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| HEK > SEC Filings for HEK > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, the terms "the Company," "we," "us" and "our" refer to the combined company, which is Heckmann Corporation and its subsidiaries, including China Water and Drinks, Inc. and its affiliated entities ("China Water"), acquired October 30, 2008, and Heckmann Water Resources Corporation ("HWR") beginning July 1, 2009.
This Quarterly Report contains statements that are forward-looking and, as such, are not historical facts. Rather, these statements constitute projections, forecasts and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements use words such as "believe," "expect," "should," "strive," "plan," "intend," "estimate," "anticipate" or similar expressions. When the Company discusses its strategies or plans, it is making projections, forecasts or forward-looking statements. Actual results and stockholders' value will be affected by a variety of risks and factors, including, without limitation, the recent crisis in worldwide financial markets, international, national and local economic conditions, merger, acquisition and business combination risks, financing risks, geo-political risks, and acts of terror or war. Many of the risks and factors that will determine these results and stockholder values are beyond the Company's ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. You should carefully read the risk factor disclosure contained in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008, 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, as supplemented by the risk factor disclosure contained in "Item 1A. Risk Factors" in Part II of this Quarterly Report.
All such forward-looking statements speak only as of the date of this Quarterly Report. The Company is under no obligation to, nor does it intend to, release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Company Overview
We are a holding company that was created to acquire or make investments in attractive businesses. We completed our first investment, the acquisition of China Water, a bottled water company operating in the People's Republic of China ("China"), on October 30, 2008. We completed our second, 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 the Silversword Partnerships, each a Texas limited partnership, pursuant to an asset purchase agreement dated April 22, 2009. The business acquired under this 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 Business").
We began our corporate existence as a blank check development stage company in 2007. On November 16, 2007, we completed an initial public offering ("IPO") of 54,116,800 units (each consisting of one share of common stock and one warrant exercisable for an additional share of common stock), including 4,116,800 units issued pursuant to the partial exercise of the underwriters' over-allotment option, and received net proceeds of approximately $421.0 million. On the same date, we also completed a private placement of warrants to our founders at an aggregate purchase price of $7.0 million, or $1.00 per warrant.
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, and oxygenated water.
China Water supplies bottled water products to beverage companies and servicing companies, including Coca-Cola China, Uni-President and Jian Li Bao. China Water also markets its bottled water products in China using the brand names "Absolutely Pure" and "Grand Canyon." In addition, China Water provides private label bottled products to companies in the service industry, such as hotels and casinos.
HWR's Saltwater Disposal Business presently includes six disposal wells and approximately 12 miles of interconnecting pipeline currently capable of disposing of approximately 35,000 barrels of saltwater and frac fluid each day. HWR enters into saltwater disposal agreements with oil and gas producers and independent trucking companies that need to dispose of saltwater and frac fluid used in drilling operations. HWR accepts trucking company deliveries of saltwater, condensate, and frac fluid at its filtration terminals, and takes delivery of saltwater and frac fluid directly into its filtration facilities and network of pipeline from the oil and gas wells of area operators. The saltwater and frac fluid is pumped through the pipeline and into disposal wells. HWR is in the process of expanding its operations to include up to six additional disposal wells and several miles of new interconnecting pipeline, which, when completed, will raise HWR's daily receiving and disposal capacity to approximately 120,000 barrels.
HWR currently has multi-year forward contracts with three principal customers, pursuant to which HWR has agreed to install 40 miles of new pipeline connecting these customers' oil and gas wells to HRW's disposal wells. The agreements provide that, upon connection of the new pipeline, the customers will have an obligation to dispose of a minimum firm quantity of saltwater and frac fluid into HWR's network and, in return, HWR will receive fixed fee payments. In addition, HWR currently has agreements with approximately 10 smaller customers, pursuant to which these customers have the right, but not the obligation, to dispose of saltwater and frac fluid into HWR's network and are obligated to make payments to HWR based upon the volume of saltwater and frac fluid actually delivered.
As of September 30, 2009, we had operated our China Water subsidiary for eleven months. Based upon our recent operating results, and evaluations performed by our new management team at China Water and our management team at Heckmann Corporation, we believe the following:
• The global water business remains an excellent long-term business opportunity.
• China presents a sizable and growing market, and is and will continue to be a key market for us.
• Through China Water, we have the capacity to produce up to 1.3 billion bottles of water annually in China.
• Our relationship with Coca-Cola in China is strong, and we are nearing completion of construction of a new facility near Xi'An, Shaanxi Province, to serve Coca-Cola in this market.
• The business we acquired in China is not currently as strong as we had anticipated. Sales for the first nine months of 2009 were disappointing. We continue to evaluate whether there are other issues that affect current and future operation of the business.
• In addition, the financial reporting systems we inherited, which we knew were deficient at the time of the acquisition, continue to be a challenge.
• We are executing on our intended cancellation of approximately 15.5 million shares issued to former China Water management and insiders, and approximately 1.5 million shares underlying warrants issuable to them. To date 3,361,000 shares have been cancelled pursuant to the settlement agreement with Chen Xinghua, China Water's former Chief Executive Officer, which is more fully described in Part II, Item 5. - Other Information, of this Quarterly Report, and we intend to complete the cancellation process for the remainder by the end of 2009 and early 2010 through additional settlement agreements or litigation.
• We have evaluated the goodwill recorded on acquisition, and have reduced
it from an initial estimate of approximately $315.0 million to $6.3
million (Note 5), reflecting (1) a reduction of approximately $28.0
million relating to the Chen Xinghua settlement agreement mentioned above,
(2) an increase of approximately $47.1 million from adjusting certain
acquired assets and assumed liabilities to recoverable amounts at the date
of acquisition, (3) an increase of approximately $34.7 from finalizing the
valuations related to the purchase price allocation and (4) approximately
$362.5 million related to non-cash impairment charges. In connection with
finalizing the Company's purchase price allocation related to China Water,
the Company corrected the allocation of its purchase price related to
certain tangible assets and assumed liabilities by $47.1 million. Pursuant
to Staff Accounting Bulletin (SAB) 99, Materiality, (SAB 99), and SAB 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, the Company evaluated
the quantitative and qualitative aspects of these corrections and
determined the corrections were not material, as there was no impact on
the Company's results of operations or cash flow statements for the year
ended December 31, 2008, or for the periods reported within the Company's
quarterly Form 10-Q filings for 2009.
As of September 30, 2009, HWR had operated our Salt Water Disposal Business for three months. Based upon our recent operating results, and evaluations performed by our management team, we believe the following:
• HWR's existing business including six disposal wells and approximately 12 miles of interconnecting pipeline is operating profitably and has contributed net earnings to our consolidated operating results. Capital expenditures will be invested by HWR in 2009-2010 to acquire, permit, and operate additional disposal wells and install interconnecting pipeline into an integrated closed loop system capable of receiving and disposing up to 120,000 barrels per day.
• Construction of HWR's new 40-mile pipeline into the Haynesville Shale Play in East Texas and North West Louisiana is on schedule for completion in three phases in 2009-2010.
• Phase I of the new pipeline will be operational and generating revenue in early 2010.
• Capital expenditures of approximately $20.0 million dollars will be invested in 2009-2010 to complete HWR's new 40-mile Haynesville pipeline and integrated disposal systems to support up to 100,000 barrels of daily disposal capacity.
• HWR has firm multi-year disposal contracts for approximately 38% of planned capacity for the new Haynesville pipeline and $60 million in revenue for the first seven years of operations.
Our balance sheet remains strong and we continue to actively evaluate potential acquisitions.
The following discussion includes the operating results of China Water since January 1, 2009 and the operating results of HWR as of the acquisition date of July 1, 2009. Prior to our October 30, 2008 acquisition of China Water, we were a blank check company with no operations. Accordingly, the results of operations for the three and nine months ended September 30, 2009 do not provide a meaningful comparison with the same period in 2008.
Results of Operations for the Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
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