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Executives

Tom Tekulve - CFO

Mike Stark - President and CEO

Scott Hamilton - General Counsel

Analysts

John Quealy - Canaccord Adam

Bill Gibson - Nollenberger Capital

Jack Rogers - Harvest Small Cap Fund

Mark Tobin - Roth Capital Partner

Basin Water Inc (BWTR) Q4 2007 Earnings Call March 17, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the year end December 31, 2007 earnings call for Basin Water Inc. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Tom Tekulve, Chief Financial Officer. Please proceed.

Tom Tekulve

Thank you, operator. Good afternoon, and welcome to the Basin Water conference call for the year ended December 31, 2007. This afternoon shortly before this call, we issued our December 31, 2007 earnings release. We also filed our December 31, 2007 form 10-K with the SEC. This conference call is being broadcast live on the Internet and may be found at our website, www.basinwater.com. A playback of this conference call will also be available on our website.

My name is Tom Tekulve, Basin Water's Chief Financial Officer. Joining me on the call today, are Mike Stark, our President and Chief Executive Officer and Scott Hamilton, Basin Water's General Counsel.

We will begin our call today with a discussion of our financial results for the year and the fourth quarter and some of the specific actions we have taken during this period. I will also review certain significant areas on our balance sheet and our cash position as of the end of the year. Mike Stark will then provide an overview on the company, its achievements and some of the business initiatives that have been developing through the last several months. After which we will open the phone lines for question-and-answer period. E-mail questions are also welcome either during or after this call. They should be directed to investorrelations@basinwater.com.

Before commenting with our call we want to make you aware that our discussions on this call may include forward-looking statements that involve risks and uncertainties. Please note that all information discussed on our call today is covered under the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Actual results could differ materially from those projected. Information concerning factors that could cause actual results to differ from those in the forward-looking statements may be found in Basin Water's Form 10-K for calendar year 2007 under the "Risk Factors" section, which was filed with the SEC this afternoon. A copy of our 2007 Form 10-K and the other filings with the SEC are available on our website.

Please be advised that the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast on March 17, 2008. Basin Water undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

You should also be advised that the company may be discussing certain measures on a historical and forward-looking basis during the conference call. Now that we have covered these cautionary comments, I would like to turn our focus to the financial results of the company for the year ended December 31, 2007. As I said our earning release was made available just a short time ago; what I would like to do is just describe briefly the results included in that release.

We considered 2007 as a transition year for Basin Water and Mike will elaborate on this a little later on today's call. Our annual revenues were $18.8 million, an increase of $1.7 million or 10% growth over the prior year. The growth was primarily due to increases in our contract revenues.

We also achieved nearly similar levels of system sales as we did in 2006. For the fourth quarter, revenues were $5.4 million, an increase over the same period last year of $1.8 million or 50% increase in revenues with the growth of 34% in system sales and a 97% growth in contract revenues. Though we only recognize revenues based on a percentage of completion bases on our projects, which may (inaudible) portion of the total project value.

For the quarter, we booked a total of $4.1 million in new system sales, which brings with an additional $8.1 million in contract revenue backlog. The important point in the fourth quarter revenues achieved this year is that we are now seeing stronger gross margins from system sales. As we described in our 10-K filing, the gross margin on our standard system sales was 34%, a significant improvement, which was due to a combination of factors, including the development of our internal business systems for new projects, and the contribution from our recent acquisition of MPT, which has historically achieved good margins on their product lines.

Standard system margin of 34% however, was offset by two items. First, the negative gross margin from the remaining revenues achieved under the percentage of completion methodology on older and larger system projects, and second, the net gross loss of $0.1 million we incurred on our fourth quarter revenues.

We are encouraged to begin seeing an improvement in our project margins, and recognize this as a result of our developing internal business processes that we have implemented throughout the 2007 year and of which we are continuing to refine and improve. It will take time for these positive results to be evident in our contact revenues because the newer, improved margin contract revenues are currently a smaller percentage of our contract mix, but as we go forward these will become more of a factor and will reduce the impact of the older reserve to legacy contracts, which should now have no material gross margin impact.

Now I will focus on gross margins for the year. The gross margins for the year were significantly impacted by the reserves we reported in the third quarter. If you were on the call last quarter, you heard us describe that these results were established to offset future contract losses on legacy contracts, which are expected to generate losses over the remaining contract lives. The charge for the year 2007 was $3.7 million, which is net of $1.4 million of charges against the reserve for actual contract losses during 2007.

For the year operating contracts incurred a gross loss of $2.3 million, prior to applying any charges against the contract loss reserve. This compared to $1 million in gross loss in the prior year. The increased loss was due primarily to certain legacy contracts booked in prior periods that became operational in 2007 that included among other things, poor pricing and inadequate contract terms.

Total negative gross margin for the year was $6.1 million. The good news is that when we look at just the margins on our standard system sales for the year, we achieved a 20% gross margin, obviously impacted by the favorable 34% gross margin we achieved on standard systems for the fourth quarter.

Our SG&A expenses have grown significantly this year, as we have developed our organization structure and as a result of our acquisition of MPT in September 2007. SG&A of $13.7 million increased by $6.9 million, which included $0.6 million in reserves for bad debt taken during the first nine months of the year and $0.8 million due to the MPT acquisition. Again, much of the remaining increases relate specifically to our significant investment in the organization structure, including increases in our sales and marketing organization, hiring our new VP of Marketing, the development of a legal department, which includes the hiring of our new General Counsel and his support staff and EH&S department, our Human Resources Department and our process engineering function.

This investment in the building blocks of our organization has been necessary and we expect a return on this investment as the company transitions from 2000 into future years. Another factor for the growth in SG&A are costs relating to being a public company, including the expenses for stock options and warrants under FAS 123R. Last year, this expense amounted to $0.9 million, compared to $1.7 million this year, a $0.8 million increase in cost.

Selling, general administrative for the fourth quarter was $5.2 million, an increase of $2.4 million over the same period in 2006. The increase was primarily due to the increased management structure and staffing costs, as well as the increased cost relating to additional public company costs and expensing of options and warrants. An additional $0.8 million was also attributed to the MPT acquisition.

The other income category on our P&L includes interest income of $0.6 million for the year and $2.7 for the year earned, on our cash balance during these periods. Note that we have no debt and no related interest expenses.

As we announced during the fourth quarter, we were successful in developing a water resource opportunity and selling it to a newly formed company called Empire Water Corporation. Empire Water raised equity in order to purchase these water resource rights from Basin. Basin received $0.2 million in cash to cover our out-of-pocket cost, plus 6 million shares of stock in Empire Water, giving Basin Water a 32% ownership in Empire Water.

We recorded a gain of $2.5 million this quarter, representing a fair value on a net basis of the stock. An interesting aspect of Empire Water is that if water resource rights are located in an area where nitric contamination in ground waters is typically prevalent, therefore Empire agrees to purchase a Basin nitrate removal system and we hope to be able to assist them with additional treatment systems and service contracts as they grow and develop their business. Should Empire be successful in raising additional capital to facilitate their growth, Basin may obtain an additional six million shares of Empire stock, which would bring our ownership of Empire to 36%.

Although we are excited about our relationship with Empire Water, we cannot assure you that our holdings in Empire Water will grow in value in the near future or at all. The net loss for the year impacted by the various items as related above was $15.2 million and for the fourth quarter was $1.4 million.

Now, I want to turn your attention to our balance sheet. First of all we do not have any debt on our books and have no debt covenants to comply with. Mike will be discussing all the accomplishments we have achieved this year and all the assets and strengths this company has, in addition to the strength is the favorable cash balance we have at the end of the year.

Our cash balance at the end of December was $35.5 million. We have utilized approximately $19 million in cash over the course of the year in a variety of activities. One, we increased our spending on system projects and processes of $4.6 million. Property equipment related to spending was at $0.7 million. In addition to the stock issue to the sellers, we used $6.2 million of cash for the acquisition of MPT in September.

We used $2.3 million for repayment of our last remaining debt during the second quarter and our net loss for the 12 months of 2007 and other operating cash flow items amounted to a net use of cash of $13.3 million. Offsetting this spending were cash proceeds of $8.1 million for warrants and options that were exercised during the year.

The company has total receivables of $22.3 million, which consists of $3.2 million in billed receivables and $11.4 million in short-term unbilled receivables and $7.7 million in long-term unbilled receivables. These receivable balances will be in an additional source of cash as these were billed to and paid by our customers.

Unbilled receivables represent that portion of the system sales for which revenue has been recognized by the company using the percentage of completion method, and has not yet been invoiced to the client. Once contracts terms have been achieved, the company bills the customer resulting in a billed receivable. The summation of our cash of $35.5 million, and our short-term billed and unbilled receivables totals $50.1 million, as compared to $66.1 million at the end of 2006.

We expect that our cash flow from operations and our current cash balance will allow us to maintain a solid liquidity position for some time. As a result of the MPT acquisition, you will notice that we have recorded $8.7 million in goodwill. We also recorded an increase of $4.2 million in intangible assets as a result of patents and technology know-how we obtained in the MPT acquisition. These assets are offset by a deferred tax liability of $2.3 million as a result of the acquisition.

As described earlier, regarding the sale of certain water assets to Empire Water, we recorded a gain of $2.5 million. We now own [6 million] shares of stock in Empire Water, which were valued based on the discounted fair value of the shares in December 2007. We recorded this value as an asset of $4.5 million offset by the value of our 32% minority ownership or $1.9 million, which is recorded as deferred revenue resulting in a net asset of $2.6 million on our balance sheet.

Some additional information that you may be tracking includes our backlog balance. For Basin Water we define backlog as revenues we expect to recognize over future periods based on the agreements we currently have as of the end of the period being reported. The backlog as of December 31, 2007 was $73.0 million. This compares to $78.9 million as of the end of last year. This $5.9 million net decrease in backlog was primarily as a result of several unprofitable contracts this year that were terminated.

The average backlog remaining like 7.9 years and since 2007 included primarily our Basin Water ion-exchange product offerings and the new offerings from the MPT acquisition though have not yet become material, I will share the contract accounts as these are still helpful in tracking our growth.

So for the mid to large ion-exchange product offering, we have 79 contracts as of the end of the year. This consisted of 48 systems that were permitted by the state agencies and capable of treating water. There were five that were installed, but waiting for final permitting to be completed. There were 26 systems both large and small that were in various stages of deployment, which we would expect to be completed in the next several quarters.

And lastly, headcount at the end of the year including the MPT acquisition totaled 107 full-time employees with 12 sales and marketing individuals.

I would now like to turn the call over to our President and newly appointed Chief Executive Officer, Mr. Mike Stark.

Michael Stark

Thank you, Tom. Good afternoon to each of you, and thank you for taking the time to join us on this call. Before we go any further, I would like to take a moment and thank Peter Jenson, who up until this month, served as our CEO and Chairman. Peter was not only a founder of Basin Water but he was our visionary and inspiration. Peter has accepted a position as CEO of Empire Water, the water resource company Tom mentioned earlier. From all of us, Basin Water wishes Peter well. I would also like to welcome Scott Katzmann as our new Chairman. Scott was an investor in Basin Water since its inception and a Director since 2000. He has extensive background in building emerging growth companies and we believe this experience will serve Basin Water well.

Now to the business at hand, I've been at Basin Water for about 16 months. It has been a very active journey. As Tom has described, the 2007 results reflect those of the company in transition. This has been a tremendously eventful year for the year and one in which we have grown and changed extensively. I hope when I'm done here today, you'll have an understanding of the changes, which have occurred in Basin Water and why I am both excited about our future and confident about becoming a predictable growth, commercial water services, company.

Let's talk about the transitions we've been referring to. As we've discussed on prior occasions, Basin Water has transitioned from its entrepreneurial phase to its current phase as a growth company with huge potential to satisfy a market and a population, which needs the most basic of all products; reliability and healthy water.

In the process of affecting that transition, we went to a tremendous effort to establish the needed discipline and physical controls, so that this company could compete and fulfill its mission. We have implemented pricing and proposal approval policies. Bill-to-cost control process, upgraded accounting systems and processes, established well. P&Ls to monitor our water service agreements, known as WSAs and their economic performance. We have developed and implemented budgeting and forecasting models.

We have developed budgeting, forecasting, and reporting processes at the product line and departmental levels. Created and installed internal billing and purchasing controls revamped our quality assurance and quality control procedures. We made significant progress on our Sarbanes-Oxley effort impacting the entire organization's processes and procedures.

We undertook the integration of MPTs acquisition into our financial and reporting systems. We established a sales commission plan, around the company’s technology for services business model, whose payout is dependent on project profitability.

We have identified for metrics, for each functional area and monthly monitoring process to track ourselves against these measures and we have established monthly managers meetings. By the end of the third quarter of 2007, we had instituted the needed business processes and had a much more robust accounting system. This has initially been borne out by the fourth quarter margins Tom conveyed to you earlier.

We must remain diligent in future quarters to assure that these margin trends continue and to make sure that the changes above are institutionalized. You know, besides all of the business process changes mentioned above, Basin Water significantly expanded its technology and service offering. At the beginning of 2007, we were taking to the market, an ion-exchange offering, which had significant IP associated with it and provided a notable competitive advantage for the removal of inorganic compounds from medium to large capacity ground water supplies.

Through the acquisition of MPT, our alliance with Rohm and Haas and the MoU we executed with Purifics, we now have technology which can be applied to groundwater and surface water supplies of widely varying capacities, which can effectively treat organic and inorganic compounds, and is applicable to both the municipal and industrial markets and all of which are applied on the basis of low life cycle cost and our pay for performance business model.

Our technology basket is substantial and even contains the ability to answer the challenges, which have recently occupied much press space regarding endocrine disruptors and various pharmaceuticals detected in the water supply. That's quite an accomplishment in a single year. We didn't get as bigger piece of the pie as was initially expected in 2007, but what we did do was make the pie much bigger.

So let me take a short break from the transition discussion and address another issue. As I identified the many things we have achieved in 2007, I am cognizant that on prior calls with you I indicated that I was expecting to see some profits by the end of the year and that we expected positive cash flows.

I will tell you now, I was over optimistic regarding how fast we could assess and change the legacy issues we face. I do believe we are doing the right things for Basin Water's future, and we are setting the stage for Basin to accomplish great things. And I think it's appropriate that we take pride in all that we have accomplished.

Despite being a transition year, which was spent building the structure, training the sales staff and developing important corporate partnerships, we still grew by 10%. This was shy of our 2007 goal, but considering the systems that have been installed to ensure long-term success, we are pleased with the progress Basin Water has made. Even more importantly, our vision and market has expanded beyond what we had hoped for a year ago and Basin is on track for long-term sustainable and predictable growth.

I will not attempt to tell you exactly, when you will see profitability in 2008. But I will tell you, that in my 43 year history in this industry, I have seen many opportunities and have had the pleasure of growing many operations. In my opinion, the opportunity of Basin Water ranks with the best of them.

Now back to the transition. Earlier, as Tom discussed, our 2007 financial performance, he indicated that we are investing in our company's future. A large part of that investment has been aimed at our management and technical human resource pool. We have attracted some very talented professional managers, who are well-grounded in their particular disciplines and in the water services industry. They are excited and motivated to assist this company because they understand our great potential. Some of the positions we have filled include, a Vice-President of Marketing, General Counsel, Process Engineering Director, and several other process engineers, an Environmental Health and Safety manager, a Human Resources manager, and I will expand on this further, but we are also establishing operating regions across the country and are bringing on board the necessary management leadership to build our business on a national basis.

Earlier, in this transition, we reduced the number of our sale personnel from seven down to three, replacing them with professional sale personnel that understand our business model and our technology plus services approach. As of the end of 2007, we had built our sales and marketing group up to 12 individuals. And as of today, we also have several additional talented marketing-related professionals. We plan to have 20 sales people by the end of 2008. Additionally, we have increased our field service support and our engineering organization in order to support our existing and valuable customer base.

Let me now turn to Basin Water's geographic expansion. Previously, we have been a very West Coast centric company, largely because the company was founded in this area. We are now positioned for national presence. We have plans underway in 2008 to develop five municipal regions, each focused on serving the local water purveyors and the regulatory agencies in those respective geographies. We also have an industrial region focused on the entire country for commercial water treatment services.

Each of these six regions will include a Regional Vice President, account management function and a supporting process engineering group. Each region is expected to also have the necessary compliment of field personnel to support the customer and provide Basin's technology plus services offering to our clients. The individual regions will have responsibility for managing their own P&L and balance sheet.

What’s our expectation for the regional sales organization? As an account manager become fully acclimated and vested in his or her region, we have expectations whereby the individual should achieve $3 million to $5 million in system or capital sales over a year’s time.

We’ve also expect that the technology plus services model should drive the account manager to achieve from 200,000 to 300,000 of contract service revenue for each $1 million in capital system sales. Assuming a 10-year WSA Water Services Agreement, this would mean $2 million to $3 million in service backlog for each one million in capital sold.

Now, please remember that this expectation assumes the time for the sales professional to become fully acclimated in his or her region. To develop the opportunities in that region and start and generating sales can be a 12 to 18 months period. Everyone must also take into account that our markets have a wide range of sales cycles. And a typical sales cycle can range in length from 30 days to as long as 18 or more months.

But overtime as each region comes online and develops leads, the sales are expected to pass through the sales funnel. We had anticipated that each sales person would be working on approximately 15 prospects. As we have replaced resources in each territory we have found a plethora of opportunities and our pipeline has grown steadily.

Today we are actually (inaudible) in our targeted 15 prospects per sales person. This will over time enhance our ability to grow our revenues and our profitability. So, as you look at what's been accomplished in 2007, you can see that we have put the pieces in place. We have come a long way in moving Basin forward to face the opportunities in its chosen market.

Our financials demonstrate an interesting trend. Gross margins in the second quarter on standard systems were quite low; they were at 2%. Then in the third quarter, margins rose to 30%, and finally in the fourth quarter, we saw a gross margins on these new standard systems rise to 34%. This gross margin level is more inline with where we expect our company's target margins to be in the future.

Existing water service agreements have not yet provided us positive margins because of the impact of the legacy projects for which we have previously reserved. However, as we continue to grow utilizing the business disciplines and the management team we have assembled, we expect to begin moving our service contract margins upward as well.

We should begin to experience good gross margins from new contracts in our service business. The gross margins going forward are targeted to be in the range of 30% for the new WSA's. There has been so much progress here at Basin Water it is difficult not to be enthusiastic about our achievements thus far and even more enthusiastic about our future. But I would like to repeat a question I am often asked. Given all this progress you talk about, what still keeps Mike Stark up at night?

I think that's a really interesting question. My biggest worry is not the long-term success to be achieved from the organization through all the initiatives, processes and disciplines we have developed. What keeps me up at night is that we are still a small, relatively young organization and our short sales organization is becoming comfortable with their markets and qualifying the leads in their expanding sales funnels. It is amazing, as I mentioned above, we have a tremendous number of sales leads. Our job, and what takes the time, is to drive those leads into proposals and into accepted sales and service agreements with the perspective prospective clients.

I believe that our proven management structure and quantified protocol and scrutiny of each lead will ensure a higher pull-through rate from the sales funnel that we have experienced in the past. What cannot be easily predicted is in which quarter we will begin to see the results of our expanded offering, expanded sales organization, and improved marketing efforts. So what keeps me up at night is the exact timing for the growth; I am confident we will achieve.

I can also say that I am truly proud of what has been accomplished at Basin Water. I know I have been consistent throughout the last year when I said that I believe that this company has the potential to be a leader in the water services market. I have no doubt that the idea of providing technological solutions to solve specific water treatment problems on a low-life cycle cost and long-term pay-for-performance basis is a concept being embraced by the market.

It has been our contention that life cycle costing would replace the ill advised practice of simple low-priced capital bidding.

We are witnessing this evolution as private municipal providers to no longer afford to sacrifice long-term operating expenses and facilities, which do not operate as projected.

Basin's business model of combining specialized technology with a long-term service offering, which we call technology plus services, coupled with our performance and life cycle cost guarantees give me further enthusiasm for our company. We have a better business model, a stronger and extensive technical offering, a professional management team and we reside in a sizeable and growing market. I believe you should be proud of your ownership in this company, and you should know we are all working diligently to increase shareholder value.

I thank you so much for being a part of this exciting company. And I hope you'll to continue to share the vision that I have for Basin Water.

Thank you and thank you for your time and your interest in Basin Water. We'll now be pleased to answer any questions you may have at this time.

Operator, would you please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) And your first question comes from the line of John Quealy from Canaccord Adam, please proceed.

John Quealy - Canaccord Adam

Hi, Good afternoon folks, a question on the outlook if you could, Mike. You gave us some details with regards to the number of, I guess, qualified leads per sales person that we can, at least, have an expectation of the level of activity, But looking in to '08, can you give us some more broad guidance or thoughts about breakeven or cash flow or what we were looking for those metrics as we go through ’08 into ’09, what trends we should be looking for?

Mike Stark

You know, John, first of all it’s the company’s policy not to give guidance. So I hesitate to expand much more about what we have said in 2008, other than to tell you that we have 12 sales people in place. We intend to grow to 20. That we expect those sales people to generate $3million to $5 million in capital when they are fully acclimated in their region,s and the time for that acclimation is going to be dependent on both the sale cycles, or the prospects that they are working with and the individual sales people, Although, these are seasoned and sales folks and grounded in the water industry.

So, I mean as I said, what keeps me up at night is trying to predict exactly which quarter we will see the effect of our tremendously expanded offering and our expanded sales and marketing capability. We could only expect to see it, but I am hesitant and I won’t predict the actual quarter, so that makes it difficult for me to give you more guidance.

John Quealy - Canaccord Adam

Let me try to ask the question this way. So you have been here 16 months. In terms of, you have gone down into the details on most of the functions of the company, do you feel that you got a good grasp on the current cost structure of the company and older contract that were unprofitable. Do you think we are fully past it, at least back stage of it?

Mike Stark

I do. I believe that as we came to the end of the third quarter, we had a very good idea of what a legacy project looks like. We had a very good idea of what caused those legacy issues. We put in place the systems that would prevent them from reoccurring. We put in place the pricing and approval policies and sales methodology to ensure that we price based on competitive alternatives and got sufficient price form our customers.

So, I think as the fourth quarter systems begin to show, we are getting the gross margins now out of our standard systems. We'd expect that to continue in the range that we saw in the fourth quarter. And the history that we are getting now on our existing wells, and our ability to track them and the consistency with which we can predict their month to month results, gives me confidence that we can probably cause WSA's going forward and achieve the 30% like margins that I referred to.

John Quealy - Canaccord Adam

And then, if you could give us a little bit more on your thought on water municipalities and customers. How you gauge their relative health, Mike? Obviously state and local governments are going to have the impact of reduced tax receipts and even the water authorities, maybe they will have revenue visibility, but maybe not a lot of tailwind to spend freely, if you get what I mean, in this recessionary macro. Can you just give us your thoughts about the health of the customers and the spend there?

Mike Stark

Well, one thing I've learned in all my years in the Water Services business is that, while some companies are recession resistant, nobody is totally recession proof. So, there is no doubt in my mind that some of the type of development that we have seen in the previous year, from real estate developers and folks like that, which were caused by more shift in population than anything else, is going to be in the form of a slowdown, and that the real estate developers themselves are in a bit of pain in terms of their financial condition.

However, the municipalities that we are dealing with, we actually see this as a bit of an opportunity for our business model and our approach to the market, because they don't have extra revenue, I mean there is no federal funding coming in. There is no state revenue sharing going on, and these municipalities and water districts are having to fund their services out the revenue they generate. And that really speaks just miles to the importance to them of ongoing operating expenses, and therefore our pay-for-performance business model.

And so I think it favors our approach to the market. In addition to that, we are finding that the financial markets are, maybe there is a slight security going on, and maybe Tom can speak to that better than I can, but we are seeing that the financial markets are still very willing to finance the capital projects that we engage in and from which we derive our water services agreements.

In addition to that, there are more and more wells everyday reaching their MCL limits and their contaminant limits, and the market is growing. I mean, as I said, we just have a plethora of leads. We had hoped to have 15 per sales person. We went from 3 sales people to 12 today, and we have well over 15 prospects for each salesperson. And so the pipeline for us appears to be a very good quality and very strong.

The real question to me is what's the sales cycle on each of those prospects, and and how fast will our new sales organization become acclimatized to their new surroundings. But I don't see a weakening in the market in terms of it being inhibitory to our growth.

John Quealy - Canaccord Adam

Great, thanks very much guys.

Operator

Your next question comes from the line of Bill Gibson from Nollenberger Capital

Bill Gibson - Nollenberger Capital

Thank you. The first area I want to zero in on is SG&A. Is that $5.2 million in the fourth quarter a good run rate going forward?

Tom Tekulve

Yeah, Bill, this is Tom Tekulve, yes, I think that's a pretty solid number for you. There are no unusual reserves in that number, and that includes MPT as well.

Bill Gibson - Nollenberger Capital

Okay and Tom, I thought Iheard you say you broke several contracts.I thought you would actually given up on one, was there more than one that was backed out?

Tom Tekulve

There were several that we evaluated, and actually some had a natural renewal period in them, and we let them drop off.

Mike Stark

Yes.

Tom Tekulve

There are several.

Mike Stark

Hi Bill.

Bill Gibson - Nollenberger Capital

Okay, so that was just coming at their normal renewal then?

Mike Stark

Yeah, Bill, this is Mike Stark. Early on, we said that we had to be careful as a services company, not to walk away from commitments. Because, I mean, after all, when you enter into a commitment and then you promise, guarantee, low life cycle cost, it would not speak well for us a company if we walked away from those commitment. But there were half a dozen or more contracts that we felt very comfortable, would not adversely affect us the marketplace long-term, and were just not fixable from our perspective and we did walk away from those.

Bill Gibson - Nollenberger Capital

Is that what the reversal of the reserved in the fourth quarter was? Or have you made progress on the cost side as well?

Tom Tekulve

No. In fact we anticipated some of these. The reversal that you saw in the fourth quarter was a natural, I have to tell you. The term reversal, what it was, was an application of the loss that we incurred on those contract revenues, applied against the balance sheet reserve that we have set up.

Bill Gibson - Nollenberger Capital

Okay.

Mike Stark

We didn’t reduce the reserve by taking it to the bottom-line. We reduce the reserve by applying it to the contracts in question.

Bill Gibson - Nollenberger Capital

Now that makes sense. And then just one bookkeeping question? What was the fourth quarter share account, Tom?

Tom Tekulve

Fourth quarter share accounts at the end of the year was 21.949 million.

Bill Gibson - Nollenberger Capital

21,949 million, so that’s what was used in determining the fourth quarter earnings?

Tom Tekulve

No, no, we would use the weighted average for that which is actually on the P&L, but just to make sure you have…

Bill Gibson - Nollenberger Capital

No, I didn’t see it on the P&L, that’s why I asked the question, I was just there and I just missed it?

Tom Tekulve

It’s in the footnote, but let me reiterate, the number of shares outstanding at December 31 was 21. 949 million, and on the weighted average if you want that number…

Bill Gibson - Nollenberger Capital

Yeah, that was the number I was after?

Tom Tekulve

The weighted average is -- looking for it in my sheet here -- 21.485 million.

Bill Gibson - Nollenberger Capital

Good and then, just one last question and I will turn it over to someone else. In terms of your holdings of Empire Water, how does their profits and losses flow through to your income statement, or how will they?

Tom Tekulve

What we have on our balance sheet is an asset that we have recorded. We've estimated a discount on that and we will have to evaluate the viability of that asset. So, as the value of Empire Water progresses, we won't be able to record anything, but if it does decline, we'll have to take some kind of a charge.

Bill Gibson - Nollenberger Capital

Okay. But in terms of their operating income or losses, that doesn't get reflected through on a below the operating income line number, below minority interest?

Tom Tekulve

We don't believe it does.

Bill Gibson - Nollenberger Capital

Okay. Thanks, Tom.

Operator

Your next question comes from the line of [Jack Rogers from Harvest Small Cap Fund].

Mike Stark

Yeah, Jack, just before we start, operator can I ask you a question. I have been handed a note that says that the volume on the call maybe going up and down. Is anybody having difficulty hearing?

Operator

I can put the volume up on your line sir.

Mike Stark

No, I just want to make sure nobody is having difficulty hearing, that's all. Okay. Sorry, Jack.

Jack Rogers - Harvest Small Cap Fund

Is my line live operator?

Operator

Yes, sir. Your line is now open.

Jack Rogers - Harvest Small Cap Fund

Yeah, hey guys. Good quarter. I appreciate the call. I guess I have just two or three questions. First, with regard to MPT, was there any contribution from MPT in the quarter?

Mike Stark

There was contribution, and Tom will give you the exact number, but let me just make a statement about that. There was contribution from MPT to the business, but it's very difficult for us to continue to separate MPT as an entity, because we have five regional entities now, and the products and services from both old Basin Water and old MPT now flow through those regions. And what we really have at the old facilities our operating facilities, which are more call centers than they are P&L activity. So, well Tom can give you the number for probably the fourth quarter, it's a question that we will not be able to answer in the future in that voyage.

Jack Rogers - Harvest Small Cap Fund

Okay, it's okay. That's good. Mike, I appreciate that color. That makes a lot of sense. Just two other ones, on the 26 systems in the pipeline, were there any unbilled receivables or did you recognize any revenue from percentage completion for the 26 systems that have not been delivered yet.

Tom Tekulve

Yes, we have.

Jack Rogers - Harvest Small Cap Fund

What was that number?

Tom Tekulve

Well, it was recognized in the prior quarter, and there was one series of large and small systems out there, and it was approximately $3 million that we have recognized in system sales on those systems. There are some smaller ones that don't come to mind, but that is the largest piece in the 26.

Jack Rogers - Harvest Small Cap Fund

Okay, that's great.

Mike Stark

I don't know if this helps you, Jack, or what you're asking for, but if you took the construction revenue and you took the WSA revenue going into the year 2008, you'd have approximately $8.2 or $8.3 million of revenue coming forward.

Jack Rogers - Harvest Small Cap Fund

That's really helpful. Mike, thank you. It will help for modeling purposes. And then I guess the last question, with regard to -- I know you guys had said you had a couple of big customers, who is your [VL] capital, and then who is the water services solutions? Are those metropolitans or municipalities?

Tom Tekulve

Of the VL capital -- if you were on the call back in the second quarter of 2007, you'll recall that we had bundled a groups of contracts of 10 systems that we sold to a financing group, and that is who VL capital is.

Jack Rogers - Harvest Small Cap Fund

Okay.

Tom Tekulve

I don't know if you recall that?

Jack Rogers - Harvest Small Cap Fund

I do, I'm sorry.

Tom Tekulve

Okay.

Jack Rogers - Harvest Small Cap Fund

That's right and water services solutions.

Mike Stark

Its VL Capital really represents ten customers that we have a list in USA.

Jack Rogers - Harvest Small Cap Fund

Okay.

Tom Tekulve

They are the owners of the assets.

Jack Rogers - Harvest Small Cap Fund

That's very helpful and then with regard to, I think, it was Bill's question, the $4.5 million, that's your discounted quoting in Empire Water on the balance sheet?

Tom Tekulve

That's correct.

Jack Rogers - Harvest Small Cap Fund

Okay and then last question, then I'll get back in the queue, the issuance of $3.4 million of notes receivable, what was that in connection with?

Tom Tekulve

It was actually in connection with the VLC transaction.

Jack Rogers - Harvest Small Cap Fund

So did you…

Tom Tekulve

It was a combination, the sales of VLC was a combination of cash and a long-term note receivable.

Jack Rogers - Harvest Small Cap Fund

To VLC, or to the ten entities on the other side, okay.

Tom Tekulve

The owners of the equipment.

Jack Rogers - Harvest Small Cap Fund

Okay. Thanks a lot guys.

Operator

(Operator Instructions) Your next question comes from the line of Mark Tobin from Roth Capital Partner

Mark Tobin - Roth Capital Partner

Good afternoon, guys, we had a lot of talk as far as ramping up the sale organization, I wanted to shift the focus to the manufacturing and assembly side. What's your current capacity in throughput, and what are your plans to ramp that, in anticipation of the increased sales?

Mike Stark

We are utilizing about 85% of one shift right now at Rancho Cucamonga. So we could go to two more shifts really, and generate plenty of capacity. And the same is basically true at our Memphis facility, where we do offside regeneration and where the construction is really how fast we can regenerate the resin, and what our discharge capacity is. And when we did the acquisition of MPT, we actually went to the city of Memphis and we doubled our discharge capacity. So we have really room for almost a 100% growth in our discharge capacity at Memphis. So we are not constrained at all in terms of manufacturing or production facilities.

Mark Tobin - Roth Capital Partner

Okay and what type of throughput that you are seeing, or how does that translate to throughput in Rancho Cucamonga, as far as in the time you begin again work on projects, to the time that’s off the door?

Tom Tekulve

Well, it depends on the size of the units as well. We have anywhere from a 500 gallon per minute system and up. But I think in the standard units, we should probably what’s the -- probably seven to ten systems per month on a single shift. And that’s kind of an average because of the size issue?

Mark Tobin - Roth Capital Partner

Okay.

Mike Stark

And that’s…

Mark Tobin - Roth Capital Partner

Okay and then, I know in past calls there’s been discussion of the ion-exchange technology and the facility that was being built, is there any update on that? Is that still looking promising or just looking for an update there?

Mike Stark

Yeah, no, great question Mark. We inadvertently totally skipped ion, and we shouldn’t have done that. We remain very excited by Bion. We’ve all but completed the work at the university of Los Vegas under Dr. Jacim Batista, and we have been able to successfully regenerate a new selective a resin for perchlorate and actually improve the capacity of Bion, because we will get more capacity out of the resin, and then we will be able to regenerate that resin. So we are actually more excited about Bion today than in the past.

We expect sometime this year to build our first demonstration plant at an industrial facility for Bion, and we expect to begin construction on a demonstration plant for a Municipal facility with Bion this year. And we've been working very closely with California's DPH and the NSF Group to ensure the acceptability of the process, and we are well on our way. We think it's going to be an important part of Basins' future.

Mark Tobin - Roth Capital Partner

Okay. And what's your CapEx outlook for '08?

Mike Stark

About $3 million. Just to tell you, about $2 million of that is for the demonstration plants for Bion, and the rest is assorted softwares and computers, and that sort of thing.

Mark Tobin - Roth Capital Partner

That’s all I have. Thank you.

Operator

(Operator Instructions)

Mike Stark

Okay operator.

Operator

And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Mike Stark

Well, I'd like to thank you all for participating with us. As I said, I hope you continue to share my vision of Basin Water and I'm excited to share with you future calls and the progress that we make as a company. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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Source: Basin Water Inc Q4 2007 Earnings Call Transcript
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