JCS Stock Price Increases Over 30% Pre-Market: Why It Happened

By Amit Chowdhry ● March 2, 2021
  • The stock price of Communications Systems, Inc. (NASDAQ:JCS) has increased by over 30% pre-market. This is why it happened.

The stock price of Communications Systems, Inc. (NASDAQ:JCS) – an IoT intelligent edge products and services company – has increased by over 30% pre-market. Investors appear to be responding to the company announcing that it entered into a definitive merger agreement with privately held Pineapple Energy, LLC, a growing U.S. operator and consolidator of residential solar, battery storage, and grid services solutions. 

And upon closing, CSI will commence doing business as Pineapple Energy, with a business model focused on the rapidly growing home solar industry. Communications Systems expects shares of the combined company to continue to trade on the Nasdaq Capital Market under the new ticker symbol “PEGY.” And the definitive merger agreement and transaction have been approved by CSI’s Board of Directors and are subject to approval by CSI’s shareholders. The deal is expected to close in the second quarter of 2021.

Members of both CSI’s and Pineapple’s management teams will maintain leadership roles in the combined company. Roger H.D. Lacey, Executive Chairman of CSI, and Mark Fandrich, CSI’s Chief Financial Officer, are expected to remain in these same roles. Pineapple’s Chief Executive Officer Kyle Udseth will assume the Chief Executive Officer position of the combined company. And Communications Systems expects to remain in its current headquarters near Minneapolis, Minnesota.

Pineapple had recently signed definitive agreements to acquire Hawaii Energy Connection (HEC) and E-GEAR, both Hawaii-based sustainable energy solution providers. These follow on Pineapple’s acquisitions of Horizon Solar Power and certain assets of Sungevity in December 2020. HEC is among the leading solar, battery storage, and distributed energy resource (DER) management companies in the nation’s most advanced alternative energy market. And these pending acquisitions are expected to close simultaneously with the closing of the CSI-Pineapple merger. The combined company’s post-merger strategy is to consolidate other leading regional players, with several acquisition targets already in the due diligence phase.

Launched in November 2020 by private equity firm Northern Pacific Group and seasoned industry executives, Pineapple provides solar, battery storage and other energy services to homeowners. And through its unique “battery-first” business model, Pineapple will offer compelling residential solar power systems, with longer-term plans to aggregate its customer fleet into regional virtual power plants.

In addition to any proceeds from pre-merger divestitures, CSI expects to distribute to the pre-merger shareholders a cash dividend of at least $1.00 per share prior to the closing of the merger. The Company also intends to make additional cash dividends from cash, cash equivalents, and investments and proceeds from the sale of legacy CSI assets and businesses sold after the merger through the Contingent Value Rights (“CVRs”).

Under terms of the merger agreement, each CSI shareholder as of the merger record date, will receive CVRs that reflect the right to receive that shareholder’s percentage of the net proceeds from the sale of legacy CSI businesses and assets, after the closing. Communications Systems currently expects that these CVRs will be nontransferable. And as of September 30, 2020, CSI’s net book value was $47.2 million, it had cash, cash equivalents, and investments of $21.0 million and had working capital of $28.5 million.

Current CSI shareholders will retain shares in the combined company, initially holding approximately 37% of total shares outstanding. This ownership is expected to decrease over time due to earnouts to Pineapple shareholders and capital to be raised through potential future equity offerings.

In connection with the merger, CSI and Pineapple Energy are exploring equity financing through a private placement that would close in connection with the closing of merger, with proceeds to be used by the combined company to finance additional acquisitions and working capital needs of the combined company. And Pineapple is exploring equity financing that would lower the amount of debt associated with its past and pending acquisitions. Any equity issued by the combined company after closing of the merger would increase the number of post-merger shares outstanding and decrease the percentage ownership of continuing CSI shareholders.

KEY QUOTE:

“Over the last three years, CSI’s Special Committee oversaw a series of initiatives designed to drive shareholder value. In 2020, we completed a reorganization of our business. While pleased with our progress, we have concluded that our two current operating segments would provide more substantial long-term growth opportunities to organizations that can unlock additional synergies, expand into adjacent markets, add scale, and broaden their existing product lines. We are committed to finding new owners for these businesses that can continue their long tradition of quality products and services, but remain committed to supporting these businesses and their current operations and customers during this process. Meanwhile, by re-inventing CSI through this proposed merger, we will set the stage to become a fast-growing and profitable company, with a focus on delivering immediate value to our shareholders while retaining an opportunity for long-term appreciation.”

“The re-invented company will be well positioned to grow organically and via targeted acquisitions. The energy transition in the U.S. is well underway but still in the early stages, as solar paired with battery storage should continue to drive down the cost of electricity and increase the resiliency of power grids nationwide. The recent grid emergency in Texas underscores the urgent need for more distributed, secure power sources for homeowners. Our new company intends to capitalize on growing demand for solutions that provide home energy security, supported by federal and local government policies related to tax credits, trade tariffs, decarbonization targets, and research and development spending.”

— Roger H.D. Lacey, Executive Chairman of CSI

“We see the energy system of tomorrow as a decentralized network grown from the grass roots of individual homeowners and their solar-plus-battery systems. Our vision is for Pineapple to become a champion for homeowners in this energy transition by delivering the best customer experience in a consultative manner. We will offer the full range of financing options and a broad selection of hardware from leading manufacturers, all with the purpose of empowering homeowners and giving them choice. We want to always stay aligned with our customers’ interests, including as we share future grid-services revenues.”

“The anticipated addition of HEC and E-GEAR to the Pineapple family will solidify our foundation and expand our geographic footprint. We intend to leverage HEC’s experience in storage design, installation and support, as well as E-GEAR’s proprietary distributed aggregation, control and grid service technology. These advantages will enhance our product offering through the mainland US, including in underpenetrated markets such as Florida and Texas.”

— Pineapple’s Chief Executive Officer Kyle Udseth

“We formed Pineapple in order to meet the growing demand for green home energy services by offering customers high-quality solutions in a transparent manner. We are very enthusiastic about the merger of Pineapple with CSI. This transaction will pave the way for the combined company to effectively raise capital and use stock as a currency to acquire other leading regional solar, storage and energy services companies.”

— Scott Honour, Managing Partner of Northern Pacific Group

Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis.