Investments in Foreign Joint Ventures

3 Months Ended

Mar. 31, 2022

Equity Method Investments and Joint Ventures [Abstract]

Investments in Foreign Joint Ventures

INVESTMENT IN FOREIGN JOINT VENTURE

The Company holds a 40% interest in BOMAY Electric Industries Company, Ltd. (“BOMAY”), which builds electrical systems for sale in China. The majority partner in this foreign joint venture is Baoji Oilfield Machinery Co., Ltd. (a subsidiary of China National Petroleum Corporation), which owns 51%. The remaining 9% is owned by AA Energies, Inc. The Company made no sales to its joint venture during the three months ended March 31, 2022 and 2021.

The Company accounts for its investment in BOMAY using the equity method of accounting. Under the equity method, the Company’s share of the joint venture operations earnings or losses is recognized in the Condensed Consolidated Statements of Operations as equity income (loss) from foreign joint venture operations. Joint venture income increases the carrying value of the joint venture and joint venture losses reduce the carrying value. Dividends received from the joint venture reduce the carrying value. The Company considers dividend distributions received from its equity method investments which do not exceed cumulative equity in earnings subsequent to the date of investment to be a return on investment and classifies these distributions as operating activities in the accompanying Condensed Consolidated Statements of Cash Flows.

The tables below present a summary of BOMAY's assets and liabilities and equity at March 31, 2022 and December 31, 2021, and its operational results for the three months ended March 31, 2022 and 2021 in U.S. dollars (in thousands, unaudited):

	March 31, 2022		December 31, 2021
Assets:
Total current assets	$	83,964	$	75,249
Total non-current assets	3,487		3,544
Total assets	$	87,451	$	78,793
Liabilities and equity:
Total liabilities	$	53,426	$	45,253
Total joint ventures’ equity	34,025		33,540
Total liabilities and equity	$	87,451	$	78,793

	Three Months Ended March 31,
	2022		2021
Revenue	$	10,079	$	14,216
Gross Profit	1,609		2,233
Earnings	323		970

The table below presents a summary of activity in our investment in BOMAY for the three months ended March 31, 2022 in U.S. dollars (in thousands, unaudited):

	March 31, 2022
Initial Investment in BOMAY (1)(2)	$	9,333
Undistributed earnings:
Balance at the beginning of the period	1,965
Equity in earnings	162
Dividend distributions	—
Undistributed earnings at March 31, 2022	2,127
Cumulative foreign currency translation:
Balance at the beginning of the period	1,027
Change during the period	37
Cumulative foreign currency translation at March 31, 2022	1,064
Investment in BOMAY at end of period	$	12,524

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(1)Accumulated statutory reserves in equity method investments of $2.66 million at March 31, 2022 and December 31, 2021 is included in our investment in BOMAY. In accordance with the People’s Republic of China, (“PRC”) regulations on enterprises with foreign ownership, an enterprise established in the PRC with foreign ownership is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.

(2)The Company’s initial investment in BOMAY differed from the Company’s 40% share of BOMAY’s equity as a result of applying fair value accounting pursuant to ASC 805. The basis difference is being accreted over eight years (the expected life of the joint venture). The Company's accretion during the three months ended March 31, 2022 and 2021 totaled approximately $32 thousand and $32 thousand, respectively, and is included in income from equity investments in foreign joint ventures in the accompanying Consolidated Statement of Operations. The remaining basis difference, net of accumulated accretion at March 31, 2022 and December 31, 2021 is summarized in the following table (amounts in thousands):

	March 31, 2022		December 31, 2021
Original basis difference	$	1,165	$	1,165
Less accumulated accretion	(346)		(314)
Net remaining basis difference, net at end of period	$	819	$	851

In accordance with our long-lived asset policy, when events or circumstances indicate the carrying amount of an asset may not be recoverable, management tests long-lived assets for impairment. If the estimated future cash flows are projected to be less than the carrying amount, an impairment write-down (representing the carrying amount of the long-lived asset which exceeds the present value of estimated expected future cash flows) would be recorded as a period expense. In making this evaluation, a variety

of quantitative and qualitative factors are considered including national and local economic, political and market conditions, industry trends and prospects, liquidity and capital resources and other pertinent factors. Based on this evaluation for this reporting period, the Company does not believe an impairment of our investment in BOMAY is necessary for the period ending March 31, 2022.