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Investment in OC-BVI | 6 Months Ended
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Jun. 30, 2016
Equity Method Investments and Joint Ventures [Abstract] |
Equity Method Investments Disclosure [Text Block] | 7. Investment in OC-BVI The Company owns 50% of the outstanding voting common shares and a 43.53% equity interest in the net income and net losses 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 net income 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 $4,678,093 and $4,548,271 as of June 30, 2016 and December 31, 2015, respectively. Until 2009, substantially all of the water sold by OC-BVI to the Ministry was supplied 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 litigation”), the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed 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 began selling water to the Ministry from this plant in January 2009 and in March 2010, OC-BVI and the BVI government executed a seven-year contract for the Bar Bay plant (the “Bar Bay agreement”). Under the terms of the Bar Bay agreement, OC-BVI delivers 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 a 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 (i) the full amount of invoices for the water provided by the Bar Bay plant on a timely basis; (ii) interest income due as a result of late payment of accounts receivable balances; and (iii) the amount for the Baughers Bay plant arising from a court ruling relating to the Baughers Bay litigation (see discussion that follows). Summarized financial information of OC-BVI is presented as follows:
|  | June 30, |  | December 31, |
|  | 2016 |  | 2015 |
Current assets |  | $ | 4,750,135 |  | $ | 4,323,792 |
Non-current assets |  |  | 4,324,175 |  |  | 4,682,650 |
Total assets |  | $ | 9,074,310 |  | $ | 9,006,442 |
|  | June 30, |  | December 31, |
|  | 2016 |  | 2015 |
Current liabilities |  | $ | 273,997 |  | $ | 584,116 |
Non-current liabilities |  |  | 1,701,000 |  |  | 1,650,252 |
Total liabilities |  | $ | 1,974,997 |  | $ | 2,234,368 |
|  | Three Months Ended June 30, |  | Six Months Ended June 30, |
|  | 2016 |  | 2015 |  | 2016 |  | 2015 |
Revenues |  | $ | 948,189 |  | $ | 1,027,352 |  | $ | 1,885,073 |  | $ | 2,096,253 |
Cost of revenues |  |  | 512,699 |  |  | 558,783 |  |  | 997,338 |  |  | 1,140,427 |
Gross profit |  | $ | 435,490 |  | $ | 468,569 |  |  | 887,735 |  |  | 955,826 |
General and administrative expenses |  |  | 222,191 |  |  | 261,456 |  |  | 482,733 |  |  | 505,798 |
Income from operations |  | $ | 213,299 |  | $ | 207,113 |  |  | 405,002 |  |  | 450,028 |
Other income (expense), net |  | $ | (8,913) |  | $ | (44,551) |  |  | (77,763) |  |  | (97,200) |
Net income |  |  | 204,386 |  |  | 162,562 |  |  | 327,239 |  |  | 352,828 |
Income attributable to non-controlling interests |  |  | 7,146 |  |  | 18,598 |  |  | 25,787 |  |  | 36,212 |
Net income attributable to controlling interests |  | $ | 197,240 |  | $ | 143,964 |  | $ | 301,452 |  | $ | 316,616 |
The Company recognized $85,858 and $62,668 for the three months ended June 30, 2016 and 2015, respectively, and $131,222 and $137,823 for the six months ended June 30, 2016 and 2015, respectively, in earnings from its investment in OC-BVI. The Company recognized $14,175 and $22,275 for the three months ended June 30, 2016 and 2015, respectively, and $48,600 and $48,600 for the six months ended June 30, 2016 and 2015, respectively, in profit sharing income from its profit sharing agreement with OC-BVI. For the three months ended June 30, 2016 and 2015, the Company recognized $125,594 and $135,537, respectively, in revenues from its management services agreement with OC-BVI. For the six months ended June 30, 2016 and 2015, the Company recognized $264,350 and $264,312, respectively, in revenues from its management services agreement with OC-BVI. Amounts payable by OC-BVI to the Company were $14,202 and $23,803 as of June 30, 2016 and December 31, 2015, respectively. The Company’s recorded value of this management services agreement, which is reflected as an intangible asset on the Company’s condensed consolidated balance sheets, was $60,588 and $105,659 as of June 30, 2016 and December 31, 2015, respectively. Baughers Bay Litigation Under the terms of a water supply agreement dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI government”) for the Baughers Bay plant upon the expiration of its initial seven-year term in May 1999, the 1990 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 at the agreed upon amount under the 1990 Agreement of 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 after 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 2006, the BVI government took the position that the seven-year extension of the 1990 Agreement had been completed and that it was entitled to ownership of the Baughers Bay plant. In response, OC-BVI disputed the BVI government’s contention that the original terms of the 1990 Agreement remained in effect. During 2007, the BVI government significantly reduced its payments for the water being supplied by OC-BVI and 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 ruled on this litigation in 2009 determining that (i) the BVI government was entitled to immediate ownership and possession of the Baughers Bay plant; (ii) OC-BVI was not entitled to compensation for the expenditures made to expand the production capacity of the plant; (iii) 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 (iv) 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. 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 September 17, 2009 ruling by the Court 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 reduce the $10.4 million awarded by the Court to OC-BVI for water supplied subsequent to December 20, 2007 to an amount equal to the cost of producing such water. In March 2010, OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct responsibility for the plant’s operations. In June 2012, the Appellate Court issued the final 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 equal to the difference between (i) the value of the Baughers Bay plant at the date OC-BVI transferred possession of the plant to the BVI government; and (ii) $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. OC-BVI and the BVI government engaged a mutually approved valuation expert to complete a valuation of the Baughers Bay plant at the date it was transferred to the BVI government in accordance with the Appellate Court ruling. In June 2016, OC-BVI received the final valuation report from the valuation expert, which sets forth a value for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred possession of the plant to the BVI government. Applying the valuation determined by the valuation expert to the formula set forth by the Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the Baughers Bay plant. The BVI government has indicated that it disagrees with the valuation methodology used by the valuation expert and the resulting valuation for the Baughers Bay plant. We cannot presently determine whether the BVI government will attempt to challenge, or the Appellate Court will uphold, the Baughers Bay plant valuation or when, or to what extent, any amount for the value of the Baughers Bay plant will be paid by the BVI government to OC-BVI. Consequently, any amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of operations until such amount, if any, is paid by the BVI government. Valuation of Investment in OC-BVI The Company accounts for its investment in OC-BVI under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment. As a quoted market price for OC-BVI’s stock is not available, to test for possible impairment of its investment in OC-BVI, the Company estimates its fair value through the use of the discounted cash flow method which relies upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of this method requires the Company to estimate OC-BVI’s cash flows from (i) the Bar Bay agreement and (ii) the pending amount due, as required under the final ruling of the Appellate Court for the value of the Baughers Bay plant at the date it was transferred by OC-BVI to the BVI government. The Company estimates the cash flows OC-BVI will receive from its Bar Bay plant by (i) identifying various possible future scenarios which include the execution of a new agreement for the Bar Bay plant as well as the termination of Bar Bay plant operations upon the expiration of the existing Bar Bay agreement in March 2017; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. The Company similarly estimates the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Appellate Court for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to different valuation scenarios. The resulting probability-weighted sum represents the expected cash flows, and the Company’s best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay plant and the pending Appellate Court ruling. The identification of the possible scenarios for the Bar Bay plant and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all represent significant estimates made by the Company. While the Company uses its best judgment in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities to each scenario, these estimates are by their nature highly subjective and are also subject to material change by the Company’s management over time based upon new information or changes in circumstances. As of June 30, 2016, after updating its probability-weighted estimates of OC-BVI’s future cash flows and its resulting estimate of the fair value of its investment in OC-BVI, the Company determined that the carrying value of its investment in OC-BVI did not exceed its fair value. As of March 31, 2016, after updating its probability-weighted estimates of OC-BVI’s future cash flows and its resulting estimate of the fair value of its investment in OC-BVI, the Company determined that the carrying value of its investment in OC-BVI exceeded its fair value and recorded an impairment charge of $50,000 for the three months ended March 31, 2016. The Company recorded impairment charges on its investment in OC-BVI of $310,000 and $275,000 for the three months ended March 31, 2015 and June 30, 2015, respectively. The remaining carrying value of the Company’s investment in OC-BVI of approximately $4.7 million as of June 30, 2016 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also assumes (on a probability-weighted basis) that (i) the BVI government will enter into a new agreement to purchase water from the Bar Bay plant after the current Bar Bay agreement expires in March 2017; and (ii) OC-BVI will receive the pending amount due (as estimated by the Company) as required under the Appellate Court ruling for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government. The $4.7 million carrying value of the Company’s investment in OC-BVI as of June 30, 2016 exceeds the Company’s underlying equity in OC-BVI’s net assets by approximately $850,000. The Company accounts for this excess as goodwill. The BVI government is OC-BVI’s sole customer and substantially all of OC-BVI’s revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures to its March 2017 expiration date and OC-BVI receives the pending amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash flows, and therefore its fair value computed under the discounted cash flow method, decreases. The Company will be required to record additional impairment charges to reduce the carrying value of its investment in OC-BVI to its then current fair value if OC-BVI does not obtain a new agreement for the Bar Bay plant that generates cash flows sufficient to support the Company’s then carrying value of its investment in OC-BVI. These impairment charges may, in the aggregate, equal the underlying $850,000 in goodwill reflected in the carrying value of the Company’s investment in OC-BVI. In addition, if OC-BVI does not obtain a new agreement for the Bar Bay plant that generates cash flows sufficient to support OC-BVI’s carrying values for its long lived Bar Bay plant assets, OC-BVI will be required to record an impairment charge to reduce the carrying value of its long lived Bar Bay plant assets to their then estimated fair value. The Company’s equity in the net earnings or loss of OC-BVI will include 43.53% of any such impairment charge recorded by OC-BVI. Based upon the updating of its probability weighted scenarios for the future cash flows to be derived from its Bar Bay plant, OC-BVI may be required to record impairment charges to reduce carrying value of its Bar Bay plants assets before the expiration of the Bar Bay agreement in March 2017. As of June 30, 2016, the aggregate carrying value of OC-BVI’s long lived Bar Bay plant assets was approximately $4.1 million. Future impairment charges for the Company’s investment in OC-BVI and the Company’s equity in any future losses incurred by OC-BVI could have a material adverse impact on the Company’s results of operations.

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=66011266&loc=d3e33918-111571 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -SubTopic 10 -Section 35 -Paragraph 35 -URI http://asc.fasb.org/extlink&oid=64825282&loc=d3e32847-111569 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.12) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -SubTopic 10 -Section 35 -Paragraph 32 -URI http://asc.fasb.org/extlink&oid=64825282&loc=d3e32787-111569 + Details
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