Red Flags at Basin Water

Apr. 7.08 | About: BASIN WATER (BWTR)

Over the past year Basin Water (NASDAQ:BWTR) seemed to have been operating their business out of a black box. It was not until they posted their most recent annual report on March 17 that we now see a company that is destined to go to 0, just like the previous water company with the same management team — Western Water (see below).

Basin Water 10-K

With negative cash flows accelerating and cash running dry, management of Basin Water decided it had to either report poor earnings to Wall St. and show they do not have a business, or commit fraud … well, you be the judge on that one. The company admitted themselves they could not make money due to “poorly priced contracts.”

Basin Water Q3 press release

In 2005, before its IPO Basin appeared to have a legitimate business in treating contaminated groundwater. This doesn’t mean that they made any money doing this but they had a legitimate list of customers. However in 2007, after a terrible operating performance, something changed and the company decided to cross over to the dark side of corporate negligence.

The 10-K filed on March 17, 2008 shows us some alarming details that detail how BWTR has crossed the line and is committing fraud on the public. It is the opinion of Citron that Basin Water is fabricating their own customers with the intention of committing fraud on the marketplace and enabling insiders to dump millions of dollars worth of stock. Lets examine Basin Water’s customer list.

Client Number 1: VL Capital LLC

BWTR’s biggest customer for 2007 was VL Capital, from which they generated $4.88 million in revenue. VL purchased Basin Water’s receivables and bailed them out of bad contracts in the June Q. Yet, most of this transaction is financed with a $3.35 note receivable. Shareholders of Basin knew nothing about VL Capital until their 10-K was released; there wasn’t even even a press release announcing the transaction. And why would BWTR want to sell some A/R? Because their DSOs were a whopping 470 days on a trailing twelve month basis! This is how the company explains the transaction in their filings.

“In June 2007, the Company sold 10 of its existing systems with various treatment capacities which had previously been placed with customers to a third party affiliate of a bank. As part of this transaction, the Company assigned all of its future standby fees from these 10 systems to the third party. Net proceeds to the Company consisted of $500 in cash, plus a non-interest bearing note receivable due in 72 monthly installments of $56 each, commencing April 2008. The aggregate present value of the notes is $3,353, which has been recorded by the Company as notes receivable as of June 30, 2007. The present value of the notes receivable, together with the cash paid by the third party, have been recorded as $3,853 of system sales revenues for the quarter ended June 30, 2007.”

So who is this “third party affiliate”? Citron searched the internet and all public documents and we only found one VL Capital. This was a company that was incorporated on the last business day of the second quarter in the State of Delaware … just in the nick of time. No proof of any operating history, not even a D&B credit rating.

Client Number 2: Water Services Solutions, LLC.

Another customer that seemed to have appeared from nowhere is Water Services Solutions. Approximately 48% of BWTR’s revenue for Q4 and 26% of the revenue for the year came from this company. Basin Water never announced any agreement or contract with Water Services Solutions; they just mysteriously appeared in the 10-K.

Citron did a thorough search on the internet and in public records including Dunn & Bradstreet and we could not find a company named Water Services Solutions. What we did find, similar to VL Cap, is that a company was registered in the state of Delaware on Sep 27, 2007 in the name of Water Services Solutions … just in the nick of time to save the fourth quarter. Needless to say, BWTR never actually received any money from Water Services Solutions but rather it was just a receivable. Not even a receivable but rather an “unbilled receivable”

Citron calls upon Basin Water to identify Water Services Solutions and its principals and operations.

Client Number 3: Empire Water

Now this one is a real doozy. In May of 2007, BWTR bought some water assets for cash and then turned around and sold them to an OTC shell company which was renamed Empire Water on December 28, 2007, the last week of the 4th quarter.

Gross margin for Q4 of 07 was $1MM. In the 10-K, $287k of this was generated by a $653k sale to Empire Water. Given that Basin water’s gross margin has been negative for the last TWO YEARS, it sure is nice to get someone to pay you a 43% gross margin, even if it is yourself.

In addition, a $2.5MM gain on sale was recorded in the 4th quarter for a sale of assets to Empire Water. And who is the CEO of Empire? None other than the former CEO of Basin Water, Peter Jensen. And did BWTR get any cash for that sale or the $653K system sale? No. Just stock in Empire Water, a worthless company.

On top of that, without ever mentioning it in a filing or a press release, the VP of business development Larry Rowe has now mysteriously become the president of Empire Water.

If Basin Water’s business really had a future, then how can you lose your CEO and head of Business Development to a start up OTC listed company?

The obvious question is what type of management would pull a stunt like this?

The former CEO of Basin Peter Jensen, along with current Chairman Scott Katzman and aforementioned Larry Rowe all used to be employed with Western Water. Mr. Jensen used to be the Chairman and CEO of Western Water Company. For those of you who don’t remember, Western Water Company was that high flyer in the 1990s that was riddled with problems of money laundering, organized crime, and undercover FBI agents. Needless to say Western Water went bankrupt in 2005.

New York Times Western Water article, 1994

Insider Dumping

What is most disturbing about the Jenson/Katzman connection is that both men have had massive insider sales since Q2 of 2007. Mr. Katzman has sold over $1 million worth of stock and Mr. Jenson has sold close to $2 million. These gentlemen have sold more in stock than their company has received in real revenues from selling their products during the same period of time.

To make matters even worse, the dumping of the stock commenced one month after the company announced a purported “share buyback” on May 14, after announcing a disastrous quarter. The buyback news allowed the stock to get propped up just in time for selling.

BWTR Insider Transactions, Last Two Years


There is nothing else to be said except in the opinion of Citron, this stock is a 0. All hope for a future jumped ship with management. Once you cross the line that Basin Water has crossed, there is no coming back.

Cautious investing to all.

Disclosure: Author is short BWTR.