Item 8.01. Other Events.
Important Information
for Holders of Contingent Value Rights (CVRs)
| · | Revised 2022 1099-DIVs for Registered CVR Holders Available March 29, 2023 |
| · | Updated Tax Information For CVR Holders |
Beginning
March 29, 2023, a revised IRS Form 1099-DIV will be available online or mailed to each Registered CVR Holder (hereafter defined) with
respect to Contingent Value Rights ("CVRs") that were issued immediately following the merger of Communications Systems, Inc. ("CSI")
and Pineapple Energy, Inc. ("Pineapple") on March 28, 2022 (the "Merger"). The revised Form 1099-DIV issued by Pineapple should be used
instead of the 1099-DIV that was mailed or available to each Registered CVR Holder beginning on or about January 23, 2023.
Those who beneficially
own CVRs indirectly through a bank or broker-dealer (a "Street Name CVR Holder") will not receive an IRS form 1099-DIV and should contact
their bank or broker-dealer for tax information applicable to the CVRs they beneficially own in street name.
Following is (i) background
information and (ii) information regarding the federal income tax treatment of the CVRs issued immediately after the Merger and taxability
of the August 3, 2022 distribution pursuant to the CVRs, as well as future distributions, if any. Unless otherwise qualified, the term
"CVR Holder" used hereafter refers to all beneficial owners of CVRs, whether as Registered CVR Holders or Street Name CVR Holders.
Background
In
connection with the Merger of CSI and Pineapple, the shareholders of CSI who were the shareholders of record of CSI common stock at the
close of business on March 25, 2022 (each a "Registered CVR Holder"), were issued one contractual non-transferable CVR per each share
of CSI common stock held by them on such date. Each CVR Holder is entitled to a portion of the net proceeds of dispositions of CSI's
pre-Merger assets that occur following the Merger and prior to March 28, 2024. Further information related to the CVRs and the Contingent
Value Rights Agreement, pursuant to which the CVRs were issued, can be found in CSI's Proxy Statement/Prospectus dated and filed with
the SEC on February 3, 2022. See: https://www.sec.gov/Archives/edgar/data/22701/000089710122000079/csi220088_424b3.htm
On August 3, 2022, Pineapple announced a $3.60 per CVR distribution of proceeds from the disposition of pre-Merger assets to CVR Holders. In its announcement, Pineapple also advised that the payment of $3.60 per CVR was not a taxable event, but that CVRs issued to CVR Holders immediately after the Merger were taxable as a dividend and that the taxable value of the dividend would be based on the CSI's accumulated earnings and profits as of December 31, 2021. The August 3, 2022 announcement also provided preliminary information regarding what portion of the CVRs issued would be taxable to CVR Holders by reference to Pineapple's initial IRS Form 8937 related to the Merger that was supplied with the announcement.
On January 23, 2023, Equiniti Trust Company, Pineapple's Rights Agent for the CVRs, began distributing IRS Form 1099-DIVs to Registered CVR Holders using the preliminary information then available regarding the CSI's accumulated earnings and profits as of December 31, 2021.
The determination of CSI's accumulated earnings and profits as of December 31, 2021 has now been finalized, and updated information with respect to the taxability of CVRs issued to the CVR Holders is discussed below.
Information Regarding the Taxability of the CVRs Issued and Distributions to CVR Holders
Due to legal
uncertainties and individual circumstances, CVR Holders are urged to consult their respective tax advisors regarding the tax
treatment of the CVRs issued to them and the tax treatment of distributions they receive after the Merger from the disposition of
CSI's pre-Merger assets. CVR Holders and their advisors are also urged to review information in the CSI's proxy statement/prospectus
dated February 3, 2022 titled "Certain Material US Federal Income Tax Consequences of the Receipt of CVRs" which can be found here
beginning at page 151, and the information that follows is subject to information and qualifications presented therein. See also the
revised IRS Form 8937 on our website https://ir.pineappleenergy.com/financial-information/cvr.
Taxability of the CVRs issued to the CVR Holders
With respect to the CVRs issued to the CVR Holders immediately following the Merger, Pineapple has received tax advice, general in nature, to the effect it is more likely than not that the fair market value of the CVRs issued to each US CVR Holder will be treated: first, as a dividend to the extent of each such Holder's share of CSI's accumulated earnings and profits at December 31, 2021; then, as a non-taxable return of capital to the extent of such Holders' basis in CSI common stock held on March 25, 2022; and, finally, if the return of capital exceeds such basis, as a gain from the sale or exchange of property. The aggregate fair market value of the CVRs distributed following the Merger was estimated to be $18,277,230 and accumulated earnings and profits as of December 31, 2021 was $746,469. Accordingly, 4.08% ($746,469/$18,277,230) of the aggregate fair market value of the CVRs following the Merger is considered to be a taxable distribution out of accumulated earnings and profits and revised 1099-DIVs made available to the respective Registered CVR Holders will reflect this determination.
Taxability of Distributions following the Merger
With respect to the tax treatment of distributions CVR Holders receive after the Merger from the disposition of legacy assets, the Issuer has received tax advice, general in nature, to the effect that it is more likely than not (i) a portion of each payment received by CVR holders after March 28, 2022 will be characterized as imputed interest; (ii) the balance of each such payment will be treated as a non-taxable return to the extent of the CVR holder's tax basis in the CVR and taxable to the extent such payment exceeds the CVR Holder's basis; and, (iii) if the CVR Holder fails to recover the full basis in the CVR, a loss is allowed in the year the CVR expires.