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DISCONTINUED OPERATIONS

6 Months Ended

Jun. 30, 2020

Discontinued Operations and Disposal Groups [Abstract]

DISCONTINUED OPERATIONS

8. 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 for the three and six months ended June 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 principal amounts of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million, 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. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended, 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.

During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. The Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company during the three months ended June 30, 2020. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at June 30, 2020 of $40, for a carrying value of $5.1 million, which is included within other long term assets (see Note 11 - Other Assets).

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.

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 year ended December 31, 2019, and $1.8 million of these insurance proceeds were received during the six months ended June 30, 2020. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the cost of goods sold in discontinued operations during the year ended December 31, 2019, the corresponding insurance receivable amounting to $1.8 million and $33 has been recognized as an asset from continuing operations as of December 31, 2019 and June 30, 2020, respectively. The amount of damaged inventory and insurance proceeds are based upon management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.

The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statement of Operations:

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Revenues		$	—			$	19,003			$	—			$	40,684
Costs and Expenses
Cost of goods sold			—				16,047				—				33,886
Selling, general and administrative			—				2,275				—				4,715
Foreign exchange loss (gain)			—				143				—				(491	)
Interest expense			—				275				—				550
Other expense			—				—				—				48
Total costs and expenses			—				18,740				—				38,708
Income before provision for income taxes			—				263				—				1,976
Income tax expense			—				131				—				533
Income from discontinued operations, net of income taxes		$	—			$	132			$	—			$	1,443

Depreciation, capital expenditures, and significant non cash items of the discontinued operations by period were as follows:

		Six Months Ended June 30,
		2020				2019
Depreciation and amortization		$	—			$	632
Capital expenditures			—				98