PIONEER POWER SOLUTIONS, INC. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35212

PIONEER POWER SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

400 Kelby Street, 12th Floor

Fort Lee, New Jersey 07024

(Address of principal executive offices)

(212) 867-0700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of August 14, 2019 was 8,726,045.

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2019

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

For assets sold and consideration received in connection with the sale of Pioneer Critical Power, Inc. see Note 3.

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

June 30, 2019 (unaudited)

1. BASIS OF PRESENTATION

Overview

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from five (5) additional locations in the U.S. for manufacturing, centralized distribution, engineering, sales and administration.

We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

Recent Developments

On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (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 (the “Equity Transaction”), for an aggregate base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $7.5 million, in each case subject to certain adjustments.

If the Equity Transaction is completed, Pioneer Power would sell 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 Transmission & Distribution Solutions segment (the “T&D Segment”). However, Pioneer Power would retain its switchgear manufacturing business within the T&D segment, as well as all of the operations associated with its critical power solutions segment.

On June 28, 2019, certain stockholders of the Company holding an aggregate of 4,774,400 shares of the Company’s common stock, which, as of such date, constituted approximately 54.7% of the voting power of the outstanding shares of the Company’s common stock, executed a written consent approving the Stock Purchase Agreement and the transactions contemplated thereby, including the Equity Transaction.

Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of June 30, 2019. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.

All dollar amounts (except share and per share data) presented in the notes to our unaudited consolidated financial statements are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.

These unaudited consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Operating results of liquid-filled and dry-type transformer manufacturing businesses have been previously included in the T&D Segment, which have now been reclassified as discontinued operations for all periods presented. See Note 6 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

These unaudited consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II – Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Liquidity

The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the six months ended June 30, 2019, the Company has an accumulated deficit of $4.8 million, and has working capital of $6.8 million. As of June 30, 2019, we had total debt of $25.1 million and $490 of cash and cash equivalents on hand. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings under our revolving credit facilities. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions. As further discussed in Note 11 - Debt in Part I of this Form 10-Q our credit facilities’ maturity dates have been extended until April 1, 2020.

The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lender will remain available to us and will not need to be replaced.

Management believes that its capital resources are adequate to fund operations through the first quarter of 2020, but the availability of the Company’s capital resources is dependent on the Company’s ability to meet the working capital obligations pursuant to the credit agreements with Bank of Montreal (“BMO”), its lender. The Company has certain credit arrangements with BMO that contain subjective acceleration clauses, and the Company has had several instances of non-compliance with certain of the covenants included in such credit agreements. Management has historically been able to obtain from BMO waivers of any non-compliance and management expects to be able to continue to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should BMO refuse to provide a waiver in the future, the outstanding debt under the credit facilities could become due immediately. Additionally, the term of the Company’s agreement with BMO ends in April 2020. Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) will be repaid in full. The operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of commercial manufacturing at acceptable margins, marketing or sales acceptance, and dependence on key personnel.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in the Company’s accounting policies during this fiscal quarter of 2019. 

Recent Accounting Pronouncements

There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires, among other things, a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. We adopted this standard in our first quarter of 2018 using the modified retrospective approach.

Stock Compensation. In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial statements.

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption permitted. The Company does not anticipate material impact of adopting this ASU on its consolidated financial statements.

Disclosure Requirements for Defined Benefit Plans. In August 2018, the FASB issued amended guidance under Subtopic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amended guidance removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the entity; and the effects of a one-percentage point change in assumed health care cost trend rates. The amended guidance requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The amended guidance is required to be applied on a retrospective basis to all periods presented. We are currently evaluating this guidance to determine the impact on our disclosures.

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We do not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.

3. DIVESTITURES

On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within Transmission and Distribution segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).

At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 1,750,000 shares of common stock, par value $0.001 per share (“Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $2.00 per share.

The Merger Agreement also contains representations, warranties and covenants of the parties customary for transactions similar to those contemplated by the Merger Agreement. Such representations and warranties are made solely for purposes of the Merger Agreement and, in some cases, may be subject to qualifications and limitations agreed to by the parties in connection with the negotiated terms of the Merger Agreement and may have been qualified by disclosures that were made in connection with the parties’ entry into the Merger Agreement.

In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger. In addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from and against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnify Agreement expires five years from the date of the Indemnity Agreement.

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis, but all purchases of Products will have a target price of 91% of the CleanSpark customer’s purchase order price and will not be more than 109% of the Company’s cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Non-Competition and Non-Solicitation Agreement (the “Non-Compete Agreement”), dated January 22, 2019, pursuant to which the Company agreed not to, among other things, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any person or entity that engages in or plans to engage in the design, manufacture, distribution and service of paralleling switchgear, automatic transfer switches, and related products (the “Restricted Business”). The Company agreed not to engage in the Restricted Business within any state or county within the United States in which CleanSpark or the surviving company of the Merger conducts such Restricted Business for a period of four (4) years from the date of the Non-Compete Agreement.

In addition, the Company also agreed, for a period of four (4) years from the date of the Non-Compete Agreement, not to, among other things, directly or indirectly (i) solicit, induce, or attempt to induce customers, suppliers, licensees, licensors, franchisees, consultants of the Restricted Business as conducted by the Company, CleanSpark or the surviving company to cease doing business with the surviving company or CleanSpark or (ii) solicit, recruit, or encourage any of the surviving company’s or CleanSpark’s employees, or independent contractors to discontinue their employment or engagement with the surviving company or CleanSpark.

The Merger resulted in the deconsolidation of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the common stock of CleanSpark was determined using quoted market prices and warrants were established using a Black Scholes model.

From the date of sale through June 30, 2019, the estimated fair value of the warrants and common stock decreased to $3.9 million and an unrealized mark to market loss of $325 was recognized within other expense for the six months ended June 30, 2019. For the three months ended June 30, 2019, the unrealized mark to market loss recognized within other expense was $3.7 million.

4. REVENUES

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606.

Financial Statement Impact of Adopting ASC 606

The Company adopted ASC 606 using the modified retrospective method. There was no adjustment to opening retained earnings due to the impact of adopting Topic 606.

Nature of our products and services

Our principal products and services include custom-engineered engine-generator sets and controls, complemented by a national field-service network to maintain and repair power generation assets.

Products

We provide switchgear that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications.

We provide customers with an advanced data collection and monitoring platform for power generation equipment which is used to ensure smooth, uninterrupted power to operations during times of emergency.

Services

Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems. 

Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve this core principal, the Company applies the following five steps:

1)          Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2)          Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.

3)          Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The customer payments are generally due in 30 days.

4)          Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis or cost of the product or service. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

5)          Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.

Substantially all of our revenue is recognized at a point of time, as the promised product passes to the customer. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

The following table presents our revenues disaggregated by revenue discipline:

See Note 15 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

5. OTHER EXPENSE

Other expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three months ended June 30, 2019, other non-operating expense was $3.8 million, as compared to $212 during the three months ended June 30, 2018. For the three months ended June 30, 2019, included in other non-operating expense was a loss of $3.7 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.

For the six months ended June 30, 2019, other non-operating expense was $465, as compared to $349 during the six months ended June 30, 2018. For the six months ended June 30, 2019, included in other non-operating expense was a loss of $325 related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.

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 June 30, 2019.

Overview

On June 28, 2019, the Company entered into 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 agreed to sell (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.

If the Equity Transaction is completed, Pioneer Power would sell 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. However, Pioneer Power would retain its switchgear manufacturing business within the T&D segment, as well as all of the operations associated with its critical power solutions segment.

Consideration

The consideration payable 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 a subordinated promissory note to Pioneer Power in the aggregate principal amount of $7.5 million (the “Seller Note”), 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 Note 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, the Buyer will have the right to set-off amounts owed to Pioneer Power under the Seller Note on a dollar-for-dollar basis by the amount of any indemnifiable losses Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies.

Covenants

The Company has agreed, subject to the terms of the Stock Purchase Agreement, to various covenants and agreements, including, among others, to conduct the business of the Disposed Companies in the ordinary course during the period between the execution of the Stock Purchase Agreement and the closing of the Equity Transaction in a manner consistent with past practice. The parties have also agreed to use their respective best efforts to take, or cause to be taken, all things necessary, proper or advisable to consummate the transactions contemplated by the Stock Purchase Agreement.

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.

Closing Conditions

Each party’s obligation to consummate the Stock Purchase Agreement is subject to certain conditions, including, among others: (i) approval of the Stock Purchase Agreement by the holders of a majority of Pioneer Power’s outstanding common stock, which such approval was obtained by the written consent of certain Pioneer Power stockholders on June 28, 2019 (as discussed in more detail below), (ii) 20 days having elapsed since the mailing to the stockholders of the Company of the definitive information statement with respect to the approval and adoption of the Stock Purchase Agreement and (iii) the absence of any order or legal requirement issued or enacted by any court or other governmental authority preventing consummation of the Equity Transaction.

In addition, the consummation of the Equity Transaction is subject to a financing condition. Certain lenders have entered into a debt financing commitment letter with the Buyer, and Mill Point Capital LLC entered into an equity commitment letter with the Buyer, in each case committing to provide the Buyer with funding to pay the aggregate consideration to be paid by the Buyer in connection with the Equity Transaction. The Buyer is not obligated to consummate the Equity Transaction unless it receives debt financing on substantially the terms provided for in the debt financing commitment letter or the Buyer is able to obtain alternative financing in amount sufficient to consummate the Equity Transaction.

If the Stock Purchase Agreement is terminated by the Buyer after all mutual conditions to closing have been satisfied, except that the Buyer has not obtained sufficient financing to consummate the Equity Transaction, the Buyer would be required to pay a $4.0 million reverse termination fee to Pioneer Power, subject to certain limitations set forth in the Stock Purchase Agreement. The reverse termination fee would also be payable by the Buyer in certain other limited circumstances described in the Stock Purchase Agreement

Termination Fee

Under the terms of the Stock Purchase Agreement, Pioneer Power is not permitted to, and may not authorize or permit its representatives to, directly or indirectly, solicit, initiate or knowingly take any action to encourage or facilitate the submission of an Acquisition Proposal (as defined in the Stock Purchase Agreement), or any inquiries relating to a potential Acquisition Proposal.

Notwithstanding this restriction, Pioneer Power may, prior to the closing of the Equity Transaction, respond to, and engage in discussions and negotiations concerning, a written unsolicited bona fide Acquisition Proposal submitted, and not withdrawn, by a party other than the Buyer that Pioneer Power’s board of directors believes, in good faith and after consultation with its outside legal counsel and its financial advisor, constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the Stock Purchase Agreement).

If the Stock Purchase Agreement were to be terminated in connection with or as a result of Pioneer Power’s adoption of a Superior Proposal or entry into an Alternative Acquisition Agreement (as defined in the Stock Purchase Agreement), Pioneer Power would be required to pay a $4.0 million termination fee to the Buyer, subject to certain limitations set forth in the Stock Purchase Agreement. The termination fee would also be payable by Pioneer Power in certain other limited circumstances described in the Stock Purchase Agreement.

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 0.5% of the purchase price, and (iii) a per-claim threshold amount of $50,000. 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 matters related to Electrogroup’s operations are subject to a true deductible equal to $500,000 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. In addition, in rather than seeking recovery from Pioneer Power, the Buyer is required to setoff amounts owed to Pioneer Power under the Seller Note on a dollar-for-dollar basis by the amount of any indemnifiable losses Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies.

Other Provisions

The Stock Purchase Agreement also contains customary representations and warranties, certain termination rights of both parties, including termination by mutual written consent of the parties, and provisions governing certain other matters between the parties.

The foregoing description of the Stock Purchase Agreement does not purport to be complete and 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 liquid-filled and dry-type transformer manufacturing businesses previously included in the T&D 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):

During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. While management continues to evaluate the extent of the damaged inventory, as of June 30, 2019 the Company has recognized a loss of $3.3 million based upon an estimate of inventory damaged and unsalable as a result of the flood. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. While the net loss on inventory damaged amounting to approximately $913 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $2.4 million has been recognized as an asset from continuing operations. 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.

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):

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):

7. INVENTORIES

The components of inventories are summarized below:

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. Included in raw materials and finished goods at June 30, 2019 and December 31, 2018 are goods in transit of approximately $36 and $120, respectively.

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized below:

Depreciation expense was $142 and $106 for the period ended June 30, 2019 and 2018, respectively.

9. OTHER ASSETS

Included in other assets at June 30, 2019 and December 31, 2018 are right-of-use asset, net, of $1.9 million and $2.2 million, respectively, related to our lease obligations.

In December 2011 and January 2012, the Company made two secured loans, each in the amount of $300 to a developer of a renewable energy project in the U.S, secured by assets of the developer. The promissory notes accrue interest at a rate of 4.5% per annum with a final payment of all unpaid principal and interest becoming fully due and payable upon the earlier to occur of (i) the four year anniversary of the issuance date of the promissory notes, or (ii) an event of default. As defined in the promissory notes, an event of default includes, but is not limited to, the following: any bankruptcy, reorganization or similar proceeding involving the borrower, a sale or transfer of substantially all the assets of the borrower, a default by the borrower relating to any indebtedness due to third parties, the incurrence of additional indebtedness by the borrower without the Company’s written consent and failure of the borrower to perform its obligations pursuant to its other agreements with the Company, including its purchase order for pad mount transformers. The principal balance of the loan receivable is outstanding at June 30, 2019 and December 31, 2018. The Company expects to fully recover these amounts. As of June 30, 2019 the Company has classified the principal of $600 as other assets as the Company does not anticipate the settlement of both notes in the next twelve months based upon ongoing negotiations with the debtor.

10. GOODWILL AND OTHER INTANGIBLE ASSETS

There were no changes in the carrying values of goodwill for the six months ended June 30, 2019.

Changes in the carrying values of intangible assets for the six months ended June 30, 2019, were as follows:

The components of intangible assets as of June 30, 2019 are summarized below:

The amortization of intangible assets expense was $21 for the six months ended June 30, 2019.

11. DEBT

Canadian Credit Facilities

In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with Bank of Montreal (“BMO”) with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. The CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a Temporary Borrowing Base Increase (defined in Note 17 - Subsequent Events), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.

Our Canadian Facilities provided for up to $8.2 million Canadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility A”) to finance ongoing operations, a $471 CAD term credit facility (“Facility B”) that financed a plant expansion, and a $712 USD Facility that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.2 million CAD.

Facility A, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, is subject to margin criteria. Facility A, as amended by the 2017 CAD ARCA Amendment, bore interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. The 2018 CAD ARCA Amendment modified the interest rate on Facility A borrowings to BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 0.50% per annum or LIBOR plus 2.0% per annum on amounts borrowed in U.S. dollars. Pursuant to the 2017 CAD ARCA Amendment, Facility A was to mature on July 31, 2018. The 2018 CAD ARCA Amendment extended the maturity of borrowings under Facility A to April 1, 2020. Consistent with the terms of the historical Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that Facility A will remain in place to fund operations through maturity of this facility in April 2020.

Borrowings under Facility B, as amended by the 2017 CAD ARCA Amendment, bore interest at BMO’s prime rate plus 1.25% per annum with principal repayments becoming due on a five year amortization schedule. Pursuant to the CAD ARCA, quarterly principal repayments were reduced to $47 CAD, with a balloon payment of $141 CAD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly principal payments of $47 CAD was to continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018. The 2018 CAD ARCA Amendment did not modify the interest rate on Facility B borrowings, which remained at BMO’s prime rate plus 1.25% per annum. Pursuant to the 2018 CAD ARCA Amendment, we made the final principal payment of $47 under Facility B on April 30, 2018.

Borrowings under Facility C, as amended by the 2017 CAD ARCA, bore interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant to the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD were to be made beginning on October 31, 2016, with a balloon payment of $496 USD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly payments of $36 USD were to continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018. Pursuant to the 2018 CAD ARCA Amendment, quarterly principal repayments of $36 were to continue until January 31, 2020, with a balloon payment of $136 due on April 1, 2020. The 2018 CAD ARCA Amendment modified the interest rate on Facility C borrowings to BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars. In December 2018 we repaid the outstanding principal balance under Facility C of $316 CAD with proceeds received from the sale of the Farnham, Quebec, Canada building.

Pursuant to the CAD ARCA, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as set forth in the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment.

As of June 30, 2019, we had approximately $6.0 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $6.0 million outstanding under Facility A. As of June 30, 2019, the Company was not in compliance with a financial covenant and on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.

Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian Facilities and the U.S. Facilities will be repaid in full.

As of December 31, 2018, we had approximately $5.8 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.8 million outstanding under Facility A. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the Company received a waiver from BMO on all financial covenant breaches existing as of December 31, 2018.

United States Credit Facilities

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility A”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility B”) that financed the acquisition of Titan, and a new $100 revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD.

USD Facility A, as amended and restated per 2017 US ARCA, bore interest, at our option, at BMO’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. Pursuant to the 2018 US ARCA Amendment, borrowings under Facility A bears interest, at our option, at the BMO’s prime rate plus 0.75% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.00% per annum on Eurodollar loans. USD Facility A had a maturity date of July 31, 2017, which was extended to July 31, 2018 pursuant to the 2017 US ARCA Amendment. The 2018 US ARCA Amendment extended the maturity of borrowings under USD Facility A to April 1, 2020. Consistent with the terms of the historical USD Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that the USD Facility A will remain in place to fund operations through maturity in April 2020.

Borrowings under USD Facility B bear interest, at our option, at U.S. base rate plus 1.25% per annum on U.S. prime loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans. Pursuant to the US ARCA, our quarterly principal payments were reduced to $31 USD for calendar year 2016, with the original amortization schedule continuing to apply to all quarterly principal payments made after December 31, 2016, and the final maturity date of December 2, 2019. The 2017 US ARCA Amendment reduced the scheduled quarterly principal payments to $31 USD, commencing March 31, 2017, to continue until July 31, 2018, with a balloon payment of $4.4 million on July 31, 2018. Pursuant to the 2018 US ARCA Amendment, monthly principal repayments beginning on July 31, 2018 are increased to $100 and will continue until March 31, 2020, with a balloon payment of $2.3 million due on April 1, 2020. The 2018 US ARCA Amendment did not change the USD Facility B interest rate.

Pursuant to the US ARCA, as amended by the 2017 US ARCA Amendment and the 2018 US ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as set forth in the 2017 US ARCA Amendment and the 2018 US ARCA Amendment. On March 28, 2018, pursuant to the 2018 US ARCA Amendment, BMO waived defaults on all financial covenants existing as of December 31, 2017 for which we were not in compliance.

Our obligations under the U.S. Facilities are guaranteed by all our wholly-owned U.S. subsidiaries. In addition, we and our wholly-owned U.S. subsidiaries granted a security interest in substantially all of our assets, including 65% of the shares of Pioneer Electrogroup Canada Inc. held by us, to secure our obligations for borrowed money under the U.S. Facilities. The U.S. Facilities also restrict our ability to incur indebtedness, create or incur liens, make investments, make distributions or dividends and enter into merger agreements or agreements for the sale of any or all our assets.

As of June 30, 2019, we had approximately $18.2 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $15.0 million outstanding under USD Facility A, and $3.2 million outstanding under USD Facility B. As of June 30, 2019, the Company was not in compliance with a financial covenant and on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.

Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian and the U.S. Facilities will be repaid in full. In the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B.

As of December 31, 2018, we had approximately $18.8 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $15.0 million outstanding under USD Facility A, and $3.8 million outstanding under USD Facility B. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the Company received a waiver from BMO on all financial covenant breaches existing as of December 31, 2018.

The Company’s debt consists of the following:

12. PENSION PLAN

The Company’s Canadian subsidiary sponsors a defined benefit pension plan at one of its locations in which a majority of its employees are members. The subsidiary funds 100% of all contributions to the plan. The benefits, or the rate per year of credit service, are established by the Company and updated at its discretion.

The components of the expense the Company incurred under the pension plan are included in Income from discontinued operations, net of income taxes, in the Consolidated Statements of operations.

The components of the expense the Company incurred under the pension plan are as follows:

The Company’s policy is to fund the pension plan at or above the minimum level required by law. The Company made $30 and $36 of contributions to its defined benefit pension plan during the six months ended June 30, 2019 and 2018, respectively. Changes in the discount rate and actual investment returns that are lower than the long-term expected return on plan assets could result in the Company making additional contributions.

13. STOCKHOLDERS’ EQUITY

Common Stock

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of June 30, 2019 and December 31, 2018.

Stock-Based Compensation

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of June 30, 2019, and changes during the six months ended June 30, 2019, are presented below:

As of June 30, 2019, there were 248,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.

Stock-based compensation expense recorded for the three and six months ended June 30, 2019 was approximately $2 and $7, respectively, as compared to the expense of approximately ($2) and $146, during the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2018, the expense reversal was primarily the result of forfeitures of previously expensed awards to a former employee. As of June 30, 2019, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $6.

Foreign Currency Translation

Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of accumulated other comprehensive income (loss). The Company had foreign currency translation adjustments resulting in unrealized gain of $374 for the three months ended June 30, 2019 and unrealized loss of $1 for the three months ended June 30, 2018. For the six months ended June 30, 2019 and 2018, the Company had foreign currency translation adjustments resulting in unrealized gain of $62 and unrealized loss of $167, respectively.

14. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

Basic and diluted income (loss) per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

15. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The T&D Solutions reportable segment is our switchgear business unit. The Critical Power reportable segment is the Company’s Titan Energy Systems Inc. business unit.

The T&D Segment is involved in the design, manufacture and distribution of switchgear used primarily by utilities, large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides power generation equipment, and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.

The following tables present information about segment income and loss:

Revenues are attributable to countries based on the location of the Company’s customers:

16. LEASES

The Company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 4 years. As of June 30, 2019 and 2018, assets recorded under finance leases were $1.0 million and $1.1 million, respectively, and accumulated amortization associated with finance leases were $475 and $397, respectively. As of June 30, 2019 and 2018, assets recorded under operating leases were $2.1 million and $1.5 million, respectively and accumulated amortization associated with operating leases were $748 and $531, respectively. Such amounts are included within other assets.

The components of the lease expense were as follows:

Other information related to leases was as follows:

Supplemental Cash Flows Information

Weighted Average Remaining Lease Term

Weighted Average Discount Rate

Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:

Reported as of June 30, 2019:

17. SUBSEQUENT EVENTS

On August 8, 2019, BMO agreed to a temporary amendment to the borrowing base under the Canadian Facilities, to increase the percentage of the outstanding unpaid amount of eligible receivables from 80% to 90%, up to a maximum of $1 million CAD of additional borrowing base (the “Temporary Borrowing Base Increase”), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities (as defined above) and the U.S. Facilities (as defined above), and (ii) August 31, 2019. In addition, in the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B (as defined above).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 29, 2019.

Unless the context requires otherwise, references in this Form 10-Q to the “Company,” “Pioneer,” “we,” “our” and “us” refer to Pioneer Power Solutions, Inc. and its subsidiaries.

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

Business Overview

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include switchgear and engine-generator controls, complemented by a national field-service network to maintain and repair power generation assets. We are headquartered in Fort Lee, New Jersey and operate from 5 additional locations in the U.S. for manufacturing, service, centralized distribution, engineering, sales and administration.

Description of Business Segments

We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

Recent Events

On June 28, 2019, the Company entered into the Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (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 (the “Equity Transaction”), for an aggregate base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $7.5 million, in each case subject to certain adjustments.

On June 28, 2019, certain stockholders of the Company holding an aggregate of 4,774,400 shares of the Company’s common stock, which, as of such date, constituted approximately 54.7% of the voting power of the outstanding shares of the Company’s common stock, executed a written consent approving the Stock Purchase Agreement and the transactions contemplated thereby, including the Equity Transaction.

If the Equity Transaction is completed, Pioneer Power would sell 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 Transmission & Distribution Solutions segment (the “T&D Segment”). However, Pioneer Power would retain its switchgear manufacturing business within the T&D segment, as well as all of the operations associated with its critical power solutions segment.

In addition, concurrently with the closing of the Equity Transaction, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) will be repaid in full.

On August 8, 2019, BMO agreed to a temporary amendment to the borrowing base under the Canadian Facilities, to increase the percentage of the outstanding unpaid amount of eligible receivables from 80% to 90%, up to a maximum of $1 million CAD of additional borrowing base (the “Temporary Borrowing Base Increase”), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below), and (ii) August 31, 2019. In addition, in the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B (as defined below).

Discontinued Operations

Operating results for liquid-filled transformer and dry-type transformer manufacturing businesses, which have been previously included in the T&D Segment, have now been reclassified as discontinued operations for all periods presented. See Note 6 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. While management continues to evaluate the extent of the damaged inventory, as of June 30, 2019 the Company has recognized a loss of $3.3 million based upon an estimate of inventory damaged and unsalable as a result of the flood. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. While the net loss on inventory damaged amounting to approximately $913 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $2.4 million has been recognized as an asset from continuing operations. 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.

Foreign Currency Exchange Rates

Although we report our results in accordance with U.S. GAAP and in U.S. dollars, PTL and Bemag are Canadian operations whose functional currency is the Canadian dollar. As such, the financial position, results of operations, cash flows and equity of these operations are initially consolidated in Canadian dollars. Their assets and liabilities are then translated from Canadian dollars to U.S. dollars by applying the foreign currency exchange rate in effect at the balance sheet date, while the results of their operations and cash flows are translated to U.S. dollars by applying weighted average foreign currency exchange rates in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss.

The following table provides actual end of period exchange rates used to translate the financial position of our Canadian operations at the end of each period reported. The average exchange rates presented below, as provided by the Bank of Canada, are indicative of the weighted average rates we used to translate the revenues and expenses of our Canadian operations into U.S. dollars (rates expressed as the number of U.S. dollars to one Canadian dollar for each period reported):

Critical Accounting Policies

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

RESULTS OF OPERATIONS

Overview of the Three and Six Month Results

Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in Note 15 – Business Segment and Geographic Information and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.

Our summary of operating results during the three and six months ended June 30, 2019 and 2018 are as follows:

As discussed above under “Discontinued Operations,” the excluded revenue for the liquid-filled transformer and dry-type transformer manufacturing businesses previously reported in T&D Solutions was $19.0 million and $21.6 million for the three months ended June 30, 2019 and 2018, respectively, and $40.7 million and $42.5 million for the six months ended June 30, 2019 and 2018, respectively. The excluded income, net of income taxes from the liquid-filled transformer and dry-type transformer manufacturing businesses was $132 and $862 for the three months ended June 30, 2019 and 2018, respectively. The excluded income, net of income taxes from the liquid-filled transformer and dry-type transformer manufacturing businesses was $1.4 million and $1.6 million for the six months ended June 30, 2019 and 2018, respectively.

Backlog

Our backlog is based on firm orders from our customers expected to be delivered in the future, most of which is expected to occur during the next twelve months. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. The time between receipt of an order and actual delivery, or completion, of our products and services varies from one or more days, in the case of inventoried standard products, to three to nine months, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.

The following table represents the progression of our backlog, by reporting segment, as of the end of the last five quarters:

Revenue

The following table represents our revenues by reporting segment and major product category for the periods indicated:

For the three months ended June 30, 2019, our consolidated revenue increased by $1.5 million, or 38.3%, to $5.4 million, up from $3.9 million during the three months ended June 30, 2018. For the six months ended June 30, 2019, our consolidated revenue decreased by $1.7 million, or 17.2%, to $8.4 million, down from $10.1 million during the six months ended June 30, 2018.

T&D Solutions. During the three months ended June 30, 2019, revenue from switchgear increased by $1.9 million, or 209.9%, as compared to the three months ended June 30, 2018 due to timing of shipments.

During the six months ended June 30, 2019, revenue from switchgear decreased by $775, or 16.9% as compared to the six months ended June 30, 2018 due to lower volume of sales.

Critical Power. Titan is the only business unit in the Critical Power segment. For the three months ended June 30, 2019, equipment sales decreased by $135, or 33.5%, as compared to the same period in the prior year. For the six months ended June 30, 2019, equipment sales were down by $343, or 43.7%, as compared to the same period in 2018 resulting from a reduced focus on equipment sales included in the Titan revenue stream.

For the three and six months ended June 30, 2019, service revenue decreased by $236, or 9.1%, and $626, or 13.2%, respectively, as compared to the same periods in the prior year.

Gross Profit and Gross Margin

The following table represents our gross profit by reporting segment for the periods indicated:

For the three months ended June 30, 2019, our consolidated gross margin was 9.7% of revenues, compared to 5.0% during the three months ended June 30, 2018. For the six months ended June 30, 2019, our gross margin was 9.3% of revenues, compared to 13.0% for the six months ended June 30, 2018. The decrease in our consolidated gross margin percentage is further explained below.

T&D Solutions. During the three and six months ended June 30, 2019 the negative gross margin decreased by 25.7% and increased by 11.3%, respectively, as compared to the same periods in 2018. The improvement in our T&D Solutions gross margin of 25.7% for the three months ended June 30, 2019 as compared to the same period in 2018 resulted primarily from higher revenues. The decrease in our T&D Solutions gross margin of 11.3% for the six months ended June 30, 2019 as compared to the same period in 2018 resulted primarily from higher costs.

Critical Power. During the three and six months ended June 30, 2019, the gross margin increased by 10.7% and 2.6%, respectively, as compared to the same period in 2018, primarily due to lower costs.

Operating Expenses

The following table represents our operating expenses by reportable segment for the periods indicated: