PROPOSAL
#1
E&S SALE PROPOSAL
Parties
to the Securities Purchase Agreement
Communications
Systems, Inc.
Communications
Systems, Inc. is a Minnesota corporation that was organized in 1969. CSI classifies its businesses into the following two segments:
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Electronics
& Software (E&S): 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; and
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Services
& Support (S&S): 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.
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Communications
Systems’ headquarters and mailing address is 10900 Red Circle Drive, Minnetonka, MN 55343, and the telephone number at that
location is (952) 996-1674. Our principal website is www.commsystems.com.
On
March 2, 2021, CSI announced that it had entered into a definitive merger agreement with privately held Pineapple Energy LLC
(“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. If the merger is approved by our shareholders, upon closing, CSI will commence doing business as Pineapple Energy, with a business model focused on the rapidly growing home
solar industry.
At
the time the merger with Pineapple was announced, CSI stated its intention to divest substantially all its current operating and
non-operating assets, including its E&S business, its S&S business, real estate holdings, and cash, cash equivalents,
and investments. The E&S Sale Transaction is part of CSI’s planned strategy to monetize its assets for the benefit of
the pre-merger CSI shareholders as contemplated by the Pineapple merger transaction.
Lantronix,
Inc.
Lantronix,
Inc. (Nasdaq: LTRX) is a global provider of software as a service (“SaaS”), engineering services, and hardware for
Edge Computing, the Internet of Things (“IoT”), and Remote Environment Management (“REM”). Lantronix enables
its customers to provide reliable and secure solutions while accelerating their time to market. Lantronix’s products and
services dramatically simplify operations through the creation, development, deployment, and management of customer projects at
scale while providing quality, reliability and security.
The
mailing address for Lantronix is 7535 Irvine Center Drive, Suite 100, Irvine, California 92618 and the telephone number at that
location is (949) 453-3990. The principal website for Lantronix is www.lantronix.com.
Background
of the E&S Sale Transaction
Our
board of directors, together with our management, regularly reviews and assesses CSI’s performance, future growth prospects,
business plans, competitive position, and overall strategic direction. As part of that review process, from time to time, we have
considered a number of strategic alternatives, including potential strategic transactions with third parties, in each case with
the goal of maximizing shareholder value.
As
part of this process, on May 23, 2018, the CSI board of directors announced the formation of a CSI special committee consisting
of independent directors Richard Primuth, Randall D. Sampson and Steven Webster to explore strategic alternatives for CSI. We
also announced that the CSI special committee expected to retain an investment banking firm
to advise it in this process. CSI director Michael Zapata joined the special committee
shortly following his election to
the CSI board of directors in June 2020. In fulfilling its responsibilities to explore strategic alternatives, the CSI special
committee, as well as the CSI board of directors, were advised by the law firm of Ballard Spahr LLP. In addition, CSI
subsequently engaged Northland Securities, Inc., referred to as “Northland,” as CSI’s financial advisor.
The
CSI special committee, working with members of management, studied a number of strategic initiatives and strategic alternatives
for CSI, and, in the period following May 23, 2018, the Company took the following actions that were approved by the CSI special
committee and the CSI board of directors:
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On
April 5, 2019, CSI’s wholly owned subsidiary Suttle, Inc. (“Suttle”)
sold its FutureLink Fiber business line for $5.0 million in cash;
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On
March 11, 2020, CSI sold the remainder of its Suttle business and related assets for
$8.0 million in cash;
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On
May 14, 2020, CSI acquired Ecessa Corporation in a reverse triangular merger for $4.6
million in cash; and
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On
November 3, 2020, CSI acquired the operating assets of privately held IVDesk Minnesota,
Inc. from a third-party receiver appointed by a Hennepin County, Minnesota State District
Court Judge for aggregate consideration of $1.4 million, including a $550,000 earnout
payment made in March 2021.
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Beginning
in December 2020, the special committee and management began considering a proposal to merge with Pineapple Energy LLC (“Pineapple”)
and, following due diligence and negotiations, the CSI special committee and the CSI board of directors approved a definitive
merger agreement with Pineapple that was announced on March 2, 2021. Throughout the negotiations with Pineapple leading to the
approval of the Pineapple merger agreement, the CSI special committee and the CSI board of directors agreed with Pineapple that
as part of the proposed merger, CSI would divest substantially all of its existing operating and non-operating assets. Accordingly,
concurrent with the ongoing discussions and negotiations with Pineapple between December 2020 and March 2, 2021, the CSI special
committee also considered strategic alternatives for the divestiture of the operating and non-operating assets of CSI that would
maximize the value of these assets for its current shareholders. In this regard, it identified Lantronix as a possible acquiror
of CSI’s E&S business segment, which consisted of two business units: Transition Networks Inc. (“TNI”) based
in the U.S. and Net2Edge (“N2E”), a business based in the U.K. that was owned by TNI through its subsidiary, Transition
Networks Europe Limited (“TN Europe”).
From
time to time beginning in 2018, CSI and Lantronix had engaged in discussions regarding a possible strategic transaction. These
discussions included a dinner at Mobile World Congress in Los Angeles in October 2019. Given Lantronix’s previously expressed
interest in a possible transaction with CSI and in particular, its expressed interest in the TNI portion of the E&S Segment
business, on December 15, 2020, after CSI had received and considered the initial inquiry from Pineapple, the CSI special committee
instructed Northland to contact Lantronix to determine its interest in acquiring the E&S Segment business if CSI proceeded
with the Pineapple merger. At this time, the special committee also directed Northland to contact other qualified buyers, which
resulted in several additional parties entering into non-disclosure agreements with CSI, and receiving information regarding the
E&S Segment business.
On
December 17, 2020, in accordance with the CSI special committee’s directives, representatives of Northland contacted Lantronix’s
Chief Financial Officer, Jeremy Whitaker, to gauge Lantronix’s interest in CSI’s E&S Segment business. The Lantronix
management team confirmed Lantronix’s interest in acquiring some or all of the E&S Segment business assets.
Later
on December 17, 2020, CSI provided Lantronix with preliminary 2020 and 2021 revenue estimates for the E&S Segment. On December
22, 2020, CSI shared with Lantronix historical revenue relating to the E&S Segment that included revenues for both TNI and
N2E as one consolidated operating segment.
On
December 29, 2020, Lantronix submitted a preliminary non-binding letter of intent to acquire the assets of TNI for a total purchase
price of $24.75 million, stating that it also would consider including the assets of the N2E business of TN Europe as part of
the transaction.
On
January 6, 2021, in accordance with the CSI special committee’s directives, Northland representatives had a telephone discussion
with Mr. Whitaker regarding including the assets of N2E as part of the proposed transaction and changing the structure of the
transaction from an asset sale to the sale of CSI’s stock in TNI and TN Europe, indicating that if N2E were included in
the transaction, the purchase price would need to be increased from the proposed $24.75 million purchase price reflected in Lantronix’s
December 29, 2020 letter of intent.
Later
on January 6, 2021, CSI’s Executive Chairman, Roger H.D. Lacey, and CSI’s Chief Financial Officer, Mark Fandrich,
attorneys from Ballard Spahr, and Northland representatives discussed Lantronix’s December 29, 2020 letter of intent and
potential revisions to reflect the inclusion of the N2E business, an increase in the proposed purchase price and the change in
structure from an asset sale to the sale of CSI’s stock in TNI and TN Europe. The Company believed that the E&S Segment
was worth more than Lantronix’s proposed purchase price and that the N2E business was worth more if sold as part of the
E&S Segment than on a stand-alone basis.
Also
on January 6, 2021, CSI sent Lantronix a five-year financial forecast for the E&S Segment for fiscal years 2021 through 2025.
This five-year financial forecast had been approved by the CSI board on December 8, 2020 as part of its regular planning cycle.
On
January 7, 2021, the CSI board of directors held a special meeting attended by Mr. Fandrich and representatives of Ballard Spahr
and Northland. CSI management and Northland reviewed and discussed with the CSI board of directors the December 29, 2020 letter
of intent from Lantronix. At that meeting, the CSI board of directors also reviewed in detail a non-binding letter of intent with
respect to the Pineapple transaction and the CSI board of directors authorized CSI management to enter into the non-binding letter
of intent for the Pineapple transaction. The CSI board of directors determined that if negotiations with Pineapple led to
a definitive merger agreement, then CSI should pursue a sale of the E&S Segment as an appropriate next step in the overall
strategy to maximize shareholder value and provide liquidity to CSI shareholders.
The
CSI board of directors then discussed the process for the possible disposition of the E&S Segment, including the proposed
purchase price and the need to include the N2E business, and the strategies to support the CSI board of directors’ exercise
of its fiduciary duties. In particular, the CSI board of directors discussed CSI’s ability to explore or respond to other
superior proposals for the E&S Segment at various times, including before the execution of any letter of intent, from the
period of the signing of the letter of intent until the execution of a definitive agreement, and between signing of a definitive
agreement and closing. The directors also requested that management prepare an analysis of how the potential merger with Pineapple
and the potential sale of the E&S Segment would affect outstanding equity awards under the CSI 2011 Executive Incentive Compensation
Plan (the “2011 Plan”) and other compensation agreements so that the CSI board of directors would understand CSI’s
obligations and could take appropriate actions consistent with the 2011 Plan and the outstanding awards and other agreements.
The
CSI board of directors then authorized CSI management to continue to negotiate with Lantronix if Lantronix agreed to include N2E
in the transaction, agreed to increase the proposed purchase price and agreed to structure the transaction as a sale of the stock
of the E&S Companies rather than as an asset sale. The CSI board of directors also authorized management to undertake to document
these terms in a letter of intent and, consistent with direction from the CSI special committee and CSI board of directors when
a letter of intent was agreed upon, to proceed with negotiating a definitive transaction agreement relating to the transaction
with Lantronix, with the final transaction agreement subject to subsequent approval by the CSI special committee and the CSI board
of directors. Although the CSI board of directors gave management discretion to proceed, as discussed below, CSI and Lantronix
did not agree on a letter of intent until after the February 2, 2021 meeting of the CSI board of directors. The CSI board of directors
also instructed Northland to continue to explore, and respond to other inquiries from, other interested parties on behalf of CSI
until there was an exclusivity obligation with Lantronix or another party.
On
January 8, 2021, a meeting was held among CSI management consisting of Messrs. Lacey and Fandrich and CSI’s Chief
Executive Officer, Anita Kumar, Ballard Spahr attorneys, and Northland representatives to discuss the draft December 29, 2020
Lantronix letter of intent, the CSI board of directors’ authorization, and strategies for negotiations with Lantronix.
Later on January 8, 2021, CSI delivered a revised letter of intent to Lantronix proposing a stock sale of the E&S
Companies for a cash purchase price to be further discussed between the parties. In response to the CSI board of
directors’ discussion at the January 7, 2021 meeting, the revised letter of intent contained a one-year standstill
provision and clarification that the purchase agreement would include a customary fiduciary-out provision. Also on January 8, 2021, CSI management met with CSI’s tax advisory firm
to review tax aspects of the E&S Segment transaction.
On
January 11, 2021, Lantronix delivered to CSI a revised draft letter of intent that proposed a cash purchase price equal to 75%
of the revenue generated by the E&S Segment business for the 12-month period ended December 31, 2020, or approximately $25.9
million, and indicated that Lantronix would consider acquiring the stock of TN Europe with an appropriate adjustment of the purchase
price if included.
On
January 14, 2021, CSI delivered to Lantronix a revised letter of intent with an increased purchase price of $38 million. This
revised letter of intent was accompanied by a cover email outlining to Lantronix the rationale for CSI’s counterproposal
and proposed purchase price based on publicly available market data for comparable entities.
On
January 15, 2021, Lantronix delivered to CSI a revised letter of intent with a proposed purchase price of $24 million for both
the Transition Networks and Net2Edge entities.
Also
on January 15, 2021, at the request of Mr. Fandrich, as part of the ongoing effort to continue to assess market interest in the
E&S Segment, Northland provided CSI with a list of potential purchasers of the E&S Segment businesses and updated CSI
on the status of discussions with potentially interested parties. CSI management and Northland discussed alternatives for a potential
approach to these other potential purchasers if CSI did not receive a revised proposal from Lantronix. CSI management directed
Northland to inform Lantronix that, to remain competitive in the process, Lantronix would need to increase its $24.0 million proposed purchase price given that Lantronix was offering to acquire the N2E business in its proposal. CSI management believed the E&S Segment was worth more than the amount proposed by Lantronix,
which was based solely on 2020 revenue that had been negatively affected by COVID-19. CSI management also directed Northland to
emphasize that CSI had significant cash reserves and was not in a distressed situation.
On
January 20, 2021, Rob Adams, Lantronix’s Head of Corporate Development and Investor Relations, contacted a
representative of Northland to continue discussions regarding the E&S Segment. In accordance with CSI’s directives,
the Northland representative relayed CSI’s position regarding changes to Lantronix’s proposal that would be
required in order to be acceptable to CSI.
On
January 22, 2021, Mr. Whitaker called a Northland representative, indicating that Lantronix was open to increasing its proposed
purchase price to $25.0 million in cash at closing, with an additional $5.0 million earnout based on existing revenue forecasts
for a total purchase price of up to $30 million.
On
January 26, 2021, CSI management and Northland representatives held a call to discuss Lantronix’s revised purchase price.
On
January 28, 2021, CSI instructed Northland to relay a counterproposal to Lantronix with a purchase price of $32.0 million, including
a $7.0 million earnout contingent upon the E&S Segment achieving designated operating milestones.
On
January 29, 2021, Messrs. Lacey and Fandrich and Ms. Kumar, together with Northland representatives, held a virtual meeting with
the chief executive officer and other management members of Company A regarding Company A’s potential acquisition of the
E&S Segment.
On
February 1, 2021, in accordance with CSI’s instructions, Northland representatives discussed the $32.0 million purchase
price, including the $7.0 earnout amount, with Mr. Adams, who verbally agreed in principle with an earnout of $7.0 million, but
indicated that Lantronix would make a counterproposal for the revenue parameters of the earnout.
On
February 2, 2021, the CSI board of directors held a special meeting attended by Mr. Fandrich and CSI Corporate Controller
Kristin Hlavka, and representatives of Ballard Spahr and Northland. The CSI board of directors discussed the status of the
potential sale of the E&S Segment and authorized management to continue to negotiate toward execution of a letter of
intent reflecting a $25.0 million base cash purchase price and a $7.0 million earnout payable to CSI shareholders within the
parameters contemplated by the Pineapple merger agreement. CSI management also shared with the CSI board of directors
information regarding the effect on shareholders of the acceleration of outstanding stock options and restricted stock units
if a change of control occurred.
Later
on February 2, 2021, CSI delivered to Lantronix a revised letter of intent reflecting a proposed base purchase price of $25.0
million and a $7.0 million earnout assuming $39.5 million in revenue during the first full 12 months immediately after the closing,
subject to a capped earnout of $2 million for revenues above $39.5 million (based on $0.50 in earnout for each $1.00 in additional
revenue). As was the case with the letter of intent exchanged between the parties after January 8, 2021, CSI’s revised letter
of intent included a one-year standstill provision and indicated that the purchase agreement would include a customary fiduciary-out
provision.
On
February 5, 2021, Lantronix delivered to CSI a revised letter of intent altering the earnout consideration language by removing
the $0.50 in earnout consideration for each $1.00 in additional revenue concept and replacing this concept with a series of revenue
targets with corresponding payments. The new earnout concept maintained the total potential earnout consideration of $7.0 million,
with increased back-end weighting over the first 360 days post-closing.
On
February 8, 2021, CSI delivered to Lantronix a revised letter of intent altering the earnout consideration language,
maintaining total potential earnout consideration of $7.0 million, while establishing a straight line measurement formula
with lower hurdles for the initial targets and payments over the 360 days after closing and extending the exclusivity date
from January 31, 2021 to February 28, 2021. During the previous several weeks, in accordance with the instructions of the
CSI board of directors, Northland had continued to solicit indications of interest regarding a transaction involving
the E&S Segment, and CSI entered into confidentiality agreements with certain potential buyers of the E&S Segment,
shared certain financial and other business information with such parties, and discussed potential alternative proposals
regarding the E&S Segment business. While those discussions were active and ongoing, none of the potential proposals
discussed with other parties matched the value to shareholders and certainty of closing contemplated by Lantronix’s
February 5, 2021 letter of intent.
On
February 9, 2021, CSI and Lantronix executed the non-binding letter of intent reflecting a purchase price of up to $32.0
million with $25.0 million payable at closing and an additional $7.0 million earnout contingent upon meeting revenue targets
in two 180-day periods following closing, a one-year standstill provision and exclusivity until March 5, 2021. After
execution of the letter of intent, on February 9, 2021, Lantronix was provided with access to CSI’s virtual data
room.
On
February 10, 2021, Mr. Fandrich from CSI and Mr. Whitaker from Lantronix discussed planned overview meetings with TNI and Lantronix
management regarding certain functional areas of the E&S Segment business.
On
February 12, 2021, representatives of Ballard Spahr and legal counsel for Lantronix and Mr. Whitaker, discussed drafting
responsibilities for the securities purchase agreement, transaction structure (stock sale or asset sale), due diligence to be
conducted by Lantronix, and the fact that CSI shareholder approval was required to consummate the
transaction.
On
February 16, 2021, the CSI compensation committee and CSI board of directors held regularly scheduled meetings attended by Mr.
Fandrich and Ms. Hlavka and representatives of Ballard Spahr. Representatives of Northland also attended the portion of the CSI
board meeting relating to the E&S Segment transaction. At this board meeting, the CSI board of directors reviewed the status
of the potential transaction with Lantronix, including the February 9, 2021 letter of intent, and were briefed on a discussion
among the CSI and Lantronix attorneys on February 12, 2021. The CSI board of directors discussed upcoming due diligence and meetings,
and potential timing for the proposed transactions with Pineapple and Lantronix.
At
the February 16, 2021 meeting of the CSI board of directors, the CSI compensation committee recommended in connection with a change
in control under the proposed Pineapple transaction, with respect to outstanding equity awards under 2011 Plan and the CSI Employee
Stock Purchase Plan (“ESPP”), that the CSI board of directors take the following actions pursuant to its obligations
and authority under the 2011 Plan and the ESPP:
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Approve
that on a date no earlier than 20 days before a change in control (the “Action
Effective Date”) resulting from the proposed Pineapple merger transaction, all
outstanding, in-the-money stock options would be settled by exchanging the options for
a “net” number of shares (“Net Shares”) that took into account
that option holders would not pay the exercise price to exercise their options, as calculated
under the formula for determining the number of Net Shares provided in the 2011 Plan
and that these Net Shares would be contingently issued as of the Action Effective Date.
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Approve
that the Action Effective Date would be set to ensure that the holders of RSUs and in-the-money
stock options would receive any dividends paid to the other CSI shareholders prior to
the effective time of the merger;
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Approve
that, as provided in the 2011 Plan, with respect to options for which the per share exercise
price was equal to or greater than the market price for the shares on the Action Effective
Date, such options automatically would be cancelled without payment of any consideration
therefor; and
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Approve
that, with respect to the ESPP, after the current quarterly phase of the ESPP ending
on March 31, 2021, unless approved by Pineapple, no new phase of the ESPP would commence
prior to the effective time of the merger or until the merger agreement is terminated.
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The
full CSI board of directors discussed this recommendation and subsequently adopted these resolutions with respect to the Pineapple
transaction at a meeting on March 1, 2021. In addition, given the possibility that approval and consummation of the proposed transaction
under discussion with Lantronix could occur prior to the Pineapple merger, and that the proposed transaction with Lantronix also
would represent a change in control under the 2011 Plan, on April 27, 2021 the CSI board of directors adopted similar resolutions
with respect to the proposed Lantronix transaction as summarized under “Treatment of Outstanding Equity Awards.”
During
the period from February 16, 2021 through February 22, 2021, Lantronix participated in CSI management presentations and due diligence
conference calls.
During
the period from February 25, 2021 through March 1, 2021, the CSI board of directors held several special meetings focused primarily
on the Pineapple transaction. On March 1, 2021, the CSI board of directors approved the CSI-Pineapple merger agreement and CSI
and Pineapple entered into that agreement. On March 2, 2021, CSI issued a press release announcing the proposed Pineapple merger
transaction. In that press release, CSI announced that in conjunction with the merger, CSI intended to divest substantially all
its current operating and non-operating assets, including its E&S Segment, its S&S Segment, real estate holdings, and
cash and cash equivalents.
Beginning
February 12, 2021, counsel for CSI and Lantronix exchanged and negotiated the securities purchase agreement consistent with the
February 9, 2021 letter of intent.
On
March 2 and March 3, 2021, Lantronix and CSI held in-person due diligence meetings at CSI’s offices in Minnetonka, Minnesota.
On
March 5, 2021, the exclusivity period under the February 9, 2021 letter of intent expired. Prior to the expiration date, Lantronix
had proposed extending the date, but CSI responded that the parties should focus on negotiating and signing a definitive securities
purchase agreement.
Despite
the expiration of exclusivity, CSI and Lantronix then continued to pursue negotiating the E&S Segment transaction in a manner
consistent with the letter of intent. In accordance with the instructions of the CSI board of directors, Northland continued to
discuss a possible transaction with other potential buyers of the E&S Segment and CSI’s availability to discuss alternative
proposals for the E&S Segment. No clear alternative emerged, however, that CSI believed offered more value and certainty of
closing than contemplated by the ongoing discussions with Lantronix.
On
March 12, 2021, Lantronix and Northland held a call in which Lantronix relayed a new proposal to pay a portion of the purchase
price payable at closing of the transaction by Lantronix’s delivery of a promissory note to CSI (“seller note”).
On
March 14, 2021, CSI and Northland held a call to discuss Lantronix’s proposal to pay part of its purchase price with a seller
note. CSI expressed its desire to limit the amount of any seller note to less than $10 million and requested confirmation from
Lantronix that Lantronix would consider pursuing equity financing to repay the seller note within a reasonable timeframe after
closing of the purchase of the E&S Segment by Lantronix.
On
March 16, 2021, Lantronix and CSI held an international sales due diligence call.
Also
on March 16, 2021, Lantronix and Northland held a call in which Lantronix proposed payment terms for the transaction, including
the seller note in an amount of $9.5 million, upfront cash of $16.0 million, and a $7.0 million earnout.
On
March 17, 2021, CSI and Lantronix discussed certain details of the transaction, including UK employees, a former sales representative
issue, employment arrangements, and IT services to be provided under the transition services agreement.
Also
on March 17, 2021, the CSI special committee met. Messrs. Lacey and Fandrich and representatives of Ballard Spahr and Northland,
attended the meeting. CSI management discussed certain items that were covered in more detail at the subsequent March 19, 2021
meeting.
On
March 19, 2021, the CSI board of directors held a special meeting attended by Mr. Fandrich and Ms. Hlavka, and representatives
of Ballard Spahr and Northland. During the meeting, the CSI board of directors reviewed and discussed with Ballard Spahr and CSI
management drafts of the securities purchase agreement, transition services agreement and related schedules that had been circulated
prior to the meeting. Northland then provided an overview of certain terms of the draft securities purchase agreement, summarized
the transaction timeline and process, and discussed certain market and other financial information relating to the E&S Segment
and the proposed transaction. Representatives of Ballard Spahr reviewed the fiduciary duties of the CSI board of directors.
The
CSI board of directors discussed at length the factors supporting the proposed sale of the E&S Segment business and the potential
risks and challenges relating to the proposed sale of the E&S Segment business. The CSI board of directors directed CSI management,
Ballard Spahr and Northland to continue to negotiate and resolve open points in the definitive agreements for the sale of the
E&S Segment.
On
March 25, 2021, the CSI board of directors met to discuss the E&S Segment transaction and the status of the legal documentation
for such transaction. The CSI board of directors was advised that representatives of CSI and Lantronix continued to negotiate
the terms of the securities purchase agreement and the transition services agreement without reaching agreement.
On
April 8, 2021, CSI and Northland had an introductory call with the chief executive officer of Company B, a private company that
CSI viewed as a competitor of the E&S Segment business. At this time, CSI was not under exclusivity with Lantronix given the
expiration of the exclusivity period included in the February 9, 2021 letter of intent. In accordance with the instructions of
the CSI board of directors, Northland also continued to seek out other alternative purchasers that might be interested in
the E&S Segment.
On
April 9, 2021, the CSI board of directors held a special meeting attended by Mr. Fandrich and Ms. Hlavka and representatives
of Ballard Spahr and Northland. The CSI board of directors discussed the status of the transaction, potential liability
issues under the transition services agreement, financial terms of the transaction, and the seller note. The CSI board of
directors also considered Lantronix’s request for a 14-day extension of the exclusivity period included in the February
9, 2021 letter of intent. At this meeting, the CSI board of directors directed CSI management to inform Lantronix that as
conditions to the requested extension of the exclusivity period, the CSI board of directors would require that Lantronix
remove its request to finance a portion of its purchase price with a seller note, provide reasonable assurance that Lantronix
would have sufficient financing to pay the full cash purchase price at closing, and agree to CSI’s proposed terms for
the transition services agreement.
On
April 15, 2021, CSI management, in consultation with representatives of Ballard Spahr, determined that Lantronix had met CSI’s
stated conditions for extending exclusivity. Accordingly, CSI and Lantronix amended the exclusivity period of the February 9,
2021 letter of intent from April 15, 2021 to April 29, 2021. Also on April 15, 2021, CSI cancelled a planned follow-up call with
Company B.
Between
April 15, 2021 and April 27, 2021, representatives of Ballard Spahr and representatives of Lantronix and Lantronix’s legal
counsel, O’Melveny & Myers LLP, negotiated and exchanged drafts of the securities purchase agreement, transition services
agreement and related schedules and ancillary documents.
On
April 27, 2021, representatives of Ballard Spahr, on the one hand, and representatives of Lantronix and O’Melveny &
Myers LLP, on the other hand, finalized the form of the securities purchase agreement and transition services agreement.
Later
on April 27, 2021, the CSI board of directors held a special meeting. Also present were Mr. Fandrich and Ms. Hlavka of CSI
management and representatives of Ballard Spahr and Northland. At this meeting the CSI board of directors reviewed the history of
discussions with Lantronix and prospective acquirors other than Lantronix, including Company A, Company B and other potential
purchasers contacted to gauge potential interest in the E&S Segment business, noting that none of these discussions resulted in
receiving an indication of interest or offer to purchase the E&S Segment on terms that it considered to be competitive with
Lantronix’s offer. Northland reviewed with the CSI board of directors its financial analysis of the aggregate purchase price
of $32,027,566 (referred to as the “Aggregate Purchase Price”) provided for in the transaction, and rendered an oral
opinion, confirmed by delivery of a written opinion dated April 27, 2021, to the CSI board of directors to the effect that, as of
such date and based on and subject to various assumptions made, procedures followed, matters considered, limitations on the review
undertaken and qualifications, the Aggregate Purchase Price to be paid to CSI for the E&S Segment business pursuant to the
securities purchase agreement was fair, from a financial point of view, to CSI. Representatives of Northland were then excused from
the meeting. Representatives of Ballard Spahr then reviewed with the CSI board of directors its fiduciary duties with respect to the
E&S Sale Transaction, and the material terms of the draft securities purchase agreement.
At
the April 27, 2021 meeting, after discussion among the special committee and the CSI board of directors, the CSI board of directors
unanimously took the following actions: (i) determined that the securities purchase agreement and the transactions contemplated
thereby were fair to and in the best interests of CSI and its shareholders, (ii) approved, adopted and declared advisable the
securities purchase agreement and the transactions contemplated thereby, (iii) directed that the approval of transactions contemplated
by the securities purchase agreement be submitted to a vote at a meeting of CSI’s shareholders and (iv) recommended the
adoption of the securities purchase agreement and the approval of the transactions contemplated by CSI’s shareholders at
the special meeting, and instructed CSI management to sign and deliver the securities purchase agreement on behalf of CSI. The
CSI board of directors, upon recommendation from the CSI compensation committee, also adopted resolutions to the effect that,
upon the closing of the E&S Sale Transaction, all outstanding equity awards under the 2011 Plan would accelerate, the outstanding
in-the-money stock options would be settled by exchanging the options for a “net” number of shares pursuant to the
2011 Plan, and that these net shares would be issued effective as of the date of closing, and the out-of-the-money stock options
would be cancelled.
After
conclusion of the April 27, 2021 meeting, CSI and Lantronix exchanged signature pages, which were held in escrow until the evening
of April 28, 2021, when Lantronix confirmed to CSI that Lantronix had secured two commitment letters for the financing needed
to complete the E&S Sale Transaction. On April 28, 2021, each of CSI and Lantronix and CSI released their signature pages
to form a fully executed securities purchase agreement.
On
April 29, 2021, prior to the opening of the stock markets, both CSI and Lantronix issued press releases announcing the securities
purchase agreement and the E&S Sale Transaction.
Past
Contacts, Transactions or Negotiations
Other
than as described under “Background of the E&S Sale Transaction” above, we and Lantronix have not had any negotiations,
transactions or material contacts during the past two years, and, other than as described therein and in the securities purchase
agreement, there are no present or proposed material agreements, arrangements, understandings or relationships between our executive
officers or directors and Lantronix, or its executive officers or directors.
Reasons
for the E&S Sale Transaction and Recommendation of the CSI Board of Directors
In
evaluating the E&S Sale Transaction, the CSI board of directors consulted with CSI’s management, legal counsel and financial
advisor. In reaching its decision to approve the E&S Sale Transaction, and to recommend that our shareholders vote to approve
the E&S Sale Transaction, the CSI board of directors considered certain factors as described below.
The
CSI board of directors discussed the fact that, prior to and throughout the course of its meetings and discussions leading
up to the publicly announced merger with Pineapple, the CSI board of directors specifically contemplated dispositions of
CSI’s current operations, and the CSI board of directors considered a number of factors regarding whether the proposed
E&S Sale Transaction for the business of the E&S Segment (which comprises substantially all of the assets of CSI),
was in the best interests of CSI’s current shareholders, including, but not limited to, the following
factors:
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the
consideration we receive in the E&S Sale Transaction will enable CSI to deliver an
attractive return on the CSI common stock, particularly considering:
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the
historically low trading volume and resulting lack of liquidity in the CSI common stock,
as well as the lack of dividends since June 2020 as we have reserved cash for operating
and potential strategic growth activities;
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that
because the E&S Sale Transaction will not alter the rights, privileges or nature
of the issued and outstanding shares of our common stock, the E&S Sale Transaction
will allow CSI shareholders the opportunity to receive an additional return from their
continuing ownership of CSI common stock through CSI’s monetization of its other
assets, such as the S&S Segment business and real estate holdings, and through the
proposed CSI-Pineapple merger;
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the
provisions of the merger agreement with Pineapple, which provides a framework that enables
CSI to sell the business of the E&S Segment to Lantronix and distribute the net proceeds
to the CSI shareholders prior to the proposed Pineapple merger;
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the
consideration we receive in the E&S Sale Transaction will provide us with substantial
cash at closing, which we intend to combine with our other available cash resources to
distribute to our shareholders a cash dividend of $3.50 per share or approximately $35.0
million, consistent with the strategy to monetize our assets for the benefit of the CSI
shareholders existing prior to the effective date of the proposed merger with Pineapple;
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the
absence of any other, bona fide expression of interest in acquiring CSI as a whole, either prior to or after the
announcement of the E&S Sale Transaction, that would allow us to deliver a comparably attractive return to the CSI
shareholders as the E&S Sale Transaction giving consideration to the opportunities for future attractive returns
to CSI shareholders from the net proceeds of CSI’s other businesses and property;
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the
timing of the signing of the securities purchase agreement for the E&S Sale Transaction
in relation to the effective time of the proposed merger with Pineapple and, in particular,
the fact that CSI shareholders will receive 100% of the net proceeds from the E&S
Sale Transaction given the fact the securities purchase agreement was signed prior to
the effective time of the Pineapple merger rather than 90% of the net proceeds from the
E&S Sale Transaction if the securities purchase agreement were signed after the effective
time of the Pineapple merger under the provisions of the merger agreement with Pineapple
and the agreement governing the CVRs;
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the
CSI board of directors believed that the E&S Sale Transaction consideration, consisting
of approximately $25.0 million base purchase price plus up to $7.0 million that may become
payable to CSI upon achievement of the earnout, was the best price reasonably attainable
for CSI shareholders after considering:
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the
absence of any other, bona fide expression of interest in acquiring the E&S
Segment on terms competitive with the proposal made by Lantronix, despite CSI publicly
announcing its strategy to dispose of substantially all CSI’s operating and non-operating
assets in connection with the announcement of the proposed merger with Pineapple on March
2, 2021;
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the
improvement in the E&S Sale Transaction consideration proposed by Lantronix from
$24.75 million in its revised preliminary non-binding letter of intent dated December
29, 2020 to approximately $25.0 plus the potential $7.0 million earnout, as well as the
fact that CSI negotiated for improved payment terms by eliminating Lantronix’s
proposed seller note in favor of an all-cash transaction;
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the
CSI board of directors’ belief, based on the nature of the negotiations, that the
E&S Sale Transaction consideration is the highest amount that Lantronix was willing
to pay and that the terms and conditions of the securities purchase agreement were, in
the CSI board of directors’ view, the most favorable to us and our shareholders
to which Lantronix was willing to agree;
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the
E&S Sale Transaction consideration is payable in cash and the closing of the E&S
Sale Transaction is not subject to any financing contingency, which provides greater
certainty of value and liquidity to our shareholders;
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the
relative uncertainty of the value that we may receive from the continued operation of
the E&S Segment business as part of CSI in light of the meaningful risks involved
in that alternative as compared to the certainty of the consideration CSI will receive
in the E&S Sale Transaction;
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the
CSI board of directors believed that the potential $7.0 million that may become payable
to CSI upon achievement of the earnout was the best alternative reasonably attainable
for our shareholders to derive additional value from the E&S Segment for our shareholders
after considering:
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the
two successive 180-day periods for determining the earnout are relatively short, the
periods fall within 2021 and 2022 of the five-year strategic plan for the E&S Segment,
and the revenue targets for the business of the E&S Companies are consistent with
the projected financial results reflected in the five-year strategic plan, which the
CSI board of directors believed reduced the risk that the earnout would not be achieved
as compared to a longer multi-year earnout period or periods at the end of the five-year
projection period;
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a
meaningful portion of the expected revenue in the earnout period relates to customer
opportunities developed and cultivated by the CSI team and already included in the E&S
Segment business pipeline;
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the
revenue targets for the business of the E&S Companies are consistent with the projected
financial results reflected for 2021 and 2022 in the five-year strategic plan, which
the CSI board of directors believed was a reasonable allocation of risk relating to future
revenue achievement as between CSI and Lantronix;
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the
structure of the earnout with two performance periods and the sliding scale method of
calculating the earnout further reduced the risk that CSI would not receive any additional
purchase price in respect of the earnout;
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after
a review of the current and historical financial condition of the E&S Segment, its
results of operations, prospects, business strategy, management team, competitive position,
and the E&S Segment industry and the industries in which the E&S Segment customers
operate, the CSI board of directors believed that the E&S Sale Transaction would
enable the CSI board of directors to deliver a more favorable and attractive return to
the CSI shareholders with the net proceeds at closing of the E&S Sale Transaction
(including the opportunity for additional future returns to CSI’s shareholders
through the earnout) than the potential value that might have resulted from possible
alternatives to the E&S Sale Transaction, including continued operation of the E&S
Segment business;
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the
CSI board of directors’ assessment over the last several years of the challenges
and risks that we have faced, and would likely continue to face, if we continued a strategy
of operating the E&S Segment business, including the challenges and risks that the
CSI board of directors’ identified in its review of the five-year strategic plan
for the E&S Segment approved on December 8, 2020, including:
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despite
significant effort and investment, CSI and the E&S Segment have not achieved many
of their business and financial objectives during the past several years;
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the
fact that many of the E&S Segment’s existing products are legacy products that
are not expected to produce significant future revenue growth and may contribute a declining
amount of revenues in future years;
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the
fact that the financial results of the E&S Segment and CSI as a whole could be adversely
affected if one or more of the E&S Segment’s larger customers substantially
reduces its orders;
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the
size of the E&S Segment business and its position in its primary markets, the stiff
competition with respect to price and other factors faced by the E&S Segment business,
including competition from larger, better-capitalized competitors that could engage in
discounting to retain market share;
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the
fact that substantial costs of remaining a public company, the level of corporate overhead
expense and risk as a public company given CSI’s relatively small revenues and
profits, combined with our investors’ expectations, which materially constrain
our ability to invest significant additional amounts to accelerate new product development
or to acquire new products for the E&S Segment without adversely affecting our profitability;
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the
expense and risk associated with any acquisition strategy CSI has pursued and may pursue
to achieve sustainable growth and profitability for the E&S Segment and to spread
public company costs over substantially greater revenues, including lack of attractive
acquisition candidates, substantial expense, risk that transactions will not be completed
with corresponding expense incurred, risk that the acquisitions will not successfully
deliver the growth and profitability we expect, integration risk and other risks;
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CSI’s
ability to compete and increase revenues for the E&S Segment requires continual focus
on delivering high-quality, innovative and competitively priced products and services
and the regular introduction of new products and services that meet evolving customer
requirements, but given the challenges and risks associated with our product development
efforts, we cannot guarantee our ability to commercialize new E&S Segment products
in a timely manner and generate substantial revenues from these products;
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the
view of the CSI board of directors starting in December 2020 that continued independent operation of the E&S Segment
likely would require the development and execution of a transformative plan in order to offset the limited prospects for
significant growth in the E&S Segment (and, therefore, CSI as a whole) and to address the challenges we historically have
experienced, the fact that any transformative plan would require significant changes in business strategy and significant
additional investment in the E&S Segment, lead to operating losses for one or more years, reduce our cash reserves, and
the other risks, challenges and uncertainties that would be associated with a transformative plan, including the risk that it
would not overcome our current and future challenges;
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the
business of the E&S Segment would be better served and provided more substantial
long-term growth opportunities in Lantronix, which can leverage synergies, expand into
adjacent markets, add scale, and broaden its existing product lines, which may benefit
CSI in the short-term through the potential to achieve the earnout;
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the
structure of the E&S Sale Transaction is expected, subject to final analysis, to
allow us to use the net operating loss carryforwards for U.S. federal income tax purposes
to offset a substantial part of the gain recognized in the E&S Sale Transaction;
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the
securities purchase agreement permits, subject to certain limitations, CSI to be contacted
regarding, and potentially consider, other proposals to purchase the business of the
E&S Segment that may represent a “superior proposal” to the terms offered
by Lantronix pursuant to the securities purchase agreement; and
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the
opinion of Northland, dated April 27, 2021, to the CSI board of directors as to the fairness, from a financial point of view and
as of the date of the opinion, to CSI of the Aggregate Purchase Price to be paid to CSI for the E&S Segment business pursuant
to the securities purchase agreement, which opinion was based on and subject to various assumptions made, procedures followed,
matters considered, limitations on the review undertaken and qualifications
as more fully described below in the section entitled “Opinion of CSI’s
Financial Advisor.”
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The
CSI board also considered potential drawbacks and risks relating to the E&S Sale Transaction, including, but not limited to:
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up
to $7.0 million of the purchase price is structured in the form of an earnout based on
revenues generated by Lantronix in the 360 days following closing, and there is no guaranty
that sufficient revenues will be generated for the earnout to become payable to us;
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the
restrictions placed on our ability to actively solicit competing bids, and the insistence
by Lantronix as a condition to its offer that CSI would be obligated to pay a termination
fee of $875,000 under certain circumstances, and that the potential payment of this fee
might deter other potential acquirors of the E&S Segment;
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that
the transaction may not close in the expected time period or any event, change or other
circumstance that could give rise to the termination of the securities purchase agreement
and termination of the E&S Sale Transaction;
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that
we cannot guarantee that the net proceeds from the E&S Sale Transaction or the net
proceeds from the planned divestiture of any of our remaining assets (such as our S&S
Segment and headquarters) will result in any specific dividend amount to CSI shareholders;
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our
ability to obtain shareholder approval for the E&S Sale Transaction, which requires
approval by the holders of at least two-thirds of our common stock outstanding and entitled
to vote on the E&S Sale Proposal;
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conditions
to the closing of the E&S Sale Transaction may not be satisfied or the sale may involve
unexpected costs, liabilities or delays;
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conditions
to the closing of the previously announced CSI-Pineapple merger may not be satisfied
or the merger may involve unexpected costs, liabilities or delays;
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risks
that the E&S Sale Transaction will disrupt current CSI plans and operations or that
the business or stock price of CSI may suffer as a result of uncertainty surrounding
the E&S Sale Transaction;
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the
outcome of any legal proceedings related to the E&S Sale Transaction or the CSI-Pineapple
merger; and
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the
fact that CSI cannot yet determine the exact amount and timing of any pre-CSI-Pineapple
merger cash dividends or the value of the CVRs that CSI intends to distribute to its
shareholders immediately prior to the effective date of the CSI-Pineapple merger.
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After
taking into account the material factors relating to the securities purchase agreement and the E&S Sale Transaction, including
those factors set forth above, the CSI board of directors unanimously concluded that the benefits of the securities purchase agreement
and the E&S Sale Transaction outweigh the risks and that the securities purchase agreement and the E&S Sale Transaction
are advisable and in the best interests of CSI and our shareholders. The CSI board of directors did not assign relative weights
to the material factors it considered. In addition, the CSI board of directors did not reach any specific conclusion on each of
the material factors considered, but conducted an overall analysis of all of the material factors. Individual members of the CSI
board of directors may have given different weights to different factors.
For
the reasons set forth above, the CSI board of directors has unanimously determined that the securities purchase agreement and
the E&S Sale Transaction are advisable and in the best interests of our company and our shareholders, and unanimously recommends
that shareholders vote “FOR” the E&S Sale Proposal.
Opinion
of CSI’s Financial Advisor
CSI
has engaged Northland as financial advisor to CSI in connection with the proposed E&S Sale Transaction. In connection with
Northland’s engagement, the CSI board of directors requested that Northland evaluate the fairness, from a financial point
of view, to CSI of the Aggregate Purchase Price to be paid to CSI for the E&S Segment business pursuant to the securities
purchase agreement. At a meeting of the CSI board of directors held on April 27, 2021 to evaluate the proposed E&S Sale Transaction,
Northland rendered an oral opinion, confirmed by delivery of a written opinion dated April 27, 2021, to the CSI board of directors
to the effect that, as of that date and based on and subject to various assumptions made, procedures followed, matters considered,
limitations on the review undertaken and qualifications, the Aggregate Purchase Price to be paid to CSI for the E&S Segment
business pursuant to the securities purchase agreement was fair, from a financial point of view, to CSI.
The
full text of Northland’s written opinion, dated April 27, 2021, which describes the assumptions made, procedures followed,
matters considered, limitations on the review undertaken and qualifications, is attached as Appendix B to this proxy statement
and is incorporated herein by reference. The description of Northland’s opinion set forth below is qualified in its entirety
by reference to the full text of Northland’s opinion. Northland’s opinion was directed to the CSI board of directors
(in its capacity as such) in connection with its evaluation of the Aggregate Purchase Price from a financial point of view to
CSI and did not address any other terms, aspects or implications of the E&S Sale Transaction. Northland was not requested
to opine as to, and its opinion did not address, the basic business decision of CSI to proceed with or effect the E&S Sale
Transaction. Northland expressed no opinion or view as to the relative merits of the E&S Sale Transaction as compared to any
alternative business strategies or transactions that might exist for the E&S Segment business or CSI or the effect of any
other transaction in which CSI or TNI and TN Europe might engage. Northland’s opinion is not intended to be and does not
constitute a recommendation to the CSI board of directors or to any shareholder as to how to act or vote with respect to the E&S
Sale Transaction or any other matter.
In
arriving at its opinion, Northland:
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reviewed
the financial terms of the execution version, provided to Northland on April 27, 2021,
of the securities purchase agreement;
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reviewed
certain business, financial and other information and data relating to the E&S Segment
business publicly available or made available to Northland from internal records of CSI;
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reviewed
certain internal financial projections and estimates relating to the E&S Segment
business furnished to Northland by the management of CSI;
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conducted
discussions with members of the senior management of CSI with respect to the E&S
Segment business and its prospects;
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compared
the financial performance of the E&S Segment business with that of certain publicly
traded companies Northland deemed relevant in evaluating the E&S Segment business;
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reviewed
the financial terms, to the extent publicly available, of certain acquisition transactions
Northland deemed relevant in evaluating the E&S Sale Transaction; and
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conducted
a discounted cash flow analysis of the E&S Segment business based on the financial
projections and estimates referred to above provided by the management of CSI.
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In
addition, Northland conducted such other analyses, examinations and inquiries and considered such other financial, economic and
market criteria as it deemed necessary and appropriate in arriving at its opinion.
In
conducting its review and in rendering its opinion, Northland relied upon and assumed, without independent verification, the accuracy
and completeness of all financial, accounting and other information furnished or otherwise made available to Northland, discussed
with or reviewed by Northland, or publicly available, and did not assume any responsibility with respect to any such information.
Northland also relied upon the assurances of the management of CSI that such management was not aware of any information or facts
that would make the information provided to Northland incomplete or misleading. In addition, the management of CSI advised Northland,
and Northland assumed, that the financial projections and estimates reviewed by Northland were reasonably prepared in good faith
on bases reflecting the best currently available estimates and judgments of such management as to, and were an appropriate basis
upon which to evaluate, the future financial results and condition of the E&S Segment business and the other matters covered
thereby. Northland also assumed that there was no change in the assets, liabilities, financial condition, results of operations,
cash flows or prospects of the E&S Segment business since the dates of the most recent financial statements and other information,
financial or otherwise, provided to Northland that would be meaningful in any respect to its analyses or opinion. For purposes
of Northland’s analyses and opinion, Northland further assumed, at the direction of CSI and consistent with the financial
projections and estimates provided by the management of CSI, that the full Earnout Amount will be received. Northland expressed
no opinion or view with respect to any projections, estimates or other financial information provided to or reviewed by Northland
or the assumptions on which they were based.
Northland
relied upon the assessments of the management of CSI as to, among other things, (i) the potential impact on the E&S Segment
business of macroeconomic, geopolitical, market, competitive and other conditions, trends and developments in and prospects for,
and governmental, regulatory and legislative matters relating to or otherwise affecting, the electronics and software industry
and the internet connectivity products sector thereof, (ii) implications for the E&S Segment business of the global COVID-19
pandemic, and (iii) the existing and future agreements and other arrangements involving, and ability to attract, retain and/or
replace, key employees, customers, manufacturers, suppliers distributors, resellers, integrators, and other commercial relationships
of the E&S Segment business. Northland assumed that there would be no developments with respect to any such matters, or any
adjustments to or allocations of the Aggregate Purchase Price, that would be meaningful in any respect to its analyses or opinion.
Northland
assumed that the executed securities purchase agreement would be substantially similar to the execution version reviewed by Northland,
without modification of material terms or conditions. Northland also assumed that the representations and warranties contained
in the securities purchase agreement were true and correct and that each party will perform all of the covenants and agreements
required to be performed by it under the securities purchase agreement. Northland further assumed that the E&S Sale Transaction
will be consummated in accordance with its terms and in compliance with all applicable laws, documents and other requirements,
without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the
necessary governmental, regulatory or third party approvals, consents, releases, waivers and agreements for the E&S Sale Transaction
or otherwise, no delay, limitation, restriction, condition or other action, including any divestiture or other requirements, amendments
or modifications, will be imposed or occur that would be meaningful in any respect to Northland’s analyses or opinion.
Northland
did not perform any appraisals or evaluations of any specific assets or liabilities (fixed, contingent, accrued, derivative, off-balance
sheet or otherwise) of the E&S Segment business, CSI or its affiliates or any other business or entity and Northland was not
furnished with any such appraisals or evaluations, and Northland made no physical inspection of the property or assets of the
E&S Segment business, CSI or its affiliates or any other business or entity. Northland did not evaluate the solvency, or liquidation
or fair value, of the E&S Segment business, CSI or its affiliates or any other business or entity under any state, federal
or other applicable laws relating to bankruptcy, insolvency or similar matters. Northland also did not undertake any independent
analysis of any pending or threatened litigation, governmental proceedings or investigations, possible unasserted claims or other
contingent liabilities involving the E&S Segment business, CSI or its affiliates or any other business or entity or to which
they may be subject and Northland made no assumption concerning, and its opinion did not consider, the potential impact of any
claims, outcomes, damages, costs, recoveries or other aspects relating to any such matters.
Northland’s
opinion was necessarily based upon the financial, market, economic and other conditions that existed on, and the information made
available to Northland as of, the date of such opinion. Subsequent developments may affect Northland’s opinion and Northland
disclaimed and disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting its
opinion which may come or be brought to its attention after the date of its opinion. Northland did not undertake to reaffirm or
revise its opinion or otherwise comment upon any events occurring after the date of its opinion and does not have any obligation
to update, revise or reaffirm its opinion. As the CSI board of directors was aware, the credit, financial and stock markets have
from time to time experienced unusual volatility and Northland expressed no opinion or view as to any potential effects of such
volatility on the E&S Segment business, CSI or its affiliates, Lantronix or the E&S Sale Transaction and its opinion
did not purport to address potential developments in any such markets.
Northland’s
opinion addressed only the fairness, from a financial point of view and as of the date of such opinion, to CSI of the Aggregate
Purchase Price (to the extent expressly set forth therein) and did not address any other terms, aspects or implications of the
E&S Sale Transaction, including, without limitation, the form or structure of the Aggregate Purchase Price or the E&S
Sale Transaction, any adjustments to or allocations of the Aggregate Purchase Price, or any terms, aspects or implications of
any transition services agreement, indemnification arrangements or any other agreement, arrangement or understanding to be entered
into in connection with or contemplated by the E&S Sale Transaction or otherwise. Northland was not asked to, and its opinion
did not, address the fairness, financial or otherwise, of any consideration to the holders of any class of securities, creditors
or other constituencies of CSI or any other party. Northland expressed no opinion or view as to the amount, nature or fairness
of the consideration or compensation to be received in or as a result of the E&S Sale Transaction by officers, directors or
employees of CSI, or any class of such persons, relative to or in comparison with the Aggregate Purchase Price or otherwise. Northland
also expressed no opinion or view as to the prices at which CSI common stock may trade, or the prices at which the Purchased Securities
may be transferable, at any time.
Northland
was not requested to opine as to, and its opinion did not address, the basic business decision of CSI to proceed with or effect
the E&S Sale Transaction. Northland expressed no opinion or view as to the relative merits of the E&S Sale Transaction
as compared to any alternative business strategies or transactions that might exist for the E&S Segment business or CSI or
the effect of any other transaction in which CSI or TNI or TN Europe might engage. Northland did not render any financial, legal,
accounting or other advice and Northland relied on the assumptions of the management of CSI as to all accounting, tax, regulatory,
legal and similar matters with respect to the E&S Segment business and the securities purchase agreement, including, without
limitation, as to tax or other consequences of the E&S Sale Transaction or otherwise or changes in, or the impact of, accounting
standards or tax and other laws, regulations and governmental and legislative policies affecting the E&S Segment business,
CSI or its affiliates or the E&S Sale Transaction and Northland assumed that CSI obtained advice as to such matters from appropriate
professionals. The issuance of Northland’s opinion was approved by the Northland Fairness Opinion Committee.
In
accordance with customary investment banking practice, Northland employed generally accepted financial analyses in reaching its
opinion. The preparation of analyses and an opinion is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and
is not necessarily susceptible to partial analysis or summary description. The summary set forth below does not contain a complete
description of the analyses performed by Northland, but does summarize the material analyses performed by Northland in rendering
its opinion. Northland believes that its analyses and the summary set forth below must be considered as a whole and in context
and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors
included in its analyses, would create an incomplete view of the processes underlying Northland’s financial analyses and
opinion. In arriving at its opinion, Northland considered the results of all of its analyses and did not attribute any particular
weight to any factor or analysis. Instead, Northland made its determination as to fairness on the basis of its experience and
financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred
to in the summary below is not meant to indicate that this analysis was given greater weight than any other analysis. In addition,
the reference ranges resulting from any particular analysis described below should not be taken to be Northland’s view of
the actual value of the E&S Segment business.
No
company, business or transaction used in the analyses described below is identical or directly comparable to the E&S Segment
business or the E&S Sale Transaction. Accordingly, an evaluation of these analyses or methodologies is not mathematical; rather,
it involves complex considerations and judgments concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies, businesses or transactions reviewed or the results from
any particular analysis or methodology.
Northland
performed its analyses solely for purposes of providing its opinion to the CSI board of directors. In performing its analyses,
Northland made numerous assumptions with respect to industry performance, general business and economic conditions and other matters.
Certain of the analyses performed by Northland are based upon forecasts of future results furnished to Northland, which are not
necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These
forecasts are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond
the control of the parties to the E&S Sale Transaction or their respective advisors. Northland does not assume responsibility
if future results are materially different from forecasted results.
The
Aggregate Purchase Price was determined through arm’s-length negotiations between CSI and Lantronix and was approved by
the CSI board of directors. Northland did not recommend any specific consideration to CSI or the CSI board of directors or suggest
that any specific consideration constituted the only appropriate consideration for the E&S Sale Transaction, including but
not limited to, the Aggregate Purchase Price. In addition, Northland’s opinion and financial analyses were one of many factors
taken into consideration by the CSI board of directors in deciding to approve the E&S Sale Transaction.
Financial
Analyses
The
summary of the financial analyses described below under this heading “—Financial Analyses” is a summary
of the material financial analyses reviewed with the CSI board of directors and performed by Northland in connection with its
opinion, dated April 27, 2021. The summary set forth below does not purport to be a complete description of the financial analyses
performed by, and underlying the opinion of, Northland, nor does the order of the financial analyses described represent the relative
importance or weight given to those financial analyses by Northland. Certain financial analyses summarized below include information
presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text
of each summary as the tables alone do not constitute a complete description of the financial analyses. Considering the data in
the tables below without considering the full narrative description of the financial analyses, including the methodologies and
assumptions underlying the financial analyses, could create a misleading or incomplete view of such financial analyses. Future
results may be different from those described and such differences may be material.
Selected
Public Companies Analysis. Northland performed a selected public companies analysis of the E&S Segment business in which
Northland reviewed certain financial information relating to the E&S Segment business and certain financial and stock market
information for the following 12 selected publicly traded technology hardware or communications equipment companies with market
capitalizations of up to $300 million that Northland considered generally relevant for purposes of analysis, consisting of seven
such companies for which forward-looking estimates from Wall Street research analysts were available, collectively referred to
in this subsection as the “selected companies with forward-looking estimates,” and five such companies for which forward-looking
estimates from Wall Street research analysts were unavailable, collectively referred to in this subsection as the “selected
companies without forward-looking estimates” and, together with the selected companies with forward-looking estimates, the
“selected companies:”
Selected
Companies with Forward-Looking Estimates
|
Selected
Companies without Forward-Looking Estimates
|
● Applied
Optoelectronics, Inc.
|
● BK
Technologies Corporation
|
● Daktronics,
Inc.
|
● Richardson
Electronics, Ltd.
|
● KVH
Industries, Inc.
|
● The
LGL Group, Inc.
|
● PCTEL,
Inc.
|
● UTStarcom
Holdings Corp.
|
● RADCOM
Ltd.
|
● Wayside
Technology Group, Inc.
|
● RF
Industries, Ltd.
|
|
● TESSCO
Technologies Incorporated
|
|
Northland
reviewed, among other information and to the extent publicly available and meaningful, enterprise values of the selected companies,
calculated as implied equity values based on closing stock prices on April 26, 2021 plus total debt, preferred equity and non-controlling
interests (as applicable) and less cash and cash equivalents, as multiples of such companies’ (i) most recent publicly reported
last 12 months, referred to in this subsection as “LTM,” revenue and calendar years 2021 and 2022 estimated revenue,
and (ii) LTM earnings before interest, taxes, depreciation and amortization, referred to as “EBITDA,” adjusted for
stock-based compensation expense and one-time non-recurring items, referred to as “adjusted EBITDA,” and calendar
years 2021 and 2022 estimated EBITDA. Financial data of the selected companies were based on publicly available Wall Street research
analysts’ estimates, public filings and other publicly available information. Financial data for the E&S Segment business
was based on financial projections and estimates of CSI’s management and public filings.
The
overall low to high, and first and third quartile, LTM revenue and calendar years 2021 and 2022 estimated revenue multiples and
LTM adjusted EBITDA and calendar years 2021 and 2022 estimated EBITDA multiples observed for the selected companies with forward-looking
estimates were as follows:
|
o
|
LTM
revenue multiples: low to high of 0.2x to 1.7x, first and third quartiles of 0.8x and
1.5x, respectively (with a mean of 1.1x and a median of 1.3x)
|
|
o
|
Calendar
year 2021 estimated revenue multiples: low to high of 0.3x to 1.6x, first and third quartiles
of 0.7x and 1.4x, respectively (with a mean of 1.0x and a median of 1.1x)
|
|
o
|
Calendar
year 2022 estimated revenue multiples: low to high of 0.2x to 1.5x, first and third quartiles
of 0.5x and 1.2x, respectively (with a mean of 0.9x and a median of 1.1x)
|
|
o
|
LTM
adjusted EBITDA multiples: low to high of 6.7x to 10.2x, first and third quartiles of
7.6x and 9.3x, respectively (with a mean and median of 8.4x)
|
|
o
|
Calendar
year 2021 estimated EBITDA multiples: low to high of 6.7x to 26.7x, first and third quartiles
of 10.5x and 17.4x, respectively (with a mean of 14.9x and a median of 13.0x)
|
|
o
|
Calendar
year 2022 estimated EBITDA multiples: low to high of 6.1x to 18.8x, first and third quartiles
of 7.8x and 13.1x, respectively (with a mean of 11.1x and a median of 9.8x)
|
The
overall low to high, and first and third quartile, LTM revenue multiples and LTM adjusted EBITDA multiples observed for the selected
companies without forward-looking estimates were as follows:
|
●
|
LTM
revenue multiples: low to high of 0.3x to 1.5x, first and third quartiles of 0.4x and
1.4x, respectively (with a mean of 0.9x and a median of 1.2x)
|
|
●
|
LTM
adjusted EBITDA multiples: low to high of 11.6x to 22.6x, first and third quartiles of
12.8x and 17.5x, respectively (with a mean of 15.8x and a median of 14.5x)
|
Northland
then applied the first and third quartiles of the revenue, adjusted EBITDA and EBITDA multiples described above derived from
the selected companies with forward-looking estimates and derived from the selected companies without forward-looking
estimates, as applicable, to the LTM revenue and adjusted EBITDA, and calendar year 2021 and calendar year 2022 estimated
revenue and adjusted EBITDA, as the case may be, of the E&S Segment business. This analysis indicated the following
approximate implied aggregate enterprise value reference ranges for the E&S Segment business, as compared to the
Aggregate Purchase Price:
Selected
Companies with Forward-Looking Estimates
|
|
Aggregate
Purchase Price
|
Implied
Aggregate Enterprise Value Reference Ranges Based on:
|
|
$32,027,566
|
LTM Revenue
|
|
CY2021E Revenue
|
|
CY2022E Revenue
|
|
$28.1
million – $50.6 million
|
|
$27.2
million – $54.4 million
|
|
$23.2
million – $54.0 million
|
|
LTM Adjusted EBITDA
|
|
CY2021E Adjusted EBITDA
|
|
CY2022E Adjusted EBITDA
|
|
$6.3
million – $7.8 million
|
|
$29.1
million – $48.4 million
|
|
$32.8
million – $55.3 million
|
|
Selected
Companies without Forward-Looking Estimates
|
|
Implied
Aggregate Enterprise Value Reference Ranges Based on:
|
|
LTM Revenue
|
|
LTM Adjusted EBITDA
|
|
$14.4
million – $47.1 million
|
|
$10.7
million – $14.6 million
|
|
|
|
|
|
|
|
|
|
|
Selected
Precedent Transactions Analysis. Using publicly available information, Northland reviewed financial data relating
to the following 20 selected transactions that Northland considered generally relevant for purposes of analysis as transactions
that closed during the three-year period prior to April 26, 2021 involving target companies with operations in the technology
hardware or communications equipment industry and enterprise values of $20 million to $125 million, collectively referred to in
this subsection as the “selected precedent transactions:”
Closed
|
Acquiror
|
Target
|
● December
2020
|
● Securitas
AB
|
● FE
Moran Security Solutions
|
● July
2020
|
● Standex
International Corporation
|
● Renco
Electronics, Inc.
|
● June
2020
|
● Motorola
Solutions, Inc.
|
● IndigoVision
Group plc
|
● January
2020
|
● Lantronix,
Inc.
|
● Intrinsyc
Technologies Corporation
|
● December
2019
|
● QinetiQ
Group plc
|
● Manufacturing
Techniques, Inc.
|
● July
2019
|
● Services
Volex plc
|
● Servatron,
Inc.
|
● July
2019
|
● Astronics
Corporation
|
● Freedom
Communication Technologies, Inc.
|
● July
2019
|
● Casa
Systems, Inc.
|
● NetComm
Wireless Limited
|
● May
2019
|
● MSA
Safety Incorporated
|
● Sierra
Monitor Corporation
|
● January
2019
|
● AGC
Networks Pte. Limited
|
● Black
Box Corporation
|
● December
2018
|
● Reliance
Industries Limited
|
● Radisys
Corporation
|
● November
2018
|
● The
Vitec Group plc
|
● AMIMON,
Inc.
|
● November
2018
|
● SMTC
Corporation
|
● MC
Test Service, Inc.
|
● October
2018
|
● Standex
International Corporation
|
● Agile
Magnetics, Inc.
|
● September
2018
|
● Adesto
Technologies Corporation
|
● Echelon
Corporation
|
● September
2018
|
● Sangoma
Technologies US Inc.
|
● Digium,
Inc.
|
● September
2018
|
● II-VI
Incorporated
|
● CoAdna
Holdings, Inc.
|
● August
2018
|
● Ribbon
Communications Inc.
|
● Edgewater
Networks Inc.
|
● June
2018
|
● SMART
Global Holdings, Inc.
|
● Penguin
Computing, Inc.
|
● April
2018
|
● TT
Electronics plc
|
● Stadium
Group plc
|
Northland
reviewed transaction values in the selected precedent transactions, based on the consideration paid in such transactions, as
multiples of the target company’s (i) LTM revenue and next 12 months, referred to as “NTM,” estimated
revenue available as of the closing date of the relevant transaction, and (ii) LTM adjusted EBITDA and NTM estimated EBITDA
available as of the closing date of the relevant transaction. Financial data of the selected precedent transactions were
based on publicly available Wall Street research analysts’ estimates and public filings. Financial data of the E&S
Segment business was based on financial projections and estimates of CSI’s management and public filings.
The
overall low to high, and first and third quartile, LTM revenue and NTM estimated revenue multiples and LTM adjusted EBITDA
and NTM estimated EBITDA multiples observed for the selected precedent transactions were as follows:
|
o
|
LTM
revenue multiples: low to high of 0.1x to 3.0x, first and third quartiles of 0.7x and
1.6x, respectively (with a mean of 1.2x and a median of 0.9x)
|
|
o
|
NTM
estimated revenue multiples: low to high of 0.7x to 1.0x, first and third quartiles of
0.8x and 1.0x, respectively (with a mean of 0.9x and a median of 1.0x)
|
|
o
|
LTM
adjusted EBITDA multiples: low to high of 4.3x to 58.6x, first and third quartiles of 10.6x and
26.2x, respectively (with a mean of 21.6x and a median of 11.8x)
|
|
o
|
NTM
estimated EBITDA multiples: low to high of 9.3x to 13.9x, first and third quartiles of
9.5x and 11.1x, respectively (with a mean of 10.7x and a median of 9.8x)
|
Northland
then applied the first and third quartiles of the LTM revenue and NTM estimated revenue multiples described above derived
from the selected precedent transactions to the calendar year 2020 (LTM) revenue and the calendar year 2021 (NTM) estimated
revenue of the E&S Segment business, respectively, and applied the first and third quartiles of the LTM adjusted EBITDA
and NTM estimated EBITDA multiples described above derived from the selected precedent transactions to the calendar year 2020
(LTM) adjusted EBITDA and calendar year 2021 (NTM) estimated adjusted EBITDA of the E&S Segment business, respectively.
This analysis indicated the following approximate implied aggregate enterprise value reference ranges for the E&S Segment
business, as compared to the Aggregate Purchase Price:
Implied
Aggregate Enterprise Value Reference Ranges Based on:
|
|
Aggregate
Purchase Price
|
LTM Revenue
|
|
NTM Estimated Revenue
|
|
|
$25.7
million – $54.6 million
|
|
$30.0
million – $39.4 million
|
|
|
|
|
$32,027,566
|
LTM
Adjusted EBITDA
|
|
NTM
Estimated Adjusted EBITDA
|
|
|
$8.8
million – $21.9 million
|
|
$26.4
million – $30.8 million
|
|
|
Discounted
Cash Flow Analysis. Northland performed a discounted cash flow analysis of the E&S Segment business by calculating the
estimated present value (as of April 26, 2021) of the stand-alone unlevered, after-tax free cash flows that the E&S Segment
business was forecasted to generate during the calendar years ending December 31, 2021 through December 31, 2025 based on financial
projections and estimates of CSI’s management. For purposes of this analysis, net operating loss carryforwards expected
by CSI’s management to be utilized were taken into account. Northland calculated implied terminal values for the E&S
Segment business by applying to the calendar year 2025 estimated unlevered, after-tax free cash flow of the E&S Segment business
a selected range of perpetuity growth rates of 0.0% to 4.0%. The present values (as of April 26, 2021) of the cash flows and terminal
values were then calculated using a selected range of discount rates of 14.7% to 17.7%. This analysis indicated the following
first quartile to third quartile approximate implied aggregate enterprise value reference range for the E&S Segment business,
as compared to the Aggregate Purchase Price:
Implied
Aggregate Enterprise Value Reference Range
|
|
Aggregate
Purchase Price
|
$29.3
million – $36.2 million
|
|
$32,027,566
|
Miscellaneous
CSI
has agreed to pay Northland for its services in connection with the E&S Sale Transaction an aggregate fee currently estimated to
be approximately $901,000, of which $200,000 was payable upon delivery of Northland’s opinion, approximately $526,000 is
payable contingent upon consummation of the E&S Sale Transaction and up to $175,000 is payable contingent on CSI’s receipt
of the earnout portion of the purchase price. In addition, CSI agreed to reimburse Northland for expenses, including fees and expenses of
counsel, and to indemnify Northland against certain liabilities, including liabilities under federal securities laws, arising from
Northland’s engagement.
In
the ordinary course of business, Northland and its affiliates may actively trade securities of CSI, Lantronix or their respective
affiliates for their own account or the account of their customers and, accordingly, may at any time hold a long or short position
in such securities. Northland in the past provided financial advisory services to CSI and/or certain of its affiliates and may
continue to do so, and received, and may receive, fees for the rendering of such services, including, during the approximately
two-year period prior to the date of its opinion, having acted or acting as financial advisor to CSI and certain of its affiliates
in connection with certain minority investments and acquisition and sale transactions, for which services Northland and its affiliates
received or expect to receive fees of approximately $4.2 million. Although Northland did not in the two-year period prior
to the date of its opinion provide financial advisory or financing services to Lantronix, Northland may provide such services
to Lantronix and its affiliates in the future and may receive fees for the rendering of such services.
Consistent
with applicable legal and regulatory requirements, Northland has adopted policies and procedures to establish and maintain the
independence of Northland’s research department and personnel. As a result, Northland’s research analysts may hold
opinions, make statements or recommendations, and/or publish research reports with respect to CSI and the E&S Sale Transaction
and other participants in the E&S Sale Transaction that differ from the views of Northland’s investment banking personnel.
Northland
is a nationally recognized investment banking firm and, as a customary part of its investment banking business, is continually
engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements
and other transactions as well as for estate, corporate and other purposes. CSI selected Northland as its financial advisor on
the basis of Northland’s familiarity with CSI and Northland’s experience and reputation in connection with mergers,
acquisitions and other similar transactions.
Projected
Financial Results
Each
year our management provides the CSI board of directors certain estimates of projected financial results as part of our budget
and planning processes. Our management also provided certain projected financial results to parties that participated in the competitive
sale process relating to the E&S Segment business, including Lantronix and its financial advisor. The projected results set
forth below are included in this proxy statement only because this information was presented
to and discussed with the CSI board of directors as part of its consideration of the E&S Sale Transaction. The projected
financial results were provided to Northland, the CSI board’s financial advisor, for its use and reliance in connection
with Northland’s financial analyses and opinion as described in the section entitled “Opinion of CSI’s Financial
Advisor.”
The
projected results described below were prepared by management of CSI and were not prepared with a view towards public disclosure.
These projections do not purport to present the results of operations in accordance with generally accepted accounting principles.
Our independent auditors have not examined or compiled the projections and accordingly, assume no responsibility for them. CSI’s
internal financial projections are, in general, prepared solely for internal use and budgeting and other management decisions
and are subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and
business developments. The projections also reflect numerous assumptions made by our management with respect to the financial
performance of the E&S Segment business as part of Communications Systems, Inc., the allocation of costs for shared services,
the continuing effects of competition, industry performance, general business, economic, market and financial conditions, and
other matters, all of which are difficult to predict and many of which are beyond CSI’s control. Accordingly, there can
be no assurance that the projected financial results would be necessarily realized, including if CSI retained the E&S Segment
business.
Set
forth below are projected financial results of certain income statement measures for the E&S Segment business for the fiscal
years ending December 31, 2021 through December 31, 2025 (may reflect rounding). Selling, general and administrative expense (SG&A)
below includes an allocation to the E&S Segment business of corporate shared services costs for finance, human resources,
information technology, and facility.
The
projected financial results below include adjusted EBITDA, a financial measure that is not prepared in accordance with generally
accepted accounting principles in the United States (non-GAAP), which excludes interest, taxes, depreciation and amortization
from net income, as well as stock-based compensation expense. For the purposes of the projected financial results, CSI calculated
adjusted EBITDA below by starting with operating income for the E&S Segment, which does not include the impact of interest
or taxes, and adding back depreciation, amortization and stock-based compensation expense.
We
have reconciled the non-GAAP financial measure used in each of projected financial results with the most directly comparable GAAP
financial measure below. CSI management believes that the non-GAAP financial measure not only provides CSI management with comparable
financial data for internal financial analysis but also allows investors to better understand the performance of CSI’s E&S
Segment business on a period-over-period basis from the same perspective as management. However, other companies may calculate
these non-GAAP financial measures differently than CSI does. Investors should not consider the non-GAAP financial measures in
isolation or as a substitute for analysis of CSI’s results or projections as reported under GAAP. CSI’s presentation
of non-GAAP financial measures should not be construed to imply that CSI’s future results will be unaffected by the adjustments
made to calculate adjusted EBITDA, such as interest, taxes, depreciation, amortization, and stock-based compensation expense.
|
|
|
2021E
|
|
|
|
2022E
|
|
|
|
2023E
|
|
|
|
2024E
|
|
|
|
2025E
|
|
Revenue
|
|
|
$39,435,000
|
|
|
|
$43,200,867
|
|
|
|
$47,352,471
|
|
|
|
$52,452,332
|
|
|
|
$57,697,565
|
|
Product Profit
|
|
|
$22,593,000
|
|
|
|
$25,013,302
|
|
|
|
$28,032,663
|
|
|
|
$31,995,923
|
|
|
|
$35,830,188
|
|
Product Margin
|
|
|
57.3
|
%
|
|
|
57.9
|
%
|
|
|
59.2
|
%
|
|
|
61.0
|
%
|
|
|
62.1
|
%
|
|
|
|
2021E
|
|
|
%
of Sales
|
|
|
|
2022E
|
|
|
%
of Sales
|
|
|
|
2023E
|
|
|
%
of Sales
|
|
|
|
2024E
|
|
|
%
of Sales
|
|
|
|
2025E
|
|
|
%
of Sales
|
|
Revenue
|
|
$
|
39,435,000
|
|
|
|
|
|
$
|
43,201,000
|
|
|
|
|
|
$
|
47,352,000
|
|
|
|
|
|
$
|
52,452,000
|
|
|
|
|
|
$
|
57,698,000
|
|
|
|
|
Product Margin
|
|
|
22,593,000
|
|
|
57
|
%
|
|
|
25,013,000
|
|
|
58
|
%
|
|
|
28,033,000
|
|
|
59
|
%
|
|
|
31,996,000
|
|
|
61
|
%
|
|
|
35,830,000
|
|
|
62
|
%
|
Other
Cost of Goods Sold
|
|
|
4,450,000
|
|
|
11
|
%
|
|
|
4,568,000
|
|
|
11
|
%
|
|
|
4,854,000
|
|
|
10
|
%
|
|
|
5,084,000
|
|
|
10
|
%
|
|
|
5,440,000
|
|
|
9
|
%
|
Gross Margin
|
|
|
18,143,000
|
|
|
46
|
%
|
|
|
20,446,000
|
|
|
47
|
%
|
|
|
23,179,000
|
|
|
49
|
%
|
|
|
26,911,000
|
|
|
51
|
%
|
|
|
30,390,000
|
|
|
53
|
%
|
SG&A
|
|
|
15,655,000
|
|
|
40
|
%
|
|
|
16,516,000
|
|
|
38
|
%
|
|
|
17,578,000
|
|
|
37
|
%
|
|
|
18,736,000
|
|
|
36
|
%
|
|
|
20,297,000
|
|
|
35
|
%
|
Operating
Income
|
|
$
|
2,488,000
|
|
|
6
|
%
|
|
$
|
3,930,000
|
|
|
9
|
%
|
|
$
|
5,601,000
|
|
|
12
|
%
|
|
$
|
8,176,000
|
|
|
16
|
%
|
|
$
|
10,093,000
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Operating Income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization
|
|
$
|
200,000
|
|
|
|
|
|
$
|
200,000
|
|
|
|
|
|
$
|
200,000
|
|
|
|
|
|
$
|
200,000
|
|
|
|
|
|
$
|
200,000
|
|
|
|
|
Stock-Based Compensation
|
|
$
|
100,000
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
2,788,000
|
|
|
|
|
|
$
|
4,230,000
|
|
|
|
|
|
$
|
5,901,000
|
|
|
|
|
|
$
|
8,476,000
|
|
|
|
|
|
$
|
10,393,000
|
|
|
|
|
The
projected results described above were not prepared with a view to public disclosure or compliance with published guidelines of
the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants
regarding forecasts or projections. These projections are forward-looking statements and are based on expectations and assumptions
at the time they were prepared by management. The projections above involve risks and uncertainties that could cause actual outcomes
and results to differ materially from such expectations, including risks and uncertainties described under “CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS” and “RISK FACTORS.” There can be no assurance that the assumptions and adjustments
made in preparing the projected financials results above will prove appropriate, or that the projected financial results necessarily
will be realized. There will be differences between actual and projected results, and actual results may be materially greater
or less than those contained in the projected results above. The inclusion of these projections should not be regarded as an indication
that CSI or its affiliates or representatives, considered or consider the projections to be an actual prediction of future events,
and the projections should not be relied upon as such. Neither CSI nor its affiliates or representatives has made or makes any
representations to any person regarding the ultimate performance of CSI or the E&S Segment business compared to the information
contained in the projected financial results, and none of them intends to provide any update or revision thereof.
Financing
Lantronix
estimates that approximately $26.0 million will be required to complete the E&S Sale Transaction. Lantronix anticipates that
these amounts will be funded with bank financing in accordance with the commitment letter from Silicon Valley Bank and the commitment
letter from SVB Innovation Credit Fund VIII, L.P., each dated April 28, 2021 and issued to Lantronix (together, the “commitment
letters”), and cash on hand of Lantronix. The securities purchase agreement provides that in no
event will the receipt by, or the availability of any funds or financing to, Lantronix or any other financing be a condition to
the obligation of Lantronix to consummate the E&S Sale Transaction. Pursuant to the
securities purchase agreement, Lantronix has delivered to us copies of the commitment letters and the corresponding fee letters.
Pursuant
to the commitment letters, Lantronix intends to (a) refinance all existing indebtedness of Lantronix and Lantronix Holding Company,
a Delaware corporation, owing to Silicon Valley Bank, and (b) finance the E&S Sale Transaction, costs and expenses related
to the E&S Sale Transaction and the ongoing working capital and other general corporate purposes of Lantronix, the E&S
Companies and their subsidiaries after consummation of the E&S Sale Transaction, from, among others, the following sources:
(i) up to $20,000,000 in senior secured credit facilities comprised of (A) a term loan facility in an aggregate principal amount
equal to $17,500,000 and (B) a revolving credit facility of up to $2,500,000, and (ii) a $12,000,000 junior secured credit facility
provided by SVB Innovation Credit Fund VIII, L.P. The commitments contained in the commitment letters expire on August 31, 2021.
Under
the commitment letters, (a) Silicon Valley Bank will have a first priority perfected security interest in substantially all assets
of Lantronix and its affiliates (including the E&S Companies after the closing of the E&S Sale Transaction), including
intellectual property, and (b) SVB Innovation Credit Fund VIII, L.P. will have a perfected security interest in substantially
all assets of Lantronix and its affiliates (including the E&S Companies after the closing of the E&S Sale Transaction),
including intellectual property. Such collateral will also include a stock pledge equal to 65% of the shares of material foreign
subsidiaries that are not borrowers or guarantors.
The
commitment letters are subject to standard closing conditions, including (a) the negotiation, execution and delivery of final
loan documentation, (b) evidence of certain filings, recordings and endorsements, (c) delivery of satisfactory opinions of counsel
and evidence of lien and security interests, (d) delivery of certain pro forma consolidated financial statements as to
the borrower and its subsidiaries, (e) delivery of a quality of earnings report from the E&S Companies and borrower and its
subsidiaries, (f) final terms and conditions of the E&S Sale Transaction documents, (g) payment of all fees and expenses of
Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P., (h) a bring-down in the accuracy of all representations and warranties
in the loan documentation as of the funding date and (i) that no event of default or material adverse change has occurred.
When
the E&S Sale Transaction is Expected to be Completed
We
expect to complete the E&S Sale Transaction promptly after all of the closing conditions in the securities purchase agreement,
including approval of the E&S Sale Proposal by our shareholders. Subject to the uncertainty concerning the satisfaction or
waiver of these conditions, we expect the E&S Sale Transaction to close by August 31, 2021. However, there can be no assurance
that the E&S Sale Transaction will be completed at all or, if completed, when it will be completed.
Effects
on Our Company if the E&S Sale Transaction is Completed and the Nature of Our Business Following the Transaction
If
the E&S Sale Transaction is completed, we will no longer conduct the E&S Segment business, and will be prevented by the
securities purchase agreement from competing with the E&S Segment business for a period of five years.
Prior
to and after the closing of the E&S Sale Transaction, we expect to continue our efforts to divest substantially all our
current operating and non-operating assets as part of our planned strategy to monetize our assets for the benefit of the CSI
shareholders existing prior to the effective date of the proposed merger with Pineapple. Prior to and after the closing of
the E&S Sale Transaction, we also plan on continuing to pursue the proposed merger with Pineapple. A meeting of the
Company’s shareholders to approve the merger agreement with Pineapple is expected to be held later in 2021. There can
be no assurance that the proposed merger with Pineapple will be completed or completed within any specific timeframe. The
E&S Sale Transaction is not conditioned upon the Pineapple merger in any way.
The
E&S Sale Transaction will not alter the rights, privileges or nature of the issued and outstanding shares of our common stock.
A shareholder who owns shares of our common stock immediately prior to the closing of the E&S Sale Transaction will continue
to hold the same number of shares immediately following the closing. A meeting of the Company's shareholders to approve the merger agreement with Pineapple is expected to be held later in 2021. If the merger is approved by our shareholders, upon shareholders of CSI as of immediately prior to the closing
of the merger with Pineapple 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 (as defined in the agreement governing
the CVRs). The E&S Sale Transaction will not change the number of CVRs a shareholder of CSI as of immediately prior to the
closing of the merger with Pineapple would receive under the agreement governing the CVRs.
Our
SEC reporting obligations as a public company will not be affected as a result of completing the E&S Sale Transaction. We
believe that immediately after the E&S Sale Transaction we will continue to qualify for listing on the Nasdaq Global Market.
Effects
on Our Company if the E&S Sale Transaction is Not Completed
If
the E&S Sale Transaction is not completed, we will continue our efforts to divest substantially all our current operating
and non-operating assets as part of our planned strategy to monetize our assets for the benefit of the CSI shareholders existing
prior to the effective date of the proposed merger with Pineapple, and we may consider and evaluate other strategic opportunities
for the E&S Segment. In such a circumstance, there can be no assurances that our continued operation of the E&S Segment
business or any alternative strategic opportunities will result in the same or greater value to our shareholders as the E&S
Sale Transaction.
The
securities purchase agreement may be terminated under certain circumstances as set forth in the securities purchase agreement
and summarized in this proxy statement. We have agreed to pay Lantronix a termination fee of $875,000 if the securities purchase
agreement is terminated under certain circumstances. See “SECURITIES PURCHASE AGREEMENT—Remedies; Termination Fees”
below.
No
Appraisal or Dissenters’ Rights
No
appraisal or dissenters’ rights are available to our shareholders under Minnesota law or our articles of incorporation or
bylaws in connection with the E&S Sale Proposal.
Interests
of Our Directors and Executive Officers in the E&S Sale Transaction
In
considering the recommendation of our board to vote “FOR” the E&S Sale Proposal, you should be aware that, aside
from their interests as Company shareholders, our directors and executive officers have interests in the E&S Sale Transaction
that are different from, or in addition to, the interests of our shareholders generally.
Members
of our board were aware of and considered these interests, among other matters, in evaluating and negotiating the E&S Sale
Transaction, and in recommending to our shareholders that the E&S Sale Proposal be approved. For more information see the
sections entitled “Proposal #1: E&S Sale Proposal—Background of the E&S Sale Transaction” and
“Proposal #1: E&S Sale Proposal—Reasons for the E&S Sale Transaction and Recommendation of the CSI Board of
Directors” above. These interests are described in more detail below, and certain of them are quantified in the narrative
below.
Additional
information concerning these potential payments and the vesting of outstanding equity awards held by our directors and executive
officers is provided in the discussion and table below.
Treatment
of Outstanding Equity Awards. All of our outstanding equity incentive awards, consisting of stock options and restricted stock
units (RSUs), have been granted under our 2011 Executive Incentive Compensation Plan (the “2011 Plan”), which is administered
by the CSI compensation committee. As of June 14, 2021, there were outstanding under the 2011 Plan stock options to purchase
1,113,825 shares of CSI common stock and RSUs for 98,705 shares of CSI common stock.
The
2011 Plan provides that upon a change of control any outstanding incentive award that is not assumed or substituted will immediately
vest and be exercisable and any restrictions on the incentive award will lapse. The 2011 Plan provides that the compensation committee
may take any or all actions in respect of these accelerated incentive awards. The E&S Sale Transaction will constitute a change
of control under the 2011 Plan.
In
view of its authority under the 2011 Plan, the terms of the E&S Sale Transaction, and after considering our proposed merger
transaction with Pineapple, our compensation committee has determined that if the E&S Sale Transaction occurs before the effective
time of the proposed merger with Pineapple, then the outstanding incentive awards of the 2011 Plan will be affected as follows,
all as of the closing date of the E&S Sale Transaction:
|
•
|
All
outstanding incentive awards will immediately vest and be exercisable and any restrictions
on the incentive award will lapse.
|
|
•
|
All
then outstanding restricted stock units (RSUs) would be settled by exchanging them for
the equivalent number of shares specified in the respective RSU agreements, reduced by
that number of whole shares (rounded up to the nearest whole share) having a Fair Market
Value (as defined in the 2011 Plan) equal to the amount of any tax withholding required.
The shares of CSI common stock issued on settlement of the RSUs will be issued and outstanding
as of the closing date of the E&S Sale Transaction.
|
|
•
|
All
stock options on the closing date having an exercise price less than the fair market
value of CSI’s common stock (i.e. in-the-money stock options) would be settled
by exchanging the options for a “net” number of shares of CSI common stock
as if exercised on a net or cashless basis as provided in the 2011 Plan. The shares of
CSI common stock issued on settlement of in-the-money stock options will be further reduced
by that number of whole shares (rounded up to the nearest whole share) having a Fair
Market Value equal to the amount of any tax withholding required. The shares of CSI common
stock issued on settlement of the in-the-money stock options will be issued and outstanding
as of the closing date of the E&S Sale Transaction.
|
|
•
|
Following
the settlement of outstanding RSUs and in-the-money stock options as provided above,
these awards will terminate and be cancelled.
|
|
•
|
All
stock options on the closing date having an exercise price equal to or greater than the fair market
value of CSI’s common stock (i.e. out-of-the-money stock options) will terminate
and be cancelled without any payment therefor.
|
The
intention of our compensation committee is that the closing date of the E&S Sale Transaction would be set to ensure that the
holders of RSUs and in-the-money stock options would receive any dividends paid to CSI shareholders generally prior to the effective
time of the merger with Pineapple.
If
the outstanding stock options and RSUs granted under the 2011 Plan are treated as described above, we would issue 252,564 shares
of CSI common stock in respect of stock options and 98,705 shares of CSI common stock in respect of RSUs, assuming all stock
options have not previously been exercised and all restricted stock unit awards have not previously been settled. These amounts
assume (a) a price per share of CSI common stock of $6.62 (which is the average of the closing prices for a share of the Company’s
common stock for the first five trading days following the public announcement of the E&S Sale Transaction) and (b) the E&S
Sale Transaction was consummated on June 14, 2021, which is the last practicable date prior to the filing of this proxy
statement.
Our
non-employee directors are: Randall D. Sampson, Richard A. Primuth, Steven C. Webster and Michael R. Zapata. The estimated value
to CSI’s non-employee directors as a group for the unvested stock options that would accelerate in connection with the closing
of the E&S Sale Transaction is $67,200, which assumes the E&S Sale Transaction was consummated on June 14, 2021,
which is the last practicable date prior to the filing of this proxy statement. None of the non-employee directors hold any outstanding
RSU awards. The value of the unvested stock option awards that would accelerate in connection with the closing of the E&S
Sale Transaction is calculated as follows: the product of (a) the excess, if any, of $6.62 (the assumed value of a share of the
CSI’s common stock) over the exercise price per share of such stock option, multiplied by (b) the number of shares of common
stock subject to the unvested portion of such stock option
The
number of shares issuable in respect of outstanding stock options or RSUs may be more or less based on the incentive awards outstanding
on, and fair market value of CSI’s common stock on, the closing date of the E&S Sale Transaction. For an estimate of
the amounts that would be payable to each of the Company’s executive officers in connection with the Company equity incentive
awards, see the “Golden Parachute Compensation” table below.
Employment
and Change of Control Agreements. CSI entered into an employment agreement with Anita Kumar on December 1, 2020 in connection
with CSI’s hiring of Ms. Kumar as its Chief Executive Officer. If CSI terminates the employment agreement with Ms. Kumar
without Cause (as defined in the employment agreement) prior to December 31, 2021, Ms. Kumar will receive a guaranteed separation
payment equivalent to 6 months base salary, subject to Ms. Kumar’s continued compliance with certain covenants and delivery
of a general release.
We
have entered into change of control agreements (“CIC Agreements”) with each named executive officer. The CIC Agreements
provide for payment of severance compensation if there is a change in control of CSI and within 24 months following this change
of control, there is either an involuntary termination of employment other than for cause, death, disability or retirement or
a voluntary termination of employment for good reason (each a “Triggering Event”). The closing of the E&S Sale
Transaction will constitute a change of control under the CIC Agreements.
Under
the securities purchase agreement, we are obligated to terminate the employment of certain E&S Companies personnel who
accept Lantronix’s offer of employment and we will be responsible for any severance obligations to these E&S
Companies transferred personnel in connection with that termination of employment. Lantronix has indicated its intention to
make an offer of employment to Ms. Kumar. Additionally, we intend to terminate employees of the E&S Companies not hired
by Lantronix around the time of the completion of the E&S Sale Transaction. However, we do not expect to terminate Roger
H.D. Lacey, Executive Chairman of CSI, and Mark Fandrich, CSI’s Chief Financial Officer, following the completion of
the E&S Sale Transaction as they are expected to remain in these same roles following the closing of the CSI-Pineapple
merger as stated in our March 2, 2021 announcement of the proposed Pineapple merger. Additionally, we also do not expect to
terminate Scott Fluegge, CSI’s Vice President of Information Technology and Digital Transformation, following the
completion of the E&S Sale Transaction as he is expected to continue employment following the closing of the
CSI-Pineapple merger.
The
severance benefit is a specified multiple of the executive’s annual compensation at the date of the change of control, payable
in a lump sum within 75 days following the date of the Triggering Event. The multiple of the executive’s annual compensation
for our named executive officers is as follows: Mr. Lacey, 1.0 times; Ms. Kumar, 1.5 times; Mr. Fandrich, 1.5 times; and Mr. Fluegge,
1.0 times. Additionally, each executive will be entitled to receive medical and dental insurance and life insurance substantially
in the form and expense to the executive as received by the executive on the date of the Triggering Event.
The
CIC Agreements provide that the payments made to the executive will be one dollar less than the amount which would cause all payments
to the executive (including payments to the executive which are not included in the CIC Agreement) to be subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code. Executive officers are not entitled to any gross-up payment under CIC
Agreements for such excise taxes.
The
CIC Agreements include provisions requiring each executive to maintain confidentiality of information acquired during the period
of employment, to refrain for a period of one year from competing with CSI or soliciting other CSI employees to leave their employment
with us and to provide a release of all claims against CSI in exchange for the benefit paid pursuant to the CIC agreement.
LTI
Plan Awards. Over the last several years, we have granted our named executive officers and senior executives awards under
our Long-Term Incentive Plan (“LTI Plan”), which is a subplan of the 2011 Plan. The LTI Plan awards provide the opportunity
to earn a payout in CSI equity awards or cash awards after the end of three-year performance periods. There are two performance
periods currently outstanding under the LTI Plan, the three-year performance period of 2019 to 2021 and the three year performance
period of 2020 to 2022. All CSI equity awards for all prior performance periods have been granted under the LTI Plan and are included
in the awards outstanding under the 2011 Plan, which will be settled as described above under “Treatment of Outstanding
Equity Awards.” As of June 14, 2021, participants had opportunities for cash awards under the LTI Plan of $127,737
for 2019 to 2021 and $188,760 for 2020 to 2022.
The
closing of the E&S Sale Transaction will constitute a change in control under the LTI Plan. A participant will be entitled
to a payment from the LTI Plan upon a change in control. The amount of the payment to each participant must be equitably prorated
based on the period between the beginning of the three-year performance period and the change in control. However, the compensation
committee has the discretion to extend this period to be a longer period not to exceed the conclusion of the year in which the
change in control occurred. The compensation committee intends to determine the amount of the cash payments to LTI Plan participants
prior to the closing of the E&S Sale Transaction. For an estimate of the amounts that would be payable to each of the Company’s
executive officers in connection with the LTI Plan cash awards, see the “Golden Parachute Compensation” table below.
Golden
Parachute Compensation. The table below sets forth the information required by Item 402(t) of Regulation S-K regarding certain
compensation that has, will or may be paid or become payable to our named executive officers in connection with the E&S Sale
Transaction, based on a number of assumptions. The table below assumes that:
|
•
|
the
E&S Sale Transaction was consummated on June 14, 2021, which is the last
practicable date prior to the filing of this proxy statement, and that the E&S Sale
Transaction is consummated prior to the effective time of our proposed merger with Pineapple;
|
|
•
|
the
employment of each of our named executive officers is terminated by CSI immediately following
the closing of the E&S Sale Transaction if it were consummated on June 14,
2021, which is the last practicable date prior to the filing of this proxy statement,
constituting a Triggering Event under the CIC Agreements (but see “Employment and
Change of Control Agreements” above for a description of our current intentions
relating to the termination of the named executive officers);
|
|
•
|
the
price per share of the Company’s common stock is $6.62 (which, in accordance with
the SEC rules, is the average of the closing prices for a share of the Company’s
common stock for the first five trading days following the public announcement of the
E&S Sale Transaction); and
|
|
•
|
the
compensation levels and outstanding and unvested equity awards for the named executive
officers at the relevant time are the levels in effect and the equity awards outstanding
and unvested.
|
Golden Parachute Compensation (1)
|
Name
|
|
Cash ($)(2)
|
|
Equity ($)(3)
|
|
Perquisites / Benefits ($)(4)
|
|
Total
|
Roger H. D. Lacey
|
|
$410,301
|
|
$229,201
|
|
$782
|
|
$640,284
|
Anita Kumar
|
|
$487,540
|
|
$128,031
|
|
$3,487
|
|
$619,058
|
Mark Fandrich
|
|
$646,820
|
|
$172,091
|
|
$15,790
|
|
$834,701
|
Scott Fluegge
|
|
$299,266
|
|
$119,300
|
|
$26,302
|
|
$444,868
|
(1)
There are no tax reimbursement, pension benefits or other payments to the named executive officers that are required to be disclosed
in this table pursuant to Item 402(t) of Regulation S-K.
(2)
The amounts reported in this column represent (a) the cash severance payment that each named executive officer would be entitled
to receive under his or her CIC Agreement, which is a “double trigger” arrangement requiring both a change of control
and a qualifying termination of employment within 24 months following the change of control, and for Ms. Kumar includes the cash
severance to which she is entitled under her employment agreement upon a termination of employment without Cause and (b) the amount
of cash payable to each named executive officer in respect of the LTI cash awards, which is a “single trigger” arrangement,
assuming the compensation committee exercised its discretion to extend the period for equitable proration to the end of 2021.
See the section entitled “Employment and Change of Control Agreements” and “LTI Plan Awards” above for
additional details. The following table presents the allocation of the value as between cash severance payment and LTI Plan cash
awards for each named executive officer:
Name
|
|
Value of Cash Severance Payment
|
|
Value of LTI Plan
Cash Awards
|
Roger H. D. Lacey
|
|
$350,301
|
|
$60,000
|
Anita Kumar
|
|
$469,769
|
|
$17,771
|
Mark Fandrich
|
|
$593,015
|
|
$53,805
|
Scott Fluegge
|
|
$262,362
|
|
$36,904
|
(3)
The amounts reported in this column represent the value of acceleration in connection with the closing of the E&S Sale Transaction
of stock options and restricted stock units (RSUs) outstanding to our named executive officers under the 2011 Plan after giving
effect to the determinations of our compensation committee as described above in the section entitled “Treatment of Outstanding
Equity Awards.” The value of the unvested equity awards that would accelerate in connection with the closing of the E&S
Sale Transaction is calculated as follows: (a) in the case of a CSI stock option, the product of (i) the excess, if any, of $6.62
(the assumed value of a share of the CSI’s common stock) over the exercise price per share of such stock option, multiplied
by (ii) the number of shares of common stock subject to the unvested portion of such stock option; and (b) in the case of CSI
RSU awards, the assumed value of a share of the Company’s common stock ($6.62) multiplied by the number of shares of common
stock subject to the RSU award. The following table presents the allocation of the value as between the accelerated stock options
and the accelerated RSUs for each named executive officer:
Name
|
|
Aggregate Value of Accelerated Stock Options
|
|
Aggregate Value of Accelerated Restricted Stock Unit Awards
|
Roger H. D. Lacey
|
|
$93,862
|
|
$135,339
|
Anita Kumar
|
|
$50,345
|
|
$77,686
|
Mark Fandrich
|
|
$64,516
|
|
$107,575
|
Scott Fluegge
|
|
$45,672
|
|
$73,628
|
(4)
The amounts reported in this column represent the estimated cost of the employer portion of medical and dental insurance and life
insurance premiums payable by CSI under the CIC Agreements assuming a qualifying termination of the named executive officer’s
employment within 24 months following the change of control as described in note 2 above.
Anticipated
Accounting Treatment
Under
generally accepted accounting principles in the United States of America, commencing with the quarter during which our shareholders
approve the E&S Sale Proposal, we expect to reflect the results of operations of the E&S Segment business as discontinued
operations. The related anticipated gain on the sale, net of any applicable taxes, will also be reported within discontinued
operations upon completion of the E&S Sale Transaction. For further information, see “UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS” attached to this proxy statement as Appendix C.
Use
of Proceeds
Communications
Systems, and not our shareholders, will receive the proceeds from the E&S Sale Transaction.
As
we have previously communicated in connection with the proposed Pineapple merger, CSI expects the net sale proceeds from any pre-merger
divestitures, such as the E&S Sale Transaction, to be distributed in the form of a cash dividend to existing CSI shareholders
prior to the effective date of the proposed merger with Pineapple.
Currently,
we expect to distribute to our shareholders a cash dividend of $3.50 per share or approximately $35.0 million from the net proceeds
from the E&S Sale Transaction and other available cash resources. We have not determined the exact timing of the cash dividend
or set a record date for CSI shareholders entitled to the dividend.
We
also intend to make additional cash dividends from cash, cash equivalents, and investments, net proceeds from the sale of legacy
CSI assets and businesses sold after the merger, and any net proceeds we receive from Lantronix from the earnout in connection
with the E&S Sale Transaction, through the contingent value rights (CVRs). The record date for CSI shareholders
entitled to the CVRs will be set as of immediately prior to the closing of the merger with Pineapple under the agreement
governing the CVRs. We expect the closing of the proposed merger with Pineapple will occur following receipt of CSI shareholder approval of the merger at a shareholder meeting to be held later in 2021.
Material
U.S. Federal Income Tax Consequences of the E&S Sale Transaction
The
following is a general discussion of the anticipated material U.S. federal income tax consequences of the E&S Sale Transaction.
The discussion addresses only the specific U.S. federal income tax consequences set forth below and does not address any other
U.S. federal, state, local or foreign income, estate, gift, transfer, sales, use or other tax consequences that may result from
the E&S Sale Transaction or any other transaction.
The
following discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, currently
applicable and proposed Treasury regulations and published rulings and decisions, all as currently in effect as of the date of
this proxy statement, an all of which are subject to change, possibly with retroactive effect. Tax considerations under state
and local laws, federal laws other than those pertaining to income tax, or non-U.S. tax laws are not addressed in this proxy statement.
The following discussion has no binding effect on the Internal Revenue Service or the courts. No ruling has been requested from
the IRS with respect to the anticipated tax treatment of E&S Sale Transaction, and we will not seek an opinion of counsel
with respect to the anticipated tax treatment summarized herein. There can be no assurance that the IRS will not take a different
position concerning the tax consequences of the E&S Sale Transaction or that any such position would not be sustained.
The
E&S Sale Transaction is entirely a corporate level action. Accordingly, the E&S Sale Transaction will not be a taxable
event for U.S. federal income tax purposes to
our shareholders.
The
E&S Sale Transaction will be treated for U.S. federal income tax purposes as a taxable transaction for which Communications
Systems will recognize gain or loss. The amount of gain or loss we recognize with respect to the sale of the stock of TNI and
the sale of the ordinary shares of TN Europe will be measured by the difference between the amount realized by us on the sale
of that particular equity interest and our tax basis in that equity interest. The determination of whether we recognize gain or
loss will be made separately with respect to our equity interests in each of TNI and TN Europe.
Management
of CSI anticipates that the E&S Sale Transaction will likely result in some taxable gain to the CSI for U.S. federal income
tax purposes. To the extent the E&S Sale Transaction results in us recognizing a net gain for U.S. federal income tax purposes,
we expect that our available net operating loss carryforwards will offset all or a substantial part of such gain.
Each
shareholder is encouraged to consult his, her, or its own tax advisor as to the U.S. federal income tax consequences of the E&S
Sale Transaction, and as to any state, local, foreign or other tax consequences based on his or her particular facts and circumstances.
Vote
Required
The
approval of the E&S Sale Proposal requires the affirmative vote of holders of at least two-thirds of the issued and outstanding
shares of CSI common stock that are entitled to vote at the special meeting. A vote of ABSTAIN on the E&S Sale Proposal will
have the same effect as a vote AGAINST the approval of the E&S Sale Proposal.
Other
than with respect to any shares allocated to you as a participant in the CSI ESOP, if you are a record holder and do not vote,
your shares will not be voted at the special meeting and this failure to vote will have the same effect as a vote against the
E&S Sale Proposal. If you are a participant in the CSI ESOP and do not vote the CSI shares allocated to you in the CSI ESOP
on any proposal, your shares will be voted at the special meeting on the E&S Sale Proposal according to the provisions of
the CSI ESOP, which provide that the trustees will vote these shares on the E&S Sale Proposal in the same proportion as all
shares of CSI common stock allocated to ESOP participants for which voting instructions were received were voted on the E&S
Sale Proposal.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR SHAREHOLDERS VOTE “FOR” PROPOSAL #1, THE E&S SALE PROPOSAL.
SECURITIES
PURCHASE AGREEMENT
This
section describes the material terms of the securities purchase agreement. Please note that the summary below and elsewhere in
this proxy statement regarding the securities purchase agreement may not contain all of the information that is important to you.
The summary below and elsewhere in this proxy statement of the securities purchase agreement does not purport to be complete and
is subject to, and qualified in its entirety by, reference to the full text of the securities purchase agreement, a copy of which
is attached to this proxy statement as Appendix A. We encourage you to read the securities purchase agreement carefully in
its entirety for a more complete understanding of the E&S Sale Transaction, the terms of the securities purchase agreement,
and other information that may be important to you.
The
securities purchase agreement has been included to provide shareholders with information regarding its terms. The securities purchase
agreement also references certain of the other transaction documents, including the transition services agreement. Certain of
the other transaction documents are summarized below, but are not binding upon any party until executed and delivered. This proxy
statement is not soliciting shareholder approval for any transaction or agreement other than the E&S Sale Transaction as described
in the E&S Sale Proposal.
General
On
April 28, 2021, we entered into a securities purchase agreement with Lantronix pursuant to which we have agreed, subject to specified
terms and conditions, including approval of the E&S Sale Proposal by our shareholders at the special meeting, to sell to Lantronix
all of the issued and outstanding shares of stock of our wholly owned subsidiary, Transition Networks, Inc., and the entire issued
share capital of our wholly owned subsidiary, Transition Networks Europe Limited. In this proxy statement, we sometimes refer
to Transition Networks, Inc. as “TNI,” to Transition Networks Europe Limited as “TN Europe” and to both
of the companies collectively with their respective subsidiaries, if any, as the “E&S Companies.”
CSI
classifies its businesses into the following two segments:
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Electronics
& Software (E&S): 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; and
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Services
& Support (S&S): 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.
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The
E&S Segment is comprised of the Transition Networks and Net2Edge businesses conducted by TNI and TN Europe. For the purposes
of this proxy statement, we refer to these businesses as the “E&S Segment business.”
We
are not selling to Lantronix any of the assets relating to our S&S Segment business.
Purchase
and Sale of the Securities of the E&S Companies
Subject
to certain exceptions described below, we agreed to sell to Lantronix:
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all
of the issued and outstanding stock of our wholly owned subsidiary, Transition Networks,
Inc., a Minnesota corporation; and
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the
entire issued share capital of our wholly owned subsidiary, Transition Networks Europe
Limited, a private limited company incorporated in England and Wales.
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The
TNI stock and the TN Europe ordinary shares we have agreed to sell to Lantronix are sometimes referred to as the “purchased
securities.”
Base
Purchase Price and Earnout
The
base purchase price for the purchased securities will be approximately $25,027,566. At the closing of the E&S Sale Transaction,
Lantronix will pay us the base purchase price in cash.
Following
the closing date, the base purchase price will be recalculated based upon final determinations of net working capital. The base
purchase price then will be adjusted upward or downward for the amount by which the base purchase price recalculated using these
final amounts is more than or less than the base purchase price paid at closing. If the recalculated base purchase price is more
than base purchase price paid at closing, Lantronix will pay to CSI such amount within five business days. If the recalculated
base purchase price is less than base purchase price paid at closing, we will pay to Lantronix such amount within five business
days.
In
addition to the base purchase price, Lantronix will pay us, if earned, earnout payments of up to $7.0 million, payable following
two successive 180-day intervals after the closing of the E&S Sale Transaction based on revenue targets for the business of
the E&S Companies as specified in the securities purchase agreement, subject to certain adjustments and allocations as further
described in the securities purchase agreement. The earnout amount, if any, would be payable as follows:
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On
a sliding scale from $1.0 million up to $3.0 million based on revenue generated by the
business of the E&S Companies in the first 180 days after the closing of the E&S
Sale Transaction meeting or exceeding $18 million; and
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On
a sliding scale from $1.0 million up to $4.0 million based on revenue generated by the
business of the E&S Companies in the subsequent 180 days after the closing of the
E&S Sale Transaction meeting or exceeding $19 million.
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For
purposes of calculating the earnout amount, “revenue” includes all revenue recognized by Lantronix from the current
business of the E&S Companies, and also includes revenue from all products that are either in development by the E&S Companies
as of the closing or subsequently developed by the E&S Companies after the closing, but that were on the roadmap of the business
and under development, and all products substantially similar to or readily derivative of a current product or development product
on the roadmap, but excluding any revenue recognized from products, software or services of Lantronix that are currently sold
or offered for sale by Lantronix or are being developed by Lantronix as of the date of the securities purchase agreement.
Financing
Lantronix
estimates that approximately $26.0 million will be required to complete the E&S Sale Transaction. Lantronix anticipates that
these amounts will be funded with bank financing in accordance with the commitment letter from Silicon Valley Bank and the commitment
letter from SVB Innovation Credit Fund VIII, L.P., each dated April 28, 2021 and issued to Lantronix (together, the “commitment
letters”), and cash on hand of Lantronix. The securities purchase agreement provides that in no
event will the receipt by, or the availability of any funds or financing to, Lantronix or any other financing be a condition to
the obligation of Lantronix to consummate the E&S Sale Transaction. Pursuant to the
securities purchase agreement, Lantronix has delivered to us copies of the commitment letters and the corresponding fee letters.
Pursuant
to the commitment letters, Lantronix intends to (a) refinance all existing indebtedness of Lantronix and Lantronix Holding Company,
a Delaware corporation, owing to Silicon Valley Bank, and (b) finance the E&S Sale Transaction, costs and expenses related
to the E&S Sale Transaction and the ongoing working capital and other general corporate purposes of Lantronix, the E&S
Companies and their subsidiaries after consummation of the E&S Sale Transaction, from, among others, the following sources:
(i) up to $20,000,000 in senior secured credit facilities comprised of (A) a term loan facility in an aggregate principal amount
equal to $17,500,000 and (B) a revolving credit facility of up to $2,500,000, and (ii) a $12,000,000 junior secured credit facility
provided by SVB Innovation Credit Fund VIII, L.P. The commitments contained in the commitment letters expire on August 31, 2021.
Under
the commitment letters, (a) Silicon Valley Bank will have a first priority perfected security interest in substantially all assets
of Lantronix and its affiliates (including the E&S Companies after the closing of the E&S Sale Transaction), including
intellectual property, and (b) SVB Innovation Credit Fund VIII, L.P. will have a perfected security interest in substantially
all assets of Lantronix and its affiliates (including the E&S Companies after the closing of the E&S Sale Transaction),
including intellectual property. Such collateral will also include a stock pledge equal to 65% of the shares of material foreign
subsidiaries that are not borrowers or guarantors.
The
commitment letters are subject to standard closing conditions, including (a) the negotiation, execution and delivery of final
loan documentation, (b) evidence of certain filings, recordings and endorsements, (c) delivery of satisfactory opinions of counsel
and evidence of lien and security interests, (d) delivery of certain pro forma consolidated financial statements as to
the borrower and its subsidiaries, (e) delivery of a quality of earnings report from the E&S Companies and borrower and its
subsidiaries, (f) final terms and conditions of the E&S Sale Transaction documents, (g) payment of all fees and expenses of
Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P., (h) a bring-down in the accuracy of all representations and warranties
in the loan documentation as of the funding date and (i) that no event of default or material adverse change has occurred.
Conditions
to Closing
The
obligation of CSI and Lantronix to complete the E&S Sale Transaction is subject to the satisfaction (or waiver by the party
entitled to the benefit thereof) of the following conditions:
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The
securities purchase agreement and the E&S Sale Transaction must have been duly approved
and adopted by the requisite shareholders of CSI at the special meeting in accordance
with the Minnesota Business Corporation Act and CSI’s organizational documents;
and
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No
government entity has enacted, issued, promulgated, enforced, or entered any law or order,
decree, ruling or other action that makes illegal, enjoins or otherwise prohibits consummation
of the E&S Sale Transaction.
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The
obligation of Lantronix to complete the E&S Sale Transaction is subject to the satisfaction (or waiver by Lantronix) of the
following conditions:
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CSI’s
representations and warranties identified as fundamental must be true and correct in
all respects on the date of the securities purchase agreement and the closing date, or
in the case of representations and warranties made as of a specified date earlier than
the closing date, as of such earlier date;
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CSI’s
representations and warranties (other than its representations and warranties identified
as fundamental) must be true and correct in all material respects on the date of the
securities purchase agreement and the closing date, or in the case of representations
and warranties made as of a specified date earlier than the closing date, as of such
earlier date;
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CSI
must have performed and complied with, in all material respects, all obligations, agreements
and covenants as specified in the securities purchase agreement;
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CSI
must have delivered to Lantronix a certificate, executed by a duly authorized officer,
that the preceding three conditions are satisfied; and
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CSI
must have delivered to Lantronix all of the required closing deliveries contemplated
by the securities purchase agreement (including a certificate of good standing of TNI;
appropriate assignment of the purchased securities; resolutions of the directors of each
of TN Europe and each subsidiary thereof to approve various closing matters; a certificate
of the secretary of CSI certifying to the resolutions duly adopted by CSI’s board
of directors authorizing and approving the securities purchase agreement and the E&S
Sale Transaction; the executed transition services agreement; resignations of certain
directors and officers of the E&S Companies; evidence of certain required consents,
waivers or approvals; register of members of each of TN Europe and its subsidiaries together
with all of the other statutory registers and statutory books of each of TN Europe and
its subsidiaries; the share certificates for all issued shares in TN Europe and each
subsidiary thereof (or, if such share certificates are lost, indemnities for lost share certificate); a power of attorney duly executed by CSI appointing Lantronix as CSI’s
duly authorized attorney to exercise all voting and other rights attaching to the TN
Europe share pending stamping of the transfer of the TN Europe share and the registration
of Lantronix of the holder of the TN Europe share; a letter from CSI confirming that
at closing it will cease to be a relevant registrable entity in relation to TN Europe;
release and termination of all liens with respect to the E&S Companies and the purchased
securities; and a Deed of Waiver to cause a waiver of the debt of £2,334,258 owed
by TN Europe to CSI).
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The
obligation of CSI to complete the E&S Sale Transaction is subject to the satisfaction (or waiver by CSI) of the following
conditions:
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Lantronix’s
representations and warranties identified as fundamental must be true and correct in
all respects on the date of the securities purchase agreement and the closing date, or
in the case of representations and warranties made as of a specified date earlier than
the closing date, as of such earlier date;
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Lantronix’s
representations and warranties (other than its representations and warranties identified
as fundamental) must be true and correct in all material respects on the date of the
securities purchase agreement and the closing date, or in the case of representations
and warranties made as of a specified date earlier than the closing date, as of such
earlier date;
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Lantronix
must have performed and complied with, in all material respects, all obligations, agreements
and covenants as specified in the securities purchase agreement;
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Lantronix
must have delivered to CSI a certificate, executed by a duly authorized officer, that
the preceding three conditions are satisfied; and
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Lantronix
must have delivered to CSI all of the required closing deliveries contemplated by the
securities purchase agreement (including a certificate of good standing of Lantronix;
a certificate of the secretary of Lantronix certifying to the resolutions duly adopted
by Lantronix’s board of directors authorizing and approving the securities purchase
agreement and the E&S Sale Transaction; the executed transition services agreement;
evidence that the landlord under the UK lease has released CSI from all obligations as
guarantor under such lease as of the closing (subject to certain additional terms set
forth in the securities purchase agreement); and evidence of certain required consents,
waivers or approvals).
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Representations
and Warranties
In
the securities purchase agreement and subject to the exceptions, qualifications and schedules to the securities purchase agreement,
as applicable, CSI makes representations and warranties to Lantronix relating to, among other things:
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the
organization, power and authority of CSI and the E&S Companies to enter into and
perform their respective obligations under the securities purchase agreement and the
other documents contemplated thereby, together with other corporate matters with respect
to CSI and the E&S Companies;
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the
binding effect of the securities purchase agreement and the other documents contemplated
thereby;
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the
absence of conflicts with, or defaults under, CSI’s or the E&S Companies’
organizational documents, certain material contracts and the absence of violations of
applicable laws;
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required
consents and approvals of third parties or government entities;
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broker,
finder, investment banker or other intermediary fees;
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ownership
of the purchased securities;
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CSI’s
filings with the SEC;
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the
capitalization of the E&S Companies and their respective subsidiaries;
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the
financial statements of the E&S Companies;
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undisclosed
liabilities and indebtedness of the E&S Companies;
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conduct
of the E&S Companies since December 31, 2020, including the absence of any event
or occurrence which has had a material adverse effect and the absence, subject to certain
threshold limitations, of certain changes;
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title
to, condition of and sufficiency of personal property;
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certain
environmental matters;
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intellectual
property owned, licensed or used by the E&S Companies;
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matters
relating to the real property leased by the E&S Companies;
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litigation
and other proceedings;
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employee
benefit plans;
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insurance
policies, bonds or other insurance maintained by the E&S Companies;
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material
contracts of the E&S Companies and certain information relating thereto;
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labor
and employment matters;
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certain
affiliate transactions;
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inventory
of the E&S Companies;
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accounts
receivable of the E&S Companies;
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permits
and licenses of the E&S Companies;
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compliance
with certain anti-corruption laws;
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books
and records of the E&S Companies; and
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a
disclaimer of other representations and warranties regarding CSI or the E&S Companies.
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Pursuant
to the securities purchase agreement and subject to the exceptions, qualifications and schedules to the securities purchase agreement,
as applicable, Lantronix makes representations and warranties to CSI relating to, among other things:
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the
organization, power and authority of Lantronix to enter into and perform its obligations
under the securities purchase agreement and the other documents contemplated thereby,
together with other corporate matters with respect to Lantronix;
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the
binding effect of the securities purchase agreement and the other documents contemplated
thereby;
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the
absence of conflicts with, or defaults under, Lantronix’s organizational documents
and the absence of violations of applicable laws;
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required
consents and approvals of third parties or government entities;
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broker,
finder, investment banker or other intermediary fees;
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litigation
and other proceedings;
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investment
intent and “accredited investor” status;
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type,
terms, validity and sufficiency of the bank financing obtained
by Lantronix in accordance with the commitment letters delivered to us;
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no
beneficial ownership of CSI’s voting stock in the prior four years; and
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the
independent investigation conducted by Lantronix and its representatives relating to
the E&S Sale Transaction and no reliance on any extra-contractual statements.
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Covenants
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Conduct
of the E&S Companies
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From
and after the date of the securities purchase agreement and until the effective time of the E&S Sale Transaction or until
the earlier termination of the securities purchase agreement, we have agreed to (a) conduct the E&S Segment business in the
ordinary course of business; (b) use commercially reasonable efforts to preserve intact the E&S Segment business and to keep
available the services of the employees of TN Europe or any subsidiary thereof and the TNI personnel; (c) use commercially reasonable
efforts to preserve the goodwill of, and maintain satisfactory relationships with, all material customers, suppliers, distributors,
lessors, tenants, creditors, debtors, employees, consultants and agents of the E&S Segment business; and (d) not take or omit
to take certain specified other actions. Our obligations relating to the conduct of the E&S Segment business prior to the
closing date are subject to exceptions for actions that are specified by the parties and those otherwise contemplated by the securities
purchase agreement, required by applicable legal requirements, or as Lantronix may consent to in writing (which may not be unreasonably
withheld, conditioned or delayed).
We
are required to give Lantronix, upon reasonable notice to us, reasonable access to any employee of the E&S Companies for in-person,
phone or video meetings during normal business hours. We are also required to provide Lantronix with reasonable access at reasonable
times and upon reasonable advance notice to the offices, properties, personnel, books and records of the E&S Companies; provided,
that such access does not unreasonably interfere with the normal operations of the E&S Companies.
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Solicitation
of Transactions
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Subject
to certain exceptions in the securities purchase agreement, following the date of the securities purchase agreement and until
the effective time of the E&S Sale Transaction, CSI and its subsidiaries (including the E&S Companies) will not, and will
cause its representatives not to, directly or indirectly:
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solicit,
seek or initiate or knowingly take any action to facilitate or encourage any offers,
inquiries or the making of any proposal or offer that constitutes, or could reasonably
be expected to lead to, any “acquisition proposal,” or engage, participate
in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any
nonpublic information to any person in connection with any inquiries, proposals or offers
that constitute or could reasonably be expected to lead to, an acquisition proposal;
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enter
into, continue or otherwise participate or engage in any discussions or negotiations
regarding any acquisition proposal, or furnish to any person any non-public information
or afford any person other than Lantronix access to such party’s property, books
or records (except pursuant to a request by a government entity) in connection with any
offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably
be expected to lead to, any acquisition proposal; or
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take
any action to make the provisions of any takeover statute inapplicable to any transactions
contemplated by an acquisition proposal.
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Notwithstanding
the foregoing, prior to receipt of the required vote of our shareholders of the E&S Sale Transaction, we may furnish non-public
information with respect to the E&S Companies to any “qualified person,” or engage in discussions or negotiations
(including solicitation of revised acquisition proposals) with any qualified person regarding any such acquisition proposal. However,
before taking these actions, we must have received a bona fide written unsolicited acquisition proposal from a qualified person,
we must have received an executed confidentiality agreement from such qualified person, and the CSI board of directors must have
determined, after consultation with outside legal counsel, that the failure to take such actions would reasonably be expected
to be inconsistent with the its fiduciary duties under applicable law. Any information made available or provided to a qualified
person by or on behalf of CSI will, substantively concurrently therewith, be made available or provided to Lantronix.
Following
the date of the securities purchase agreement and until the effective time of the E&S Sale Transaction, the CSI board of directors
may not, except as set forth in the securities purchase agreement:
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(a)
withhold, withdraw or modify, or publicly propose to withhold, withdraw or modify, in
a manner adverse to Lantronix, the approval or recommendation by the CSI board of directors
with respect to the E&S Sale Transaction, (b) fail to include the CSI board of directors’
recommendation that you vote for the E&S Sale Proposal in this proxy statement or
(c) if any person (other than Lantronix) has publicly announced an acquisition proposal
(or publicly announced any material modification thereto), fail to publicly reaffirm
the CSI board of directors’ recommendation that you vote for the E&S Sale Proposal
within 10 business days (with certain exceptions) of being requested to do so by Lantronix
(any of clauses (a), (b) or (c), a “seller board recommendation change”);
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enter
into any letter of intent, memorandum of understanding, agreement in principle, acquisition
agreement, merger agreement, purchase agreement, exchange agreement or similar agreement
contemplating any acquisition proposal (other than a confidentiality agreement); and
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adopt,
approve or recommend, or publicly propose to adopt, approve or recommend, any acquisition
proposal.
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The
CSI board of directors unanimously recommends that you vote for the E&S Sale Proposal.
Prior
to receipt of the required vote of our shareholders of the E&S Sale Transaction, the CSI board of directors may effect a seller
board recommendation change or terminate the securities purchase agreement in order to enter into an alternative acquisition agreement,
with respect to an unsolicited bona fide acquisition proposal that did not result from a breach of the securities purchase agreement
if:
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the
CSI board of directors has determined after consultation with outside legal counsel and
financial advisors, that such acquisition proposal constitutes a “superior proposal”
and, after consultation with outside legal counsel, that the failure to make such seller
board recommendation change would reasonably be expected to be inconsistent with the
CSI board of directors’ fiduciary obligations under applicable law;
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we
have provided at least four business days prior written notice to Lantronix that we intend
to effect a seller board recommendation change;
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during
such four business day period, we negotiate with Lantronix in good faith to make adjustments
in the terms and conditions of the securities purchase agreement so that the acquisition
proposal ceases to constitute a superior proposal, if Lantronix, in its discretion, proposes
to make adjustments; and
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if
Lantronix has delivered to us a written offer to alter the terms or conditions of the
securities purchase agreement during such four business day period, the CSI board of
directors has determined in good faith, after considering the terms of such offer by
Lantronix, that a seller board recommendation change would still be required for the
CSI board of directors to be consistent with its fiduciary obligations under applicable
law.
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We
must notify Lantronix of our receipt of any acquisition proposal and provide Lantronix a copy of such acquisition proposal (if
written), or a summary of the material terms and conditions of such acquisition proposal (if oral). We further agreed to cease
immediately all discussions and negotiations that commenced prior to the date of the securities purchase agreement regarding any
proposal or offer that constitutes, or could reasonably be expected to lead to, an acquisition proposal.
As
used in the securities purchase agreement, “acquisition proposal” means any inquiry, proposal or offer from any person,
other than Lantronix or its subsidiaries, relating to any:
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merger,
consolidation, sale of assets, dissolution, liquidation, joint venture, recapitalization,
reorganization, share exchange, tender offer, exchange offer, or other business combination
transaction or series of related transactions involving any E&S Company, CSI or any
other subsidiary of CSI, under which (a) such person would, directly or indirectly,
acquire assets equal to 20% or more of the consolidated assets of CSI or any E&S
Company, or to which 20% or more of the revenues CSI or of the E&S Companies on a
consolidated basis are attributable for the most recent fiscal year in which audited
financial statements are then available, or (b) the equity holders of such person
immediately after giving effect to such transaction(s) would beneficially own 20% or
more of any class of equity or voting securities of CSI or any E&S Company or the
surviving or resulting entity in such transaction(s);
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issuance
by CSI or any E&S Company of 20% or more of its equity or voting securities; or
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acquisition
in any manner, directly or indirectly, of 20% or more of the equity securities or consolidated
total assets of CSI or any E&S Company, in each case other than the transactions
contemplated by the securities purchase agreement.
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For
clarity, CSI and Lantronix have agreed that the transactions contemplated by our proposed merger agreement with Pineapple are
expressly excluded from the definition of “acquisition proposal” in the securities purchase agreement.
As
used in the securities purchase agreement, “superior proposal” means a bona fide, unsolicited written acquisition
proposal that was first received after the date of the securities purchase agreement that is:
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on
terms which the CSI board of directors determines in its good faith judgment to be more
favorable to the holders of our capital stock from a financial point of view than the
transactions contemplated by the securities purchase agreement, taking into account all
the terms and conditions of such proposal and this Agreement that the CSI board of directors
determines to be relevant;
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is
not subject to any financing condition (and if financing is required, such financing
is then fully committed to the third party);
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is
reasonably capable of being completed on the terms proposed without unreasonable delay;
and
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includes
termination rights no less favorable than the terms set forth in the securities purchase
agreement, and in all respects from a third party capable of performing such terms.
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If
an “intervening event” occurs after the date of the securities purchase agreement but prior to the receipt of the
required vote of our shareholders of the E&S Sale Transaction, the CSI board of directors may effect a seller board recommendation
change if:
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the
CSI board of directors has determined (after consultation with outside legal counsel)
that the failure to make such seller board recommendation change would reasonably be
expected to be inconsistent with its fiduciary obligations under applicable law,
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prior
to effecting the seller board recommendation change, we notify Lantronix, in writing,
at least five business days before taking such action of the CSI board of directors’
intent to consider such action;
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during
such period we negotiate with Lantronix in good faith to make such adjustments in the
terms and conditions of the securities purchase agreement so that the underlying facts
giving rise to, and the reasons for taking such action, cease to constitute an intervening
event, if Lantronix, in its reasonable discretion, proposes to make such adjustments;
and
|
|
•
|
the
CSI board of directors still determines in good faith, after consulting with outside
legal counsel, that the failure to effect such seller board recommendation change, after
taking into account any adjustments made by Lantronix, would reasonably be expected to
be inconsistent with its fiduciary duties under applicable law.
|
As
used in the securities purchase agreement, “intervening event” means with respect to CSI any material event, circumstance,
change, effect, development, or condition occurring or arising after the date of the securities purchase agreement that (a) affects
the business, assets or operations of the E&S Companies; (b) was not known to, nor reasonably foreseeable by, or if known,
the effect of which was not reasonably foreseeable by, any member of the CSI board of directors as of or prior to the date of
the securities purchase agreement; (c) becomes known to the CSI board of directors prior to the receipt of the required vote of
our shareholders of the E&S Sale Transaction; and (d) did not result from or arise out of the announcement or pendency of,
or any actions required to be taken by either Lantronix or CSI (or to be refrained from being taken by Lantronix or CSI) pursuant
to, the securities purchase agreement. However, neither an acquisition proposal nor a change in the market price or trading
volume of our securities constitutes an intervening event.
|
(b)
|
SUPPLEMENTAL FINANCIAL INFORMATION
|
Quarterly Operating Results
(in thousands except per share amounts)
Unaudited
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sep 30
|
|
|
Dec 31
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
9,163
|
|
|
$
|
9,628
|
|
|
$
|
12,110
|
|
|
$
|
11,675
|
|
Operating (loss) income from continuing operations
|
|
|
(1,224
|
)
|
|
|
(1,646
|
)
|
|
|
306
|
|
|
|
(133
|
)
|
Net (loss) income from continuing operations
|
|
|
(809
|
)
|
|
|
(1,367
|
)
|
|
|
554
|
|
|
|
(174
|
)
|
Net income (loss) from discontinued operations
|
|
|
2,313
|
|
|
|
(569
|
)
|
|
|
(291
|
)
|
|
|
171
|
|
Net income (loss)
|
|
|
1,504
|
|
|
|
(1,936
|
)
|
|
|
263
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
$
|
0.25
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
Diluted net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
$
|
0.25
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
11,216
|
|
|
$
|
10,704
|
|
|
$
|
13,622
|
|
|
$
|
15,364
|
|
Operating (loss) income from continuing operations
|
|
|
(821
|
)
|
|
|
(1,129
|
)
|
|
|
772
|
|
|
|
1,187
|
|
Net (loss) income from continuing operations
|
|
|
(771
|
)
|
|
|
(1,069
|
)
|
|
|
877
|
|
|
|
1,214
|
|
Net income from discontinued operations
|
|
|
1,010
|
|
|
|
3,842
|
|
|
|
860
|
|
|
|
506
|
|
Net income
|
|
|
239
|
|
|
|
2,773
|
|
|
|
1,737
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
Discontinued operations
|
|
$
|
0.11
|
|
|
$
|
0.41
|
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
Diluted net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
Discontinued operations
|
|
$
|
0.11
|
|
|
$
|
0.41
|
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
The company recorded a gain of $2,161,000 on the sale inventory, working
capital, and certain capital equipment to Primex in the first quarter of 2020.
APPENDIX A
Securities Purchase Agreement dated April 28, 2021 by and between Lantronix, Inc., as Purchaser and Communications Systems, Inc., as Seller
Execution Copy
SECURITIES PURCHASE AGREEMENT
by and between
LANTRONIX, INC.,
as Purchaser,
and
COMMUNICATIONS SYSTEMS, INC.,
as Seller
April 28, 2021
TABLE OF CONTENTS
EXHIBITS AND SCHEDULES
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT
(this “Agreement”) is made as of April 28, 2021, by and between LANTRONIX, INC., a Delaware corporation (“Purchaser”),
and COMMUNICATIONS SYSTEMS, INC., a Minnesota corporation (“Seller”).
BACKGROUND
A. Seller
(i) owns all of the issued and outstanding shares of Transition Networks, Inc., a Minnesota corporation (“TNI”), which
consists of 2,940,000 shares of common stock (the “TNI Shares”) and (ii) is the sole legal and beneficial owner of
the entire issued share capital of Transition Networks Europe Limited, a private limited company incorporated in England and Wales (“TN
Europe” and, together with TNI, the “Companies”), which consists of one (1) ordinary share of nominal value
£1.00 (the “TN Europe Share” and, together with the TNI Shares, the “Purchased Securities”).
B. Seller
desires to sell to Purchaser, and Purchaser desires to purchase from Seller, all of the Purchased Securities for the consideration and
in accordance with the terms and subject to the conditions set forth in this Agreement (the “Contemplated Transactions”).
C. The
Board of Directors of Seller (the “Seller Board”) has unanimously (i) determined that this Agreement and the Contemplated
Transactions are fair to and in the best interests of Seller and its shareholders, (ii) approved, adopted and declared advisable this
Agreement and the Contemplated Transactions, (iii) directed that the approval of the Contemplated Transactions be submitted to a vote
at a meeting of Seller’s shareholders and (iv) recommended the adoption of this Agreement and the approval of the Contemplated Transactions
by Seller’s shareholders at the Seller Shareholders Meeting (as defined below) as required by the Minnesota Business Corporation
Act (the “MBCA”) and Seller’s Organizational Documents (as defined below).
NOW, THEREFORE, in consideration
of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, Purchaser and Seller, intending to be legally bound, hereby agree as follows:
ARTICLE
I
DEFINITIONS
1.1
Specific Definitions. As used in this Agreement, the terms identified
on Exhibit A shall have the meanings set forth or referred to in Exhibit A.
1.2
Other Terms. Other terms may be defined elsewhere in the text of
this Agreement and, unless otherwise indicated, shall have such meaning throughout this Agreement.
ARTICLE
II
PURCHASE AND SALE OF SECURITIES
2.1
Purchase and Sale. At the Closing, subject to the terms and conditions
set forth in this Agreement, Purchaser will purchase and acquire from Seller, and Seller will sell, convey, assign, transfer and deliver
to Purchaser, all of Seller’s right, title and interest in and to the Purchased Securities for the Purchase Price (as defined below).
Without limitation to the foregoing, Purchaser will purchase and acquire from Seller, and Seller will sell to Purchaser with full title
guarantee the TN Europe Share together with the benefit of all rights to dividends and other distributions declared, made or paid or agreed
to be made or paid on or after Closing.
2.2
Purchase Price; Estimated Closing Statement; Payment at the Closing.
(a)
Purchase Price. The aggregate purchase price for the Purchased Securities (the “Purchase Price”)
shall be equal to: (i) $25,000,000 plus the UK Deposit Amount (such sum, the “Preliminary Purchase Price”),
subject to adjustment pursuant to Section 2.3, plus (ii) the contingent right to receive the earnout payments (the
“Earnout Payments”), if any, that may become payable pursuant to Section 2.4. The Purchase Price shall be apportioned
between the amount payable for the sale and purchase of the TN Europe Share and the amount payable for the sale and purchase of the TNI
Shares in accordance with Section 2.8.
(b)
Estimated Closing Statement. At least two (2) Business Days prior to the Closing Date, Seller shall cause to be prepared
and delivered to Purchaser a statement (the “Estimated Closing Statement”) setting forth Seller’s good faith
estimate of the Net Working Capital (the “Estimated Net Working Capital”).
(c)
Payment at the Closing. At the Closing, Purchaser shall pay or cause to be paid to Seller, by wire transfer of immediately
available funds to a bank account designated in writing by Seller (with such account designated in writing to Purchaser at least two (2)
Business Days prior to the Closing Date), an amount (the “Estimated Purchase Price”) equal to (i) the Preliminary Purchase
Price, plus (ii) the amount (if any) by which the Estimated Net Working Capital exceeds the Target Net Working Capital minus
(iii) the amount (if any) by which the Estimated Net Working Capital is less than the Target Net Working Capital.
2.3
Purchase Price Adjustment. Following the Closing Date, the Purchase
Price will be adjusted as set forth below:
(a)
Closing Statement Preparation. Within sixty (60) days after the Closing Date, Purchaser will prepare and deliver to Seller
a statement (the “Closing Statement”) setting forth in reasonable detail Purchaser’s good faith calculations
of (i) the Net Working Capital and (ii) the amount of any adjustment to the Purchase Price pursuant to Section 2.3(d). Purchaser
will make the work papers and back-up materials used in preparing the Closing Statement, and the books, records and financial staff of
the Acquired Companies, available to Seller and its accountants and other representatives at reasonable times and upon reasonable notice
at any time during (A) the review by Seller of the Closing Statement, and (B) the resolution by the parties of any objections thereto;
provided, that prior to being required to make any such books, records
and financial staff available, Seller and its accountants
and other representatives shall execute a confidentiality agreement in a form reasonably acceptable to Purchaser.
(b) Closing
Statement Review. Within forty-five (45) days following Purchaser’s delivery of the Closing Statement to Seller, Seller will
give Purchaser a written notice stating either (i) Seller’s acceptance, without objection, of the Closing Statement (an “Acceptance
Notice”) or (ii) Seller’s objections to the Closing Statement as set forth in a Notice of Disagreement (as defined below)
pursuant to Section 2.5(a). If Seller gives Purchaser an Acceptance Notice or does not give Purchaser a Notice of Disagreement
within such 45-day period, then the Closing Statement will be conclusive and binding upon the parties and the calculation of Net Working
Capital set forth in the Closing Statement will constitute the Final Net Working Capital.
(c)
Dispute Resolution Procedures. Any dispute arising out of or relating to the calculation of the Final Net Working Capital
shall be resolved in accordance with the dispute resolution procedures set forth in Section 2.5.
(d) Adjustment
Payment. Upon the determination, in accordance with this Section 2.3 and Section 2.5, of the Final Net Working Capital,
the Purchase Price will be recalculated using the Final Net Working Capital in lieu of the Estimated Net Working Capital used in the calculation
of the Estimated Purchase Price (the “Adjusted Purchase Price”).
(i)
If the Adjusted Purchase Price exceeds the Estimated Purchase Price (the amount by which the Adjusted Purchase Price exceeds the
Estimated Purchase Price is referred to herein as the “Increase Amount”), then, within five (5) Business Days after
the determination of the Final Net Working Capital pursuant to this Section 2.3 and Section 2.5, Purchaser will pay the
Increase Amount to Seller, by wire transfer of immediately available funds to an account designated by Seller.
(ii)
If the Adjusted Purchase Price is less than the Estimated Purchase Price (the amount by which the Adjusted Purchase Price is less
than the Estimated Purchase Price is referred to herein as the “Decrease Amount”), then, within five (5) Business Days
after the determination of the Final Net Working Capital pursuant to this Section 2.3 and Section 2.5, Seller will pay the
Decrease Amount to Purchaser, by wire transfer of immediately available funds to an account designated by Purchaser.
(iii)
If the Adjusted Purchase Price is equal to the Estimated Purchase Price, then there will be no adjustment to the Purchase Price
pursuant to this Section 2.3.
2.4
Earnouts.
(a)
Within forty-five (45) days after the last day of each Earnout Period, Purchaser will cause to be prepared and delivered to Seller
a statement (each, an “Earnout Statement”) setting forth in reasonable detail Purchaser’s good faith calculations
of (i) Revenue for such Earnout Period and (ii) the amount of any Earnout Payment to which Seller is entitled pursuant to Section
2.4(b). Within forty-five (45) days following Purchaser’s delivery of each Earnout Statement to Seller, Seller will give Purchaser
a written notice stating either (i) Seller’s
acceptance, without objection, of the Earnout Statement
(an “Earnout Acceptance Notice”) or (ii) Seller’s objections to the Earnout Statement as set forth in a Notice
of Disagreement pursuant to Section 2.5(a). If Seller gives Purchaser an Earnout Acceptance Notice or does not give Purchaser a
Notice of Disagreement within such 45-day period, then the Earnout Statement (including the Revenue calculation therein) will be conclusive
and binding upon the parties, and the calculation of the Earnout Payment set forth in such Earnout Statement will constitute the final
Earnout Payment for such Earnout Period. Any dispute arising out of or relating to the calculations of the Revenue for any Earnout Period
and the Earnout Payments shall be resolved in accordance with the dispute resolution procedures set forth in Section 2.5.
(b)
Calculation of Earnout Payments.
(i)
First Earnout Period. The Earnout Payment for the First Earnout Period, if any, will be calculated as follows:
A.
If the Revenue for the First Earnout Period is greater than or equal to $20,000,000, then Purchaser shall pay or cause to be paid
to Seller an amount equal to $3,000,000;
B.
If the Revenue for the First Earnout Period is greater than or equal to $19,500,000 and less than $20,000,000, then Purchaser shall
pay or cause to be paid to Seller an amount equal to $2,500,000;
C.
If the Revenue for the First Earnout Period is greater than or equal to $19,000,000 and less than $19,500,000, then Purchaser shall
pay or cause to be paid to Seller an amount equal to $2,000,000;
D.
If the Revenue for the First Earnout Period is greater than or equal to $18,500,000 and less than $19,000,000, then Purchaser shall
pay or cause to be paid to Seller an amount equal to $1,500,000;
E.
If the Revenue for the First Earnout Period is greater than or equal to $18,000,000 and less than $18,500,000, then Purchaser shall
pay or cause to be paid to Seller an amount equal to $1,000,000; or
F.
If the Revenue for the First Earnout Period is less than $18,000,000, then Seller shall not be entitled to receive any Earnout
Payment pursuant to this Section 2.4(b)(i);
provided, however,
that in no event shall Purchaser be required to pay Seller an amount in excess of $3,000,000 for the Earnout Payment for the First Earnout
Period. Any amount owing to Seller pursuant to this Section 2.4(b)(i) shall be paid to Seller by wire transfer of immediately available
funds to a bank account designated in writing by Seller no later than five (5) Business Days after the final determination of the Earnout
Payment for the First Earnout Period.
(ii)
Second Earnout Period. The Earnout Payment for the Second Earnout Period, if any, will be calculated as follows:
A.
If the Revenue for the Second Earnout Period is greater than or equal to $22,000,000, then Purchaser shall pay or cause to be paid
to Seller an amount equal to $4,000,000;
B.
If the Revenue for the Second Earnout Period is greater than or equal to $21,500,000 and less than $22,000,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $3,500,000;
C.
If the Revenue for the Second Earnout Period is greater than or equal to $21,000,000 and less than $21,500,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $3,000,000;
D.
If the Revenue for the Second Earnout Period is greater than or equal to $20,500,000 and less than $21,000,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $2,500,000;
E.
If the Revenue for the Second Earnout Period is greater than or equal to $20,000,000 and less than $20,500,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $2,000,000;
F.
If the Revenue for the Second Earnout Period is greater than or equal to $19,500,000 and less than $20,000,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $1,500,000;
G.
If the Revenue for the Second Earnout Period is greater than or equal to $19,000,000 and less than $19,500,000, then Purchaser
shall pay or cause to be paid to Seller an amount equal to $1,000,000; or
H.
If the Revenue for the Second Earnout Period is less than $19,000,000, then Seller shall not be entitled to receive any Earnout
Payment pursuant to this Section 2.4(b)(ii);
provided, however,
that in no event shall Purchaser be required to pay Seller an amount in excess of $4,000,000 for the Earnout Payment for the Second Earnout
Period. Any amount owing to Seller pursuant to this Section 2.4(b)(ii) shall be paid to Seller by wire transfer of immediately
available funds to a bank account designated in writing by Seller no later than five (5) Business Days after the final determination of
the Earnout Payment for the Second Earnout Period pursuant to Section 2.5.
(c)
From the Closing through the end of the Second Earnout Period, Purchaser shall (i) not contractually restrict Purchaser’s right
and ability to pay the Earnout Payments when due; (ii) not directly or indirectly take, or omit to take, any action, or permit any Subsidiary
(including the Acquired Companies after the Closing) to take or omit to take any action, the intent or purpose of which is or would be
to impair the likelihood of the Earnout Payments becoming due and payable under this Section 2.4; (iii) operate the Business in
good faith in accordance and consistent with Purchaser’s business judgment and historical practices, standard policies, procedures
and terms of business; and (iv) use Commercially Reasonable Efforts to maximize the Revenue. This Section 2.4(c) will survive the
Closing and will bind any
successors or assigns of Purchaser or the Acquired
Companies. During the period commencing ninety (90) days prior to the end of each Earnout Period and ending forty-five (45) days following
Seller’s receipt of each Earnout Statement, Seller shall have the right to audit Purchaser’s books and records with respect
to booking, sales orders and deliveries, and Purchaser agrees to provide all documents and information requested by Seller reasonably
related to such audit.
2.5
Dispute Resolution Procedures.
(a)
Notice of Disagreement. The (i) Closing Statement delivered pursuant to Section 2.3(a) and Purchaser’s calculations
of the Net Working Capital set forth therein, and (ii) Earnout Statements delivered pursuant to Section 2.4(a) and Purchaser’s
calculations of (A) the Revenue for such Earnout Period and (B) the amount of the Earnout Payment, if any, for such Earnout Period, shall
be final, binding and conclusive on the parties hereto unless Seller, within forty-five (45) days following Seller’s receipt of
the Closing Statement or Earnout Statement, as applicable, delivers to Purchaser a written notice of disagreement (a “Notice
of Disagreement”) setting forth in reasonable detail (1) each specific item or amount in the Closing Statement or Earnout Statement,
as applicable, as to which Seller disagrees in good faith (each, a “Disputed Item”), (2) the basis for each Disputed
Item and reasonable supporting documentation therefor and (3) Seller’s calculations of, as applicable, (x) the Final Net Working
Capital or (y) the Revenue for such Earnout Period and the Earnout Payment for such Earnout Period. Seller shall be deemed to have agreed
with all other items and amounts set forth in any Closing Statement or Earnout Statement, as applicable, other than the Disputed Items
set forth in any Notice of Disagreement with respect to such Closing Statement or Earnout Statement, as applicable.
(b)
Resolution Period. If Seller duly and timely delivers to Purchaser a Notice of Disagreement with respect to any Closing
Statement or Earnout Statement, as applicable, that complies with Section 2.5(a), then Purchaser and Seller shall, during the thirty
(30) day period following Purchaser’s receipt of such Notice of Disagreement (as such period may be mutually extended in writing
by Purchaser and Seller, the “Resolution Period”), negotiate in good faith and use good faith efforts to resolve promptly
all of the Disputed Items set forth in such Notice of Disagreement. All discussions related thereto shall be governed by Rule 408 of the
Federal Rules of Evidence and any applicable similar state rule, and evidence of such discussions shall not be admissible or used by any
party in any future proceedings between the parties hereto, including any proceedings before or with the Accounting Firm (as defined below)
pursuant to Section 2.5(c). Any such Disputed Items that are resolved by a written agreement between Purchaser and Seller during
the Resolution Period shall be final, binding and conclusive on the parties hereto and shall become part of the calculations of, as applicable,
(i) the Final Net Working Capital or (ii) the Revenue for the applicable Earnout Period and the Earnout Payment for such Earnout Period.
(c)
Accounting Firm.
(i)
If, by the end of the Resolution Period, Purchaser and Seller are unable to resolve all of the Disputed Items set forth in a Notice
of Disagreement with respect to any Closing Statement or Earnout Statement, as applicable, then as promptly as practicable and in no event
later than ten (10) days thereafter, they shall jointly engage
and submit such unresolved Disputed Items
(each, an “Unresolved Item”) for resolution to a nationally recognized independent accounting firm mutually acceptable
to Purchaser and Seller (the “Accounting Firm”), with each acting reasonably. Purchaser and Seller agree (A) to execute
a reasonable engagement letter with the Accounting Firm, which letter will specifically require the Accounting Firm to review this Agreement
and agree to comply with the terms of this Section 2.5, (B) to submit to the Accounting Firm not later than thirty (30) days after
the end of the Resolution Period a written statement summarizing its position on the Unresolved Items, together with such supporting documentation
as it deems necessary, and (C) not to engage in any ex parte communications with the Accounting Firm.
(ii)
Purchaser and Seller shall jointly instruct the Accounting Firm that (A) it shall act as an expert in accounting, and not as an
arbitrator, to resolve only the Unresolved Items in accordance with, in the case of the Closing Statement, the Net Working Capital Principles
and the definitions of Net Working Capital and the other applicable terms specifically set forth in this Agreement, and in the case of
an Earnout Statement, the definitions of Revenue, Earnout Statement, Earnout Payment and the other applicable terms specifically set forth
in this Agreement; (B) it shall base its decision solely on the written submissions of Purchaser and Seller and shall not conduct an independent
review or audit; (C) it may not assign a dollar value to any Unresolved Item greater than the highest amount or less than the lowest amount
claimed by Purchaser or Seller, as applicable, in their written submissions to the Accounting Firm; and (D) it shall deliver to Purchaser
and Seller its written decision setting forth its calculations of each of the Unresolved Items as promptly as practicable (and in no event
later than thirty (30) days) after the submission of the Unresolved Items to the Accounting Firm. The Accounting Firm’s written
decision shall be final, binding and conclusive on the parties hereto absent fraud or manifest error. The Closing Statement or Earnout
Statement, as applicable, shall be revised as necessary to reflect the Accounting Firm’s written decision, and such decision may
be entered as a judgment in any court of competent jurisdiction.
(iii)
The fees, costs and expenses of the Accounting Firm shall be allocated to and borne by Purchaser and Seller in inverse proportion
as they may prevail on the Unresolved Items, which proportionate allocations shall be calculated on an aggregate basis based on the relative
dollar values of all Unresolved Items and shall be determined by the Accounting Firm and included in its written decision.
2.6
The Closing. The closing of the Contemplated Transactions (the
“Closing”) will take place no later than two (2) Business Days following the satisfaction or (to the extent permitted
by applicable Law) waiver of all of the conditions precedent set forth in Article VIII (other than those conditions that by their
nature or terms are to be satisfied at the Closing, but subject to the satisfaction or (to the extent permitted by applicable Law) waiver
of those conditions), or at such other place or time or on such other date as Purchaser and Seller may mutually agree in writing. The
date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” The parties intend that the
Closing will be effected, to the extent practicable, by conference call, the electronic delivery of documents, and, if needed, the prior
physical exchange of certain other documents and instruments to be held in escrow by outside
counsel to the recipient party hereto pending authorization
to release at the Closing. Regardless of the time at which the Closing occurs, the Closing will be deemed to have occurred at 12:01 a.m.
Central Time on the Closing Date (the “Effective Time”).
2.7
Closing Deliveries.
(a)
At the Closing, Seller shall deliver or cause to be delivered to Purchaser all of the following:
(i) a
certificate issued as of a recent date as to the good standing of TNI in the State of Minnesota;
(ii)
executed assignment of the TNI Shares, in form and substance reasonably satisfactory to Purchaser;
(iii) executed
stock transfer form for the TN Europe Share, in form and substance reasonably satisfactory to Purchaser, together with either the original
share certificate or an indemnity for lost share certificate (in a form reasonably acceptable to Purchaser) in respect of the TN Europe
Share;
(iv) resolutions
of the directors of each of TN Europe and each UK Company Subsidiary, in form and substance reasonably satisfactory to Purchaser, to approve
Closing matters including: (a) in the case of TN Europe only, registering Purchaser as holder of the TN Europe Share, subject only to
due stamping of the transfer, (b) in the case of TN Europe only, authorizing the execution and delivery to Purchaser of share certificates
in respect of the TN Europe Share; (c) confirming the resignations and appointments of directors and officers;
(v)
a certificate of the secretary of Seller, dated as of the Closing Date, in form and substance reasonably satisfactory to Purchaser,
certifying to the resolutions duly adopted by the Seller Board authorizing the execution, delivery and performance of this Agreement and
the consummation of the Contemplated Transactions, which resolutions shall have been certified as true, correct and in full force and
effect without rescission, revocation or amendment as of the Closing Date;
(vi) the
Transition Services Agreement, duly executed by Seller;
(vii) resignations,
in form and substance reasonably satisfactory to Purchaser, duly executed by the directors and officers of the Acquired Companies listed
on Schedule 2.7(a)(vii);
(viii) evidence
of the consents, waivers or approvals set forth on Schedule 2.7(a)(viii);
(ix) the
register of members of each of TN Europe and the UK Company Subsidiaries together with all of the other statutory registers and statutory
books of each of TN Europe and the UK Company Subsidiaries, in each case, duly written up to date as at Closing;
(x)
the share certificates for all issued shares in each of the UK Company Subsidiaries (or, if such share certificates are lost, indemnities
for lost share certificate in form and substance reasonably satisfactory to Purchaser);
(xi) a
power of attorney in a form and substance reasonably satisfactory to Purchaser and duly executed by Seller appointing Purchaser as Seller’s
duly authorized attorney to exercise all voting and other rights attaching to the TN Europe Share pending stamping of the transfer of
the TN Europe Share and the registration of Purchaser of the holder of the TN Europe Share;
(xii) a
letter from Seller in form and substance reasonably satisfactory to Purchaser confirming that on Closing it will cease to be a relevant
registrable entity (within the meaning of section 790C of the UK Companies Act 2006) in relation to TN Europe;
(xiii) deeds
of release duly executed by each holder of any Lien (other than HSBC Bank plc in respect of the debenture granted by Net2Edge in favor
of HSBC Bank plc) releasing and confirming that all Liens granted by or affecting the share capital of or the assets or undertaking of
any Company or Company Subsidiary (including the UK Company Subsidiaries) have been released and discharged in full;
(xiv) a
Deed of Waiver, in form and substance reasonably satisfactory to Purchaser, to cause a waiver of the debt of £2,334,258 owed by
TN Europe to Seller; and
(xv) evidence
reasonably satisfactory to Purchaser (A) of the termination and release of all instruments providing for or related to the Wells Debt,
including any related guaranty and promissory notes, in each case with respect to the Acquired Companies, and (B) that all Liens on the
Purchased Securities shall have been released at or prior to the Closing, including documentation in form and substance reasonably satisfactory
to Purchaser executed by each Person holding a security interest or other Lien in any Purchased Security as of the Closing Date terminating
any and all such security interests and other Liens and authorizing Purchaser to file or record on behalf of such Person a UCC-3 termination
statement or other instruments of release or discharge relating thereto.
(b)
At the Closing, Purchaser shall deliver or cause to be delivered to Seller all of the following:
(i)
a certificate issued as of a recent date as to the good standing of Purchaser in the State of Delaware;
(ii)
a certificate of the secretary of Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to Seller,
certifying to the resolutions duly adopted by Purchaser’s board of directors authorizing the execution, delivery and performance
of this Agreement and the consummation of the Contemplated Transactions, which resolutions shall have been certified as true, correct
and in full force and effect without rescission, revocation or amendment as of the Closing Date;
(iii) the
Transition Services Agreement, duly executed by Purchaser;
(iv) subject
to Section 7.11, evidence that the landlord under the UK Lease has released Seller from all obligations as guarantor under the
UK Lease effective as of the Closing; and
(v)
evidence of the consents, waivers or approvals set forth on Schedule 2.7(b)(v).
2.8
Allocation of Purchase Price. The parties agree that, prior to
Closing, they will (acting reasonably and in good faith) agree to the apportionment of the Purchase Price between the TNI Shares and the
TN Europe Share based on the fair market value of such shares and, on the basis of such allocation, file all Tax Returns consistent with
such values.
ARTICLE
III
CERTAIN REPRESENTATIONS AND WARRANTIES ABOUT SELLER
Except as otherwise set forth
on the Disclosure Schedule, Seller represents and warrants to Purchaser that:
3.1
Organization, Power and Authorization. Seller (a) is a corporation,
duly incorporated, validly existing and in good standing under the laws of the State of Minnesota and (b) has the requisite power and
authority necessary to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is a
party. Seller’s execution, delivery and performance of each Transaction Document to which it is a party have been duly authorized
by Seller. Other than the Acquired Companies, Seller does not own or control, directly or indirectly, any equity or ownership interest
(or any interest convertible into or exchangeable for any equity or ownership interest) in any other Person who holds any equity right
or interest in the Business. Section 3.1 of the Disclosure Schedule sets forth a true and complete list of all Subsidiaries of
Seller.
3.2
Binding Effect and Noncontravention.
(a) This
Agreement has been duly executed and delivered by Seller and constitutes, and each other Transaction Document to which Seller is a party
when executed and delivered will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with its
terms except as such enforceability may be limited by (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar
laws affecting creditors’ rights generally, and (ii) applicable equitable principles (whether considered in a proceeding at law
or in equity).
(b) The
execution and delivery by Seller of each of the Transaction Documents to which Seller is a party do not, and the consummation of the Contemplated
Transactions will not, (i) violate any material Law to which Seller is subject or any provision of its Organizational Documents, (ii)
conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate,
terminate, modify or cancel or require any notice under any material agreement, contract, lease, license, instrument or
other arrangement to which Seller is a party or by
which Seller is bound or to which the assets of Seller are subject, (iii) result in the creation of any Lien (other than Permitted Liens)
on the Purchased Securities or (iv) except as set forth on Schedule 2.7(a)(viii), require any authorization, consent, release,
waiver, approval or notice by or to, or registration, declaration or filing with, any Person.
3.3
Brokers. Except for the Persons set forth in Section 3.3
of the Disclosure Schedule (whose fees and expenses shall be the sole and exclusive responsibility of Seller), no broker, finder, investment
banker or other intermediary is entitled or has claimed to be entitled to any fee or commission in connection with the Contemplated Transactions
based upon arrangements made by or on behalf of Seller.
3.4
Ownership of Purchased Securities. Seller owns beneficially and
of record, and has good and marketable title to the Purchased Securities free and clear of all liens other than as provided in Seller’s
Organizational Documents. No Person other than Seller has a beneficial interest in or a right to acquire or vote any of the Purchased
Securities (excluding for purposes of this section any equity holders of Seller (including the beneficial owners of such equity holders)).
There is no agreement, voting trust or other understanding to which Seller is party or is otherwise bound relating to the voting of any
of the Purchased Securities.
3.5
SEC Filings.
(a)
Since January 1, 2019, Seller has filed all forms, reports, schedules, statements and other documents, including any exhibits
thereto, required to be filed by it with the Securities and Exchange Commission (the “SEC”) relating to the Acquired
Companies, together with any amendments, restatements or supplements thereto (collectively, the “SEC Reports”). As
of their respective dates, the SEC Reports complied in all material respects with the applicable requirements of the Securities Act and
the Exchange Act. As of the date hereof, there are no outstanding SEC comments from the SEC with respect to the SEC Reports. To
the Knowledge of Seller, none of the SEC Reports filed on or prior to the date hereof is subject to ongoing SEC review or investigation
as of the date hereof.
(b)
Seller has established and maintains disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act).
Seller’s disclosure controls and procedures are reasonably designed to ensure that all material information required to be disclosed
by Seller in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
(c)
Since January 1, 2018, Seller’s principal executive officer and its principal financial officer have disclosed to
Seller’s auditors and the audit committee of the Seller Board, and have disclosed in the SEC Reports, all known (i) significant
deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely
to adversely and materially affect Seller’s ability to record, process, summarize and report financial information, (ii) material
weaknesses in the design and operation of internal controls over financial reporting and (iii) any fraud, whether or not material, that
involves the management or other employees who have a significant role in Seller’s internal controls over financial reporting. Seller
has materially complied with or substantially addressed such
deficiencies, material weaknesses and/or fraud. Seller
maintains systems of internal control over financial reporting that are sufficient to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
ARTICLE
IV
REPRESENTATIONS AND WARRANTIES ABOUT THE ACQUIRED COMPANIES
Except as otherwise set forth
on the Disclosure Schedule, Seller represents and warrants to Purchaser that:
4.1
Organization, Power and Authorization. TNI (a) is a corporation,
duly incorporated, validly existing and in good standing under the laws of the State of Minnesota and (b) has the requisite power and
authority necessary to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is a
party. TN Europe and each UK Company Subsidiary (i) is a private limited company, duly organized, validly existing under the laws of England
and Wales and (ii) has the requisite power and authority necessary to enter into, deliver and perform its obligations pursuant to each
of the Transaction Documents to which it is a party. Each Company and UK Company Subsidiary is qualified or licensed to do business as
a foreign corporation in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except where the failure to be so qualified and in good standing, individually
or in the aggregate with any such other failures, would not reasonably be expected to have a Material Adverse Effect. The execution, delivery
and performance of each Transaction Document by each Company to which it is a party have been duly authorized by such Company and, if
required by applicable Law or such Company’s or the Seller’s Organizational Documents, by Seller. Each Acquired Company has
the organizational power to carry on the businesses in which it is engaged, and, collectively, the Business, and to own, operate and use
the properties owned and used by it. The Seller Board has unanimously and duly (A) declared that this Agreement and the Contemplated
Transactions are fair to and in the best interests of Seller’s shareholders, (B) approved and declared advisable this Agreement
and the Contemplated Transactions in accordance with applicable Law, and (C) recommended that the shareholders of Seller vote in
favor of, and adopt and approve, this Agreement and the Contemplated Transactions (the “Seller Board Recommendation”).
4.2
Binding Effect and Noncontravention.
(a) The
Transaction Documents to which each Company is a party, when executed and delivered by the applicable company, will constitute a valid
and binding obligation of such company, enforceable against such company in accordance with its terms except as such enforceability may
be limited by (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws affecting creditors’ rights
generally, and (ii) applicable equitable principles (whether considered in a proceeding at law or in equity).
(b) The
execution and delivery by each Company of each of the Transaction Documents to which it is a party do not, and the consummation of the
Contemplated Transactions will not, (i) violate any Law to which any Acquired Company is subject or any
provision of such Acquired Company’s Organizational
Documents, (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify or cancel or require any notice under any Material Contract to which an Acquired Company is a party
or by which an Acquired Company is bound or to which an Acquired Company’s assets are subject, (iii) except as set forth on Schedule
2.7(a)(viii), result in the creation of any Lien (other than Permitted Liens) on any assets of any Acquired Company, or (iv) except
as set forth on Schedule 2.7(a)(viii), require any authorization, consent, release, waiver, approval or notice by or to, or registration,
declaration or filing with, any Person or Government Entity.
4.3
Capitalization; Subsidiaries.
(a)
The authorized capital stock of TNI consists solely of 3,500,000 authorized shares of common stock, of which 2,940,000 shares are
issued and outstanding as of the date hereof. The entire issued share capital of TN Europe consists solely of one (1) ordinary share of
nominal value of £1.00 (one pound sterling), and such share has been duly allotted and is issued as of the date hereof. Seller is
the sole legal and beneficial owner of the TN Europe Share. The Purchased Securities constitute all of the issued equity interests of
the Companies, and are free of all Liens, preemptive rights, rights of first refusal and “put” or “call” rights
created by statute, the Organizational Documents of Seller or of either of the Companies or any agreement to which Seller or either of
the Companies is a party or by which Seller or either of the Companies is bound. The TNI Shares have been duly authorized and are validly
issued, fully paid and nonassessable. The TN Europe Share was validly issued and is fully paid. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could
require either Company to issue, sell or otherwise cause to become (as applicable) outstanding or issued any of its equity interests.
The Companies are not required to register any of the Purchased Securities under the Securities Act.
(b)
Section 4.3(b) of the Disclosure Schedule sets forth (i) the name of each Subsidiary (direct or indirect) of each Company
(including each UK Company Subsidiary) (any such Subsidiary, a “Company Subsidiary” and all such Subsidiaries, the
“Company Subsidiaries”), (ii) the jurisdiction of its incorporation or organization and (iii) the direct owner of the
(as applicable) issued or outstanding capital stock or other equity securities of such Subsidiary and the amount of the (as applicable)
issued or outstanding capital stock or other equity interests of such Subsidiary owned by the Company or any of its Subsidiaries. TN Europe
is the sole legal and beneficial owner of all of the allotted and issued shares in the capital of each of the UK Company Subsidiaries.
Except as set forth on Section 4.3(b) of the Disclosure Schedule, no Acquired Company (x) has any Subsidiaries or (y) holds
any equity or debt interest in any Person. Each of the Company Subsidiaries is duly organized, validly existing and (where applicable)
in good standing under the Laws of the jurisdiction of its incorporation or organization, as applicable, possesses all requisite power
and authority to own and operate its properties, to carry on its businesses as conducted on the date hereof and is qualified to do business
in each jurisdiction in which the ownership of its properties or the conduct of its business as conducted on the date hereof requires
it by Law to be so qualified, except where the failure to be so qualified and in good standing, individually or in the aggregate with
any such other failures, would not reasonably be expected to have a Material Adverse Effect. All of the
(as applicable) outstanding or issued capital stock
or other equity securities of each of the Company Subsidiaries are duly authorized, validly issued and fully paid, and are owned by the
Company or another Company Subsidiary free and clear of any Liens, other than Permitted Liens. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could
require any Company Subsidiary to issue, sell or otherwise cause to become outstanding any of its equity interests. The Company Subsidiaries
are not required to register any of their respective securities under applicable federal or state securities Laws.
4.4
Financial Statements; Undisclosed Liabilities; Indebtedness.
(a)
Each of the most recent audited and interim financial statements filed with the SEC by Seller to the extent regarding the Acquired
Companies (collectively, the “Financial Statements”) (i) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved and at the dates involved (except as may be indicated in the notes to such Financial Statements
or, in the case of unaudited interim financial statements, as permitted by the SEC on Form 10-Q under the Exchange Act) and (ii) fairly
presented in all material respects the consolidated financial position of the Acquired Companies as of the dates indicated and the consolidated
assets, liabilities, business, financial condition, results of its operations and cash flows for the periods indicated, consistent with
the books and records of the Acquired Companies, except that the unaudited interim financial statements were or are subject to normal
and recurring year-end adjustments. The audited financial statements of TN Europe for the years ended December 31, 2019 and December 31,
2020 (x) show a true and fair view of the state of affairs of TN Europe and the UK Company Subsidiaries as at that date, and of TN Europe’s
and the UK Company Subsidiaries; loss for the year then ended, (y) have been properly prepared in accordance with United Kingdom generally
accepted accounting principles, and (z) have been prepared in accordance with the UK Companies Act 2006.
(b) None
of the Acquired Companies has any liabilities, other than (i) liabilities that are reflected or reserved against in the Financial
Statements or (ii) liabilities or obligations incurred in the ordinary course of business consistent with past practice since December
31, 2020.
(c)
Section 4.4(c) of the Disclosure Schedule sets forth a true and complete list of all outstanding Indebtedness of the Acquired
Companies. None of the Acquired Companies is a guarantor or indemnitor of any Indebtedness of any other Person.
4.5
Subsequent Events. Except as set forth in Section 4.5 of
the Disclosure Schedule, since December 31, 2020:
(a) there
has been no event or occurrence regarding the Acquired Companies which has had a Material Adverse Effect, and
(b) except
as expressly contemplated by this Agreement, none of the Acquired Companies has:
(i) incurred
any Indebtedness;
(ii) mortgaged,
pledged or subjected any of its assets to any lien (other than Permitted Liens);
(iii) sold,
assigned, transferred, leased or licensed any assets material to the Business;
(iv) sold,
assigned, transferred, leased or licensed any Intellectual Property material to the Business;
(v) issued,
sold or transferred any of its equity interests, securities convertible into its equity interests or warrants, options or other rights
to acquire its equity interests;
(vi) made
any material capital expenditures or commitments therefor in excess of $50,000;
(vii) declared
or made any payment or distribution of cash or other property to members with respect to its equity interests or purchased or redeemed
any equity interests;
(viii) had
any delay in excess of thirty (30) days in the payment on accounts payable to suppliers, vendors or others on the part of such Acquired
Company that is material to the Business;
(ix) entered
into, terminated or materially amended any Material Contracts (or any Contract which would be reasonably expected to have been a Material
Contract had such Contract been entered into prior to the date hereof);
(x) cancelled
any debts owed to such Acquired Company or waived any claims or rights of substantial value, except as would not be reasonably expected
to have a Material Adverse Effect;
(xi) initiated
or settled any litigation that is material to the Business;
(xii) made
any material changes in any employee compensation, benefits, severance or termination agreement, other than routine salary increases in
the ordinary course of business, or entered into any employment, deferred compensation, severance, consulting, non-competition or similar
agreement (or amended any such agreement) to which such Acquired Company is a party involving a director, officer, manager, or key employee
of such Acquired Company; or
(xiii) agreed
to do any of the foregoing.
4.6
Title to, Condition of and Sufficiency of Personal Property.
(a)
Except as set forth in Section 4.6(a) of the Disclosure Schedule, the Acquired Companies have good, valid and marketable
title to, or a valid leasehold interest in, the tangible personal property, intangible personal property and assets used in the conduct
of the Business, free and clear of all Liens (other than Permitted Liens). The tangible personal property owned or used by the Acquired
Companies is free from material defects and is in good operating condition and repair (subject to normal wear and tear) and have been
maintained in accordance with normal industry practice and are otherwise suitable for the purposes for which they are currently used.
(b) Except
for (i) the corporate headquarter facilities currently utilized by TNI; (ii) the services, and the underlying assets used therein, that
are not specific to the Business that are customarily provided to all businesses of Seller and its Affiliates such as legal, finance,
accounting, corporate information, technology, insurance, safety, health, environmental, payroll, employee benefits and other administrative
services and (iii) the rights afforded to Purchaser under the Transition Services Agreement, the assets, rights and properties of the
Acquired Companies (A) are sufficient for the continued conduct of the Business by Purchaser immediately after the Closing, substantially
in the same manner as conducted immediately prior to the Closing and (B) constitute all of the assets, rights and properties necessary
to conduct the Business substantially as conducted immediately prior to the Closing.
4.7
Compliance with Laws. Since December 31, 2018, (a) Seller and the
Acquired Companies have operated the Business in compliance with all applicable Laws except where the failure to comply would not have
a Material Adverse Effect and (b) none of the Acquired Companies (nor Seller, to the extent applicable to the Companies or Company Subsidiaries)
has received any written notice of or been charged with a material violation of any Law.
4.8
Tax Matters. Except as set forth in Section 4.8 of the Disclosure
Schedule:
(a)
Each of the Acquired Companies has filed (or had filed on its behalf) all material Tax Returns that it was required to
file. Such Tax Returns were submitted within applicable time limits and were true, complete and correct when submitted and remains so
in all material respects. No such Tax Return above is the subject of any material dispute with any Taxing Authority.
(b)
All material Taxes (whether of the United States, the UK or elsewhere), for which the Companies and the Company Subsidiaries
have been liable or are liable to account, have been duly paid (insofar as such Taxes ought to have been paid) by the due dates and no
penalties, fines, surcharges or interest have been incurred.
(c)
No Acquired Company has agreed to any extension or waiver of the statute of limitations applicable to any Tax Return, or
agreed to any extension of time with respect to a Tax assessment or deficiency, which period (after giving effect to such extension or
waiver) has not expired.
(d)
Each Company and each Company Subsidiary maintains complete and accurate records, invoices and other information in relation
to Taxes that meet all legal
requirements and enable the tax liabilities of each
Company and each Company Subsidiary to be calculated accurately in all material respects.
(e)
There are no ongoing or pending Tax audits or written enquiries by any Taxing Authority against any Acquired Company.
(f)
No Acquired Company is a party to any Tax allocation or sharing agreement the principal purpose of which relates to the
sharing of Taxes between related parties which agreement will be in effect following the Closing Date.
(g)
No Acquired Company has liability for the Taxes of any Person (other than such Acquired Company) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign Law).
(h)
No Acquired Company has been a party to a “listed transaction” within the meaning of Section 6707A(c)(2) of
the Code and Treasury Regulation Section 1.6011-4(b)(2) that could affect its Taxes for a period not closed by the applicable statute
of limitations.
(i)
All Taxes (including where applicable national insurance contributions) deductible under any Law relating to Tax have, so
far as is required to be deducted, been deducted from all payments made (or treated as made) by the Companies and each Company Subsidiary.
All amounts due to be paid to the relevant Taxing Authority on or before the Closing Date have been so paid.
(j)
No employee benefit trust or other third party has: (i) made any payment or loan to; (ii) made any assets available or transferred
any assets to; or (iii) earmarked any assets, however informally, for the benefit of any employee or former employee (or any associate
of such employee or former employee) of the Companies or any Company Subsidiary, in circumstances falling within the provisions of Part
7A to the Income Tax (Earnings and Pensions) Act 2003 and there are no such trusts or arrangements capable of conferring such a benefit.
(k)
Neither Company nor any Company Subsidiary has entered into any agreement or arrangement with a Taxing Authority whereby
it is assessed to or accounts for Tax other than in accordance with the strict terms of relevant legislation or the published practice
of the relevant Taxing Authority.
(l)
No distribution or deemed distribution, within the meaning of section 1000 or sections 1022-1027 of Corporation Tax Act
2010, has been made (or will be deemed to have been made) by TN Europe or any Company Subsidiary, except dividends shown in its statutory
accounts, and neither TN Europe nor any Company Subsidiary is bound to make any such distribution.
(m)
Neither TN Europe nor any Company Subsidiary has, within the period of seven years preceding the Closing Date, been engaged
in, nor been a party to, any of the transactions set out in Chapter 5 of Part 23 of Corporation Tax Act 2010 (demergers).
(n)
Neither the execution nor closing of this Agreement, nor any other event
in the 12 months preceding the Closing Date, will
result in any chargeable asset being deemed to have been disposed of and re-acquired by either Company or any Company Subsidiary for Tax
purposes or to the clawback of any relief previously given for any Tax purpose.
(o)
Each Company and each Company Subsidiary has, throughout the past seven years, been resident for Tax purposes in the jurisdiction
in which it was incorporated and has not, at any time in the past seven years, been treated as resident in any other jurisdiction for
the purposes of any double taxation arrangements or for any other Tax purposes.
(p)
All transactions or arrangements made by the Companies and each Company Subsidiary have been made on arm’s length
terms. No notice, enquiry or adjustment has been made by any Taxing Authority in connection with any such transactions or arrangements.
(q)
Neither Company nor any Company Subsidiary has been involved in any transaction or series of transactions the main purpose,
or one of the main purposes of which was the avoidance or deferral of Tax or any transaction that produced a Tax loss with no corresponding
commercial loss.
(r)
TN Europe and each Company Subsidiary has in place (and has had since 30 September 2017) such prevention procedures (as
defined in section 45(3) and 46(3) of the Criminal Finance Act 2017 (the “CFA”)) as are proportionate to its business
risk and are in line with any guidance published from time to time pursuant to section 47 of CFA.
(s)
No person, acting in the capacity of an Associated Person (as defined in section 44(4) of CFA) of TN Europe or any Company
Subsidiary has committed: (i) a UK tax evasion facilitation offence under section 45(5) of CFA; or (ii) a foreign tax evasion facilitation
offence under section 46(6) of CFA.
(t)
TN Europe and each Company Subsidiary is a taxable person and is registered for the purposes of VAT with quarterly prescribed
accounting periods.
(u)
Neither TN Europe nor any Company Subsidiary is or has been in the period of six years ending with the Closing Date, a member
of a group of companies for the purposes of section 43 Value Added Tax Act 1994 (the “VATA”).
(v)
Neither TN Europe nor any Company Subsidiary owns any assets which are capital items subject to the capital goods scheme
under Part XV of the VAT Regulations 1995, nor has TN Europe or any Company Subsidiary exercised any option to tax under Part 1 of Schedule
10 to the VATA.
(w)
Any document that may be necessary or desirable in proving the title of the Companies or any Company Subsidiary to any asset
which is owned by the Companies or any Company Subsidiary at the Closing Date, is duly stamped for stamp duty purposes. No such documents
which are outside the UK would attract stamp duty if they were brought into the UK.
(x)
Section 4.8(x) of the Disclosure Schedule sets out full and accurate details of any chargeable interest (as defined
under section 48 of the Finance Act 2003 and/or section 4
of the Land Transaction Tax and Anti-avoidance of
Devolved Taxes (Wales) Act 2017 and/or section 3 of the Land and Buildings Transaction Tax (Scotland) Act 2013) acquired or held by the
Companies or any Company Subsidiary before the Closing Date in respect of which Seller is aware, or ought reasonably to be aware, that
an additional land transaction return will be required to be filed with a Taxing Authority and/or a payment of stamp duty land tax, land
transaction tax or land and buildings transactions tax made on or after the Closing Date.
4.9
Environmental Matters. The Acquired Companies are in compliance
with all applicable Environmental Laws except where the failure to comply would not have a Material Adverse Effect. The Acquired Companies
have complied with, and are in compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental
Laws for the occupation of the Real Property and the operation of the Business except where the failure to comply would not have a Material
Adverse Effect. Since December 31, 2018, no Acquired Company has received any written notice from any Government Entity of any actual
or alleged violations or liabilities, including any investigatory, remedial or corrective obligations, arising under Environmental Laws.
Except as would not constitute a Material Adverse Effect, (a) no Acquired Company has provided any indemnities with respect to or assumed
by merger, contract, assignment, or assumption any environmental liabilities of any other person relating to Environmental Laws, and (b)
there are no past or present events, conditions, circumstances, activities, practices, incidents, actions, or plans that are reasonably
expected to give rise to any liability under any Environmental Law or otherwise form the basis of any claim, suit, action, demand, proceeding,
penalty, fine, hearing, notice of violation, directive, or requirement to undertake any remedial action under any Environmental Laws.
4.10
Intellectual Property. Set forth on Section 4.10 of the
Disclosure Schedule are all of the following: (a) patents and patent applications owned by the Acquired Companies; (b) registered trademarks
and applications to register trademarks owned by the Acquired Companies; (c) registered copyrights and applications to register copyrights
owned by the Acquired Companies; and (d) the Intellectual Property (except for commercially available off-the-shelf software) that the
Acquired Companies use under any license, sublicense, grant or other agreement and that is material to the Business. Except as set forth
in Section 4.10 of the Disclosure Schedule, the Acquired Companies own or have a valid right to use all Intellectual Property that
is material to the conduct of the Business. Since December 31, 2018, the Acquired Companies have not received any written claims that
Seller or any Acquired Company has infringed or misappropriated the Intellectual Property of any other Person. To Seller’s Knowledge,
(i) no Person is infringing upon or misappropriating any material Intellectual Property owned or used by the Acquired Companies, and (ii)
the Acquired Companies are not infringing upon or misappropriating the Intellectual Property of any other Person. All Net2Edge employees
and employees of Seller to the extent such employees have provided services to TNI have acknowledged the assignment of inventions and
other intellectual property provisions and the confidentiality provisions set forth in the Code of Ethics and Business Conduct in the
form attached to Section 4.10 of the Disclosure Schedule.
4.11
Real Estate.
(a) Set
forth on Section 4.11(a) of the Disclosure Schedule is a complete list of all real property leased or licensed by any of the Acquired
Companies or used in the operation
of the Business (the “Real Property”).
Except as set forth on Section 4.11(a) of the Disclosure Schedule, the Acquired Companies do not own and have never owned any real
property and are not a party to any current agreement, option to purchase, right of pre-emption, right of first refusal or any other right
of acquisition in relation to any real property or interest therein and have never given any guarantee or indemnity for any liability
relating to real property.
(b) Set
forth on Section 4.11(b) of the Disclosure Schedule is each lease, license and other contractual arrangement pursuant to which
any of the Acquired Companies leases any Real Property (the “Real Property Leases”). For the avoidance of doubt, except
to the extent otherwise set forth in the Transition Services Agreement, Seller will not sell, assign or transfer to Purchaser, and Purchaser
will not purchase or acquire, any right, title or interest in and to the corporate headquarter facilities currently utilized by TNI. Each
Real Property Lease is a valid and binding obligation of the respective Acquired Company, enforceable against such Acquired Company in
accordance with its terms except as such enforceability may be limited by (i) applicable insolvency, bankruptcy, reorganization, moratorium
or other similar laws affecting creditors’ rights generally, and (ii) applicable equitable principles (whether considered in a proceeding
at law or in equity). Each Acquired Company has good and valid title to the leasehold estates in all Real Property Leases to which it
is a party, free and clear of all Liens (other than Permitted Liens). No Acquired Company is in material violation or breach of or default
under any Real Property Lease and to Seller’s Knowledge no event has occurred, is pending or, to Seller’s Knowledge, is threatened,
which, after the giving of notice, with lapse of time, or otherwise, would constitute a breach or default by the relevant Company or Company
Subsidiary. To Seller’s Knowledge, the other parties to each Real Property Lease are not in material violation or breach of or default
thereunder. There are no fees or charges payable in connection with any Real Property Lease that are in the process of being reviewed
and no such fees or charges can be reviewed before the Closing Date. Except as set forth on Section 4.11(b) of the Disclosure Schedule,
no Acquired Company has subleased or otherwise granted to any Person the right to use or occupy the Real Property, or any portion thereof,
subject to any Real Property Lease. To Seller’s Knowledge, there are no pending, contemplated or threatened condemnation proceedings
against all or any portion of the Real Property. Use of the Real Property for the various purposes for which it is presently being used
is permitted under all applicable Laws (including those pertaining to planning / zoning) or is a lawful nonconforming use, and is not
subject to outstanding variances or special use permits. To Seller’s Knowledge, all improvements, additions and/or other alterations
made to the Real Property are in compliance with all applicable Laws, including those pertaining to planning / zoning.
(c)
None of the Companies and Company Subsidiaries has any actual or contingent liability in respect of Previously-owned Land and Buildings.
None of the Companies and Company Subsidiaries has given any guarantee or indemnity for any liability relating to any Previously-owned
Land and Buildings or any other land or buildings. For the purposes of this Section 4.11(c), “Previously-owned Land and
Buildings” shall mean any land and/or buildings that have, at any time before the date of this agreement, been owned (under
whatever tenure) and/or occupied and/or used by a Company or Company Subsidiary but which are either: (i) no longer owned, occupied or
used by a Company or Company Subsidiary; or (ii) are owned, occupied or used by a Company or Company Subsidiary but pursuant to a different
lease,
license, transfer or conveyance than that pursuant
to which the same was previously owned, occupied or used.
4.12
Litigation. Except as set forth in Section 4.12 of the Disclosure
Schedule, (a) there is no action, suit, arbitration, mediation, proceeding, claim or investigation instigated by Seller (to the extent
relating to the Business) or any Acquired Company pending against any Government Entity or other Person and (b) there is no action, suit,
arbitration, mediation, proceeding, claim or investigation pending against Seller (to the extent relating to the Business), any Acquired
Company or any of their respective facilities, properties or assets (or against any of their officers, directors, managers or, to the
Knowledge of Seller, employees or agents in their capacity as such or relating to their employment, services or relationship with such
Acquired Company) before any Government Entity, arbitrator or mediator, except, in any such case, as would not reasonably be expected
to have a Material Adverse Effect; nor, to the Knowledge of Seller, is any such action, suit, arbitration, mediation, proceeding, claim
or investigation threatened. The Acquired Companies and the Business are not subject to any outstanding judgment, decree, ruling, assessment
or arbitration award, injunction or rule or order (specific to the Acquired Companies or the Business) of any Government Entity, arbitrator
or mediator.
4.13
Employee Benefits.
(a) Section
4.13(a) of the Disclosure Schedule lists each Benefit Plan. Each Benefit Plan has been maintained in substantial compliance with its
terms (in form and in operation) and with applicable Laws, except where such failure would not have a Material Adverse Effect.
(b) With
the exception of the UK Benefit Plans, each Benefit Plan that is intended to be qualified under Section 401(a) of the Code has a favorable
advisory, opinion or determination letter from the Internal Revenue Service to the effect that such Benefit Plan is qualified as to form
with respect to all applicable requirements of the Code other than those for which the remedial amendment period under Section 401(b)
of the Code has not expired and, to Seller’s Knowledge, nothing has occurred since the date of such advisory, opinion or determination
letter that could reasonably be expected to adversely affect the qualification of such Benefit Plan.
(c) The
Acquired Companies do not maintain, contribute to or have any liability with respect to any “defined benefit plan” (as defined
in Section (3)(35) of ERISA) or any “multiemployer plan” (as defined in Section (3)(37) or 4001(a)(3) of ERISA).
(d) With
respect to each Benefit Plan, Seller has delivered or made available to Purchaser correct and complete copies of (to the extent applicable):
(i) each Benefit Plan document (including all amendments and related trust documents) which implements each such Benefit Plan, (ii) the
most recent summary plan descriptions provided to participants, (iii) where applicable, the most recent determination letter received
from the Internal Revenue Service, and (iv) where applicable, the most recent annual report (Form 5500 series) as filed with the Internal
Revenue Service.
(e) There
are no pending or, to Seller’s Knowledge, threatened claims by or on behalf of any Benefit Plan, any employee or beneficiary covered
under any Benefit Plan, any Government Entity or otherwise involving any Benefit Plan (other than routine claims for benefits), except
as would not have a Material Adverse Effect.
(f) To
Seller’s Knowledge, there are no nonexempt prohibited transactions within the meaning of Section 4975 of the Code or Section 406
of ERISA with respect to any Benefit Plan that would result in a Material Adverse Effect.
(g) No
Benefit Plan of TN Europe or any UK Company Subsidiary provides retirement benefits which are not “money purchase benefits”
as defined in section 181 of the UK Pension Schemes Act 1993. Each of TN Europe and each UK Company Subsidiary: (i) has at all times complied
with its auto-enrolment obligations under the UK Pensions Act 2008; (ii) except as set forth in Section 4.13(g)(ii) of the Disclosure
Schedule, has not at any time employed a member of, or been associated or connected (as defined in section 51(3) of the UK Pensions Act
2004) with an employer which employed a member of, an occupational defined benefit pension scheme; and (iii) has not at any time employed
an employee who has a right to pension benefits which are not benefits for old age, invalidity or survivors as a result of the transfer
of his contract of employment transferred to TN Europe or any UK Company Subsidiary under the UK Transfer of Undertakings (Protection
of Employment) Regulations 1981 or 2006.
4.14
Insurance. Section 4.14 of the Disclosure Schedule contains
a description of each insurance policy, bond or other form of insurance (excluding, for the avoidance of doubt, Benefit Plans) maintained
by any Acquired Company (the “Insurance Policies”). All Insurance Policies are in full force and effect and no Acquired
Company is in material default with respect to its obligations under any of the Insurance Policies. No written notice of cancellation
or termination has been received by the Acquired Companies with respect to any Insurance Policy. The Insurance Policies constitute all
insurance policies that the Acquired Companies are required to maintain in accordance with all applicable Laws.
4.15
Contracts.
(a) Except
as set forth in Section 4.15(a) of the Disclosure Schedule or as set forth in the SEC Reports, no Acquired Company is a party to
any of the following (collectively, the “Material Contracts”):
(i) any
contract that involves the performance of services or delivery of goods or materials by any Acquired Company that is reasonably expected
to result in revenue to such Acquired Company in excess of $50,000 in the twelve (12) month period following the Closing Date (other than
open purchase orders made in the ordinary course of business and distributor agreements that do not, by themselves, generate revenue);
(ii) any
contract that involves the performance of services for, or delivery of goods or materials to, any Acquired Company that is reasonably
expected to result in expenditures by such Acquired Company in excess of $50,000 in the twelve (12) month period following the Closing
Date (other than open sales orders made in the ordinary course of business);
(iii) any
agreement or contract for the employment of any Person on a full-time, part-time, consulting or other basis (A) providing annual cash
or other compensation in excess of $100,000, or (B) providing for the payment of any cash or other compensation or benefits upon the consummation
of the Contemplated Transactions;
(iv) any
agreement, promissory note, loan agreement, guaranty or indenture relating to Indebtedness of any Acquired Company or the mortgaging or
pledging of any asset of or that evidences any Lien (other than Permitted Liens) on the assets of any Acquired Company;
(v) any
agreement that restricts any Acquired Company from (A) engaging in any aspect of the Business, (B) participating or competing in any line
of business or market, (C) freely setting prices for its products, services or technologies (including most favored customer pricing provisions),
(D) engaging in any business in any market or geographic area or that grants any exclusive rights, rights of refusal, rights of first
negotiation or similar rights to any party, or (E) soliciting potential suppliers or customers;
(vi) any
joint venture or partnership agreement involving a sharing of profits, losses, costs or liabilities by any Acquired Company with any other
Person;
(vii)
any agreement with any labor union, works council or similar labor organization, or any collective bargaining agreement or similar
agreement with or regarding any of the employees of any Acquired Company;
(viii) any
agreement between or among any Acquired Company, on the one hand, and any of the Acquired Companies’ respective officers, directors,
employees or stockholders or any member of their immediate families, on the other hand (excluding, for the avoidance of doubt, agreements
relating to the employment, engagement or termination of employees of the Acquired Companies);
(ix) any
agreement with a Government Entity;
(x) any
lease or agreement under which any Acquired Company is (A) lessee of or holds or operates any tangible personal property owned by any
other Person in which the aggregate annual rental payments exceed $50,000, or (B) lessor of or permits any other Person to hold or operate
any tangible personal property owned by any Acquired Company in which the aggregate annual rental payments exceed $50,000;
(xi) any
agreement under which any Acquired Company licenses to or from another Person any Intellectual Property, other than “shrink wrap”
and agreements under which commercially available, off-the-shelf software is licensed to such Acquired Company; or
(xii) any
other agreement that (A) is material to the conduct of the Business or the absence of which would have a Material Adverse Effect
and (B) is not terminable by the Acquired Companies on sixty (60) days’ or less notice without penalty or cost to any Acquired
Company.
(b) Seller
has provided to Purchaser a true, correct and complete copy of each written Material Contract and a written description of the material
terms of each oral Material Contract. Each Material Contract is in full force and effect and, assuming the due execution by the other
parties thereto, is a valid and binding obligation of the applicable Acquired Company, except to the extent any such Material Contract
has expired or has been terminated in accordance with its terms and except as may be limited by (i) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors’ rights generally and (ii) applicable equitable principles
(whether considered in a proceeding at law or in equity). No Acquired Company is in material violation or breach of or default under any
Material Contract, and to Seller’s Knowledge, the other parties to each Material Contract are not in material violation or breach
of or default thereunder. No event has occurred that, with notice or lapse of time or both, would constitute a material breach of or material
default under any Material Contract by any Acquired Company or, to Seller’s Knowledge, by any other party thereto. None of the counterparties
to any Material Contract has notified Seller or any Acquired Company in writing that it intends to terminate, cancel or not renew any
Material Contract.
4.16
Employees.
(a)
No Acquired Company is a party to, bound by or subject to any collective bargaining agreement or other similar contract with any
labor or trade union. To Seller’s Knowledge, no Transferred Employee is represented by a labor union or trade union. No Acquired
Company has experienced any strike or material grievance, claim of unfair labor practices or other collective bargaining dispute that
is pending or that occurred in the two (2) years preceding the date of this agreement. To Seller’s Knowledge, no organizational
effort is presently being made or threatened by or on behalf of any labor or trade union with respect to any Transferred Employees or
any employees of any Acquired Company.
(b) The
Acquired Companies and Seller (with respect to the TNI Transferred Personnel) have complied, in all material respects, with all applicable
Laws concerning employment, immigration and social security. TNI has complied, in all material respects, with the U.S. Immigration and
Nationality Act, as amended from time to time, and the rules and regulations promulgated thereunder, and, to Seller’s Knowledge,
there is no basis for any claim that TNI or Seller (with respect to the Transferred Employees) is not in compliance with the terms thereof.
No TNI Transferred Personnel is (i) a non-immigrant employee whose status would terminate or otherwise be affected by the Contemplated
Transactions, or (ii) except as set forth in Section 4.16(b) of the Disclosure Schedule, an alien who is authorized to work in
the United States in non-immigrant status. For each TNI Transferred Personnel hired after November 6, 1986 who works in the United States,
TNI or Seller, as applicable, has retained an Immigration and Naturalization Service Form I-9 completed in material compliance with all
applicable Laws.
(c)
Section 4.16(c) of the Disclosure Schedule contains a true and complete list of all the UK Employees (as defined below)
(together with details of their remuneration by way of salary, commission, bonus and material benefits but excluding their names which
have been anonymized). None of the Companies and the Company Subsidiaries has at any time been a party to a relevant transfer for the
purposes of the UK Transfer of Undertakings (Protection of Employment) Regulations 1981 or 2006.
4.17 Affiliate
Transactions. No Seller, officer, manager or Affiliate of any Acquired Company
is a party to any material agreement, contract, commitment or transaction with such Acquired Company or has any interest in any material
property used by such Acquired Company in the Business.
4.18 Brokers.
Except for the Persons set forth in Section 4.18 of the Disclosure Schedule (whose fees and expenses shall be the sole and exclusive
responsibility of Seller), no broker, finder, investment banker or other intermediary is entitled or has claimed to be entitled to any
fee or commission in connection with the Contemplated Transactions based upon arrangements made by or on behalf of the Acquired Companies.
4.19 Inventory.
Subject to reserves reflected in the Financial Statements, as adjusted to reflect operations thereafter in accordance with past practices,
(a) the inventory of the Acquired Companies is suitable and usable in the ordinary course of business in accordance with past practices,
and (b) to Seller’s Knowledge, none of the inventory of the Acquired Companies is defective or damaged in any material respect.
4.20 Receivables.
The accounts receivable of the Acquired Companies (a) are bona fide receivables representing amounts due with respect to actual, arm’s
length transactions entered into in the ordinary course of business, and (b) to Seller’s Knowledge, are legal, valid and binding
obligations of the obligors and, subject to any reserves for bad debts shown on the Financial Statements or, with respect to accounts
receivable arising after the last date of the Financial Statements, on the accounting records of the Acquired Companies (as applicable),
fully collectible in accordance with their terms.
4.21 Permits
and Licenses. Section 4.21 of the Disclosure Schedule contains a true
and complete list of all licenses, permits, certificates of authority, authorizations, approvals, registrations and similar consents granted
or issued by any Government Entity to the Acquired Companies and that are material to the Business (the “Permits”).
All of the Permits are currently effective and valid and are sufficient to enable the Acquired Companies to conduct the Business in material
compliance with all Laws relating to the Permits. To Seller’s Knowledge, the consummation of the Contemplated Transactions, by itself,
will not cause the revocation or cancellation of any Permit.
4.22 Anti-Corruption.
(a)
Neither any of the Acquired Companies, nor any of their respective directors or officers (or to Seller’s Knowledge,
their respective employees or agents, or any person acting on behalf of any of the Acquired Companies), has taken or failed to take any
action, either directly or indirectly, that is or would result in a violation of the Anti-Corruption
Laws (as defined below), including making, offerings,
authorizing, or promising any payment, contribution, gift, entertainment, bribe, rebate, kickback, or any other thing of value, regardless
of form or amount, to any (i) foreign or domestic government official or employee, (ii) employee of a foreign or domestic government-owned
entity, or (iii) foreign or domestic political party official or organization with the intent to obtain a competitive advantage to receive
favorable treatment in obtaining or retaining a business, or to compensate for favorable treatment already secured.
(b)
Neither any of the Acquired Companies, nor any of their respective directors or officers (or to Seller’s Knowledge,
their respective employees or agents, or any person acting on behalf of any of the Acquired Companies), has received any written notice
or communication from, or made any voluntary disclosure to, any Government Entity alleging noncompliance with any applicable Anti-Corruption
Law. The Acquired Companies and each of their respective directors or officers (or to Seller’s Knowledge, their respective employees
or agents) have at all times fully complied with, and are currently in full compliance with, the UK Bribery Act 2010, the U.S. Foreign
Corrupt Practices Act of 1977, and any similar applicable Law of any non-U.S. jurisdiction in which any Acquired Company has conducted
business (collectively, the “Anti-Corruption Laws”). Neither any of the Acquired Companies, nor any of their respective
directors or officers (or to Seller’s Knowledge, their respective employees or agents, or any person acting on behalf of any Acquired
Company) is, or has been, under administrative, civil, or criminal investigation, indictment, information, suspension, debarment, or audit
(other than a routine contract audit) by any party, in connection with alleged or possible violations of the Anti-Corruption Laws.
4.23
Books and Records. For the respective period during which each
Acquired Company has been owned, directly or indirectly, by Seller, the minute book of such Acquired Company (a) is in all material respects
true and accurate and (b) accurately reflects in all material respects all actions previously taken by the holders of stock and the board
of directors or other governing body (including all committees) of such Acquired Company. Except as set forth in Section 4.23 of
the Disclosure Schedule, (i) for the respective period during which each of them has been owned, directly or indirectly, by Seller, the
statutory books (including all registers) of TN Europe and each UK Company Subsidiary have been properly kept, are in the possession of
Seller or TN Europe or the relevant UK Company Subsidiary, and contain a true and accurate record of the matters which should be dealt
with in those books and no notice or allegation that any of them is incorrect or should be rectified has been received; and (ii) the register
of members of each of TN Europe and each UK Company Subsidiary is correct and up to date and accurately shows the entire issued share
capital and the legal ownership of the share capital of TN Europe or each UK Company Subsidiary (as applicable).
4.24
Disclaimer of Other Representations and Warranties. Except as expressly
set forth in Article III and Article IV, Seller will sell the Purchased Securities to Purchaser “AS IS,” and
Seller makes no representation or warranty, express or implied, at law or in equity, in respect of the Purchased Securities, the Acquired
Companies or any of the Acquired Companies’ assets, liabilities or operations, including with respect to merchantability or fitness
for any particular purpose, and any such other representations or warranties are expressly disclaimed. Nothing in this Section 4.24
shall limit or restrict the rights and remedies of Purchaser and the other Indemnified Parties pursuant to Article X in the event
of actual fraud in the making of the
representations and warranties contained in Article
III and Article IV of this Agreement or any agreement or certificate delivered by Seller pursuant to this Agreement.
ARTICLE
V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants
to Seller that:
5.1
Organization, Power and Authorization. Purchaser is a corporation,
duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Purchaser is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the failure to
be so qualified and in good standing, individually or in the aggregate with any such other failures, would not reasonably be expected
to have a material adverse effect on the ability of Purchaser to consummate the Contemplated Transactions. Purchaser has the power to
carry on the businesses in which it is engaged and to own and use the properties owned and used by it. Purchaser has the requisite power
and authority necessary to enter into, deliver and perform its obligations pursuant to each of the Transaction Documents to which it is
a party. Purchaser’s execution, delivery and performance of each Transaction Document to which it is a party have been duly authorized.
5.2
Binding Effect and Noncontravention.
(a) This
Agreement has been duly executed and delivered by Purchaser and constitutes, and each other Transaction Document to which Purchaser is
a party when executed and delivered will constitute, a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance
with its terms except as such enforceability may be limited by (i) applicable insolvency, bankruptcy, reorganization, moratorium or other
similar laws affecting creditors’ rights generally, and (ii) applicable equitable principles (whether considered in a proceeding
at law or in equity).
(b) The
execution, delivery and performance by Purchaser of the Transaction Documents to which it is a party do not (i) violate any material Law
to which Purchaser is subject or its Organizational Documents or (ii) except as set forth on Schedule 2.7(b)(v), require any authorization,
consent, release, waiver, approval or notice by or to, or registration, declaration or filing with, any Person.
5.3
Brokers. Purchaser has not retained any broker in connection with
the Contemplated Transactions. Seller will not have any obligation to pay any broker’s, finder’s, investment banker’s,
financial advisor’s or similar fee in connection with this Agreement or the Contemplated Transactions by reason of any action taken
by or on behalf of Purchaser.
5.4
Litigation. Purchaser is not (a) subject to any outstanding injunction,
judgment, order or decree, or (b) party to or, to Purchaser’s Knowledge, threatened to be made a party to, any proceeding, hearing,
legal action, suit, arbitration or other legal or administrative proceeding, which would reasonably be expected to have an adverse effect
on Purchaser’s ability to consummate the Contemplated Transactions or otherwise perform its obligations under any Transaction Document
to which it is a party.
5.5
Investment. Purchaser is acquiring the Purchased Securities for
its own account, for investment only, and not with a view toward, or for sale in connection with, any distribution thereof, nor with the
present intention of distributing or selling the Purchased Securities. Purchaser will not offer to sell or otherwise dispose of the Purchased
Securities in violation of any Law applicable to any such offer, sale or other disposition. Purchaser acknowledges that (a) the Purchased
Securities have not been registered under the Securities Act or any state securities laws, (b) there is no public market for the Purchased
Securities and there can be no assurance that a public market will develop, and (c) Purchaser must bear the economic risk of its investment
in the Purchased Securities for an indefinite period of time. Purchaser is an “accredited investor” within the meaning of
the Securities and Exchange Commission Rule 501 of Regulation D of the Securities Act, as presently in effect.
5.6
Financing.
(a)
Financing Letters. Purchaser has delivered to Seller true, correct and complete copies of duly executed debt commitment
letters, dated as of the date of this Agreement, among Purchaser and the financial institutions party thereto (the “Lenders”)
(including all exhibits, schedules, and annexes thereto, as may be amended or modified in accordance with the terms hereof, collectively
the “Debt Commitment Letters”), pursuant to which the Lenders have committed, subject to the terms and conditions thereof,
to provide the debt financing described therein (the “Debt Financing”). Purchaser has also delivered to Seller a true,
correct and complete copy of each executed fee letter that relates to the Debt Financing (provided, however, that the fee
amounts, pricing caps and other economic terms, and the rates (but not covenants), may be redacted, none of which redacted provisions
could adversely affect the conditionality, enforceability, termination or aggregate principal amount of the Debt Financing). There are
no conditions precedent or contingencies related to the funding of the full amount of the Debt Financing at or prior to the Closing under
the Debt Commitment Letters other than as expressly set forth in the Debt Commitment Letters.
(b) No
Amendments. As of the date of this Agreement, (i) the Debt Commitment Letters and the terms of the Debt Financing have not been amended
or modified; (ii) no such amendment or modification is contemplated except as otherwise expressly set forth therein; and (iii) the respective
commitments contained in the Debt Commitment Letters have not been withdrawn (or contemplated to be), terminated or rescinded in any respect
by Purchaser and, to the knowledge of Purchaser, the other parties thereto.
(c)
Sufficiency of Financing. Assuming (i) the Debt Financing is funded in accordance with the Debt Commitment Letters and (ii)
the satisfaction of the conditions to Purchaser’s obligation to consummate the Contemplated Transactions (other than those conditions
that by their terms are to be satisfied at the Closing, but subject to the satisfaction), the Debt Financing, together with cash on hand
of Purchaser, is sufficient to (A) make all payments, without duplication, contemplated by the Contemplated Transactions; and (B) pay
all fees and expenses required to be paid by Purchaser in connection with the consummation of the Contemplated Transactions, including
those required to be paid at the Closing in connection with the Contemplated Transactions.
(d) Validity.
Each of the Debt Commitment Letters (each in the form
delivered by Purchaser to Seller) is, as of the date
hereof, (i) in full force and effect, and constitutes the legal, valid and binding obligations of, Purchaser and, to the knowledge of
Purchaser, the other parties thereto, and (ii) enforceable against Purchaser and, to the knowledge of Purchaser, the other parties thereto,
in accordance with their terms, in each case, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting or relating to creditors’ rights generally and subject to general principles of equity.
(e)
No Default; No Condition Precedent. As of the date of this Agreement, assuming the satisfaction of the conditions set forth
in Article VIII, no event has occurred that, with or without notice, lapse of time or both, would constitute a default or breach
on the part of Purchaser or, to the knowledge of Purchaser, any other parties thereto under any term or condition of the Debt Commitment
Letters or a failure of any condition to the Debt Financing or otherwise result in any portion of the Debt Financing being unavailable
on the Closing Date. Purchaser has fully paid all commitment fees or other fees in connection with the Debt Commitment Letters that are
payable on or prior to the date hereof. In no event shall the receipt by, or the availability of any funds or financing to, Purchaser
or any of its Affiliates or any other financing be a condition to Purchaser’s obligation to consummate the Contemplated Transactions.
5.7
No Beneficial Ownership of Seller. In the four (4) years prior
to the date of this Agreement, neither Purchaser nor any controlled Affiliate thereof has been, and neither Purchaser nor any controlled
Affiliate thereof will be at the Closing, a beneficial owner, directly or indirectly, of Seller’s voting stock.
5.8
Independent Investigation; No Reliance. In connection with its
investment decision, Purchaser and/or its representatives have inspected and conducted such reasonable independent review, investigation
and analysis (financial and otherwise) of the Acquired Companies as desired by Purchaser. The purchase of the Purchased Securities by
Purchaser and the consummation of the Contemplated Transactions by Purchaser are not done in reliance upon any representation or warranty
by, or information from, Seller, the Acquired Companies or any of their respective Affiliates, employees or representatives, whether oral
or written, express or implied, including any implied warranty of merchantability or of fitness for a particular purpose, except for the
representations and warranties specifically and expressly set forth in Article III and Article IV (in each case, as modified
by the Disclosure Schedule), and Purchaser acknowledges that Seller and the Acquired Companies expressly disclaim any other representations
and warranties. Purchaser further acknowledges that none of Seller, the Acquired Companies or any other Person has made any representation
or warranty, express or implied, as to the accuracy or completeness of any information regarding the Acquired Companies, their businesses
or the Contemplated Transactions not specifically and expressly set forth in Article III and Article IV (in each case, as
modified by the Disclosure Schedule), and none of Seller, the Acquired Companies or any other Person will have or be subject to any liability
to Purchaser or any other Person resulting from the distribution to Purchaser or its representatives of, or Purchaser’s use of,
any such information, including any confidential information memoranda distributed on behalf of the Acquired Companies relating to their
respective businesses or other publications or data room (including any electronic or “virtual” data room) information provided
or made available to Purchaser or its representatives, or any
other document or information in any form provided
or made available to Purchaser or its representatives, including management presentations, in connection with the purchase and sale of
the Purchased Securities and the Contemplated Transactions (any of the foregoing, an “Extra-Contractual Statement”).
PURCHASER AND ITS AFFILIATES HEREBY EXPRESSLY WAIVE AND ARE NOT RELYING ON, ANY EXTRA-CONTRACTUAL STATEMENT, AND PURCHASER AND ITS AFFILIATES
HEREBY EXPRESSLY WAIVE AND RELINQUISH ANY AND ALL RIGHTS, CLAIMS AND CAUSES OF ACTION IN CONNECTION WITH, THE ACCURACY, COMPLETENESS OR
MATERIALITY OF ANY EXTRA-CONTRACTUAL STATEMENT HERETOFORE FURNISHED OR MADE AVAILABLE TO PURCHASER OR ITS REPRESENTATIVES OR AFFILIATES
BY OR ON BEHALF OF SELLER, THE ACQUIRED COMPANIES OR ANY OF THEIR AFFILIATES (IT BEING INTENDED THAT NO SUCH PRIOR EXTRA-CONTRACTUAL STATEMENT
WILL SURVIVE THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE CLOSING OF THE CONTEMPLATED TRANSACTIONS). Nothing in this Section
5.8 shall limit or restrict the rights and remedies of Purchaser and the other Indemnified Parties pursuant to Article X in
the event of actual fraud in the making of the representations and warranties contained in Article III and Article IV of
this Agreement or any agreement or certificate delivered by Seller pursuant to this Agreement.
ARTICLE
VI
INTERIM PERIOD COVENANTS
6.1
Conduct of the Companies.
(a)
From the date hereof until the Effective Time or until the earlier termination of this Agreement (the “Interim
Period”), Seller shall not, and shall cause the Acquired Companies not to, enter into (or agree to enter into) any transaction
with respect to the Purchased Securities, except as contemplated by this Agreement (including, without limitation, Section 6.2(c))
or with the prior written consent of Purchaser, which consent shall not be unreasonably withheld, conditioned or delayed. During the Interim
Period, except as otherwise contemplated by this Agreement, set forth on Schedule 6.1(a) or consented to in writing by Purchaser,
Seller shall, and shall cause the Acquired Companies to: (i) conduct the Business in the ordinary course of business; (ii) use commercially
reasonable efforts to preserve intact the Business and to keep available the services of the Transferred Employees (as defined below),
provided, that Seller and its Affiliates shall have no obligation to pay any Transferred Employee any stay or retention bonus or
similar payment; and (iii) use commercially reasonable efforts to preserve the goodwill of, and maintain satisfactory relationships with,
all material customers, suppliers, distributors, lessors, tenants, creditors, debtors, employees, consultants and agents of the Business.
(b) Without
limiting the foregoing, during the Interim Period, the Acquired Companies will not take any action or omit to take any action that would,
if such action or omission occurred between December 31, 2020 and the date hereof, constitute a breach of the representations and warranties
contained in Section 4.5.
(c)
Notwithstanding the foregoing or any other provision of this Agreement, Purchaser shall not have the right, directly or
indirectly, to control or direct the operations of
Seller or any of the Acquired Companies prior to the
Effective Time. During the Interim Period, Seller and the Acquired Companies shall grant Purchaser, upon reasonable notice to Seller,
reasonable access to any employee of the Acquired Companies for either in-person, phone or video meetings during normal business hours.
6.2
No-Solicitation.
(a)
No Solicitation or Negotiation. Except as set forth in this Section 6.2, until the Effective Time, Seller
and its Subsidiaries (including the Acquired Companies) shall not, and Seller shall cause its and their respective directors, officers,
members, employees, agents, attorneys, consultants, contractors, accountants, financial advisors and other authorized representatives
(collectively, “Representatives”) not to, directly or indirectly:
(i) solicit,
seek or initiate or knowingly take any action to facilitate or encourage any offers, inquiries or the making of any proposal or offer
that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal, or engage, participate in, or knowingly facilitate,
any discussions or negotiations regarding, or furnish any nonpublic information to any person in connection with any inquiries, proposals
or offers that constitute or could reasonably be expected to lead to, an Acquisition Proposal;
(ii)
enter into, continue or otherwise participate or engage in any discussions or negotiations regarding any Acquisition Proposal,
or furnish to any Person any non-public information or afford any Person other than Purchaser access to such party’s property, books
or records (except pursuant to a request by a Government Entity) in connection with any offers, inquiries or the making of any proposal
or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal; or
(iii) take
any action to make the provisions of any takeover statute inapplicable to any transactions contemplated by an Acquisition Proposal.
Notwithstanding the foregoing or
anything to the contrary set forth in this Agreement, but subject to compliance with the other applicable terms of this Section 6.2,
prior to receipt of the Seller Shareholder Approval, Seller may (A) furnish non-public information with respect to the Acquired Companies
to any Qualified Person (and the Representatives of such Qualified Person), or (B) engage in discussions or negotiations (including solicitation
of revised Acquisition Proposals) with any Qualified Person (and the Representatives of such Qualified Person) regarding any such Acquisition
Proposal; provided that prior to taking any of the actions contemplated by clauses (A) and (B) above (w) Seller has received a
bona fide written unsolicited Acquisition Proposal from a Qualified Person, (x) Seller receives from such Qualified Person an executed
confidentiality agreement on terms not less restrictive than exist in the Confidentiality Agreement and additional provisions that expressly
permit such party to comply with this terms of this Section 6.2 (a copy of which shall be provided to Purchaser), (y) Seller
has not materially breached this Section 6.2 with respect to such Acquisition Proposal, and (z) the Seller Board has determined,
after consultation with outside legal counsel, that the failure to take such actions would reasonably be expected to be inconsistent with
the Seller Board’s fiduciary duties under applicable Law. Any information made available or provided to a Qualified Person pursuant
to this Section 6.2 by or on behalf of Seller shall, substantively
concurrently therewith, be made available or provided
to Purchaser (unless such information has already been provided to Purchaser).
(b) No
Change in Recommendation or Alternative Acquisition Agreement.
(i)
Prior to the Effective Time, the Seller Board shall not, except as set forth in this Section 6.2, (A) withhold,
withdraw or modify, or publicly propose to withhold, withdraw or modify, in a manner adverse to Purchaser, the approval or recommendation
by the Seller Board with respect to the Contemplated Transactions, (B) fail to include the Seller Board Recommendation in the Proxy Statement
that is mailed to Seller’s shareholders in connection with the Contemplated Transactions pursuant to this Agreement or (C) if any
Person (other than Purchaser) shall have publicly announced an Acquisition Proposal (or publicly announced any material modification thereto),
fail to publicly reaffirm the Seller Board Recommendation within ten (10) Business Days (or if the Seller Shareholders Meeting is scheduled
to be held within ten (10) Business Days from the date of such announcement, promptly and in any event prior to the date on which the
Seller Shareholders Meeting is scheduled to be held) of being requested to do so by Purchaser (any of clauses (A), (B) or (C), a “Seller
Board Recommendation Change”);
(ii)
except as set forth in this Section 6.2, Seller shall not enter into any letter of intent, memorandum of understanding,
agreement in principle, acquisition agreement, merger agreement, purchase agreement, exchange agreement or similar agreement (an “Alternative
Acquisition Agreement”) contemplating any Acquisition Proposal (other than a confidentiality agreement referred to in Section
6.2(a) entered into in the circumstances referred to in Section 6.2(a)); and
(iii) the
Seller Board, and each committee thereof, shall not, except as set forth in this Section 6.2, adopt, approve or recommend, or publicly
propose to adopt, approve or recommend, any Acquisition Proposal.
(c)
Acquisition Proposal. Notwithstanding the foregoing or anything to the contrary set forth in this Agreement (including
the provisions of this Section 6.2), at any time after the date of this Agreement and prior to receipt of the Seller Shareholder
Vote, the Seller Board may effect a Seller Board Recommendation Change or terminate this Agreement in order to enter into an Alternative
Acquisition Agreement, with respect to an unsolicited bona fide Acquisition Proposal that did not result from a breach of this Section
6.2 if (and only if): (i) the Seller Board shall have determined (A) after consultation with Seller’s outside legal counsel
and financial advisors, that such Acquisition Proposal constitutes a Superior Proposal and (B) after consultation with Seller’s
outside legal counsel, that the failure to make such Seller Board Recommendation Change would reasonably be expected to be inconsistent
with the Seller Board’s fiduciary obligations under applicable Law; (ii) Seller has provided at least four (4) Business Days prior
written notice to Purchaser that it intends to effect a Seller Board Recommendation Change, including a description in reasonable detail
of the reasons for such recommendation change, and written copies of any relevant proposed transactions agreements (and related ancillary
agreements, including any financing commitments) with any party making a potential Superior Proposal (including the identity of the Person
making such Superior
Proposal) (a “Recommendation Change Notice”)
(it being understood that the Recommendation Change Notice shall not constitute a Seller Board Recommendation Change for purposes of this
Agreement); (iii) Seller shall, and shall cause its Representatives to, during such four (4) Business Day period, negotiate with Purchaser
in good faith to make such adjustments in the terms and conditions of this Agreement so that the Acquisition Proposal ceases to constitute
a Superior Proposal, if Purchaser, in its discretion, proposes to make such adjustments; (iv) Seller has complied in all material respects
with the requirements of this Section 6.2 in connection with such Superior Proposal; and (v) if Purchaser shall have delivered
to Seller a written offer to alter the terms or conditions of this Agreement during the four (4) Business Day period referred to in clause
(ii) above, the Seller Board shall have determined in good faith, after considering the terms of such offer by Purchaser, (A) after consultation
with Seller’s outside legal counsel and financial advisors, that the Acquisition Proposal still constitutes a Superior Proposal
and (B) after consultation with Seller’s outside legal counsel, that a Seller Board Recommendation Change would still be required
for the Seller Board to be consistent with its fiduciary obligations under applicable Law. In the event of any material amendment to any
Superior Proposal (including any revision in the amount, form or mix of consideration Seller’s shareholders or Seller would receive
as a result of such potential Superior Proposal), Seller shall be required to provide Purchaser with written notice of such material amendment
and there shall be a new three (3) Business Day period following such notification during which Seller shall comply again with the requirements
of this Section 6.2(c), and the Seller Board shall not make a Seller Board Recommendation Change prior to the end of any such
period as so extended.
(d)
Notices of Proposals. Seller will as promptly as reasonably practicable (and in any event within twenty-four (24)
hours after receipt) (i) notify Purchaser of its receipt of any Acquisition Proposal and (ii) provide Purchaser a copy of such Acquisition
Proposal (if written), or a summary of the material terms and conditions of such Acquisition Proposal (if oral), including the identity
of the Person making such Acquisition Proposal, and copies of all written communications with such Person with respect to such actual
or potential Acquisition Proposal. Seller shall (A) notify Purchaser, in writing, of any decision of the Seller Board as to whether to
consider any Acquisition Proposal or to enter into discussions or negotiations concerning any Acquisition Proposal or to provide non-public
information with respect to such to any person, which notice shall be given as promptly as practicable after such determination was reached
(and in any event no later than twenty-four (24) hours after such determination was reached), (B) provide Purchaser with written notice
setting forth such information as is reasonably necessary to keep Purchaser informed of the material terms of any such Acquisition Proposal
and of any material amendments or modifications thereto, and (C) promptly (and in any event within twenty-four (24) hours of such determination)
notify Purchaser of any determination by the Seller Board that such Acquisition Proposal constitutes a Superior Proposal.
(e)
Certain Permitted Disclosure. Nothing contained in this Agreement shall prohibit Seller or the Seller Board from
complying with Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act; provided, however, that any disclosure
made by Seller or the Seller Board pursuant to Rules 14d-9 and 14e-2(a) shall be limited to a statement that Seller is unable to take
a position with respect to the bidder’s tender offer unless the Seller Board determines in good faith, after consultation with Seller’s
outside legal counsel, that such statement would reasonably be expected to be inconsistent with its fiduciary duties under applicable
Law.
(f)
Cessation of Ongoing Discussions. Seller shall, and shall cause its Representatives to, cease immediately all discussions
and negotiations that commenced prior to the date of this Agreement regarding any proposal or offer that constitutes, or could reasonably
be expected to lead to, an Acquisition Proposal; provided, however, that the foregoing shall not in any way limit
or modify the rights of any party hereto under the other provisions of this Section 6.2. Seller will immediately revoke or
withdraw access of any Person (other than Seller, Purchaser and their respective Representatives) to any data room (virtual or actual)
containing any non-public information with respect to the Acquired Companies and request from each third party (other than Seller, Purchaser
and their respective Representatives) the prompt return or destruction of all non-public information with respect to the Acquired Companies
previously provided to such Person.
(g)
Intervening Event. In response to an Intervening Event (as defined below) that has occurred after the date of this
Agreement but prior to the receipt of the Seller Shareholder Vote, the Seller Board may, prior to the receipt of the Seller Shareholder
Vote, effect a Seller Board Recommendation Change if (and only if): (i) the Seller Board shall have determined (after consultation with
Seller’s outside legal counsel) that the failure to make such Seller Board Recommendation Change would reasonably be expected to
be inconsistent with the Seller Board’s fiduciary obligations under applicable Law, (ii) prior to effecting the Seller Board Recommendation
Change, Seller promptly notifies Purchaser, in writing, at least five (5) Business Days (the “Intervening Event Notice Period”)
before taking such action of its intent to consider such action (which notice shall not, by itself, constitute a Seller board Recommendation
Change), and which notice shall include a reasonably detailed description of the underlying facts giving rise to, and the reasons for
taking, such action; (iii) Seller shall, and shall cause its Representatives to, during the Intervening Event Notice Period, negotiate
with Purchaser in good faith to make such adjustments in the terms and conditions of this Agreement so that the underlying facts giving
rise to, and the reasons for taking such action, ceases to constitute an Intervening Event, if Purchaser, in its reasonable discretion,
proposes to make such adjustments (it being agreed that in the event that, after commencement of the Intervening Event Notice Period,
there is any material development in an Intervening Event, the Intervening Event Notice Period shall be extended, if applicable, to ensure
that at least three (3) Business Days remains in the Intervening Event Notice Period subsequent to the time Seller notifies Purchaser
of any such material development (it being understood that there may be multiple extensions)); and (iv) the Seller Board still determines
in good faith, after consulting with Seller’s outside legal counsel, that the failure to effect such Seller Board Recommendation
Change, after taking into account any adjustments made by Purchaser during the Intervening Event Notice Period, would reasonably be expected
to be inconsistent with its fiduciary duties under applicable Law. Seller acknowledges and hereby agrees that any Seller Board Recommendation
Change effected (or proposed to be effected) in response to or in connection with any Acquisition Proposal may be made solely and exclusively
pursuant to Section 6.2(c) only, and may not be made pursuant to this Section 6.2(g). “Intervening Event” means,
with respect to Seller any material event, circumstance, change, effect, development, or condition occurring or arising after the date
hereof that (A) affects the business, assets or operations of the Acquired Companies, (B) was not known to, nor reasonably foreseeable
by, or if known, the effect of which was not reasonably foreseeable by, any member of the Seller Board (assuming consultations with appropriate
officers and Representatives of Seller) as of or prior to the date of this Agreement, (C) becomes known to the Seller Board prior to the
receipt of the Seller Shareholder Vote and (D) did not
result from or arise out of the announcement or pendency
of, or any actions required to be taken by either Purchaser or Seller (or to be refrained from being taken by such Purchaser or Seller)
pursuant to, this Agreement; provided, however, that in no event shall (x) the receipt, existence, or terms of an Acquisition
Proposal or any matter relating thereto or consequence thereof constitute an Intervening Event or (y) a change in the market price
or trading volume of the equity or debt securities of Seller or of the equity or credit ratings or the ratings outlook for Seller by any
applicable rating agency (in and of themselves) constitute an Intervening Event.
6.3
Proxy Statement.
(a)
In connection with the Seller Shareholders Meeting, as soon as reasonably practicable (and in no event later than forty-five
(45) days after the date hereof), Seller shall prepare and file with the SEC the Proxy Statement in preliminary form. Seller shall set
a record date for determining Seller’s stockholders entitled to attend the Seller Shareholders Meeting as promptly as reasonably
practicable after the date hereof. Seller shall cause the Seller Shareholders Meeting to be duly called and held as soon as reasonably
practicable following clearance of the Proxy Statement by the SEC for the purpose of voting on the adoption and approval of this Agreement
and the transactions contemplated hereby. As soon as reasonably practicable following the establishment of the record date for the Seller
Shareholders Meeting and clearance of the Proxy Statement by the SEC, Seller shall cause the Proxy Statement to be mailed to each of Seller’s
shareholders entitled to vote at the Seller Shareholders Meeting. Seller shall ensure that the Proxy Statement complies in all material
respects with the applicable provisions of the Exchange Act. Purchaser shall promptly furnish all information concerning itself as may
reasonably be required by Seller in connection with the Proxy Statement. Each of Seller and Purchaser shall promptly correct any information
provided by it for use in the Proxy Statement if and to the extent that such information shall have become false or misleading in any
material respect, and Seller shall promptly amend or supplement the Proxy Statement and to cause the Proxy Statement, as so amended or
supplemented, to be filed with SEC and mailed to its shareholders, in each case as and to the extent required by applicable Law. Prior
to any filing or mailing of the Proxy Statement (or any amendment or supplement thereto) or responding to any comments of the SEC with
respect thereto, Seller shall provide Purchaser a reasonable opportunity to review and comment on such document or response and shall
consider in good faith any such comments proposed by Purchaser. Seller may adjourn or postpone the Seller Shareholders Meeting (i) to
the extent necessary to ensure that any required supplement or amendment to the Proxy Statement is provided to Seller’s shareholders
within a reasonable amount of time in advance of the Seller Shareholders Meeting, (ii) as otherwise required by applicable Law or
(iii) if as of the time for which the Seller Shareholders Meeting is scheduled as set forth in the Proxy Statement, there are insufficient
shares of capital stock of Seller represented (in person or by proxy) to constitute a quorum necessary to conduct the business of the
Seller Shareholders Meeting. The Seller Board shall (A) subject to Section 6.2, include the Seller Board Recommendation
in the Proxy Statement, and (B) otherwise comply with all Laws applicable to the Seller Shareholders Meeting.
(b) Seller
and Purchaser shall each promptly make all necessary filings with respect to the Contemplated Transactions under the Exchange Act, applicable
state blue sky laws and the rules and regulations thereunder, and each party shall furnish to the other party all
information concerning the other party as may be reasonably
requested in connection with any such actions.
6.4
Seller Shareholder Approval. Subject to Section 6.2, Seller,
acting through the Seller Board, shall use reasonable best efforts to obtain the Seller Shareholder Approval (as defined below) at the
Seller Shareholders Meeting.
6.5
Access to Books and Records. During the Interim Period, to the
extent consistent with applicable Law, Seller shall, and Seller shall cause each Acquired Company to, provide Purchaser and its authorized
representatives with reasonable access at reasonable times and upon reasonable advance notice to the offices, properties, personnel, books
and records of the Acquired Companies in order for Purchaser to have the opportunity to make such investigation as it shall reasonably
desire to make of the affairs of the Acquired Companies; provided, that such access does not unreasonably interfere with the normal
operations of the Acquired Companies. Neither the Acquired Companies nor Seller makes any representation or warranty as to the accuracy
of any information (if any) provided pursuant to this Section 6.5, and Purchaser may not rely on the accuracy of any such information,
other than the representations and warranties of the Acquired Companies expressly and specifically set forth in Article IV, as
qualified by the Disclosure Schedule. Following the Closing, Seller shall, at the reasonable request of Purchaser, reasonably cooperate
with Purchaser in providing information regarding the Acquired Companies, and, to the extent information regarding the Acquired Companies
is held by Seller, provide such information to Purchaser, to the extent necessary for Purchaser to prepare and file filings required to
be made by Purchaser under the Exchange Act, including pursuant to Form 8-K and any financial statements required in connection therewith;
provided, however, that such cooperation shall be provided at no out-of-pocket cost or expense to Seller and shall not unreasonably
interfere with the normal operations of Seller or any of its Affiliates.
6.6
Interim Period Public Disclosure. Except as may be required by
applicable Law, including the Securities Act or Exchange Act, or stock market regulations, (a) the press release announcing the execution
of this Agreement shall be issued only in such form as shall be mutually agreed upon by Purchaser and Seller and (b) both Purchaser and
Seller shall consult with one another before issuing any press release or otherwise making any public statement with respect to the Contemplated
Transactions or this Agreement; provided, however, that subject to applicable disclosure obligations of Seller under applicable
Law, the restrictions set forth in this Section 6.6 shall not apply to any communications by Seller with respect to any Acquisition
Proposal, Superior Proposal, Recommendation Change Notice or Seller Board Recommendation Change, in each case, made in accordance with
Section 6.2.
6.7
Notification of Breaches. Each party agrees that it shall promptly
notify in writing the other party if such notifying party becomes aware of any breach of, or inaccuracy in, or of any facts or circumstances
constituting or resulting in the breach of, or inaccuracy in, any representation, warranty, covenant or agreement of such notifying party
or of such other party that would cause a failure of the conditions to Closing set forth in Article VIII with respect to such party.
6.8
Efforts to Consummate. Subject to the terms and conditions of this
Agreement, each party will use its commercially reasonable efforts to take, or cause to be taken, and to assist
and cooperate with the other party in taking or causing
to be taken, all actions and to use its commercially reasonable efforts to do, or cause to be done, all things necessary, proper or advisable
under this Agreement and applicable Law to cause the conditions set forth in Article VIII to be satisfied and to consummate and
make effective the Contemplated Transactions, including (a) preparing and filing as promptly as practicable after the date hereof
with any Government Entity all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions
of information, financial statements, records, applications and other documents, in each case, to the extent applicable, (b) obtaining
and maintaining all approvals, consents, registrations, Permits, authorizations, licenses, waivers and other confirmations required to
be obtained from any Government Entity to consummate the Contemplated Transactions and (c) executing and delivering any additional
instruments necessary to consummate the Contemplated Transactions. Notwithstanding the foregoing or anything in this Agreement to the
contrary, in no event shall either party be required to (a) effect any sale, divestiture, disposition, license, holding separate or other
structural or behavioral remedy with respect to its or any of its Affiliate’s assets, properties or business, (b) terminate any
existing relationship or contractual right or obligation or (c) enter into any settlement, undertaking, consent decree, stipulation or
agreement with any Government Entity in connection with the Contemplated Transactions.
6.9
Financing Cooperation.
(a)
Prior to the Closing, the Acquired Companies shall provide to Purchaser, and shall use commercially reasonable efforts to cause
their respective officers, employees, representatives and advisors, including legal and accounting, to provide to Purchaser, such customary
cooperation as may be reasonably requested by Purchaser in connection with the Debt Financing, including the following: (i) furnishing
Purchaser and the Lenders with such financial and operating data and other information with respect to the Acquired Companies as is reasonably
requested by Purchaser and the Lenders and is customarily required for consummation of debt financings similar to the Debt Financing,
including, without limitation, information that would enable the Lenders to have a quality of earnings report prepared, together with,
to the extent required, a customary authorization letter authorizing the distribution of such information; (ii) using commercially reasonable
efforts: (A) to assist in the preparation and negotiation of definitive financing documentation and the schedules and exhibits thereto
(including loan agreements, guarantees, collateral agreements, hedging arrangements, and customary officer’s certificates) as may
reasonably be requested; and (B) to facilitate the pledging of collateral; (iii) furnishing Purchaser and the Lenders promptly with all
documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money
laundering rules and regulations, including the USA PATRIOT Act and the Beneficial Ownership Regulation, that has been reasonably requested
by Purchaser in writing, at least five (5) Business Days prior to the Closing Date and (iv) participating in a reasonable number of virtual
or telephone meetings and due diligence sessions.
(b) Purchaser
shall: (i) promptly reimburse Seller, the Acquired Companies and any of their respective Affiliates and representatives for all of the
reasonable and documented out-of-pocket costs and expenses (including attorneys’ fees) incurred by Seller, the Acquired Companies
and any of their respective Affiliates and representatives in connection with this Section 6.9; and (ii) indemnify and hold harmless
Seller, the Acquired Companies and any
of its Affiliates and representatives from and against
all claims, losses, damages, injuries, liabilities, judgments, awards, penalties, fines, Taxes, costs (including cost of investigation),
expenses (including reasonable and documented attorneys’ fees) or settlement payments suffered or incurred by any of them in connection
with the arrangement of the Debt Financing and any information used in connection therewith other than as a result of Seller’s or
the Acquired Companies’ actual fraud or intentional misrepresentation, as finally determined by a court of competent jurisdiction.
Purchaser shall provide Seller prompt written notice upon becoming aware of any material breach by any party to any Debt Commitment Letter,
any failure to carry out any of the material terms of any Debt Commitment Letter by any party thereto or any termination of any Debt Commitment
Letter by any party thereto. Purchaser shall keep Seller informed on a reasonable basis and in reasonable detail of the status of its
efforts to arrange the financings contemplated by the Debt Commitment Letters.
(c)
Notwithstanding anything in this Agreement to the contrary (including this Section 6.9), none of the Acquired Company, Seller
or any of their respective Affiliates or representatives shall: (i) be required to waive or amend any terms of this Agreement or agree
to pay any commitment or other fee or reimburse any expenses prior to the Closing; (ii) be required to incur any liability or give any
indemnity in connection with the Debt Financing prior to the Closing; (iii) be required to take any action that would require any director,
officer or employee of Seller or any of the Acquired Companies to execute any document, agreement, certificate or instrument (other than
with respect to any authorization letter described in this Section 6.9) that would become effective prior to the Closing; (iv)
be required to take any action that would unreasonably interfere with the ongoing business or operation of the Acquired Companies, Seller
or any of their respective Affiliates or representatives; (v) cause any representation or warranty in this Agreement to be breached or
become inaccurate; (vi) be required to take any action that would cause any director, officer or employee of Seller or the Acquired Companies
to incur any personal liability other than in connection with actual fraud; (vii) conflict with or violate the Organizational Documents
of Seller or the Acquired Companies or applicable Law; (viii) result in the contravention of, or that could reasonably be expected to
result in a violation or breach of, or a default under, any agreement to which Seller or any of its Subsidiaries is a party and not entered
into in connection therewith; (ix) provide access to or disclose information that Seller reasonably determines would jeopardize any attorney-client
privilege of Seller or any of its Subsidiaries or which is restricted or prohibited under applicable Law; or (x) prepare separate financial
statements for Seller or any of its Subsidiaries or change any fiscal period.
ARTICLE
VII
ADDITIONAL COVENANTS
7.1
Non-Competition. Neither Seller nor any of its Affiliates or designees
(each, a “Restricted Party”) during the period commencing on the Closing Date and ending on the fifth (5th) anniversary
of the Closing Date (the “Restricted Period”), shall:
(a)
design, develop, license, manufacture, distribute, sell or support (or knowingly assist any third party, directly or indirectly,
in designing, developing, licensing, manufacturing, distributing, selling or supporting) any existing product of the Business or on any
related roadmap or any other similar product anywhere in the world (provided, however, that the restrictions set forth in
this Section 7.1(a) shall not (i) prohibit any Restricted Party from being
an investor in a mutual fund or a diversified investment
company, (ii) prohibit any Restricted Party from being a passive owner of not more than five percent (5%) in the aggregate of an outstanding
class of publicly traded securities or (iii) in any way limit or prohibit Seller’s or any of its Affiliates’ (A) actions or
operations with respect to Seller’s Services and Support segment or (B) strategic investments in Quortus Limited, Spyrus Solutions,
Inc. and Kogniz, Inc.);
(b)
directly or indirectly (i) solicit for employment or any similar arrangement any employee of the Companies or of the Company Subsidiaries
or (ii) hire or knowingly assist any other Person in hiring any employee of the Companies or of the Company Subsidiaries (provided,
however, that this Section 7.1(b) shall not apply to (A) employees of the Companies or of the Company Subsidiaries who have
been terminated by the Companies or any of their Affiliates (including Purchaser) after Closing, (B) employees of the Companies who have
left the employment of the Companies or any of their Affiliates (including Purchaser) for a period of at least six (6) months and (C)
any general solicitations for employment (such as any newspaper, periodical or internet help wanted advertisement or any search firm engagement)
and any hiring arising out of such general solicitations); or
(c)
directly or indirectly cause, solicit, induce or encourage any client, customer, supplier or licensor of the Business or the Companies
prior to the Closing to terminate or modify any such relationship.
7.2
Employee Matters.
(a)
Purchaser will offer, subject to satisfactory completion of Purchaser’s standard pre-employment screening process,
which may include background checks, employment to each of the persons identified on Schedule 7.2(a) (all such persons identified
on Schedule 7.2(a) who accept Purchaser’s offer of employment and satisfy the requirements of Purchaser’s pre-employment
screening process, the “TNI Transferred Personnel”). Schedule 7.2(a) may be updated and changed by Purchaser
at any time during the thirty (30) day period immediately following the date hereof, at which time such schedule shall be considered final
by the parties. Effective prior to 11:59:59 p.m. on the day prior to the Closing Date, Seller will terminate, or cause the termination
of, the employment of each of the TNI Transferred Personnel. Purchaser will not be responsible for any severance obligations arising out
of Seller’s termination of any TNI Transferred Personnel (including but not limited to any wages, bonuses, commissions, vacation,
paid time off, severance payments, severance benefits and expense reimbursements that have been earned or that is due upon or arising
out of the termination of employment of each of the TNI Transferred Personnel), and Seller shall retain and discharge any such severance
obligations. With respect to the employees of TN Europe or any Subsidiary thereof (the “UK Employees” and, together
with the TNI Transferred Personnel, the “Transferred Employees”), the parties acknowledge and agree that the employment
of the UK Employees will not be terminated by the Closing except as expressly set forth herein; provided, however, that
nothing herein shall in any way limit Purchaser’s right to terminate the employment of any of the Transferred Employees after the
Closing Date.
(b)
For purposes of determining eligibility to participate, vesting and determination of the level of benefits (but not accrual
or entitlement to benefits other than severance benefit accrual where length of service is relevant and paid time off) for Transferred
Employees under all employee benefit plans and arrangements
of Purchaser and its Affiliates (including the Acquired Companies after the Closing), Purchaser shall recognize service with Seller or
Net2Edge, as applicable.
(c)
Purchaser agrees that, during the period commencing on the Closing Date and ending on the one (1)-year anniversary thereof,
each Transferred Employee who continues to be employed by Purchaser or its Affiliates (including the Acquired Companies after the Closing)
after the Closing will continue to be provided with employee benefits that are substantially comparable to the employee benefits offered
to similarly-situated employees of Purchaser. Purchaser further agrees that (i) it will comply with the wage and working conditions requirements
outlined in the Labor Condition Application for all Transferred Employees on H-1B non-immigration visa status and (ii) during the period
commencing on the Closing Date and ending on the six (6)-month anniversary thereof, each Transferred Employee who continues to be employed
by Purchaser or its Affiliates (including the Acquired Companies after the Closing) after the Closing will continue to be provided with
a salary that is substantially comparable in the aggregate to the salary in effect with respect to such Transferred Employee immediately
prior to the Closing; provided, however, that a Transferred Employee may waive the foregoing undertaking of Purchaser. Nothing
herein shall in any way limit Purchaser’s right to terminate the employment of any of the Transferred Employees after the Closing
Date.
(d)
With respect to any UK Employees terminated by Purchaser (acting by the relevant Subsidiary) during the sixty (60) day period
after the Closing, Purchaser shall, within such sixty (60) day period, submit to Seller an invoice detailing any statutory redundancy
and minimum notice period costs incurred by Purchaser with respect to any such terminations and Seller shall promptly pay such invoice;
provided, however, that (i) Purchaser shall use commercially reasonable efforts to minimize such statutory redundancy and
minimum notice period costs incurred by Purchaser and (ii) in no event shall Seller be responsible for any costs, fees or expenses arising
out of the termination of any UK Employee following the Closing (including, without limitation, pursuant to this Section 7.2(d))
in excess of the UK Reimbursement Amount.
(e)
Purchaser will be responsible for providing continuation coverage to the extent required under COBRA to all Transferred
Employees, including any dependents or beneficiaries thereof, who are or become “M&A Qualified Beneficiaries” (as defined
in Treasury Regulations §54.4980B-9) as a result of the consummation of Contemplated Transactions.
(f)
With respect to each employee benefit plan and arrangement of Purchaser providing medical, dental, pharmaceutical and vision
benefits in which any Transferred Employee becomes eligible to participate after the Closing, Purchaser shall waive or use commercially
reasonable efforts to cause the applicable provider to waive, all pre-existing condition limitations, exclusions and waiting periods with
respect to participation and coverage requirements applicable to the Transferred Employees and their eligible dependents, other than any
such limitations, exclusions and waiting periods that are in effect with respect to such individuals and have not been satisfied under
the analogous welfare benefit plan sponsored or participated in by Seller or Net2Edge, as applicable, immediately prior to the Closing.
(g)
Nothing in this Section 7.2 shall create any right in any Person, including any employees, former employees, any
participant in any benefits plan maintained by Purchaser or any of its Affiliates or any beneficiary thereof, nor create any right to
continued employment with Purchaser, the Acquired Companies or any of their Affiliates, nor be construed in any way as modifying or amending
the provisions of any Benefit Plan or any benefits plan maintained by Purchaser or any of its Affiliates.
7.3
Record Retention. For a period of seven years after the Closing
Date, without the prior written consent of Seller (which will not be unreasonably withheld, conditioned or delayed), Purchaser will not,
and will cause the Acquired Companies to not, dispose of or destroy any of the books and records of the Acquired Companies which may be
relevant to any legal, regulatory or Tax audit, investigation, inquiry or requirement of Seller or the Acquired Companies without first
offering such records to Seller. Purchaser will, and will cause the Acquired Companies to, upon reasonable notice, afford Seller and its
representatives reasonable access (including the right to make, at Seller’s expense, photocopies), during normal business hours,
to such books and records only for the purposes of any legal, regulatory or Tax audit, investigation, inquiry or requirement for which
such books and records are required in connection therewith; provided, that prior to providing such books and records, Seller and
its representatives shall execute a confidentiality agreement in a form reasonably acceptable to Purchaser.
7.4
Further Assurances. Purchaser and Seller will execute and deliver
such further instruments of conveyance and transfer and take such other action as may be reasonably necessary to effect the Contemplated
Transactions. If at any time after the Closing Date any further action is reasonably necessary to carry out the purposes of the Contemplated
Transactions, each party hereto will take such further action (including the execution and delivery of such further instruments and documents)
as the other party may reasonably request at the sole cost and expense of the requesting party.
7.5
Insurance; Organizational Documents.
(a) For
a period of six (6) years after the Closing Date, Purchaser shall cause the Acquired Companies to honor and maintain in effect all indemnification,
hold harmless and advancement of expenses rights in favor of all past and present directors, managers, governors, officers and employees
of the Acquired Companies, and employees of Seller (solely to the extent such employees performed services for or on behalf of TNI) (collectively,
the “Company Indemnified Parties”), pursuant to the Organizational Documents of the Acquired Companies and indemnification
agreements of the Acquired Companies, if any, in existence on the date hereof, in any such case, provided that such Organizational Documents
or indemnification agreements were made available to Purchaser prior to the date hereof. Notwithstanding Section 11.7, the provisions
of this Section 7.5 are intended to be for the benefit of, and will be enforceable by, each Company Indemnified Party, his or her
heirs and his or her representatives and are not intended to be in substitution for any other right to indemnification or contribution
that any such Company Indemnified Parties may have by contract or otherwise.
(b) In
the event that Purchaser, the Acquired Companies or any of their respective successors or assigns: (i) consolidates with, merges or amalgamates
into any other
Person and is not the continuing or surviving corporation
or entity of such consolidation, merger or amalgamation, or (ii) transfers or conveys all or substantially all of its properties and assets
to any other Person then, and in each such case, Purchaser will ensure that proper provisions are made so that the successors and assigns
of Purchaser, the Acquired Companies, or, in each case, all or substantially all of its or their properties and assets, as the case may
be, and their successors and assigns, as applicable, assume or are bound by the obligations set forth in this Section 7.5.
(c) Notwithstanding
anything herein to the contrary, if any claim (whether arising before, at or after the Closing) is made against any past or present director,
manager, governor, officer or employee of the Acquired Companies, or any employee of Seller (solely to the extent such employee performed
services for or on behalf of TNI), on or prior to the sixth anniversary of the Closing Date, the provisions of this Section 7.5
will continue in effect until the final disposition of such claim.
(d) Nothing
in this Agreement is intended to, will be construed to or will release, waive or impair any rights to directors’ and officers’
insurance claims under any policy that is or has been in existence with respect to the Acquired Companies or any of their respective directors,
managers, governors, officers or employees.
7.6
Certain Tax Matters.
(a) Responsibility
for Preparing and Filing Tax Returns.
(i) Seller
will prepare or cause to be prepared all Tax Returns for each of the Companies and Company Subsidiaries for taxable periods ending on
or before the Closing Date. After receipt of such Tax Returns from Seller incorporating any revisions required in accordance with Section
7.6(a)(iii), Purchaser will cause such Tax Returns to be timely filed.
(ii) Purchaser
will prepare or cause to be prepared and timely file or caused to be timely filled all Tax Returns of the Companies and the Company Subsidiaries
other than the Tax Returns prepared by Seller pursuant to Section 7.6(a)(i).
(iii) In
the case of any Tax Return of either Company or any Company Subsidiary for a Pre-Closing Tax Period, such Tax Return will be prepared
in a manner that is consistent with practices, procedures, and accounting methods of such Company or Company Subsidiary in existence on
the date hereof and consistent with the conventions in Section 7.6(b). At least thirty (30) days prior to the due date of any Tax
Return relating to the Pre-Closing Tax Period other than a Straddle Period (after applicable extensions), the party responsible for preparing
such Tax Return (the “Preparing Party”) will deliver such Tax Return to the other party (the “Reviewing Party”)
for the Reviewing Party’s review and comment. Within ten (10) days following receipt of such Tax Return, the Reviewing Party will
notify the Preparing Party in writing of any reasonable objections the Reviewing Party may have to any items set forth in such Tax Return
and the Preparing Party and the Reviewing Party will consult and attempt to resolve in good faith any such objection and to mutually consent
to the filing of such Tax Return;
provided, that if the Preparing Party
and the Reviewing Party are unable to resolve any objection raised by the Reviewing Party within ten (10) days after the Reviewing Party
notifies the Preparing Party in writing of any objection relating to such Tax Return, the dispute will be submitted to the Accounting
Firm for resolution in accordance with Section 2.5(c).
(b) Certain
Conventions. For purposes of any Income Tax Returns of either Company or any Company Subsidiary for the Pre-Closing Tax Period, unless
otherwise required by applicable Law: (i) such Company will make the election under Revenue Procedure 2011-29 to apply the 70% safe harbor
to any “success based fee” as defined in Treasury Regulation Section 1.263(a)-5(f) for purposes of determining Transaction
Tax Deductions; and (ii) any gains, income, deductions, losses, or other items resulting from transactions outside of the ordinary course
occurring on the Closing Date and not contemplated by this Agreement, but after the Closing, including any relating to the financing of
the Contemplated Transactions by Purchaser or any of its Affiliates, will be allocated to the Post-Closing Tax Period.
(c) Certain
Post-Closing Actions. Neither Purchaser nor any of its Affiliates will (i) file, amend, refile, supplement, revoke or otherwise modify
any Tax Return or Tax election of any Acquired Company with respect to any Pre-Closing Tax Period (other than a Straddle Period), (ii)
make any Tax election that has retroactive effect to any such Tax year of any Acquired Company (other than a Straddle Period), (iii) take
any action with respect to any such Tax Returns to extend the applicable statute of limitations, (iv) file a Tax Return with respect to
any Acquired Company for a Pre-Closing Tax Period (other than a Straddle Period) in a jurisdiction in which such Acquired Company did
not file such Tax Return prior to Closing, or (v) take any action on the Closing Date (other than as expressly contemplated by this Agreement)
that is outside the ordinary course of business that Purchaser knows or ought reasonably to have known will create a Tax liability for
Seller, in each such case without the prior written consent of Seller (not to be unreasonably withheld or delayed). Prior to making any
voluntary disclosure, amnesty or similar filing with respect to any Acquired Company for a Pre-Closing Tax Period (other than a Straddle
Period), Purchaser or its Affiliates will provide written notice to Seller and the parties will cooperate in determining the most reasonable
approach for addressing any such actions. Purchaser will indemnify and hold Seller harmless from and against any liability for Taxes resulting
from any actions taken by it that are described in this Section 7.6(c) without the prior written consent of Seller, save where
such consent has been unreasonably withheld or delayed.
(d) Tax
Refunds. All refunds of Taxes of the Acquired Companies for any Pre-Closing Tax Period (whether in the form of cash received or a
credit against Taxes otherwise payable) will be the property of Seller to the extent not included in the computation of Final Net Working
Capital and only to the extent that such refunds are not the result of a voluntary act, transaction or omission of Purchaser after the
Closing Date or the utilization of a Buyer’s Relief. To the extent that Purchaser or any Acquired Company receives a refund that
is the property of Seller under this Section 7.6(d) and in respect of which payment is not due under Section 7.6(e)(ii),
Purchaser will pay to Seller the amount of such refund (and interest received from the Taxing Authority). The amount due to or on behalf
of Seller will be payable ten (10) days after receipt of the refund from the applicable Taxing Authority (or, if the refund is in the
form of a
credit against Taxes otherwise payable, ten (10) days
after the due date of the Tax Return claiming such credit or offset).
(e) Cooperation
on Tax Matters.
(i)
In connection with the preparation of Tax Returns, audit examinations, and any administrative or judicial proceedings relating
to the Tax liabilities imposed on the Companies for Pre-Closing Tax Periods, Purchaser, on the one hand, and Seller, on the other hand,
will cooperate fully with each other, including the furnishing or making available during normal business hours records, personnel (as
reasonably required), books of account, powers of attorney or other materials necessary or helpful for the preparation of such Tax Returns,
the conduct of audit examinations or the defense of claims by Taxing Authorities as to the imposition of Taxes. Purchaser will and will
cause the Companies to (A) retain all books and records with respect to Tax matters pertinent to the Companies relating to any taxable
period beginning before the Closing Date until the expiration of the applicable statute of limitations (and, to the extent notified by
Seller, any extension thereof) for the respective taxable periods, and to abide by all record retention agreements entered into with any
Taxing Authority, and (B) give Seller reasonable written notice prior to transferring, destroying or discarding any such books and records
and will allow Seller to take possession of such books and records.
(ii)
R&D Payments. Purchaser shall pay to Seller all amounts received by Net2Edge that constitute R&D Relief (collectively,
the “R&D Payments”). Purchaser shall pay to Seller all R&D Payments no later than ten (10) days following the
date on which Net2Edge receives such R&D Payments. Purchaser shall cause Net2Edge to make such elections and take such actions as
Seller may reasonably request to claim any R&D Relief, provided that Purchaser shall not be required to take any action that Purchaser
reasonably determines would violate any applicable Law. Purchaser shall not be required to make payment to Seller more than once in respect
of any R&D Relief.
(iii) After
the Closing, Purchaser shall promptly notify Seller in writing of its receipt of any written notice of a proposed assessment or claim
in an audit or administrative or judicial proceeding of the Acquired Companies that, if determined adversely to the taxpayer, would be
grounds for indemnification under this Agreement. In the case of an audit or administrative or judicial proceeding that relates to a Pre-Closing
Tax Period, Seller shall have the right at Seller’s expense to participate in and control the conduct of such audit or proceeding.
Purchaser may participate in any such audit or proceeding and, if Seller does not assume the defense of any such audit or proceeding,
Purchaser may defend the same in such manner as it may deem appropriate, provided that Purchaser shall not settle such audit or proceeding
without Seller’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed. Neither Purchaser nor
Seller shall enter into any compromise or agree to settle any claim pursuant to any Tax audit or proceeding which would adversely affect
the other party for such taxable period(s) covered by the Tax audit or proceeding or a subsequent taxable period without the written consent
of the other party, which shall not be unreasonably withheld, conditioned or delayed.
(f) Transfer
Taxes. Purchaser and Seller shall equally share the payment of any stamp, transfer, recordation, documentary, sales and use, value
added, registration and other similar Taxes and fees (including any penalties and interest) incurred in connection with, or as a consequence
of, this Agreement or any other transaction contemplated hereby (“Transfer Tax”); provided, however,
that Purchaser shall be solely responsible for all costs incurred in connection with the stamp duty tax submission in the United Kingdom
for the TN Europe Share. The parties shall cooperate with the filing of any report in connection with any Transfer Tax.
7.7
Transaction Litigation. Seller shall control the defense of any
litigation brought by shareholders of Seller against Seller and/or its directors or officers relating to the transactions contemplated
by this Agreement, including the Contemplated Transaction; provided, however, that Seller shall promptly provide Purchaser
with copies of all proceedings and correspondence relating to such litigation (to the extent permitted by applicable Law). Prior to the
earlier of the Closing and the termination of this Agreement in accordance with its terms, Seller shall not settle any litigation against
Seller or any director or officer of Seller by any shareholder relating to this Agreement or the Contemplated Transactions that would
materially and adversely affect Purchaser or the Acquired Companies, in each case, without the prior written consent of Purchaser, which
shall not be unreasonably withheld, conditioned or delayed.
7.8
Confidentiality. Purchaser and Seller acknowledge that Purchaser
and TNI have previously entered into the Confidentiality Agreement, which Confidentiality Agreement shall continue in full force and effect
in accordance with its terms, except as expressly modified by this Agreement. For the avoidance of doubt, Purchaser acknowledges that
all information provided to Purchaser or its Affiliates by or on behalf of Seller or the Acquired Companies in connection with the Contemplated
Transactions is subject to the terms and conditions of the Confidentiality Agreement. From and after the date of this Agreement, Seller
will, and will cause its Affiliates and Representatives to, maintain in confidence any written or oral confidential and non-public information
regarding the Acquired Companies, except to the extent that (a) Seller is required to disclose such information by judicial or administrative
process or pursuant to applicable Law or the rules or regulations of any stock exchange upon which the securities of Seller (or an Affiliate
thereof) is listed, (b) such information is, was or becomes publicly available through no fault of Seller after the Closing, (c) such
information is disclosed in connection with any litigation relating to Seller’s rights or obligations under this Agreement, or (d)
such information is disclosed in accordance with the terms of this Agreement.
7.9
Release. Effective at the Closing, Seller, for itself and its Affiliates
and the respective heirs, executors, beneficiaries, administrators, successors and assigns of each of the foregoing (each, a “Releasor”
and collectively, the “Releasors”), hereby irrevocably and unconditionally release and forever discharge Purchaser,
the Acquired Companies, each of their respective Affiliates and each of their respective and their respective Affiliates’ present
and former officers, directors, managers, equityholders, members, employees, agents, Representatives, successors and assigns of each of
the foregoing (collectively, the “Releasees”), from any and all claims, suits, demands, causes of action, contracts,
agreements, covenants, obligations, debts, costs, expenses, attorney’s fees, and other liabilities of whatever kind or nature, in
law or equity, by statute or otherwise, whether now known or unknown, vested or contingent or suspected or unsuspected, (“Claims”),
which such Releasor now has, has ever had
or may hereafter have against any of the Releasees
arising out of any matter, cause or event occurring contemporaneously with or prior to the Closing relating to the Business or the Acquired
Companies (collectively, the “Released Claims”). Each Releasor hereby irrevocably consents to refrain from, directly
or indirectly, asserting any Released Claim or commencing, instituting or causing to be commenced any lawsuit of any kind against any
Releasee based upon any matter released hereby. Notwithstanding the foregoing, nothing contained in this Section 7.9 will operate
to waive or release any Claims, whether known or unknown, suspected or unsuspected, matured or unmatured, whether arising at law or in
equity that any Releasor has under this Agreement, or any agreements, certificates or other documents entered into in accordance with,
or pursuant to, this Agreement.
7.10
Seller Stock Awards. In connection with the Closing, Purchaser
shall not assume or substitute any of the equity or equity-based awards under Seller’s 2011 Executive Incentive Compensation Plan,
as amended through May 23, 2018 or any other equity incentive plan of Seller that has any equity award outstanding (collectively, the
“Seller Stock Awards”), and Purchaser shall have no responsibility or liability with respect to the Seller Stock Awards,
including the actions of Seller with respect to the Seller Stock Awards.
7.11
Real Property Lease. Each of Seller and Purchaser shall, as promptly
as reasonably practicable after the date hereof, use commercially reasonable efforts to have the landlord under the UK Lease release Seller
from all obligations as guarantor under the UK Lease effective as of the Closing (the “Guarantor Release”); provided,
that if the Guarantor Release is not received prior to or as of the Closing, (a) each of Seller and Purchaser shall continue to use commercially
reasonable efforts to have the landlord under the UK Lease release Seller from all obligations as guarantor under the UK Lease, and (b)
Seller and Purchaser shall enter into a mutually acceptable (with both parties acting reasonably) indemnity agreement pursuant to which
Purchaser will indemnify Seller for all Losses suffered or incurred by Seller arising out of or relating to Seller’s continuing
status as the guarantor under the UK Lease until the Guarantor Release is obtained.
ARTICLE
VIII
CONDITIONS TO CLOSING
8.1
Conditions to the Obligations of Each Party. The respective obligations
of each party to this Agreement to consummate the Contemplated Transactions will be subject to the satisfaction (or waiver by the party
entitled to the benefit thereof to the extent permitted by Law) at or prior to the Closing of the following conditions:
(a)
Shareholder Approval. This Agreement and the Contemplated Transactions shall have been duly approved and adopted
by the requisite shareholders of Seller at the Seller Shareholders Meeting in accordance with the MBCA and Seller’s Organizational
Documents (the “Seller Shareholder Approval”).
(b) No
Injunctions. No Government Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced, or entered any Law
or order, decree, ruling or other action, whether temporary, preliminary or permanent, that makes illegal, enjoins or otherwise prohibits
consummation of the Contemplated Transactions.
8.2
Conditions to the Obligations of Seller. The obligations of Seller
to consummate the Contemplated Transactions shall be subject to the satisfaction or waiver (where permissible pursuant to applicable Law)
by Seller on or prior to the Closing Date of each of the following conditions:
(a)
Representations and Warranties of Purchaser.
(i) The
Fundamental Representations made by Purchaser in Article V will be true and correct in all respects at and as of the date hereof
and at and as of the Closing as if made at and as of such time (other than any such Fundamental Representation made by Purchaser that
expressly relates to a specific date, which Fundamental Representation will be true and correct on the date so specified); and
(ii)
the representations and warranties set forth in Article V of this Agreement (other than the Fundamental Representations
made by Purchaser) will be true and correct in all material respects (without giving effect to any limitation as to “materiality”
or “material adverse effect” or any similar limitation contained in this Agreement) at and as of the date hereof and at and
as of the Closing as if made at and as of such time (other than any such representation or warranty that expressly relates to a specific
date, which representation and warranty will be true and correct on the date so specified).
(b) Performance
of Covenants. Purchaser will have performed and complied with, in all material respects, all obligations, agreements and covenants
required to be performed by, or complied with by, Purchaser under this Agreement at or prior to the Closing.
(c)
Certificate. Seller will have received a certificate dated the Closing Date and executed by a duly authorized officer
of Purchaser certifying that the conditions set forth in Sections 8.2(a) and 8.2(b) have been satisfied.
(d) Deliveries.
Purchaser will have executed and delivered to Seller the documents referenced in Section 2.7(b) of this Agreement.
8.3
Conditions to the Obligations of Purchaser. The obligations of
Purchaser to consummate the Contemplated Transactions will be subject to the satisfaction or waiver (where permissible pursuant to applicable
Law) by Purchaser at or prior to the Closing of the following conditions:
(a)
Representations and Warranties Relating to Seller and the Acquired Companies.
(i)
The Fundamental Representations made by Seller in Article III and Article IV, and the representations and
warranties made by Seller in Section 4.5(a), will be true and correct in all respects at and as of the date hereof and at and as
of the Closing as if made at and as of such time (other than any such representation and warranties made by Seller that expressly relates
to a specific date, which representation and warranties will be true and correct on the date so specified); and
(ii)
the representations and warranties set forth in Article III and Article IV of this Agreement (other than the
Fundamental Representations made by Seller) will be true and correct in all material respects (without giving effect to any limitation
as to “materiality” or “material adverse effect” or any similar limitation contained in this Agreement) at and
as of the date hereof and at and as of the Closing as if made at and as of such time (other than any such representation or warranty that
expressly relates to a specific date, which representation and warranty will be true and correct on the date so specified).
(b) Performance
of Covenants. Seller will have performed and complied with, in all material respects, all obligations, agreements and covenants required
to be performed by, or complied with by, Seller under this Agreement at or prior to the Closing.
(c)
Certificate. Purchaser will have received a certificate dated the Closing Date and executed by a duly authorized
officer of Seller certifying that the conditions set forth in Sections 8.3(a) and 8.3(b) have been satisfied.
(d) Closing
Documents. Seller will have executed and delivered to Purchaser the documents and certificates referenced in Section 2.7(a)
of this Agreement.
8.4
Frustration of Closing Condition. No party may rely on the failure
of any condition set forth in Sections 8.1, 8.2 or 8.3, as the case may be, to refuse to consummate the Contemplated
Transactions if such failure was caused by such party’s failure to comply with any provision of this Agreement.
ARTICLE
IX
TERMINATION; TERMINATION FEE AND AMENDMENT
9.1
Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Sections 9.1(b) through 9.1(h), by written notice by the terminating party to the
other party), whether before or, subject to the terms hereof, after obtaining Seller Shareholder Approval:
(a)
by mutual written consent of Purchaser and Seller;
(b) by
either Purchaser or Seller if the Contemplated Transactions shall not have been consummated by August 31, 2021 (the “Outside
Date”) (provided, that the right to terminate this Agreement under this Section 9.1(b) shall
not be available to any party whose failure to fulfill any obligation under this Agreement has been a principal cause of or resulted in
the failure of the Contemplated Transactions to be consummated on or before the Outside Date); provided, however,
that, in the event that (i) the Proxy Statement is still being reviewed or commented on by the SEC or (ii) the SEC has cleared or approved
the Proxy Statement but the Seller Shareholders Meeting has not yet been held and completed, either party shall be entitled to extend
the date for termination of this Agreement pursuant to this Section 9.1(b) for an additional thirty (30) days;
(c)
by either Purchaser or Seller if a Government Entity of competent jurisdiction shall have issued a nonappealable final order,
decree or ruling or taken any other
nonappealable final action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the Contemplated Transactions; provided, however,
that a party hereto shall not be permitted to terminate this Agreement pursuant to this Section 9.1(c) if the issuance of
any such order, decree, ruling or other action is attributable to the failure of such party (or any Affiliate of such party) to perform
in any material respect any covenant in this Agreement required to be performed by such party (or any Affiliate of such party) at or prior
to the Effective Time;
(d)
by either Purchaser or Seller if at the Seller Shareholders Meeting (including any adjournment or postponement), at which
a vote on the Seller Shareholder Approval is taken, the requisite vote of the shareholders of Seller in favor of Seller Shareholder Approval
shall not have been obtained;
(e)
by Purchaser, at any time prior to the receipt of the Seller Shareholder Approval, if (i) a Seller Board Recommendation
Change shall have occurred or (ii) Seller shall have breached or shall be deemed to have breached Section 6.2 in any material respect;
(f)
by Seller, if there has been a material breach of or material failure to perform any representation, warranty, covenant
or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 9.1) on the part of Purchaser,
which breach would cause the conditions set forth in Section 8.2(a) or 8.2(b) not to be satisfied; provided,
that Seller is not then in material breach of any representation, warranty or covenant under this Agreement and provided,
further, that if such breach or failure to perform is curable by Purchaser, then this Agreement shall not terminate pursuant
to this Section 9.1(f) as a result of such particular breach or failure until the earlier of (i) the expiration of a ten (10)
day period commencing upon delivery of written notice from Seller to Purchaser of such breach or failure and (ii) Purchaser ceasing to
exercise commercially reasonable efforts to cure such breach or failure following delivery of written notice from Seller of such breach
or failure and its intention to terminate pursuant to this Section 9.1(f) (it being understood that, in each case, this Agreement
shall not terminate pursuant to this Section 9.1(f) as a result of such particular breach or failure if such breach or failure
is cured prior to such termination becoming effective);
(g)
by Purchaser, if there has been a material breach of or material failure to perform any representation, warranty, covenant
or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 9.1) on the part of Seller,
which breach would cause the conditions set forth in Section 8.3(a) or 8.3(b) not to be satisfied; provided,
that Purchaser is not then in material breach of any representation, warranty or covenant under this Agreement and provided,
further, that if such breach or failure to perform is curable by Seller, then this Agreement shall not terminate pursuant to
this Section 9.1(g) as a result of such particular breach or failure until the earlier of (i) the expiration of a ten (10)
day period commencing upon delivery of written notice from Purchaser to Seller of such breach or failure and (ii) Seller ceasing to exercise
commercially reasonable efforts to cure such breach or failure following delivery of written notice from Purchaser of such breach or failure
and its intention to terminate pursuant to this Section 9.1(g) (it being understood that, in each case, this Agreement shall
not terminate pursuant to this Section 9.1(g) as a result of such particular breach or failure if such breach or failure is
cured prior to such termination becoming effective); or
(h)
by Seller if, at any time prior to the receipt of the Seller Shareholder Approval, each of the following occur: (i) Seller
shall have received a Superior Proposal that did not result from a breach of Section 6.2(a); (ii) Seller shall have complied in
all respects with its obligations under Section 6.2(c), including with respect to making a Seller Board Recommendation Change
with respect to such Superior Proposal; (iii) the Seller Board approves, and Seller concurrently with the termination of this Agreement
enters into, a definitive agreement with respect to such Superior Proposal and (iv) Seller shall have concurrently complied in all respects
with Section 9.2.
9.2
Termination Fee.
(a)
If Purchaser terminates this Agreement pursuant to Section 9.1(e) or Seller terminates this Agreement pursuant to
Section 9.1(h), then Seller shall pay to Purchaser, by wire transfer of immediately available funds to an account designated in
writing by Purchaser, a fee of $875,000 (the “Termination Fee”) (i) in the case of a termination pursuant to Section
9.1(e), within two (2) Business Days after the date of such termination and (ii) in the case of a termination pursuant to Section
9.1(h), concurrently with such termination.
(b) If
(i) after the date of this Agreement, an Acquisition Proposal is made, proposed or communicated to the Seller Board or becomes publicly
known; (ii) thereafter this Agreement is terminated by either Seller or Purchaser pursuant to Sections 9.1(b) or 9.1(d),
or by Purchaser pursuant to Section 9.1(g); and (iii) within twelve (12) months after such termination (A) any transaction included
within the definition of an Acquisition Proposal is consummated or (B) Seller enters into a definitive agreement providing for the consummation
of any transaction within the definition of Acquisition Proposal, then Seller shall pay to Purchaser, by wire transfer of immediately
available funds to an account designated in writing by Purchaser, the Termination Fee within two (2) Business Days of the first to occur
of (1) consummation of such transaction or (2) execution of such definitive agreement; provided that, solely for purposes of this
Section 9.2(b), the term “Acquisition Proposal” shall have the meaning ascribed thereto in this Agreement, except that
all references to 20% shall be changed to 50%.
(c)
Notwithstanding anything herein to the contrary, Purchaser’s right to receive a Termination Fee pursuant to this Section
9.2 under circumstances under which Purchaser is entitled to receive the Termination Fee shall be the sole and exclusive remedy of
Purchaser or any of its Affiliates against Seller or its Representatives for any and all losses that may be suffered based upon, resulting
from or arising out of the circumstances giving rise to such termination, and upon payment of the Termination Fee to Purchaser, Seller
and its Representatives shall have no liability or obligation relating to or arising out of the failure to consummate the Contemplated
Transactions. Purchaser agrees that in no event shall Seller be obligated to pay the Termination Fee on more than one occasion.
(d) Each
of the parties hereto acknowledges that the agreements contained in this Section 9.2 are an integral part of this
Agreement, and that the Termination Fee is not a penalty, but rather is a reasonable amount that will compensate Purchaser in the circumstances
in which such payment is payable for the efforts and resources expended and opportunities foregone while negotiating this Agreement and
in reliance on this Agreement and on the expectation of the consummation of the Contemplated Transactions, each of which amounts
would otherwise be impossible to calculate with precision.
In addition, if Seller fails to pay in a timely manner any amount due pursuant to Section 9.2(a) or Section 9.2(b),
as applicable, then Seller shall reimburse Purchaser for all reasonable costs and expenses (including disbursements and fees of counsel)
incurred in the collection of such overdue amount, including in connection with any related actions, litigation, or other proceeding commenced.
9.3
Effect of Termination. In the event of termination of this Agreement
as provided in Section 9.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part
of Purchaser, Seller or the Acquired Companies or their respective officers, directors, shareholders or Affiliates; provided, that
(a) any such termination shall not relieve any party from liability for any knowing and intentional breach of this Agreement, fraud or
intentional misconduct and (b) the provisions of Section 7.8 (Confidentiality), Section 9.2 (Termination Fee), this Section
9.3 (Effect of Termination), Article X (Indemnification) and Article XI (Miscellaneous) of this Agreement and the Confidentiality
Agreement shall remain in full force and effect and survive any termination of this Agreement.
9.4
Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective boards, at any time before or after approval of the matters presented in connection
with the Contemplated Transactions by the shareholders of any of the parties; provided, that after any such approval, no
amendment shall be made which by Law requires further approval by such shareholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
9.5
Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective boards, may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions
contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. Such extension or waiver shall not be deemed to apply to any time for performance, inaccuracy
in any representation or warranty, or noncompliance with any agreement or condition, as the case may be, other than that which is specified
in the extension or waiver. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights.
9.6
Procedure for Termination, Amendment, Extension or Waiver. A termination
of this Agreement pursuant to Section 9.1, an amendment, modification or supplement of this Agreement pursuant to Section 9.4
or an extension or waiver of this Agreement pursuant to Section 9.5 shall, in order to be effective, require action by the respective
boards of the applicable parties.
ARTICLE
X
INDEMNIFICATION
10.1
Survival. Effective as of the Closing, the representations and
warranties set forth in Article III, Article IV and Article V shall survive the Closing for a period of twelve (12)
months; provided, however, that the Fundamental Representations and the representations and warranties set forth in Section
4.8 shall survive until the expiration of the applicable statute of limitations. The survival period contemplated by this Section
10.1 with respect to any such representations or warranties shall continue notwithstanding the expiration of the term of such survival
period pursuant to the other provisions of this Article X if a written claim for indemnification is provided by the Indemnified
Party to the Indemnifying Party prior to the expiration of such survival period. Save for the Fundamental Representations and the representations
and warranties set forth in Section 4.8 (in relation to which the foregoing provisions of this Section 10.1 shall apply), all covenants
and agreements contemplated hereby shall survive the Closing for a period of twelve (12) months; provided, however, that
all covenants and agreements of the parties that contemplate performance on or after the Closing shall survive until fully and finally
performed in accordance with this Agreement, including all covenants and agreements set forth in Section 10.2 and Section 10.3.
10.2
Indemnification by Seller. Subject to the other provisions of this
Article X, including, without limitation, the recovery limitations set forth in Section 10.8, Seller shall indemnify, defend
and hold harmless the Purchaser Indemnified Parties from and against, and reimburse the Purchaser Indemnified Parties for, any and all
Losses incurred or suffered by the Purchaser Indemnified Parties arising out of or relating to:
(a)
any breach of or inaccuracy in any representation or warranty of Seller contained in Article III or Article IV of
this Agreement;
(b) (i)
any breach of or failure to perform any covenant or agreement of Seller contained in this Agreement or (ii) any Access Breach (as defined
in the Transition Services Agreement and subject to the terms and conditions set forth therein);
(c)
(i) any Taxes of Seller for any Tax period, (ii) any Taxes of any of the Acquired Companies for the Pre-Closing Tax Period, (iii)
any Taxes of any member of an affiliated, consolidated, combined, or unitary group of which any of the Acquired Companies (or any predecessor
thereof) is or was a member on or prior to the Closing Date, including pursuant to Treasury Regulation Section 1.1502-6 or any analogous
or similar state, local, or foreign Law, (iv) any Taxes of any Person imposed on or payable by any of the Acquired Companies, as a transferee
or successor, by contract or otherwise, which Taxes relate to an event or transaction occurring on or prior to the Closing Date, or (v)
any payments under any Tax allocation, sharing, or similar agreement entered into or binding on any of the Acquired Companies at or prior
to the Closing, in each case, other than to the extent such Taxes are specifically included in the calculation of the Final Net Working
Capital;
(d) any
of the Indemnified Liabilities; and/or
(e)
any actual fraud of Seller or any of the Acquired Companies prior to or as of the Closing.
10.3 Indemnification
by Purchaser. Subject to the other provisions of this Article X, Purchaser
shall indemnify, defend and hold harmless the Seller Indemnified Parties from and against, and reimburse the Seller Indemnified Parties
for, any and all Losses incurred or suffered by the Seller Indemnified Parties arising out of or relating to:
(a)
any breach of or inaccuracy in any representation or warranty of Purchaser contained in Article V of this Agreement;
(b) any
breach of or failure to perform any covenant or agreement of Purchaser contained in this Agreement;
(c)
any Taxes of Purchaser or any of the Acquired Companies for the Post-Closing Tax Period; and/or
(d) any
actual fraud of Purchaser prior to or as of the Closing.
10.4 Limitations
on Indemnification.
(a)
The Indemnified Party shall not be entitled to indemnification pursuant to Section 10.2(a) or Section 10.3(a), as
applicable, unless and until the aggregate amount of all Losses in respect of which the Indemnified Party would otherwise be entitled
to indemnification pursuant to Section 10.2(a) or Section 10.3(a), as applicable, exceeds $200,000 (the “Deductible”),
and then only for the amount of Losses in excess of the Deductible; provided, however, that the Deductible shall not apply
to Losses arising out of or relating to any inaccuracy in or breach of any Fundamental Representation of the Indemnifying Party.
(b) The
maximum aggregate amount of all Losses for which the Indemnifying Party shall be liable pursuant to Section 10.2(a) or Section
10.3(a), as applicable, shall not exceed the sum of (i) $2,500,000 plus (ii) ten percent (10%) of the Earnout Payments actually
earned pursuant to Section 2.4 (prior to giving effect to any offset rights set forth in this Agreement), unless such Losses arise
out of or result from any inaccuracy in or breach of any Fundamental Representation of the Indemnifying Party (in which case Section
10.4(c) shall apply).
(c)
The maximum aggregate amount of all Losses arising out of or relating to (i) any inaccuracy in or breach of any Fundamental Representation
of the Indemnifying Party or (ii) pursuant to Section 10.2(b), Section 10.2(c), Section 10.2(d), Section 10.2(e),
Section 10.3(b), Section 10.3(c) or Section 10.3(d), as applicable, for which the Indemnifying Party shall be liable
shall not exceed the Purchase Price.
(d) Notwithstanding
anything contained herein to the contrary, in no event shall an Indemnified Party be entitled to indemnification pursuant to this Article
X for, any special, indirect, consequential, incidental or punitive damages (except to the extent any Indemnified Party is required
to pay any punitive damages to a third party), lost profits or any
diminution in value, or any damages based on a multiple,
each of which is hereby excluded by agreement of the parties.
(e)
For purposes of this Article X, the amount of any Losses incurred by any Indemnified Party shall be calculated net of (i)
any amounts actually recovered by such Indemnified Party from a third party with respect to such Losses, less the reasonable costs, fees,
reserves and expenses incurred to obtain such recovery; and (ii) any third party insurance proceeds actually received by such Indemnified
Party with respect to such Losses under any applicable insurance policy, excluding self-insurance arrangements and less any applicable
and reasonable collection costs, fees, expenses and reserves, deductibles, premium adjustments, retrospectively rated premiums and other
similar amounts. If an Indemnified Party receives any amounts under applicable insurance policies or from any third party alleged to be
responsible for any Losses subsequent to an indemnification set-off or payment, then such Indemnified Party shall promptly reimburse the
Indemnifying Party for any set-off or payment made or expense incurred by such Indemnifying Party in connection with providing such indemnification
payment up to the amount retained or received by the Indemnified Party, net of any applicable and reasonable collection costs, fees, expenses
and reserves, deductibles, premium adjustments, retrospectively rated premiums and other similar amounts.
10.5
Mitigation. The Indemnified Party shall use commercially reasonable
efforts to mitigate any Losses as and to the extent required by applicable Law.
10.6
Third Party Claim Procedures.
(a)
Notice. The Indemnified Party shall as promptly as reasonably practicable give written notice to the Indemnifying Party
of the assertion of any claim or the commencement of any action, claim, suit, arbitration or proceeding by a third party or Government
Entity in respect of which indemnification shall be sought hereunder (a “Third Party Claim”); provided, that
failure to timely deliver such a notice will not affect the indemnification provided hereunder except to the extent, and only to the extent,
the Indemnifying Party is materially and adversely prejudiced as a result of such failure. Such notice shall describe in reasonable detail
the Third Party Claim and, if ascertainable, the amount in dispute thereunder.
(b) Defense.
Subject to the limitations set forth in this Section 10.6(b), the Indemnifying Party shall have the right to elect to conduct and
control the defense, compromise or settlement of any Third Party Claim with counsel of its choice reasonably acceptable to the Indemnified
Party and at the Indemnifying Party’s sole cost and expense; provided, however, that the Indemnified Party may participate
therein through separate counsel chosen by it and at its sole cost and expense. Notwithstanding the foregoing, if (i) the Indemnifying
Party shall not have given written notice (A) of its election to conduct and control the defense of the Third Party Claim and (B) that
the Indemnifying Party agrees, on behalf of all Indemnifying Parties, that the Third Party Claim is indemnifiable hereunder within thirty
(30) days after the Indemnified Party has given notice thereof, (ii) the Indemnified Party shall reasonably determine in good faith,
after consultation with its outside counsel, that use of counsel selected by the Indemnifying Party to represent the Indemnified Party
would present such counsel with a conflict of interest or that the Indemnified Party has material defenses or counterclaims available
to it that are not available to the Indemnifying Party (and that cannot be utilized by the Indemnifying Party on behalf of the
Indemnified Party), (iii) the Indemnified Party is
not reasonably diligently defending such Third Party Claim, (iv) solely with respect to any indemnification claim pursuant to Section
10.2(a) or Section 10.3(a) (other than with respect to a breach of a Fundamental Representation), the Losses sought and reasonably
likely to be suffered or incurred in such Third Party Claim are reasonably expected to be more than two times the amount that the Indemnifying
Party is potentially liable for with respect to such Third Party Claim taking into account Section 10.4(b) or (v) the Third
Party Claim is for injunctive relief against the Indemnified Party, then in each such case the Indemnified Party shall have the right
to control the defense, compromise or settlement of the Third Party Claim at the Indemnifying Party’s sole cost and expense, not
to exceed one law firm in the United States and one firm in any foreign jurisdiction, if applicable.
(c)
Cooperation. From and after delivery of notice of a Third Party Claim, and subject to limitations to preserve attorney-client
privilege, the Indemnifying Party and the Indemnified Party shall, and shall cause their respective Affiliates and representatives to,
cooperate in the defense or prosecution of any Third Party Claim, including furnishing such records, information and testimony and attending
such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Indemnifying Party or the
Indemnified Party in connection therewith. The party controlling the defense of any Third Party Claim shall keep the non-controlling party
reasonably advised of the status thereof and shall consider in good faith any recommendations made by the non-controlling party with respect
thereto. The Indemnifying Party and the Indemnified Party shall use commercially reasonable efforts to avoid production of confidential
information (consistent with applicable Law) and to cause all communications among employees and counsel in connection with a Third Party
Claim to be made so as to preserve any applicable attorney-client or work-product privileges.
(d)
Settlement Limitations. Except as set forth below, no Third Party Claim may be settled or compromised (i) by the Indemnified
Party without the prior written consent of the Indemnifying Party or (ii) by the Indemnifying Party without the prior written consent
of the Indemnified Party, in each case which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing,
(A) the Indemnified Party shall have the right to pay, settle or compromise any Third Party Claim without the prior written consent
of the Indemnifying Party (such consent not to be unreasonably withheld, conditioned or delayed), provided that in such event the Indemnified
Party shall waive all rights against the Indemnifying Party to indemnification under this Article X with respect to such Third
Party Claim; and (B) the Indemnifying Party shall have the right to consent to the entry of a judgment or enter into a settlement
with respect to any Third Party Claim without the prior written consent of the Indemnified Party (such consent not to be unreasonably
withheld, conditioned or delayed) if the judgment or settlement (1) involves only the payment of money damages by or on behalf of
the Indemnifying Party (and not by any Indemnified Party), (2) will not encumber any of the Purchased Securities and will not contain
any restriction or condition that would or would reasonably be expected to adversely affect the conduct of the Business, and (3) includes,
as a condition to any settlement or other resolution, an irrevocable release of all Indemnified Parties from all liability in respect
of such Third Party Claim and includes no admission of wrongdoing.
10.7
Direct Claim Procedures. In the event the Indemnified Party should
have a claim for indemnification hereunder that does not involve a Third Party Claim (a “Direct Claim”), the Indemnified
Party shall, as promptly as reasonably practicable after obtaining knowledge of such
claim, deliver to the Indemnifying Party a written
notice that contains (a) a description and the amount (the “Claimed Amount”) of any Losses (if and to the extent
then ascertainable) incurred or suffered, or that would reasonably be expected to be incurred or suffered, by the Indemnified Party, (b) a
statement that the Indemnified Party is entitled to indemnification under this Article X and a reasonable explanation of the basis
therefor, and (c) a demand for payment by the Indemnifying Party. Within thirty (30) days after delivery of such written notice,
the Indemnifying Party shall deliver to the Indemnified Party a written response in which the Indemnifying Party shall (i) agree
that the Indemnified Party is entitled to receive all of the Claimed Amount, (ii) agree that the Indemnified Party is entitled to
receive part, but not all, of the Claimed Amount, or (iii) contest that the Indemnified Party is entitled to receive any of the Claimed
Amount. If the Indemnifying Party disputes the payment of all or part of the Claimed Amount, such indemnification claim shall be resolved
by mutual written agreement between the Indemnified Party and the Indemnifying Party. If such dispute is not resolved within thirty (30)
days following the delivery by the Indemnifying Party of such response, the Indemnified Party and the Indemnifying Party shall each have
the right to submit such dispute for resolution to a court of competent jurisdiction pursuant to Section 11.3.
10.8
Recovery against Seller.
(a)
Notwithstanding anything herein to the contrary but subject to Section 10.4, except in the event of actual fraud by Seller,
with respect to any indemnification payment for Losses to which Purchaser is entitled under this Article X, Purchaser shall (i)
first seek to recover such Losses pursuant to an offset by Purchaser in accordance with Section 10.8(b) in the amount of such Losses
against any Earnout Payment that is then owing to Seller or that is reasonably likely to become owing to Seller in the subsequent ninety
(90) days and (ii) second, to the extent that the offset contemplated by clause (i) is not sufficient or not available to satisfy in full
the amount of Losses to which Purchaser is entitled under this Article X, then Purchaser may recover the remainder of such Losses
directly from Seller in accordance with this Article X.
(b) With
respect to any indemnification claim (whether a Third Party Claim or a Direct Claim) for which a Purchaser Indemnified Party and Seller
(as the Indemnifying Party) have finally and mutually agreed in writing (i) that the indemnification claim is valid and (ii) on the amount
of Losses attributable thereto, Purchaser shall have the right to set-off against any Earnout Payment otherwise due and payable by Purchaser
to Seller hereunder in an amount equal to such mutually agreed Losses. With respect to any Losses that Purchaser seeks to set-off against
any Earnout Payment otherwise due and payable by Purchaser for which (A) a Purchaser Indemnified Party and Seller (as the Indemnifying
Party) have not yet finally and mutually agreed in writing as to whether the indemnification claim is valid and the amount of Losses
and (B) such indemnification claim and the amount of Losses resulting therefrom have not yet been finally determined pursuant to
Section 11.3, Purchaser shall have the right, in its reasonable discretion, to withhold an amount reasonably estimated to equal
the Losses suffered or incurred relating to such indemnification claim from any Earnout Payment (the “Withheld Amount”)
otherwise payable to Seller with at least five (5) Business Days’ written notice to Seller regarding such set-off; provided,
however, that if the determination of whether the Indemnified Party has a valid indemnification claim under this Agreement is finally
resolved in accordance herewith in favor of the Indemnifying Party or, if such determination is finally resolved in favor of the Indemnified
Party, it is finally resolved that the amount of Losses suffered or incurred by
the Indemnified Party arising from or relating to
such indemnification claim is less than the Withheld Amount, Purchaser shall promptly pay to Seller the Withheld Amount less the amount
of Losses (if any) for which it is finally resolved that the Indemnified Party is entitled to recover pursuant to this Article X.
10.9
Brazilian Litigation Matter. Notwithstanding anything herein to
the contrary:
(a)
Seller and Purchaser shall equally share all Losses incurred by either party or their respective Affiliates arising out of or relating
to the Brazilian Litigation (as defined in Section 4.12 of the Disclosure Schedule) from and after the Closing Date;
(b) Seller
shall have the exclusive right to conduct and control the defense, compromise and settlement of the Brazilian Litigation (provided,
however, Seller shall not compromise or settle the Brazilian Litigation without the consent of Purchaser, which consent shall not
be unreasonably withheld, conditioned or delayed); and
(c)
Purchaser agrees to promptly reimburse Seller for 50% of all costs, fees and expenses (including, for the avoidance of doubt, court
costs, arbitration costs and reasonable attorneys’ fees and expenses) incurred by Seller or its Affiliates arising out of or relating
to conducting, controlling and/or settling or otherwise resolving the Brazilian Litigation from and after the Closing Date.
10.10
Exclusive Remedy. Except for the remedies of specific performance
or injunctive or other equitable relief, the parties acknowledge and agree that their sole and exclusive remedy with respect to any and
all claims for any breach of any representation, warranty, covenant or agreement set forth herein or relating to the Contemplated Transactions
shall be pursuant to the indemnification provisions set forth in this Article X. In the event that a particular matter entitles
an Indemnified Party to indemnification pursuant to more than one provision of this Article X, such Indemnified Party shall be
entitled to recover a particular dollar amount of Losses associated with such matter only once pursuant to this Article X. An Indemnified
Party shall not be entitled to indemnification for any Losses to the extent (but only to the extent) that such Losses are included in
the calculation of the Final Net Working Capital.
10.11
Tax Treatment of Indemnification Payments. All payments by the
Indemnifying Party to the Indemnified Party pursuant to this Article X shall to the extent permitted by applicable Law be treated
as adjustments to the Purchase Price for U.S. Tax purposes.
ARTICLE
XI
MISCELLANEOUS
11.1 Transaction
Expenses. Subject to Section 2.5, Purchaser and Seller will each bear
such Person’s own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the Contemplated
Transactions (it being understood that Seller shall bear the Acquired Companies’ costs and expenses (including legal fees and expenses)
incurred prior to the Closing in connection with this Agreement and the Contemplated Transactions).
11.2 Successors
and Assigns; Binding Effect. Neither this Agreement nor any of the rights,
interests or obligations of any party hereunder may be assigned, delegated or otherwise
transferred by such party, in whole or in part (whether
by operation of Law or otherwise), without the prior written consent of the other party hereto, and any attempted assignment, delegation
or other transfer without such consent shall be null and void; provided, that Purchaser shall have the right to assign Purchaser’s
rights under this Agreement to a wholly owned, direct or indirect, Subsidiary of Purchaser; provided, further, that Purchaser
shall remain liable for, and such assignee shall have expressly assumed, all of Purchaser’s obligations hereunder (including, without
limitation, payment to Seller of the Earnout Payments, if any). Subject to the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.
11.3
Governing Law; Consent to Jurisdiction; Service; Waiver of Jury Trial.
This Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice
of law or conflict provision or rule (whether of such State or any other jurisdiction) that would cause the laws of any other jurisdiction
to be applied. Any proceeding arising out of or relating to this Agreement or any transaction contemplated hereby will be brought exclusively
in the Court of Chancery of the State of Delaware, in and for the County of New Castle, or in the United States District Court for the
District of Delaware, and each of the parties hereby submits to the exclusive jurisdiction of such courts for the purpose of any such
proceeding. A final judgment in any such proceeding may be enforced in other jurisdictions by suit on the judgment or in any other manner
provided by Law. Each party irrevocably and unconditionally waives any objection to the laying of venue of any proceeding arising out
of this Agreement or the Contemplated Transactions in such courts, and hereby irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such proceeding brought in any such court has been brought in an inconvenient forum or does
not have jurisdiction over any party. Each party further agrees that service of any process, summons, notice or document by U.S. registered
mail to such party’s respective address set forth herein will be effective service of process for any such proceeding. EACH PARTY
HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY LITIGATION, ACTION, PROCEEDING, CROSS-CLAIM, OR COUNTERCLAIM IN ANY
COURT (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF, RELATING TO OR IN CONNECTION WITH (a) THIS AGREEMENT OR THE VALIDITY,
PERFORMANCE, INTERPRETATION, COLLECTION OR ENFORCEMENT HEREOF OR (b) THE ACTIONS OF SUCH PARTY IN THE NEGOTIATION, AUTHORIZATION, EXECUTION,
DELIVERY, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
11.4
Notices. All notices, requests and other communications to either
party hereunder (a) shall be in writing; (b) shall be deemed to have been duly given (i) on the date of delivery if delivered personally
or by e-mail transmission (which, in the case of e-mail transmission, is confirmed by delivery receipt), (ii) on the third Business Day
after being deposited in the United States mail if sent by registered or certified mail, postage prepaid, return receipt requested or
(iii) on the first Business Day after being deposited with a reputable overnight courier service; and (c) shall be addressed to each party
hereto at the following addresses (or at such other address for a party hereto as shall be specified in a notice given in accordance with
this Section 11.4):
If to Purchaser, addressed to:
Lantronix, Inc.
Attention: Chief Financial Officer
7535 Irvine Center Drive, Suite 100
Irvine, CA 92618
with a copy (which will not constitute notice)
to:
O’Melveny & Myers LLP
Attention: Warren Lazarow
Noah
Kornblith
2765 Sand Hill Road
Menlo Park, CA 94025
Email:
wlazarow@omm.com
nkornblith@omm.com
If to Seller, addressed to:
Communications Systems, Inc.
Attention: Chief Financial Officer
10900 Red Circle Drive
Minnetonka, Minnesota 55343
with a copy (which will not constitute notice)
to:
Ballard Spahr LLP
Attention: Barbara Rummel
Peter Jaslow
2000 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Email: rummelb@ballardspahr.com
jaslowp@ballardspahr.com
11.5
Schedules and Exhibits. The exhibits and schedules to this Agreement
constitute a part of this Agreement and are incorporated into this Agreement for all purposes as if fully set forth herein. The Disclosure
Schedule includes references to the particular section of the Agreement that relates to each disclosure. Any disclosure which may be applicable
to another section of this Agreement will be deemed to be made with respect to such other section if reasonably apparent from the face
of such disclosure, regardless of whether or not a specific cross reference is made thereto. By listing matters on the Disclosure Schedule,
no party will be deemed to have established any materiality standard, admitted any liability, concluded that any one or more of such matters
are material or expanded in any way the scope or effect of the representations or warranties pertaining to any party or the Acquired Companies
contained in this Agreement.
11.6
Counterparts. The parties may execute this Agreement in multiple
counterparts (no one of which need contain the signatures of all parties), each of which will be an original and all of which together
will constitute one and the same instrument. The parties may deliver an executed copy of this Agreement (and an executed copy of any of
the Transaction Documents contemplated by this Agreement) by e-mail or other electronic transmission (in PDF or similar format) to the
other parties, and such delivery will have the same force and effect as any other delivery of a manually signed copy of this Agreement
(or such other Transaction Document).
11.7
No Third Party Beneficiaries. Except as expressly provided in this
Agreement, no Person that is not a party will have any right or obligation pursuant to this Agreement.
11.8
Headings. The headings used in this Agreement are for the purpose
of reference only and will not affect the meaning or interpretation of any provision of this Agreement.
11.9
Entire Agreement. Except as otherwise provided in this Agreement,
this Agreement, including the Exhibits, Schedules and Disclosure Schedule delivered pursuant hereto, sets forth the entire understanding
of the parties relating to the subject matter hereof, and all prior and contemporaneous agreements and understandings, whether written
or oral, are hereby terminated and superseded by this Agreement.
11.10
Severability. In case any one or more of the provisions contained
in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will
not affect any other provision of this Agreement, but this Agreement will be construed as if such invalid, illegal or unenforceable provision
or provisions had never been contained herein.
11.11
Construction. The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed
as if drafted jointly by the parties and no presumption or burden of proof will arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement. Unless the context requires otherwise, all words used in this Agreement in the
singular number will extend to and include the plural, all words in the plural number will extend to and include the singular and all
words in any gender will extend to and include all genders.
11.12
Conflict of Interest.
(a) If
Seller so desires, and without the need for any consent or waiver by Purchaser or any Acquired Company, Ballard Spahr LLP is permitted
to represent Seller after the Closing in connection with any matter related to the Contemplated Transactions or any disagreement or dispute
relating thereto. Without limiting the generality of the foregoing, after the Closing, Ballard Spahr LLP is permitted to represent Seller,
any of its agents and Affiliates, or any one or more of them, in connection with any negotiation, transaction or dispute with Purchaser,
any Acquired Company or any of their respective agents or Affiliates under or relating to this Agreement, any transaction contemplated
by this Agreement, and any related matter, such as claims for indemnification and disputes involving employment or noncompetition or other
agreements entered into in connection with this Agreement. Purchaser consents to the
disclosure by Ballard Spahr LLP to Seller of any information
learned by Ballard Spahr LLP in the course of its representation of Seller or any Acquired Company, regardless of whether such information
is subject to attorney-client privilege or Ballard Spahr LLP’s duty of confidentiality and whether or not such disclosure is made
before or after the Closing. Upon and after the Closing, the Acquired Companies will cease to have any attorney-client relationship with
Ballard Spahr LLP unless and to the extent Ballard Spahr LLP is specifically engaged in writing by any Acquired Company to represent such
Acquired Company after the Closing and either such engagement involves no conflict of interest with respect to Seller, or Seller consents
in writing at the time to such engagement. Any such representation of an Acquired Company by Ballard Spahr LLP after the Closing will
not affect the foregoing provisions hereof. Furthermore, Ballard Spahr LLP is permitted to withdraw from any representation of the Acquired
Companies in order to be able to represent or continue so representing Seller, even if such withdrawal causes an Acquired Company or Purchaser
additional legal expense, delay or other prejudice.
(b) Purchaser,
on behalf of itself and the Acquired Companies, and Seller agree that all communications among Ballard Spahr LLP, Seller, the Acquired
Companies and their respective representatives that relate in any way to the Contemplated Transactions are subject to the attorney-client
privilege and that the expectation of client confidence belongs to Seller and will be controlled by Seller following the Closing Date
and will not pass to or be claimed by Purchaser or the Acquired Companies following the Closing Date. Notwithstanding the foregoing, in
the event that a dispute arises between Purchaser, any Acquired Company and a third party other than a party to this Agreement after the
Closing, such party may assert the attorney-client privilege to prevent disclosure of confidential communications by Ballard Spahr LLP
to such third party; provided, however, that such party may not waive such privilege without the prior written consent of
Seller, if such waiver could reasonably be expected to result in liability of Seller.
11.13
Remedies; Specific Performance. Except as otherwise provided herein,
any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other
remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this
Agreement, this being in addition to any other remedy to which they are entitled at law or in equity.
* * * * *
IN WITNESS WHEREOF, the parties
have executed this Agreement as of the date first written above.
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PURCHASER:
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LANTRONIX, INC.
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By:
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/s/ Paul Pickle
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Name:
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Paul Pickle
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Title:
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President & Chief Executive Officer
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[Signature Page to Securities
Purchase Agreement]
IN WITNESS WHEREOF, the parties
have executed this Agreement as of the date first written above.
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SELLER:
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COMMUNICATIONS SYSTEMS, INC.
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By:
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/s/ Mark D. Fandrich
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Name:
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Mark D. Fandrich
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Title:
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Chief Financial Officer
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[Signature Page to Securities
Purchase Agreement]
EXHIBIT A
Certain Defined Terms
“Acceptance Notice”
has the meaning set forth in Section 2.3(b).
“Accounting Firm”
has the meaning set forth in Section 2.5(c)(i).
“Acquired Companies”
means, collectively, the Companies and the Company Subsidiaries.
“Acquisition Proposal”
means any inquiry, proposal or offer from any Person, other than Purchaser or its Subsidiaries, relating to any (a) merger, consolidation,
sale of assets, dissolution, liquidation, joint venture, recapitalization, reorganization, share exchange, tender offer, exchange offer,
or other business combination transaction or series of related transactions involving any Acquired Company, Seller or any other Subsidiary
of Seller (other than internal mergers, consolidations, recapitalizations, share exchanges or other business combinations involving solely
such party), under which (i) such Person would, directly or indirectly, acquire assets equal to twenty percent (20%) or more of the
consolidated assets of Seller or any Acquired Company, or to which twenty percent (20%) or more of the revenues Seller or of the Acquired
Companies on a consolidated basis are attributable for the most recent fiscal year in which audited financial statements are then available,
or (ii) the stockholders or equityholders of such Person immediately after giving effect to such transaction(s) would beneficially
own 20% or more of any class of equity or voting securities of Seller or any Acquired Company or the surviving or resulting entity in
such transaction(s), (b) issuance by Seller or any Acquired Company of twenty percent (20%) or more of its equity or voting securities
or (c) acquisition in any manner, directly or indirectly, of twenty percent (20%) or more of the equity securities or consolidated total
assets of Seller or any Acquired Company, in each case other than the Contemplated Transactions; provided, however, that
in no event shall any of the transactions contemplated by that certain Agreement and Plan of Merger, dated March 1, 2021, by and among
Seller, Helios Merger Co., Pineapple Energy LLC, Lake Street Solar LLC and Randall D. Sampson (including, without limitation, the Pre-Closing
Financing and Equity Offering described therein) constitute an Acquisition Proposal.
“Adjusted Purchase Price”
has the meaning set forth in Section 2.3(d).
“Affiliate”
of any particular Person means any other Person controlling, controlled by or under common control with such particular Person. For the
purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the ownership of voting securities, contract or otherwise.
“Agreement”
has the meaning set forth in the Preamble.
“Alternative Acquisition
Agreement” has the meaning set forth in Section 6.2(b)(ii).
“Anti-Corruption Laws”
has the meaning set forth in Section 4.22(b).
“Benefit Plan”
means any “employee benefit plan” (as such term is defined in Section 3(3) of ERISA, where applicable) and any other material
employee benefit plan, program or arrangement that any Acquired Company or Seller (solely to the extent offered by Seller to employees
performing services for or on behalf of TNI), as applicable, maintains or contributes to for the benefit of any employee or former employee
(or their beneficiaries) of any Acquired Company or Seller (solely to the extent offered by Seller to employees performing services for
or on behalf of TNI).
“Business”
means the businesses of the Acquired Companies as conducted on the date of this Agreement.
“Business Day”
means any day other than Saturday, Sunday or any other day on which commercial banks in the State of Minnesota are authorized or required
by applicable Law to be closed.
“Buyer’s Relief”
means any loss, relief, allowance, exemption, set-off or deduction for any Tax purpose (each a “Relief”) which is (a)
a Relief of the relevant Acquired Company which arises in any period other than a Pre-Closing Tax Period; or (b) a Relief of Purchaser
which arises at any time.
“CFA” has the
meaning set forth in Section 4.8(r).
“Claimed Amount”
has the meaning set forth in Section 10.7.
“Closing” has
the meaning set forth in Section 2.6.
“Closing Date”
has the meaning set forth in Section 2.6.
“Closing Statement”
has the meaning set forth in Section 2.3(a).
“COBRA” means
the provisions for the continuation of health care enacted by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended,
and as codified in Section 4980B of the Code and Section 601 et. seq. of ERISA, and the rules and regulations promulgated under
the applicable provisions of the Code and ERISA.
“Code” means
the Internal Revenue Code of 1986, as amended.
“Commercially Reasonable
Efforts”, as used in Section 2.4(c), means the efforts which would be used by Purchaser in connection with comparable
internal projects of similar nature, value and status, which in no event will be less than those generally used by a company of similar
size and resources as Purchaser at the time such efforts are required, with respect to a product or potential product at a similar stage
in its development or product life, all as measured by the facts and circumstances at the time such efforts are due.
“Companies”
has the meaning set forth in the Background.
“Company Indemnified
Party” has the meaning set forth in Section 7.5(a).
“Company Subsidiary”
has the meaning set forth in Section 4.3(b).
“Confidentiality Agreement”
means the Bilateral Confidential Disclosure Agreement dated as of July 31, 2020 by and between Purchaser and TNI.
“Contemplated Transactions”
has the meaning set forth in the Background.
“Debt Commitment Letters”
has the meaning set forth in Section 5.6(a).
“Debt Financing”
has the meaning set forth in Section 5.6(a).
“Decrease Amount”
has the meaning set forth in Section 2.3(d)(ii).
“Deductible”
has the meaning set forth in Section 10.4(a).
“Direct Claim”
has the meaning set forth in Section 10.7.
“Disclosure Schedule”
means the disclosure schedule prepared by Seller attached to this Agreement, which sets forth the exceptions to the representations and
warranties contained in Articles III and IV and certain other information called for by this Agreement.
“Disputed Item”
has the meaning set forth in Section 2.5(a).
“Earnout Acceptance Notice”
has the meaning set forth in Section 2.4(a).
“Earnout Payments”
has the meaning set forth in Section 2.2(a).
“Earnout Period”
means the First Earnout Period or the Second Earnout Period.
“Earnout Statement”
has the meaning set forth in Section 2.4(a).
“Effective Time”
has the meaning set forth in Section 2.6.
“Environmental Laws”
means all Laws concerning occupational safety and health hazards, pollution or protection of the environment, including without limitation
all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution,
labeling, testing, processing, discharge, release, threatened release, control or cleanup of any materials, substances or wastes classified
as hazardous under any such Law.
“ERISA” means
the Employee Retirement Income Security Act of 1974, as amended.
“Estimated Closing Statement”
has the meaning set forth in Section 2.2(b).
“Estimated Net Working
Capital” has the meaning set forth in Section 2.2(b).
“Estimated Purchase Price”
has the meaning set forth in Section 2.2(c).
“Exchange Act”
means Securities Exchange Act of 1934, as amended.
“Extra-Contractual Statement”
has the meaning set forth in Section 5.7.
“Final Net Working Capital”
means the Net Working Capital as finally determined pursuant to Section 2.3 and Section 2.5.
“Financial Statements”
has the meaning set forth in Section 4.4(a).
“First Earnout Period”
means the 180-day period commencing immediately following the Closing Date.
“full title guarantee”
has the meaning set forth in the UK Law of Property (Miscellaneous Provisions) Act 1994 but on the basis that section 6(2) of the UK Law
of Property (Miscellaneous Provisions) Act 1994 does not apply.
“Fundamental Representations”
means the representations and warranties set forth in Section 3.1, Section 3.2, Section 3.3, Section 3.4,
Section 4.1, Section 4.2, Section 4.3, Section 4.18, Section 5.1, Section 5.2 and Section
5.3.
“GAAP” means
United States generally accepted accounting principles in effect from time to time.
“Government Entity”
means any (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of
any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any
nature; (d) multi-national organization or body; or (e) Person exercising, or entitled to exercise, any executive, legislative, judicial,
administrative, regulatory, police, military or Taxing Authority or power of any nature.
“Guarantor Release”
has the meaning set forth in Section 7.11.
“Income Tax”
means U.S. federal income tax and any other income or franchise tax imposed on or measured by net income including, for UK purposes, corporation
tax.
“Income Tax Return”
means any Tax Return relating to Income Taxes.
“Increase Amount”
has the meaning set forth in Section 2.3(d)(i).
“Indebtedness”
means, with respect to any Person, without duplication, (a) all indebtedness for borrowed money, or with respect to deposits or advances
of any kind, of such Person and its Subsidiaries; (b) all indebtedness of such Person or any of its Subsidiaries secured by any lien on
any property of such Person or any of its Subsidiaries, whether or not the indebtedness secured has been assumed; (c) all capital leases,
including, without limitation, all amounts representing the capitalization of rentals in accordance with GAAP; (d) all obligations
of such Person and its Subsidiaries evidenced by bonds,
debentures, notes, mortgages or similar instruments or securities; (e) all letters of credit or performance bonds issued for the account
of such Person or any of its Subsidiaries (excluding (i) letters of credit issued for the benefit of suppliers to support accounts
payable to suppliers incurred in the ordinary course of business, (ii) standby letters of credit relating to workers’ compensation
insurance and surety bonds, (iii) surety bonds and customs bonds and (iv) clearing house guarantees), (f) all liabilities or
obligations of such Person under any interest rate, currency or commodity derivatives or hedging transactions or similar instruments and
(g) all guarantees with respect to liabilities of a type described in any of clauses (a) through (f) above.
“Indemnified Liabilities”
means (a) all liabilities for Indebtedness of the Acquired Companies prior to the Closing, to the extent not (i) paid at or prior
to the Closing or (ii) intercompany debt solely between Acquired Companies; (b) all fees, costs, expenses and other amounts incurred or
payable by or on behalf of the Acquired Companies or Seller in connection with their negotiation, preparation, execution and delivery
of this Agreement, to the extent not (i) paid at or prior to the Closing or (ii) expressly included in the calculation of Final
Net Working Capital; (c) all liabilities relating to any intercompany transfer or intercompany debt, or any forgiveness thereof, between
Seller, on the one hand, and any Acquired Company, on the other hand; (d) in relation to the Austin Taylor Communications Limited (registered
company number 00425286) Pension Scheme Number 1 only, and only to the extent such pension scheme still exists (in other words its liabilities
have not been fully secured with an insurance company, or its liabilities have not been assumed, or are not in the process of being assumed,
by the Pension Protection Fund and/or its trusts have not terminated), any contribution notice or financial support directions that is,
or may be (in either case within no more than six (6) years following the Closing), issued to or threatened against Purchaser and/or any
Acquired Company under the UK Pensions Act 2004; and (e) all liabilities arising from this Agreement or the Contemplated Transactions
solely to the extent such liabilities relate to or arise from a proceeding, litigation, action, claim, complaint, investigation or other
similar matter brought by or on behalf of any holder of equity securities of Seller (whether held beneficially or of record).
“Indemnified Party”
means the party making a claim under Article X.
“Indemnifying Party”
means the party against whom a claim is asserted under Article X and such party’s successors and assigns.
“Insurance Policies”
has the meaning set forth in Section 4.14.
“Intellectual Property”
means all of the following: (a) patents, patent applications and patent disclosures; (b) trademarks, service marks, corporate names, trade
names, slogans, brand names, logos and internet domain names; (c) copyrights and copyrightable works; (d) registrations and applications
for any of the foregoing; (e) trade secrets and inventions; and (f) computer software (including all source code and related documentation.
“Interim Period”
has the meaning set forth in Section 6.1(a).
“Intervening Event”
has the meaning set forth in Section 6.2(g).
“Intervening Event Notice
Period” has the meaning set forth in Section 6.2(g).
“Knowledge”
means, with respect to a Person, the actual knowledge, after reasonable inquiry, of such Person. Seller’s Knowledge means only the
Knowledge of Anita Kumar, Roger Lacey and Mark Fandrich.
“Law” means
any law, rule, regulation, judgment, injunction, order or decree of any Government Entity, as enacted or properly promulgated.
“Lenders” has
the meaning set forth in Section 5.6(a).
“Lien” means,
with respect to any asset, any mortgage, deed of trust, lien, pledge, charge, security interest, or other encumbrance of any kind in respect
of such asset.
“Loss” means,
with respect to any Person, any liability, cost, damage, deficiency, penalty, fine, lien, fee, or other loss or expense, including court
costs and reasonable attorneys’ fees and expenses, whether or not arising out of a third party claim, against or affecting such
Person.
“Material Adverse Effect”
means an event, fact, change, occurrence, effect, circumstance or development (1) that, individually or in the aggregate, has, or would
reasonably be expected to have, a material adverse effect on the Business or condition (financial or otherwise) or results of operations
of the Acquired Companies taken as a whole or (2) that would reasonably be expected to prevent, materially impair or materially delay
the consummation of the Contemplated Transactions; provided, however, that none of the following (either alone or in combination),
shall be deemed to be a Material Adverse Effect or taken into account in determining whether there has been or will be a Material Adverse
Effect: (a) any changes in general United States or global political, economic or market conditions, unless such changes have a materially
disproportionate adverse effect on the Acquired Companies as compared to other participants in the industries in which the Acquired Companies
operate; (b) any changes in conditions generally affecting the industry in which the Acquired Companies operate, unless such changes have
a materially disproportionate adverse effect on the Acquired Companies as compared to other participants in the industries in which the
Acquired Companies operate; (c) financial, banking, or securities markets (including any disruption thereof and any decline in the price
of any security or any market index), unless such changes have a materially disproportionate adverse effect on the Acquired Companies
as compared to other participants in the industries in which the Acquired Companies operate; (d) any changes in Law or applicable accounting
regulations or principles (including GAAP) or the enforcement, implementation or interpretation thereof; (e) acts of terrorism, war
(whether or not declared), armed hostility, sabotage, national or international calamity, epidemics, pandemics, or orders, writs, injunctions,
decrees or guidance of any Government Entity relating thereto, civil unrest, or escalations thereof, or natural disasters, or any material
worsening of such conditions threatened or existing as of the date of this Agreement, including the COVID-19 pandemic, unless such changes,
actions or events have a materially disproportionate adverse effect on the Acquired Companies; (f) the announcement, pendency, or consummation
of the Contemplated Transactions, the announcement of the identity
of Purchaser, or other communication by Purchaser
or any of its Affiliates of its plans or intentions (including in respect of employees) with respect to the Acquired Companies; (g) any
failure by the Acquired Companies to meet any internal projections or forecasts; or (h) a party’s compliance with the terms of,
or taking any action required by, this Agreement or any of the documents contemplated hereby.
“Material Contracts”
has the meaning set forth in Section 4.15(a).
“MBCA” has
the meaning set forth in the Background.
“Net Working Capital”
means, as of the Effective Time, (a) the aggregate amount of the current assets of the Companies (excluding the UK Deposit Amount)
minus (b) the aggregate amount of the current liabilities of the Companies, in each case as determined in accordance
with the Net Working Capital Principles.
“Net Working Capital
Principles” means the document attached hereto as Exhibit B, setting forth certain accounting-related principles, policies,
procedures and methodologies to be used in connection with the calculation of the Net Working Capital in the Estimated Closing Statement
and the Closing Statement.
“Net2Edge”
means Net2Edge Limited, a company incorporated in England and Wales with registered number 02438435 and which is a UK Company Subsidiary.
“Notice of Disagreement”
has the meaning set forth in Section 2.5(a).
“Organizational Documents”
means (a) in the case of a Person that is a corporation, its articles or certificate of incorporation and its by-laws, regulations
or similar governing instruments required by the laws of its jurisdiction of formation or organization; (b) in the case of a Person
that is a partnership, its articles or certificate of partnership, formation or association, and its partnership agreement (in each case,
limited, limited liability, general or otherwise); (c) in the case of a Person that is a limited liability company, its articles
or certificate of formation or organization, and its limited liability company agreement or operating agreement; and (d) in the case
of a Person that is none of a corporation, partnership (limited, limited liability, general or otherwise), limited liability company or
natural person, its governing instruments as required or contemplated by the laws of its jurisdiction of organization.
“Outside Date”
has the meaning set forth in Section 9.1(b).
“Patapsco Designs”
means Patapsco Designs Limited, a company incorporated in England and Wales with registered number 09858549 and which is a UK Company
Subsidiary.
“Permits” has
the meaning set forth in Section 4.21.
“Permitted Liens”
means (a) liens for Taxes, assessments and other governmental charges that are not yet due and payable or the amount or validity of which
is being contested in good faith by appropriate proceedings; (b) liens under original purchase price conditional sales
contracts and equipment leases with third parties
entered into in the ordinary course of business (c) easements, covenants, conditions and restrictions of record; (d) easements, covenants,
conditions and restrictions not of record as to which no material violation or encroachment exists or, if such violation or encroachment
exists, as to which the cure of such violation or encroachment would not materially interfere with the conduct of the Business, in any
such case, that are not created or consented to in writing by Seller or any of its Affiliates; (e) any zoning or other governmentally
established restrictions or encumbrances; (f) pledges or deposits to secure obligations under applicable Law related to workers or unemployment
compensation or similar legislation or to secure public or statutory obligations; (g) mechanic’s, materialman’s, warehouse
man’s, supplier’s, vendor’s or similar liens arising or incurred in the ordinary course of business securing amounts
that are not overdue for a period of more than sixty (60) days or the amount or validity of which is being contested in good faith by
appropriate proceedings; and (h) railroad trackage agreements, utility, slope and drainage easements, right of way easements and leases
regarding signs.
“Person” means
an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture,
an unincorporated organization, an estate, a labor union or a Government Entity.
“Post-Closing Tax Period”
means any taxable year (or portion of any Straddle Period) other than the Pre-Closing Tax Period.
“Pre-Closing Tax Period”
means any taxable period of the Companies or any Company Subsidiary that ends on or before the Closing Date and the portion of any Straddle
Period that ends on the Closing Date.
“Preliminary Purchase
Price” has the meaning set forth in Section 2.2(a).
“Preparing Party”
has the meaning set forth in Section 7.6(a)(iii).
“Previously-owned Land
and Buildings” has the meaning set forth in Section 4.11(c).
“Proxy Statement”
means the proxy statement, together with any amendments or supplements thereto, to be filed with the SEC and sent to Seller’s shareholders
in connection with the Seller Shareholders Meeting.
“Purchase Price”
has the meaning set forth in Section 2.2(a).
“Purchased Securities”
has the meaning set forth in the Background.
“Purchaser”
has the meaning set forth in the Preamble.
“Purchaser Indemnified
Party” means Purchaser and its Affiliates (including, after the Closing, the Acquired Companies) and each of their respective
officers, directors, equityholders, managers, members, employees, agents, representatives, affiliates, successors and assigns.
“Qualified Person”
means any person making an unsolicited Acquisition Proposal that the Seller Board determines in good faith (after consultation with Seller’s
outside counsel and financial advisors) is, or could reasonably be expected to lead to, a Superior Proposal, and (after consultation with
Seller’s outside counsel) such Acquisition Proposal has not resulted from a breach by Seller of its obligations under Section 6.2(a).
“R&D Relief”
means any relief in the form of a tax credit claimed pursuant to Section 1054 of the UK Corporation Tax Act 2009 arising as a result of
any expenditure incurred (or otherwise accrued) by Net2Edge during the last accounting period ending on or before the Closing Date.
“Real Property”
has the meaning set forth in Section 4.11(a).
“Real Property Leases”
has the meaning set forth in Section 4.11(b).
“Recommendation Change
Notice” has the meaning set forth in Section 6.2(c).
“Released Claim”
has the meaning set forth in Section 7.9.
“Releasee”
has the meaning set forth in Section 7.9.
“Releasor”
has the meaning set forth in Section 7.9.
“Representatives”
has the meaning set forth in Section 6.2(a).
“Resolution Period”
has the meaning set forth in Section 2.5(b).
“Restricted Party”
has the meaning set forth in Section 7.1.
“Restricted Period”
has the meaning set forth in Section 7.1.
“Revenue” means
all revenue (including, without limitation, all product, software and service revenue) recognized by Purchaser from the Business and calculated
in accordance with GAAP, applied on a basis consistent with the then applicable accounting practices, policies and methodologies of Purchaser.
For purposes of this definition, “Business” shall include, in addition to the definition of “Business” otherwise
contained herein, (i) all products that are either in development by the Acquired Companies as of the Closing or subsequently developed
by the Business after the Closing, but which were on the roadmap of the Business and under development on or prior to the date hereof
and (ii) all products that are substantially similar to or readily derivative of (A) a product manufactured or marketed by the Acquired
Companies on or prior to the date hereof or (B) a product contemplated by clause (i); notwithstanding the foregoing, “Revenue”
and the term “Business” provided in this definition, shall not include any revenue recognized from products, software or services
of Purchaser that are currently sold or offered for sale by Purchaser or are being developed by Purchaser as of the date of this Agreement.
“Reviewing Party”
has the meaning set forth in Section 7.6(a)(iii).
“SEC” has the
meaning set forth in Section 3.6.
“SEC Reports”
has the meaning set forth in Section 3.6.
“Second Earnout Period”
means the 180-day period commencing immediately following the expiration of the First Earnout Period.
“Securities Act”
means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Seller” has
the meaning set forth in the Preamble.
“Seller Board”
has the meaning set forth in the Background.
“Seller Board Recommendation”
has the meaning set forth in Section 4.1.
“Seller Board Recommendation
Change” has the meaning set forth in Section 6.2(b)(i).
“Seller Indemnified Party”
means Seller and its Affiliates and each of their respective officers, directors, equityholders, managers, members, employees, agents,
representatives, affiliates, successors and assigns.
“Seller Shareholder Approval”
has the meaning set forth in Section 8.1(a).
“Seller Shareholders
Meeting” means the special meeting of the shareholders of Seller to be held to consider the approval of this Agreement and the
Contemplated Transactions.
“Seller Stock Awards”
has the meaning set forth in Section 7.10.
“Straddle Period”
means any period for Taxes beginning before and ending after the Closing Date.
“Subsidiary”,
when used with respect to any Person, means another Person, in which such first Person (a) owns, directly or indirectly, more than
fifty percent (50%) of the outstanding voting securities, equity securities, profits interest or capital interest or (b) is entitled
to elect at least a majority of the board of directors, board of managers or similar governing body.
“Superior Proposal”
means any bona fide, unsolicited written Acquisition Proposal that was first received after the date hereof that is (a) on terms
which the Seller Board determines in its good faith judgment to be more favorable to the holders of Seller’s capital stock from
a financial point of view than the Contemplated Transactions (after consultation with Seller’s outside legal counsel and financial
advisors), taking into account all the terms and conditions of such proposal and this Agreement (including any termination or break-up
fees and conditions to consummation, certainty of closing and regulatory filings, as well as any written offer by
Purchaser to amend the terms of this Agreement) that
the Seller Board determines to be relevant, (b) is not subject to any financing condition (and if financing is required, such financing
is then fully committed to the third party), (c) is reasonably capable of being completed on the terms proposed without unreasonable delay
and (d) includes termination rights no less favorable than the terms set forth in this Agreement, and in all respects from a third party
capable of performing such terms.
“Target Net Working Capital”
means $11,500,000.
“Tax” or “Taxes”
means any federal, state, local or foreign income, corporation, gross receipts, capital stock, franchise, profits, payroll, employment,
withholding, social security, unemployment, disability, real property, ad valorem/personal property, stamp, excise, license, occupation,
sales, use, transfer, registration, value added, alternative minimum, estimated or other tax imposed by a Government Entity, including
any interest, penalty or addition thereto, whether disputed or not.
“Tax Return”
means any return, computation, report, information return or other document relating to Taxes required to be filed with a Government Entity.
“Taxing Authority”
means any Government Entity responsible for the administration or imposition of any Tax.
“Termination Fee”
has the meaning set forth in Section 9.2(a).
“Third Party Claim”
has the meaning set forth in Section 10.6(a).
“TN EMEA” means
Transition Networks EMEA Limited, a company incorporated in England and Wales with registered number 09844063 and which is a UK Company
Subsidiary.
“TN Europe”
has the meaning set forth in the Background.
“TN Europe Share”
has the meaning set forth in the Background.
“TNI” has the
meaning set forth in the Background.
“TNI Shares”
has the meaning set forth in the Background.
“TNI Transferred Personnel”
has the meaning set forth in Section 7.2(a).
“Transaction Documents”
means this Agreement, the Transition Services Agreement and any other document expressly contemplated by this Agreement.
“Transfer Tax”
has the meaning set forth in Section 7.6(f).
“Transferred Employees”
has the meaning set forth in Section 7.2(a).
“Transition Services
Agreement” means the Transition Services Agreement to be entered into at the Closing by and between Purchaser and Seller substantially
in the form attached hereto as Exhibit C, with such changes as may be mutually agreed to by Purchaser and Seller prior to the Closing.
“UK Benefit Plan”
means any material employee benefit plan, program or arrangement that Net2Edge or Seller (solely to the extent offered by Seller to employees
of Net2Edge), as applicable, maintains or contributes to for the benefit of any employee or former employee (or their beneficiaries) of
Net2Edge.
“UK Deposit Amount”
means $27,566.
“UK Employees”
has the meaning set forth in Section 7.2(a)
“UK Lease”
means the Lease dated July 20, 2016 in respect of the premises at Kulite House, Stroudley Road, Basingstoke RU24 8UG, UK.
“UK Company Subsidiaries”
means together Net2Edge, Patapsco Designs and TN EMEA, each being a “UK Company Subsidiary”.
“UK Reimbursement Amount”
means $400,000.
“Unresolved Item”
has the meaning set forth in Section 2.5(c)(i).
“VATA” has
the meaning set forth in Section 4.8(u).
“Wells Debt”
means that certain Credit Agreement dated August 28, 2020 by and between Seller and Wells Fargo Bank, National Association, as amended,
and all other agreements contemplated thereby or relating thereto, including that certain Amended Security Account Agreement dated August
28, 2020 by and between Seller and Wells Fargo Bank, National Association, and that certain Revolving Line of Credit Note dated August
28, 2020 in the amount of $5.0 million from Seller to Wells Fargo Bank, National Association.
“Withheld Amount”
has the meaning set forth in Section 10.8(b).
EXHIBIT B
Net Working Capital Principles
The Estimated Net Working Capital and the Final Net
Working Capital shall be (1) calculated using the below general ledger account numbers with balances, (2) prepared in accordance with
GAAP, as applied by Seller in preparation of its financial statements and (3) calculated in accordance with the definition of Net Working
Capital contained in the Securities Purchase Agreement, dated as of April 28, 2021 (the “Purchase Agreement”), by and
between Purchaser and Seller. All capitalized terms that are used but not defined in this Exhibit B shall have the meanings given to them
in the Purchase Agreement.
Transition Networks, Inc.
Account No. Account Description
1100 AR-Trade
1110 AR-Other
1145 Doubtful Trade Receivable
1150 Allowance for Doubtful Accounts
Above accounts represent accounts receivable accounts per the balance sheet
classification
1200 Prepaid Expenses
1210 Prepaid Insurance
1220 Prepaid Trade Show Expenses
1225 Marketing Inventory
1230 Deposits to Supplier
1355 Inventory Reserve for Returns
Above accounts represent other current asset accounts per the balance sheet
classification
1300 Inventory-RM
1310 Inventory-WIP
1320 Inventory-WIP at Sub Contractor
1325 Inventory in Transit
1326 Inventory in Transit (Other)
1330 Inventory in Transit-contra
account
1335 Inventory-FG
1350 Inventory Reserve for Obsolete
1391 Labor & Overhead Allocation
Above accounts represent inventory accounts per the balance sheet classification
1160 Allowance for Returns
2000 AP-Trade
2010 AP-Other
2020 Return to Supplier
2035 Customer Payment in Advance
2040 AP-Received Uninvoiced -
Material
2041 AP-Received Uninvoiced -
Non-Material
2200 Accrued Co-op
2210 Accrued Warranty
2233 Royalties Payable
2240 Deferred Revenue
2270 VAT Payable
Above accounts represent other current liabilities accounts per the balance
sheet classification and excludes accrued compensation liabilities
Net2Edge Limited
Account No. Account Description
1600 Stock
1601 Obsolete stock provision
1603 STI CM stock
1712 Kulite Recharge account
1720 Prepayments
Above accounts represent current assets per the balance sheet classification
2100 Purchase Ledger Control
2150 Accruals
2300 VAT Account
2301 C&E DEFERRED DUTY
2310 Payroll Taxes Due
2313 LotteryAccount
2350 Employers Pension Cont.
2353 Employees contributions Scottish
Widows
Above accounts represent current liabilities per the balance sheet classification
APPENDIX B
Opinion of Northland Securities, Inc. dated April 27, 2021
APPENDIX
B
Opinion
of Northland Securities, Inc.
April
27, 2021
The
Board of Directors
Communications
Systems, Inc.
10900
Red Circle Drive
Minnetonka,
Minnesota 55343
The
Board of Directors:
You
have requested our opinion as to the fairness, from a financial point of view, to Communications Systems, Inc., a Minnesota
corporation (“CSI”), of the Purchase Price (as defined below) to be paid to CSI pursuant to a Securities Purchase
Agreement (the “Agreement”) to be entered into between CSI and Lantronix, Inc., a Delaware corporation
(“Lantronix”), in connection with which CSI will sell to Lantronix CSI’s electronics and software business
(the “Business” and, such sale, the “Transaction”) conducted through CSI’s wholly owned
subsidiaries, Transition Networks, Inc., a Minnesota corporation (“TNI”), and Transition Networks Europe Limited,
a private limited company incorporated in England and Wales (“TN Europe” and, together with TNI, the “TN
Companies”). As more fully described in the Agreement, the Transaction will be effected by the sale to Lantronix of all
outstanding shares of the common stock of TNI and one outstanding ordinary share (constituting all of the outstanding ordinary
shares) of TN Europe (such outstanding shares of TNI and TN Europe, collectively, the “TN Securities”) for an
aggregate purchase price of $32,027,566 (the “Purchase Price”), consisting of (i) $25,027,566 in cash, payable at
closing, plus (ii) earnout payments of up to $7,000,000 (the “Earnout Amount”), payable following two successive
180-day intervals after the closing of the Transaction based on certain revenue targets for the Business as specified in the
Agreement, with the Purchase Price subject to certain adjustments and allocations (as to which adjustments and allocations we
express no opinion). The terms and conditions of the Transaction are more fully set forth in the Agreement.
We,
as a customary part of our investment banking business, are continually engaged in performing financial analyses with respect to businesses
and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions
of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. We have
been engaged by CSI to act as its financial advisor in connection with the Transaction and we will receive a fee from CSI for our services,
a significant portion of which is contingent upon the consummation of the Transaction. As part of our engagement, we have been requested
by CSI to render an opinion to its Board of Directors (the “Board”) in connection with the Transaction and we will
receive a fee from CSI upon delivery of this opinion, which is not contingent upon the consummation of the Transaction or the conclusion
reached in our opinion. CSI also has agreed to reimburse us for expenses and to indemnify us against certain liabilities arising from
our engagement.
In
the ordinary course of business, we and our affiliates may actively trade securities of CSI, Lantronix or their respective affiliates
for our own account or the account of our customers and, accordingly, we may at any time hold a long or short position in such securities.
We in the past have provided financial advisory services to CSI and/or certain of its affiliates and we may continue to do so, and have
received, and may receive, fees for the rendering of such services, including, during the approximately past two years, having acted or
acting as financial advisor to CSI and certain of its affiliates in connection with certain minority investments and acquisition and sale
transactions. Although we have not in the past two years provided financial advisory or financing services to Lantronix, we may provide
such services to Lantronix and its affiliates in the future and may receive fees for the rendering of such services.
In
arriving at our opinion, we have (i) reviewed the financial terms of the execution version, provided to us on April 27, 2021, of the Agreement;
(ii) reviewed certain business, financial and other information and data relating to the Business publicly available
or made available to us from internal records of CSI; (iii) reviewed certain internal financial projections and estimates relating to
the Business furnished to us by the management of CSI; (iv) conducted discussions with members of the senior management of CSI with respect
to the Business and its prospects; (v) compared the financial performance of the Business with that of certain publicly traded companies
we deemed relevant in evaluating the Business; (vi) reviewed the financial terms, to the extent publicly available, of certain acquisition
transactions we deemed relevant in evaluating the Transaction; and (vii) conducted a discounted cash flow analysis of the Business based
on the financial projections and estimates referred to above provided by the management of CSI. In addition, we have conducted such other
analyses, examinations and inquiries and considered such other financial, economic and market criteria as we deemed necessary and appropriate
in arriving at our opinion.
In
conducting our review and in rendering our opinion, we have relied upon and assumed, without independent verification, the accuracy and
completeness of all financial, accounting and other information furnished or otherwise made available to us, discussed with or reviewed
by us, or publicly available, and do not assume any responsibility with respect to any such information. We also have relied upon the
assurances of the management of CSI that such management is not aware of any information or facts that would make the information provided
to us incomplete or misleading. In addition, the management of CSI has advised us, and we have assumed, that the financial projections
and estimates reviewed by us have been reasonably prepared in good faith on bases reflecting the best currently available estimates and
judgments of such management as to, and are an appropriate basis upon which to evaluate, the future financial results and condition of
the Business and the other matters covered thereby. We also have assumed that there has been no change in the assets, liabilities, financial
condition, results of operations, cash flows or prospects of the Business since the dates of the most recent financial statements and
other information, financial or otherwise, provided to us that would be meaningful in any respect to our analyses or opinion. For purposes
of our analyses and opinion, we further have assumed, at the direction of CSI and consistent with the financial projections and estimates
provided by the management of CSI, that the full Earnout Amount will be received. We express no opinion or view with respect to any projections,
estimates or other financial information provided to or reviewed by us or the assumptions on which they are based.
We
have relied upon the assessments of the management of CSI as to, among other things, (i) the potential impact on the Business of macroeconomic,
geopolitical, market, competitive and other conditions, trends and developments in and prospects for, and governmental, regulatory and
legislative matters relating to or otherwise affecting, the electronics and software industry and the internet connectivity products sector
thereof, (ii) implications for the Business of the global COVID-19 pandemic, and (iii) the existing and future agreements and other arrangements
involving, and ability to attract, retain and/or replace, key employees, customers, manufacturers, suppliers distributors, resellers,
integrators, and other commercial relationships of the Business. We have assumed that there will be no developments with respect to any
such matters, or any adjustments to or allocations of the Purchase Price, that would be meaningful in any respect to our analyses or opinion.
We
have assumed that the executed Agreement will be substantially similar to the execution version reviewed by us, without modification of
material terms or conditions. We also have assumed that the representations and warranties contained in the Agreement are true and correct
and that each party will perform all of the covenants and agreements required to be performed by it under the Agreement. We further have
assumed that the Transaction will be consummated in accordance with its terms and in compliance with all applicable laws, documents and
other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of
obtaining the necessary governmental, regulatory or third party approvals, consents, releases, waivers and agreements for the Transaction
or otherwise, no delay, limitation, restriction, condition or other action, including any divestiture or other requirements, amendments
or modifications, will be imposed or occur that would be meaningful in any respect to our analyses or opinion.
We
have not performed any appraisals or evaluations of any specific assets or liabilities (fixed, contingent, accrued, derivative,
off-balance sheet or otherwise) of the Business, CSI or its affiliates or any other business or entity
and we have not been furnished with any such appraisals or evaluations, and we have made no physical inspection of the property or assets
of the Business, CSI or its affiliates or any other business or entity. We have not evaluated the solvency, or liquidation or fair value,
of the Business, CSI or its affiliates or any other business or entity under any state, federal or other applicable laws relating to bankruptcy,
insolvency or similar matters. We also have undertaken no independent analysis of any pending or threatened litigation, governmental proceedings
or investigations, possible unasserted claims or other contingent liabilities involving the Business, CSI or its affiliates or any
other business or entity or to which they may be subject and we make no assumption concerning, and our opinion does not consider, the
potential impact of any claims, outcomes, damages, costs, recoveries or other aspects relating to any such matters.
This
opinion is necessarily based upon the financial, market, economic and other conditions that exist on, and the information made available
to us as of, the date hereof. It should be understood that subsequent developments may affect this opinion and that we disclaim any undertaking
or obligation to advise any person of any change in any fact or matter affecting this opinion which may come or be brought to our attention
after the date of this opinion. We have not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring
after the date hereof and do not have any obligation to update, revise or reaffirm this opinion. As you are aware, the credit, financial
and stock markets have from time to time experienced unusual volatility and we express no opinion or view as to any potential effects
of such volatility on the Business, CSI or its affiliates, Lantronix or the Transaction and this opinion does not purport to address potential
developments in any such markets.
Consistent
with applicable legal and regulatory requirements, we have adopted policies and procedures to establish and maintain the independence
of our research department and personnel. As a result, our research analysts may hold opinions, make statements or recommendations, and/or
publish research reports with respect to CSI and the Transaction and other participants in the Transaction that differ from the views
of our investment banking personnel.
This
opinion is directed to the Board (in its capacity as such) in connection with its evaluation of the Transaction. This opinion is not intended
to be and does not constitute a recommendation to the Board or to any shareholder as to how to act or vote with respect to the Transaction
or any other matter. The issuance of this opinion has been approved by the Northland Fairness Opinion Committee.
This
opinion addresses only the fairness, from a financial point of view and as of the date hereof, to CSI of the Purchase Price (to the extent
expressly set forth herein) and does not address any other terms, aspects or implications of the Transaction, including, without limitation,
the form or structure of the Purchase Price or the Transaction, any adjustments to or allocations of the Purchase Price, or any terms,
aspects or implications of any transition services agreement, indemnification arrangements or any other agreement, arrangement or understanding
to be entered into in connection with or contemplated by the Transaction or otherwise. We have not been asked to, and this opinion does
not, address the fairness, financial or otherwise, of any consideration to the holders of any class of securities, creditors or other
constituencies of CSI or any other party. We express no opinion or view as to the amount, nature or fairness of the consideration or compensation
to be received in or as a result of the Transaction by officers, directors or employees of CSI, or any class of such persons, relative
to or in comparison with the Purchase Price or otherwise. We also express no opinion or view as to the prices at which CSI common stock
may trade, or the prices at which the TN Securities may be transferable, at any time.
We
were not requested to opine as to, and this opinion does not address, the basic business decision to proceed with or effect the Transaction.
We express no opinion or view as to the relative merits of the Transaction as compared to any alternative business strategies or transactions
that might exist for the Business or CSI or the effect of any other transaction in which CSI or the TN Companies might engage. We are
not rendering any financial, legal, accounting or other advice and we have relied on the assumptions of the management of CSI as to all
accounting, tax, regulatory, legal and similar matters with respect to the Business and the Agreement, including, without limitation,
as to tax or other consequences of the Transaction or otherwise or changes in, or the impact of, accounting standards or tax and other
laws, regulations and governmental and legislative policies affecting the Business, CSI or its affiliates or the Transaction and have
assumed that CSI has obtained advice as to such matters from appropriate professionals.
Based
upon and subject to the foregoing and such other factors as we consider relevant, it is our opinion that, as of the date hereof, the Purchase
Price to be paid to CSI for the Business pursuant to the Agreement is fair, from a financial point of view, to CSI.
Sincerely,
/s/
Northland Securities, Inc.
Northland
Securities, Inc.
APPENDIX C
Communications Systems, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements
COMMUNICATIONS
SYSTEMS, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro
forma condensed consolidated financial statements are derived from the historical consolidated financial statements of Communications
Systems, Inc. (“CSI” or the “Company”) as of and for the three months ended March 31, 2021, and for the
years ended December 31, 2020 and 2019, which are incorporated by reference herein. The pro forma adjustments give effect to the
disposal of the Electronics & Software Segment (the “E&S Segment”). The E&S Segment is being disposed of
through the sale by CSI to Lantronix, Inc. pursuant to the securities purchase agreement dated April 28, 2021 of all of the issued
and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of
CSI’s wholly owned subsidiary, Transition Networks Europe Limited, which is referred to as the “E&S Sale Transaction.”
Collectively, Transition Networks, Inc., and Transition Networks Europe Limited are sometimes referred to as the “E&S
Companies.”
These unaudited pro forma
condensed consolidated financial statements include adjustments to reflect the following:
|
●
|
the sale of all of CSI’s interest in Transition Networks, Inc. and Transition Networks Europe Limited, which comprises all the E&S Segment’s assets, liabilities, and operations;
|
|
●
|
the base purchase price of approximately $25,027,566 received by CSI at the closing of the E&S Sale Transaction; and
|
|
●
|
an estimate of the additional transaction costs payable and severance accruals.
|
The pro forma financial information
reflects the accounting treatment of the E&S Segment as discontinued operations within CSI’s pro forma historical balance
sheet and statement of operations. The basis of accounting applied to discontinued operations can differ from the basis of accounting
used to prepare the unaudited combined financial statement of the E&S Segment, included elsewhere in this proxy statement.
Furthermore, amounts reflected within discontinued operations reflect anticipated accounting treatment and, in some cases, are
based on estimates of expected value. Final values may differ significantly in the event the transaction closes and are expected
to reflect changes that occur from now until closing of the transaction.
The unaudited pro forma consolidated
balance sheet as of March 31, 2021, is presented to reflect adjustments to CSI’s balance sheet as if the E&S Sale Transaction
were completed as of March 31, 2021.
The unaudited pro forma consolidated
statements of operations for the three months ended March 31, 2021, and for the years ended December 31, 2020 and 2019 are presented
as if the E&S Sale Transaction were completed at the beginning of each period. The E&S Segment column in the unaudited
pro forma condensed consolidated balance sheet reflects the assets and liabilities that will be sold as part of the E&S Sale
Transaction. The pro forma adjustments within the unaudited pro forma consolidated statements of operations reflect the operations
of the E&S Segment excluding any allocation of corporate overhead. In connection with the closing of the E&S Sale Transaction,
the Company will accelerate vesting of stock-based awards, which have a total unamortized expense amount of approximately $424,000
as of March 31, 2021. No entries have been made to the pro forma statement of operations for the additional expense to be incurred
for the acceleration of vesting.
The following unaudited pro
forma condensed consolidated financial statements should be read in conjunction with:
|
●
|
the accompanying notes to the unaudited pro forma consolidated financial statements;
|
|
●
|
the audited consolidated financial statements and accompanying notes of Communications Systems, Inc., contained elsewhere in this proxy statement; and
|
|
●
|
the unaudited combined financial statements of the E&S Segment contained elsewhere in this proxy statement.
|
The unaudited pro forma condensed
consolidated financial data has been presented for informational purposes only. The assumptions used and pro forma adjustments
derived from these assumptions are based on currently available information, and the Company believes these assumptions are reasonable
under the circumstances. The pro forma data is not necessarily indicative of our results of operations or financial condition if
the E&S Sale Transaction had been completed as of the dates assumed. In addition, they are not necessarily indicative of our
future results of operations or financial condition.
|
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC. (“CSI”)
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
AS
OF MARCH 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
CSI
|
|
|
E&S
|
|
|
Pro Forma
|
|
|
CSI
|
|
|
|
Historical
|
|
|
Segment
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,747,054
|
|
|
$
|
(250,589
|
)
|
|
$
|
24,486,566
|
(a)
|
|
$
|
38,983,031
|
|
Investments
|
|
|
693,424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
693,424
|
|
Trade accounts receivable, net
|
|
|
8,673,414
|
|
|
|
(5,508,857
|
)
|
|
|
-
|
|
|
|
3,164,557
|
|
Inventories
|
|
|
8,218,822
|
|
|
|
(8,090,248
|
)
|
|
|
-
|
|
|
|
128,574
|
|
Other current assets
|
|
|
1,330,487
|
|
|
|
(450,796
|
)
|
|
|
-
|
|
|
|
879,691
|
|
TOTAL CURRENT ASSETS
|
|
|
33,663,201
|
|
|
|
(14,300,490
|
)
|
|
|
24,486,566
|
|
|
|
43,849,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
7,088,892
|
|
|
|
(161,038
|
)
|
|
|
-
|
|
|
|
6,927,854
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
7,064,665
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,064,665
|
|
Goodwill
|
|
|
2,086,393
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,086,393
|
|
Operating lease right of use asset
|
|
|
362,812
|
|
|
|
(109,369
|
)
|
|
|
-
|
|
|
|
253,443
|
|
Intangible assets, net
|
|
|
2,661,541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,661,541
|
|
Other assets, net
|
|
|
180,734
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,734
|
|
TOTAL OTHER ASSETS
|
|
|
12,356,145
|
|
|
|
(109,369
|
)
|
|
|
-
|
|
|
|
12,246,776
|
|
TOTAL ASSETS
|
|
$
|
53,108,238
|
|
|
$
|
(14,570,897
|
)
|
|
$
|
24,486,566
|
|
|
$
|
63,023,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,685,775
|
|
|
$
|
(1,871,815
|
)
|
|
$
|
-
|
|
|
$
|
813,960
|
|
Accrued compensation and benefits
|
|
|
1,776,982
|
|
|
|
(886,498
|
)
|
|
|
1,260,000
|
(b)
|
|
|
2,150,484
|
|
Operating lease liability
|
|
|
217,133
|
|
|
|
(88,027
|
)
|
|
|
-
|
|
|
|
129,106
|
|
Other accrued liabilities
|
|
|
1,440,107
|
|
|
|
(1,170,071
|
)
|
|
|
1,250,000
|
(b)
|
|
|
1,520,036
|
|
Income taxes payable
|
|
|
2,225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,225
|
|
Dividends payable
|
|
|
5,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,387
|
|
Deferred revenue
|
|
|
589,444
|
|
|
|
-
|
|
|
|
-
|
|
|
|
589,444
|
|
TOTAL CURRENT LIABILITIES
|
|
|
6,717,053
|
|
|
|
(4,016,411
|
)
|
|
|
2,510,000
|
|
|
|
5,210,642
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term compensation plans
|
|
|
142,835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142,835
|
|
Operating lease liability
|
|
|
140,105
|
|
|
|
(7,487
|
)
|
|
|
-
|
|
|
|
132,618
|
|
Deferred revenue
|
|
|
386,314
|
|
|
|
-
|
|
|
|
-
|
|
|
|
386,314
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
669,254
|
|
|
|
(7,487
|
)
|
|
|
-
|
|
|
|
661,767
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.05 per share; 30,000,000 shares authorized; 9,448,129 shares issued and outstanding
|
|
|
472,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
472,406
|
|
Additional paid-in capital
|
|
|
43,969,776
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,969,776
|
|
Retained earnings
|
|
|
1,948,084
|
|
|
|
(11,226,172
|
)
|
|
|
21,976,566
|
(c)
|
|
|
12,698,478
|
|
Accumulated other comprehensive income (loss)
|
|
|
(668,335
|
)
|
|
|
679,173
|
|
|
|
-
|
|
|
|
10,838
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
45,721,931
|
|
|
|
(10,546,999
|
)
|
|
|
21,976,566
|
|
|
|
57,151,498
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
53,108,238
|
|
|
$
|
(14,570,897
|
)
|
|
$
|
24,486,566
|
|
|
$
|
63,023,907
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC. (“CSI”)
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2021
|
|
|
CSI Historical
|
|
|
Pro Forma Adjustments
|
|
|
CSI Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
10,159,315
|
|
|
$
|
(8,364,527
|
)
|
|
$
|
1,794,788
|
|
Cost of sales
|
|
|
5,942,677
|
|
|
|
(4,780,717
|
)
|
|
|
1,161,960
|
|
Gross profit
|
|
|
4,216,638
|
|
|
|
(3,583,810
|
)
|
|
|
632,828
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
5,219,731
|
|
|
|
(3,011,549
|
)
|
|
|
2,208,182
|
|
Acquisition-related costs
|
|
|
1,143,423
|
|
|
|
-
|
|
|
|
1,143,423
|
|
Total operating expenses
|
|
|
6,363,154
|
|
|
|
(3,011,549
|
)
|
|
|
3,351,605
|
|
Operating loss from continuing operations
|
|
|
(2,146,516
|
)
|
|
|
(572,261
|
)
|
|
|
(2,718,777
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other (expense) income
|
|
|
(10,855
|
)
|
|
|
19,403
|
|
|
|
8,548
|
|
Interest and other expense
|
|
|
(2,277
|
)
|
|
|
-
|
|
|
|
(2,277
|
)
|
Other (expense) income, net
|
|
|
(13,132
|
)
|
|
|
19,403
|
|
|
|
6,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations before income taxes
|
|
|
(2,159,648
|
)
|
|
|
(552,858
|
)
|
|
|
(2,712,506
|
)
|
Income tax expense
|
|
|
1,203
|
|
|
|
-
|
(d)
|
|
|
1,203
|
|
Net loss from continuing operations
|
|
$
|
(2,160,851
|
)
|
|
$
|
(552,858
|
)
|
|
|
(2,713,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share from continuing operations
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
$
|
(0.29
|
)
|
Diluted net loss per share from continuing operations
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding
|
|
|
9,332,589
|
|
|
|
|
|
|
|
9,332,589
|
|
Weighted Average Dilutive Shares Outstanding
|
|
|
9,332,589
|
|
|
|
|
|
|
|
9,332,589
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC. (“CSI”)
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2020
|
|
|
CSI Historical
|
|
|
Pro Forma Adjustments
|
|
|
CSI Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
9,162,742
|
|
|
$
|
(8,536,404
|
)
|
|
$
|
626,338
|
|
Cost of sales
|
|
|
5,425,595
|
|
|
|
(4,806,767
|
)
|
|
|
618,828
|
|
Gross profit
|
|
|
3,737,147
|
|
|
|
(3,729,637
|
)
|
|
|
7,510
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
4,960,890
|
|
|
|
(3,346,402
|
)
|
|
|
1,614,488
|
|
Total operating expenses
|
|
|
4,960,890
|
|
|
|
(3,346,402
|
)
|
|
|
1,614,488
|
|
Operating loss from continuing operations
|
|
|
(1,223,743
|
)
|
|
|
(383,235
|
)
|
|
|
(1,606,978
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other (expense) income
|
|
|
111,757
|
|
|
|
(14,067
|
)
|
|
|
97,690
|
|
Gain on sale of assets
|
|
|
308,403
|
|
|
|
-
|
|
|
|
308,403
|
|
Interest and other expense
|
|
|
(9,593
|
)
|
|
|
-
|
|
|
|
(9,593
|
)
|
Other (expense) income, net
|
|
|
410,567
|
|
|
|
(14,067
|
)
|
|
|
396,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations before income taxes
|
|
|
(813,176
|
)
|
|
|
(397,302
|
)
|
|
|
(1,210,478
|
)
|
Income tax benefit
|
|
|
(4,457
|
)
|
|
|
-
|
(d)
|
|
|
(4,457
|
)
|
Net loss from continuing operations
|
|
$
|
(808,719
|
)
|
|
$
|
(397,302
|
)
|
|
$
|
(1,206,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share from continuing operations
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
$
|
(0.13
|
)
|
Diluted net loss per share from continuing operations
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding
|
|
|
9,265,590
|
|
|
|
|
|
|
|
9,265,590
|
|
Weighted Average Dilutive Shares Outstanding
|
|
|
9,265,590
|
|
|
|
|
|
|
|
9,265,590
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC. (“CSI”)
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
FOR
THE YEAR ENDED DECEMBER 31, 2020
|
|
|
CSI Historical
|
|
|
Pro Forma Adjustments
|
|
|
CSI Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
42,575,546
|
|
|
$
|
(34,495,984
|
)
|
|
$
|
8,079,562
|
|
Cost of sales
|
|
|
25,369,118
|
|
|
|
(19,606,468
|
)
|
|
|
5,762,650
|
|
Gross profit
|
|
|
17,206,428
|
|
|
|
(14,889,516
|
)
|
|
|
2,316,912
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
19,218,922
|
|
|
|
(11,959,314
|
)
|
|
|
7,259,608
|
|
Acquisition-related costs
|
|
|
684,856
|
|
|
|
-
|
|
|
|
684,856
|
|
Total operating expenses
|
|
|
19,903,778
|
|
|
|
(11,959,314
|
)
|
|
|
7,944,464
|
|
Operating loss from continuing operations
|
|
|
(2,697,350
|
)
|
|
|
(2,930,202
|
)
|
|
|
(5,627,552
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other (expense) income
|
|
|
661,754
|
|
|
|
10,289
|
|
|
|
672,043
|
|
Gain on sale of assets
|
|
|
288,778
|
|
|
|
(209
|
)
|
|
|
288,569
|
|
Interest and other expense
|
|
|
(28,514
|
)
|
|
|
-
|
|
|
|
(28,514
|
)
|
Other income, net
|
|
|
922,018
|
|
|
|
10,080
|
|
|
|
932,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations before income taxes
|
|
|
(1,775,332
|
)
|
|
|
(2,920,122
|
)
|
|
|
(4,695,454
|
)
|
Income tax expense
|
|
|
20,342
|
|
|
|
-
|
(d)
|
|
|
20,342
|
|
Net loss from continuing operations
|
|
$
|
(1,795,674
|
)
|
|
$
|
(2,920,122
|
)
|
|
$
|
(4,715,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share from continuing operations
|
|
$
|
(0.19
|
)
|
|
$
|
|
|
|
$
|
(0.51
|
)
|
Diluted net loss per share from continuing operations
|
|
$
|
(0.19
|
)
|
|
$
|
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding
|
|
|
9,322,672
|
|
|
|
|
|
|
|
9,322,672
|
|
Weighted Average Dilutive Shares Outstanding
|
|
|
9,322,672
|
|
|
|
|
|
|
|
9,322,672
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC. (“CSI”)
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
FOR
THE YEAR ENDED DECEMBER 31, 2019
|
|
|
CSI Historical
|
|
|
Pro Forma Adjustments
|
|
|
CSI Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
50,906,179
|
|
|
$
|
(47,007,077
|
)
|
|
$
|
3,899,102
|
|
Cost of sales
|
|
|
28,720,367
|
|
|
|
(25,613,718
|
)
|
|
|
3,106,649
|
|
Gross profit
|
|
|
22,185,812
|
|
|
|
(21,393,359
|
)
|
|
|
792,453
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
22,176,598
|
|
|
|
(15,457,434
|
)
|
|
|
6,719,164
|
|
Total operating expenses
|
|
|
22,176,598
|
|
|
|
(15,457,434
|
)
|
|
|
6,719,164
|
|
Operating income (loss) from continuing operations
|
|
|
9,214
|
|
|
|
(5,935,925
|
)
|
|
|
(5,926,711
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other (expense) income
|
|
|
284,944
|
|
|
|
(3,478
|
)
|
|
|
281,466
|
|
Gain on sale of assets
|
|
|
(20,368
|
)
|
|
|
10,433
|
|
|
|
(9,935
|
)
|
Interest and other expense
|
|
|
(38,440
|
)
|
|
|
-
|
|
|
|
(38,440
|
)
|
Other income, net
|
|
|
226,136
|
|
|
|
6,955
|
|
|
|
233,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations before income taxes
|
|
|
235,350
|
|
|
|
(5,928,970
|
)
|
|
|
(5,693,620
|
)
|
Income tax benefit
|
|
|
(15,269
|
)
|
|
|
-
|
(d)
|
|
|
(15,269
|
)
|
Net income (loss) from continuing operations
|
|
$
|
250,619
|
|
|
$
|
(5,928,970
|
)
|
|
$
|
(5,678,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share from continuing operations
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
(0.61
|
)
|
Diluted net income (loss) per share from continuing operations
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding
|
|
|
9,272,259
|
|
|
|
|
|
|
|
9,272,259
|
|
Weighted Average Dilutive Shares Outstanding
|
|
|
9,337,422
|
|
|
|
|
|
|
|
9,272,259
|
|
Communications
Systems, Inc.
Notes
to Unaudited Pro Forma Condensed Consolidated Financial Information
|
(a)
|
Reflects
the base purchase price of approximately $25,027,566
in cash to be received by CSI at the closing of the E&S Sale Transaction. The working
capital adjustment is calculated based on the working capital balances as of March 31,
2021 as compared to the working capital target. In addition to the base purchase price,
Lantronix will pay to CSI, if earned, earnout payments of up to $7.0 million, payable
following two successive 180-day intervals after the closing
of the E&S Sale Transaction based on revenue targets for the business of the
E&S Companies as specified in the securities purchase agreement, subject to certain
adjustments and allocations as further described in the securities purchase agreement.
Any potential proceeds related to the earn out are not included within the pro forma
cash adjustment.
|
Initial consideration
|
|
$
|
25,027,566
|
|
Working capital adjustment
|
|
|
(541,000
|
)
|
|
|
$
|
24,486,566
|
|
|
(b)
|
Reflects
estimated costs incurred by the Company directly attributable to the E&S Sale Transaction
that are not yet reflected on the balance sheet as of March 31, 2021. These amounts are
not included in the pro forma condensed consolidated statements of operations as these
costs are considered to be nonrecurring in nature.
|
|
(c)
|
Reflects
the equity impact of assets and liabilities recorded as the result of the E&S Sale
Transaction.
|
|
(d)
|
No
tax effects of pro forma adjustments have been recorded due to the extent of the Company’s
tax loss carryforwards reduced by valuation allowances.
|
APPENDIX D
Communications Systems, Inc. Unaudited Condensed Combined Financial Statements for the E&S Segment
UNAUDITED
HISTORICAL CONDENSED COMBINED FINANCIAL STATEMENTS OF ELECTRONICS & SOFTWARE SEGMENT
Communications
Systems, Inc. (“CSI” or the “Company”) has prepared the following unaudited financial statements to show
the balance sheets and statements of operations and cash flows of its Electronics & Software Segment (“E&S Segment”)
on a stand-alone basis. The unaudited financial statements have been derived from CSI’s historical financial data and represent
the results of operations and financial position of the E&S Segment.
The
unaudited financial statements include unaudited condensed combined balance sheets and statements of changes in net investment
of the E&S Segment as of March 31, 2021, and December 31, 2020 and 2019, and unaudited condensed combined statements of operations
and cash flows for the three months ended March 31, 2021 and 2020, and for the years ended December 31, 2020 and 2019.
The
unaudited financial statements of the E&S Segment do not purport to represent, and are not necessarily indicative of what
the actual financial results would have been had CSI operated the E&S Segment as a separate entity.
The
unaudited financial statements of the E&S Segment, including the notes thereto, are qualified in their entirety by reference
to, and should be read in conjunction with, the audited historical financial statements and the notes thereto for the years ended
December 31, 2020 and 2019 and the unaudited historical financial statements and the notes thereto for the three months ended
March 31, 2021 and 2020, which are contained elsewhere in this proxy statement.
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC.
|
UNAUDITED
CONDENSED COMBINED BALANCE SHEETS
|
ELECTRONICS
& SOFTWARE SEGMENT
|
|
|
March 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
250,589
|
|
|
$
|
302,509
|
|
|
$
|
297,812
|
|
Trade accounts receivable, net
|
|
|
5,508,857
|
|
|
|
5,775,422
|
|
|
|
9,921,323
|
|
Inventories
|
|
|
8,090,248
|
|
|
|
8,560,616
|
|
|
|
8,481,829
|
|
Other current assets
|
|
|
450,795
|
|
|
|
439,518
|
|
|
|
751,582
|
|
TOTAL CURRENT ASSETS
|
|
|
14,300,489
|
|
|
|
15,078,065
|
|
|
|
19,452,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
161,038
|
|
|
|
190,299
|
|
|
|
243,548
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,239,948
|
|
|
|
1,197,966
|
|
|
|
1,429,797
|
|
Operating lease right of use asset
|
|
|
109,369
|
|
|
|
129,164
|
|
|
|
206,166
|
|
TOTAL OTHER ASSETS
|
|
|
1,349,317
|
|
|
|
1,327,130
|
|
|
|
1,635,963
|
|
TOTAL ASSETS
|
|
$
|
15,810,844
|
|
|
$
|
16,595,494
|
|
|
$
|
21,332,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,019,862
|
|
|
$
|
1,669,166
|
|
|
$
|
3,344,707
|
|
Accrued compensation and benefits
|
|
|
970,099
|
|
|
|
1,039,619
|
|
|
|
2,011,010
|
|
Operating lease liability
|
|
|
88,027
|
|
|
|
86,310
|
|
|
|
79,310
|
|
Other accrued liabilities
|
|
|
1,170,073
|
|
|
|
1,205,864
|
|
|
|
2,024,722
|
|
Income taxes payable
|
|
|
1,379,429
|
|
|
|
1,440,918
|
|
|
|
1,203,734
|
|
TOTAL CURRENT LIABILITIES
|
|
|
5,627,490
|
|
|
|
5,441,877
|
|
|
|
8,663,483
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
|
100,051
|
|
|
|
99,596
|
|
|
|
85,538
|
|
Operating lease liability
|
|
|
7,487
|
|
|
|
29,611
|
|
|
|
111,394
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
107,538
|
|
|
|
129,207
|
|
|
|
196,932
|
|
NET INVESTMENT IN ELECTRONICS & SOFTWARE
|
|
|
10,075,816
|
|
|
|
11,024,410
|
|
|
|
12,471,642
|
|
TOTAL LIABILITIES AND E&S NET INVESTMENT
|
|
$
|
15,810,844
|
|
|
$
|
16,595,494
|
|
|
$
|
21,332,057
|
|
See accompanying Notes to Unaudited Condensed Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC.
|
UNAUDITED
CONDENSED COMBINED STATEMENT OF OPERATIONS
|
ELECTRONICS
& SOFTWARE SEGMENT
|
|
|
Three Months Ended March 31
|
|
|
Twelve Months Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,364,527
|
|
|
$
|
8,536,404
|
|
|
$
|
34,495,984
|
|
|
$
|
47,007,077
|
|
Cost of sales
|
|
|
4,780,717
|
|
|
|
4,806,767
|
|
|
|
19,606,468
|
|
|
|
25,613,718
|
|
Gross profit
|
|
|
3,583,810
|
|
|
|
3,729,637
|
|
|
|
14,889,516
|
|
|
|
21,393,359
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,714,277
|
|
|
|
3,897,136
|
|
|
|
13,917,278
|
|
|
|
17,381,139
|
|
Transaction costs
|
|
|
271,112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
3,985,389
|
|
|
|
3,897,136
|
|
|
|
13,917,278
|
|
|
|
17,381,139
|
|
Operating (loss) income
|
|
|
(401,579
|
)
|
|
|
(167,499
|
)
|
|
|
972,238
|
|
|
|
4,012,220
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other (expense) income
|
|
|
(19,403
|
)
|
|
|
14,067
|
|
|
|
(10,289
|
)
|
|
|
3,478
|
|
Gain (loss) on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
209
|
|
|
|
(10,433
|
)
|
Other (expense) income, net
|
|
|
(19,403
|
)
|
|
|
14,067
|
|
|
|
(10,080
|
)
|
|
|
(6,955
|
)
|
Operating (loss) income before income taxes
|
|
|
(420,982
|
)
|
|
|
(153,432
|
)
|
|
|
962,158
|
|
|
|
4,005,265
|
|
Income tax (benefit) expense
|
|
|
(103,016
|
)
|
|
|
44,876
|
|
|
|
483,150
|
|
|
|
1,225,182
|
|
Net (loss) income
|
|
|
(317,966
|
)
|
|
|
(198,308
|
)
|
|
|
479,008
|
|
|
|
2,780,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
19,731
|
|
|
|
(132,103
|
)
|
|
|
9,648
|
|
|
|
55,422
|
|
Comprehensive (loss) income
|
|
$
|
(298,235
|
)
|
|
$
|
(330,411
|
)
|
|
$
|
488,656
|
|
|
$
|
2,835,505
|
|
See
accompanying Notes to Unaudited Condensed Combined Financial Statements
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC.
|
UNAUDITED
CONDENSED COMBINED STATEMENTS OF CHANGES IN NET INVESTMENT
|
ELECTRONICS
& SOFTWARE SEGMENT
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
BALANCE AT DECEMBER 31, 2018
|
|
$
|
15,222,307
|
|
|
$
|
(763,974
|
)
|
|
$
|
14,458,333
|
|
Net income
|
|
|
2,780,083
|
|
|
|
-
|
|
|
|
2,780,083
|
|
Noncash contributions from CSI
|
|
|
101,133
|
|
|
|
-
|
|
|
|
101,133
|
|
Distributions to CSI
|
|
|
(4,923,329
|
)
|
|
|
-
|
|
|
|
(4,923,329
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
55,422
|
|
|
|
55,422
|
|
BALANCE AT DECEMBER 31, 2019
|
|
|
13,180,194
|
|
|
|
(708,552
|
)
|
|
|
12,471,642
|
|
Net income
|
|
|
479,008
|
|
|
|
-
|
|
|
|
479,008
|
|
Noncash contributions from CSI
|
|
|
146,705
|
|
|
|
-
|
|
|
|
146,705
|
|
Distributions to CSI
|
|
|
(2,082,593
|
)
|
|
|
-
|
|
|
|
(2,082,593
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
9,648
|
|
|
|
9,648
|
|
BALANCE AT DECEMBER 31, 2020
|
|
|
11,723,314
|
|
|
|
(698,904
|
)
|
|
|
11,024,410
|
|
Net loss
|
|
|
(317,966
|
)
|
|
|
-
|
|
|
|
(317,966
|
)
|
Noncash contributions from CSI
|
|
|
46,267
|
|
|
|
-
|
|
|
|
46,267
|
|
Distributions to CSI
|
|
|
(696,626
|
)
|
|
|
-
|
|
|
|
(696,626
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
19,731
|
|
|
|
19,731
|
|
BALANCE AT MARCH 31, 2021
|
|
$
|
10,754,989
|
|
|
$
|
(679,173
|
)
|
|
$
|
10,075,816
|
|
See
accompanying Notes to Unaudited Condensed Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
COMMUNICATIONS
SYSTEMS, INC.
|
UNAUDITED
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
|
ELECTRONICS
& SOFTWARE SEGMENT
|
|
|
Three Months Ended March 31
|
|
|
Twelve Months Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(317,966
|
)
|
|
$
|
(198,308
|
)
|
|
$
|
479,008
|
|
|
$
|
2,780,083
|
|
Adjustments to reconcile net (loss) income to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
33,773
|
|
|
|
40,359
|
|
|
|
154,269
|
|
|
|
196,557
|
|
Share based compensation
|
|
|
46,267
|
|
|
|
25,727
|
|
|
|
124,448
|
|
|
|
101,133
|
|
Deferred taxes
|
|
|
(41,982
|
)
|
|
|
38,824
|
|
|
|
231,832
|
|
|
|
(18,463
|
)
|
(Loss) gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
10,433
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
268,789
|
|
|
|
3,886,867
|
|
|
|
4,144,854
|
|
|
|
(3,913,863
|
)
|
Inventories
|
|
|
470,368
|
|
|
|
369,233
|
|
|
|
(98,084
|
)
|
|
|
4,237,809
|
|
Other assets, net
|
|
|
(10,735
|
)
|
|
|
40,855
|
|
|
|
310,825
|
|
|
|
(432,850
|
)
|
Accounts payable
|
|
|
350,252
|
|
|
|
(1,592,341
|
)
|
|
|
(1,676,203
|
)
|
|
|
5,786
|
|
Accrued compensation and benefits
|
|
|
(69,916
|
)
|
|
|
(920,549
|
)
|
|
|
(973,081
|
)
|
|
|
548,028
|
|
Other accrued liabilities
|
|
|
(36,908
|
)
|
|
|
(411,824
|
)
|
|
|
(822,127
|
)
|
|
|
891,037
|
|
Income taxes payable
|
|
|
(61,034
|
)
|
|
|
6,052
|
|
|
|
251,242
|
|
|
|
660,052
|
|
Net cash provided by operating activities
|
|
|
630,908
|
|
|
|
1,284,895
|
|
|
|
2,126,774
|
|
|
|
5,065,742
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,100
|
)
|
|
|
(39,301
|
)
|
|
|
(80,627
|
)
|
|
|
(84,582
|
)
|
Proceeds from the sale of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(4,100
|
)
|
|
|
(39,301
|
)
|
|
|
(77,627
|
)
|
|
|
(84,582
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in CSI net investment
|
|
|
(696,626
|
)
|
|
|
(1,001,993
|
)
|
|
|
(2,082,593
|
)
|
|
|
(4,923,329
|
)
|
Net cash used in financing activities
|
|
|
(696,626
|
)
|
|
|
(1,001,993
|
)
|
|
|
(2,082,593
|
)
|
|
|
(4,923,329
|
)
|
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
|
|
17,898
|
|
|
|
(36,822
|
)
|
|
|
38,143
|
|
|
|
(7,963
|
)
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(51,920
|
)
|
|
|
206,779
|
|
|
|
4,697
|
|
|
|
49,868
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
302,509
|
|
|
|
297,812
|
|
|
|
297,812
|
|
|
|
247,944
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
250,589
|
|
|
$
|
504,591
|
|
|
$
|
302,509
|
|
|
$
|
297,812
|
|
See
accompanying Notes to Unaudited Condensed Combined Financial Statements
ELECTRONICS
& SOFTWARE SEGMENT
NOTES
TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business: Communications Systems, Inc. is a Minnesota corporation that was organized in 1969. CSI classifies its businesses
into the following two segments:
|
●
|
Electronics
& Software (E&S): 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; and
|
|
●
|
Services
& Support (S&S): 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.
|
On
March 2, 2021, CSI announced that it had entered into a definitive merger agreement with privately held Pineapple Energy LLC
(“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. If the merger is approved by our shareholders, upon closing of the merger, CSI will commence doing business as Pineapple Energy, with a business model focused on the rapidly
growing home solar industry.
At
the time it announced the merger with Pineapple, CSI also announced its intention to divest of substantially all its current operating
and non-operating assets, including its E&S Segment, its S&S Segment, real estate holdings, and cash, cash equivalents,
and investments.
On
April 28, 2021, CSI entered into a securities purchase agreement with Lantronix, pursuant to which CSI has agreed, subject to
specified terms and conditions, including approval of the E&S Sale Transaction by its shareholders at a special meeting, to
sell to Lantronix all of the issued and outstanding shares of our wholly-owned subsidiary, Transition Networks, Inc., and the
entire issued share capital of our wholly-owned subsidiary, Transition Networks Europe Limited, which includes subsidiary Net2Edge
Limited. The E&S Sale Transaction is part of CSI’s planned strategy to monetize its assets for the benefit of the pre-merger
CSI shareholders as contemplated by the Pineapple merger transaction.
The unaudited condensed combined financial statements and footnotes
herein contain only the operations of the E&S Segment.
Basis
of Presentation: The accompanying unaudited condensed combined financial statements as of and for the years ended December
31, 2020 and 2019, and as of March 31, 2021 and the three-month periods ended March 31, 2021 and 2020, have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) and include the only those
balances related to the E&S Segment.
These
financial statements are presented without audit. In the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows for all periods presented have been made.
The
financial information included herein was derived from the consolidated financial statements and accounting records of CSI and
may not necessarily reflect the combined financial position, results of operations and cash flows of the E&S Segment in the
future or what they would have been had the E&S Segment operated as a separate, stand-alone entity during the periods presented.
The unaudited condensed combined financial statements of the E&S Segment include all of the assets, liabilities, revenue,
expenses, and cash flows of the segment, as well as expense allocations deemed reasonable by management, to present the condensed
combined financial position, results of operations and cash flows of the E&S Segment on a stand-alone basis. The unaudited
condensed combined financial statements only include assets and liabilities that are specifically attributable to the E&S
Segment. Management believes expense allocations are reasonable; however, they may not be indicative of the actual level
of expense that would have been incurred by the E&S Segment if these operations had operated as a separate, standalone entity
or of the costs expected to be incurred in the future. Refer to Note 10 for further information related to expense allocation
methodologies.
All
intercompany accounts and transactions have been eliminated in preparing the unaudited condensed combined financial statements
of the E&S Segment.
Use
of Estimates: The presentation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company uses estimates based on the best information available in recording
transactions and balances resulting from operations. Actual results could differ from those estimates. The Company’s estimates
consist principally of reserves for doubtful accounts, sales returns, warranty costs, asset impairment evaluations, accruals for
compensation plans, lower of cost or market inventory adjustments, provisions for income taxes and deferred taxes, and depreciable
lives of fixed assets.
Cash
and cash equivalents: For purposes of the condensed combined statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains its
cash in bank deposit accounts which, at times, may exceed federally insured limits. Refer to Note 10 for further information related
to cash management.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method.
Provision to reduce inventories to the lower of cost or net realizable value is made based on a review of excess and obsolete
inventories, estimates of future sales, examination of historical consumption rates and the related value of component parts.
Property,
plant and equipment: Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line
method. Depreciation included in cost of sales and selling, general and administrative expenses was $34,000 and $40,000 for the
three months ended March 31, 2021 and 2020 and $154,000 and $192,000 for 2020 and 2019, respectively. Maintenance and repairs
are charged to operations and additions or improvements are capitalized. Items of property sold, retired or otherwise disposed
of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in operations.
Recoverability
of long-lived assets: The Company reviews its long-lived assets periodically when impairment indicators exist as required
under generally accepted accounting principles. Potential impairment is determined by comparing the carrying value of the assets
with expected net cash flows expected to be provided by operating activities of the business or related products. If the sum of
the expected future net cash flows is less than the carrying value, an impairment loss would be measured by comparing the amount
by which the carrying value exceeds the fair value of the asset.
Warranty:
The Company reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs
of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product
failure rates, and use of materials and service delivery costs incurred in correcting product failures. Management reviews the
estimated warranty liability on a quarterly basis to determine its adequacy.
The
following table presents the changes in the Company’s warranty liability for the E&S Segment, included in other accrued
liabilities in the unaudited condensed combined balance sheets, which relate to normal product warranties and a five-year obligation
to provide for potential future liabilities for certain network equipment sales:
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
505,000
|
|
|
$
|
513,000
|
|
|
$
|
513,000
|
|
|
$
|
554,000
|
|
Amounts charged to expense
|
|
|
16,000
|
|
|
|
7,000
|
|
|
|
59,000
|
|
|
|
10,000
|
|
Actual warranty costs paid
|
|
|
(24,000
|
)
|
|
|
(15,000
|
)
|
|
|
(67,000
|
)
|
|
|
(51,000
|
)
|
Ending balance
|
|
$
|
497,000
|
|
|
$
|
505,000
|
|
|
$
|
505,000
|
|
|
$
|
513,000
|
|
Revenue
recognition: The E&S Segment recognizes revenue upon delivery of its connectivity infrastructure and data transmission
products. To determine when revenue should be recognized, it is important to determine when the transfer of control has occurred.
The Company has determined that control transfers for these products upon shipment or delivery to the customer, in accordance
with the agreed upon shipping terms. As such, the timing of revenue recognition occurs at a specific point in time. Sales are
made directly to customers and through distributors. Payment terms for distributors are consistent with the terms of the Company’s
direct customers. The Company records a provision for sales returns, sales incentives and warranty costs at the time of the sale
based on historical experience and current trends. See Note 2 for further discussion regarding revenue recognition.
Research
and development: Research and development costs consist primarily of designing, prototyping, and testing of equipment and
supplies associated with developing new products and enhancing existing products, including personnel costs, outside testing services,
equipment, and supplies. Research and development costs are expensed when incurred and totaled $2,808,000 and $3,600,000 for years
ended December 31, 2020 and 2019, respectively, and totaled $890,000 and $758,000 for the three months ended March 31, 2021 and
2020, respectively.
Employee
Retirement Benefits: The Company has an Employee Savings Plan (401(k)) and matches at its discretion a percentage of employee
contributions up to six percent of compensation. Contributions to the plan for the E&S Segment during the three months ended
March 31, 2021 and 2020 were $45,000 and $66,000, respectively and contributions during the years ended December 31, 2020 and
2019 were $205,000 and $217,000, respectively.
Share
based compensation: The Company accounts for share based compensation awards on a fair value basis.
The estimated grant date fair value of each stock-based award is recognized in income over the requisite service period (generally
the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
Accounting
standards issued:
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.”
The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects
expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about
expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December
15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018.
We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
NOTE
2 – REVENUE RECOGNITION
In
accordance with Accounting Standards Codification (“ASC”) 606, revenue is recognized when a customer obtains control
of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive
in exchange for these goods or services.
The
Company has determined that the revenue recognition for the E&S Segment occurs upon delivery of the Company’s connectivity
infrastructure and data transmission products. To determine when revenue should be recognized, it is important to determine when
the transfer of control has occurred. The Company has determined that control transfers for these products upon shipment or delivery
to the customer, in accordance with the agreed upon shipping terms. As such, the timing of revenue recognition occurs at a specific
point in time.
Significant
Judgments
To
determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract, depending
on the facts and circumstances relative to the contract. The Company may provide credits or incentives to its customers, which
are accounted for as either variable consideration or consideration payable to the customer. The Company estimates product returns
based on historical return rates. The Company constrains (reduces) the estimates of variable consideration such that it is probable
that a significant revenue reversal of previously recognized revenue will not occur throughout the life of the contract. When
determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s
control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood
and magnitude of a potential reversal of revenue. The Company will assess if any incentives it offers to its customer is a consideration
payable. The Company accounts for consideration payable to a customer as a reduction of the transaction price, and therefore,
of revenue. For contracts with more than one performance obligation, the consideration is allocated between separate products
and services based on their stand-alone selling prices. Judgment is required to determine standalone selling prices for each distinct
performance obligation. The Company generally
determines standalone selling prices based on the actual prices charged to customers
and has an established range of amounts that fall within stand-alone selling price for its distinct performance obligations. The
Company evaluates this range quarterly.
Costs
to Obtain or Fulfill a Contract
The
Company evaluates “Other Assets and Deferred Costs” (ASC 340-40), for the accounting for certain costs to obtain and
fulfill contracts (or, in some cases, an anticipated contract) with a customer. ASC 340-40 is applicable only to incremental contract
costs, those that an entity would not have incurred if the contract had not been obtained, and requires the capitalization of
these costs as well as provides guidance on the amortization and impairment considerations. The Company elects the practical expedient
and expenses certain costs to obtain contracts when applicable. There were no material costs to obtain a contract in the years
ended December 31, 2020 and 2019 or the three months ended March 31, 2021 and 2020.
Transaction
Price Allocated to Future Performance Obligations
To
determine the allocation of the transaction price and amounts allocated to the performance obligations, the Company first determined
the standalone selling price for each distinct performance obligation in the contract in order to determine the allocations of
the transaction price in proportion to the standalone selling price for each performance obligation in the contract in accordance
with ASC 606-10-32-31 and 32-33. Judgment is required to determine standalone selling price for each distinct performance obligation.
The Company generally determines standalone selling prices based on the actual prices charged to customers and has an established
range of amounts that fall within stand-alone selling price for its distinct performance obligations. The Company evaluates this
range quarterly.
Practical
Expedients and Exemptions
The
Company adopted various practical expedients and policy elections related to the accounting for significant finance components,
sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services. The practical expedient
to disclose the unfulfilled performance obligations was not made as they are expected to be fulfilled within one year.
Disaggregation
of revenue
Revenues
are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects
the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following
tables present how we disaggregate our revenues.
For
the E&S segment, we analyze revenue by region and product group, which is as follows for the three months ended March 31,
2021 and 2020 and the years ended December 31, 2020 and 2019:
|
|
Electronics & Software Sales by Region
|
|
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
$
|
7,201,000
|
|
|
$
|
7,448,000
|
|
|
$
|
29,721,000
|
|
|
$
|
39,771,000
|
|
International
|
|
|
1,164,000
|
|
|
|
1,088,000
|
|
|
|
4,775,000
|
|
|
|
7,236,000
|
|
|
|
$
|
8,365,000
|
|
|
$
|
8,536,000
|
|
|
$
|
34,496,000
|
|
|
$
|
47,007,000
|
|
|
|
Electronics & Software Sales by Product Group
|
|
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Intelligent edge solutions
|
|
$
|
3,713,000
|
|
|
$
|
3,354,000
|
|
|
$
|
12,162,000
|
|
|
$
|
18,442,000
|
|
Traditional products
|
|
|
4,652,000
|
|
|
|
5,182,000
|
|
|
|
22,334,000
|
|
|
|
28,565,000
|
|
|
|
$
|
8,365,000
|
|
|
$
|
8,536,000
|
|
|
$
|
34,496,000
|
|
|
$
|
47,007,000
|
|
NOTE
3 – LEASES
In
accordance with ASC Topic 842, the Company recognizes assets and liabilities for the rights and obligations created by leases
that extend more than twelve months from the date of the balance sheet. Right of use (“ROU”)
assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to
make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date of a lease
based on the present value of lease payments over the lease term. Because the rate implicit in each individual lease is not readily
determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
The
E&S Segment has entered into an operating lease for one office location, which has a remaining lease term of less than 2 years.
The lease includes an option to terminate the lease in 2022. As of March 31, 2021, total ROU assets and operating lease liabilities
were $109,000 and $96,000, respectively. As of December 31, 2020, total ROU assets and operating lease liabilities were $129,000
and $116,000, respectively. As of December 31, 2019, total ROU assets and operating lease liabilities were $206,000 and $191,000,
respectively. All operating lease expense is recognized on a straight-line basis over the lease term. The Company recognized $23,000
and $21,000 in lease expense for the three months ended March 31, 2021 and 2020, respectively, and $85,000 and $84,000 for the
years ended December 31, 2020 and 2019, respectively.
Information
related to the Company’s ROU assets and related lease liabilities for the E&S Segment were as follows:
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for operating leases
|
|
$
|
23,000
|
|
|
$
|
21,000
|
|
|
$
|
85,000
|
|
|
$
|
84,000
|
|
Right-of-use assets obtained in exchange for new operating lease obligations (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280,000
|
|
|
|
As of
|
|
|
As of December 31,
|
|
|
|
March 31, 2021
|
|
|
2020
|
|
|
2019
|
|
Weighted-average remaining lease term
|
|
1.3 years
|
|
|
1.6 years
|
|
|
2.6 years
|
|
Weighted-average discount rate
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
(1)
|
Includes
$280,000 for operating leases existing on January 1, 2019.
|
Maturities
of lease liabilities as of March 31, 2021 were as follows:
Q2 - Q4 2021
|
|
$
|
68,000
|
|
2022
|
|
|
30,000
|
|
Total lease payments
|
|
|
98,000
|
|
Less imputed interest
|
|
|
(2,000
|
)
|
Total operating lease liabilities
|
|
$
|
96,000
|
|
NOTE
4 - STOCK-BASED COMPENSATION
CSI
grants stock-based awards, including stock options, restricted stock awards, and restricted stock units to certain employees,
including those of the E&S Segment and other employees that provide services to the E&S Segment. Stock-based compensation
expense is measured at the grant date based on the fair value of the award and recognized as expense over the vesting or service
period, as applicable, of the stock-based award. Forfeitures are accounted for as they occur.
Share-based
compensation expense recognized for the three months ended March 31, 2021 and 2020 was $46,000 and $26,000, respectively and was
$124,000 and $101,000 for the years ended December 31, 2020 and 2019, respectively. Share-based compensation expense is recorded
as a part of selling, general and administrative expenses.
NOTE
5 - INVENTORIES
Inventories
of the E&S Segment summarized below are priced at the lower of first-in, first-out cost or net realizable value:
|
|
March 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Finished goods
|
|
$
|
7,429,000
|
|
|
$
|
7,848,000
|
|
|
$
|
6,678,000
|
|
Raw and processed materials
|
|
|
661,000
|
|
|
|
713,000
|
|
|
|
1,804,000
|
|
|
|
$
|
8,090,000
|
|
|
$
|
8,561,000
|
|
|
$
|
8,482,000
|
|
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
E&S
Segment’s property, plant and equipment and the estimated useful lives are as follows:
|
|
Estimated
|
|
March 31
|
|
|
December 31
|
|
|
|
useful life
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Buildings and improvements
|
|
3-40 years
|
|
$
|
29,000
|
|
|
$
|
28,000
|
|
|
$
|
25,000
|
|
Machinery and equipment
|
|
3-15 years
|
|
|
2,463,000
|
|
|
|
2,457,000
|
|
|
|
2,256,000
|
|
Furniture and fixtures
|
|
3-10 years
|
|
|
2,645,000
|
|
|
|
2,645,000
|
|
|
|
2,559,000
|
|
|
|
|
|
|
5,137,000
|
|
|
|
5,130,000
|
|
|
|
4,840,000
|
|
Less accumulated depreciation
|
|
|
|
|
(4,976,000
|
)
|
|
|
(4,940,000
|
)
|
|
|
(4,596,000
|
)
|
|
|
|
|
$
|
161,000
|
|
|
$
|
190,000
|
|
|
$
|
244,000
|
|
NOTE
7 – COMMITMENTS AND CONTINGENCIES
In
the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions
and claims. Company management is not aware of any outstanding or pending legal actions or claims that would materially affect
the Company’s financial position, results of operations, or cash flows of the E&S Segment.
NOTE
8 – INCOME TAXES
Income
tax (benefit) expense from continuing operations of the E&S Segment consists of the following:
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Current year income taxes (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(59,000
|
)
|
|
$
|
6,000
|
|
|
$
|
244,000
|
|
|
$
|
1,217,000
|
|
State
|
|
|
(2,000
|
)
|
|
|
-
|
|
|
|
7,000
|
|
|
|
27,000
|
|
|
|
|
(61,000
|
)
|
|
|
6,000
|
|
|
|
251,000
|
|
|
|
1,244,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(41,000
|
)
|
|
$
|
38,000
|
|
|
$
|
225,000
|
|
|
$
|
(18,000
|
)
|
State
|
|
|
(1,000
|
)
|
|
|
1,000
|
|
|
|
7,000
|
|
|
|
(1,000
|
)
|
|
|
|
(42,000
|
)
|
|
|
39,000
|
|
|
|
232,000
|
|
|
|
(19,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(103,000
|
)
|
|
$
|
45,000
|
|
|
$
|
483,000
|
|
|
$
|
1,225,000
|
|
Net2Edge,
Ltd., formally known as Transition Networks EMEA, Ltd., operates in the U.K. and is subject to U.K. rather than U.S. income taxes.
Net2Edge, Ltd. had pretax losses of $955,000 and $1,519,000 in 2020 and 2019, respectively. At March 31, 2021, Net2Edge, Ltd.’s
net operating loss carry-forward was $9,700,000, of which a full valuation allowance is recorded.
The
provision for income taxes varied from the federal statutory tax rate as follows:
|
|
Three Months Ended March 31
|
|
|
Year Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Tax at U.S. statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
|
|
0.7
|
|
|
|
(1.1
|
)
|
|
|
1.4
|
|
|
|
0.7
|
|
Permanent differences
|
|
|
0.1
|
|
|
|
(5.3
|
)
|
|
|
3.4
|
|
|
|
0.2
|
|
Foreign income taxes, net
|
|
|
0.3
|
|
|
|
(4.8
|
)
|
|
|
2.0
|
|
|
|
0.8
|
|
Effect of change in uncertain tax positions
|
|
|
(0.1
|
)
|
|
|
(2.3
|
)
|
|
|
1.5
|
|
|
|
1.0
|
|
Change in valuation allowance
|
|
|
2.5
|
|
|
|
(45.6
|
)
|
|
|
18.7
|
|
|
|
7.0
|
|
Other
|
|
|
0.0
|
|
|
|
8.9
|
|
|
|
2.2
|
|
|
|
(0.1
|
)
|
Effective tax rate
|
|
|
24.5
|
%
|
|
|
(29.2
|
%)
|
|
|
50.2
|
%
|
|
|
30.6
|
%
|
Deferred
tax assets and liabilities related to the following:
|
|
March 31
|
|
|
December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
23,000
|
|
|
$
|
23,000
|
|
|
$
|
20,000
|
|
Inventory
|
|
|
806,000
|
|
|
|
782,000
|
|
|
|
930,000
|
|
Accrued and prepaid expenses
|
|
|
212,000
|
|
|
|
194,000
|
|
|
|
224,000
|
|
Long-term compensation plans
|
|
|
-
|
|
|
|
-
|
|
|
|
128,000
|
|
Stock compensation
|
|
|
319,000
|
|
|
|
319,000
|
|
|
|
292,000
|
|
Intangible assets
|
|
|
28,000
|
|
|
|
28,000
|
|
|
|
6,000
|
|
Foreign net operating loss carry-forwards and credits
|
|
|
1,834,000
|
|
|
|
1,844,000
|
|
|
|
1,663,000
|
|
Federal and state credits
|
|
|
149,000
|
|
|
|
149,000
|
|
|
|
151,000
|
|
Other
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
3,376,000
|
|
|
|
3,344,000
|
|
|
|
3,419,000
|
|
Valuation allowance
|
|
|
(1,983,000
|
)
|
|
|
(1,993,000
|
)
|
|
|
(1,814,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,393,000
|
|
|
|
1,351,000
|
|
|
|
1,605,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(153,000
|
)
|
|
|
(153,000
|
)
|
|
|
(175,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
|
(153,000
|
)
|
|
|
(153,000
|
)
|
|
|
(175,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset
|
|
$
|
1,240,000
|
|
|
$
|
1,198,000
|
|
|
$
|
1,430,000
|
|
During
2015, the Company engaged in a research and development tax credit study for the tax years 2011 to 2014. The Company amended prior
year tax returns to claim these credits and offset prior year taxes paid. Credits not used to reduce taxes are available to be
carried forward. At December 31, 2020, the Company has an estimated state research and development credit carryforward related
to the E&S Segment of approximately $210,000.
The
Company assesses uncertain tax positions in accordance with ASC 740. Under this method, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
these uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate resolution. The Company’s practice is to recognize interest and penalties related to income tax matters
in income tax expense.
Changes
in the Company’s uncertain tax positions are summarized as follows:
|
|
March 31
|
|
|
December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Uncertain tax positions – Beginning Balance
|
|
$
|
100,000
|
|
|
$
|
86,000
|
|
|
$
|
46,000
|
|
Gross increases - current period tax positions
|
|
|
-
|
|
|
|
14,000
|
|
|
|
40,000
|
|
Uncertain tax positions – Ending Balance
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
86,000
|
|
Included
in the balance of uncertain tax positions at March 31, 2021, December 31, 2020 and 2019 are $100,000, $100,000 and $86,000 of
tax benefits that if recognized would affect the tax rate, respectively. The Company’s unrecognized tax benefits will be reduced by $0 in the next twelve months due to statute of limitations expirations. There are no other expected significant changes in the Company’s uncertain tax positions in the next twelve months. The Company’s income tax liability accounts included no accruals for interest and penalties at March 31, 2021, December 31, 2020 or 2019. The Company’s 2020 and 2019 income tax expense decreased by $0 due to net decreases for accrued interest and penalties.
NOTE
9 – MAJOR CUSTOMERS AND CONCENTRATION
The
E&S Segment manufactures its products in Asia and the United States and makes sales in both the U.S. and international markets.
Net long-lived assets held in foreign countries were approximately $33,000, $49,000 and $112,000 at March 31, 2021, December 31,
2020 and 2019, respectively.
The
customers representing more than 10% of net sales of the E&S Segment is as follows:
|
|
Three Months Ended March 31
|
|
|
Years Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
32
|
%
|
|
|
26
|
%
|
|
|
23
|
%
|
|
|
18
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
19
|
%
|
|
|
21
|
%
|
|
|
12
|
%
|
Customer C
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
23
|
%
|
The
customer receivables representing more than 10% of accounts receivables of the E&S Segment were as follows:
|
|
March 31
|
|
|
December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
32
|
%
|
|
|
17
|
%
|
|
|
18
|
%
|
Customer B
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
9
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
46
|
%
|
Customer D
|
|
|
4
|
%
|
|
|
13
|
%
|
|
|
4
|
%
|
NOTE
10 – RELATED PARTY TRANSACTIONS AND EXPENSE ALLOCATION
The
E&S Segment has received certain management and administrative services from CSI (referred to as “shared services”)
including, but not limited to, accounting and finance, information technology, human resources, and building space for office
use and use in operations. The operating costs and expenses associated with these services have been allocated to the E&S
Segment on the basis of direct usage when identifiable, with the remainder allocated pro rata based on employee headcount, facility
space occupied, or revenue, as applicable. The E&S Segment recognized allocations for shared services for the three months
ended March 31, 2021 and 2020 for the years ended December 31, 2020 and 2019 all of which are included in the unaudited condensed
combined statements of operations as follows:
|
|
Three Months Ended March 31
|
|
|
Years Ended December 31
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Cost of sales
|
|
$
|
96,000
|
|
|
$
|
100,000
|
|
|
$
|
402,000
|
|
|
$
|
401,000
|
|
Selling, general and administrative expenses
|
|
|
752,000
|
|
|
|
603,000
|
|
|
|
2,153,000
|
|
|
|
2,272,000
|
|
Total operating expenses
|
|
$
|
848,000
|
|
|
$
|
703,000
|
|
|
$
|
2,555,000
|
|
|
$
|
2,673,000
|
|
Additionally,
CSI primarily uses a centralized approach to cash management and financing of its operations with related activity between the
E&S Segment and CSI reflected in “Net Investment in Electronics & Software” within the unaudited condensed
combined balance sheets. These transactions include (a) cash deposits from customer payments and other cash receipts that are
transferred to CSI on a regular basis, (b) cash contributions from CSI to the E&S Segment, and (c) allocation of CSI’s
shared services. Cash and cash equivalents of $251,000, $303,000, and $298,000 as of March 31, 2021, December 31, 2020 and 2019,
respectively, reflects cash that remained outside of the centralized cash management program.
COMMUNICATIONS
SYSTEMS, INC.
SHAREOWNER
SERVICES
P.O.
BOX 64945
ST.
PAUL, MN 55164-0945
|
VOTE
BY INTERNET
Before
The Meeting - Go to www.proxyvote.com
Use
the Internet to transmit your voting instructions and for electronic delivery of information. Vote by 11:59 p.m. Eastern Time
on July 27, 2021 for shares held directly and by 11:59 p.m. Eastern Time on July 25, 2021 for shares held in a Plan. Have
your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic
voting instruction form.
During
The Meeting - Go to www.virtualshareholdermeeting.com/JCS2021SM1
You
may attend the meeting via the Internet and vote during the meeting. Have the information that is printed in the box marked by
the arrow available and follow the instructions.
VOTE
BY PHONE - 1-800-690-6903
Use
any touch-tone telephone to transmit your voting instructions. Vote by 11:59 p.m. Eastern Time on July 27, 2021 for shares
held directly and by
11:59
p.m. Eastern Time on July 25, 2021 for shares held in a Plan. Have your proxy card in hand when you call and then follow the
instructions.
VOTE
BY MAIL
Mark,
sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
|
|
|
|
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
|
|
|
|
|
|
|
D55970-280656
|
KEEP THIS PORTION FOR YOUR RECORDS
|
|
DETACH AND RETURN THIS PORTION ONLY
|
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
|
|
|
|
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|
|
COMMUNICATIONS
SYSTEMS, INC.
|
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|
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The Board of Directors recommends
you vote FOR the following proposals:
|
For
|
Against
|
Abstain
|
|
|
|
|
|
|
|
|
|
1.
|
To approve
the sale (the “E&S Sale Transaction”) by Communications Systems, Inc. of all of the issued and outstanding stock
of its wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary,
Transition Networks Europe Limited, to Lantronix, Inc. pursuant to the securities purchase agreement dated April 28, 2021
(the “E&S Sale Proposal”).
|
☐
|
☐
|
☐
|
|
|
|
|
|
|
|
|
|
2.
|
To approve,
on an advisory, non-binding basis, certain compensation that has, will or may be paid or become payable to the Communications
Systems, Inc. named executive officers in connection with the E&S Sale Transaction.
|
☐
|
☐
|
☐
|
|
|
|
|
|
|
|
|
|
3.
|
To approve
the adjournment or postponement of the special meeting to solicit additional proxies if there are insufficient votes at the
time of the special meeting to approve the E&S Sale Proposal.
|
☐
|
☐
|
☐
|
|
|
|
|
|
|
|
|
|
THIS
PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. PLEASE SIGN, DATE AND RETURN THIS PROXY CARD.
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|
Please
date and sign exactly as your name(s) appear(s) hereon, indicating, where proper, official
position or representative capacity in which you are signing. When signing as executor,
administrator, trustee or guardian, give full title as such; when shares have been issued
in names of two or more persons, all should sign.
|
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Signature
[PLEASE SIGN WITHIN BOX]
|
Date
|
|
Signature
(Joint Owners)
|
Date
|
|
|
COMMUNICATIONS
SYSTEMS, INC.
SPECIAL
MEETING OF SHAREHOLDERS
July
28, 2021
10:00 a.m., Central Daylight Time
Important
Notice Regarding the Internet Availability of Proxy Materials for the Special Meeting:
The
Notice and Proxy Statement is available at www.proxyvote.com.
D55971-TBD
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COMMUNICATIONS SYSTEMS,
INC.
|
Proxy
|
|
|
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|
|
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 28, 2021.
The undersigned
hereby appoints Roger H.D. Lacey and Mark D. Fandrich, or either of them, as proxies, with full power of substitution to vote
all the shares of common stock that the undersigned would be entitled to vote if personally present at the Special Meeting of
Shareholders of Communications Systems, Inc., to be held through a virtual special meeting that will be accessible at www.virtualshareholdermeeting.com/JCS2021SM1
to be held on July 28, 2021 at 10:00 a.m., CDT, or at any adjournment thereof, upon any and all matters that may properly be
brought before the meeting or at any adjournment thereof, hereby revoking all former proxies.
(Continued
and to be marked, dated and signed, on the other side)
|
|
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