Investments in Foreign Joint Ventures

BOMAY. 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), who owns 51%. The remaining 9% is owned by AA Energies, Inc.

The Company made no sales to its joint venture in the three months ended March 31, 2020.

Below is summary financial information for BOMAY at March 31, 2020 and December 31, 2019 and operational results for the three months ended March 31, 2020 in U.S. dollars (in thousands, unaudited):



	March 31, 2020		December 31, 2019
Assets:
Total current assets	$	66,465	$	81,247
Total non-current assets	5,646		5,775
Total assets	$	72,111	$	87,022
Liabilities and equity:
Total liabilities	$	43,971	$	58,176
Total joint ventures’ equity	28,140		28,846
Total liabilities and equity	$	72,111	$	87,022



	Three Months Ended March 31,
	2020
Revenue	$	8,556
Gross Profit	896
Earnings	(284		)

The following is a summary of activity in our investment in BOMAY for the three months ended March 31, 2020 in U.S. dollars (in thousands, unaudited):



	March 31, 2020
Investments in BOMAY (1) (2)
Balance at the beginning of the year	$	9,333
Undistributed earnings:
Balance at the beginning of the year	1,257
Equity in earnings	(114		)
Dividend distributions	—
Balance at end of period	1,143
Foreign currency translation:
Balance at the beginning of the year	(69		)
Change during the period	(287		)
Balance at end of period	(356		)
Total investment in BOMAY at March 31, 2020	$	10,120

________

(1)

Accumulated statutory reserves in equity method investments of $2.71 million at March 31, 2020 and December 31, 2019 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 of approximately $1.0 million will be accreted over the remaining nine year life of the joint venture. The Company accreted $43 thousand during the three months ended March 31, 2020 which is included in loss from equity investments in foreign joint ventures in the accompanying condensed consolidated statement of operations. As of March 31, 2020, accumulated accretion totaled $97 thousand.

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. 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 adjustment is necessary at March 31, 2020.