What changed in this filing

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Item 1. Business

2022-03-14 compared with 2021-03-31 · 122 added, 500 removed, 17 unchanged (97% of the section changed)

Communications Systems, Inc.

(herein collectively referred to

as “CSI,”

“our,”

“we”

or the “Company”) is a Minnesota corporation organized in

1969 that operates directly and through its subsidiaries located in the United States (U.S.) and the United Kingdom (U.K.).

Company maintains a website at www.commsystems.com.

Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our

periodic reports on Form 8-K (and any amendments to these reports) are available free of charge by linking from our website to

the Securities and Exchange Commission website.

(herein collectively referred to as “CSI,” “our,” “we” or the “Company”) is a Minnesota corporation organized in 1969 that operates directly and through its subsidiaries located in the United States (U.S.).

The Company maintains a website at www.commsystems.com.

CSI’s annual reports on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K , and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on CSI’s website as soon as reasonably practicable after these documents are filed electronically with the SEC.

To obtain copies of these reports, go to www.commsystems.com and click on “Financial Reports,” then click on “Edgar Filings” to view all of CSI’s current EDGAR reports.

The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, like CSI, that file electronically with the SEC.

The SEC’s website is www.sec.gov.

RECENT DEVELOPMENTS

Proposed Merger with Pineapple Energy

On March 1, 2021, Communications Systems,

(“CSI”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Helios Merger Co.,

a Delaware corporation and a wholly-owned subsidiary of CSI (the “Merger Sub”), Pineapple Energy LLC, a Delaware limited

liability company (“Pineapple”), Lake Street Solar LLC, a Delaware limited liability company (the “Members’

Representative”),

and Randall D.

Sampson, as the Shareholders’

Representative (the “Shareholders’

Representative,”

and together with CSI,

the Merger Sub, Pineapple and the Members’

Representative, the “Parties”), pursuant to which Merger Sub will merge with

and into Pineapple with Pineapple surviving the merger as a wholly owned subsidiary of CSI (the “Merger”).

Under the terms of the Merger Agreement, CSI

has agreed to issue to the members of Pineapple 15.6 million shares of CSI’s common stock (the “Common

Stock”), subject to certain adjustments, as consideration for the Merger (the “Base Consideration”).

The Base Consideration

will be increased for any outstanding convertible notes issued by Pineapple in a pre-closing financing, which will convert into

additional shares of CSI common stock at a rate of $2.00 per share.

The Base Consideration will be decreased for any outstanding

indebtedness of Pineapple at the closing of the Merger in excess of $22.5 million (the “Permitted Indebtedness”), which

will reduce the base consideration at a rate of $2.00 per share.

In addition to the Base Consideration, certain

members of Pineapple may receive additional shares pursuant to an earnout.

Additional shares of common stock will be issued to

such members of Pineapple upon the occurrence of the following milestones:

● If Pineapple discharges its Permitted Indebtedness of $22.5 million within three months of closing, then such members will

be entitled to an additional 3.0 million shares of Common Stock.

● If, within two years of closing, the Common Stock achieves a 30-day VWAP (volume weighted average price) of at least $6.00

per share, such members will be entitled to receive up to 4.0 million shares of Common Stock (to be

increased to 5.0 million if CSI consummates the “Dispositions,”

(as defined below) of a majority of its assets by the

18-month anniversary of the closing).

● If, within two years of closing, the Common Stock achieves a 30-day VWAP of at least $8.00 per share, such members will be

entitled to receive up to an additional 4.0 million shares of Common Stock (to be increased to 5.0 million

if CSI consummates the “Dispositions”

by the 18-month anniversary of the closing).

As provided in the Merger Agreement, CSI expects

to declare a cash dividend that will be payable with respect to its outstanding shares as of a record date prior to the closing

of the Merger (the “Pre-Closing Record Date”) to the holders of its outstanding stock on such date (the “Legacy

Shareholders”).

In addition, as provided in the Merger Agreement, CSI is in the process of pursuing dispositions (the “Dispositions”)

of substantially all of its existing assets and businesses (“Legacy Assets”).

To the extent these Dispositions occur

prior to the closing of the Merger, CSI expects to declare a cash dividend that distributes a substantial portion of the proceeds

from these Dispositions to the Legacy Shareholders.

Following the closing, CSI will use commercially reasonable efforts to complete

the Dispositions of the Company’s Legacy Assets as soon as reasonably practicable (and, in any event, within 18 months of

the closing).

Proceeds that become available from the Dispositions that occur following the closing of the Merger will be distributed

pro rata to the Legacy Shareholders pursuant to the Contingent Value Rights Agreement described below.

CSI will continue to support

these existing business lines as it pursues new owners for these businesses.

Prior to closing, CSI and Pineapple will cooperate

in connection with a potential private equity transaction that would result in the issuance of additional shares of CSI Common

Stock at or following closing of the Merger.

The Merger Agreement also contains indemnification

The obligations of each of Pineapple and CSI

are subject to specified conditions, including, among other matters:

(i) the approval by Pineapple members and CSI shareholders

of the Merger;

(ii) a registration statement becoming effective under the Securities Act of 1933, as amended, related to the

and (iii) the filing of an amendment to CSI’s Articles of Incorporation in order to increase the number of shares

of Common Stock authorized for issuance to a number at least necessary to consummate the Merger.

The Merger Agreement contains customary representations

and warranties from Pineapple and CSI.

It also contains customary covenants, including (i) providing for each of the parties to

use reasonable best efforts to cause the Merger to be consummated, and (ii) for Pineapple and CSI to carry on their respective

businesses in the ordinary course of business consistent with past practice during the period between the execution of the Merger

Agreement and the closing of the Merger.

Both CSI and Pineapple also agreed not to solicit, seek or initiate or knowingly take

any action to facilitate or encourage another transaction, subject to certain exceptions.

CSI is required to seek shareholder

approval of the issuance of the shares of Common Stock to be issued in the Merger pursuant to Nasdaq listing rules.

The Merger Agreement contains termination

rights for each of Pineapple and CSI, including, without limitation, in the event that (i) any governmental entity issues

a non-appealable final order permanently enjoining the Merger;

(ii) the Merger is not consummated by August 31, 2021;

the other party breaches its representations, warranties or covenants under the Merger Agreement, which breach would give rise

to the failure of a closing condition and such breach is not cured within 10-days of receipt of written notice of such breach.

The Merger Agreement provides that both CSI

and Pineapple will be obligated to pay the other a termination fee of $2.5 million plus reimbursement of certain expenses, up to

$750,000, if the Merger Agreement is terminated under certain circumstances.

The foregoing description of terms in the

Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement,

which was filed as Exhibit 2.1 to a Current Report on Form 8-K dated March 1, 2020.

The Merger Agreement contains representations,

warranties, covenants and other terms, provisions and conditions that the parties made to each other as of specific dates.

assertions embodied therein were made solely for purposes of the Merger Agreement and may be subject to important qualifications

and limitations agreed to by the parties in connection with negotiating their respective terms.

Moreover, they may be subject to

a contractual standard of materiality that may be different from what may be viewed as material to shareholders, or may have been

used for the purpose of allocating risk between the parties rather than establishing matters as facts.

For the foregoing reasons,

no person should rely on such representations, warranties, covenants or other terms, provisions or conditions as statements of

factual information at the time they were made or otherwise.

Unless required

by applicable law, CSI undertakes no obligation to update such information.

Simultaneously with the execution of the Merger

Agreement, Pineapple entered into a Voting Agreement, dated March 1, 2021 (the “Voting Agreement”) with officers and

director of CSI (the “CSI Holders”).

The CSI Holders hold in the aggregate approximately 13.8% of CSI’s outstanding shares.

Pursuant to the Voting Agreement, each CSI Holder has agreed, with respect to all of the voting securities of CSI that such CSI

Holder beneficially owns as of the date thereof or thereafter, to vote in favor of the Merger.

The Voting Agreement will terminate

on the Effective Time (as defined therein) or upon termination of the Merger Agreement in accordance with its terms.

The foregoing description of the Voting Agreement

does not purport to be complete and is qualified in its entirety by reference to the full text of the Voting Agreement, which is

filed as Exhibit 10.1 to the March 1, 2020 Current Report on Form 8-K.

Pursuant to the Merger Agreement, at the closing of the Merger,

CSI will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) with a person designated by CSI as the

Holders’

Representative (as defined therein), and the Rights Agent (as defined therein).

Pursuant to the CVR Agreement, each

shareholder of CSI as of immediately prior to the closing of the Merger will receive one non-transferable Contingent Value Right

(“CVR”) for each outstanding share of common stock of CSI held as of the close of business on the day immediately before

the Effective Time of the Merger, which will represent the right to receive pro-rata distributions of proceeds from Dispositions

that occur following the Effective Time.

Sale of Suttle Business

was a significant component of

CSI’s business since 1969.

As a key element of the Company’s strategic plan, however, the Company sold substantially

all of Suttle’s business, assets and operations pursuant to two separate transactions occurring in 2019 and 2020 that were

previously reported.

See Note 4 of the Notes to the Consolidated Financial Statements, “Discontinued Operations.”

As a result of the Suttle sale, unless otherwise noted, all

information in this Form 10-K about Suttle will be discussed and presented as discontinued operations and the Company will report

its remaining business operations as continuing operations as described below.

After giving effect to the Suttle transactions and following

the acquisition of Ecessa during the second quarter of 2020 and the merging of certain operations, CSI is principally engaged (i)

through its Electronics & Software (“E&S”) segment in the manufacture and sale of Ethernet switches, core media

conversion products, and other connectivity and data transmission products, and (ii) through its Services & Support (“S&S”)

segment, in providing technology solutions including virtualization, managed

services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment.

Acquisition of Ecessa Corporation

On May 14, 2020, CSI acquired Ecessa Corporation in a reverse

triangular merger for $4.6 million in cash.

Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions

for businesses through the deployment of field installations of Ecessa Edge®, PowerLink®, and WANworX®

and is part of the Company’s Services & Support segment.

See Note 5 of the Notes to the Consolidated Financial Statements,

“Business Combinations.”

Acquisition of IVDesk

On November 3, 2020, the Company

acquired the operating assets of privately held IVDesk Minnesota, Inc.

(“IVDesk”) from a third-party receiver (“Receiver”)

appointed by Hennepin County, Minnesota State District Court Judge for aggregate consideration of $1.4 million, including a $550,000

earnout payment made in March 2021.

IVDesk provides private cloud services to small- and mid-size businesses (SMB), with

a particular focus on the financial services industry.

IVDesk currently services over 85 customers across the U.S.

on a tri-state region with Minnesota at the center.

IVDesk’s business model is built on monthly recurring revenue and is

included within the Company’s Services & Support Segment.

See Note 5 of the Notes to the Consolidated Financial Statements,

“Business Combinations.”

Current Operations

The Company classifies its businesses into the following two

● Electronics

designs, develops and sells Intelligent Edge solutions that provide connectivity and power through Power over

Ethernet (“PoE”) products and actionable intelligence to end devices in an Internet of Things (“IoT”)

ecosystem through embedded and cloud-based management software.

In addition, this segment continues to generate revenue from its

traditional products consisting of, media converters, NICs, and Ethernet switches that offer the ability to affordably integrate

the benefits of fiber optics into any data network;

● Services & Support:

provides SD-WAN and other technology solutions that address prevalent

IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed

services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management .

noted within this Form 10-K, we have classified the operations of Suttle as discontinued operations for 2020 and 2019.

Non-allocated

general and administrative expenses are separately accounted for as “Other”

in the Company’s segment reporting.

Additionally, any indirect general and administrative costs previously allocated to Suttle are also included in “Other.”

Intersegment revenues are eliminated upon consolidation.

Further information regarding these segments, including customer and industry

concentration, is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of

Operations”

and in Note 14 of the Notes to Consolidated Financial Statements under Item 8.

Information Regarding Business Segments

Electronics & Software

segment is comprised of CSI’s Transition Networks, Inc.

(“Transition Networks”

or “Transition”) and

Net2Edge Limited (“Net2Edge”) businesses.

Transition Networks is based in Minnetonka, Minnesota, and Net2Edge

is based in Basingstoke, Hampshire, United Kingdom.

Electronics & Software develops, markets and sells PoE switches, media

converters, network interface cards (NICs), Ethernet switches, Small Form Factor Pluggable modules (SFP), and other connectivity

products under the Transition Networks brand name.

Transition sells its products through distributors, resellers, integrators,

and original equipment manufacturers (“OEMs”).

These media converters, network interface devices (NIDs), and Ethernet

Switch products allow network operators to transmit voice and data across networks as well as provide connectivity and power in

security and surveillance, smart building, smart city and intelligent transportation applications.

Sales by E&S were $34,496,000

in 2020 compared to $47,007,000 in 2019.

International sales accounted for 14% of E&S’s sales, or $4,775,000 in 2020,

compared to $7,236,000, or 15% of E&S’s sales in 2019.

Electronics & Software develops, markets and sells solutions

that provide actionable intelligence, power and connectivity at the edge of networks through PoE switches, software and services

as well as traditional products such as media converters, network adapters and other connectivity products, edge network access

products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software

Our PoE switches, media converter devices, Ethernet switches and other connectivity products enable customers

to transmit voice and data across networks as well as provide connectivity and power to end devices in the IoT ecosystem.

growing PoE products support remote devices such as cameras and wireless access points by passing electrical power along with data

on Ethernet cabling, eliminating the need for traditional AC/DC electrical power in hard-to-reach locations.

Our media converters

and other customer premise equipment (CPE) assist customers in resolving challenges in the areas of bandwidth constraints, security

risks, and distance limitations as networks extend from local area to wide area networks and adapt to ever increasing end-user

As more cities move to implement smart city technology, a major component will be solutions designed to protect and provide

services to citizens, such as intelligent transportation and surveillance networks.

Electronics & Software switches deliver

the necessary connectivity, bandwidth and power to enable these solutions.

of our products incorporate features to perform advanced levels of fault management and diagnostics to troubleshoot networks and

proactively fix problems.

Electronics & Software develops product hardware and software

internally and expenses the related costs as they are incurred.

In connection with the sale of its hardware products, Electronics

& Software provides its customers with a variety of software management options including Network Management System (NMS) software

for providing superior provisioning and monitoring of its Ethernet switches and other managed devices.

Transition has been developing

and marketing Ethernet-based networking products for over 30 years.

Electronics & Software continues to develop products that

address the enterprise, service provider, industrial, government, and security markets.

Increasingly, Electronics & Software

PoE switches are used in smart building environments, intelligent transportation applications, and in security and surveillance

Manufacturing and Sources of Supply

Electronics & Software uses contract manufacturers to manufacture

its products in different geographical locations, in addition to OEM partners through which the Company sources product and markets

under its own name.

In 2020, 91% of the total value of Electronics & Software’s products were manufactured in or sourced

from Trade Agreement Acts (TAA) compliant countries (i.e.

Taiwan, U.S., U.K.) and the remaining 9% was manufactured in or sourced

from other geographies.

Offshore sources of supply are subject to certain risks, including political risk.

Markets and Marketing

Electronics & Software’s products are used in a broad

array of markets including federal government, enterprise, service provider, industrial, security, and surveillance markets.

& Software has a broad customer base that uses its products in a variety of applications.

The line of Ethernet switches (both PoE and non-PoE) is used

in last-mile access, backhaul, wiring closets and at end-user stations.

These are sold into security networks, intelligent transportation

applications, smart buildings, corporate enterprise networks, and other IoT applications domestically and abroad.

The media conversion

product line is used in several applications.

The ION chassis-based modular systems are used primarily in telecommunications closets

for high-density applications or when multiple protocols need to be supported.

Stand-alone media converters are used typically

at customer premises or for lower density applications.

The Carrier Ethernet NID line of products addresses the high-quality access

requirements for both business services and wireless backhaul data communications and telecommunications applications.

Marketing primarily consists of direct marketing using a sales

force, tradeshows, trade magazine advertising, on-line advertising, website, email, social media, and public relations activities.

Electronics & Software also provides and participates in advertising and cooperative marketing campaigns with distribution

Research and Development

Electronics & Software develops products for the federal

government, enterprise, service provider, security, and industrial markets.

This includes developing commercial and hardened PoE

switches, converters for emerging protocols and existing protocols in new markets, as well as new industry standards.

Some of these

products include devices built on the IEEE 802.3ah, 802.3ag, ITU-T Y.1731 standards, Metro Ethernet Forum (MEF)®

and PoE devices based on the IEEE 802.3af, 802.3at, 802.3bt standards.

Some design efforts are paced by the development of critical

components such as integrated circuits and optical transceivers.

Research and development consists primarily of designing, prototyping,

and testing of equipment and supplies associated with developing new products and enhancing existing products.

Research and development

costs are expensed when incurred and were $2,808,000 in 2020 compared to $3,600,000 in 2019.

Electronics & Software conducts its research and development

operations in the United States, at its Minnetonka, Minnesota headquarters location and out of its Net2Edge Basingstoke location.

While these locations have primary engineering and product development responsibility, E&S occasionally uses third-party design

services and Original Design Manufacturers (“ODM”) to support specific product design requirements.

E&S faces strong competition across its entire product line.

A large number of competitors exist for high-volume products in Ethernet switches and media converters.

Low-cost competitors from

China and Taiwan are strongest in (i) Asian, (ii) European, Middle Eastern, and African (“EMEA”) and (iii) South American

E&S also faces new competitors as it enters new markets for smart cities, smart buildings, intelligent transportation

systems, and higher performance devices for the service provider market.

Outstanding customer orders for Electronics & Software products

were approximately $1,559,000 at March 1, 2021 and $2,813,000 at March 1, 2020.

Electronics & Software orders are fulfilled

on a relatively short-term basis and therefore the Company does not consider the order book as a significant indicator of longer-term

future results.

(ii) Services & Support

This segment is comprised of CSI’s JDL Technologies, Inc.

(“JDL Technologies”

or “JDL”) and Ecessa Corporation (“Ecessa”) businesses.

JDL is based in

Fort Lauderdale, Florida, and Ecessa is based in Minnetonka, Minnesota.

Services & Support (“S&S”) provides

technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network

virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged

infrastructure configuration, deployment and management .

Services & Support’s 2020 sales were $8,777,000 compared

to 2019 sales of $4,741,000.

Project and product revenue totaled $5,120,000 in 2020 or 58% of segment sales compared to $2,242,000

in 2019 or 47% of this segment’s sales.

As previously reported, CSI, Helios Merger Co., a Minnesota corporation and a wholly-owned subsidiary of CSI (“Merger Sub”), and Pineapple Energy LLC, a Delaware limited liability company (“Pineapple”), have entered into an Agreement and Plan of Merger dated March 1, 2021, as amended (the “merger agreement”), pursuant to which Merger Sub will merge with and into Pineapple, with Pineapple surviving the merger as a wholly-owned subsidiary of CSI.

The merger and the other transactions contemplated by the merger agreement are referred to collectively as the “Pineapple Merger Transaction.”

Following the merger, CSI will be renamed “Pineapple Holdings, Inc.” and is sometimes referred to herein as the “combined company.” Immediately prior to the effective time of the merger, Pineapple will complete its acquisition of two Hawaiian solar companies, Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”), which is sometimes referred to as the “Pre-Closing Acquisition.” Following the closing of the merger, the combined company will be focused on the growing home solar industry, primarily operating through its Pineapple, HEC and E-Gear subsidiary businesses.

At the time the Pineapple Merger Transaction was announced, CSI stated its intention to divest substantially all its current operating and non-operating assets, including its E&S Segment business, its S&S Segment business, real estate holdings, and cash, cash equivalents, and investments.

Consistent with that announcement, on August 2, 2021, CSI sold the two subsidiaries that operated the E&S Segment business to Lantronix, Inc.

and, as a result, CSI disposed of its E&S Segment business as of that date.

See “Sale of E&S Segment” below for additional details.

A special meeting of CSI shareholders has been scheduled for Wednesday, March 16, 2022, at 10:00 a.m.

Central Time to vote on the proposed Pineapple merger transaction, among other things.

Beginning on February 4, 2022, the notice of the special meeting and a proxy statement/prospectus was sent to CSI shareholders as of the January 27, 2022 record date.

Pursuant to the merger agreement, at the effective time of the merger, the outstanding Pineapple units held by members of Pineapple immediately prior to the effective time will be automatically cancelled and represent only the right to receive shares of CSI common stock.

As Base Consideration, CSI has agreed to issue to the members of Pineapple 15.6 million shares of CSI’s common stock.

The Base Consideration will be increased for any outstanding convertible notes issued by Pineapple in a pre-closing financing referred to as the Convertible Note Financing, which will convert into additional shares of CSI common stock at a rate of one additional share for every $2.00 in unpaid principal and accrued interest on outstanding convertible notes.

The Base Consideration will be decreased for any outstanding indebtedness of Pineapple at the closing of the merger in excess of $22.5 million, which will reduce the Base Consideration at a rate one share for every $2.00 of excess indebtedness.

In addition to the Base Consideration, certain members of Pineapple will receive 3.0 million shares of CSI common stock as Earnout Consideration if a funding-related condition to closing the merger is satisfied by Pineapple or waived by CSI and certain Pineapple members may receive up to an additional 10.0 million shares of CSI common stock as Earnout Consideration upon the occurrence of milestones specified in the merger agreement.

In addition, in connection with the Pineapple Merger Transaction, on September 15, 2021, CSI entered into a securities purchase agreement with certain investors, referred to as the PIPE Investors, to make a $32.0 million private placement investment referred to as the PIPE Offering.

Under the terms of the securities purchase agreement, for their $32.0 million investment, the PIPE Investors will receive shares of newly authorized CSI Series A convertible preferred stock convertible at a price of $3.40 per share into CSI common stock, together with five-year warrants to purchase an additional $32.0 million of common shares at that same price.

The PIPE Offering is expected to close immediately following the consummation of the merger.

Thus, the PIPE Investors will invest in the combined company and will not be entitled to any cash dividends prior to the effective time or to the CVRs issued to CSI shareholders as of the close of the business day immediately preceding the effective time.

The combined company will use the proceeds from the PIPE Offering to fund the cash portion of the purchase price to acquire Hawaii Energy Connection, LLC and E-Gear, LLC assets, to

repay $4.5 million of Pineapple’s $7.5 million term loan from Hercules, for transaction expenses, and for working capital to support Pineapple’s growth strategy of acquiring leading local and regional solar installers around the United States.

It is expected that the Pre-Closing Acquisition, the merger and the PIPE Offering will close sequentially on the same date.

If the merger is approved and the merger is consummated, the shareholders of CSI as of the close of the business day immediately preceding the effective time of the merger will receive one contractual non-transferable contingent value right, or CVR, per share of CSI common stock then held by them.

The CVRs will be governed by a CVR agreement by and among CSI, a Rights Agent and a CVR Holders’ Representative.

The rights and obligations of the CVR agreement will become the rights and obligations of the combined company after the closing of the merger.

Under the CVR agreement, holders of the CVRs will be entitled to receive a portion of the proceeds of any divestiture, assignment or other disposition of all assets of CSI or its subsidiaries that are related to CSI’s pre-merger business, assets and properties that occur during the 24-month period following the closing of the merger.

The foregoing description of the merger and merger agreement, the PIPE Offering and the securities purchase agreement, and the CVR and CVR agreement, do not purport to be complete and are each qualified in their respective entirety by reference to the merger agreement, the securities purchase agreement and the CVR agreement, respectively.

In addition, see Part I – Item 1A – Risk Factors:

 If the merger is approved by CSI shareholders and the merger is consummated, the combined company will be subject to the risks set forth under Item 1A – Risk Factors – “Risks Related to the Combined Company Following Consummation of the Merger.”

 If the merger is not approved by CSI shareholders or the merger is not consummated for any other reason, CSI will be subject to the risks set forth under Item 1A – Risk Factors – “Risks Related to CSI Following Termination of the Merger.”

SALE OF SUTTLE BUSINESSS

was a significant component of CSI’s business since 1969.

As a key element of the Company’s strategic plan, however, the Company sold substantially all of Suttle’s business, assets and operations pursuant to two separate transactions occurring in 2019 and 2020 that were previously reported.

See Note 4 of the Notes to the Consolidated Financial Statements, “Discontinued Operations.”

As a result of the Suttle sale, unless otherwise noted, all information in this Form 10-K about Suttle will be discussed and presented as discontinued operations and the Company will report its remaining business operations as continuing operations as described below.

SALE OF E&S SEGMENT

On August 2, 2021, the Company and Lantronix, Inc.

(“Lantronix”) completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to a securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).

See Note 4 of the Notes to the Consolidated Financial Statements, “Discontinued Operations.”

As a result of the E&S Sale Transaction, unless otherwise noted, all information in this Form 10-K about the E&S Segment will be discussed and presented as discontinued operations and the Company will report its remaining business operations as continuing operations as described below.

OVERVIEW OF CURRENT CSI OPERATIONS

Following the E&S Sale Transaction, the Company classifies its business operations into one segment, its Services & Support segment.

The Services & Support segment is comprised of CSI’s JDL Technologies, Inc.

(“JDL Technologies” or “JDL”) and Ecessa Corporation (“Ecessa”) businesses.

JDL is based in Fort Lauderdale, Florida, and Ecessa is based in Minnetonka, Minnesota.

Services & Support (“S&S”) provides technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management .

The Services & Support segment includes the business operations of IVDesk, which was purchased in November 2020.

Services & Support’s 2021 sales were $7,483,000 compared to 2020 sales of $8,777,000.

Project and product revenue totaled $1,168,000 in 2021 or 16% of segment sales compared to $5,120,000 in 2020 or 58% of this segment’s sales.

Services revenues increased to $6,315,000 in 2021 from $3,657,000 in 2020.

As noted within this Form 10-K, we have classified the operations of the E&S Segment as discontinued operations for 2021 and 2020.

Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting.

Additionally, any indirect general and administrative costs previously allocated to Suttle and the E&S Segment are also included in “Other.” Intersegment revenues are eliminated upon consolidation.

Markets and Marketing

Services & Support differentiates itself from its competitors

by continuously adopting and adapting to changes in available IT services, ensuring it continues to provide new and innovative

solutions to its clients and prospective clients.

This ensures this business segment remains well

qualified to help clients with their use of technology and IT resources to meet business

objectives and regulatory requirements.

Services & Support partners with clients to provide complete

support for their information technology environments, from servers to software applications, from the network-level down to the

desktop level.

Under a typical managed services agreement, S&S provides virtual CIO services to client management, deploys,

manages, secures, and supports client’s IT systems and services, provides helpdesk support to the client’s user community,

and adds value to the client’s business by enabling the client to focus on its core competencies.

Services & Support’s

key avenues for delivering on this commitment—and its competitive advantages—include on-premise managed services operations

center and secure, state-of-the-art hosted datacenter and partnerships with industry leading solution providers.

The managed services

operations center leverages the best available tools, applications, practices, and resources to deliver a consistent, quality customer

Services & Support holds the MSP Trustmark credential from CompTIA and is a member of the MSP Alliance.

Services & Support’s portfolio of technology solutions

reflects the regular introduction of new technologies and delivery methodologies and the increasing demand among businesses for

innovative solutions to strengthen their competitive edge and address prevailing IT challenges.

With its team of professionally

certified engineers, more than 250 years of technical experience, and talented leadership, S&S develops IT solutions that effectively

meet these demands.

To sustain its leading-edge position, S&S also maintains robust partnerships with strategic manufacturers

and is a 3CX VoIP Gold Partner, HP Enterprise Gold Partner, Microsoft Silver Partner, eMDs Solution Provider, and Citrix Solutions

Service Provider.

In 2020, Services & Support Technologies aggressively targeted

its primary vertical markets, healthcare, education and commercial business.

Services & Support continues to serve as a trusted partner

to its healthcare clients, offering SD-WAN devices and an array of services that address HIPAA Security Rule and Privacy Rule compliance

requirements, including its flagship cloud-based service, HIPAA FastTrack.

Services & Support’s managed services practice

supports clients ranging from single-office providers, to multi-location regional specialists, to their regulated suppliers and

business associates.

Services & Support Technologies provides support and service

to a diverse commercial client set.

In 2019, Services & Support continued to place emphasis on an expanded set of security

solutions layered on top of its Cloud-Based IT Managed Services.

This enabled Services & Support to provide an even more secure

total solution that included security awareness testing and training of client end users which has become increasingly important

as threats to an organization’s security are focused more and more on end users as the weakest link.

During 2020, Services & Support continued to support a multi-year

project to provide wireless network services and datacenter upgrades for several hundred public K-12 schools in Florida.

the Company’s work on this project was completed in 2020.

The education vertical remains an important element of Services

& Support’s overall market strategy.

Much of the Company’s historical revenue from the education sector has been derived

from a school district in Florida.

The Company has substantially completed its work on this project and was not selected as the

primary vendor on the next multi-year project for this school district but was selected as the secondary vendor for structured

cabling and enterprise networking.

Services & Support differentiates itself from its competitors by continuously adopting and adapting to changes in available IT services, ensuring it continues to provide new and innovative solutions to its clients and prospective clients.

This ensures this business segment remains well qualified to help clients with their use of technology and IT resources to meet business objectives and regulatory requirements.

Services & Support partners with clients to provide complete support for their information technology environments, from servers to software applications, from the network-level down to the desktop level.

Under a typical managed services agreement, S&S provides virtual Chief Information Officer (“CIO”) services to client management, deploys, manages, secures, and supports each client’s IT systems and services, provides helpdesk support to the client’s user community, and adds value to the client’s business by enabling the client to focus instead on its core competencies.

Services & Support’s key avenues for delivering on this commitment, and its competitive advantages, include on-premise managed services operations center and secure, state-of-the-art hosted datacenter and partnerships with industry leading solution providers.

The managed services operations center leverages the best available tools, applications, practices, and resources to deliver a consistent, quality customer experience.

Services & Support holds the MSP Trustmark credential from CompTIA TM and is a member of the MSP Alliance TM .

Services & Support’s portfolio of technology solutions reflects the regular introduction of new technologies and delivery methodologies and the increasing demand among businesses for innovative solutions to strengthen their respective competitive edges and address prevailing IT challenges.

With its team of professionally certified engineers, more than 250 years of technical experience, and talented leadership, S&S develops IT solutions that effectively meet these demands.

To sustain its leading-edge position, S&S also maintains robust partnerships with strategic manufacturers and is a 3CX VoIP Gold Partner, HP Enterprise Gold Partner, Microsoft Gold Partner, eMDs Solution Provider, and Citrix Silver level Solutions Service Provider.

In 2021, Services & Support aggressively targeted its primary vertical markets of healthcare, financial services, commercial business and education.

Services & Support continues to serve as a trusted partner to its healthcare clients, offering SD-WAN devices and an array of services that address HIPAA Security Rule and Privacy Rule compliance requirements, including its flagship cloud-based service, HIPAA FastTrack TM , which enables healthcare providers to achieve compliance with the complex requirements of the HIPAA.

Services & Support’s managed services practice supports clients ranging from single-office providers, to multi-location regional specialists, to their regulated suppliers and business associates.

Financial Services:

Services & Support provides a variety of solutions to the financial services industry.

Most notably in the areas of SD-Wan and Network Redundancy which provides a never down network to many local and regional banks and our hosted cloud desktop solution which CPA firms both large and small have adopted to ensure their agents have consistent and secure access to their industry solutions and sensitive client data.

Services & Support provides support and service to a diverse commercial client set.

In 2021, Services & Support continued to place emphasis on an expanded set of security solutions layered on top of its Cloud-Based IT Managed Services.

This enabled Services & Support to provide an even more secure total solution that included security awareness testing and training of client end users which has become increasingly important as threats to an organization’s security are focused more and more on end users as the weakest link.

During 2020, Services & Support continued to support a multi-year project to provide wireless network services and datacenter upgrades for several hundred public K-12 schools in Florida.

Most of the Company’s work on this project was completed in 2020.

The education vertical remains an important element of Services & Support's overall market strategy.

Much of the Company’s historical revenue from the education sector has been derived from a school district in Florida.

The Company has substantially completed its work on this project and was not selected as the primary vendor on the next multi-year project for this school district but was selected as the secondary vendor for structured cabling and enterprise networking.

JDL continued to provide certain data center support services in 2021.

Products and Services

As a managed service

provider and value-added reseller, Services & Support Technologies specializes in delivering technology solutions that free

organizations to focus on the strategic business activities critical to their financial success.

Services & Support’s

technology solutions encompass an extensive range of networking, virtualization, cloud, cybersecurity, and infrastructure services,

most of which are available under JDL managed services contracts.

A proprietary offering is the Ecessa SD-WAN device which provides

Never Down ®

By deploying automatic failover and leveraging up to 25 communication links ranging from MPLS, lower

cost broadband, cable, satellite, microwave or cellular 5G/4G/LTE, Ecessa’s SD-WAN devices guarantee network and Internet

As technology continues its move to the cloud, JDL aggressively markets its portfolio of cloud-based service offerings

and SD-WAN devices to healthcare and commercial business.

Its HIPAA FastTrack and Security FastTrack services, available in the

JDL Cloud powered by Citrix, have won awards for product innovation, just as Services & Support Technologies has been recognized

in the industry as a leading Managed Service Provider.

Services & Support engineers are trained and certified in the newest

cloud and other technology solutions.

As a managed service provider and value-added reseller, Services & Support specializes in delivering technology solutions that free organizations to focus on the strategic business activities and core competencies critical to their financial success.

Services & Support’s technology solutions encompass an extensive range of networking, virtualization, cloud, cybersecurity, and infrastructure services, most of which are available under JDL managed services contracts and a proprietary offering with Ecessa’s SD-WAN device which provides Never Down ® networks.

By deploying automatic failover and leveraging up to 25 communication links ranging from MPLS (multiprotocol label switching), lower cost broadband, cable, satellite, microwave or cellular 5G/4G/LTE, Ecessa’s SD-WAN devices guarantee network and Internet uptime.

As technology continues its move to the cloud, JDL aggressively markets its portfolio of cloud-based service offerings and SD-WAN devices to healthcare and commercial business.

Its HIPAA FastTrack TM and Security FastTrack TM services, available in the JDL Cloud powered by Citrix, have won awards for product innovation, just as Services & Support has been recognized in the industry as a leading Managed Service Provider.

Services & Support engineers are trained and certified in the newest cloud and other technology solutions.

Managed Services:

Services & Support Technologies continues

to refine its Managed Services offering as the industry matures taking it from a traditional remote management model to a hosted

service offering that grants Services & Support greater control, enables tighter service level agreements and increases margins

while providing clients with a more service rich, cost effective, and secure environments for their IT systems.

Support serves a diverse base of clients with locations throughout the United States, offering managed service programs designed

specifically for the healthcare and commercial markets.

These robust programs meet HIPAA compliance standards and, while the majority

of clients are supported remotely, independent of geographic borders, Services & Support is also able to provide on-site network

management and help desk support for key enterprise clients in the South Florida, Atlanta, Georgia, and the Minneapolis/St.

Minnesota markets.

Services & Support’s managed services include network management, availability assurance, event alerting

and incident management services;

Services & Support continues to refine its Managed Services offering as the industry matures taking it from a traditional remote management model to a hosted service offering that grants Services & Support greater control, enables tighter service level agreements and increases margins while providing clients with a more service rich, cost effective, and secure environments for their IT systems.

Services & Support serves a diverse base of clients with locations throughout the United States, offering managed service programs designed specifically for the healthcare and commercial markets.

These robust programs meet HIPAA compliance standards and, while the majority of clients are supported remotely, independent of geographic borders, Services & Support is also able to provide on-site network management and help desk support for key enterprise clients in the South Florida, Atlanta, Georgia, and Minneapolis/St.

Paul, Minnesota markets.

Services & Support’s managed services include network management, availability assurance, event alerting and incident management services;

server, workstation, mobile device, and other asset management services;

security services including

software patching, firewall, antivirus, anti-malware, and cybersecurity intrusion detection and prevention services;

support for client users;

security services including software patching, firewall, antivirus, anti-malware, and cybersecurity intrusion detection and prevention services;

help desk support for client users;

SIP-trunking, voice over IP and office management services;

2 unchanged sentences

Cloud Solutions:

With widespread adoption of cloud solutions

on the rise, Services & Support continues to focus on these solutions as key offerings with significant revenue growth potential.

cloud solutions, wireless as a service, infrastructure as a service, and Citrix®

as a service (sold as Services

& Support FastTrack) are among Services & Support’s most successful cloud offerings, with others including backup,

storage, voice over IP, firewall and email as cloud or hosted services.

The benefits to clients are numerous and include vertical

and horizontal scalability, internal bandwidth conservation, and simplification of IT management within client organizations, while

Services & Support benefits from substantial economies of scale and standardization.

All Services & Support cloud offerings

are billable as monthly recurring revenue under its managed service model, and Services & Support is committed to bringing

the benefits of cloud services to all clients.

With widespread adoption of cloud solutions on the rise, Services & Support continues to focus on these solutions as key offerings with significant revenue growth potential.

Azure® cloud solutions, wireless as a service, infrastructure as a service, and Citrix® as a service (sold as Services & Support FastTrack) are among Services & Support’s most successful cloud offerings, with others including backup, storage, voice over IP, firewall and email as cloud or hosted services.

The benefits to clients are numerous and include vertical and horizontal scalability, internal bandwidth conservation, and simplification of IT management within client organizations, while Services & Support benefits from substantial economies of scale and standardization.

All Services & Support cloud offerings are billable as monthly recurring revenue under its managed service model, and Services & Support is committed to bringing the benefits of cloud services to all clients.

Network Services:

Services & Support’s roots are in

network services, and these services remain central to its role as a managed service provider and value-added reseller.

& Support team has extensive experience and professional certifications in assessing, architecting, designing, and implementing

wired and wireless networks as well as entire technology infrastructures.

Networking services also include network infrastructure

as a service, network design and deployment, network and endpoint security, SD-WAN and SASE offerings, edge security, network optimization,

and device installation/configuration services.

Services & Support’s roots are in network services, and these services remain central to its role as a managed service provider and value-added reseller.

The Services & Support team has extensive experience and professional certifications in assessing, architecting, designing, and implementing wired and wireless networks as well as entire technology infrastructures.

Networking services also include network infrastructure as a service, network design and deployment, network and endpoint security, SD-WAN and SASE offerings, edge security, network optimization, and device installation/configuration services.

Virtualization:

Whether hosted on premise, in Services &

Support’s private cloud, or on third-party platforms such as Azure or AWS (Amazon Web Services), using virtualization across

an organization’s IT environment delivers greater agility, mobility and efficiency.

Services & Support’s virtualization

engineers assess, design, deploy, and manage virtualization programs that are designed to ensure user access to any workload, anytime,

anywhere, on any device.

Services & Support’s virtualization services encompass network infrastructure, security, desktops,

servers, applications, storage, and any combination thereof, including connectivity and software licensing.

As Services & Support

clients continue to adopt virtualization, they experience the economies of scale, reduced capital requirements, enhanced security,

and disaster recovery protections that are inherent in virtualized environments.

The Company expects the Managed Services market

will continue to grow significantly over the next several years, and as a result will attract many competitors, becoming a highly

competitive industry.

In response to these factors, Services & Support’s focus is to quickly adapt to the changing needs

of its clients through the adoption and productizing of new IT Service technologies as they become available.

An example of this

would be the addition of several security services to the Services & Support portfolio in 2019 including security tools to

monitor the flow of sensitive data in and on the network, additional cloud-based services through Azure and AWS and enhanced end-point

security services.

By ensuring Services & Support continuously evaluates the services we offer with a focus on the changing

market, we are able to provide a better range of services to our clients and prospects while increasing their reliance upon us

as their IT service provider.

Outstanding customer orders and contracts for Services &

Support products and services were approximately $4,333,000 at March 1, 2021 and $1,546,000 at March 1, 2020.

The Company does

not consider current outstanding orders and contracts as a significant indicator of longer-term future results.

Whether hosted on premise, in Services & Support’s private cloud, or on third-party platforms such as Azure or Amazon Web Services (“AWS®”), using virtualization across an organization’s IT environment delivers greater agility, mobility and efficiency.

Services & Support’s virtualization engineers assess, design, deploy, and manage virtualization programs that are designed to ensure user access to any workload, anytime, anywhere, on any device.

Services & Support’s virtualization services encompass network infrastructure, security, desktops, servers, applications, storage, and any combination thereof, including connectivity and software licensing.

As Services & Support clients continue to adopt virtualization, they experience the economies of scale, reduced capital requirements, enhanced security, and disaster recovery protections that are inherent in virtualized environments.

The Company expects the Managed Services market will continue to grow significantly over the next several years, and as a result will attract additional competitors, becoming an even more competitive industry.

In response to these factors, Services & Support’s focus is to quickly adapt to the changing needs of its clients through the adoption and productizing of new IT Service technologies as they become available.

An example of this was the addition of several security services to the Services & Support portfolio in 2021 including Microsoft 365’s Workforce Modernization which includes a suite of solutions designed to enhance security and flexibility from the workstation to cloud hosted applications.

By ensuring Services & Support continuously evaluates the services we offer with a

focus on the changing market, we are able to provide a better range of services to our clients and prospects while increasing their reliance upon us as their IT service provider.

Outstanding customer orders and contracts for Services & Support products and services were approximately $2,800,000 at March 1, 2022 and $4,333,000 at March 1, 2021.

The Company does not consider current outstanding orders and contracts as a significant indicator of longer-term future results.

Human Capital

As of March 1, 2022, the Company employed 39 people.

number, 92 were within the Electronics & Software segment (including 74 in the U.S and 18 in the U.K.), 37 within the Services

& Support segment, and 21 in corporate general and administrative positions.

We consider our relations with our employees

Of this number, 31 were employed within the Services & Support segment, and 8 in corporate general and administrative positions.

We consider our relations with our employees to be good.

None of our employees are currently represented by a labor union.

The Company views its employees and culture as keys to its

The Company aims to attract and retain qualified personnel and provides wages and benefits that are competitive

locally to reward employees for performance.

The Company values innovation, inclusion and diversity, safety and engagement

as they attract, develop, and retain the best talent.

The Company’s employees are critical to the Company’s ability to execute the strategic direction and transactions approved by the CSI board of directors, including the continued operation of the S&S segment, the Company’s efforts to pursue and consummate the Pineapple Merger Transaction and related transactions, and the Company’s divestiture of substantially all its current operating and non-operating assets as part of CSI’s previously stated intention.

Despite the uncertainties presented by the proposed Pineapple Merger Transaction and related transactions, the Company aims to attract and retain qualified personnel and provides wages and benefits that are competitive locally to reward employees for performance.

The Company values innovation, inclusion and diversity, safety and engagement as they attract, develop, and retain the best talent.

We have adopted a diversity statement that is posted on our website at https://www.commsystems.com/corporate-governance/communications-systems-inc-diversity-inclusion-statement/.

The health and safety of our employees is a top priority of

In response to the COVID-19 pandemic, we instituted temporary office closures, implemented shelter-in-place

orders and restrictions and instituted a mandatory work from home policy for substantially all office employees, and instituted

social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders.

We believe the Company has generally been successful implementing proactive measures to protect the health and safety of its employees

while maintaining business continuity and high levels of service to our customers.

Executive Officers of Registrant

The executive officers of the Company and their ages at March

1, 2021 are set forth below.

See Item 9B of this Form 10-K for additional information on the Company’s management.

Executive Chairman of the Company’s

Chief Executive Officer 3

Treasurer and Chief Financial Officer

Scott Fluegge

VP of IT and Digital Transformation

Michael Siegler, II

SVP of Service and Customer Experience

Corporate Controller 7

1 Additional footnotes indicate when officers began serving in their current capacity.

Executive officers serve at the pleasure

of the Board of Directors.

Lacey served as the Company’s Chief Executive Officer from February 2015 until November 2020 and has served as the

Executive Chairman of the Company’s Board of Directors since December 2018.

Additional information about Mr.

Lacey’s

background will be contained in the 2021 Proxy Statement.

Kumar was appointed Chief Executive Officer in December 2020.

From November 2019 to November 2020, she served as General

Manager for Transition Networks, Inc.

Prior to that, she was the Director of PLM & Software Engineering within Transition Networks,

Additional information about Ms.

Kumar’s background will be contained in the 2021 Proxy Statement.

Fandrich was appointed Chief Financial Officer in August 2016.

From July 2015 to August 2016, he served as Vice President

of Finance of Suttle, Inc.

From April 2004 to July 2015, he was Corporate Controller for The Bergquist Company, a global supplier

of thermal interface material.

Fluegge was appointed Vice President of IT and Digital Transformation in January 2021.

Previously he was Vice President

and General Manager of JDL Technologies in December 2011, and was named President and General Manager in September 2013.

to this, he was the Vice President of Workload Automation at GSS AMERICA / GSS INFOTECH / INFOSPECTRUM CONSULTING.

Siegler was appointed Senior Vice President of Service and Customer Experience in December 2020.

From May 2020 to November

2020, he was the General Manager of Ecessa.

Prior to CSI’s acquisition of Ecessa he was the Chief Executive Officer of Ecessa.

Hlavka was appointed Corporate Controller in May 2011.

From July 2008 to April 2011, she served as the Assistant Corporate

Prior to July 2008, she was an auditor for Deloitte and Touche LLP.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS

AND EXPORT SALES

Financial information about domestic and foreign operations

and export sales may be obtained by reference to Note 14 of the “Notes to Consolidated Financial Statements”

Item 8 herein.

The health and safety of our employees is a top priority of our leaders.

In response to the COVID-19 pandemic, we instituted temporary office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders.

We believe the Company has generally been successful implementing proactive measures to protect the health and safety of its employees while maintaining business continuity and high levels of service to our customers.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business