||||
Pipeline start-up and commissioning |
13,005 | | ||||||
Total operating expenses |
21,834 | 196,351 | ||||||
Loss from operations |
(17,072 | ) | (191,698 | ) | ||||
Interest income, net |
1,098 | 2,185 | ||||||
Income (loss) from equity method investment |
(4,048 | ) | 335 | |||||
Other, net |
4,257 | 281 | ||||||
Loss before income taxes |
(15,765 | ) | (188,897 | ) | ||||
Income tax benefit (expense) |
2,722 | (420 | ) | |||||
Net loss |
$ | (13,043 | ) | $ | (189,317 | ) | ||
Net Sales
Our net sales for the six months ended June 30, 2010 were $20.2 million, which represents $15.7 million of sales of bottled water and $4.5 million of revenues from water disposal compared to $16.1 million for the six months ended June 30, 2009, all of which represents sales of bottled water. Sales for the six months ended June 30, 2010 included approximately $1.1 million of bottled drink sales from the Xian facility, which started production in March 2010, and for sales of the Howmax line of private label fruit beverage products. Bottled water sales for the six months ended June 30, 2009 included approximately $0.9 million of sales from the Beijing and Shen Yang Aixin factories. In September 2009 the Company announced the restructuring of the Beijing factory and the deconsolidation of the Shen Yang Aixin factory (see Notes 2 and 4 in our Annual Report on Form 10-K for the year ended December 31, 2009). Accordingly, there are no sales reported in the six months ended June 30, 2010 for either Beijing or Shen Yang Aixin. Effective June 1, 2010 the Company has divested itself of the Harbin facility (Note 9). Sales for the Harbin facility were approximately $2.5 million for the period January 1 to May 31, 2010 with no reported sales in June 2010, and $1.7 million for the six months ended June 30, 2009.
19
Table of Contents
Cost of Goods Sold
The cost of goods sold for the six months ended June 30, 2010, including approximately $2.0 million of depreciation expense, was $15.5 million, resulting in total gross profit of $4.8 million, or 23.5% of net sales. Gross profit from bottled water sales was $3.6 million, or 23.0% of net sales. Gross profit of $1.2 million, or 25.3%, was attributable to HWRs water disposal revenues. The cost of goods sold for the six months ended June 30, 2009, including approximately $0.8 million of depreciation expense, was $11.4 million, resulting in total gross profit of $4.7 million, or 28.9% of net sales.
Operating Expenses
Operating expenses for the six months ended June 30, 2010 totaled $21.8 million, compared to $196.4 million for the six months ended June 30, 2009. During the six months ended June 30, 2009, the Company recorded a $184.0 million non-cash goodwill impairment charge related to its acquisition of China Water (see Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2009).
General and administrative expenses for the six months ended June 30, 2010 were $7.5 million and includes approximately $0.4 million of stock-based compensation and amortization expense of approximately $0.8 million. Also included in general and administrative expense are approximately $1.6 million of expenses relating to undertaking the rescission of the Harbin business acquisition (Note 9). General and administrative expenses for the six months ended June 30, 2009 were $10.9 million and includes approximately $2.1 million of amortization expense, $1.7 million of stock-based compensation expense and approximately $2.0 million of bad debt expense.
Also included in operating expense are pipeline start-up and commissioning costs of approximately $13.0 million resulting from anomalies in certain segments of the Haynesville pipeline. Accordingly, we reduced the operating pressures below normal operating pressures as we performed additional testing procedures and remediated the anomalies. The pressure reductions and shutdowns that were undertaken to remediate anomalies reduced throughput and adversely impacted our operating costs and revenues during the six months ended June 30, 2010.
Loss from Operations
We had operating losses of $17.1 million and $191.7 million for the six months ended June 30, 2010 and 2009, respectively, as a result of the items mentioned above.
Interest Income, net
During the six months ended June 30, 2010, we recorded interest income, net of $1.1 million compared to $2.2 million for the six months ended June 30, 2009. The decrease was due to lower interest rates for invested funds and lower investment balances in the six months ended June 30, 2010 when compared to the same 2009 period.
Income (Loss) from Equity Method Investment
During the six months ended June 30, 2010, we recorded $4.1 million impairment expense from our 48% equity method investment in China Bottles (Note 5), compared to $0.3 million of equity income during the six months ended June 30, 2009.
Other Income (Expense), net
We recorded other income of approximately $4.2 million in the six months ended June 30, 2010 compared to $0.3 million for the six months ended June 30, 2009. The increase was attributable to the changes in fair value of contingent consideration associated with the performance based earn-out related to the Charis acquisition. As a result of the pipeline start-up and commissioning expenses incurred in the six months ended June 30, 2010, management determined that the earn-out obligation related to the profitability target for 2010 would not be met.
Income Taxes
The Company expects to utilize the deferred tax asset generated from operating losses recorded in the six months ended June 30, 2010 by carrying back the amount to offset prior yearss taxable income, and accordingly has recorded an income tax benefit for the six months ended June 30, 2010 of approximately $2.7 million compared with a $0.4 million income tax expense for the six months ended June 30, 2009.
Net Loss
Our net loss for the six months ended June 30, 2010 was approximately $13.0 million compared to a net loss of $189.3 million for the six months ended June 30, 2009. The change relates primarily to $184.0 million non-cash goodwill impairment charge recorded during the six months ended June 30, 2009 in addition to the other items mentioned above.
20
Table of Contents
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, strategic acquisitions and investments, repurchases of our securities, and lease payments. Our principal sources of liquidity are cash on hand and cash generated from operations. Cash generated from operations is a function of such factors as changes in demand for our products and services, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, and the impact of integration on our productivity. As of June 30, 2010, we had cash and cash equivalents of approximately $119 million, and approximately $116 million of short and long-term investments, for an aggregate of approximately $235 million in invested cash, cash equivalents and marketable securities.
We have budgeted capital expenditures of approximately $7 million for the remainder of 2010 for new equipment, plant expansion, pipeline construction, and similar projects. In addition, we expect to make capital contributions to the ETWS joint venture in the remainder of 2010.
We believe that our cash, cash equivalents and investments will be sufficient to fund operations, facilitate plant expansions and complete any acquisitions we may undertake for the foreseeable future.
Cash Flows for Six Months Ended June 30, 2010
Net cash used in operating activities was approximately $0.7 million for the six months ended June 30, 2010. Cash used by operating activities was primarily driven by working capital changes offset by various non-cash charges.
Net cash used in investing activities was approximately $16.9 million for the six months ended June 30, 2010. Of this amount, $67.4 million was received from the sale and maturity of securities, offset by the use of $71.0 million for investments in high grade corporate notes and the use of $13.2 million for payments on purchases of machinery and equipment.
Net cash provided by financing activities was $0.3 million for the six months ended June 30, 2010. This amount primarily represents short term borrowings made under a revolving credit facility in China.
Off-Balance Sheet Arrangements
As of June 30, 2010, we did not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
Consolidation of Variable Interest Entities Amended
Effective January 1, 2010, the Company adopted the revised authoritative guidance that, among other things, requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (VIE), which amends previous guidance for consideration of related party relationships in the determination of the primary beneficiary of a VIE, amends certain guidance for determining whether an entity is a VIE, requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE, and requires enhanced disclosures about an enterprises involvement with a VIE. The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
Fair Value Measurements Disclosures
Effective January 1, 2010, the Company adopted the Financial Accounting Standards Board (FASB) updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the
21
Table of Contents
reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information related to purchases, sales, issuances, and settlements information to be included in the roll forward of activity. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance, however, adoption of the updated guidance did not have an impact on the Companys consolidated results of operations or financial position.
Multiple Deliverable Revenue Arrangements
In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on managements best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for the Company in the first quarter of 2011. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.
Critical Accounting Policies
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 customers willingness or ability to pay, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. The Company writes off trade receivables when they become uncollectible. As of June 30, 2010 and December 31, 2009, the allowance for doubtful accounts was approximately $1.1 and $0.9 million, respectively.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Authoritative guidance requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates. The Company will perform its impairment annually during the third quarter of the fiscal year.
Accounting for the Impairment of Long-Lived Assets other than Goodwill - In accordance with authoritative guidance, the Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Companys amortizable intangible assets include registered trademarks, customer relationships and distribution networks and customer contracts acquired in the acquisitions of China Water and HWR. These costs are being amortized using the straight-line method over a weighted average estimated useful life of approximately 13 years.
Revenue Recognition - Revenues are recognized when finished products are delivered or services are rendered to customers and all of the following have occurred: (i) both title and the risks and benefits of ownership are transferred; (ii) persuasive evidence of an arrangement with the customer exists; (iii) the price is fixed and determinable; and (iv) collection is reasonably assured.
Fair Value Measurements - The Company is required to disclose assets and liabilities subject to fair value measurements within a specified fair value hierarchy. The fair value hierarchy gives the highest priority to fair value measurements based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to fair value measurements derived through the use of unobservable inputs (Level 3 measurements). Assets and liabilities are classified within the fair value hierarchy, in their entirety, based on the lowest level input that is significant to the related fair value measurement. Determining where a particular asset or liability should be disclosed within the hierarchy involves judgment regarding the significance of inputs relative to a fair value measurement and where such inputs lie within the hierarchy. Furthermore, assets and liabilities that are not actively traded may have little or no price transparency. As such, estimating the fair value of Level 3 assets and liabilities (such as contingent consideration obligations) involves the use of significant subjective assumptions and judgments. We often employ a discounted cash flow model to help us estimate the fair value of our Level 3 assets and liabilities. Inputs to the model that involve a significant degree of judgment include estimating the amounts and timing of expected cash flows and determining a suitable discount rate.
22
Table of Contents
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Exchange Risk
The value of the RMB against the United States dollar and other currencies is affected by, among other things, changes in Chinas 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 Peoples 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, Chinas 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.
Companys Operations in Foreign Countries
Our operations conducted in China are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, the operations of the Companys China Water subsidiary are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
Interest Rates
Our exposure to market risk for changes in interest rates relates to our cash investments. Our cash investments policy emphasizes the preservation of principal over other portfolio considerations. If market interest rates increased by one percent from June 30, 2010, the fair value of our portfolio would decline approximately $0.4 million.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, our management, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at that time to provide reasonable assurance that the information required to be disclosed in our reports filed with the Securities and Exchange Commission (SEC) under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and are accumulated and communicated to our management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
In making this evaluation, our Chief Executive Officer and Chief Financial Officer considered the material weaknesses of China Water discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2009, under the heading Managements Report on Internal Control over Financial Reporting. Based on this evaluation, we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2010 because of the identification of material weaknesses in China Waters internal control over financial reporting that have not yet been fully remediated and which continue to exist at June 30, 2010.
Remediation Measures of Material Weaknesses
In connection with our acquisition of China Water, we began to address its internal control weaknesses. We have implemented, or plan to implement, the measures described below under the supervision and guidance of our executive management as well as the Audit Committee of our Board of Directors.
23
Table of Contents
Key elements of the remediation effort include, but are not limited to the following initiatives, which have been implemented, or are in the process of implementation as of the date of filing:
| Implementation of the ERP System, a computer based application for the financial process, including an integrated general ledger and financial reporting system for all business centers of our China Water subsidiary. |
| A new President of our China Water subsidiary was appointed, effective January 2009. |
| A new Manager of Internal Audit for our China Water subsidiary was appointed, effective April 2009. |
| A new PRC Finance Manager for our China Water subsidiary was appointed, effective June 2009. |
| A new Manager of Information Technology for our China Water subsidiary was appointed, effective September 2009. |
| Improving the training programs for the financial accounting staff of our China Water subsidiary and recruiting qualified executive operations management for our China Water subsidiary. |
| We have adopted and emphasized to our China Water employees our Code of Business Conduct and Ethics. |
| We have established policy statements and process overviews in appropriate areas of accounting and financial reporting controls, as well as continuing to develop implementation procedures under each policy statement. |
| We have directed significant time of our Manager of Internal Audit to reviewing, testing and documenting financial controls and have used external consultants to supplement these efforts. |
When implemented, management believes that these proposed controls will operate effectively for a sufficient period of time to reduce to a less than reasonably possible likelihood the possibility of a material misstatement and remediate the material weaknesses reported by both management and our independent registered public accounting firm.
The acquisition of China Water will require the development of more robust disclosure controls and procedures, which we are currently continuing to develop. In addition, management will continue to monitor, evaluate and test both the design effectiveness and the operating effectiveness of China Waters internal controls over financial reporting, with the goal of eliminating such material weaknesses by the end of 2010.
Internal Control Over Financial Reporting
In the three months ended June 30, 2010 we have improved process overviews and implemented additional procedures and controls over customer payments in China. Management is currently in the process of completing its internal control testing on China Waters internal controls over financial reporting and we have begun to develop the appropriate internal controls and procedures for our HWR business.
24
Table of Contents
Item 1. | Legal Proceedings. |
On June 1, 2009, Xu Hong Bin, the former president and chairman of China Water and his affiliated entity, Kotex Development Corp. (collectively Xu), filed a lawsuit in the Delaware Court of Chancery (the Court) making various claims against the Company and our directors and executive officers. Xus 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 Xus request for expedited scheduling but indicated that pending resolution of the Xu litigation we may not cancel the 5.3 million Xu shares at issue. On June 22, 2009, we filed a vigorous answer and countersuit expanding our claims against Xu and seeking recovery of not only the stock at issue, but also cash paid to Xu, and cash we believe was misappropriated by Xu. Our affirmative defenses and our countersuit contend that the general release in the escrow resolution and transition agreement is infected with fraud and therefore voidable.
In response to our affirmative defenses and countersuit, Xu tried to circumvent the emerging evidence with a technical motion for partial judgment. It failed. On October 26, 2009, the Court denied Xus 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 Xus arguments as premature, and ruled that evidentiary questions of fraud and the voidabilty of the transition agreement will remain for later proceedings and trial. The Court also denied Xus motion to dismiss our counterclaims for his breach of the fiduciary duties of care and loyalty as a member of the Companys Board of Directors. Although our fraud defenses and countersuit for breach of fiduciary duties remains, the Court trimmed the pleadings by dismissing our counterclaims for contract breach and conversion. Our evidence of Xus wrongdoing raises serious issues for trial. Our countersuit for Xus breach of fiduciary duties and our affirmative defenses to his claims are going forward. In light of the pending litigation, disputed shares will continue to be included in our outstanding shares until the litigation is finally resolved. Based on statements made by Xu during recent discovery proceedings, we believe that Xu, together with one of the holders of the noncontrolling interest in China Waters subsidiary Harbin Taoda Drinks (Harbin), were parties to certain loan agreements that were not disclosed to us in connection with our acquisition of China Water or in China Waters SEC filings prior to such acquisition, and were also involved in preparing and submitting to the Chinese government various conflicting purchase agreements that did not accurately reflect correct net asset value for the Harbin business. Further, Xus recent deposition suggests, in our view, significant noncompliance with the discovery process. As a result of these revelations we are seeking to suspend further discovery until there is full compliance.
In Xus companion case for legal fee expense reimbursement as a former director under the indemnity provisions of our bylaws and certificate of incorporation, Xu recently complied with the conditions set by our Board of Directors and the Court mandate that he provide an irrevocable bonded and collateralized $1,000,000 letter of credit in favor of the Company. As a result, requests for expense reimbursement are secured, and, upon submission to the Company and/or approval by the Court, as applicable, the Company may issue reimbursement payments.
On May 28, 2010, Ng Tak Kau, a former officer of China Water that was also part of the selling insiders group that includes Xu, filed a lawsuit in the Delaware Court of Chancery making various claims against the Company and its directors and executive officers. Ngs lawsuit makes claims allegedly arising out of the Companys intended cancellation of 4.08 million shares of Company common stock potentially issuable to Ng in connection with our acquisition of China Water. Ng contends that our intended cancellation of his 4.08 million shares is unwarranted and a breach of agreements entered in connection with the acquisition. On July 13, 2010, we filed an answer denying all allegations and also a countersuit for fraud and fraudulent inducement. To date, there has been no further activity by Ng toward discovery or prosecution of the case.
On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of shareholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware, (the Class Action). The Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded to the Class Action by filing a motion to transfer and consolidate the Delaware action to California. The motion to transfer is presently pending for decision, after which the Company intends to file a motion to dismiss. On May 21, 2010, Westfield Retirement Board, also purporting to act on behalf of shareholders filed a virtually identical class action lawsuit in the United States District for the Central District of California. On July 26, 2010, Westfield filed a request to voluntarily dismiss that case.
The outcome of the above litigation could have a material adverse effect on our consolidated financial statements.
Separately, we are subject to claims and litigation in the ordinary course of business, the outcome of which is not material and cannot be predicted with certainty.
25
Table of Contents
Item 1A. | Risk Factors. |
Factors that could cause our actual results to differ materially from those in this report are any of the risks recently updated and described in our Annual Report on Form 10-K for the year ended December 31, 2009, which we filed with the SEC on March 11, 2010. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Reserved |
None.
Item 5. | Other Information. |
None.
26
Table of Contents
Item 6. | Exhibits. |
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q/A.
Exhibit |
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 Corporations 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 Corporations 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 Corporations Current Report on Form 8-K filed November 5, 2008) | |
2.2 | Amended and Restated Agreement for Share Exchange, dated May 11, 2007, by and among Ugods, Inc. (predecessor of China Water and Drinks, Inc.), Gain Dynasty Investments Limited and the shareholders of Gain Dynasty Investments Limited (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.3 | Stock Purchase Agreement, dated June 15, 2007, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.3A | Amendment No. 1 to Stock Purchase Agreement, dated August 15, 2007, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.3B | Amendment No. 2 to Stock Purchase Agreement, dated July 16, 2008, by and among China Water and Drinks, Inc., Fine Lake International Limited, Peter Ng and Connie Leung, relating to the acquisition of Pilpol (HK) Biological Limited (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.4 | Stock Purchase Agreement, dated August 24, 2007, by and among China Water and Drinks, Inc., Pilpol (HK) Biological Limited and Haoyang Bian, relating to the acquisition of Shenyang Aixin Industry Company Ltd. (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.4A | Amendment No. 1 to Stock Purchase Agreement, dated December 13, 2007, by and among China Water and Drinks, Inc., Pilpol (HK) Biological Limited and Haoyang Bian, relating to the acquisition of Shenyang Aixin Industry Company Ltd. (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.5 | Amended and Restated Share Purchase Agreement, dated June 12, 2008, by and between China Water and Drinks, Inc. and Li Sui Poon, relating to the acquisition of the parent company of Guangzhou Grand Canyon Pure Distilled Water Co. Ltd. (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.6 | Share Purchase Agreement, dated October 22, 2008, by and between Gain Dynasty Investments Ltd. and Yu Waiman, relating to the acquisition of the parent company of Changsha Rongtai Co., Ltd. (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.7 | Share Purchase Agreement, dated October 22, 2008, by and between Gain Dynasty Investments Ltd. and Leung Yu, relating to the acquisition of the parent company of Beijing Changsheng Taoda Co., Ltd. (incorporated herein by reference to Heckmann Corporations Annual Report on Form 10-K for the year ended December 31, 2008) | |
2.8 | Asset Purchase Agreement, dated as of June 12, 2009, by and among Heckmann Corporation, Heckmann Water Resources Corporation, Charis Partners, LLC, David Melton, Chris Cooper, Craig Zips, Mike Davis, Kevin Greer, Greer Exploration Corporation, James Greer, Silversword, L.P., Silversword II, L.P., Silversword III, L.P., Silversword IV, L.P., Silversword V, L.P., Silversword VII, L.P., and Jon Hileman (incorporated herein by reference to Heckmann Corporations Current Report on Form 8-K filed June 12, 2009) | |
2.9 | Amendment No. 1 to Asset Purchase Agreement, dated as of June 30, 2009, by and among Heckmann Corporation, Heckmann Water Resources Corporation, Charis Partners, LLC, David Melton, Chris Cooper, Craig Zips, Mike Davis, Kevin Greer, Greer Exploration Corporation, James Greer, Silversword, L.P., Silversword II, L.P., Silversword III, L.P., Silversword IV, L.P., Silversword V, L.P., Silversword VII, L.P., and Jon Hileman (incorporated herein by reference to Heckmann Corporations Current Report on Form 8-K filed June 30, 2009). |
27
Table of Contents
Exhibit |
Description | |
3.1 | Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to Heckmann Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations Registration Statement on Form S-1 filed November 8, 2007) | |
10.42 | First Supplemental and Amended Agreement for Firm Disposal of Saltwater between Heckmann Water Resources Corporation and Exco Production Company, L.P., executed February 26 2010, effective January 25, 2010 (incorporated by reference to Exhibit 10.42 to Heckmann Corporations Annual Report on Form 10-K filed March 11, 2010). | |
10.43 | Limited Liability Company Agreement of Energy Transfer Water Solutions JV, LLC by and between ETC Water Solutions, LLC and HEK Water Solutions, LLC, dated February 4, 2010 (incorporated by reference to Exhibit 10.42 to Heckmann Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations Current Report on Form 8-K filed February 9, 2010) | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |
| Certain Confidential Information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
28
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 14, 2011 | ||
/s/ RICHARD J. HECKMANN | ||
Name: | Richard J. Heckmann | |
Title: | Chief Executive Officer (Principal Executive Officer) | |
/s/ BRIAN R. ANDERSON | ||
Name: | Brian R. Anderson | |
Title: | Chief Financial Officer (Principal Financial Officer and Accounting Officer) |
29