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DISCONTINUED OPERATIONS | 9 Months Ended
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Sep. 30, 2019
Discontinued Operations and Disposal Groups [Abstract] |
DISCONTINUED OPERATIONS | 6. DISCONTINUED OPERATIONS A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Cash Flows, and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year. Based upon the authoritative guidance, the Company concluded that the operations of the liquid-filled and dry-type transformer business should be presented as discontinued operations as of September 30, 2019. Overview On August 16, 2019, the Company completed the Equity Transaction pursuant to the Stock Purchase Agreement, by and among the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to the terms of the Stock Purchase Agreement, the Company sold (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer. Upon completion of the Equity Transaction, Pioneer Power sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment. Consideration The consideration paid by the Buyer in the Equity Transaction is a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of two subordinated promissory notes to Pioneer Power in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”), in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement, the Seller Notes will bear interest at an annualized rate of 4.0%, to be paid-in-kind annually, and will have a maturity date of December 31, 2022. The Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a reduction to the value of the notes at September 30, 2019 of $942, for a carrying value of $6.6 million. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended by the Amendment, the Buyer may set-off on a dollar-for-dollar basis any indemnifiable losses the Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million, and such right of set-off is the Buyer’s sole source of recovery with respect to losses resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities. No such losses are expected as of September 30, 2019. Covenants In addition, pursuant to the Stock Purchase Agreement, each of Pioneer Power, its affiliates and Nathan Mazurek, Pioneer Power’s President, Chief Executive Officer and Chairman of the Board of Directors, have agreed to a non-solicitation provision that generally prohibits such persons, for a three-year period, from, among other things, soliciting or attempting to hire employees of the Disposed Companies or the Buyer or engaging in the business operated by the Disposed Companies within certain geographic areas, subject to certain limitations and exceptions. Indemnification Pursuant to the Stock Purchase Agreement, Pioneer Power and the Buyer have each agreed to indemnify one another for any and all liabilities, losses, damages, claims, demands, suits, actions, judgments, fines, penalties, deficiencies, awards, taxes, assessments, costs or expenses (including reasonable attorney’s or other professional fees and expenses) (“Losses”) resulting from any inaccuracy or breach of the respective party’s representations and warranties or any breach or nonperformance of the respective party’s covenants and agreements in the Stock Purchase Agreement or its related ancillary agreements. In addition, Pioneer Power has agreed to indemnify the Buyer and its affiliated parties for Losses resulting from, among other things, certain pre-closing tax matters, debt held by the Disposed Companies, transaction expenses, breaches of representations and warranties that are not covered by the Buyer’s representation and warranty insurance because the Buyer had knowledge of such breach (only to the extent such Losses would have been covered by the representation and warranty insurance had the Buyer not known of such breach) (“Interim Breaches”), certain matters related to Electrogroup’s operations, certain legal proceedings, certain matters related to Nexus Custom Magnetics, L.L.C., a wholly owned subsidiary of Jefferson, and certain matters concerning end-user software utilized by the Disposed Companies. The indemnification obligations of Pioneer Power with respect to Losses of the Buyer resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities, are subject to (i) a true deductible equal to $330,000, (ii) a cap equal to $330,000, and (iii) a per-claim threshold amount of $50,000, and any such Losses shall be satisfied solely through a set-off to the first Seller Note with the principal amount of $5 million. In addition, the indemnification rights of the Buyer with respect to Interim Breaches are subject to a cap equal to $5.0 million, and the indemnification rights of the Buyer with respect to Losses resulting from certain legal matters are subject to a true deductible equal to $150,000 and a cap equal to $5.0 million. The indemnification obligations of the Buyer, except with respect to breaches of certain fundamental representations and warranties and claims of fraud, are subject to a true deductible equal to $330,000 and a cap equal to $3.3 million. In addition, each party’s total indemnification obligation is subject to a cap equal to the purchase price, except for claims of fraud. The Buyer has obtained a customary representation and warranty insurance policy insuring the Buyer against losses resulting from a breach of representations and warranties by Pioneer Power and the Disposed Companies, and the Buyer is required to use commercially reasonable efforts to utilize the representation and warranty insurance to cover any Losses resulting from such a breach. Other Provisions The Stock Purchase Agreement also contains customary representations and warranties, and provisions governing certain other matters between the parties. The foregoing description of the Stock Purchase Agreement does not purport to be complete is qualified in its entirety by reference to the full text of the Stock Purchase Agreement, a copy of which is filed as Exhibit 2.1 on Form 8-K filed with the Security and Exchange Commission on July 1, 2019 and is incorporated by reference herein. Operating results of the liquid-filled and dry-type transformer manufacturing businesses previously included in the T&D Solutions segment, have now been reclassified as discontinued operations for all periods presented. The components of assets and liabilities that are attributable to discontinued operations are as follows (in thousands):
|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
Assets of discontinued operations: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | — |  |  | $ | 11 |
Accounts receivable - trade, net |  |  | — |  |  |  | 12,944 |
Inventories, net |  |  | — |  |  |  | 23,632 |
Income taxes receivable |  |  | — |  |  |  | 566 |
Prepaid expenses |  |  | — |  |  |  | 514 |
Property, plant and equipment, net |  |  | — |  |  |  | 4,406 |
Right of use asset |  |  | — |  |  |  | 2,124 |
Deferred income taxes |  |  | — |  |  |  | 134 |
Intangible assets, net |  |  | — |  |  |  | 3,460 |
Goodwill |  |  | — |  |  |  | 5,557 |
Assets of discontinued operations |  | $ | — |  |  | $ | 53,348 |
Liabilities of discontinued operations: |  |  |  |  |  |  |  |
Bank overdrafts |  | $ | — |  |  | $ | 1,690 |
Accounts payable and accrued liabilities |  |  | — |  |  |  | 18,894 |
Income taxes payable |  |  | — |  |  |  | 778 |
Pension deficit |  |  | — |  |  |  | 148 |
Other long-term liabilities |  |  | — |  |  |  | 2,187 |
Liabilities of discontinued operations |  | $ | — |  |  | $ | 23,697 |
During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. The Company received $600 of these insurance proceeds during the quarter ended September 30, 2019. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $1.8 million has been recognized as an asset from continuing operations as of September 30, 2019. The amount of damaged inventory and insurance proceeds are based upon the management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates. During the quarter ended September 30, 2019, the Company determined that there was substantial doubt over our ability to collect $2.3 million due from our former Asian manufacturing partner as the Company no longer retains a relationship with this entity subsequent to the sale of the Transformer business. While the Company will continue to pursue collection of the amount, based upon discussions with the supplier during the third quarter the recognition of a reserve was deemed appropriate. The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statement of Operations (in thousands):
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Revenues |  | $ | 5,948 |  |  | $ | 22,663 |  |  | $ | 46,631 |  |  | $ | 65,193 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of goods sold |  |  | 6,029 |  |  |  | 18,349 |  |  |  | 39,915 |  |  |  | 52,098 |
Selling, general and administrative |  |  | 4,493 |  |  |  | 2,755 |  |  |  | 9,207 |  |  |  | 8,150 |
Foreign exchange gain |  |  | (342 | ) |  |  | (890 | ) |  |  | (833 | ) |  |  | (618 | )
Interest expense |  |  | 103 |  |  |  | 489 |  |  |  | 653 |  |  |  | 1,437 |
Other (income) expense |  |  | (6 | ) |  |  | 10 |  |  |  | 41 |  |  |  | 106 |
Total costs and expenses |  |  | 10,277 |  |  |  | 20,713 |  |  |  | 48,983 |  |  |  | 61,173 |
Gain on sale of discontinued subsidiaries |  |  | 17,210 |  |  |  | — |  |  |  | 17,210 |  |  |  | — |
Income before provision for income taxes |  |  | 12,881 |  |  |  | 1,950 |  |  |  | 14,858 |  |  |  | 4,020 |
Income tax expense |  |  | 2,637 |  |  |  | 488 |  |  |  | 3,171 |  |  |  | 964 |
Income from discontinued operations, net of income taxes |  | $ | 10,244 |  |  | $ | 1,462 |  |  | $ | 11,687 |  |  | $ | 3,056 |
The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statements of Cash Flows (in thousands):
|  | Nine Months Ended September 30, |
|  | 2019 |  |  | 2018 |
Net cash (used in)/provided by operating activities |  | $ | (2,043 | ) |  | $ | 567 |
Net cash provided by/(used in) investing activities |  |  | 41,777 |  |  |  | (369 | )
Net cash (used in)/provided by financing activities |  |  | (26,461 | ) |  |  | 167 |
Effect of foreign exchange on cash and cash equivalents |  |  | 36 |  |  |  | 76 |
Increase in cash and cash equivalents |  | $ | 13,309 |  |  | $ | 441 |

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- Definition The entire disclosure related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 + Details
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