6. Investment in OC-BVI

The Company owns 50% of the outstanding voting common shares and a 43.5% equity interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company also owns certain profit sharing rights in OC-BVI that raise its effective interest in the profits of OC-BVI to approximately 45%. Pursuant to a management services agreement, OC-BVI pays the Company monthly fees for certain engineering and administrative services. OC-BVI’s sole customer is the Ministry of Communications and Works of the Government of the British Virgin Islands (the “Ministry”) to which it sells bulk water.

The Company’s equity investment in OC-BVI amounted to $6,854,775 and $6,925,346 as of June 30, 2013 and December 31, 2012, respectively.

Until 2009, substantially all of the water sold by OC-BVI to the Ministry was initially supplied under a Water Supply Agreement dated May 1990 (the “1990 Agreement”) and was produced by one desalination plant with a capacity of 1.7 million gallons per day located at Baughers Bay, Tortola (the “Baughers Bay plant”). As discussed later in this Note (see “Baughers Bay dispute”), the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed, for a total cost of approximately $8 million, the construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the “Bar Bay plant”). OC-BVI and the BVI government executed a definitive seven-year contract for the Bar Bay plant (the “Bar Bay Agreement”) on March 4, 2010. Under the terms of the Bar Bay Agreement, OC-BVI is required to deliver up to 600,000 gallons of water per day to the BVI government from the Bar Bay plant. The Bar Bay Agreement includes a seven-year extension option exercisable by the BVI government and required OC-BVI to complete a storage reservoir on the BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of this storage reservoir due to the BVI government’s failure to pay the invoices for the water provided by the Bar Bay plant on a timely basis.

Summarized financial information of OC-BVI is presented as follows:

	June 30,		December 31,
	2013		2012
Current assets	$	3,007,518	$	3,033,939
Non-current assets		6,318,531		6,730,121
Total assets	$	9,326,049	$	9,764,060

	June 30,		December 31,
	2013		2012
Current liabilities	$	637,051	$	937,965
Non-current liabilities		1,705,050		1,743,077
Total liabilities	$	2,342,101	$	2,681,042

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Revenues	$	1,182,786	$	1,118,504	$	2,413,574	$	2,153,413
Gross Profit	$	477,657	$	377,549	$	1,005,450	$	661,290
Income from operations	$	235,095	$	50,635	$	507,700	$	136,375
Other income (expense), net ⁽¹⁾	$	(50,476)	$	65,745	$	1,496,980	$	117,918
Net income attributable to controlling interests	$	175,355	$	102,970	$	1,985,281	$	233,772

(1)

Includes income of $2.0 million and $nil related to the Court award – Baughers Bay dispute, for the six months ended June 30, 2013 and 2012, respectively.

The Company recognized $76,332 and $44,823 in earnings from its equity investment in OC-BVI for the three months ended June 30, 2013 and 2012, respectively. The Company recognized $864,193 and $101,761 in earnings from its equity investment in OC-BVI for the six months ended June 30, 2013 and 2012, respectively. The Company recognized $27,652 in profit sharing income from its profit sharing agreement with OC-BVI for the three months ended June 30, 2013 and no profit sharing income for the three months ended June 30, 2012. The Company recognized $315,111 in profit sharing income from its profit sharing agreement with OC-BVI for the six months ended June 30, 2013 and no profit sharing income for the six months ended June 30, 2012.

For the three months ended June 30, 2013 and 2012, the Company recognized approximately $126,791 and $148,856, respectively, in revenues from its management services agreement with OC-BVI which is included in the services segment revenues. For the six months ended June 30, 2013 and 2012, the Company recognized approximately $264,141 and $242,238, respectively, in revenues from its management services agreement with OC-BVI which is included in the services segment revenues. The Company’s recorded value of this management services agreement, which is reflected as an intangible asset on the Company’s condensed consolidated balance sheet, was approximately $356,000 and $428,000 as of June 30, 2013 and December 31, 2012, respectively. For the three months ended June 30, 2013, the Company generated revenues and gross profit of $100,420 and $65,448 respectively, from sales of consumables stock to OC-BVI. For the six months ended June 30, 2013, the Company generated revenues and gross profit of $221,155 and $97,923 respectively, from sales of consumables stock to OC-BVI. The Company did not generate revenues or gross profit from the sales of consumables stock to OC-BVI during the six months ended June 30, 2012.

Baughers Bay dispute

In 2006, the Government of the British Virgin Islands (the “BVI government”) asserted a purported right of ownership of the Baughers Bay plant operated by OC-BVI pursuant to the terms of the 1990 Agreement.

Under the terms of the 1990 Agreement, upon the expiration of the initial seven-year term in May 1999, the agreement would automatically be extended for another seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase the plant from OC-BVI for approximately $1.42 million. In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but would be amenable to negotiating a new water supply agreement, and that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties since 2000 without resolution of the matter. OC-BVI continued to supply water from the plant and expended approximately $4.7 million between 1995 and 2003 to significantly expand the production capacity of the plant beyond that contemplated in the 1990 Agreement.

In 2007, the BVI government ceased honoring the terms of the 1990 Agreement by significantly reducing the amount and frequency of its payments to OC-BVI, and also filed a lawsuit with the Eastern Caribbean Supreme Court (the “Court”) seeking ownership of the Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued possession and operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7 million, which OC-BVI believed represented the value of the Baughers Bay plant at its expanded production capacity. OC-BVI subsequently filed claims with the Court seeking payment for water sold and delivered to the BVI government through May 31, 2009 at the contract prices in effect before the BVI government asserted its purported right of ownership of the plant.

The Court issued its rulings with respect to this litigation in September 2009. The Court determined that (i) the BVI government was entitled to immediate ownership and possession of the Baughers Bay plant and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for the expenditures made to expand the production capacity of the plant; (ii) OC-BVI was entitled to full payment of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original 1990 Agreement; and (iii) OC-BVI was entitled to the amount of $10.4 million for water produced by OC-BVI from the Baughers Bay plant subsequent to December 20, 2007. The BVI government made a payment of $2.0 million to OC-BVI under the Court order during the fourth quarter of 2009, a second payment of $2.0 million under the Court order during 2010 and a third payment under the Court order of $1.0 million in 2011.

OC-BVI filed an appeal with the Eastern Caribbean Court of Appeals (the “Appellate Court”) in October 2009 asking the Appellate Court to review the Court’s ruling as it related to OC-BVI’s claim for compensation for expenditures made to expand the production capacity of the Baughers Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court, requesting the Appellate Court to review the Court’s ruling and reduce the $10.4 million awarded by the Court for water produced by OC-BVI for the period subsequent to December 20, 2007 to an amount equal to the actual production cost of the water.

In March 2010, OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct responsibility for the plant’s operations.

On June 30, 2012, the Appellate Court issued its final amended and corrected ruling with respect to the Baughers Bay litigation. This ruling dismissed the BVI government’s appeal against the previous judgment of the Court awarding $10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements made to the plant in the amount by which the value of the Baughers Bay plant at the date OC-BVI transferred possession of the plant to the BVI government exceeded $1.42 million (the purchase price for the Baughers Bay plant under the 1990 Agreement). OC-BVI was also awarded all of its court costs at the trial level and two-thirds of such costs incurred on appeal. Prior to the final ruling the BVI government had paid only $5.0 million of the original $10.4 million, and the remaining $5.4 million amount due had increased to approximately $6.7 million by the fourth quarter of 2012 due to the court costs awarded by the Appellate Court and the accrued interest due on the aggregate unpaid balance. The BVI government paid OC-BVI $4.7 million of this amount during the fourth quarter of 2012 and the remaining $2.0 million in January 2013. These amounts paid by the BVI government were recognized in OC-BVI’s earnings in accordance with the cash basis of accounting.

The Appellate Court has yet to determine what amount, if any, must be paid by the BVI government to OC-BVI for the value of the Baughers Bay plant at the date OC-BVI transferred possession of the plant to the BVI government.