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Note 7 - Investment in Foreign Joint Venture

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Equity Method Investments and Joint Ventures Disclosure [Text Block]

7. INVESTMENT IN FOREIGN JOINT VENTURE

The Company holds a 40% interest in BOMAY, which builds electrical systems. 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 and nine months ended September 30, 2023 and 2022.

The tables below present a summary of BOMAY's assets, liabilities and equity at September 30, 2023 and December 31, 2022, and its operational results for the three and nine months ended September 30, 2023 and 2022 in U.S. dollars (in thousands):

		*September 30,*				*December 31,*
		*2023*				*2022*
Assets:
Total current assets		$	136,833			$	88,536
Total non-current assets			2,677				3,016
Total assets		$	139,510			$	91,552
Liabilities and equity:
Total liabilities		$	106,982			$	58,482
Total joint ventures’ equity			32,528				33,070
Total liabilities and equity		$	139,510			$	91,552

		*Three Months Ended*								*Nine Months Ended*
		*September 30,*								*September 30,*
		*2023*				*2022*				*2023*				*2022*
Revenue		$	18,565			$	12,364			$	70,148			$	55,090
Gross Profit			2,754				2,332				8,640				7,637
Net income			749				430				3,422				2,573

The table below presents the components of our investment in BOMAY and a summary of the activity within those components for the nine months ended September 30, 2023 in U.S. dollars (in thousands):

		Initial Investment at Merger ⁽¹⁾, ⁽²⁾				*Undistributed Earnings*				*Cumulative Foreign Exchange Translation Adj*				*Investment in BOMAY*
Balance at December 31, 2022		$	9,333			$	2,295			$	(22	)		$	11,606
Equity in earnings			—				1,466				—				1,466
Less: dividend distributions			—				(813	)			—				(813	)
Foreign currency translation gain (loss)			—				—				(668	)			(668	)
Balance at September 30, 2023		$	9,333			$	2,948			$	(690	)		$	11,591

(1)

Accumulated statutory reserves in equity method investments of $2.7 million at September 30, 2023 and December 31, 2022 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 an original period of nine years (the expected life of the joint venture). The Company's accretion during the nine months ended September 30, 2023 and 2022 both totaled approximately $97 thousand each, respectively, and is included in income from equity investment in foreign joint venture in the accompanying Condensed Consolidated Statements of Operations. The remaining basis difference, net of accumulated accretion at September 30, 2023 and December 31, 2022 is summarized in the following table (in thousands):

		*September 30,*				*December 31,*
		*2023*				*2022*
Original basis difference		$	1,165			$	1,165
Less accumulated accretion			(539	)			(443	)
Net remaining basis difference at end of period		$	626			$	722

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 September 30, 2023.