COMMUNICATIONS SYSTEMS INC : Entry into a Material Definitive Agreement, Other Events, Financial Statements and Exhibits (form 8-K)

Item 1.01 Entry into Definitive Material Agreement

On June 28, 2021, Communications Systems, Inc. ("CSI" or the "Company") entered into a securities purchase agreement with a group of institutional investors (the "PIPE Investors") to make a $25.0 million private placement investment in CSI in connection with the closing of the previously announced merger between CSI and Pineapple Energy, LLC ("Pineapple"). Proceeds of this investment will used primarily to fund Pineapple strategic initiatives. The closing of the financing is subject to approval of CSI's shareholders.

Terms of PIPE Offering

Under the terms of the securities purchase agreement, the PIPE Investors have agreed to purchase $25.0 million in newly authorized CSI Series A Convertible Preferred Stock convertible at a price of $3.40 per share into CSI common stock, with five-year warrants to purchase an additional $25.0 million of common shares at that same price (the "PIPE Offering"). The PIPE Offering is expected will close immediately following the consummation of the CSI-Pineapple merger (the "Merger"); thus, the PIPE Investors will invest in the post-Merger company. Therefore, the PIPE Investors will not be entitled to receive any cash dividends paid prior to closing and will not receive the Contingent Value Rights ("CVRs") to be issued to pre-Merger CSI shareholders.

CSI and one of the PIPE Investors, CrowdOut Capital LLC ("CrowdOut"), which has agreed, subject to the satisfaction of certain closing conditions, to purchase $9.0 million of the $25.0 million of Series A Convertible Preferred Stock, have also entered into a non-binding letter of intent for a $20.0 million term loan (the "Debt Transaction") to be provided by CrowdOut to the Company to assist the combined CSI-Pineapple company fund the acquisitions of Hawaii Energy Connection ("HEC") and E-GEAR, which will are expected to close concurrently with the Merger. CrowdOut's obligation to consummate the transactions in the PIPE Offering, including its obligation to purchase the CSI Series A Convertible Preferred Stock and warrants from the Company, is expressly conditioned on CrowdOut closing and funding the Debt Transaction pursuant to fully executed credit documents that are mutually acceptable to CSI and CrowdOut.

The Series A Convertible Preferred Stock will have no liquidation or dividend preference over CSI common stock and no voting rights until after converted into CSI common stock. Assuming conversion of the Series A Convertible Preferred Stock, the PIPE Investors would own approximately 7.35 million shares of the Company's outstanding common stock immediately following the closing of the PIPE Offering, representing approximately 22% of CSI's outstanding Common Stock after giving effect to the issuance of shares in the Merger, and approximately 14.7 million shares assuming exercise of all the warrants for cash, representing approximately 37% of CSI's outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants.

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The Series A Convertible Preferred Stock and warrants will have anti-dilution provisions that would increase the number of shares issuable upon conversion or exercise, and lower the conversion or exercise price, if CSI issues equity securities at a price less than the conversion or exercise price at the time of such issuance. The securities purchase agreement also prohibits the combined company from conducting a new equity offering within 30 days of the closing, gives the PIPE Investors in the aggregate the right to purchase up to 25% of the equity securities in future CSI-Pineapple offerings within one year of closing and requires 30-day lock-up agreements of CSI common stock by certain CSI-Pineapple officers, directors and major shareholders following the closing. In connection with the transaction, CSI has agreed to file a registration statement on behalf of the PIPE Investors allowing them to resell the common stock into which the Series A Convertible Preferred Stock is convertible and the warrants are exercisable immediately after issuance. Closing is subject to the effectiveness of this registration statement and other customary closing conditions.

The foregoing descriptions of the (i) securities purchase agreement, (ii) the CSI Series A Convertible Preferred Stock, (iii) the warrant, (iv) the registration rights agreement, (v) the lock up agreement between the Company, certain CSI-Pineapple officers, directors and major shareholders and the PIPE Investors, and (vi) the letter agreement dated as of June 28, 2021 between Communications Systems, Inc. and CrowdOut Capital LLC confirming that the CrowdOut $9.0 million equity commitment is contingent on closing of the $20.0 million term loan do not purport to be complete and are qualified in their entirety by reference to the full text of these agreements, which are filed as Exhibit 10.1, 4.1, 4.2, 4.3, 10.2 and 10.3 to this Current Report on Form 8-K and are incorporated herein by reference.

Significance of the PIPE Offering for the CSI- Pineapple Merger

On March 2, 2021, CSI, which has operated as an IoT intelligent edge products and services company, entered into a definitive merger agreement with privately held Pineapple, a growing U.S. operator and consolidator of residential solar, battery storage, and grid services solutions. A meeting of the Company's shareholders to approve the Merger agreement with Pineapple is expected to be held later in 2021. During the same meeting, CSI will also be requesting shareholder approval of the issuance of the Series A Convertible Preferred Stock and warrants. If the Merger is approved by CSI shareholders, upon closing, CSI will commence doing business as Pineapple Energy, with a business model focused on the rapidly growing home solar industry.

Summary of CSI Shares to be Outstanding after CSI-Pineapple Merger and PIPE Offering

As June 24, 2021, CSI has approximately 9,470,000 million shares outstanding and expects to have approximately 9.9 million shares outstanding immediately prior to the closing of the CSI-Pineapple Merger. CSI will initially issue 15.6 million shares in the CSI-Pineapple Merger and may issue up to an additional 3.0 million shares to the Pineapple shareholders if specific post-Merger milestones are achieved in accordance with the Merger agreement. Immediately after the closing of CSI-Pineapple merger and PIPE Offering, the PIPE Investors would own Series A Convertible Preferred Stock immediately convertible into 7.35 million shares of Company common stock, representing approximately 22% of CSI's outstanding common stock after giving effect to the issuance of shares in the Merger, and also own warrants immediately exercisable for an additional 7.35 million shares of Company common stock, representing approximately 37% of CSI's outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants. The following chart summarizes the treatment of the different shareholders of CSI.

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The following chart summarizes the treatment of the different shareholders of CSI.

Type of Share Purchase Price Right to Receive Dividends Shares of the

 Shareholder                           and CVR relating to     combined company held
                                         Pre-Merger CSI        immediately after the
                                                               merger with Pineapple
CSI           Various, based on    Dividends will consist of   9,470,425 shares
Shareholders  purchases in the     the $3.50 per share         outstanding as June
immediately   public market on the expected to be declared and 24, 2021, plus shares
prior to the  Nasdaq Capital       paid after the closing of   related to CSI
CSI-Pineapple Market.              the E&S Sale. In addition,  incentive plans
Merger                             these shareholders will     triggered by the sale
                                   receive any cash generated  of the CSI's
                                   on the sale of CSI's        Electronics &
                                   Services & Support segment, Software segment
                                   real estate holdings,       Existing CSI
                                   investments, and remaining  shareholders will
                                   cash - either through a     continue to hold the
                                   cash dividend or through    same numbers of
                                   distributions pursuant to   shares in the
                                   the CVR                     CSI-Pineapple
                                                               post-Merger company
                                                               Existing CSI
                                                               shareholders will
                                                               continue to hold the
                                                               same numbers of
                                                               shares in the
                                                               CSI-Pineapple
                                                               post-Merger company
PIPE          $25.0 million in     No rights to pre-Merger     7.35 million shares
Investors     newly authorized CSI dividends or distributions  of outstanding common
              Series A Convertible under CVR relating to CSI   stock
              Preferred Stock      assets existing prior to    Approximately 14.7
              convertible at a     the CSI-Pineapple Merger    million shares
. . .


 Item 8.01 Other Events

On June 28, 2021 CSI issued a press release announcing that it had entered into the Purchase Agreement discussed in Item 1.01 of this Form 8-K. A copy of that press release is filed as Exhibit 99.1 to this Form 8-K.

Proposed Debt Financing

In addition, as noted above, CSI and one of the PIPE Investors, CrowdOut Capital LLC ("CrowdOut"), have also entered into a non-binding letter of intent for a $20.0 term loan (the "Debt Transaction") to be provided by CrowdOut to the Company to assist the combined CSI-Pineapple company fund the acquisitions of Hawaii Energy Connection ("HEC") and E-GEAR, which are expected to close concurrently with the CSI-Pineapple Merger. CrowdOut's obligation to consummate the transactions in the PIPE Offering, including its obligation to purchase the CSI Series A Convertible Preferred Stock and warrants from the Company, is expressly conditioned on CrowdOut closing and funding, on or prior to the CSI-Pineapple Closing Date, the Debt Transaction pursuant to fully executed credit documents that are mutually acceptable to CSI and CrowdOut.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

The following exhibits are filed with this Form 8-K.

Exhibit Number Exhibit

  4.1            Form of Certificate of Designation of Preferences, Rights and
               Limitations of Series A Convertible Preferred Stock of
               Communications Systems, Inc
  4.2            Form of Communications Systems, Inc. Warrant to be issued to the
               PIPE Investors
  4.3            Registration Rights Agreement between Communications Systems,
               Inc. and PIPE Investors
  10.1           Securities Purchase Agreement dated as of June 28, 2021, between
               Communications Systems, Inc. and the PIPE Investors
  10.2           Form of Lock-up Agreement by and among the Company, certain
               Company directors, officers and shareholders and the PIPE
               Investors
  10.3           Letter Agreement dated as of June 28, 2021 between
               Communications Systems, Inc. and CrowdOut Capital LLC confirming
               that the CrowdOut $9.0 million equity commitment is contingent on
               the closing of $20.0 million term loan.
  99.1           Press Release of Communications Systems, Inc. dated June 28,
               2021

* All schedules to the securities purchase agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. CSI hereby agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request.

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