COMMUNICATIONS SYSTEMS INC

As disclosed in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments: Proposed Merger with Pineapple Energy and Proposed Sale of E&S Segment Businesses” and Note 16 of Notes to Financial Statements in Part I, Item 1, Financial Information, on March 1, 2021 and April 28, 2021, respectively, Communications Systems, Inc. (“CSI” or the “Company”) entered into (i) the Pineapple Merger agreement and (ii) the E&S Segment Sale stock purchase agreement, each of which are subject to CSI shareholder approval.

The financial statements, notes to financial statements, Management's Discussion and Analysis, and other information contained in this Form 10-Q are based on the Company’s financial operations in the 2021 first quarter and except as expressly forth in this Form 10-Q, do not reflect the effect of these transactions.

On April 28, 2021 the Company entered into a definitive securities purchase agreement with Lantronix, Inc. (Nasdaq: LTRX) (“Lantronix”), under which CSI agreed to sell to Lantronix CSI’s Transition Networks and Net2Edge businesses, which comprise substantially all the assets of the Company’s E&S segment, for an aggregate purchase price of up to $32,027,566, consisting of (i) $25,027,566 in cash payable at closing, subject to a working capital adjustment following closing, plus (ii) earnout payments of up to $7,000,000, payable following two successive 180-day intervals after the closing of the transaction based on revenue targets for these companies. The sale requires CSI shareholder approval and is expected to close in June 2021. Concurrently with the closing of the transaction, CSI and Lantronix will enter into a Transition Services Agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix at CSI’s Minnetonka, Minnesota facility for a period of up to twelve months.

A detailed description of the Pineapple Merger, the Voting Agreement and the CVR Agreement is contained in the Form 8-K dated March 1, 2021, and the Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021.

In addition, a full description of the terms of the Pineapple Merger will be provided in a proxy statement for the shareholders of Communications Systems, Inc. (the “Pineapple Merger Proxy Statement”) to be filed with the SEC. CSI urges investors, shareholders and other interested persons to read, when available, the preliminary proxy statement as well as other documents filed with the SEC because these documents will contain important information about CSI, Pineapple, and the proposed transaction. The definitive proxy statement will be mailed to CSI shareholders as of a record date to be established for voting on the proposed transaction. Shareholders will also be able to obtain a copy of the definitive proxy statement (when available), without charge, by directing a request to: Communications Systems, Inc., 10900 Red Circle Drive, Minnetonka, MN 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).

In addition, a full description of the terms of the E&S Segment Sale will be provided in a proxy statement for the shareholders of Communications Systems, Inc. (the “E&S Segment Sale Proxy Statement”) to be filed with the SEC. CSI urges investors, shareholders and other interested persons to read, when available, the preliminary proxy statement as well as other documents filed with the SEC because these documents will contain important information about the proposed transaction. The definitive proxy statement will be mailed to CSI shareholders as of a record date to be established for voting on the proposed transaction. Shareholders will also be able to obtain a copy of the definitive proxy statement (when available), without charge, by directing a request to: Communications Systems, Inc., 10900 Red Circle Drive, Minnetonka, MN 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).

Sales in North America decreased $247,000, or 3%, primarily due to supply chain constraints in addition to delayed project spending by customers due to the COVID-19 pandemic. International sales increased $76,000, or 7%, primarily due to growth in the Asia Pacific region of sales of our traditional products. Sales of Intelligent edge solutions (“IES”) products increased 11% or $359,000 due to an uptick in our core IES media converter products by Federal agencies and an uptick in our Switch products used in security and surveillance applications. Traditional product sales decreased 10% or $530,000 due to supply chain constraints in addition to delayed project spending by customers due to the COVID-19 pandemic.