I need help with this case study - just the parts A and B, I know how to do the next portion so I did not upload it. A. Improper Use of SPEs: The SECs Complaint (2011) against Basin Water, Inc. alleged: The Defendants Materially Overstate Basins Q2 2007 And Year-To-Date Revenues By Engaging In A Sham $3.8 Million Sale To A Special Purpose Entity They Directly Or Indirectly Cause To Be Created (section F). After reviewing the signals for Enrons schemes of using SPEs to understate debt and to overstate earnings, identify the signals of the improper use of unconsolidated affiliates, or SPEs, that were present in the Enron case and can allegedly be found in Basin Waters notes to its financial statements. Explain why those signals could have been indications that Basin Water may have allegedly overstated its sales and under-stated its loss.

B. Improper Recognition of Sales: The SEC Complaint (2011) alleged that Basin also overstated revenues via contingent sales. Further, according to the SEC Complaint, Several sales did not occur in the quarter for which revenue was recognized (par. 3). These alleged methods described by the SEC are similar to some of Sunbeams methods of overstating sales. What signals of overstatement of sales could have been found in an analysis of Basin Waters financial statements. Provide supporting calculations.

CASE STUDY BASIN WATER. INC* Examine extracts from the selected affiliates, or SPEs, that were present financial statements from Basin in the Enron case and can allegedly Water, Inc., for the fiscal years ended be found in Basin Water's notes to 2005, 2006, and 2007 its financial statements. Explain why Examine Note 9 and Note 15 to those signals could have been indica- Basin Water's Consolidated Financial tions that Basin Water may have alleg- Statements for 2007 edly overstated its sales and under- Respond to the following Case Study stated its loss. questions. b. Improper Recognition of Sales: The Required SEC Complaint (2011) alleged that Basin also overstated revenues via a. Improper Use of SPES: The SEC's contingent sales. Further, according to Complaint (2011) against Basin the SEC Complaint, "Several sales did Water, Inc. alleged: "The Defendants not occur in the quarter for which rev- Materially Overstate Basin's Q2 2007 enue was recognized" (par. 3). These And Year-To-Date Revenues By alleged methods described by the Engaging In A Sham $3.8 Million Sale SEC are similar to some of Sunbeam's To A Special Purpose Entity They methods of overstating sales. Directly or indirectly Cause To Be Review Sunbeam's signals of over- Created" (section F). After review- statement of sales (see Chapter 3) and ing the signals for Enron's schemes of identify which of those signals could have using SPs to understate debt and to been found in an analysis of Basin Water's overstate eamings, identify the signals financial statements. Provide supporting of the improper use of unconsolidated calculations. *In early November, 2013, the bench trial for the Basin Water case was concluded, pending decision by the court. According to Litigation Release 22014, "In February 2009, Basin Water restated its financial results. In July 2009, the Rancho Cucamonga, Calif.-based company declared Chapter 11 bankruptcy and is now defunct. FINANCIAL STATEMENTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Extracts from FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 31, 2006 BASIN WATER, INC. Balance Sheets (in thousands except share and per share data) December 31, December 31, 2006 2005 ASSETS Current assets Cash and cash equivalents $ 54,567 $ 2,724 BASIN WATER, INC. Balance Sheets (in thousands except share and per share data) December 31, December 31, 2006 2005 ASSETS Current assets Cash and cash equivalents $ 54,567 $ 2,724 Accounts receivable, net of $67 and $0 allowance for doubtful accounts 2,416 3,927 Unbilled receivables, net of $433 and $0 allowance for doubtful accounts 9,123 3,123 Inventory 714 347 Prepaid expenses and other 634 189 Notes receivable 100 Total current assets 67,454 10,410 Property and equipment Property and equipment 13,621 10,445 Less: accumulated depreciation 1,394 962 Property and equipment, net 12,227 9,483 12,227 9,483 7,466 383 37 2,485 10,371 $ 90,052 2,744 286 428 447 3,905 $ 23,798 Property and equipment, net Other assets Long-term unbilled receivables Patent costs, net Loan costs, net Other assets, net Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable Current portion of notes payable Current portion of capital lease obligations Current portion of deferred revenue and advances Current portion of contract loss reserve Accrued expenses and other Total current liabilities $ 2,150 674 $ 1,562 2,007 17 292 1,321 2,291 7,490 15 741 273 3,853 (continued) 6 Extracted from 10-K filings for Basin Water, Inc. 20052007. Obtained from U.S. Securities and Exchange Commission. www.sec.gov December 31, December 31, 2006 2005 10 6,878 24 40 387 439 2,404 2,250 6,529 10,315 19,989 Notes payable, net of current portion and unamortized discount Capital lease obligations, net of current portion Deferred revenue, net of current portion Contract loss reserve, net of current portion Redeemable convertible Series A preferred stock, no par value6,000,000 shares authorized, 0 and 627,500 shares issued and outstanding Redeemable convertible Series B preferred stock, no par value5,000,000 shares authorized, 0 and 1,734,125 shares issued and outstanding Total liabilities Commitments and contingencies Stockholders' equity Common stock, no par value40,000,000 shares authorized, 10,303,047 shares issued and outstanding Common stock, $0.001 par value100,000,000 shares authorized, 19,887,672 shares issued and outstanding Additional paid-in capital Accumulated deficiency Total stockholders' equity Total liabilities and stockholders' equity 7,927 20 95,002 (15,285) 79,737 $ 90,052 (4,118) 3,809 $ 23,798 Extracts from FORM 10-K? For the fiscal year ended December 31, 2007 BASIN WATER, INC. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, December 31, 2007 2006 ASSETS Current assets Cash and cash equivalents $ 35,456 $ 54,567 Accounts receivable, net of $72 and $67 allowance for doubtful accounts 3,167 2,416 Unbilled receivables, net of $524 and $433 allowance for doubtful 11,443 9,123 accounts Inventory 1,055 714 Current portion of notes receivable 338 Prepaid expenses and other 1,233 634 Total current assets 52,692 67,454 Property and equipment Property and equipment 15,945 13,621 BASIN WATER, INC. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, December 31, 2007 2006 $ 35,456 3,167 11,443 $ 54,567 2,416 9,123 714 ASSETS Current assets Cash and cash equivalents Accounts receivable, net of $72 and $67 allowance for doubtful accounts Unbilled receivables, net of $524 and $433 allowance for doubtful accounts Inventory Current portion of notes receivable Prepaid expenses and other Total current assets Property and equipment Property and equipment Less: accumulated depreciation Property and equipment, net 1,055 338 1,233 52,692 634 67,454 15,945 1,645 14,300 13,621 1,394 12,227 (continued) December 31, December 31, 2007 2006 7,466 8,682 7,664 3,015 3,416 2,274 4,502 1,667 31,220 $ 98,212 1,641 383 Other assets Goodwill Unbilled receivables, net of current portion Notes receivable, net of current portion Intangible assets, net Patent costs, net Investment in affiliate Other assets Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable Current portion of notes payable Current portion of capital lease obligations Current portion of deferred revenue and advances Current portion of contract loss reserve Accrued expenses and other 881 10,371 $ 90,052 $ 3,553 $ 1,562 2,007 17 11 266 292 1,964 3,140 1,321 2,291 3,140 8,934 2,291 7,490 10 24 387 Accrued expenses and other Total current liabilities Notes payable, net of current portion Capital lease obligations, net of current portion Deferred revenue, net of current portion Deferred revenue-affiliate Contract loss reserve, net of current portion Deferred income tax liability Other long-term liabilities Total liabilities Commitments and contingencies Stockholders' equity Common stock, $0.001 par value100,000,000 shares authorized, 21,948,704 and 19,887,672 shares issued and outstanding Additional paid-in capital Treasury stock Accumulated deficiency Total stockholders' equity Total liabilities and stockholders' equity 15 296 1,920 5,311 2,268 179 18,923 2,404 10,315 22 20 95,002 110,354 (552) (30,535) 79,289 $ 98,212 (15,285) 79,737 $ 90,052 The accompanying notes are an integral part of these consolidated financial statements. Basin Water, Inc. Consolidated Balance Sheets (In thousands, except per share data) Years Ended December 31, 2007 2006 2005 $ 13,477 $ 13,861 $ 10,016 5,307 3,253 2,215 18,784 17,114 12,231 Revenues System sales Contract revenues Total revenues Cost of revenues Cost of system sales Cost of contract revenues Depreciation expense Total cost of revenues Gross profit (loss) Research and development expense Selling, general and administrative expense Income (loss) from operations Other income (expense) Interest expense Interest income 13,790 10,698 443 24,931 (6,147) 564 13,685 (20,396) 12,161 7,522 423 20,106 (2,992) 634 6,827 (10,453) 4,467 2,323 340 7,130 5,101 651 3,334 1,116 (98) 2,736 (2,781) 2,061 (621) 52 10,698 443 24,931 (6,147) 564 13,685 (20,396) 7,522 423 20,106 (2,992) 634 6,827 (10,453) 2,323 340 7,130 5,101 651 3,334 1,116 (621) 52 Cost of contract revenues Depreciation expense Total cost of revenues Gross profit (loss) Research and development expense Selling, general and administrative expense Income (loss) from operations Other income (expense) Interest expense Interest income Gain on sale to affiliate Other income Total other income (expense) Income (loss) before taxes Income tax benefit Net income (loss) Net income (loss) per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted (98) (2,781) 2,736 2,061 2,500 8 6 5,146 (714) (15,250) (11,167) 16 (553) 563 $ (15,250) $ (11,167) $ 563 $ $ (0.76) $ (0.76) $ (0.70) $ (0.70) $ 0.06 0.04 20,185 20,185 16,048 16,048 9,924 12,849 Basin Water, Inc. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2007 2006 2005 $ (15,250) $ (11,167) $ 563 Cash flows from operating activities Net income (loss) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Gain on sale to affiliate Issuance of warrants for services Write off of loan acquisition costs 995 1,706 (2,500) 1,024 744 506 31 417 34 401 (continued) (11,592) (3,941) (1,695) Net cash used in investing activities Cash flows from financing activities Issuance of common stock Repurchase of common stock Proceeds from employee stock option exercises Proceeds from warrant exercises Issuance of redeemable preferred stock Proceeds from notes payable Loan origination fees Repayments of notes payable and capital lease obligations Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 75,178 3,584 (552) 527 162 8,060 596 2,000 5,156 (100) (100) (2,298) (9,095) (112) 5,737 68,145 9,124 (19,111) 51,843 1,020 54,567 2,724 1,704 $ 35,456 $ 54,567 $ 2,724 From Basin's 10-K 2007 NOTES, Pages F20-F228 Note 9: OTHER ASSETS Goodwill The table below summarizes the changes in the carrying amount of goodwill for the year ended December 31, 2007: $ Balance at December 31, 2006 Acquisition of business during the period Balance at December 31, 2007 8,682 $ 8,682 Long-term Accounts Receivable and Notes Receivable The Company has four cus- tomer system sales agreements which provide for payment terms ranging from two to five years, unless certain conditions are met, in which case the payment terms are 8 Source: U.S. Securities and Exchange Commission. www.sec.gov accelerated. At December 31, 2007 and 2006, the amount of long-term accounts receiv- able was $7,664 and $7,466, respectively, which represents the balance due from these four customers under the extended payment terms. In 2004, in connection with the sale of a system, the Company received a $300 unse- cured note that provides for interest at a rate of 3% per annum. The Company received a payment of $200 in connection with this note in 2005. The final principal payment of $100 became due in 2006, and as such, the note has been classified as current. The Company has reserved $67 of this note as of December 31, 2007 and 2006. Both the note and the related allowance for doubtful accounts have been classified as current assets and are included in the accounts receivable balance at December 31, 2007 and 2006. At December 31, 2007, long-term notes receivable consist of non-interest bear- ing notes receivable from VL Capital, due in 72 monthly installments of $63 beginning April 2008, with a net present value of $3,353, calculated using an imputed interest rate of 5.0% per annum. Intangible Assets Net intangible assets are as shown in the following table as of the dates indicated: Intangible Assets Net intangible assets are as shown in the following table as of the dates indicated: December 31, 2007 2006 $ 189 $ 394 916 1,210 1,299 560 Deferred stock based compensation Fair value of warrants, net Service agreements and contracts Customer relationships Covenant not to compete Trade name Loan costs, net Intangible assets, net 295 157 37 $ 1,641 $ 3,416 The amortization period of intangible assets are as follows: customer relationships15 years; covenant not to competethree years; trade nametwo years; service agreements and contractssix years; deferred stock-based compensation- three years; and fair value of warrants issued to a joint venture partner-five years. Patent Costs The Company capitalizes costs of patent applications. As a result of the September 2007 acquisition of MPT, the Company recorded an additional $1,812 repre- senting the fair value of patents acquired. When patents are issued, the Company amor- tizes the patent cost over the life of the patent, usually 17 years. Future amortization of patent costs at December 31, 2007 is approximately $107 per year for each of the five years ended December 31, 2008 through 2013, and $107 each year thereafter through 2024. If a patent is denied, capitalized patent costs are written off in the period in which a patent application is denied. Investment in Empire Water Corporation (Empire) In May 2007, the Company entered into an agreement to acquire certain water rights and related assets. In December 2007, the Company sold its rights to purchase these assets to Empire. As consideration for the sale of these assets, the Company received 6,000,000 shares of Empire common stock, which represents an ownership interest of approximately 32% in Empire as of December 31, 2007. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. This reduction of approxi- mately $1,900 has been recorded as deferred revenue-affiliate on the balance sheet of the Company at December 31, 2007. The Company has recorded its investment in Empire at approximately $4,500, while the amount of underlying equity in the net assets of Empire is approximately $3,000. The dif- ference of approximately $1,500 represents the excess of the market value of the Company's investment in Empire over the Company's 32% interest in the net assets of Empire. The following tables present summarized information concerning the assets, liabilities and results of operations of Empire for the most recent periods for which information is available: Assets Liabilities Dec 31, 2007 $ 9,460 $ 101 Six Months Ended Dec 31, 2007 $ $ (11) Year Ended June 30, 2007 $ $ (33) Revenues Net loss From BASIN's 10-K 2007 NOTES, Page 27 Note 15: RELATED PARTY TRANSACTIONS The Company paid legal fees to a legal firm whose partner is a director. The total payments for legal fees to this firm were $315, $192 and $154 for the years ended December 31, 2007, 2006 and 2005, respectively. The Company also leases office space and equipment from two individuals, one of whom is a director and employee and the other an employee, under month-to-month agreements. The total payments under these related party rental agreements were $57, $54 and $55 for the years ended December 31, 2007, 2006, and 2005, respectively. In May 2007, the Company entered into an agreement to acquire certain water rights and related assets. In December 2007, the Company sold its rights to purchase these assets to Empire. As consideration for the sale of these assets, the Company received 6,000,000 shares of Empire common stock, which represents an ownership interest of approximately 32% in Empire as of December 31, 2007. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. In addition, Empire agreed to purchase one water treatment system from the Company concurrent with the December 2007 closing for a total price of $900. During the year ended December 31, 2007, the Company recorded $653 of system sales rev- enue and $287 of gross margin on this transaction under the percentage-of-completion method of revenue recognition. The Company has recorded $92 as a charge against other income under the equity method, which represents 32% of the Company's gross margin on this system sale to a related party. CASE STUDY BASIN WATER. INC* Examine extracts from the selected affiliates, or SPEs, that were present financial statements from Basin in the Enron case and can allegedly Water, Inc., for the fiscal years ended be found in Basin Water's notes to 2005, 2006, and 2007 its financial statements. Explain why Examine Note 9 and Note 15 to those signals could have been indica- Basin Water's Consolidated Financial tions that Basin Water may have alleg- Statements for 2007 edly overstated its sales and under- Respond to the following Case Study stated its loss. questions. b. Improper Recognition of Sales: The Required SEC Complaint (2011) alleged that Basin also overstated revenues via a. Improper Use of SPES: The SEC's contingent sales. Further, according to Complaint (2011) against Basin the SEC Complaint, "Several sales did Water, Inc. alleged: "The Defendants not occur in the quarter for which rev- Materially Overstate Basin's Q2 2007 enue was recognized" (par. 3). These And Year-To-Date Revenues By alleged methods described by the Engaging In A Sham $3.8 Million Sale SEC are similar to some of Sunbeam's To A Special Purpose Entity They methods of overstating sales. Directly or indirectly Cause To Be Review Sunbeam's signals of over- Created" (section F). After review- statement of sales (see Chapter 3) and ing the signals for Enron's schemes of identify which of those signals could have using SPs to understate debt and to been found in an analysis of Basin Water's overstate eamings, identify the signals financial statements. Provide supporting of the improper use of unconsolidated calculations. *In early November, 2013, the bench trial for the Basin Water case was concluded, pending decision by the court. According to Litigation Release 22014, "In February 2009, Basin Water restated its financial results. In July 2009, the Rancho Cucamonga, Calif.-based company declared Chapter 11 bankruptcy and is now defunct. FINANCIAL STATEMENTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Extracts from FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 31, 2006 BASIN WATER, INC. Balance Sheets (in thousands except share and per share data) December 31, December 31, 2006 2005 ASSETS Current assets Cash and cash equivalents $ 54,567 $ 2,724 BASIN WATER, INC. Balance Sheets (in thousands except share and per share data) December 31, December 31, 2006 2005 ASSETS Current assets Cash and cash equivalents $ 54,567 $ 2,724 Accounts receivable, net of $67 and $0 allowance for doubtful accounts 2,416 3,927 Unbilled receivables, net of $433 and $0 allowance for doubtful accounts 9,123 3,123 Inventory 714 347 Prepaid expenses and other 634 189 Notes receivable 100 Total current assets 67,454 10,410 Property and equipment Property and equipment 13,621 10,445 Less: accumulated depreciation 1,394 962 Property and equipment, net 12,227 9,483 12,227 9,483 7,466 383 37 2,485 10,371 $ 90,052 2,744 286 428 447 3,905 $ 23,798 Property and equipment, net Other assets Long-term unbilled receivables Patent costs, net Loan costs, net Other assets, net Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable Current portion of notes payable Current portion of capital lease obligations Current portion of deferred revenue and advances Current portion of contract loss reserve Accrued expenses and other Total current liabilities $ 2,150 674 $ 1,562 2,007 17 292 1,321 2,291 7,490 15 741 273 3,853 (continued) 6 Extracted from 10-K filings for Basin Water, Inc. 20052007. Obtained from U.S. Securities and Exchange Commission. www.sec.gov December 31, December 31, 2006 2005 10 6,878 24 40 387 439 2,404 2,250 6,529 10,315 19,989 Notes payable, net of current portion and unamortized discount Capital lease obligations, net of current portion Deferred revenue, net of current portion Contract loss reserve, net of current portion Redeemable convertible Series A preferred stock, no par value6,000,000 shares authorized, 0 and 627,500 shares issued and outstanding Redeemable convertible Series B preferred stock, no par value5,000,000 shares authorized, 0 and 1,734,125 shares issued and outstanding Total liabilities Commitments and contingencies Stockholders' equity Common stock, no par value40,000,000 shares authorized, 10,303,047 shares issued and outstanding Common stock, $0.001 par value100,000,000 shares authorized, 19,887,672 shares issued and outstanding Additional paid-in capital Accumulated deficiency Total stockholders' equity Total liabilities and stockholders' equity 7,927 20 95,002 (15,285) 79,737 $ 90,052 (4,118) 3,809 $ 23,798 Extracts from FORM 10-K? For the fiscal year ended December 31, 2007 BASIN WATER, INC. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, December 31, 2007 2006 ASSETS Current assets Cash and cash equivalents $ 35,456 $ 54,567 Accounts receivable, net of $72 and $67 allowance for doubtful accounts 3,167 2,416 Unbilled receivables, net of $524 and $433 allowance for doubtful 11,443 9,123 accounts Inventory 1,055 714 Current portion of notes receivable 338 Prepaid expenses and other 1,233 634 Total current assets 52,692 67,454 Property and equipment Property and equipment 15,945 13,621 BASIN WATER, INC. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, December 31, 2007 2006 $ 35,456 3,167 11,443 $ 54,567 2,416 9,123 714 ASSETS Current assets Cash and cash equivalents Accounts receivable, net of $72 and $67 allowance for doubtful accounts Unbilled receivables, net of $524 and $433 allowance for doubtful accounts Inventory Current portion of notes receivable Prepaid expenses and other Total current assets Property and equipment Property and equipment Less: accumulated depreciation Property and equipment, net 1,055 338 1,233 52,692 634 67,454 15,945 1,645 14,300 13,621 1,394 12,227 (continued) December 31, December 31, 2007 2006 7,466 8,682 7,664 3,015 3,416 2,274 4,502 1,667 31,220 $ 98,212 1,641 383 Other assets Goodwill Unbilled receivables, net of current portion Notes receivable, net of current portion Intangible assets, net Patent costs, net Investment in affiliate Other assets Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable Current portion of notes payable Current portion of capital lease obligations Current portion of deferred revenue and advances Current portion of contract loss reserve Accrued expenses and other 881 10,371 $ 90,052 $ 3,553 $ 1,562 2,007 17 11 266 292 1,964 3,140 1,321 2,291 3,140 8,934 2,291 7,490 10 24 387 Accrued expenses and other Total current liabilities Notes payable, net of current portion Capital lease obligations, net of current portion Deferred revenue, net of current portion Deferred revenue-affiliate Contract loss reserve, net of current portion Deferred income tax liability Other long-term liabilities Total liabilities Commitments and contingencies Stockholders' equity Common stock, $0.001 par value100,000,000 shares authorized, 21,948,704 and 19,887,672 shares issued and outstanding Additional paid-in capital Treasury stock Accumulated deficiency Total stockholders' equity Total liabilities and stockholders' equity 15 296 1,920 5,311 2,268 179 18,923 2,404 10,315 22 20 95,002 110,354 (552) (30,535) 79,289 $ 98,212 (15,285) 79,737 $ 90,052 The accompanying notes are an integral part of these consolidated financial statements. Basin Water, Inc. Consolidated Balance Sheets (In thousands, except per share data) Years Ended December 31, 2007 2006 2005 $ 13,477 $ 13,861 $ 10,016 5,307 3,253 2,215 18,784 17,114 12,231 Revenues System sales Contract revenues Total revenues Cost of revenues Cost of system sales Cost of contract revenues Depreciation expense Total cost of revenues Gross profit (loss) Research and development expense Selling, general and administrative expense Income (loss) from operations Other income (expense) Interest expense Interest income 13,790 10,698 443 24,931 (6,147) 564 13,685 (20,396) 12,161 7,522 423 20,106 (2,992) 634 6,827 (10,453) 4,467 2,323 340 7,130 5,101 651 3,334 1,116 (98) 2,736 (2,781) 2,061 (621) 52 10,698 443 24,931 (6,147) 564 13,685 (20,396) 7,522 423 20,106 (2,992) 634 6,827 (10,453) 2,323 340 7,130 5,101 651 3,334 1,116 (621) 52 Cost of contract revenues Depreciation expense Total cost of revenues Gross profit (loss) Research and development expense Selling, general and administrative expense Income (loss) from operations Other income (expense) Interest expense Interest income Gain on sale to affiliate Other income Total other income (expense) Income (loss) before taxes Income tax benefit Net income (loss) Net income (loss) per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted (98) (2,781) 2,736 2,061 2,500 8 6 5,146 (714) (15,250) (11,167) 16 (553) 563 $ (15,250) $ (11,167) $ 563 $ $ (0.76) $ (0.76) $ (0.70) $ (0.70) $ 0.06 0.04 20,185 20,185 16,048 16,048 9,924 12,849 Basin Water, Inc. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2007 2006 2005 $ (15,250) $ (11,167) $ 563 Cash flows from operating activities Net income (loss) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Gain on sale to affiliate Issuance of warrants for services Write off of loan acquisition costs 995 1,706 (2,500) 1,024 744 506 31 417 34 401 (continued) (11,592) (3,941) (1,695) Net cash used in investing activities Cash flows from financing activities Issuance of common stock Repurchase of common stock Proceeds from employee stock option exercises Proceeds from warrant exercises Issuance of redeemable preferred stock Proceeds from notes payable Loan origination fees Repayments of notes payable and capital lease obligations Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 75,178 3,584 (552) 527 162 8,060 596 2,000 5,156 (100) (100) (2,298) (9,095) (112) 5,737 68,145 9,124 (19,111) 51,843 1,020 54,567 2,724 1,704 $ 35,456 $ 54,567 $ 2,724 From Basin's 10-K 2007 NOTES, Pages F20-F228 Note 9: OTHER ASSETS Goodwill The table below summarizes the changes in the carrying amount of goodwill for the year ended December 31, 2007: $ Balance at December 31, 2006 Acquisition of business during the period Balance at December 31, 2007 8,682 $ 8,682 Long-term Accounts Receivable and Notes Receivable The Company has four cus- tomer system sales agreements which provide for payment terms ranging from two to five years, unless certain conditions are met, in which case the payment terms are 8 Source: U.S. Securities and Exchange Commission. www.sec.gov accelerated. At December 31, 2007 and 2006, the amount of long-term accounts receiv- able was $7,664 and $7,466, respectively, which represents the balance due from these four customers under the extended payment terms. In 2004, in connection with the sale of a system, the Company received a $300 unse- cured note that provides for interest at a rate of 3% per annum. The Company received a payment of $200 in connection with this note in 2005. The final principal payment of $100 became due in 2006, and as such, the note has been classified as current. The Company has reserved $67 of this note as of December 31, 2007 and 2006. Both the note and the related allowance for doubtful accounts have been classified as current assets and are included in the accounts receivable balance at December 31, 2007 and 2006. At December 31, 2007, long-term notes receivable consist of non-interest bear- ing notes receivable from VL Capital, due in 72 monthly installments of $63 beginning April 2008, with a net present value of $3,353, calculated using an imputed interest rate of 5.0% per annum. Intangible Assets Net intangible assets are as shown in the following table as of the dates indicated: Intangible Assets Net intangible assets are as shown in the following table as of the dates indicated: December 31, 2007 2006 $ 189 $ 394 916 1,210 1,299 560 Deferred stock based compensation Fair value of warrants, net Service agreements and contracts Customer relationships Covenant not to compete Trade name Loan costs, net Intangible assets, net 295 157 37 $ 1,641 $ 3,416 The amortization period of intangible assets are as follows: customer relationships15 years; covenant not to competethree years; trade nametwo years; service agreements and contractssix years; deferred stock-based compensation- three years; and fair value of warrants issued to a joint venture partner-five years. Patent Costs The Company capitalizes costs of patent applications. As a result of the September 2007 acquisition of MPT, the Company recorded an additional $1,812 repre- senting the fair value of patents acquired. When patents are issued, the Company amor- tizes the patent cost over the life of the patent, usually 17 years. Future amortization of patent costs at December 31, 2007 is approximately $107 per year for each of the five years ended December 31, 2008 through 2013, and $107 each year thereafter through 2024. If a patent is denied, capitalized patent costs are written off in the period in which a patent application is denied. Investment in Empire Water Corporation (Empire) In May 2007, the Company entered into an agreement to acquire certain water rights and related assets. In December 2007, the Company sold its rights to purchase these assets to Empire. As consideration for the sale of these assets, the Company received 6,000,000 shares of Empire common stock, which represents an ownership interest of approximately 32% in Empire as of December 31, 2007. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. This reduction of approxi- mately $1,900 has been recorded as deferred revenue-affiliate on the balance sheet of the Company at December 31, 2007. The Company has recorded its investment in Empire at approximately $4,500, while the amount of underlying equity in the net assets of Empire is approximately $3,000. The dif- ference of approximately $1,500 represents the excess of the market value of the Company's investment in Empire over the Company's 32% interest in the net assets of Empire. The following tables present summarized information concerning the assets, liabilities and results of operations of Empire for the most recent periods for which information is available: Assets Liabilities Dec 31, 2007 $ 9,460 $ 101 Six Months Ended Dec 31, 2007 $ $ (11) Year Ended June 30, 2007 $ $ (33) Revenues Net loss From BASIN's 10-K 2007 NOTES, Page 27 Note 15: RELATED PARTY TRANSACTIONS The Company paid legal fees to a legal firm whose partner is a director. The total payments for legal fees to this firm were $315, $192 and $154 for the years ended December 31, 2007, 2006 and 2005, respectively. The Company also leases office space and equipment from two individuals, one of whom is a director and employee and the other an employee, under month-to-month agreements. The total payments under these related party rental agreements were $57, $54 and $55 for the years ended December 31, 2007, 2006, and 2005, respectively. In May 2007, the Company entered into an agreement to acquire certain water rights and related assets. In December 2007, the Company sold its rights to purchase these assets to Empire. As consideration for the sale of these assets, the Company received 6,000,000 shares of Empire common stock, which represents an ownership interest of approximately 32% in Empire as of December 31, 2007. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. The Company accounted for the December 2007 transaction under the equity method. Specifically, the Company recorded $2,500 as gain on sale to affiliate upon the receipt of the shares of Empire common stock by estimating the fair value of such stock based upon concurrent sales of Empire common stock to third parties, and reducing the fair value by the Company's ownership interest in Empire. In addition, Empire agreed to purchase one water treatment system from the Company concurrent with the December 2007 closing for a total price of $900. During the year ended December 31, 2007, the Company recorded $653 of system sales rev- enue and $287 of gross margin on this transaction under the percentage-of-completion method of revenue recognition. The Company has recorded $92 as a charge against other income under the equity method, which represents 32% of the Company's gross margin on this system sale to a related party