Reporting strong
growth and margin improvement
Communications Systems, Inc. (NASDAQ: JCS) (“CSI” or the
“Company”), which has operated as a global IoT intelligent edge
products and services company, today announced financial results
for the first quarter (“Q1”) ended March 31, 2021, including a
discussion of results of operations by segment.
Management Comments for Q1
2021
Anita Kumar, CSI’s CEO commented, “Although our operations in Q1
2021 continued to be affected by the COVID-19 pandemic which
resulted in supply chain challenges and delays in project spending
by customers, due to the proactive measures we took and the
resilience of our team, we were able to take advantage of the
growing need for actionable insight and ubiquitous connectivity at
the edge of networks. As a result, our total consolidated sales
increased by 11% and gross margin improved by 13%.”
“That said, in April 2021, we entered into a definitive
securities purchase agreement (“Purchase Agreement”) with
Lantronix, Inc. (“Lantronix”), to sell our Electronics and Software
segment (E&S Segment), which contains our Transition Networks
and Net2Edge businesses, for a base price of $25.0 million to be
paid at closing, subject to a working capital adjustment following
the closing, plus up to an additional $7.0 million in earnout
payments based on revenue milestones for the E&S Segment
businesses in the two consecutive 180-day periods after closing of
the sale.”
Roger Lacey, CSI’s Chairman noted, “The agreement to sell our
E&S Segment businesses marks an important milestone towards our
goal of completing the previously announced merger with Pineapple
Energy, LLC (“Pineapple”), a growing U.S. operator and consolidator
of residential solar, battery storage, and grid services solutions.
As previously announced, we plan to distribute available sale
proceeds from any pre-merger divestitures, together with other
available cash in the form of a cash dividend to existing CSI
shareholders prior to the effective date of the Pineapple merger.
CSI’s balance sheet at March 31, 2021 included cash, cash
equivalents, and liquid investments of $21.0 million and the
divestiture of assets to Lantronix for $25.0 million, will further
increase our cash position. Currently, we intend to distribute
$3.50 per share or approximately $35.0 million, consisting of
proceeds from the sale of the E&S Segment businesses and other
available cash after closing the sale of these businesses, but
prior to the closing of the CSI-Pineapple merger. We will provide
more information about the payment of this proposed dividend in the
future.”
For more information about the previously announced
CSI-Pineapple merger visit
https://www.commsystems.com/investor-resources.
Q1 2021 Summary
- Q1 2021 consolidated sales from continuing operations increased
by 11% to $10.2 million compared to $9.2 million in Q1 2020.
- Q1 2021 consolidated gross profit increased by 13% to $4.2
million from $3.7 million in the same period of 2020. Gross margin
also increased to 41.5% in Q1 2021 from 40.8% in Q1 2020.
- Q1 2021 consolidated operating loss from continuing operations
was $2.1 million compared to a Q1 2020 consolidated operating loss
from continuing operations of $1.2 million.
- Electronics & Software operating loss was $24,000 as
compared to operating loss of $168,000 in Q1 2020.
- Services & Support operating loss was $203,000 compared to
operating loss of $121,000 in Q1 2020.
- Other operating expenses were $1.9 million, compared to
$935,000 of other operating expenses in Q1 2020, and increased due
to merger and business segment sale projects.
- Income from discontinued operations totaled zero in Q1 2021
compared to income from discontinued operations of $2.3 million Q1
2020.
- Q1 2021 net loss was $2.2 million, or ($0.23) per diluted
share, compared to a net income of $1.5 million, or $0.16 per
diluted share, in Q1 2020.
- At March 31, 2021, cash, cash equivalents, and liquid
investments totaled $21.0 million and working capital was $26.9
million.
Q1 2021 Segment Financial
Overview
Electronics &
Software
(in 000s)
Three
Months
Ended
March 31
2021
2020
Sales
$ 8,365
$ 8,536
Gross profit
3,584
3,729
Operating (loss)
(24)
(168)
Electronics & Software sales decreased 2% to $8,365,000 in
Q1 2021 compared to $8,536,000 in Q1 2020. Sales in North America
decreased $247,000, or 3%, primarily due to supply chain
constraints in addition to delayed project spending by customers
due to the COVID-19 pandemic. International sales increased
$76,000, or 7%, primarily due to growth in the Asia Pacific region
of sales of our traditional products. Sales of Intelligent edge
solutions (“IES”) products increased 11% or $359,000 due to an
uptick in our core IES media converter products by Federal agencies
and an uptick in our Switch products used in security and
surveillance applications. Traditional product sales decreased 10%
or $530,000 due to supply chain constraints in addition to delayed
project spending by customers due to the COVID-19 pandemic.
Q1 2021 Gross profit decreased to $3,584,000 from $3,729,000 in
Q1 2020. Gross margin decreased to 42.8% in Q1 2021 from 43.7% in
Q1 2020 primarily due to an unfavorable product mix including some
lower margin sales on IES products sold to Federal agencies due to
competitive bidding. Selling, general and administrative expenses
decreased 7% to $3,608,000, or 43.1% of sales, in Q1 2021 compared
to $3,897,000, or 45.7% of sales, in Q1 2020 due to reduced travel,
marketing and personnel expenses, in part due to steps taken by
management in response to the COVID-19 pandemic.
Electronics & Software incurred an operating loss of $24,000
in Q1 2021 compared to an operating loss of $168,000 in Q1 2020,
primarily due to lower sales and gross margin.
Services & Support
(in 000s)
Three
Months
Ended
March 31
2021
2020
Sales
$1,938
$ 827
Gross profit
776
207
Operating (loss)
(203)
(121)
Revenues from the education sector decreased $30,000 or 32% in
Q1 2021 as compared to Q1 2020 due to the substantial completion of
projects from the Company’s Florida school district customer. The
Company was not selected as the primary vendor on the next
multi-year project for this school district, but has been selected
as the secondary vendor for structured cabling and enterprise
networking.
Revenue from sales to small and medium size businesses, which
are primarily financial, healthcare and commercial clients
increased $1,198,000 or 225% in Q1 2021 as compared to Q1 2020 due
to the acquisition of Ecessa on May 14, 2020 and the acquisition of
the assets of IVDesk on November 3, 2020. Also, project and product
revenue increased $244,000 or 173% in Q1 2021 as compared to the
same period of 2020 primarily due to the acquisition of Ecessa and
its SD-WAN products. Similarly, services and support revenue
increased $867,000 or 126% as compared to the same quarter of the
prior year due to the Company’s acquisition of Ecessa and its
service and support revenue on its SD-WAN products as well as the
acquisition of IVDesk, which contributed $597,000 in revenue during
the quarter. Overall, Ecessa contributed $653,000 in revenue during
the quarter.
Gross profit increased 275% to $776,000 in Q1 2021 compared to
$207,000 in the same period in 2020. Gross margin increased to
40.0% in Q1 2021 compared to 25.0% in Q1 2020 due to the increase
in services & support revenue, which has higher margins.
Selling, general and administrative expenses increased 198% in Q1
2021 to $979,000, or 50.5% of sales, compared to $328,000, or 39.7%
of sales, in the same period of 2020 due to the May 2020
acquisition of Ecessa and the inclusion of its general and
administrative costs that are not included in the prior year.
Services & Support incurred an operating loss of $203,000 in
Q1 2021 compared to an operating loss of $121,000 in the same
period of 2020, primarily due to increased selling, general and
administrative expenses, including amortization expense.
Discontinued Operations –
Suttle
On March 11, 2020, CSI announced that its Suttle, Inc.
subsidiary had sold the remainder of its business lines including
inventory, related capital equipment, intellectual property, and
customer relationships to a third party for $8.0 million in cash,
with a net working capital adjustment. CSI recognized income from
discontinued operations of $2.3 million in Q1 2020, but had no
income from discontinued operations in Q1 2021.
Financial Condition
CSI’s balance sheet at March 31, 2021 included cash, cash
equivalents, and liquid investments of $21.0 million, working
capital of $26.9 million, and stockholders’ equity of $45.7
million.
Form 10-Q
For further information, please see the Company’s Form 10-Q,
which will be filed on or about May 7, 2021.
About Communications
Systems
Communications Systems, Inc., which has operated as an IoT
intelligent edge products and services company, with its planned
merger with Pineapple Energy will be positioned to acquire and grow
leading local and regional solar, storage, and energy services
companies nationwide. The vision is to power the energy transition
through grass-roots growth of solar electricity paired with battery
storage on consumers' homes.
Forward-Looking
Statements
This press release includes certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995, including statements regarding future financial
performance, future growth and future acquisitions. These
statements are based on Communications Systems’ current
expectations or beliefs and are subject to uncertainty and changes
in circumstances. There can be no guarantee that the previously
announced proposed CSI- Pineapple Energy transactions and other
transactions referred to in this press release will be completed,
or that they will be completed as currently proposed, or at any
particular time. Actual results may vary materially from those
expressed or implied by the statements here due to changes in
economic, business, competitive or regulatory factors, and other
risks and uncertainties affecting the operation of Communications
Systems’ business, as well as the business of Pineapple Energy.
These risks, uncertainties and contingencies are presented in the
Company’s Annual Report on Form 10-K and, from time to time, in the
Company’s other filings with the Securities and Exchange
Commission. The information set forth herein should be read
considering these risks. Further, investors should keep in mind
that the Company’s financial results in any period may not be
indicative of future results. Communications Systems is under no
obligation to, and expressly disclaims any obligation to, update or
alter its forward-looking statements, whether because of new
information, future events, changes in assumptions or otherwise. In
addition to these factors, there are a number of specific factors
related to this transaction, including:
- The Company’s ability to obtain shareholder approval for the
sale to Lantronix;
- conditions to the closing of the sale to Lantronix may not be
satisfied or the sale may involve unexpected costs, liabilities or
delays;
- up to $7 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 recognized for the earnout to be paid
to the Company;
- how the restrictions placed on the Company’s ability to
actively solicit competing bids, and the obligation for the Company
to pay a termination fee of $875,000 under certain circumstances,
might deter other potential acquirers of the Electronics and
Software segment;
- 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;
- related to the CSI-Pineapple announced merger, the Company’s
ability to successfully sell its other existing operating business
assets and its real estate assets at a value close to their current
fair market value and distribute these proceeds to its existing
shareholder base;
- the fact that the continuing CSI-Pineapple entity will be
entitled to retain ten percent of the net proceeds of CSI legacy
assets that are sold pursuant to an agreement entered into after
the effective date of the CSI-Pineapple closing;
- the occurrence of any other risks to consummation of the sale
to Lantronix or the CSI-Pineapple merger, including the risk that
the sale to Lantronix or CSI-Pineapple merger will not be
consummated within the expected time period or any event, change or
other circumstances that could give rise to the termination of the
sale to Lantronix or the CSI-Pineapple merger;
- risks that the Lantronix transaction and the CSI-Pineapple
merger 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 Lantronix transaction and the
CSI-Pineapple merger;
- the outcome of any legal proceedings related to the sale to
Lantronix or the CSI-Pineapple merger; and
- 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 Contingent Value Rights that CSI intends to distribute to
its shareholders immediately prior to the effective date of the
CSI-Pineapple merger.
Selected Income Statement Data
Unaudited
Three Months Ended
Mar. 31,
2021
Mar. 31,
2020
Sales
$
10,159,315
$
9,162,742
Gross profit
4,216,638
3,737,147
Operating loss from continuing
operations
(2,146,516)
(1,223,743)
Operating loss from continuing operations
before income taxes
(2,159,648)
(813,176)
Income tax expense (benefit)
1,203
(4,457)
Income from discontinued operations
-
2,313,352
Net (loss) income
$
(2,160,851)
$
1,504,633
Basic net (loss) income per share
$
(0.23)
$
0.16
Diluted net (loss) income per share
$
(0.23)
$
0.16
Cash dividends declared per share
$
0.00
$
0.02
Average basic shares outstanding
9,332,589
9,265,590
Average dilutive shares outstanding
9,332,589
9,445,299
Selected Balance Sheet Data
Unaudited
Mar. 31,
2021
Dec. 31,
2020
Total assets
$
53,108,238
$
55,556,325
Cash, cash equivalents &
investments
21,001,288
21,456,865
Working capital
26,946,148
28,320,602
Property, plant and equipment, net
7,088,892
7,242,072
Long-term liabilities
669,254
623,947
Stockholders’ equity
45,721,931
47,494,727
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version on businesswire.com: https://www.businesswire.com/news/home/20210507005124/en/
Communications Systems, Inc. Anita Kumar Chief Executive
Officer 952-996-1674 Mark D. Fandrich Chief Financial Officer
952-582-6416 mark.fandrich@commsysinc.com Roger H. D. Lacey
Executive Chair 952-996-1674 The Equity Group Inc. Lena Cati
Vice President 212-836-9611 lcati@equityny.com Devin Sullivan
Senior Vice President 212-836-9608 dsullivan@equityny.com
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