UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
 
(Mark One)
 ☒Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For quarterly period ended SeptemberJune 30, 20212022
or
 ☐Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             

Commission file Number: 0-10546 
LAWSON PRODUCTS,DISTRIBUTION SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2229304
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
8770 W. Bryn Mawr Avenue, Suite 900,Chicago,Illinois 60631
(Address of principal executive offices) (Zip Code)
(773) 304-5050
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $1.00 par valueLAWSDSGRNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filer☒
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company☒
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 15, 2021August 1, 2022 was 9,078,347.19,444,740.
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PART I - FINANCIAL INFORMATION
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PART II - OTHER INFORMATION
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SIGNATURES
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“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,“aim,” “anticipate,” “believe,” “contemplates,” “continues,” “could,” “ensure,” “estimate,” “expect,” “forecasts,” “if,” “intend,” “likely,” “may,” “might,” “objective,” “outlook,” “plan,” “positioned,” “potential,” “project”“predict,” “probable,” “project,” “shall,” “should,” “strategy,” “will,” “would,” and other words and terms of similar expressionsmeaning and expression are intended to identify forward-looking statements. Forward-looking statements can also be identified by the fact that they do not relate strictly to historical or current facts. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact theour business, financial condition and results of operations include:

•the effect of the COVID-19 virus on the overall economy, demand for our products, our supply chain, our employees and our operating results;
•the effect of general economic and market conditions;
•the ability to generate sufficient cash to fund our operating requirements;
•the ability to meet the covenant requirements of our line of credit;
•the market price of our common stock may decline;
•inventory obsolescence;
•work stoppages and other disruptions at transportation centers or shipping ports;
•changing customer demand andTestEquity Acquisition, LLC's ("TestEquity's") reliance on a significant supplier for a significant amount of its product mixes;inventory;
•increaseschanges in energy costs, tariffsour customers, product mix and the cost of raw materials, including commodity prices;
•decreases in demand from oil and gas customers due to lower oil prices;pricing strategy;
•disruptions of our information and communication systems;
•cyber attacks or other information security breaches;
•failure to recruit, integrate and retain a talented workforce including productive sales representatives;incidents;
•the inability to successfully make orrecruit, integrate acquisitions into the organization;
•foreign currency fluctuations;and retain productive sales representatives;
•failure to manage change within retain talented employees, managers and executives;
•the inability of management to successfully implement changes in operating processes;
•the inability to successfully integrate acquisitions into our organization;
•highly competitive market;competition in the markets in which we operate;
•changes that affect governmental and other tax-supported entities;
•our significant amount of indebtedness;
•failure to adequately fund our operating and working capital needs through cash generated from operations and cash available through our credit facility;
•failure to meet the covenant requirements of our credit facility;
•prolonged periods of inflation could require government efforts to combat inflation which could lead to higher financing costs;
•declines in the market price of our common stock;
•Luther King Capital Management Corporation’s significant influence over the Company in light of its ownership percentage;
•violations of environmental protection or other governmental regulations;
•negative changes related toin tax matters;
•the COVID-19 pandemic;
•the issuance of additional shares of our common stock in accordance with the earnout provisions of the Merger Agreements (as defined herein) to entities affiliated with Luther King Capital's significant influence overCapital Management Corporation in connection with the Company given its ownership percentage;Mergers (as defined herein);
•any difficulties in integrating the business operations of TestEquity and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services") respective businesses with our legacy Lawson operations, and/or the failure to successfully combine those operations within our expected timetable;
•business uncertainties as a result of the Mergers;
•incurrence of additional transaction costs in connection with the Mergers;
•any inaccuracies in the Company’s estimates and judgments related to the acquisition accounting models used to record the purchase price allocation in connection with the Mergers;
•potential impairment charges for goodwill and other intangible assets;
•risks arising from TestEquity’s and Gexpro Services’ international operations subjecting us to new and additional legal and regulatory regimes;
•stockholder litigation relating to the Mergers;
•limitations on our ability to use our net operating losses and certain other tax attributes generated prior to the Mergers;
•TestEquity and/or Gexpro Services may not have in place the financial organization, reporting and internal controls necessary for a public company;
•a downturn in the economy or in certain sectors of the economy;
•changes in energy costs, tariffs and the cost of raw materials used in our products, and other inflationary pressures;
•supply chain constraints, inflationary pressure and labor shortages;
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•foreign currency exchange rate changes; and
•all other factors discussed in the Company’s “Risk Factors” section set forth in its Annual Report on Form 10-K for the year ended December 31, 2020 and in this Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 2021.2022.

The Company undertakes no obligation to update any such factors, assumptions and uncertainties or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
September 30,December 31,
20212020
ASSETS(Unaudited)
Current assets:
Cash and cash equivalents$7,460 $28,393 
Restricted cash197 998 
Accounts receivable, less allowance for doubtful accounts of $771 and $654, respectively50,779 44,515 
Inventories, net67,452 61,867 
Miscellaneous receivables and prepaid expenses8,629 7,289 
Total current assets134,517 143,062 
Property, plant and equipment, net17,794 15,800 
Goodwill35,253 35,176 
Deferred income taxes18,877 18,482 
Intangible assets, net16,796 18,503 
Cash value of life insurance18,240 16,185 
Right of use assets12,702 8,764 
Other assets318 332 
Total assets$254,497 $256,304 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued acquisition liability$— $32,673 
Accounts payable25,585 22,262 
Lease obligation4,348 4,568 
Accrued expenses and other liabilities39,083 38,492 
Total current liabilities69,016 97,995 
Revolving line of credit10,900 — 
Security bonus plan10,853 11,262 
Deferred compensation11,821 10,461 
Lease obligation9,744 5,738 
Deferred tax liability2,945 2,841 
Other liabilities4,862 5,585 
Total liabilities120,141 133,882 
Stockholders’ equity:
Preferred stock, $1 par value:
Authorized - 500,000 shares, Issued and outstanding — None— — 
Common stock, $1 par value:
Authorized - 35,000,000 shares
Issued - 9,305,566 and 9,287,625 shares, respectively
Outstanding - 9,078,347 and 9,061,039 shares, respectively
9,306 9,288 
Capital in excess of par value21,546 19,841 
Retained earnings111,796 101,609 
Treasury stock – 227,219 and 226,586 shares, respectively(9,048)(9,015)
Accumulated other comprehensive income756 699 
Total stockholders’ equity134,356 122,422 
Total liabilities and stockholders’ equity$254,497 $256,304 
(Unaudited)
June 30, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$17,872 $14,671 
Restricted cash194 — 
Accounts receivable, less allowance for doubtful accounts of $2,058 and $2,473, respectively168,247 80,574 
Inventories, net250,696 132,717 
Prepaid expenses and other current assets30,801 8,098 
Total current assets467,810 236,060 
Property, plant and equipment, net64,958 9,079 
Rental equipment, net26,108 24,727 
Goodwill355,440 106,145 
Deferred tax asset267 266 
Intangible assets, net242,926 96,608 
Cash value of life insurance17,537 — 
Right of use assets47,055 19,662 
Other assets4,095 747 
Total assets$1,226,196 $493,294 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$93,191 $47,958 
Current portion of long-term debt16,495 134,405 
Current portion of lease obligation10,487 4,641 
Earnout derivative liability23,000 — 
Related party payables— 4,813 
Accrued expenses and other current liabilities58,310 23,126 
Total current liabilities201,483 214,943 
Long-term debt, less current portion, net389,279 93,134 
Security bonus plan10,163 — 
Deferred compensation10,827 — 
Lease obligation38,652 16,132 
Deferred tax liability30,446 2,742 
Other liabilities3,518 574 
Total liabilities684,368 327,525 
Stockholders’ equity:
Preferred stock, $1 par value:
Authorized - 500,000 shares, issued and outstanding — NaN— — 
Common stock, $1 par value:
Authorized - 35,000,000 shares
Issued - 19,694,145 and 10,542,333 shares, respectively
Outstanding - 19,443,982 and 10,294,824 shares, respectively
19,468 10,318 
Capital in excess of par value573,649 197,057 
Retained deficit(40,394)(33,142)
Treasury stock – 250,163 and 247,509 shares, respectively(10,144)(10,033)
Accumulated other comprehensive (loss) income(751)1,569 
Total stockholders’ equity541,828 165,769 
Total liabilities and stockholders’ equity$1,226,196 $493,294 
See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)
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Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Statements of IncomeOperations and Comprehensive (Loss) Income
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2021202020212020
Revenue$105,570 $90,277 $315,666 $253,458 
Cost of goods sold49,524 43,052 150,440 118,999 
Gross profit56,046 47,225 165,226 134,459 
Operating expenses:
Selling expenses24,908 19,155 72,945 55,445 
General and administrative expenses26,518 26,069 79,469 57,806 
Operating expenses51,426 45,224 152,414 113,251 
Operating income4,620 2,001 12,812 21,208 
Interest expense(119)(142)(710)(329)
Other income (expense), net(209)615 802 15 
Income before income taxes4,292 2,474 12,904 20,894 
Income tax expense636 736 2,717 6,004 
Net income$3,656 $1,738 $10,187 $14,890 
Basic income per share of common stock$0.40 $0.19 $1.12 $1.65 
Diluted income per share of common stock$0.39 $0.19 $1.09 $1.60 
Weighted average shares outstanding:
Basic weighted average shares outstanding9,078 9,017 9,073 9,017 
Effect of dilutive securities outstanding279 313 273 312 
Diluted weighted average shares outstanding9,357 9,330 9,346 9,329 
Comprehensive income:
Net income$3,656 $1,738 $10,187 $14,890 
Other comprehensive income (expense), net of tax
Adjustment for foreign currency translation(928)398 57 (918)
Net comprehensive income$2,728 $2,136 $10,244 $13,972 








Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Revenue$321,336 $134,152 $475,421 $258,979 
Cost of goods sold206,781 100,411 319,982 194,991 
Gross profit114,555 33,741 155,439 63,988 
Selling, general and administrative expenses110,442 28,273 148,338 56,267 
Operating income4,113 5,468 7,101 7,721 
Interest expense(3,751)(4,262)(10,607)(8,506)
Loss on extinguishment of debt(2,814)— (3,395)— 
Change in fair value of earnout derivative liability(5,693)— (5,693)— 
Other (expense) income, net(182)(186)774 (254)
(Loss) income before income taxes(8,327)1,020 (11,820)(1,039)
Income tax (benefit) expense(3,612)559 (4,568)390 
Net (loss) income$(4,715)$461 $(7,252)$(1,429)
Basic (loss) income per share of common stock$(0.23)$0.04 $(0.47)$(0.14)
Diluted (loss) income per share of common stock$(0.23)$0.04 $(0.47)$(0.14)
Comprehensive (loss) income
Net (loss) income$(4,715)$461 $(7,252)$(1,429)
Other comprehensive (loss) income, net of tax:
Loss on foreign currency translation(2,491)(171)(2,320)(3)
Comprehensive (loss) income$(7,206)$290 $(9,572)$(1,432)

See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)
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Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share data)
(Unaudited)

Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at December 31, 202110,294,824 $10,318 $197,057 $(33,142)$(10,033)$1,569 $165,769 
Net loss— — — (2,537)— — (2,537)
Gain for foreign currency translation— — — — — 171 171 
Shares issued6,065 6 (6)— — — — 
Tax withholdings related to net share settlements of stock-based compensation awards(889)— 33 — (33)— — 
Other— — (95)— — — (95)
Balance at March 31, 202210,300,000 $10,324 $196,989 $(35,679)$(10,066)$1,740 $163,308 
Net loss— — — (4,715)— — (4,715)
Loss for foreign currency translation— — — — — (2,491)(2,491)
Stock-based compensation— — 573 — — — 573 
Shares issued25,682 24 (24)— — — — 
Deemed consideration for reverse acquisition9,120,167 9,120 342,371 — — — 351,491 
Reclassification of issuable shares from earnout derivative liability— — 26,593 — — — 26,593 
Fair value adjustment of stock-based compensation awards— — 1,910 — — — 1,910 
Tax withholdings related to net share settlements of stock-based compensation awards(1,867)— — — (78)— (78)
Settlement of related party liability— — 5,276 — — — 5,276 
Other— — (39)— — — (39)
Balance at June 30, 202219,443,982 $19,468 $573,649 $(40,394)$(10,144)$(751)$541,828 

See notes to Condensed Consolidated Financial Statements (Unaudited)
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Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive IncomeTotal Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at December 31, 20209,061,039 $9,288 $19,841 $101,609 $(9,015)$699 $122,422 
Net income— — — 3,596 — — 3,596 
Adjustment for foreign currency translation— — — — — 631 631 
Stock-based compensation— — 422 — — — 422 
Shares issued5,776 5 (5)— — — — 
Shares repurchased held in treasury(268)— — — (13)— (13)
Balance at March 31, 20219,066,547 $9,293 $20,258 $105,205 $(9,028)$1,330 $127,058 
Net income— — — 2,935 — — 2,935 
Adjustment for foreign currency translation— — — — — 354 354 
Stock-based compensation— — 551 — — — 551 
Shares issued10,965 11 (11)— — — — 
Balance at June 30, 20219,077,512 $9,304 $20,798 $108,140 $(9,028)$1,684 $130,898 
Net income— — — 3,656 — — 3,656 
Adjustment for foreign currency translation— — — — — (928)(928)
Stock-based compensation— — 750 — — — 750 
Shares issued1,200 2 (2)— — — — 
Shares repurchased held in treasury(365)— — — (20)— (20)
Balance at September 30, 20219,078,347 $9,306 $21,546 $111,796 $(9,048)$756 $134,356 


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Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive LossTotal Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at December 31, 20199,043,771 $9,190 $18,077 $86,496 $(5,761)$(1)$108,001 
Net income— — — 12,533 — — 12,533 
Shares repurchased held in treasury(47,504)— — — (1,756)— (1,756)
Adjustment for foreign currency translation— — — — — (2,494)(2,494)
Stock-based compensation— — 451 — — — 451 
Balance at March 31, 20208,996,267 $9,190 $18,528 $99,029 $(7,517)$(2,495)$116,735 
Net income— $— $— $619 $— $— 619 
Adjustment for foreign currency translation— — — — — 1,178 1,178 
Stock-based compensation— — 498 — — — 498 
Shares issued11,144 11 3 — — — 14 
Balance at June 30, 20209,007,411 $9,201 $19,029 $99,648 $(7,517)$(1,317)$119,044 
Net income— $— $— $1,738 $— $— 1,738 
Treasury stock repurchase(12,077)— — — (436)— (436)
Adjustment for foreign currency translation— — — — — 398 398 
Stock-based compensation— — 510 — — — 510 
Shares issued30,283 31 (31)— — — — 
Balance at September 30, 20209,025,617 $9,232 $19,508 $101,386 $(7,953)$(919)$121,254 

Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive IncomeTotal Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at December 31, 202010,233,223 $10,233 $180,609 $(28,090)$(9,015)$1,511 $155,248 
Net loss— — — (1,890)— — (1,890)
Gain for foreign currency translation— — — — — 168 168 
Shares issued6,523 6 (6)— — — — 
Tax withholdings related to net share settlements of stock-based compensation awards(303)— 13 — (13)— — 
Balance at March 31, 202110,239,443 $10,239 $180,616 $(29,980)$(9,028)$1,679 $153,526 
Net income— — — 461 — — 461 
Loss for foreign currency translation— — — — — (171)(171)
Shares issued12,383 12 (12)— — — — 
Balance at June 30, 202110,251,826 $10,251 $180,604 $(29,519)$(9,028)$1,508 $153,816 

See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)
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Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 Nine Months Ended September 30,
 20212020
Operating activities:
Net income$10,187 $14,890 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization5,990 4,660 
Stock-based compensation1,403 (2,767)
Deferred income taxes(298)1,454 
Changes in operating assets and liabilities, net of acquisition
Accounts receivable(6,582)(2,128)
Inventories(5,554)1,101 
Miscellaneous receivables, prepaid expenses and other assets(3,443)(725)
Accounts payable and other liabilities3,790 3,097 
Other672 441 
Net cash provided by operating activities$6,165 $20,023 
Investing activities:
Purchases of property, plant and equipment$(5,664)$(1,311)
Business acquisition(33,000)(2,300)
Net cash used in investing activities$(38,664)$(3,611)
Financing activities:
Net proceeds from revolving line of credit$10,900 $(2,271)
Repurchase treasury shares(33)(2,192)
Payment of financing lease principal(179)(192)
Proceeds from stock option exercise— 15 
Net cash provided by (used in) financing activities$10,688 $(4,640)
Effect of exchange rate changes on cash and cash equivalents$77 $(74)
Increase (decrease) in cash, cash equivalents and restricted cash(21,734)11,698 
Cash, cash equivalents and restricted cash at beginning of period29,391 6,297 
Cash, cash equivalents and restricted cash at end of period$7,657 $17,995 
Cash and cash equivalents$7,460 $17,193 
Restricted cash197 802 
Cash, cash equivalents and restricted cash$7,657 $17,995 
Supplemental disclosure of cash flow information
Net cash paid for income taxes$4,044 $3,733 
Net cash paid for interest$834 $295 
Additions of property, plant and equipment included in accounts payable$47 $78 

Six Months Ended June 30,
 20222021
Operating activities
Net loss$(7,252)$(1,429)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization22,335 8,921 
Amortization of debt issue costs421 598 
Extinguishment of debt3,395 — 
Stock-based compensation4,013 — 
Deferred income taxes(420)(58)
Change in fair value of earnout liability5,693 — 
Gain on sale of rental equipment(1,821)(836)
Reserve for obsolete and excess inventory1,377 578 
Bad debt expense244 4 
Changes in operating assets and liabilities:
Accounts receivable(27,639)2,047 
Inventories, net(28,983)(6,562)
Prepaid expenses and other current assets(13,777)2,137 
Accounts payable(5,254)5,628 
Accrued expenses and other current liabilities9,957 (2,060)
Other changes in operating assets and liabilities(1,832)(56)
Net cash (used in) provided by operating activities(39,543)8,912 
Investing activities
Purchases of property, plant and equipment(3,410)(2,561)
Business acquisitions, net of cash acquired(113,781)(6,501)
Purchases of rental equipment(4,878)(5,799)
Proceeds from sale of rental equipment6,783 2,772 
Net cash used in investing activities(115,286)(12,089)
Financing activities
Proceeds from revolving lines of credit166,200 18,401 
Payments on revolving lines of credit(67,687)(7,200)
Proceeds from term loans377,552 — 
Payments on term loans(307,490)(7,446)
Deferred financing costs(11,415)— 
Shares repurchased held in treasury(78)— 
Payment of financing lease principal(39)— 
Net cash provided by financing activities157,043 3,755 
Effect of exchange rate changes on cash and cash equivalents1,181 25 
Increase in cash, cash equivalents and restricted cash3,395 603 
Cash, cash equivalents and restricted cash at beginning of period14,671 10,399 
Cash, cash equivalents and restricted cash at end of period$18,066 $11,002 
Cash and cash equivalents$17,872 $11,002 
Restricted cash194 — 
Total cash, cash equivalents and restricted cash$18,066 $11,002 

See notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)


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Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)

Six Months Ended June 30,
 20222021
Supplemental disclosure of cash flow information
Net cash paid for income taxes6,267 425 
Net cash paid for interest10,600 8,034 
Non-cash activities:
Fair value of common stock exchanged for reverse acquisition351,491 — 
Settlement of related party obligations5,276 — 
Additions of property, plant and equipment included in accounts payable135 67 

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 — Nature of Operations and Basis of Presentation

Organization

Effective May 5, 2022, Distribution Solutions Group, Inc. ("DSG"), a Delaware corporation, changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG is a global specialty distribution company providing value added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets. DSG has 3 principal operating companies: Lawson Products, Inc. ("Lawson"), TestEquity Acquisition, LLC ("TestEquity") and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services"). The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined for the purpose of creating a specialty distribution company. A summary of the Mergers (as defined below), including the legal entities party to the transactions and the stock consideration, is presented below.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “DSG”, the “Company”, "we", "our" or "us" refer to the holding company, Distribution Solutions Group, Inc., and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

Business Combination Background

On December 29, 2021, DSG entered into an:

• Agreement and Plan of Merger (the “TestEquity Merger Agreement”) by and among (i) LKCM TE Investors, LLC, a Delaware limited liability company (the “TestEquity Equityholder”), (ii) TestEquity Acquisition, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the TestEquity Equityholder (“TestEquity”), (iii) DSG and (iv) Tide Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of DSG (“Merger Sub 1”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 1 would merge with and into TestEquity, with TestEquity surviving the merger as a wholly-owned subsidiary of DSG (the “TestEquity Merger”); and

• Agreement and Plan of Merger (the “Gexpro Services Merger Agreement” and, together with the TestEquity Merger Agreement, the “Merger Agreements”) by and among (i) 301 HW Opus Investors, LLC, a Delaware limited liability company (the “Gexpro Services Stockholder”), (ii) 301 HW Opus Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of the Gexpro Services Stockholder (“Gexpro Services”), (iii) DSG and (iv) Gulf Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of DSG (“Merger Sub 2”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 2 would merge with and into Gexpro Services, with Gexpro Services surviving the merger as a wholly-owned subsidiary of DSG (the “Gexpro Services Merger” and, together with the TestEquity Merger, the “Mergers”).

Each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Merger can be derived by converted into approximately 0.3618 shares and 0.7675 shares, respectively, of Company common stock.

Completion of the TestEquity Merger

On April 1, 2022, (the "Merger Date"), the TestEquity Merger was consummated pursuant to the TestEquity Merger Agreement.

In accordance with and under the terms of the TestEquity Merger Agreement, at the closing of the TestEquity Merger, DSG: (i) issued to the TestEquity Equityholder 3,300,000 shares of DSG common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity.

The TestEquity Merger Agreement provides that an additional 700,000 shares of DSG common stock (the “TestEquity Holdback Shares”) may be issued to the TestEquity Equityholder or forfeited in accordance with 2 earnout provisions of the TestEquity Merger Agreement. The amount of TestEquity Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of a certain additional acquisition by TestEquity during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any TestEquity Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in TestEquity EBITDA (as defined in the TestEquity Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the
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calculations within the TestEquity Merger Agreement. As of June 30, 2022, 700,000 TestEquity Holdback Shares are expected to be issued under the first earnout opportunity due to the consummation of the certain additional acquisition as referenced in the TestEquity Merger Agreement and were remeasured and reclassified to equity at April 29, 2022 when the additional acquisition was consummated. Refer to Note 11 - Earnout Derivative Liability for information about the earnout derivative liability related to the TestEquity Holdback Shares.

Completion of the Gexpro Services Merger

On the Merger Date, the Gexpro Services Merger was consummated pursuant to the Gexpro Services Merger Agreement.

In accordance with and under the terms of the Gexpro Services Merger Agreement, at the closing of the Gexpro Services Merger, DSG: (i) issued to the Gexpro Services Stockholder 7,000,000 shares of DSG common stock, (ii) on behalf of Gexpro Services, paid certain indebtedness of Gexpro Services and (iii) on behalf of Gexpro Services, paid certain specified transaction expenses of Gexpro Services.

The Gexpro Services Merger Agreement provides that an additional 1,000,000 shares of DSG common stock (the “Gexpro Services Holdback Shares”) may be issued to the Gexpro Services Stockholder or forfeited in accordance with 2 earnout provisions of the Gexpro Services Merger Agreement. The amount of Gexpro Services Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of one or more of three certain additional acquisitions by Gexpro Services during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any Gexpro Services Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in Gexpro Services EBITDA (as defined in the Gexpro Services Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the Gexpro Services Merger Agreement. As of April 1, 2022, approximately 538,000 Gexpro Services Holdback Shares were expected to be issued under the first earnout opportunity due to the consummation of the certain additional acquisitions which were completed prior to the Merger Date. The fair value of the remaining 462,000 Gexpro Services Holdback Shares available under the second earnout opportunity are included in Earnout derivative liability in the Unaudited Condensed Consolidated Balance Sheets. Final issuance of the Gexpro Services Holdback Shares under the second earnout opportunity is subject to certain terms and conditions as specified in the Gexpro Services Merger Agreement. Refer to Note 11 - Earnout Derivative Liability for information about the earnout derivative liability related to the Gexpro Services Holdback Shares.

TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. Accordingly, periods prior to the Merger Date reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

Nature of Operations

A summary of the nature of operations for each of DSG's operating companies is presented below. Information regarding DSG's reportable segments is presented in Note 19 - Segment Information.

Lawson sells and distributes specialty products to the industrial, commercial, institutional and government MRO market and uses sales representatives to provide Vendor Managed Inventory ("VMI") services to Lawson's customers. Through The Bolt Supply House business, customers in Western Canada have access to products at 14 branch locations in Alberta, Saskatchewan, Manitoba and British Columbia, Canada. Under its Kent Automotive brand, Lawson provides collision and mechanical repair products to the automotive aftermarket. Lawson ships from several strategically located distribution centers to customers in all 50 states, Puerto Rico, Canada, Mexico, and the Caribbean.

TestEquity is a distributor of test and measurement equipment and solutions, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries. TestEquity operates primarily through 4 brands, TestEquity, TEquipment, Jensen Tools and Techni-Tool. TestEquity also designs a full line of environmental test chambers.

Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical Original Equipment Manufacturer (OEM) products.

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Basis of Presentation and SummaryConsolidation

The Mergers were accounted for as a reverse merger under the acquisition method of Significantaccounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting PoliciesStandards Codification ("ASC") 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owns a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

The Company and its consolidated subsidiaries, except for Gexpro Services, operate on a calendar year-end. Gexpro Services operates on a calendar year-end for annual reporting purposes. However, quarterly financial statements for Gexpro Services are prepared on financial close dates that may differ from that of the Company. The consolidated financial statement impact of the two day difference arising from the different period ends for the quarter ended June 30, 2022 was not material. The Company utilizes the exchange rates in effect at Gexpro Services’ reporting date and the appropriate weighted-average rate for its fiscal reporting period.

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”)DSG have been prepared in accordance with accounting principles generally accepted accounting principlesin the United States ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. ReferenceGAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be made toread in conjunction with the Company’s Consolidated Financial StatementsTestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc. audited consolidated financial statements and accompanying notes included in the Company's Current Report on Form 8-K/A filed with the U.S. Securities and Exchange Commission ("SEC") on June 15, 2022, and the Lawson Products, Inc. audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2020. In the opinion of the Company, all2021. All normal recurring adjustments have been made that are necessary to present fairly state the results of operations for the interim periods. Operating results for the three and ninesix month periods ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The Company has 2 operating segments. The Lawson operating segment distributes maintenance, repair and operations ("MRO") products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada. The Bolt Supply House Ltd. ("Bolt Supply") operating segment distributes MRO products primarily through its branches located in Western Canada. Bolt Supply had 14 branches in operation at the end of the third quarter 2021. See Note 2 of the 2020 Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for further details of the significant accounting policies of the Company.2022.

Note 2 - Summary of Significant Accounting Policies

Revenue Recognition — The majority of the Company’s revenue is generated through the sale of a broad range of specialized products and components, with revenue recognized upon transfer of control, title and risk of loss, which is generally upon shipment. VMI service revenue represents less than 5% of total revenue and is recognized as the services are performed. The Company offers VMI services only in conjunction with product sales. The Company does not bill product sales and services separately. A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services. A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed. The Company includes shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services. The Company accrues for returns based on historical evidence of return rates. The Company has adopted the practical expedient within ASC 340 to recognize incremental costs to obtain a contract, primarily employee related costs, as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.

Cash Equivalents— The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of the Company’s cash equivalents at June 30, 2022 and December 31, 2021 approximates fair value.

Allowance for Doubtful Accounts — The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on the Company’s historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected
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Note 2 - Acquisitionmaterial adverse change in a major customer's ability to meet its financial obligations), the estimates of the recoverability of amounts due the Company could be revised.

On August 31, 2020,Inventories— Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson and TestEquity segments and weighted average for the Gexpro Services segment. To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company acquired Partsmasterconsiders several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence.

Property, Plant and Equipment — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles. The Company estimates useful lives of 10 to 40 years for buildings and improvements, the shorter of the useful life of the assets or term of the underlying leases for leasehold improvements, and 2 to 10 years for machinery and equipment, furniture and fixtures and vehicles. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. The costs of repairs, maintenance and minor renewals are charged to expense as incurred. Amortization of financing and capital leases is included in depreciation expense. When property, plant and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from NCH Corporation. Partsmasterthe accounts and any gain or loss is included in the income from operations.

Rental Equipment — Rental equipment is stated at cost less accumulated depreciation and amortization. Expense is computed primarily by the straight-line method over an estimated useful life of 3 to 7 years. Upon sale or retirement of such assets, the related cost and accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet, and gains or losses are reflected in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The costs of repairs, maintenance and minor renewals are charged to expense as incurred. When rental equipment is retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet and any gain or loss is included in the income from operations.

Cash Value of Life Insurance— The Company invests funds in life insurance policies for certain current and former employees. The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset on our Unaudited Condensed Consolidated Balance Sheets. The Company records these policies at their contractual value. The change in the cash surrender value of the life insurance policies, which is recorded as a component of General and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, is the change in the policies' contractual values.

Deferred Compensation — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation. The deferred compensation is recorded in an account balance, which is a leading maintenance, MRO solutions providerbookkeeping entry made by the Company to measure the amount due to the participant. The account balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that serves approximately 16,000 customersthe participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds. The Company adjusts the deferred compensation liability to equal the contractual value of the participants’ account balances. These adjustments are the changes in contractual value of the individual plans and are recorded as a component of General and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period. Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash. The Company accounts for forfeitures of stock-based compensation in the period in which they occur.

Goodwill — The Company had $355.4 million of goodwill at June 30, 2022 and $106.1 million of goodwill at December 31, 2021. Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If the Company determines that
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it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

Intangible Assets — The Company's intangible assets primarily consist of trade names and customer relationships. Intangible assets are amortized over a weighted average of 8 to 15 year and 9 to 20 year estimated useful lives for trade names and customer relationships, respectively. The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with approximately 200 sales representatives. their estimated economic benefit.

Impairment of Long-Lived Assets — The acquisition was made primarilyCompany reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Recoverability is measured by a comparison of the assets carrying amount to expandtheir expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. No impairments occurred in the first six months of 2022 or during the year ended December 31, 2021.

Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e. greater than 50% likely) that some or all of the deferred tax assets will not be realized. The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

Earnings from the Company's sales coverage, expand product lines, add experienced sales representatives,foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to foreign withholding taxes and leveragemay subject the Company's infrastructure.Company to U.S. federal and state taxes.

The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Income tax expense in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Leases— Leases are categorized as either operating or financing leases at commencement of the lease. For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement of the lease. Operating leases consist of the Company headquarters, distribution and service centers, and Bolt branches. Financing leases consist of equipment such as forklifts and copiers. The value of the lease assets and liabilities are the present value of the total cash payments for each lease. The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease. The Company reviews each lease to determine if there is a more appropriate discount rate to apply. Upon commencement of the lease, rent expense is recognized on a straight line basis for each operating lease. Each financing lease ROU asset is amortized on a straight line basis over the lease period. TestEquity and the Lawson Partsmaster business have equipment leasing programs for customers. These leases are classified as operating leases. The leased equipment is recognized in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheets and the leasing revenue is recognized on a straight line basis.

Earnings per Share— Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding performance awards, stock options, market stock
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units and restricted stock awards into common stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. Contingently issuable shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent). For diluted EPS, the contingently issuable shares should be included in the denominator of the diluted EPS calculation as of the beginning of the interim period in which the conditions are satisfied and the earnout arrangements have been resolved.

For the reverse acquisition period prior to April 1, 2022, the Company calculates the basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements by dividing the income of the accounting acquirer attributable to common shareholders in each of those periods by the accounting acquirer’s historical weighted-average number of common shares outstanding. The Company calculates the weighted-average number of common shares outstanding (the denominator of the EPS calculation), including the equity interests issued by the legal acquirer to effect the reverse acquisition, as; the number of common shares outstanding from the beginning of that period to the acquisition date computed on the basis of the weighted-average number of common shares of the accounting acquirer outstanding during the period multiplied by an exchange ratio derived from the shares exchanged at the Merger Date.

For the three and six months ended June 30, 2022 0 options to purchase shares of common stock were excluded from the computation of diluted earnings per share because none of the options were in the money.

Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency. All balance sheet amounts are translated into U.S. dollars using the exchange rates in effect at the applicable period end. Components of income or loss are translated using the average exchange rate for each reporting period.

Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S. dollars are reported as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets. Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.

Gains and losses resulting from foreign intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets.

Treasury Stock — The Company repurchased 2,756 of its common stock in 2022 from employees upon the vesting of restricted stock to offset the income taxes owed by those employees. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The cost of the common stock repurchased and held in treasury was $0.08 million in 2022.

Segment Information — The Financial Accounting Standards Board ("FASB") ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision-maker (“CODM”) is the Chief Executive Officer of DSG. The CODM reviews the financial performance and the results of operations of the segments when making decisions about allocating resources and assessing performance of the Company.

The Company has determined it has 4 operating segments: (i) Lawson, (ii) Gexpro Services, (iii) TestEquity and (iv) All Other. The Company’s 3 reportable segments include (i) Lawson, (ii) Gexpro Services and (iii) TestEquity. The Company’s CODM reviews the operating results of these reportable segments for the purpose of allocating resources and evaluating financial performance.

There are no intersegment revenues. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. Please see Note 19 - Segment Information for further details.

Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition
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date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Fair Value Measurements — The Company applies the guidance in ASC 820, Fair Value Measurements to account for financial assets and liabilities measured on a recurring basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices for identical assets and liabilities in active markets.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management's best estimate of fair value and that are significant to the fair value of the asset or liability

The carrying amount of accounts receivable, accounts payable, accrued expenses and other working capital balances are considered a reasonable estimate of their fair value due to the short-term maturity of these instruments. The carrying amount of debt is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. The Company’s earnout derivative liability is recorded at fair value on a recurring basis and was estimated using Level 3 inputs.

Earnout Derivative Liability— The Company recorded an earnout derivative liability for the future contingent equity shares related to the TestEquity Holdback Shares and the Gexpro Services Holdback Shares provisions within the Merger Agreements. The contingently issuable shares are not indexed to the common stock of the Company and, therefore, are accounted for as liability classified instruments in accordance with ASC 815-40, Contracts in Entity’s Own Equity, as the events that determine the number of contingently issuable shares required to be released or issued, as the case may be, include events that are not solely indexed to the fair value of common stock of the Company. The contingently issuable shares were initially measured at the Merger Date and are subsequently measured at each reporting date until settled, or when they meet the criteria for equity classification. Changes in the fair value of the earnout derivative liability are recorded as a component of Change in fair value of earnout derivative liability in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

The purchase price was $35.3 million in cash plusCompany reassesses the assumptionclassification of certain liabilities. The Company paid $2.3 millionthese derivative liabilities for earnout arrangements each balance sheet date. If the contingencies are resolved for the issuable shares, the earnout derivative liability is reclassified from the liability to equity as of the purchase price in cash at closing and paid the remaining $33.0 million in May 2021. The payment obligation was discounted to present value and recognized as an accrued acquisition liability of $32.7 million as of December 31, 2020 in the Company's condensed consolidated balance sheet. Interest expense of $0.3 million was recorded in the nine months ended September 30, 2021. Payment was guaranteed under the Purchase Agreement, and included the issuance of a $33.0 million irrevocable standby letter of credit. The letter of credit was released upon paymentdate of the acquisitionevent that caused the contingencies were met. The earnout derivative liability in May 2021.is measured at fair value immediately prior to the reclassification to equity. If the earnout derivative liability is reclassified from a liability to equity, gains or losses recorded to account for the liability at fair value during the period that the contract was classified as a liability are not reversed.

The purchase pricecontingently issuable shares are included in the denominator of the acquisition was allocated to the fair value of Partsmaster’s assets and liabilities on the acquisition date. The fair market value appraisalsbasic earnings per share calculation as of the majoritydate that all necessary conditions have been satisfied (i.e., when issuance of the assetsshares is no longer contingent). For diluted earnings per share, the contingently issuable shares are included in the denominator of the diluted earnings per share calculation as of the beginning of the interim period in which the conditions are satisfied and liabilities was determined by a third party valuation firm usingthe earnout arrangements have been resolved. See Note 15 - Earnings Per Share for further information.

Use of Estimates— Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions includingthat affect the amounts reported for service revenue, service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

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Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises the requirements for customer relationshipshow an entity should measure credit losses on financial instruments. The pronouncement is effective for smaller reporting companies in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and $2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively.the new guidance will be applied on a prospective basis. The $15.8 million allocated to goodwill reflectsCompany is still evaluating the purchase price lesseffect the fair market valueadoption of the identifiable net assets.new standard will have on its financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The goodwillpronouncement is attributableeffective in fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.

Note 3 - Business Acquisitions

Completion of Mergers

On April 1, 2022, the Mergers were completed via all-stock merger transactions. Pursuant to the workforceMerger Agreements, DSG issued an aggregate of 10.3 million shares of its common stock to the acquired businessformer owners of TestEquity and Gexpro Services. An additional 1.7 million shares of DSG common stock remain potentially issuable upon meeting the synergies expectedconditions of certain earnout provisions. Refer to arise after Lawson's acquisitionNote 1 - Nature of Partsmaster. The entire amountOperations and Basis of goodwill is expected to be deductiblePresentation for tax purposes.further information regarding the Mergers.

The accountingbusiness combination of Lawson, TestEquity and Gexpro Services brings together 3 value added complementary distribution businesses. Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental MRO marketplace. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical Original Equipment Manufacturer ("OEM") products. Refer to Note 1- Nature of Operations and Basis of Presentation for this acquisition was complete asmore information on the nature of June 30, 2021. Partsmaster contributed $13.6 million of revenue and an operating loss of $0.8 million in the third quarter of 2021 and $44.6 million of revenue and $0.4 million of operating income in the first nine months of 2021, compared to $5.4 million of revenue and $0.4 million of operating income in the third quarter 2020 post acquisition.operations for these businesses.

The Mergers were accounted for as a reverse merger under the acquisition method of accounting for business combinations, whereby TestEquity and Gexpro Services were identified as the accounting acquirers and were treated as a combined entity for financial reporting purposes, and DSG was identified as the accounting acquiree. Accordingly, under the acquisition method of accounting, the purchase price was allocated to DSG's tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition-date fair values. These estimates were determined through established and generally accepted valuation techniques.

A summaryAllocation of the purchase price allocation ofConsideration Exchanged

Under the acquisition ismethod of accounting, the estimated consideration exchanged was calculated as follows (Dollars in thousands):

follows:
Cash paid and payable and liabilities assumed
Cash paid(in thousands, except share data)April 1, 2022
Number of DSG common shares exchanged9,120,167
DSG closing price per common stock on March 31, 2022$34,523 
Accounts payable and accrued expenses4,086 
Deferred compensation2,938 
Lease obligation620 
$42,16738.54 
Fair value of assets acquired
Goodwillshares exchanged$15,816351,491 
InventoriesOther consideration(1)
7,7971,910 
Accounts receivable7,706 
Customer relationshipsTotal consideration exchanged4,961 $353,401 
(1)Fair value adjustment of stock-based compensation awards.

Due to the publicly traded nature of shares of DSG common stock, the equity issuance of shares of DSG common stock based on this value was considered to be a more reliable measurement of the fair market value of the transaction compared to the equity interests of the accounting acquirer.

The allocation of consideration exchanged to the tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the Merger Date. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change. Certain estimated
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values for the acquisition, including the valuation of intangibles and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. Goodwill generated from the acquisition is not deductible for tax purposes. The Company will continue to obtain information necessary to finalize the fair values, which may differ materially from these preliminary estimates. The final valuation will be completed within the one-year measurement period ending March 31, 2023, and any measurement period adjustments will be applied in the reporting period in which the adjustments are determined.

The preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed as of the Merger Date is summarized as follows:
Trade names(in thousands)2,775 Total
Current assets$148,308 
Property, plant and equipment2,12157,053 
Right of use assets17,571 
Other intangible assets119,060 
Deferred tax liability, net of deferred tax asset620 (26,237)
Other assets37118,373 
Current liabilities(71,097)
Long-term obligations(25,722)
Lease and financing obligations(29,474)
Derivative earnout liability(43,900)
Goodwill189,466 
Total consideration exchanged$42,167353,401 

The unaudited pro forma revenue and net income for the Company for the three months ended September 30, 2020, assuming the Partsmaster acquisition closed on January 1, 2019, was $101.2 million and $2.0 million, respectively. The unaudited pro forma revenue and net income for the Company for the nine months ended September 30, 2020, assuming the Partsmaster acquisition closed on January 1, 2019, was $298.5 million and $16.3 million, respectively.preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:
(in thousands)Fair Value
Estimated Life
(in years)
Customer relationships$76,050 19
Trade names43,010 8
Total other intangible assets$119,060 

The Company incurred transaction costs related to the Mergers of $5.8 million and $7.2 million for the three and six months ended June 30, 2022, respectively and $0.4 million and $0.5 million for the three and six months ended June 30, 2021, respectively.

Pro Forma Information

The following table presents estimated unaudited pro forma disclosures includeconsolidated financial information for DSG as if the Mergers and other acquisitions disclosed below occurred on January 1, 2021 for the 2022 acquisitions and January 1, 2020 for the 2021 acquisitions. The unaudited pro forma information reflects adjustments forincluding amortization ofon acquired intangible assets, implied interest expense, and acquisition costs to reflectthe related tax effects. This information is presented for informational purposes only and is not necessarily indicative of future results as ifor the results that would have occurred had the Mergers been completed on the date indicated.
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Revenue$471,280 $299,854 $647,030 $454,895 
Net income6,056 8,081 4,560 14,431 

Other Acquisitions
TestEquity and Gexpro Services acquired other businesses during the first six months of 2022 and year ended December 31, 2021. The consideration exchanged for the acquired businesses included various combinations of cash, sellers notes, and forms of share based payments. The acquisitions were accounted for under ASC 805, the acquisition method of Partsmaster had closedaccounting. For each acquisition, the allocation of consideration exchanged to the assets acquired and liabilities assumed was based on January 1, 2019 rather than on the actual
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estimated acquisition-date fair values. Certain estimated values for the acquisitions, including the valuation of intangibles, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuations will be completed within the one-year measurement periods following the respective acquisition date. Thisdates, and any adjustments will be recorded in the period in which the adjustments are determined.

During the first six months of 2022, TestEquity acquired Interworld Highway, LLC and National Test Equipment, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc. ("Frontier"). The purchase consideration for each business acquired and the preliminary allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:
(in thousands)Interworld Highway LLCResoluxFrontierNational Test Equipment
Acquisition dateApril 29, 2022January 3, 2022March 31, 2022June 1, 2022Total
Current assets$15,018 $8,551 $3,299 $2,186 $29,054 
Property, plant and equipment313 459 1,065 642 2,479 
Right of use assets— 1,125 9,218 — 10,343 
Other intangible assets:
Customer relationships6,369 11,400 10,000 1,830 29,599 
Trade names4,600 6,100 3,300 — 14,000 
Other assets10 1,745 — — 1,755 
Accounts payable(8,856)(3,058)(1,359)(2,268)(15,541)
Accrued expenses and other liabilities— (939)(1,067)(1,169)(3,175)
Lease obligation— (1,125)(9,218)— (10,343)
Goodwill37,236 6,498 10,439 5,971 60,144 
Total purchase consideration exchanged, net of cash acquired$54,690 $30,756 $25,677 $7,192 $118,315 

The consideration for the Frontier acquisition includes a potential earn-out payment up to $3.0 million based upon the achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2024. The fair value of the contingent consideration arrangement was classified within Level 3 and was determined using a probability-based scenario analysis approach. As of March 31, 2022 and June 30, 2022, the fair value of the earn-out was $0.9 million and $0.9 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

During the year ended December 31, 2021, TestEquity acquired MCS Test Group Limited ("MCS"), and Gexpro Services acquired Omni Fasteners Inc. ("Omni"), National Engineered Fasteners ("NEF") and State Industrial Supply ("SIS"). The accounting for the Omni and MCS acquisitions was complete as of June 30, 2022. Certain estimated values for the NEF and SIS acquisitions are preliminary, including goodwill, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances). These values are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuations will be completed within the one-year measurement periods following the respective acquisition dates, and any adjustments will be recorded in the period in which the adjustments are determined.

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The purchase consideration for each business acquired during 2021 and the preliminary allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:
(in thousands)Omni
NEF(1)
SISMCS
Acquisition dateJune 8, 2021November 1, 2021December 31, 2021July 31, 2021Total
Current assets$2,259 $17,882 $3,541 $6,521 $30,203 
Property, plant and equipment600 589 125 — 1,314 
Right of use assets— 1,774 799 — 2,573 
Other intangible assets:
Customer relationships2,530 5,007 4,800 2,621 14,958 
Trade names200 2,503 1,500 41 4,244 
Other intangible assets9 — 380 — 389 
Other assets— 1,236 10 — 1,246 
Accounts payable(50)(3,506)(1,464)(2,523)(7,543)
Accrued expenses and other liabilities— (3,332)— (685)(4,017)
Lease obligation— (1,774)(799)0(2,573)
Goodwill953 — 3,010 7,245 11,208 
Gain on bargain purchase— (1,363)— — (1,363)
Total purchase consideration exchanged, net of cash acquired$6,501 $19,016 $11,902 $13,220 $50,639 
(1)The consideration exchanged in the NEF acquisition included a shared-based payment valued at $2.8 million with the remainder of the payment in cash.    

A gain on bargain purchase related to the acquisition of NEF was recognized within Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income in the fourth quarter of 2021. The gain of $1.4 million was calculated as the excess of net assets recognized over the consideration transferred. The bargain purchase was primarily attributable to owners that were highly motivated to sell.

The Company incurred transaction costs related to the other acquisitions of $0.3 million and $1.3 million for the three and six months ended June 30, 2022, respectively and $0.8 million and $1.0 million for the three and six months ended June 30, 2021, respectively.

Other Acquisitions Pro Forma Information - The pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflectedother acquisitions was included in the pro forma information. Theestimated unaudited pro forma consolidated financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.for DSG, which is presented above under Pro Forma Information.

Actual Results of Business Acquisitions

The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the second quarter and first six months of 2022 and 2021. The results of DSG's legacy Lawson business are included only subsequent to the April 1, 2022 Merger Date, and the results for other acquisitions are only included subsequent to their respective acquisition dates provided above.
(in thousands)Three Months Ended June 30, 2022Three Months Ended June 30, 2021
LawsonOther AcquisitionsTotalLawsonOther AcquisitionsTotal
Revenue$123,670 $52,739 $176,409 $— $468 $468 
Net Income$3,084 $5,316 $8,400 $— $(335)$(335)
Six Months Ended June 30, 2022Six Months Ended June 30, 2021
LawsonOther AcquisitionsTotalLawsonOther AcquisitionsTotal
Revenue$123,670 $75,522 $199,192 $— $468 $468 
Net Income$3,084 $8,285 $11,369 $— $(335)$(335)

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Note 34 - Revenue Recognition

As part of the Company's revenue recognition analysis, it concluded that it has 2 separate performance obligations, and accordingly, two separate revenue streams: products and services. Under the definition of a contract as defined by Accounting Standards CodificationASC 606, Revenue From Contracts With Customers ("ASC 606"), the Company considers contracts to be created at the time an order to purchase product and services is agreed upon regardless of whether or not there is a written contract.

Performance Obligations Revenue from customers is recognized when obligations under the terms of a contract are satisfied; this generally occurs with the delivery of products or services. Revenue from customers is measured as the amount of consideration the Company expects to receive in exchange for the delivery of goods or services. Contracts may last from one month to one year or more and may have renewal terms that extend indefinitely at the option of either party. Price is typically based on market conditions, competition, changes in the industry and product availability. Volumes fluctuate primarily as a result of customer demand and product availability. Consistent with the way the Company manages its businesses, the Company refers to sales under service agreements, which includes both goods (such as parts, equipment and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of the Company’s operations. The Company has no significant financing components in its contracts with customers. The Company records revenue net of certain taxes, such as sales taxes, that are assessed by governmental authorities on the Company’s customers.

The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has 2 operating segments;adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.

The Company does not incur significant costs to obtain contracts. Incidental items that are immaterial in the context of the contract are recognized as expenses. Sales of products and services to customers are invoiced and settled on a monthly basis. ASC 606 requires an entity to present a contract liability in instances where the customer is entitled to a volume rebate based on purchases made during the period. The Company is not usually subject to obligations for warranties, rebates, returns or refunds except in the case of rebates for select customers if pre-determined purchase thresholds are met as discussed for the TestEquity segment below. The Company does not typically receive payment in advance of satisfying its obligations under the terms of its sales contracts with customers; therefore, liabilities related to such payment are not significant to the Company. Accounts receivable represents the Company’s unconditional right to receive consideration from its customers.

Lawson segment and the Bolt Supply segment.Segment

The Lawson segment has two2 distinct performance obligations from contracts withoffered to its customers: a product performance obligation and a service performance obligation. While the Companyobligation, and accordingly, 2 separate revenue streams. Although Lawson has identified that it offers its customers both a product and a service obligation, customers receivethe customer only receives one invoice per transaction with no price breakoutallocation between these obligations. The CompanyLawson does not separately price performanceits offerings based on any allocation between these obligations.

The Lawson segment generates revenue primarily from the sale of MRO products to its customers. RevenuesRevenue related to product sales is recognized at the time that control of the product has been transferred to the customer,customer; either at the time the product is shipped or the time the product has been received by the customer. The CompanyLawson does not commit to long-term contracts to sell customers a certain minimum quantity of products.

The Lawson segment, including the recent Partsmaster acquisition, offers a vendor managed inventory ("VMI")VMI service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided over a short period of time after control of the purchased product has been transferred to the customer. Since some components ofcertain obligations pursuant to the VMI service agreement have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.provided and the related performance obligations have been satisfied.

The Bolt Supply segment provides productGexpro Services Segment

Gexpro Services’ contracts with customers generally represent a single performance obligation to sell its products. Revenue from sales and does not provide VMI services or other services. Revenue isof Gexpro Services’ products are recognized at the time thatupon transfer of control of the product has been transferred to the customer, which is either upon delivery or shipment dependingtypically when the product has been shipped from its distribution facilities. The transaction price is the amount of consideration to which Gexpro Services expects to be entitled in exchange for transferring goods to the customer. Revenue is recorded based on the termstransaction price, which includes fixed consideration and an estimate of variable consideration such as, early payment/volume discounts and rebates. The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the customer.

Disaggregated revenue by geographic area follows:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands)2021202020212020
United States$85,343 $72,030 $256,577 $202,709 
Canada20,227 18,247 59,089 50,749 
Consolidated total$105,570 $90,277 $315,666 $253,458 
variable consideration is subsequently resolved.

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DisaggregatedGexpro Services’ products are marketed and sold primarily to original equipment manufacturers globally. Sales of products are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets. Payment terms on invoiced amounts range from 10 to 120 days. In instances where the timing of revenue by product type follows:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Fastening Systems22.2 %22.3 %21.4 %22.7 %
Cutting Tools and Abrasives15.0 %12.2 %14.8 %13.1 %
Fluid Power13.0 %12.6 %13.2 %13.2 %
Specialty Chemicals10.5 %13.3 %10.1 %11.7 %
Electrical10.4 %10.0 %10.4 %10.2 %
Aftermarket Automotive Supplies7.6 %7.0 %7.2 %7.1 %
Safety5.1 %7.0 %5.0 %6.4 %
Welding and Metal Repair1.4 %1.4 %1.6 %1.4 %
Other14.8 %14.2 %16.3 %14.2 %
Consolidated Total100.0%100.0%100.0%100.0%
recognition differs from the timing of the right to invoice, the Company has determined that a significant financing component does not exist.

Activities as lessorTestEquity Segment

PriorTestEquity’s contracts with customers generally represent a single performance obligation to acquisition, Partsmaster leasedsell its products. Revenues from contracts with customers reflect the transaction prices for contracts reduced by variable consideration. TestEquity provides a rebate to select customers if pre-determined purchase thresholds are met. The rebate consideration is not in exchange for a distinct good or service. Variable consideration is estimated using the expected-value method considering all reasonably available information, including TestEquity’s historical experience and current expectations, and is reflected in the transaction price when sales are recorded. Sales returns are generally accepted by TestEquity, however, sales returns are not material to the Company’s operations. TestEquity provides an assurance type warranty which is not sold separately and does not represent a separate performance obligation. Contractual rebate obligations were $0.1 million at June 30, 2022, and are expected to be paid or expire in their entirety during fiscal year ended December 31, 2022.

TestEquity generates revenue from contracts with customers through the sale of new and used electronic test and measurement products. Typically, TestEquity has a purchase order or master service agreement with the customer that specifies the goods and/or services to be provided. TestEquity generally invoices customers as goods are shipped. Fees are typically due and payable 30 days after date of shipment. Generally, customers gain control of the goods upon providing the product to the carrier, or when services are completed. For the majority of transactions, TestEquity recognizes revenue at the time of shipment, when control passes to the customer. For consigned inventory, revenue is recognized when inventory is removed from TestEquity’s stock location and control passes to the customer.

The Company has elected not to disclose the disaggregated components of revenue and cost of sales in its Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and in the related notes to the condensed consolidated financial statements.

Disaggregated revenue by geographic area (based on the location to which the product is shipped to):
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
United States$261,071 $120,020 $386,327 $233,420 
Canada36,372 4,145 46,169 7,789 
Europe9,889 2,517 17,971 3,517 
Pacific Rim5,585 3,367 10,624 6,435 
Latin America6,949 2,621 11,794 4,821 
Other1,470 1,482 2,536 2,997 
Total revenue$321,336 $134,152 $475,421 $258,979 

Rental Revenues

TestEquity rents new and used electronic test and measurement equipment, to customers in many industries. These leases are classified as operating leases. Rental equipment is included in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheet, and rental revenues is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Rental revenues are recognized in the month they are due on the accrual basis of accounting. The unearned portion of rental payments received is accrued as deferred revenue. The TestEquity rental program generated $3.2 million and $2.6 million of revenue for the three months ended June 30, 2022 and 2021, respectively and $6.8 million and $5.4 million of revenue for the six months ended June 30, 2022 and 2021, respectively. The unearned rental revenue related to customer prepayments on equipment leases of $0.4 million at June 30, 2022 and $0.5 million at December 31, 2021, which is included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet, is expected to be earned in its entirety during the next twelve months.

Lawson leases parts washer machines to customers through its Torrents leasing program. The Torrents leasing program comprised a minor portion of the Partsmaster business. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets onincluded in Rental equipment, net in the Company's consolidated balance sheetUnaudited Condensed Consolidated Balance Sheet and the leasing revenue is recognized on a straight line basis over the leasing term.basis. The Torrents machine leasing program generated $0.8 million and $2.2 $1.1
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million of revenue for the three months ended June 30, 2022 and $1.1 million of revenue for the six months ended June 30, 2022. The unearned rent revenue of $0.7 million at June 30, 2022 is included as a component of Accrued expenses and other current liabilities in the three and nine months ended September 30, 2021. The carrying value of the Torrents leasing assets as of September 30, 2021Unaudited Condensed Consolidated Balance Sheet, is $1.0 million. The Company has adopted the practical expedient notexpected to separate non-lease components that would be within the scope of ASC 606 from the associated lease components as the relevant criteria under ASC 842 are met.


Note 4 — Restricted Cash

The Company has agreed to maintain $0.2 millionearned in a guaranteed investment certificate as collateral for an outside party that is providing certain commercial credit card services for Bolt. The Company is restricted from withdrawing this balance without the prior consent of the outside partyits entirety during the term of the agreement. The Company previously agreed to maintain $0.8 million in a money market account as collateral for an outside party that provided certain commercial card processing services for the Company, however this agreement ended in the third quarter 2021 and the $0.8 million is now unrestricted.next twelve months.

Note 5 — Inventories

Inventories, net, consisting primarily of purchased goods and manufactured electronic equipment offered for resale, were as follows:
 (Dollars in thousands)
 September 30, 2021December 31, 2020
Inventories, gross$75,632 $67,137 
Reserve for obsolete and excess inventory(8,180)(5,270)
Inventories, net$67,452 $61,867 
(in thousands)June 30, 2022December 31, 2021
Inventories, gross$259,900 $140,544 
Reserve for obsolete and excess inventory(9,204)(7,827)
Inventories, net$250,696 $132,717 

DuringChanges in the nine months ended September 30, 2021, the Company increased its reserve for obsolete and excess inventory by were as follows:
(in thousands)Amount
Balance at December 31, 2021$(7,827)
Additions charged to expense(1,694)
Write-offs317 
Balance at June 30, 2022$(9,204)

Note 6 - Property, Plant and Equipment
$0.9 million
Components of property, plant and equipment were as follows:
(in thousands)June 30, 2022December 31, 2021
Land$9,980 $1,700 
Buildings and improvements27,254 2,930 
Machinery and equipment20,920 4,389 
Capitalized software7,529 3,407 
Furniture and fixtures7,336 2,700 
Vehicles1,465 798 
Construction in progress5,531 12 
Total80,015 15,936 
Accumulated depreciation and amortization(15,057)(6,857)
Property, plant and equipment, net$64,958 $9,079 

Depreciation expense for which its cost exceeded its estimated selling priceproperty, plant, and $1.0equipment was $2.5 million and $0.3 million for rationalizationthe second quarter of inventory related to Partsmaster.2022 and 2021, respectively and $3.1 million and $0.5 million for the first six months of 2022 and 2021, respectively. Amortization expense for capitalized software was $0.9 million and $0.2 million for the second quarter of 2022 and 2021, respectively and $1.1 million and $0.4 million for the first six months of 2022 and 2021, respectively.

Note 7 - Rental Equipment

Rental equipment, net consisted of the following:
(in thousands)June 30, 2022December 31, 2021
Rental equipment$47,863 $46,500 
Accumulated depreciation(21,755)(21,773)
Rental equipment, net$26,108 $24,727 

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Depreciation expense included in cost of sales for rental equipment was $1.5 million and $1.5 million for the second quarter of 2022 and 2021, respectively and $2.9 million and $3.0 million for the first six months of 2022 and 2021, respectively. Refer to Note 64 - Revenue Recognition for a discussion on the Company's activities as lessor.

Note 8 - Goodwill

Goodwill activity for the first nine months of 2021 is includedChanges in the table below:carrying amount of goodwill by segment were as follows:
 (Dollars in Thousands)
Goodwill By Reportable Segment
LawsonBoltTotal
Beginning balance December 31, 2020$21,352 $13,824 $35,176 
Impact of foreign exchange rates18 59 77 
Balance at September 30, 2021$21,370 $13,883 $35,253 

(in thousands)LawsonTestEquityGexpro ServicesAll OtherTotal
Balance at December 31, 2021$— $70,112 $36,033 $— $106,145 
Acquisitions172,333 43,207 16,912 17,133 249,585 
Impact of foreign exchange rates— — — (290)(290)
Balance at June 30, 2022$172,333 $113,319 $52,945 $16,843 $355,440 

Note 79 - Intangible Assets

The gross carrying amount and accumulated amortization byfor definite-lived intangible asset classassets were as follows:
June 30, 2022December 31, 2021
(in thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
Trade names$93,355 $(12,389)$80,966 $36,304 $(8,353)$27,951 
Customer relationships197,362 (40,524)156,838 92,947 (29,269)63,678 
Other (1)
8,753 (3,631)5,122 8,159 (3,180)4,979 
Total$299,470 $(56,544)$242,926 $137,410 $(40,802)$96,608 
(1)    
 (Dollars in thousands)
September 30, 2021December 31, 2020
Gross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
Trade names$11,364 $(3,593)$7,771 $11,289 $(2,733)$8,556 
Customer relationships12,410 (3,385)9,025 12,349 (2,402)9,947 
$23,774 $(6,978)$16,796 $23,638 $(5,135)$18,503 
Other primarily consists of non-compete agreements.

Amortization expense of $0.6for definite-lived intangible assets was $9.7 million and $0.4$15.1 million for the three and six months ended June 30, 2022, respectively and $2.5 million and $5.0 million for the three and six months ended June 30, 2021, respectively. Amortization expense related to intangible assets was recorded in General and administrative expense for the three months ended September 30, 2021 and 2020, respectively. Amortization expenseexpenses. The remaining weighted-average useful lives of$1.8 million and $1.1 million related to intangible assets as of June 30, 2022 was recorded in General7.0 years for trade names and administrative expenses14.3 years for the nine months ended September 30, 2021 and 2020, respectively.customer relationships.

The estimated aggregate amortization expense for the remaining year 2022 and each of the next five years are as follows:
(in thousands)Amortization
Remaining 2022$17,074 
202332,994 
202433,335 
202530,549 
202628,134 
202724,044 
Thereafter76,796 
Total$242,926 

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Note 810 - Leases

Activities as Lessee

The Company leases equipment,property used for warehousing, distribution centers, office space, and branch locations, throughout the USequipment and Canada.

Expenses related tovehicles. The expenses generated by leasing activitiesactivity for the three and six months ended SeptemberJune 30, 20212022 and September 30, 2020 are2021 were as follows (Dollars in(in thousands):
Three Months Ended September 30,
Lease TypeClassification20212020
Operating Lease ExpenseOperating expenses$1,500 $1,262 
  Financing Lease AmortizationOperating expenses44 $63 
  Financing Lease InterestInterest expense2 8 
Financing Lease Expense46 71 
Net Lease Cost$1,546 $1,333 
Three Months Ended June 30,Six Months Ended June 30,
Lease TypeClassification2022202120222021
Operating Lease Expense (1)
Operating expenses$3,896 $1,475 $5,524 $2,868 
Financing Lease AmortizationOperating expenses163 56 232 103 
Financing Lease InterestInterest expense23 13 34 26 
Financing Lease Expense186 69 266 129 
Net Lease Cost$4,082 $1,544 $5,790 $2,997 

(1)

Expenses related to leasing activities for the nine months ended September 30, 2021 and September 30, 2020 are as follows (Dollars in thousands):
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Nine Months Ended September 30,
Lease TypeClassification20212020
Operating Lease ExpenseOperating expenses$4,429 $3,630 
  Financing Lease AmortizationOperating expenses179 $165 
  Financing Lease InterestInterest expense12 22 
Financing Lease Expense191 187 
Net Lease Cost$4,620 $3,817 

     Includes short term lease expense, which is immaterial

NetThe value of net assets and liabilities related togenerated by leasing activities asactivity of SeptemberJune 30, 20212022 and December 31, 20202021 arewere as follows (Dollars in(in thousands):
Lease TypeSeptember 30, 2021December 31,
2020
Total Right Of Use ("ROU") operating lease assets (1)
$12,292 $8,246 
Total ROU financing lease assets (2)
410 518 
Total lease assets$12,702 $8,764 
Total current operating lease obligation
$4,187 $4,360 
Total current financing lease obligation
161 208 
Total current lease obligations$4,348 $4,568 
Total long term operating lease obligation
$9,587 $5,498 
Total long term financing lease obligation
157 240 
Total long term lease obligation$9,744 $5,738 

Lease TypeJune 30, 2022December 31, 2021
Total ROU operating lease assets (1)
$45,667 $19,662 
Total ROU financing lease assets (2)
1,388 — 
Total lease assets$47,055 $19,662 
Total current operating lease obligation
$10,030 $4,641 
Total current financing lease obligation
457 — 
Total current lease obligations$10,487 $4,641 
Total long term operating lease obligation
$37,886 $16,132 
Total long term financing lease obligation
766 — 
Total long term lease obligation$38,652 $16,132 
(1)Operating lease assets are recorded net of accumulated amortization of $8.7 million and $5.9$6.4 million as of SeptemberJune 30, 20212022 and $2.8 million as of December 31, 2020, respectively2021
(2)Financing lease assets are recorded net of accumulated amortization of $0.6 million and $0.4$0.1 million as of June 30, 2022 and $0.0 million as September 30, 2021 andof December 31, 2020, respectively2021

LiabilitiesThe value of lease liabilities generated by leasing activities as of SeptemberJune 30, 20212022 were as follows (Dollars in(in thousands):
Maturity Date of Lease LiabilitiesOperating LeasesFinancing LeasesTotal
Year one$4,535 $166 $4,701 
Year two3,841 114 3,955 
Year three2,865 39 2,904 
Year four1,870 14 1,884 
Year five345 — 345 
Subsequent years1,265 — 1,265 
Total lease payments14,721 333 15,054 
Less: Interest947 15 962 
Present value of lease liabilities$13,774 $318 $14,092 
Maturity Date of Lease LiabilitiesOperating LeasesFinancing LeasesTotal
Year one$8,743 $527 $9,270 
Year two10,646 811 11,457 
Year three8,603 488 9,091 
Year four6,088 312 6,400 
Year five5,071 240 5,311 
Subsequent years14,602 102 14,704 
Total lease payments53,753 2,480 56,233 
Less: Interest(6,485)(609)(7,094)
Present value of lease liabilities$47,268 $1,871 $49,139 

(1)    Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance $0.6 million

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The weighted average lease terms and interest rates of the leases held by Lawson as of SeptemberJune 30, 2021 are2022 were as follows:
Lease TypeWeighted Average Term in YearsWeighted Average Interest Rate
Operating Leases4.03.53%
Financing Leases2.24.99%
Lease TypeWeighted Average Term in YearsWeighted Average Interest Rate
Operating Leases6.27.0%
Financing Leases3.96.4%

The cash outflows of the leasing activity for the threesix months ending Septemberended June 30, 2021 are2022 were as follows (Dollars in(in thousands):
Cash Flow SourceClassificationAmount
Operating cash flows from operating leasesOperating activities$3,5495,182 
Operating cash flows from financing leasesOperating activities123 
Financing cash flows from financing leasesFinancing activities17939 

In March 2021 the Company signed a three year extension for their lease at the McCook distribution center ("McCook"). The lease extension created a right of use asset of $5.3 million and a lease liability of $5.3 million.

Refer to Note 34 - Revenue Recognition for a discussion on Lawsonthe Company's activities as lessor.

Note 9 — Revolving Credit Facility11 - Earnout Derivative Liability

On the Merger Date, the Company recorded an earnout derivative liability for the 2 earnout provisions within the Merger Agreements. The Company estimated the fair value of the earnout derivative liability based on an aggregate of 1,162,000 additional shares expected to be issued under the 2 earnout provisions of the Merger Agreements. The aggregate of 1,162,000 shares is comprised of 700,000 shares of DSG common stock that are contingently issuable (or forfeitable) to the TestEquity Equityholder and 462,000 shares of DSG common stock that are contingently issuable (or forfeitable) to the Gexpro Services Stockholder. The additional 538,000 shares of the remaining potential shares of the earnout were not recorded as an earnout derivative liability as the acquisition contingency for these shares was met at the Merger Date.

The Company's earnout derivative liability is classified as a Level 3 instrument and is measured at fair value on a recurring basis. The fair value of the earnout derivative liability was measured using the Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis for the year ended December 31, 2022. Inputs to that model include the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock. The significant unobservable inputs used in the fair value measurement of the earnout derivative liability are the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

The Revolvingestimated aggregate fair value of the earnout derivative liability recorded on the Merger Date was $43.9 million, with an offsetting entry to additional paid-in capital. As of April 29, 2022, 700,000 of the 1,162,000 shares were reclassified to equity, as the acquisition contingencies had been met. Immediately prior to reclassification, these shares were remeasured to fair value, resulting in a loss of $5.7 million being recorded as a component of Change in fair value of earnout derivative liability in the Unaudited Consolidated Statements of Income and Comprehensive Income.” The earnout opportunity for the remaining 462,000 shares for Gexpro Services expires on December 31, 2022. See Fair Value Measurements in Note 2 - Summary of Significant Accounting Policies for further information.

The change in the fair value of the earnout derivative liability was as follows:
(in thousands)Amount
Balance at December 31, 2021$— 
Initial recognition on Merger Date43,900 
Change in fair value5,693 
Reclassifications to equity at fair value(26,593)
Balance at June 30, 2022$23,000 

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Note 12 - Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:
(in thousand)June 30, 2022December 31, 2021
Accrued stock-based compensation$10,995 $— 
Accrued compensation16,257 5,997 
Accrued and withheld taxes, other than income taxes6,063 880 
Accrued income taxes2,062 4,170 
Accrued customer rebates3,205 2,657 
Accrued severance649 — 
Accrued interest1,130 1,515 
Deferred revenue1,140 485 
Accrued health benefits1,285 59 
Other15,524 7,363 
Total accrued expenses and other current liabilities$58,310 $23,126 

Note 13 - Debt

The Company's outstanding long-term debt was comprised of the following:
(in thousands)June 30, 2022December 31, 2021
Senior secured revolving credit facility$113,079 $— 
Senior secured term loan246,875 — 
Senior secured delayed draw term loan50,000 — 
Other revolving line of credit1,495 — 
Previous revolving credit facilities— 38,707 
Previous term loans— 190,337 
Total debt411,449 229,044 
Less current portion of long-term debt(16,495)(134,405)
Less deferred financing costs(5,675)(1,505)
Total long-term debt$389,279 $93,134 

Amended and Restated Credit Facility matures on October 11, 2024Agreement - April 1, 2022

On April 1, 2022 (the "Closing Date"), DSG and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among DSG, certain subsidiaries of DSG as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. Pursuant to the Amended and Restated Credit Agreement, the Company's previous credit agreement was amended and restated in its entirety.

The Amended and Restated Credit Agreement provides $100.0for (i) a $200 million senior secured revolving credit facility, with a $25 million letter of credit sub-facility and a $10 million swingline loan sub-facility, (ii) a $250 million senior secured initial term loan facility and (iii) a $50 million senior secured delayed draw term loan facility. In addition, the Amended and Restated Credit Agreement permits the Company to increase the commitments under the Amended and Restated Credit Agreement from time to time by up to $200 million in the aggregate, subject to, among other things, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the Amended and Restated Credit Agreement. The revolving credit facility is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed.

On the Closing Date, the Company borrowed $250 million of initial term loan facility loans and approximately $86 million of revolving commitments.credit facility loans under the Amended and Restated Credit Agreement. These borrowings were used to 1) repay all obligations and refinance the Company's previous credit agreement, 2) repay certain existing indebtedness of TestEquity and Gexpro Services and their respective subsidiaries, 3) pay fees and expenses in connection with the Mergers, and 4) finance the working capital needs and general corporate purposes of the Company.
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A $2.8 million loss on the extinguishment of debt for remaining unamortized deferred financing costs associated with the previous indebtedness was recorded in the second quarter of 2022 in connection with the payoff. The extinguishment is recorded in Loss on extinguishment of debt in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

The Amended and Restated Credit Agreement requires that the proceeds of any revolving credit facility loans be used for working capital and general corporate purposes (including, without limitation, permitted acquisitions), and requires that the proceeds of any delayed draw term loan facility be used solely to finance the payment of consideration for (i) the potential acquisition by TestEquity of a certain business that had been previously identified to DSG as a potential acquisition candidate by TestEquity prior to the date of the TestEquity Merger Agreement and (ii) other acquisitions permitted under the Amended and Restated Credit Agreement, and for any fees, costs and expenses incurred in connection therewith. On April 29, 2022, the Company borrowed the $50 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC made by TestEquity.

As of June 30, 2022, there were $247 million of term loan facility loans outstanding, $50 million of delayed draw term loans outstanding and approximately $113 million of revolving credit facility loans outstanding under the Amended and Restated Credit Agreement.Net of outstanding letters of credit, the Company had $87.4there was $85.9 million of borrowingborrowing availability under the Revolving Credit Facilityrevolving credit facility as of SeptemberJune 30, 2021 and $66.0 million as of December 31, 2020. Weighted2022. The weighted average interest rates forrate from the nine months ended SeptemberClosing Date through June 30, 2021 and September 30, 2020 were 2.88% and 2.64%, respectively.2022 was 3.61%.

The loans under the Amended and Restated Credit Agreement bear interest, at the Company’s option, at a rate equal to (i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the Amended and Restated Credit Agreement), plus, in each case, an additional margin ranging from 0.0% to 1.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the Amended and Restated Credit Agreement), plus, in each case, an additional margin ranging from 1.0% to 2.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides that the additional margin for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall be 1.5% per annum for Alternate Base Rate or Canadian Prime Rate loans and 2.5% per annum for all other loans.
Fees
Certain closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees are payable to the lenders and the agents under the Amended and Restated Credit Agreement, including a commitment fee on the daily unused amount of the revolving credit facility that will accrue at a rate ranging from 0.15% to 0.35% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides that such commitment fee for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall accrue at a rate of 0.3% per annum.

In addition, the Amended and Restated Credit Agreement provides that the delayed draw term loan facility shall accrue a ticking fee at a rate ranging from 0.15% to 0.35% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement, and that such ticking fee shall be payable during the period from the Closing Date to the date on which the lenders’ delayed draw term loan facility commitments terminate. The Amended and Restated Credit Agreement further provides that the ticking fee for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter after the Closing Date shall accrue at a rate of 0.3% per annum. The fees outlined above are reported as interest expense and include customary charges relating to letters of credit and an unused commitment fee ranging from 0.15% to 0.30%,vary depending on the Total Net Leverage Ratiototal net leverage ratio as defined in the Amended and Restated Credit Agreement. Fees for bothfrom the nine months ended SeptemberClosing Date through June 30, 2021 and September 30, 20202022 were $0.1 million governing the Revolving Credit Facility.million.

In connection with the RevolvingAmended and Restated Credit Facility originated in 2019,Agreement, deferred financing costs of $0.6$4.0 million were incurred. Deferred financing costs are amortized over the life of the debt instrument and reported as interest expense.expense. As of SeptemberJune 30, 2021 and December 31, 20202022, deferred financing costs net of accumulated amortization were $0.3$9.2 million of which $5.7 million are included in Long-term debt, less current portion, net (related to the senior secured term loan and $0.4senior secured delayed draw term loan) and $3.5 million respectively, and are included in Other assets.assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance Sheets.

Borrowings are designed as alternate base rate
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Each of the loans Canadian prime rateunder the Amended and Restated Credit Agreement mature on April 1, 2027, at which time all outstanding loans, Eurodollartogether with all accrued and unpaid interest, must be repaid and the revolving credit facility commitments will terminate. The Company is required to repay principal on the term loans each quarter in the following amounts (subject to potential adjustment): (i) $3,125,000, in the case of the initial term loan facility, and (ii) an amount equal to 1.25% of the funded delayed draw term loan facility, in the case of the delayed draw term loan facility. The Company is also required to prepay the term loans with the net cash proceeds from any disposition of certain assets (subject to reinvestment rights) or from the incurrence of any unpermitted debt. The Company may borrow, repay and reborrow the revolving loans until April 1, 2027, prepay any of the term loans, and Canadian dollar offered rateterminate any of the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions and the reimbursement of certain lender costs in the case of prepayments of certain types of loans. Interest rates vary

Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations of the Company and its U.S. subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the typeCompany and certain of borrowingthe Company’s U.S. subsidiaries and Total Net Leverage Ratiothe obligations of each of the Company’s Canadian subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the Company and certain of its U.S. and Canadian subsidiaries.

Subject to certain exceptions as definedset forth in the Amended and Restated Credit Agreement, the obligations under the Amended and Restated Credit Agreement are secured by a first priority security interest in and lien on substantially all assets of the most recent fiscal quarter.Company, each other borrower and each guarantor.

The RevolvingAmended and Restated Credit Facility includes customaryAgreement contains various affirmative covenants, including financial maintenance covenants representationsrequiring the Company to maintain compliance with a consolidated minimum interest coverage ratio and warranties. a maximum total net leverage ratio, each determined in accordance with the terms of the Amended and Restated Credit Agreement.

The Company was in compliance with all financial covenants as of SeptemberJune 30, 2021.2022.

In the third quarter of 2020, the Company entered into an amendment to theThe Amended and Restated Credit Agreement which among other items temporarily increasedcontains various events of default (subject to exceptions, thresholds and grace periods as set forth in the allowed letter of credits from $15.0 millionAmended and Restated Credit Agreement). Under certain circumstances, a default interest rate will apply on all obligations at a rate equal to $40.0 million until August 31, 2021 and authorized indebtedness not to exceed $36.0 million for2.0% per annum above the acquisition of Partsmaster.applicable interest rate.


Previous Credit Agreements

Gexpro Services - January 3, 2022 Gexpro Services Credit Agreement

On January 3, 2022, prior to the Gexpro Services Merger, Gexpro Services entered into a credit agreement ("2022 Gexpro Services Credit Agreement") with a financial institution under which Gexpro Services obtained an initial $137 million term loan ("2022 Gexpro Services Term Loan"), a $25 million revolving line of credit ("2022 Gexpro Services Revolver") and a delayed $83 million term loan ("2022 Gexpro Services Delayed Term Loan"), together the "2022 Gexpro Services Facilities". The proceeds of the 2022 Gexpro Services Term Loan and 2022 Gexpro Services Delayed Term Loan were used to fund the Resolux acquisition, repay all borrowings under the 2020 Gexpro Services Credit Agreement (as defined below) and seller’s promissory note from SIS acquisition (refer to Note 103 - Accrued Acquisition LiabilityBusiness Acquisitions for further details of these acquisitions). In connection with the 2022 Gexpro Services Credit Agreement, deferred financing costs of $7.4 million were incurred.

Gexpro Services - February 24, 2020 Gexpro Services Term Loan Credit Agreement

On August 31,February 24, 2020, Lawson acquired Partsmaster from NCH Corporation. As partGexpro Services entered into a credit agreement ("2020 Gexpro Services Term Loan Credit Agreement") with a financial institution under which Gexpro Services obtained a $60 million term loan ("2020 Gexpro Services Term Loan"). Also on February 24, 2020, Gexpro Services entered into a credit agreement ("2020 Gexpro Services Revolver Credit Agreement" and together with the 2020 Gexpro Services Term Loan Credit Agreement, "2020 Gexpro Services Credit Agreements") with a financial institution under which Gexpro Services obtained a $15 million revolving line of credit ("2020 Gexpro Services Revolver"). Availability of the purchase price,2020 Gexpro Services Revolver was reduced by issued and outstanding letters of credit, which were limited to $38.5 million. There were $0.7 million outstanding letters of credit as of December 31, 2021 and $37.7 million outstanding on the Company agreed to pay $33.0 million in May 2021. The payment obligation was discounted to present value using an implied interest rate2020 Gexpro Services Revolver. A loss on debt extinguishment of 1.8%. A discounted current liability of $32.7$0.6 million was recognized as ofrecorded on January 3, 2022 in connection with the January 3, 2022 December 31, 2020 in the Company's consolidated balance sheet. In May 2021, the Company paid the outstanding $33.0 million accrued acquisition liability.Gexpro Services Credit Agreements.

TestEquity - 2017 TestEquity Credit Agreement

On April 28, 2017, TestEquity entered into a credit agreement ("2017 TestEquity Credit Agreement") with a financial institution under which TestEquity obtained a $101 million term loan ("2017 TestEquity Term Loan") and a $15.0 million
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Paymentrevolving line of credit ("2017 TestEquity Revolver"). Availability of the 2017 TestEquity Revolver was guaranteed underreduced by issued and outstanding letters of credit, which were limited to $2.0 million. There were $0.0 million outstanding letters of credit as of December 31, 2021 and $1.0 million outstanding on the Purchase Agreement which included the issuance of a $33.0 million irrevocable standby letterrevolving line of credit. The letterA loss on debt extinguishment of credit$0.2 million was releasedrecorded on April 1, 2022 in June 2021 subsequent to paymentconnection with the April 1, 2022 Amended and Restated Credit Agreement executed in connection with the consummation of the liability in May 2021.

Interest expense of Mergers$0.3 million on the accrued acquisition liability was recorded in the nine months ended September 30, 2021, with all interest expense recorded prior to the payment of the accrued acquisition liability..

Note 11 - Stock Repurchase Program

In the second quarter of 2019, the Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company's common stock from time to time in open market transactions, privately negotiated transactions or by other methods. The Company had $4.5 million remaining under its repurchase plan as of September 30, 2021. No shares were repurchased in 2021 under the Company stock repurchase plan. The Company purchased 47,504 of common stock at an average price of $36.93 under the repurchase program in the first quarter of 2020.

Note 12 - Severance Reserve

Changes in the Company’s reserve for severance included in Accrued expenses and other liabilities, as of September 30, 2021 and 2020 were as follows:
 (Dollars in thousands)
 Nine Months Ended September 30,
 20212020
Balance at beginning of period$1,251 $909 
Charged to earnings328 1,520 
Payments(1,085)(1,239)
Balance at end of period$494 $1,190 

Note 1314 - Stock-Based Compensation

The Company recorded stock-based compensation benefitexpense of $1.2$4.0 million and expense of $4.7$4.0 million for the three and six months ending September 30, 2021 and 2020, respectively, and expenseended of $1.4 million and benefit of $2.8 million for the nine months ending SeptemberJune 30, 2021 and 2020,2022, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock. Stock-basedA stock-based compensation lialiability bility of $14.0$11.0 million asas of SeptemberJune 30, 20212022 and $14.4$0.0 million as of December 31, 2020 is2021 was included in Accrued expenses and other liabilities.current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

A summaryEquity Compensation Plans

The Company's Amended and Restated 2009 Equity Compensation Plan (“Equity Plan”) provides for the grant of stock-basednonqualified and incentive stock options, stock awards issued duringand stock units to officers and employees of the nine months ended SeptemberCompany. The Equity Plan also provides for the grant of option rights and restricted stock to non-employee directors. As of June 30, 2021 follows:2022, the Company had approximately 164,000 shares of common stock still available under the Equity Plan. Non-employee directors are limited to grants of no more than 20,000 shares of common stock in any calendar year and other than non-employee directors are limited to grants of no more than 125,000 shares of common stock in any calendar year. The Equity Plan is administered by the Compensation Committee of the Board of Directors, or its designee, which as administrator of the plan, has the authority to select plan participants, grant awards, and determine the terms and conditions of the awards.

The Company also has a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of Stock Performance Rights (“SPRs”) that allow non-employee directors, officers and key employees to receive cash awards, subject to certain restrictions, equal to the appreciation of the Company's common stock. The SPR Plan is administered by the Compensation Committee of the Board of Directors.

Stock Performance Rights

SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of the Company's common stock over the SPR exercise price when the SPRs are surrendered. Expense, equal to the fair market value of the SPR at the date of grant and remeasured each reporting period, is recorded ratably over the vesting period. Compensation expense is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The outstanding SPRs were granted with approximately a seven year life and vest over one to three years beginning on the first anniversary of the date of the grant. The SPRs are liability classified and included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

Restricted Stock Units ("RSUs")Awards
The Company i
ssued 7,862 RSUsRestricted stock awards ("RSAs") generally vest over a one to key employees that cliff vestthree years period beginning on December 31, 2023. The Company issued 2,000 RSUs to one key employee that vest ratably through June 15, 2023 and 5,000 RSUs to one key employee that cliff vest on April 15, 2024. Additionally the Company issued 28,600 RSUs to various employees that vest ratably through May 16, 2024. The Company issued 6,995 RSUs to certain membersfirst anniversary of the Company's Board of Directors with a vesting date of May 11, 2022. Each RSU is exchangeablethe grant. Upon vesting, the vested restricted stock awards are exchanged for 1 sharean equal number of the Company'sCompany’s common stock. The participants have no voting or dividend rights with the restricted stock awards. The restricted stock awards are valued at the closing price of the common stock aton the enddate of grant and the expense is recorded ratably over the vesting period.

Market Stock Units

Market Stock Units ("MSUs")
The Company issued 19,688 MSUs to key employees that cliff vest on December 31, 2023. MSUs are exchangeable for between 0% to 150% of the Company's common stockshares at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 29,532 shares, will be determinedperiod based uponon the trailing sixty-day60 day average closing price of the Company's common stock. The value of the MSUs is determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the common stock on December over the measurement period.

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Stock Options

In April 2022, the Company issued 242,000 stock options to key employees that vest through the fifth anniversary from the grant date. The fair value was determined using a Black-Scholes valuation model with a grant date fair value of $2.2 million.Each stock option can be exchanged for 1 share of the Company’s common stock at the stated exercise price. Upon vesting, stock options are recognized as a component of equity. Unrecognized compensation related to stock options as of June 30, 2022 was $2.1 million.

Performance Awards

Performance Awards ("PAs")
The Company issued 15,723 PAs to key employees that cliff vest on December 31, 2023. PAs are exchangeable for sharesbetween 0% to 150% of the Company's common stock ranging from zero to 23,585 shares, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics.metrics at the end of the vesting period. The PAs are liability classified and included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

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Note 14 — Income TaxesExcept for the stock options above, no additional stock-based awards were issued during the six months ended June 30, 2022.


Note 15 - Earnings Per Share

As a result of the Mergers discussed in Note 1 - Nature of Operations and Basis of Presentation, all historical per share data and number of shares and numbers of equity awards were retroactively adjusted. The following table provides the computation of basic and diluted earnings per share:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands, except share and per share data)2022202120222021
Basic income per share:
Net (loss) income$(4,715)$461 $(7,252)$(1,429)
Basic weighted average shares outstanding20,343,028 10,251,827 15,347,943 10,246,383 
Basic (loss) income per share of common stock$(0.23)$0.04 $(0.47)$(0.14)
Diluted income per share:
Net (loss) income$(4,715)$461 $(7,252)$(1,429)
Basic weighted average shares outstanding20,343,028 10,251,827 15,347,943 10,246,383 
Effect of dilutive securities— 306 — — 
Diluted weighted average shares outstanding20,343,028 10,558,275 15,347,943 10,246,383 
Diluted (loss) income per share of common stock$(0.23)$0.04 $(0.47)$(0.14)
Anti-dilutive securities excluded from the calculation of diluted income per share464,068 — 359,358 304,178 

Note 16 - Income Taxes

The Company recorded income tax expensebenefit of $2.7$3.6 million, a 21.1%43.4% effective tax rate for the ninethree months ended SeptemberJune 30, 2021. The effective tax rate approximates the U.S. statutory tax rate as state taxes and other permanent items are offset by the reversal of uncertain tax positions.2022. Income tax expense of $6.0$0.6 million, a 28.7%54.8% effective tax rate was recorded for the ninethree months ended SeptemberJune 30, 2020.2021. The effective tax rate isfor the three months ended June 30, 2022 was higher than the U.S. statutory rate primarily due primarily to state taxes, recordingforeign operations, as well as transaction costs and other permanent items.

The Company recorded income tax benefit of reserves$4.6 million, a 38.6% effective tax rate for the six months ended June 30, 2022. Income tax expense of $0.4 million, a 37.5% effective tax rate, was recorded for the six months ended June 30, 2021. The change in the year over year effective tax rate was primarily due to the changes in the valuation allowance in the six months ended June 30, 2021, merger costs incurred in the six months ended June 30, 2022, and the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 - Business Acquisitions. Relative to the U.S. statutory rate, the effective tax rate for the six months ended June 30, 2022 was impacted by state taxes, foreign operations, and the expiration of uncertain tax positions, as well as liabilities and transaction expenses related to the Mergers, and discrete tax items related to changes in the uncertain tax positions and an inclusion for Global Intangible Low Tax Income.prior period true-ups as a result of the completed Mergers.
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The Company and its subsidiaries are subject to U.S. Federalfederal income tax, as well as income tax of multiple state and foreign jurisdictions. As of SeptemberJune 30, 2021,2022, the Company is subject to U.S. Federalfederal income tax examinations for the years 20172018 through 20192020 and income tax examinations from various other jurisdictions for the years 20142015 through 2019.2021.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.

Note 17 - Commitments and Contingencies

Shareholder lawsuits

Between January 25, 2022 and March 7, 2022, 7 lawsuits were filed in federal district courts against DSG, the members of the DSG board of directors and, in some cases, the TestEquity Equityholder, TestEquity, Merger Sub 1, the Gexpro Services Stockholder, Gexpro Services and Merger Sub 2 in connection with the Mergers. Between February 24, 2022 and April 28, 2022, all of these lawsuits were voluntarily dismissed by the respective plaintiffs. The plaintiffs in these lawsuits have made a demand to DSG for payment of attorneys’ fees and expenses in connection with these lawsuits.

In addition, on each of February 2, 2022, February 14, 2022 and February 15, — Contingent Liabilities2022, purported DSG stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of DSG (collectively, the “Books and Records Demands”). One stated purpose of the Books and Records Demands is to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG board of directors’ approval of the Mergers. In addition, on March 16, 2022, one of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Robert Garfield v. Lawson Products, Inc., Case No. 2022-0252, in the Court of Chancery of the State of Delaware against DSG (the “Garfield Action”). On March 22, 2022, another of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Jeffrey Edelman v. Lawson Products, Inc., Case No. 2022-0270, in the Court of Chancery of the State of Delaware against DSG (the “Edelman Action”). The Garfield Action and the Edelman Action are collectively referred to as the “Books and Records Actions.” The Books and Records Actions seek to compel inspection of certain books and records of DSG to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG board of directors’ approval of the Mergers. Pursuant to a stipulation approved by the Delaware Court of Chancery on March 24, 2022, the Books and Records Actions were held in abeyance until May 23, 2022. Following the parties’ inability to reach a resolution of the Books and Records Actions, the Delaware Court of Chancery scheduled briefing followed by a trial on July 14, 2022 to adjudicate the Books and Records Actions. At the conclusion of the trial, the Court ruled orally that the stockholders’ demands would be granted only in one respect (production of documents sufficient to show the identities of any guarantors of debt of the acquired companies) and the Court denied the remainder of the stockholders’ requests. The Court’s ruling was memorialized in an order issued on July 20, 2022. DSG and the members of its board of directors disagree with and intend to vigorously defend against the Books and Records Actions and any other claim, if asserted, arising from the Books and Records Demands.

Due to the inherent uncertainties of these matters, DSG is not able to predict either the outcome of these matters on its business, financial condition and results of operations, or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the condensed consolidated financial statements for these matters.

Environmental matter

In 2012, it was determined a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM"ADEM”) voluntary cleanup program.

TheA remediation plan was approved by ADEM in 2018,2018. The plan consists of chemical injections throughout the affected area, andas well as subsequent monitoring.monitoring of the area. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring is ongoing pending certification by ADEM.the affected area. At SeptemberJune 30, 2021 estimated2022 the Company had less than $0.1 million accrued for potential monitoring costs. The costs for future monitoring are not significant and have been fully accrued. The Company does not expect to capitalize any amounts related to the remediation plan.


Note 16 — Related Party Transaction

During the nine months ended September 30, 2021, the Company purchased approximately $0.1 million of inventory from a company owned by an immediate relative of a Board member at fair market value. No remaining liabilities exist with respect to this purchase as of September 30, 2021.

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Note 18 - Related Party Transactions

Management Services Agreements

Prior to the Mergers, a subsidiary of TestEquity was party to a management agreement with Luther King Capital Management Corporation (“LKCM”) for certain advisory and consulting services (the “TestEquity Management Agreement”), and a subsidiary of Gexpro Services was party to a management agreement with LKCM for certain advisory and consulting services (the “Gexpro Services Management Agreement”). In connection with the closing of the Mergers on April 1, 2022, (i) all of the TestEquity subsidiary’s rights, liabilities and obligations under the TestEquity Management Agreement were novated to, transferred to and assumed by the TestEquity Equityholder, and LKCM released the TestEquity subsidiary from all obligations and claims under the TestEquity Management Agreement, and (ii) all of the Gexpro Services subsidiary’s rights, liabilities and obligations under the Gexpro Services Management Agreement were novated to, transferred to and assumed by the Gexpro Services Stockholder, and LKCM released the Gexpro Services subsidiary from all obligations and claims under the Gexpro Services Management Agreement (collectively, the “Novations”). During the first six months of 2022, expense of $0.5 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive (Loss) Income, reflecting expenses accrued under these management agreements from January 1, 2022 through the April 1, 2022 Merger Date. As of December 31, 2021, $4.8 million was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets in connection with these management agreements. During the first three months of 2022, expense of $0.5 million was recorded under these management agreements. As of April 1, 2022, the prior obligation of $5.3 million was effectively settled and considered to be a deemed equity contribution by LKCM recorded to additional paid in capital. As a result of the Novations, no additional expense under these management agreements has been incurred subsequent to the Mergers.

TestEquity and Gexpro Services Mergers

Immediately prior to the Mergers, entities affiliated with Luther King Capital Management Corporation (“LKCM”) and J. Bryan King (the Chairman of the DSG board of directors), including private investment partnerships for which LKCM serves as investment manager, owned a majority of the ownership interests in the TestEquity Equityholder (which in turn owned all of the outstanding equity interests of TestEquity as of immediately prior to the completion of the TestEquity Merger). As of the Merger Date, Mr. King was a director of the TestEquity Equityholder. In addition, as of the Merger Date, Mark F. Moon (a member of the DSG board of directors) was a director of, and held a direct or indirect equity interest in, the TestEquity Equityholder.

Immediately prior to the Mergers, entities affiliated with LKCM and Mr. King, including private investment partnerships for which LKCM serves as investment manager, owned a majority of the ownership interests in the Gexpro Services Stockholder (which in turn owned all of the then outstanding stock of Gexpro Services).

Immediately prior to the Mergers, entities affiliated with LKCM and Mr. King owned approximately 48% of the shares of DSG common then stock outstanding.

As a result of and after the consummation of the Mergers, entities affiliated with LKCM and J. Bryan King (the Chairman of the DSG board of directors) owned in the aggregate approximately 14,640,000 shares of DSG common stock as of the Merger Date, which shares represented approximately 75% of the shares of DSG common stock then outstanding after giving effect to the issuance of shares as of the Merger Date in connection with the consummation of the Mergers. Such aggregate share amount does not include any of the up to 700,000 additional shares of DSG common stock or any of the up to 1,000,000 additional shares of DSG common stock potentially issuable to the TestEquity Equityholder and the Gexpro Services Stockholder, respectively, in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement, respectively, summarized in Note 1 - Nature of Operations and Basis of Presentation.

Note 1719 – Segment Information

The Company's operating segments, LawsonAs a result of the Mergers described in Note 1 - Nature of Operations and Bolt, also representBasis of Presentation, the Company evaluated its operational, reporting and management structures and identified 3 reportable segments becausebased on the nature of differencesthe products and services and type of customer for those products and services. A description of our reportable segments is as follows:

•Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and government maintenance, repair and operations market.
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•TestEquity is a distributor of test and measurement equipment and solutions, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.
•Gexpro Services is a global supply chain solutions provider, specializing in developing and implementing vendor managed inventory and kitting programs to high-specification manufacturing customers.

In addition to these 3 reportable segments, the businesses' financial characteristicsCompany also identified an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the methods they employ to deliver product to customers. Theinconsequential results of the Company's operating segments are reviewed byBolt Supply House ("Bolt") non-reportable segment. Revenues within the Company’s chief operating decision maker responsibleAll Other category represent the results of Bolt. Bolt generates revenue primarily from the sale of MRO products to its walk-up customers and service to its customers through their 14 branch locations. Bolt Supply does not provide VMI services for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network ofcustomers or provide services in addition to product sales representatives to visit the customercustomers. Revenue is recognized at the customers' location and produce sales orders fortime that control of the product that is then shippedhas been transferred to the customer and it also provides VMI services. The Bolt segment primarily sells product to customers whenwhich is either upon delivery or shipment depending on the customers visit one of Bolt's 14 branch locations and the product is delivered to the customers at the point of sale. The Bolt segment total assets include the valueterms of the acquired intangibles and the related amortization within its operating income.contract.

Financial information for the Company's reportable segments follows:is presented below. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Revenue
Lawson$93,686 $79,806 $281,877 $224,511 
   Bolt Supply11,884 10,471 33,789 28,947 
      Consolidated total$105,570 $90,277 $315,666 $253,458 
Gross profit
Lawson$51,127 $43,038 $151,436 $123,031 
Bolt Supply4,919 4,187 13,790 11,428 
Consolidated total$56,046 $47,225 $165,226 $134,459 
Operating income
   Lawson$3,488 $1,112 $10,188 $19,003 
   Bolt Supply1,132 889 2,624 2,205 
      Consolidated total4,620 2,001 12,812 21,208 
Interest expense(119)(142)(710)(329)
Other income (expense), net(209)615 802 15 
      Income before income taxes$4,292 $2,474 $12,904 $20,894 
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Revenue
Lawson (1)
$107,334 $— $107,334 $— 
TestEquity97,874 67,856 170,276 133,631 
Gexpro Services99,792 66,296 181,475 125,348 
All Other16,336 — 16,336 — 
Total revenue$321,336 $134,152 $475,421 $258,979 
Operating Income
Lawson (1)
$(2,562)$— $(2,562)$— 
TestEquity471 3 (133)(1,362)
Gexpro Services5,390 5,465 8,982 9,083 
All Other814 — 814 — 
Total operating income$4,113 $5,468 $7,101 $7,721 

(1)
Note 18 - COVID-19 Risks and Uncertainties

There is substantial uncertainty asIncludes the operating results of Lawson only subsequent to the effectMerger Date of April 1, 2022 and not Lawson operating results prior to the COVID-19 pandemic will have on the future results of the Company. Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely.

Mergers.
The government of the State of Illinois defines Lawson Products as an essential business. A change in this status could result in the temporary closure of our business if the COVID-19 pandemic worsens, and government restrictions are reimposed to require business shutdowns. The COVID-19 pandemic could result in a temporary closure of any or all of our office space, distribution facilities, or Bolt branch locations, as well as disruptions to our supply chain and interactions with our suppliers and customers. The pandemic may have a material adverse impact on future financial results, liquidity, and overall performance of the Company. It is reasonably possible that estimates made in the financial statements may be materially and adversely impacted as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The total amount deferred is $3.5 million, with $1.7 million expected to be paid in the fourth quarter of 2021 and the remainder in 2022. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows.

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The Company will continue to closely monitor the operating environment and will take appropriate actions to protect the safety for its employees, customers and suppliers.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


PartsmasterThe following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, the TestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc. (conducting business as Gexpro Services) audited consolidated financial statements and accompanying notes included in the Company's Form 8-K/A as filed on June 15, 2022, and the Lawson Products, Inc. audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2021.

In August 2020, we acquired Partsmaster, a leading Maintenance, RepairReferences to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc. and Operations ("MRO") distributor from NCH Corporation, with approximately 200 sales representatives and approximately 16,000 customers throughout the United States and Canada. The purchase price of the acquisition was $35.3 million in cash and the assumption of certain liabilities. We paid $2.3 million at the time of the acquisition and paid the remaining $33.0 million in May 2021. Partsmaster contributed $13.6 million of revenue and an operating loss of $0.8 millionall entities consolidated in the third quarter of 2021 and $44.6 million of revenue and $0.4 million of operating income in the first nine months of 2021.

Additional information related to the Partsmaster acquisition is provided in Note 2 - Acquisition in the notes to theaccompanying unaudited condensed consolidated financial statements.

COVID-19 PandemicOverview

ThereOrganization and Business Combination

Effective May 5, 2022, Distribution Solutions Group, Inc. ("DSG"), a Delaware corporation formerly known as Lawson Products, Inc., changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” Distribution Solutions Group, Inc. is substantial uncertainty asa specialty distribution company structure providing value added distribution solutions to the effect the COVID-19 pandemic will have on the future results of the Company. Various events related to COVID-19 may impact revenue, product sourcing, sales functions,maintenance, repair and customers' ability to pay timely.operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets. DSG has three principal operating companies: Lawson Products, Inc. ("Lawson"), TestEquity Acquisition, LLC ("TestEquity") and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services").

The governmentcomplementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in the Mergers for the purpose of creating a specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management. The DSG leadership team provides oversight to the separate leadership teams of each of the Stateoperating companies. This structure enables the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies. The combined company has the ability to utilize its combined financial resources to accelerate a strategy of Illinois continuesexpansion through both business acquisitions and organic growth.

Refer to define Lawson Products as an essential business. A changethe section entitled "Organization" in this status could resultNote 1 - Nature of Operations and Basis of Presentation in the temporary closure of our business. The COVID-19 pandemic could result in a temporary closure of any or all of our office space, distribution facilities, or Bolt branch locations, as well as disruptions to our supply chain and interactions with customers. The pandemic may have a material adverse impact on future financial results, liquidity, and overall performancePart 1. Financial Statements, which section is incorporated herein by reference, for description of the Company. ItTestEquity Merger and Gexpro Services Merger consummated on April 1, 2022.

Our Three Principal Operating Companies

Lawson

Lawson is possible that estimates made ina distributor of products and services to the financial statements may be materiallyindustrial, commercial, institutional, and adversely impacted asgovernmental maintenance, repair and operations ("MRO") marketplace. Lawson distributes MRO products to its customers through a resultnetwork of COVID's future path, including delay in payment of receivables, impairment losses related to goodwillsales representatives throughout the U.S. and other long-lived assets, and inability to utilize deferred tax assets.Canada.

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief,Background and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The total amount deferred is Operations$3.5 million, with $1.7 million expected to be paid in 2021 and the remainder in 2022. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows.

Lawson delivers quality products to customers and offers them extensive product knowledge, product application expertise and Vendor Managed Inventory ("VMI") services. Lawson competes for business primarily by offering a value-added service approach in which highly trained sales representatives manage the product inventory for customers. The onsetVMI model makes it less likely that customers will run out of a product while optimizing their inventory levels. Lawson ships products to its customers in all 50 states, Puerto Rico, Canada, Mexico and the COVID-19 pandemic occurred in March 2020. This resulted in widespread closures of businesses, decreased travel and other substantial restrictions on economic activity beginning in the first quarter of 2020. The most severe restrictions were effective in the second quarter of 2020, particularly the month of April. These restrictions began to be relaxed subsequent to April 2020, which led to an improved business climate and increased economic activity throughout the remainder of the year. The relaxed restrictions continued in the first nine months of 2021, which led to increased business activity and contributed to improved operating results compared to the first nine months of 2020.Caribbean.

We will continueVision/Strategy - Lawson's vision is to be its customers' first choice for maintenance, repair and operational solutions that improve their operating performance. Lawson plans to achieve its vision by working closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees,with customers and suppliers. While we believe that COVID-19 and supply chain disruptions continue to negatively impact our sales and cost control measures, our ability to effectively service our customers have continued to generate positive cash flow that has enabled us to maintain a strong financial position. We plan to continue to respond to pandemic developments in a prompt and disciplined mannerenhance their operations by providing them with an emphasis on maintaining our strong financial position.quality products, superior service and innovative solutions.

Sales Drivers

- The North American MRO distribution industrymarket is highly fragmented. We competeLawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall
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strength of the manufacturing sector of the U.S. economy which was significantlyhas been affected by the COVID-19 pandemic. One measure used to evaluateDSG believes that the strength of the industrial products market is the PMI indexPurchasing Managers Index ("PMI") published by the Institute for Supply Management which is considered by many economists to be a reliable near-term economic barometeran indicative measure of the relative strength of the economic environment of the industry in which Lawson operates. The PMI is a composite index of economic activity in the United States manufacturing sector. ADSG believes that a measure
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that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 60.2was 54.8 in the thirdsecond quarter of 20212022 compared to 55.260.8 in the thirdsecond quarter of 2020.

Our2021. Lawson's sales are also influenced by the number of sales representatives and their productivity. Our average sales rep headcount for the third quarter of 2021 was 1,076 sales representatives, inclusive of the Partsmaster sales representatives. This is compared to the average sales rep headcount of 993 sales reps in the third quarter of 2020, which only included Partsmaster sales reps for the one-month post-acquisition period of the month of September 2020. Lawson segment sales representative productivity, measured as sales per rep per day and including Partsmaster sales reps, increased 8.2% to $1.352 in the third quarter of 2021 compared to $1.249 in the prior year quarter. Partsmaster contributed $13.6 million in sales in the third quarter of 2021 compared to $5.4 million in sales in the third quarter of 2020 for one-month post-acquisition. Excluding the impact of Partsmaster, sales rep productivity measured as average sales per rep per day increased 19.9% compared to the year ago quarter, primarily driven by the improved business conditions and fewer pandemic-related restrictions in the third quarter of 2021 compared to the year ago quarter. This was partially offset by the negative impacts of supply chain issues that have affected the broader economy throughout this year. We have instituted various price increases during 2021 in response to rising supplier, transportation and labor costs. We planplans to continue concentrating ourits efforts on increasing the productivity and size of its sales team. Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations. Lawson also uses an inside sales team and an e-commerce site to generate sales.

TestEquity

TestEquity is a leading distributor of test and measurement equipment and solutions, electronic production supplies and tool kits from its leading manufacturing partners. TestEquity operates primarily through four brands, TestEquity, TEquipment, Jensen Tools and Techni-Tool, focusing primarily in North America with a network of sales representatives throughout the United States, Canada, Mexico and the United Kingdom.

Background and Operations - Based out of Moorpark, California, TestEquity is a large, comprehensive provider of electronic test solutions in the United States supporting the aerospace, defense, automotive, electronics, education, and medical industries. TestEquity designs, rents and sells a full line of high-quality environmental test chambers. In addition to a large array of test and measurement products, TestEquity also offers calibration, refurbishment and rental solutions and a wide array of refurbished products. TestEquity continues to benefit from ubiquitous electronification of all types of products across most industries including IOT, EV, and 5G.

TEquipment, is one of the top distributors for both test and measurement and electronic production supplies in the US. Going to market with an eCommerce focused strategy, TEquipment offers a range of 200,000 products and 500 manufacturer brands, most of which overlap with the rest of the TestEquity group.

Techni-Tool is one of the industry’s largest solder, soldering equipment and electronic production distributors. Techni-Tool offers a wide range of products to support electronic production as well as compliance testing. In addition to the approximately 80,000 of products offered, Techni-Tool also provides vendor managed inventory solutions and dedicated technical support.

Jensen Tools, as a top distributor for the electronics MRO customer base, has access to approximately 400 suppliers and over 70,000 products. Jensen Tools offers private label Jensen branded hand tools that have been developed over years of customer usage and manufactured to a specified and demanding tolerance level and is viewed as a leader in the industry. Jensen Tools employs a dedicated team of engineering, operational and sales professionals who focus on designing and building quality tool kits for its customers.

Vision/Strategy - TestEquity intends to grow sales organically, pursue acquisitions and continue to expand and improve its service offerings to its customers. In particular, TestEquity strives to improve its digital experience, with a consistent approach for all of its brands. TestEquity intends to seek to increase its market share through continued expansion of product lines and greater penetration of the eCommerce market, enabled through investment in key digital talent and leverage of the existing TestEquity and TEquipment platforms. TestEquity expects to benefit from its improved integrated organization and processes, driving improved gross margin and financial operating leverage.

Sales Drivers - Across both the test and measurement and electronic production supplies businesses the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors. TestEquity believes that the PMI is an indicative measure of the relative strength of the economic environment of the industry in which TestEquity operates. The PMI index is a composite index of economic activity in the United States manufacturing sector. TestEquity believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 54.8 in the second quarter of 2022 compared to 60.8 in the second quarter of 2021.

TestEquity management focuses on the internal metric of Sales per Day (“SPD”) and Day Adjust Growth (“DAG”). The SPD calculates and compares TestEquity’s total sales divided by the number of selling days, adjusted for weekends and holidays. A selling day generally represents a business day in which TestEquity ships products to its customers. The DAG represents the percentage increase or decrease in the SPD for a defined period of time.
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Specifically in respect of its Electronics Production Supplies business, the current semi-conductor chip shortage, due in significant part to the COVID-19 pandemic, is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process. TestEquity anticipates that recovery of this important part of its customers’ supply chain may not occur until 2023.

Gexpro Services

Gexpro Services is a world-class global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs. Gexpro Services provides comprehensive supply chain management solutions, including a full technology suite offering of vendor managed inventory, kitting, global logistics management, manufacturing localization and import expertise, value engineering and quality assurance. Gexpro Services' end-to-end project management is designed to support manufacturing OEMs with their engineered material specifications, fulfillment, and quality requirements to improve their total cost of ownership. Gexpro Services has manufacturing and supply chain operations in over 32 Service Center sites across nine countries including key geographies in North America, South America, Asia, Europe, and the Middle East. Gexpro Services serves customers in six vertical markets, including renewables, industrial power, consumer and industrial, technology, transportation, and aerospace and defense.

Background and Operations- Gexpro Services was formed in November 2019 and, in February 2020, acquired the “Gexpro Services” business from French distributor Rexel S.A. via a carve-out acquisition. Gexpro Services has now fully separated its “Gexpro Services” operations from Rexel and operates as a stand-alone organization with its own leadership team, operating activities, financial systems and team members.

As a top distributor and service provider to the OEM market, Gexpro Services has approximately 3,100 suppliers offering approximately 60,000 products. These products are inventoried and sourced through 32 locations in North America, South America, Asia, Europe, and the Middle East.

Vision/Strategy- Gexpro Services intends to grow organically through market share expansion primarily through new production introduction, increased sales of products and services to existing customers and expansion of its customer base. Gexpro Services believes that its services benefit its customers by helping them reduce their direct and indirect procurement costs and total cost of ownership for high volume, low value Class C parts, and that its services can help drive substantial cost savings for its customers. Additionally, Gexpro Services intends to grow its business through strategic, accretive acquisitions, and through continued improvement in service and product offerings to its customers.

Sales Drivers- Gexpro Services believes that the PMI Index is an indicative measure of the relative strength of the economic environment of the industry in which Gexpro Services operates. The PMI index is a composite index of economic activity in the United States manufacturing sector. Gexpro Services believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 54.8 in the second quarter of 2022 compared to 60.8 in the second quarter of 2021

Key Factors Affecting our sales representatives.Results of Operations and Financial Condition

Supply Chain Disruptions

Along with the broader economy, we are experiencing additional pressure in our supply chain,continue to be affected by rising supplier costs caused by inflation and increased transportation and labor shortages and inflation.costs. This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, and increased product costs. Further discussion in included within the financial discussionwhich has offset some of the Management's Discussionsales gains we recorded in 2022 compared to 2021. The supply chain disruptions have also led to higher product costs which have contributed to lower gross margins as a percentage of sales compared to the prior year. We have instituted various price increases during 2021 and Analysis of Financial Condition2022 in response to rising supplier costs, as well as increased transportation and Results of Operations.labor costs.

Non-GAAP Financial Measure - Adjusted Non-GAAP Operating IncomeImpact of COVID-19 on Human Capital

The Company believes that its response to the COVID-19 pandemic demonstrated its ability to focus on the safety of its team members while continuing to service its customers. Lawson, TestEquity, and Gexpro Services were deemed essential businesses early in the pandemic, which allowed them to continue to operate their facilities. While there were some limitations on the ability to physically visit customer locations, the Company continued to service various customers via phone and electronic communication channels and other technological means, while instituting procedures to help maintain
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compliance with applicable social distancing guidelines in respect of in-person operations. The Company currently has the majority of its corporate workforce working through a combination of in the office and remote settings and continues to monitor local, state and federal COVID-19 requirements so that its business operations and sales representative activities operate in accordance with these rules.

Impact of COVID-19 on Financial Performance

Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely. While the overall business environment has been recovering, the pandemic negatively impacted the Company’s financial performance in 2021. Specifically in respect of TestEquity, the current semi-conductor chip shortage, due in significant part to the COVID-19 pandemic, is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process. TestEquity anticipates that recovery of this important part of its customers’ supply chain may not occur until 2023.

Cyber Security Incident

In February 2022, DSG became aware that its computer network was the subject of a cyber incident potentially involving unlawful access. DSG engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network.

Because of the nature of the information that may have been compromised, DSG was required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and has taken other actions, such as offering credit monitoring services. DSG has not incurred material costs and, at this time, is unable to estimate the total cost of any remediation that may be required.

Critical Accounting Policies and Use of Estimates

We believehave disclosed our significant accounting policies in Note 2 - Summary of Significant Accounting Policies to the unaudited condensed consolidated financial statements. The following provides information on the accounts requiring more significant estimates.

Inventory Reserves — Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson and TestEquity segments and weighted average for the Gexpro Services segment. Most of our products are not exposed to the risk of obsolescence due to technology changes. However, some of our products do have a limited shelf life, and from time to time we add and remove items from our catalogs, brochures or website for marketing and other purposes.

To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence. In general, depending on the product category, we reserve inventory with low turnover at higher rates than inventory with higher turnover.

At June 30, 2022, our inventory reserve was $9.2 million, equal to approximately 3.5% of our gross inventory. A hypothetical change of one percent to our reserve as a percent of total inventory would have affected our cost of goods sold by $2.5 million.

Income Taxes— Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

Goodwill Impairment – Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.
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The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If the Company determines that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

Business Combinations - We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:
•intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, recurring revenues attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;
•deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances;
•inventory; property, plant and equipment; pre-existing liabilities or legal claims; and
•goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.

Valuation of Earnout Derivative Liability - The Company's earnout derivative liability is classified as a Level 3 instrument and is measured at fair value on a recurring basis. The fair value of the earnout derivative liability is measured using the Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis for the year ended December 31, 2022. Inputs to that model include the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock. The significant unobservable inputs used in the fair value measurement of the earnout derivative liability are the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

Revenue Recognition - For reporting purposes, the Lawson segment has two separate performance obligations including products and vendor managed inventory services. The allocation of product and service revenue as well as the estimation of service costs requires judgments and assumptions including the standalone selling prices, the period of time that it takes for the service obligation to be fulfilled and the amount of time spent on vendor managed inventory services during the sales process. Changes in various assumptions could increase or decrease the allocation of service revenue and related costs; however, would not materially impact total reported revenues or reported operating income.

Factors Affecting Comparability to Prior Periods

Our results of operations are not directly comparable to prior results for the periods presented due to the Mergers that were completed on April 1, 2022. The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owns a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are included only subsequent, and not prior, to the April 1, 2022 Merger Date.

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Non-GAAP Financial Measures

The Company's management believes that certain non-GAAP financial measures providesmay provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. We believeManagement believes that these non-GAAP financial measures can help identifyprovide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, ourthe Company's reported results prepared in accordance with GAAP.

Non-GAAP Adjusted EBITDA

Management believes Adjusted EBITDA is an important measure of the Company's operating performance. We define Adjusted EBITDA as operating income is defined by us as GAAP operating income excludingplus depreciation and amortization, costs related to the execution of the Mergers, stock-based compensation, severance expenses,costs, amortization of fair value step-up resulting from the Mergers, acquisition related costs, and other non-recurring items in the period in which these items are incurred. Operating income was $4.6 millionitems. The following table provides our calculation of Adjusted EBITDA for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020. Excluding stock-based compensation, severance expense, acquisition coststhree and other non-recurring items, adjusted non-GAAP operating income was $7.3 million in the third quarter of 2021 compared to $7.7 million in the third quarter of 2020 and $21.4 million for the first nine months of 2021 compared to $20.5 million for the prior year period.

The decrease in adjusted non-GAAP operating income in the third quarter 2021 compared to the prior year quarter was driven by increased supplier costs, higher selling expenses due to higher sales, and restored salary and compensation costs compared to the prior year quarter. The increase in adjusted non-GAAP operating income for the ninesix months ended September 2021 compared to the prior year period is driven by increased sales year to date in 2021 compared to the prior year as the overall business environment improvedJune 30, 2022 and pandemic-related restrictions were relaxed in the first nine months of 2021 compared to the prior year. Additionally, the inclusion of Partsmaster for the full year contributed $1.2 million of adjusted non-GAAP operating income in the first nine months of 2021 compared to $0.4 million of adjusted non-GAAP operating income contributed in the one-month post-acquisition period of September 2020. This was partially offset by the negative impacts of supply chain issues impacting the Company and the broader economy.

2021:

Reconciliation of Operating Income to Non-GAAP Adjusted EBITDA (Unaudited)
21
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)
2022(7)
2021
2022(7)
2021
Operating income$4,113 $5,468 $7,101 $7,721 
Depreciation and amortization14,746 4,466 22,335 8,921 
Stock-based compensation(1)
4,013 — 4,013 — 
Severance costs(2)
953 17 1,409 20 
Merger transaction costs(3)
5,790 367 7,232 527 
Inventory step-up(4)
1,622 — 1,622 — 
Acquisition related costs(5)
334 806 1,337 1,035 
Other non-recurring(6)
82 20 106 130 
Adjusted EBITDA$31,653 $11,144 $45,155 $18,354 

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Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited)
Three Months Ended
September 30,		Nine Months Ended
 September 30,
(Dollars in Thousands)2021202020212020
Operating income as reported by GAAP$4,620 $2,001 $12,812 $21,208 
   Stock based compensation (1)
(1,171)4,746 1,403 (2,767)
   Inventory reserves (2)
425 — 1,750 — 
   Severance expense and employee acquisition costs241 961 846 2,075 
   Costs related to potential acquisitions (3)
3,222 — 4,576 — 
Adjusted non-GAAP operating income$7,337 $7,708 $21,387 $20,516 

(1)    Expense primarily for stock-based compensation, of which a portion varies with the Company'sCompany’s stock priceprice.
(2)    Expense for Partsmaster inventory rationalization plan    Includes severance expense from actions taken in 2022 and write-down of personal protective equipment (PPE) to net2021.
realizable value
(3)     Including    Merger transaction costs related to the evaluationnegotiation, review and execution of the LKCM proposal disclosedMerger Agreements relating to the Mergers.
(4)    Inventory fair value step-up adjustment for Lawson resulting from the reverse merger acquisition accounting.
(5)    Expense for acquisition related costs, unrelated to the Mergers.
(6)    Other non-recurring costs consists of acquisition integration costs and other non-recurring items.
(7)    Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in a Schedule 13D amendment filed onaccordance with GAAP accounting guidance for reverse acquisitions.
May 17, 2021
Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments. See Note 19 - Segment Information of our unaudited condensed consolidated financial statements within Part I. Item 1. Financial Information for additional information about our reportable segments. The following table provides Adjusted EBITDA by reportable segment:
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Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Adjusted EBITDA
Lawson(1)
$9,405 $— $9,405 $— 
TestEquity8,647 3,680 14,138 5,938 
Gexpro Services11,915 7,464 19,926 12,416 
All Other1,686 — 1,686 — 
Consolidated Adjusted EBITDA$31,653 $11,144 $45,155 $18,354 
(1)Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions.

Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non- GAAP Adjusted EBITDA

For management to discuss Lawson's operating results on a comparable basis, Lawson's historical, pre-merger components of operating income have been provided separately in the table below. In addition, Lawson's GAAP results of operations were adjusted to include the results prior to the Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. Management believes this historical information provides the most meaningful basis of comparison for Lawson's operations, is more useful in identifying current business trends, and is important for the user of our financial statements in understanding Lawson's business. Refer to Note 1 - Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements for information about the Mergers.

These amounts are not considered to be prepared in accordance with GAAP, have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Mergers occurred at the beginning of 2021, and should not be viewed as a substitute for the results of operations presented in accordance with GAAP. Lawson's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in DSG's Form 10-Q filed for the quarterly periods ended June 30, 2021 and March 31, 2022.

Lawson Non-GAAP Adjusted Results - Calculation of Supplemental Information (Unaudited)
(in thousands)Three Months Ended June 30, 2022Three Months Ended June 30, 2021
Lawson Operating Income
GAAP Results(1)
Pre-Merger Results(2)
Adjusted
Results(3)
GAAP Results(1)
Pre-Merger Results(4)
Adjusted
Results(3)
Revenue$107,334 $— $107,334 $— $94,861 $94,861 
Cost of goods sold50,552 — 50,552 — 44,960 44,960 
Gross profit56,782 — 56,782 — 49,901 49,901 
Selling, general and administrative expenses59,344 — 59,344 — 47,458 47,458 
Operating (loss) income$(2,562)$— $(2,562)$— $2,443 $2,443 
Lawson Adjusted EBITDA(5)
$9,405 $— $9,405 $— $7,779 $7,779 
(1)Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations from the April 1, 2022 Merger Date through June 30, 2022.
(2)All of Lawson’s results of operations for the three months ended June 30, 2022 occurred after the April 1, 2022 Merger Date.
(3)Lawson's results of operations adjusted for comparability on a period-over-period basis. These non-GAAP results represent Lawson’s total operating activities for the three months ended June 30, 2022 and 2021, regardless of the Merger Date (reflects both pre- and post-Merger results).
(4)Lawson's results of operations for the three months ended June 30, 2021, which occurred prior to the April 1, 2022 Merger Date and were not included in GAAP operating results under reverse merger acquisition accounting. See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements.
(5)Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of GAAP Results as Adjusted EBITDA to operating income.

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(in thousands)Six Months Ended June 30, 2022Six Months Ended June 30, 2021
Lawson Operating Income
GAAP Results(1)
Pre-Merger Results(2)
Adjusted
Results(3)
GAAP Results(1)
Pre-Merger Results(4)
Adjusted
Results(3)
Revenue$107,334 $104,902 $212,236 $— $188,191 $188,191 
Cost of goods sold50,552 49,371 99,923 — 87,882 87,882 
Gross profit56,782 55,531 112,313 — 100,309 100,309 
Selling, general and administrative expenses59,344 44,435 103,779 — 93,610 93,610 
Operating (loss) income$(2,562)$11,096 $8,534 $— $6,699 $6,699 
Lawson Adjusted EBITDA(5)
$9,405 $8,042 $17,447 $— $16,267 $16,267 
(1)Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations from the April 1, 2022 Merger Date through the six months ended June 30, 2022.
(2)Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date and were excluded from GAAP operating results under reverse merger acquisition accounting.
(3)Lawson's results of operations adjusted for comparability on a period-over-period basis. These non-GAAP results represent Lawson’s total operating activities for the six months ended June 30, 2022 and 2021, regardless of the Merger Date (reflects both pre- and post-Merger results).
(4)Lawson's results of operations for the six months ended June 30, 2021, which occurred prior to the April 1, 2022 Merger Date and were excluded from GAAP operating results under reverse merger acquisition accounting. See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements.
(5)Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of GAAP Results as Adjusted EBITDA to operating income.

Composition of Results of Operations

The following results of operations for the three and six months ended June 30, 2022 and 2021 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer. The results of Lawson have been included only subsequent, and not prior to, to the April 1, 2022 Merger Date.

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RESULTS OF OPERATIONS

Three months ended SeptemberMonths Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 compared to three months ended September 30, 2020

 20212020
(Dollars in thousands)Amount% of
Net Sales		Amount% of
Net Sales
Revenue$105,570 100.0 %$90,277 100.0 %
Cost of goods sold49,524 46.9 %43,052 47.7 %
Gross profit56,046 53.1 %47,225 52.3 %
Operating expenses:
Selling expenses24,908 23.6 %19,155 21.2 %
General and administrative expenses26,518 25.1 %26,069 28.9 %
Total operating expenses51,426 48.7 %45,224 50.1 %
Operating income4,620 4.4 %2,001 2.2 %
Interest expense(119)(0.1)%(142)(0.2)%
Other income (expenses), net(209)(0.2)%615 0.7 %
Income before income taxes4,292 4.1 %2,474 2.7 %
Income tax expense636 0.6 %736 0.8 %
Net income$3,656 3.5 %$1,738 1.9 %
Consolidated Results of Operations
Three Months Ended June 30,
20222021
(Dollars in thousands)Amount% of Net SalesAmount% of Net Sales
Revenue
Lawson$107,334 33.4%$— —%
TestEquity97,874 30.5%67,856 50.6%
Gexpro99,792 31.1%66,296 49.4%
All Other16,336 5.1%— —%
Total Revenue321,336 100.0%134,152 100.0%
Cost of goods sold
Lawson50,552 15.7%— —%
TestEquity75,064 23.4%53,452 39.8%
Gexpro70,615 22.0%46,959 35.0%
All Other10,550 3.3%— —%
Total Cost of goods sold206,781 64.4%100,411 74.8%
Gross profit114,555 35.6%33,741 25.2%
Selling, general and administrative expenses
Lawson59,344 18.5%— —%
TestEquity22,339 7.0%14,401 10.7%
Gexpro23,787 7.4%13,872 10.3%
All Other4,972 1.5%— —%
Total Selling, general and administrative expenses110,442 34.3%28,273 21.1%
Operating income4,113 1.3%5,468 4.1%
Interest expense(3,751)(1.2)%(4,262)(3.2)%
Loss on extinguishment of debt(2,814)(0.9)%— —%
Change in fair value of earnout derivative liability(5,693)(1.8)%— —%
Other expense, net(182)—%(186)(0.1)%
(Loss) income before income taxes(8,327)(2.6)%1,020 0.8%
Income tax (benefit) expense(3,612)(1.1)%559 0.4%
Net (loss) income$(4,715)(1.5)%$461 0.3%

Overview of Consolidated Results of Operations

RevenueOur consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022. The increase in gross profit for the second quarter of 2022 compared to the second quarter of 2021 was primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date and Gross Profitsthe exclusion of Lawson operations prior to the Merger Date as a result of the accounting treatment of the Mergers. Excluding Lawson and All Other gross profit of $62.6 million for the
Three Months Ended September 30,Increase
(Dollars in thousands)20212020Amount%
Revenue
Lawson$93,686 $79,806 $13,880 17.4%
Bolt Supply11,884 10,471 1,413 13.5%
Consolidated$105,570 $90,277 $15,293 16.9%
Gross profit
Lawson$51,127 $43,038 $8,089 18.8%
Bolt Supply4,919 4,187 732 17.5%
Consolidated$56,046 $47,225 $8,821 18.7%
Gross profit margin
Lawson54.6 %53.9 %
Bolt Supply41.4 %40.0 %
Consolidated53.1 %52.3 %

second quarter of 2022, gross profit for the second quarter of 2022 improved $18.2 million over the prior year due to 2021 and 2022 acquisitions and growth in the organic businesses. Expenses for the second quarter of 2022 were impacted by merger related transaction and integration costs as well as the inclusion of Lawson operating results subsequent, and not prior to, the Merger Date.









Refer to Results by Reportable Segment below for a complete discussion of our results of operations.

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RevenueResults by Reportable Segment

Lawson Segment
Three Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$107,334 $— $107,334 — %
Cost of goods sold50,552 — 50,552 — %
Gross profit56,782 — $56,782 — %
Selling, general and administrative expenses59,344 — 59,344 — %
Operating loss$(2,562)$— $(2,562)— %
Gross profit margin52.9 %— %
Adjusted EBITDA(1)
$9,405 $— $9,405 — %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Total salesThe $107.3 million increase in revenue for the second quarter of 2022 compared to the second quarter of 2021 was due to the inclusion of Lawson revenue beginning on the Merger Date.

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. These non-GAAP Adjusted Results presented in the table below are referred to within this results of operations discussion as "Adjusted".
Three Months Ended June 30,Change from Adjusted 2021
(Dollars in thousands)2022
Adjusted 2021(1)
Amount%
Revenue$107,334 $94,861 $12,473 13.1 %
Cost of goods sold50,552 44,960 5,592 12.4 %
Gross profit56,782 49,901 6,881 13.8 %
Selling, general and administrative expenses59,344 47,458 11,886 25.0 %
Operating (loss) income$(2,562)$2,443 $(5,005)(204.9)%
Gross profit margin52.9 %52.6 %
Adjusted EBITDA(2)
$9,405 $7,779 $1,626 20.9 %
(1)For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results prior to the Merger Date. Refer to the section Factors Affecting Comparability to Prior Periods and the non-GAAP measures section Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non-GAAP Adjusted EBITDA for more information related to the calculation of adjusted amounts.
(2)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased 16.9%13.1% to $105.6$107.3 million in the thirdsecond quarter of 20212022 compared to $90.3adjusted revenue of $94.9 million in the thirdsecond quarter of 2020. 2021. The increase in revenue over the comparable prior year quarter was primarily driven by the inclusionrealization of price increases enacted throughout 2021 and 2022 to offset rising supplier costs and strengthening sales to our strategic and Kent Automotive customers. $13.6 million of Partsmaster sales in 2021 compared to $5.4 million of Partsmaster sales in the third quarter 2020 one-month post-acquisition period andSales per rep per day improved business conditions fromapproximately 20% over a year ago. Overall, business conditions improved in the thirdago quarter of 2021 compared to the third quarter of 2020, which led to greater business activity and increased sales. Excluding the impact of the Partsmaster acquisition,on fewer sales grew 8.4% over the third quarter of 2020. repsBolt Supply sales improved 13.5% compared to the prior year quarter. Excluding the impact of foreign currency, total sales increased 15.7% in the third quarter of 2021. Both the third quarter of 2021 and 2020 had 64 selling days..

Gross Profit

Reported gross profit increased $8.8$6.9 million to $56.0$56.8 million in the thirdsecond quarter of 20212022 compared to $47.2adjusted gross profit of $49.9 million in the prior year quarter primarily as a result of increased sales. Partsmaster contributed $8.3 million to reported gross profitsales and the related price increases put in the third quarter of 2021 before the classification of certain service-related costs in gross profit compared to $3.6 million in the one-month post-acquisition period in 2020. Consolidatedplace. Lawson gross profit as a percent of sales was 53.1%52.9% in the thirdsecond quarter of 20212022 compared to 52.3%52.6% as adjusted in the prior year quarter. GrossThe gross margin percentage for the thirdsecond quarter 2021of 2022 was impacted by the sustainedincreased supplier costs from
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inflation, supply chain constraints affectingdisruptions, a sales shift toward lower margin customers, and the broader economy, which resulted in product shortagesamortization of the fair value step-up of $1.6 million related to the Mergers. Price increases enacted throughout 2021 and increased supplier, transportation and labor2022 have generally offset the negative impacts of these higher costs. The organic Lawson MRO gross margin, defined as margin generated by Lawson MRO excluding Partsmaster, as a percent of sales was 58.7% in the third quarter of 2021 compared to 58.8% a year ago quarter before the classification of certain service-related costs in gross profit. Actions taken on pricing, product sourcing and labor allocation offset increased freight and inflation pressure.

Selling, General and Administrative Expenses
Three Months Ended September 30,Increase
(Dollars in thousands)20212020Amount%
Selling expenses
Lawson$23,922 $18,373 $5,549 30.2%
Bolt Supply986 782 204 26.1%
Consolidated$24,908 $19,155 $5,753 30.0%
General and administrative expenses
Lawson$23,717 $23,553 $164 0.7%
Bolt Supply2,801 2,516 285 11.3%
Consolidated$26,518 $26,069 $449 1.7%

Selling expenses consist of compensation and support for our sales representatives. Selling expenses increased to $24.9 million in the third quarter of 2021 compared to $19.2 million in the prior year quarter. The increase in selling expense is primarily driven by increased sales, along with the inclusion of $5.6 million in selling expense in the third quarter of 2021 from the Partsmaster business compared to $1.7 million of selling expense from Partsmaster in the one-month post-acquisition period of September 2020. As a percent of sales, selling expenses increased to 23.6% from 21.2% in the third quarter of 2020 driven by the reinstatement of normalized selling activities including sales rep travel not incurred during the pandemic and higher Partsmaster selling expensesrepresentatives as a percent of sales.

General and administrative expenses consist ofwell as expenses to operate our distribution network and overhead expenses to manage the business. Generalexpenses. Selling, general and administrative expenses increased to $26.5$59.3 million in the thirdsecond quarter of 2021 from $26.12022 compared to the adjusted amount of $47.5 million in the prior year quarter. Higher expenses in the second quarter versus a year ago quarter were primarily driven by compensation expense to support increased sales, higher severance, additional stock-based compensation expense, increased merger related costs and higher amortization expense related to the reverse merger accounting.Additionally, the company incurred higher consulting expenses as it reviewed opportunities to increase sales rep productivity.

Adjusted EBITDA

During the three months ended June 30, 2022, Lawson generated Adjusted EBITDA of $9.4 million, an increase of $1.6 million, or 20.9%, from the same period a year ago on an adjusted basis for pre-merger activity driven primarily by increased revenues and expanded margins.

TestEquity Segment
Three Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$97,874 $67,856 $30,018 44.2%
Cost of goods sold75,064 53,452 21,612 40.4%
Gross profit22,810 14,404 8,406 58.4%
Selling, general and administrative expenses22,339 14,401 7,938 55.1%
Operating income$471 $3 $468 15600.0%
Gross profit margin23.3 %21.2 %
Adjusted EBITDA(1)
$8,647 $3,680 4,967 135.0 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $30.0 million to $97.9 million in the three months ended June 30, 2022 from $67.9 million in the comparable period a year ago. The growth was primarily driven by the recovery of the test and measurement market as business conditions improved after the easing of certain COVID-related restrictions, market gain share from supplier expansion in 2021, the inclusion of $21.2 million of aggregate revenue from the 2022 acquisition of TEquipment and National Test Equipment for two and one-month post-acquisition periods, respectively, and the 2021 acquisition of MCS. Excluding acquisitions, revenue grew approximately 10.6% driven by test and measurement revenue growth of approximately 5.7% on higher rental revenues from additional rental units placed with customers as well as a 17.4% growth in revenue in the electronic production supplies business.

As a percent of sales, gross profit increased 210 basis points (bps) to 23.3% for the three months ended June 30, 2022 from 21.2% in the same period in the prior year. The increase was primarily driven by a sales mix toward higher margin electronic production supplies business partially offset by the test and measurement acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenseexpenses increased $7.9 million driven primarily by the acquisitions during the current quarter, costs to support the organic growth of the existing base business, and costs related to the TestEquity Merger.

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Adjusted EBITDA

During the three months ended June 30, 2022, TestEquity generated Adjusted EBITDA of $8.6 million, an increase of $5.0 million from the same period a year ago with approximately $2.0 million driven by the 2021 and 2022 acquisitions and increases in revenues and margins on the base business.

Gexpro Services Segment
Three Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$99,792 $66,296 $33,496 50.5%
Cost of goods sold70,615 46,959 23,656 50.4%
Gross profit29,177 19,337 9,840 50.9%
Selling, general and administrative expenses23,787 13,872 9,915 71.5%
Operating income$5,390 $5,465 $(75)(1.4)%
Gross profit margin29.2 %29.2 %
Adjusted EBITDA(1)
11,915 7,464 4,451 59.6 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue for the three months ended June 30, 2022 was $99.8 million. This compares to revenue of $66.3 million for the same period a year ago or an increase of 50.5%. During the three months ended June 30, 2022 revenue increased primarily due to acquisitions completed in both 2021 and 2022. Of the $33.5 million increase over the second quarter a year ago, $29.5 million was driven by the inclusion2021 and 2022 acquisitions. An expansion of Partsmasterproducts and services to existing customers, as well as the addition of new customers, drove organic growth of approximately 6.0%.

Gross profit was $29.2 million or 29.2% of revenue for the three-month period ending June 30, 2022 compared to $19.3 million or 29.2% for the same period a year ago. The improvement in gross margin dollars was driven by the 2021 and 2022 acquisitions as well as improving global supply chain issues that were more prevalent during 2021. As a percentage of sales, gross profit was flat with price actions, strategic sourcing improvements, new supplier development, and a continued movement toward longer-term agreements with suppliers being offset by lower gross margin profiles of acquired companies.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate our business and service customers.

Selling, general, and administrative expense for the three-month period ending June 30, 2022 was $23.8 million or 23.8% of $3.5 millionrevenue compared to $1.5 $13.9 million included from or 20.9% of revenue for the one-month post-acquisitionsame period last year. The $9.9 million increase was driven primarily by the inclusion of September 2020, offset by a stock-based compensation benefit from the third quarter 2021 and 2022 acquisitions, costs to support the organic revenue increase and costs related to the Gexpro Services Merger.

Adjusted EBITDA

During the three months ended June 30, 2022, Gexpro Services generated Adjusted EBITDA of $11.9 million, an increase of $1.24.5 million compared to expense from the same period a year ago with approximately $3.7 million driven by the 2021 and 2022 acquisitions and organic growth in revenue and margins on the existing base business.

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Table of $4.7 million for the third quarter 2020Contents. Costs of $3.2 million related to the evaluation of the LKCM proposal disclosed in a Schedule 13D amendment filed on May 17, 2021 are also in general
Consolidated Non-operating Income and administrative expenses for the quarter.Expense
Three Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Interest expense$(3,751)$(4,262)$511 (12.0)%
Loss on extinguishment of debt$(2,814)$— $(2,814)—%
Change in fair value of earnout derivative liability$(5,693)$— $(5,693)—%
Other expense, net$(182)$(186)$4 (2.2)%
Income tax (benefit) expense$(3,612)$559 $(4,171)(746.2)%

Interest Expense

Interest expense was $0.13.8 million in the thirdsecond quarter of 2022 compared to $4.3 million of interest expense in the prior year quarter. The decrease was due to a lower interest rate as a result of the debt refinancing related to the Mergers, partly offset by interest on higher outstanding borrowings related to the 2021 and 2022 acquisitions.

Loss on Extinguishment of Debt

The $2.8 million loss on extinguishment of debt in linethe second quarter of 2022 was due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.

Change in Fair Value of Earnout Derivative Liability

The $5.7 million loss in the second quarter of 2022 related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements. Refer to Note 11 - Earnout Derivative Liability within Part I. Item 1. Financial Information to our Unaudited Condensed Consolidated Financial Statements for information about the earnout liability.

Other Expense, Net

Other expense, net was consistent in the second quarter of 2022 compared to the prior year quarter.

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Other Income, Net

Other income, net decreased $0.8 million in the third quarter of 2021 over the prior year quarter primarily due to Canadian currency exchange rate effect.

Income Tax (Benefit) Expense

Income tax expensebenefit was $0.6$3.6 million, resulting in a 14.8%43.4% effective tax rate for the three months ended SeptemberJune 30, 20212022 compared to an income tax expense of $0.7$0.6 million and an effective tax rate of 29.7%54.8% for the three months ended SeptemberJune 30, 2020.2021. The effective tax rate isfor the three months ended June 30, 2022 was higher than the U.S. statutory rate primarily due mainly to discrete items recorded instate taxes, foreign operations, as well as transaction expenses related to the quarter.Mergers and other permanent items.

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Nine months ended SeptemberSix Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Consolidated Results of Operations

Six Months Ended June 30,
20222021
(Dollars in thousands)Amount% of Net SalesAmount% of Net Sales
Revenue
Lawson(1)
$107,334 22.6 %$— — %
TestEquity170,276 35.8 %133,631 51.6 %
Gexpro181,475 38.2 %125,348 48.4 %
All Other16,336 3.4 %— — %
Total Revenue475,421 100.0 %258,979 100.0 %
Cost of goods sold
Lawson(1)
50,552 10.6 %— — %
TestEquity130,543 27.5 %105,472 40.7 %
Gexpro128,337 27.0 %89,519 34.6 %
All Other10,550 2.2 %— — %
Total Cost of goods sold319,982 67.3 %194,991 75.3 %
Gross profit155,439 32.7 %63,988 24.7 %
Selling, general and administrative expenses
Lawson(1)
59,344 12.5 %— — %
TestEquity39,866 8.4 %29,521 11.4 %
Gexpro44,156 9.3 %26,746 10.3 %
All Other4,972 1.0 %— — %
Total Selling, general and administrative expenses148,338 31.2 %56,267 21.7 %
Operating income7,101 1.5 %7,721 3.0 %
Interest expense(10,607)(2.2)%(8,506)(3.3)%
Loss on extinguishment of debt(3,395)(0.7)%— — %
Change in fair value of earnout derivative liability(5,693)(1.2)%— — %
Other income (expense), net774 0.2 %(254)(0.1)%
Loss before income taxes(11,820)(2.5)%(1,039)(0.4)%
Income tax (benefit) expense(4,568)(1.0)%390 0.2 %
Net loss$(7,252)(1.5)%$(1,429)(0.6)%
(1)Includes the operating results of Lawson only subsequent to the Merger Date of April 1, 2022 and not Lawson operating results prior to the Mergers.

Overview of Consolidated Results of Operations

Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022. The increase in gross profit for the first six months of 2022 compared to September 30, 2020the first
 20212020
(Dollars in thousands)Amount% of
Net Sales		Amount% of
Net Sales
Revenue$315,666 100.0 %$253,458 100.0 %
Cost of goods sold150,440 47.7 %118,999 47.0 %
Gross profit165,226 52.3 %134,459 53.0 %
Operating expenses:
Selling expenses72,945 23.1 %55,445 21.9 %
General and administrative expenses79,469 25.2 %57,806 22.8 %
Total operating expenses152,414 48.2 %113,251 44.6 %
Operating income12,812 4.1 %21,208 8.4 %
Interest expense(710)(0.2)%(329)(0.1)%
Other income (expense), net802 0.2 %15 (0.1)%
Income before income taxes12,904 4.1 %20,894 8.2 %
Income tax expense2,717 0.9 %6,004 2.3 %
Net income$10,187 3.2 %$14,890 5.9 %
six months of 2021 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date. Excluding Lawson and All Other gross profit of $62.6 million, gross profit for the first six months of 2022 improved $28.8 million over the prior year. Expenses for the first six months of 2022 were impacted by the inclusion of Lawson, the 2021 and 2022 acquisitions, and merger related costs.

Refer to Results by Reportable Segment below for a complete discussion of our results of operations.

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Results by Reportable Segment

Lawson Segment
Six Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$107,334 $— $107,334 —%
Cost of goods sold50,552 — 50,552 —%
Gross profit56,782 — 56,782 —%
Selling, general and administrative expenses59,344 — 59,344 —%
Operating loss$(2,562)$— $(2,562)—%
Gross profit margin52.9 %— %
Adjusted EBITDA(1)
$9,405 $— $9,405 — %
(1)Includes the operating results of Lawson only subsequent to the Merger Date of April 1, 2022 and not Lawson operating results prior to the Mergers.
(2)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

The $107.3 million increase in revenue for the first six months of 2022 compared to the first six months of 2021 was due to the inclusion of Lawson revenue beginning on the Merger Date and not including any Lawson revenue prior to the Merger Date.

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. These non-GAAP Adjusted Results presented in the table below are referred to within this results of operations discussion as "Adjusted".
Six Months Ended June 30,Adjusted Change
(Dollars in thousands)
Adjusted 2022(1)
Adjusted 2021(1)
Amount%
Revenue$212,236 $188,191 $24,045 12.8%
Cost of goods sold99,923 87,882 12,041 13.7%
Gross profit112,313 100,309 12,004 12.0%
Selling, general and administrative expenses103,779 93,610 10,169 10.9%
Operating income$8,534 $6,699 $1,835 27.4%
Gross profit margin52.9 %53.3 %
Adjusted EBITDA(2)
$17,447 $16,267 $1,180 7.3%
(1)For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results prior to the Merger Date. Refer to the section Factors Affecting Comparability to Prior Periods and the non-GAAP measures section Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non- GAAP EBITDA for more information related to the calculation of adjusted amounts.
(2)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit
Nine Months Ended September 30,Increase/(Decrease)
(Dollars in thousands)20212020Amount%
Revenue
Lawson$281,877 $224,511 $57,366 25.6%
Bolt Supply33,789 28,947 4,842 16.7%
Consolidated$315,666 $253,458 $62,208 24.5%
Gross profit
Lawson$151,436 $123,031 $28,405 23.1%
Bolt Supply13,790 11,428 2,362 20.7%
Consolidated$165,226 $134,459 $30,767 22.9%
Gross profit margin
Lawson53.7 %54.8 %
Bolt Supply40.8 %39.5 %
Consolidated52.3 %53.0 %

Revenue

RevenueAdjusted revenue increased 12.8% to $212.2 million for the ninefirst six months ended September 30, 2021 increased 24.5% of 2022 compared to adjusted revenue of $315.7188.2 million from $253.5 million for the nine months ended September 30, 2020. Business conditions continued to improvesame period a year ago. The increase in the first nine months of 2021 over 2020, which led to greater business activity and increased sales. Partsmaster contributed $44.6 million in sales in the first nine months of 2021 compared to $5.4 million in September 2020 one-month post-acquisition. Excluding the impact of the Partsmaster acquisition, sales grew 9.3% in the nine months ended September 30, 2021adjusted revenue compared to the nineprior year was primarily driven by the realization of price increases enacted throughout 2021 and 2022 to offset rising supplier costs and strengthening sales to our strategic and Kent Automotive customers.The six months ended SeptemberJune 30, 2020. On a year-to-date basis, Bolt sales have increased 16.7% as business conditions improved in western Canada. Excluding the impact of foreign currency, total sales increased 23.2% in the first nine months of 2021. There is one less2022 included 128 selling days, or 1 additional selling day inover the nine monthsame period 2021 compared to 2020.

a year ago.

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Gross Profit

GrossAdjusted gross profit increased $12.0 millionto $165.2112.3 million for the six months ended June 30, 2022 compared to $100.3 million in the first nine monthsprior year primarily as a result of 2021 compared to $134.5 million in the first nine months of 2020, primarily driven by increased sales and the inclusion of the Partsmaster acquisition for the full year, partially offset by the negative impacts of sustained supply chain constraints affecting the broader economy. Consolidatedrelated price increases put in place. Lawson adjusted gross profit as a percent of sales was 52.3%52.9% for the first six months of 2022 compared to 53.0% a year ago. The organic Lawson MRO segment gross profit before the classification of certain service-related costs in gross profit as a percent of sales was 58.1%53.3% in the first nine monthsprior year. The adjusted gross margin percentage for 2022 was impacted by price increases enacted throughout 2021 and 2022 partially offset by increased supplier costs, freight costs and a shift toward lower margin strategic customers and the amortization of 2021 compared to 59.8% a year ago. The decrease was primarilythe fair value step up of $1.6 million related to increased freightthe Mergers.

Selling, General and supply chain costs, increased reserves established for which the costs exceed the selling price on PPE items as well as changes in product and customer sales mix.Administrative Expenses

Selling Generalexpenses consist of compensation and Administrative Expensessupport for our sales representatives as well as expenses to operate our distribution network and overhead expenses. Adjusted selling, general and administrative expenses increased to
Nine Months Ended September 30,Decrease
(Dollars in thousands)20212020Amount%
Selling expenses
Lawson$70,006 $53,222 $16,784 31.5%
Bolt Supply2,939 2,223 716 32.2%
Consolidated$72,945 $55,445 $17,500 31.6%
General and administrative expenses
Lawson$71,242 $50,816 $20,426 40.2%
Bolt Supply8,227 6,990 1,237 17.7%
Consolidated$79,469 $57,806 $21,663 37.5%
$103.8 million for the six months ended June 30, 2022 compared to the adjusted amount of $93.6 million in same period a year ago. Higher expense on a year-to-date basis versus a year ago were primarily driven by costs related to the Mergers, compensation expense to support increased sales, higher severance, additional stock-based compensation expense and higher amortization expense related to the reverse merger accounting.

Selling expenses increased to $72.9Adjusted EBITDA

During the six months ended June 30, 2022, Lawson generated Adjusted EBITDA of $17.4 million for the first nine months, an increase of 2021 compared to $55.4$1.2 million in from the same period a year ago driven by increased revenues and margins.

TestEquity Segment
Six Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$170,276 $133,631 $36,645 27.4%
Cost of goods sold130,543 105,472 25,071 23.8%
Gross profit39,733 28,159 11,574 41.1%
Selling, general and administrative expenses39,866 29,521 10,345 35.0%
Operating loss$(133)$(1,362)$1,229 (90.2)%
Gross profit margin23.3 %21.1 %
Adjusted EBITDA(1)
14,138 5,938 8,200 138.1 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased to $170.3 million for the six months ended June 30, 2022 from $133.6 million during the same period in 2021. This increase was driven by the TEquipment and National Test Equipment acquisitions during the second quarter of 2022 and the acquisition of MCS in 2021, which generated aggregate revenue of $25.1 million for the post-acquisition periods, as well as organic growth of 8.6% in the existing base business.

Gross profit increased $11.6 million to $39.7 million in the first six months of 2022 compared to $28.2 million in the same period of 2021 primarily due to acquisitions and increased levels in the base business. As a percent of revenue, gross profit improved to 23.3% in 2022 as compared to 21.1% in 2021 driven by an expansion of margins within the existing base business (excluding acquisitions) and a shift in sales mix toward higher margin electronic production supplies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $10.3 millionto 23.1%$39.9 million in 2022 from $29.5 million in 2021. Approximately $6.0 million of costs were added due to the acquisitions made in 2021 and 2022 and increased compensation and distribution costs to support the organic revenue growth in the first ninebase business.

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Adjusted EBITDA

During the six months ended June 30, 2022, TestEquity generated Adjusted EBITDA of $14.1 million, an increase of $8.2 million from the same period a year ago driven by increased revenues and margins on the existing base business (excluding acquisitions).

Gexpro Services Segment
Six Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Revenue$181,475 $125,348 $56,127 44.8%
Cost of goods sold128,337 89,519 38,818 43.4%
Gross profit53,138 35,829 17,309 48.3%
Selling, general and administrative expenses44,156 26,746 17,410 65.1%
Operating income$8,982 $9,083 $(101)(1.1)%
Gross profit margin29.3 %28.6 %
Adjusted EBITDA(1)
19,926 12,416 7,510 60.5 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue for the six months ended June 30, 2022 was $181.5 million. This compares to revenue of $125.3 million for the same period a year ago, or a 44.8% increase with four additional selling days in the six months ended June 30, 2022. A selling day generally represents a business day in which Gexpro Services ships products to its customers. During the six months ended June 30, 2022, revenue increased due to revenue generated from the 2021 from 21.9%and 2022 acquisitions of $49.9 million and organic growth in the base business of 5% through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit was $53.1 million or 29.3% of revenue for the six months ended June 30, 2022 compared to gross profit of $35.8 million for the same period a year ago. The gross profit increase was driven by the 2021 and 2022 acquisitions and improvement in global supply chain over 2021 activities as well as customer price increases put in place.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate the business and service customers.

Selling, general, and administrative expense for the six months ended June 30, 2022 was $44.2 million compared to $26.7 million for the same period a year ago. The increase in selling expense is primarily related to increased sales compensation from higher sales, and the inclusion of $16.9$17.4 million of selling expenses from the Partsmaster business compared to $1.7 million in the post-acquisition period in 2020.

General and administrative expenses increased to $79.5 million in the first nine months of 2021 from $57.8 million in the priorover a year period. Thisago was primarily driven by the inclusion of $10.7 millionthe 2021 and 2022 acquisitions of general and administrative expenses from$8.7 million. The remainder of the Partsmaster business for the first nine months of 2021 compared to the inclusion of $1.5 million of general and administrative expenses in the one-month post-acquisition period of September 2020,increase was driven primarily by an increase in stock-basedmerger related costs of $2.5 million and additional compensation expense of $4.2, and restored expenses over 2020 on normalized sales. Costs of $4.6 million relatedproduct fulfillment costs to support the evaluationorganic growth of the LKCM proposal disclosedexisting base business.

Adjusted EBITDA

During the six months ended June 30, 2022, Gexpro Services generated Adjusted EBITDA of $19.9 million, an increase of $7.5 million from the same period a year ago with approximately $6.9 million driven by the acquisitions closed during 2021 and 2022 and increases in a Schedule 13D amendment filedrevenues and margins on May 17, 2021 are included in generalthe base business.

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Consolidated Non-operating Income and administrative expense in 2021.Expense
Six Months Ended June 30,Change
(Dollars in thousands)20222021Amount%
Interest expense$(10,607)$(8,506)$(2,101)24.7%
Loss on extinguishment of debt$(3,395)$— $(3,395)—%
Change in fair value of earnout derivative liability$(5,693)$— $(5,693)—%
Other income (expense), net$774 $(254)$1,028 (404.7)%
Income tax (benefit) expense$(4,568)$390 $(4,958)(1,271.3)%

Interest Expense

Interest expenses increased $0.4$2.1 million in the first ninesix months of 2022 primarily due to additional borrowings related to the 2021 and 2022 acquisitions partly offset by a lower interest rate as a result of the debt refinancing related to the Mergers.

Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt in the first six months of 2022was primarily due primarily to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.

Change in Fair Value of Earnout Derivative Liability

The interest on$5.7 million loss in the accrued acquisitionfirst six months of 2022 related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements. Refer to Note 11 - Earnout Derivative Liability within Part I. Item 1. Financial Information to our Unaudited Condensed Consolidated Financial Statements for information about the earnout liability.

Other Income (Expense), Net

Other income (expense),expense, net increased $0.8$1.0 million in the first ninesix months of 2021,2022 compared to the prior year primarily due to Canadian currency exchange rate effect.the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date.

Income Tax (Benefit) Expense

Income tax expenses were $2.7benefit was $4.6 million, resulting in a 21.1%38.6% effective tax rate for the first ninesix months of 20212022 compared to income tax expense of $6.0$0.4 million and a 28.7%37.5% effective tax rate for the first ninesix months of 2020.2021. The change in the year over year effective tax rate was primarily due to changes in the valuation allowance in the first six months of 2021, merger costs incurred in the first six months of 2022, and the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 - Business Acquisitions within Part I. Item 1. Financial Information to our Unaudited Condensed Consolidated Financial Statements. Relative to the U.S. statutory rate, the effective tax rate for the first six months of 2022 was impacted by state taxes, foreign operations, and the expiration of uncertain tax positions, as well as liabilities and transaction expenses related to the Mergers, and discrete tax items related to changes in the uncertain tax positions and prior period true-ups as a result of the completed Mergers.

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Liquidity and Capital Resources

AvailableCash and cash and cashequivalents equivalents were $7.5$17.9 million on SeptemberJune 30, 20212022 compared to $28.4$14.7 million on December 31, 2020. The decrease in available cash is primarily due to the payment of the acquisition liability related to the purchase of Partsmaster for $33.0 million in May 2021.

NetThe Company believes its current balances of cash and cash equivalents, availability under its Amended and Restated Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of June 30, 2022, liquidity for the Company was $103.8 million comprised of $17.9 million of cash and cash equivalents and $85.9 million of borrowing availability remaining, net of outstanding letters of credit, under the Amended and Restated Credit Agreement.

Our primary short-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, possible business acquisitions, strategic initiatives and general corporate purposes. Our current debt obligations under the Amended and Restated Credit Agreement mature in 2027. Principal payments for the next twelve months are $15.0 million. Refer to Note 13 - Debt within Part I. Item 1. Financial Information for additional information related to our debt obligations. Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future with our history of favorable results in debt capital markets and strong relationships with global financial institutions, however, we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity.

Sources and Uses of Cash

The following table presents a summary of our cash flows:
(in thousands)June 30, 2022June 30, 2021Change
Net cash (used in) provided by operating activities$(39,543)$8,912 $(48,455)
Net cash used in investing activities$(115,286)$(12,089)$(103,197)
Net cash provided by financing activities$157,043 $3,755 $153,288 

Cash (Used in) Provided by Operating Activities

Cash used by operations for the six months ended June 30, 2022 was $39.5 million, excluding non-cash items, this was primarily due to increased accounts receivables driven by higher sales and increased inventories due to increased supplier costs driven by inflation and global supply chain disruptions.

Cash provided by operations for the ninesix months ended September June 30, 2021 was $6.2$8.9 million, primarily driven by reported operating earningsdue to decreased accounts receivable and inventories partially offset by increased net working capital from increasesaccounts payable and prepaid expenses.

Cash Used in accounts receivable related to higher sales and increased inventories associated with the global supply chain disruptions.Investing Activities

Capital expenditures were $5.7 million and $1.3 millionCash used in investing activities for the nine month periodsix months ended SeptemberJune 30, 20212022 was $115.3 million, primarily as a result of the 2022 other acquisitions by TestEquity and 2020, respectively,Gexpro as described in Note 3 - Business Acquisitions within Part I. Item 1. Financial Information.

Net cash used in investing activities for the six months ended June 30, 2021was $12.1 million, primarily for improvementsdue to our distribution centersbusiness acquisitions and information technology.purchases of rental equipment.

Cash Provided by Financing Activities

Cash provided by financing activities was $10.7$157.0 million for the first ninesix months of 2021,2022, primarily due to a net drawdownproceeds under the April 1, 2022 Amended and Restated Credit Agreement partially offset by repayment of $10.9previous indebtedness. On April 29, 2022, the Company borrowed the $50 million available under the delayed draw term loan facility to finance the acquisition of our RevolvingInterworld Highway, LLC made by TestEquity. Deferred financing costs of $11.4 million were incurred during the first six months of 2022 in connection with the April 1, 2022 Amended and Restated Credit Facility partially driven by the final Partsmaster payment.Agreement and January 3, 2022 Gexpro Services Credit Agreement.

In 2019, oCash provided by financing activities for the ur Boardsix months ended June 30, 2021 was $3.8 million, primarily due to increased borrowings on the Company's revolving lines of Directors authorized a program in which we may repurchase up to $7.5 millioncredit partially offset by payments on the Company's term loans.

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Table of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods. We did not repurchase any shares of stock in the first nine months of 2021 under this plan.Contents
Material Cash Requirements

The Company anticipates that outstanding stock performance rights with a value of $8.4$5.4 million at SeptemberJune 30, 20212022 will be paid out within the next twelve months prior to expiration.

Revolving As of June 30, 2022, we had contractual commitments to purchase approximately $195.9 million of product from our suppliers and contractors.

Credit Facility

On April 1, 2022, in connection with the closing of the Mergers, DSG entered into an Amended and Restated Credit Agreement, which includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility and a $50 million senior secured delayed draw term loan facility. Refer to Note 13 - Debt within Part I. Item 1. Financial Information for a description of the agreement.

On SeptemberJune 30, 2021,2022, we had $411.4 million$10.9 million in outstanding borrowings and $87.4$85.9 million of borrowingborrowing availability remaining, net of outstanding letters of credit, under our Revolving Credit Facility.the revolving credit facility.

Along with certain standard terms and conditions of our Credit Agreement governing our Revolving Credit Facility, we are able to borrow up to 3.25 times our EBITDA, as defined, and maintain a minimum fixed charge ratio, as defined, of 1.15. As of SeptemberJune 30, 2021,2022, we were in compliance with all financial covenants.covenants under our Amended and Restated Credit Agreement.

While we were in compliance with our financial covenants included in our Credit Agreement for the quarter ended Septemberas of June 30, 2021,2022, failure to meet the covenant requirements of the Amended and Restated Credit Agreement in future quarters could lead to higher financing costs, increased restrictions, or reduce or eliminate our ability to borrow funds and could have a material adverse effect on our business, financial condition and results of operations.

We believe cash provided by operations and funds available under our Credit Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements, although we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 of Part I has been omitted from this report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Lawson,DSG, including ourDSG's consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) includes, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

ThereThe Mergers that were completed on April 1, 2022, had a material impact on the financial position, results of operations, and cash flows of the combined company from the Merger Date through June 30, 2022. We have implemented new processes and internal controls as a result of the Mergers to assist us in the preparation and disclosure of financial information. Given the significance of the Mergers and the complexity of systems and business processes, we intend to exclude the TestEquity and Gexpro Services operating companies from our assessment and report on internal control over financial reporting for the year ending December 31, 2022. Other than as discussed above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during theour most recently completed fiscal quarter ended September 30, 2021 that materially affected or are reasonably likely to materially offsetaffect our internal control over financial reporting. We substantially completed the integration of the internal control procedures of Partsmaster into our existing internal control structure.

PART II
OTHER INFORMATION

ITEMS 1, 1A,2, 3, 4 and 5 of Part II are inapplicablenot applicable and have been omitted from this report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1. LEGAL PROCEEDINGS

None

See Note 17 - Commitments and Contingencies to our condensed consolidated financial statements, included in Part I. Item 1. Financial Information, which is incorporated herein by reference, for a description of certain of our pending legal proceedings. In addition, the Company is involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any currently pending litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. 

ITEM 1A. RISK FACTORS

Our operating results depend upon many factors and are subject to various risks and uncertainties, including those discussed below. The material risks and uncertainties known to us and described below may negatively affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair or otherwise adversely affect our business, financial condition and results of operations, and may give rise to or amplify many of the risks discussed below.

Business Risks

A significant portion of our inventory may become obsolete.

Our business strategy requires us to carry a significant amount of inventory to meet rapid processing of customer orders. If our inventory forecasting and production planning processes result in inventory levels exceeding the levels demanded by customers or should our customers decrease their orders with us, our operating results could be adversely affected due to costs of carrying the inventory and additional inventory write-downs for excess and obsolete inventory.
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Work stoppages and other disruptions at transportation centers or shipping ports, along with other supply chain disruptions, may adversely affect our ability to obtain inventory and make deliveries to our customers.

Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our business, financial condition and results of operations. Similarly, other supply chain disruptions have impacted our ability to maintain certain core products in inventory and deliver products to customers on a timely basis, and may continue to impact our ability to do so. Such supply chain disruptions may adversely affect our business, financial condition and results of operations.

TestEquity relies on a single supplier for a significant amount of its product inventory, and any disruptions in such supplier’s business, operations or financial condition, or TestEquity’s relationship with such supplier, could have a material adverse effect on our business, financial condition and results of operations.

TestEquity relies on a single supplier for a significant amount of its product inventory, including electronic test and measurement equipment. Any disruptions in that particular supplier’s business, operations or financial condition, or TestEquity’s relationship with this significant supplier, could have a material adverse effect on our business, financial condition and results of operations.

Changes in our customers, product mix and pricing strategy could cause our gross margin percentage to decline in the future.

From time to time, our businesses have experienced overall changes in the product mix demand of customers. When customers or product mix changes, there can be no assurance that we will be able to maintain our gross profit margins. Changes in our customers, product mix, volume of orders or prices charged, along with additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline. Our gross margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.

Disruptions of our information and communication systems could adversely affect the Company.

We depend on our information and communication systems to process orders, purchase and manage inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable collections and serve our customers. Disruptions in the operation of information and communication systems can occur due to a variety of factors including power outages, hardware failure, programming faults and human error. Disruptions in the operation of our information and communication systems, whether over a short or an extended period of time or affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition and results of operations.

Cyber attacks or other information security incidents could have a material adverse effect on our operating results and financial condition, subject us to additional legal costs and damage our reputation in the marketplace.

We are increasingly dependent on digital technology to process and record financial and operating data and communicate with our employees and business partners. During the normal course of business we receive, retain and transmit certain confidential information that our customers provide to purchase products or services or to otherwise communicate with us, as well as certain information about our employees.

Our technologies, systems and networks (and those of our business partners) have been and may in the future be the target of cyber attacks and/or information security incidents that may have resulted in, or may in the future result in, the unauthorized release, misuse, loss or destruction of proprietary, personal and other information, or other disruption of our business operations. For example, in February 2022, DSG became aware that its computer network was the subject of a cyber incident potentially involving unlawful access. Because of the nature of the information that may have been compromised, we were required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and have taken other actions, such as offering credit monitoring services.

Such attacks or incidents could have a material adverse effect on our operating results and financial condition, subject us to additional legal costs and damage our reputation in the marketplace. As cyber threats continue to evolve, we may be required to
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expend additional resources to continue to modify or enhance our protective measures or to investigate and fix any information security vulnerabilities.

The inability to successfully recruit, integrate and retain productive sales representatives could adversely affect our business and operating results.

We have committed to a plan to increase the size of our sales force. A successful expansion in our sales force requires us to identify under-served territories that offer the greatest potential growth opportunity, locate and recruit talented sales representatives, provide them with the proper training, and successfully integrate them into our organization. This expansion will require significant investment in capital and resources. The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our business, financial condition and results of operations.

It is also critical to retain the experienced and productive sales representatives that have historically contributed to the successes of our businesses. Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our business, financial condition and results of operations.

Failure to retain talented employees, managers and executives could negatively impact our business and operating results.

Our success depends on, among other things, our ability to attract, develop and retain talented employees, including executives and other key managers. The loss of certain key executives and managers or the failure to attract and develop talented employees could have a material adverse effect on our business, financial condition and results of operations.

The inability of management to successfully implement changes in operating processes could lead to disruptions in our operations.

We strive to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations. The implementation of changes to our current operations involve a risk that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies. Failure to successfully manage the implementation of these changes could lead to disruptions in our operations.

The inability to successfully integrate additional acquisitions into our organization could adversely affect our operations and operating results.

One of our growth strategies is to actively pursue additional acquisition opportunities which complement our business model. However, there are risks associated with pursuing acquisitions, which include the incurrence of significant transaction costs without the guarantee that such transactions will be completed. Further, we may fail to successfully identify the right opportunities and/or to successfully integrate the acquired businesses, operations, technologies, systems and/or personnel with those of DSG, which could adversely affect our business, financial condition and results of operations. See also the section entitled “Item 1A. Risk Factors – TestEquity Merger and Gexpro Services Merger Risks” for a discussion of various additional risk factors relating to our completed business combination with TestEquity and Gexpro Services.

We operate in highly competitive markets.

The marketplaces in which we operate are highly competitive. Our competitors include large and small companies with similar or greater market presence, name recognition, and financial, marketing, and other resources. We believe the competition will continue to challenge our business with their product selection, financial resources and services.

Changes that affect governmental and other tax-supported entities could negatively impact our sales and earnings.

A portion of our sales are derived from the United States military and other governmental and tax-supported entities. These entities are largely dependent upon government budgets and require adherence to certain laws and regulations. A decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, could lead to reduced sales or an increase in compliance costs which would adversely affect our business, financial condition and results of operations.

Debt Financing Risks
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We have a significant amount of indebtedness, and our significant indebtedness could adversely affect our business, financial condition and results of operations.

We incurred a significant amount of indebtedness in connection with the Mergers, and our significant indebtedness includes a significant amount of indebtedness under our Amended and Restated Credit Agreement.In addition, we may be able to incur a significant amount of additional indebtedness, subject to the terms and restrictions of our Amended and Restated Credit Agreement. Our indebtedness could have significant consequences on our future operations, including:

•events of default if we fail to comply with the financial and other covenants contained in the Amended and Restated Credit Agreement and/or other agreements governing our debt instruments, which could result in all of the debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;
•reducing the availability of our cash flow to fund working capital, capital expenditures, investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
•limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy;
•limiting our ability to buy back common stock or pay dividends;
•placing us at a competitive disadvantage compared to any of our competitors that have less debt or are less leveraged; and
•increasing our vulnerability to the impact of adverse economic and industry conditions.

Our ability to meet our payment and other obligations under our debt instruments will depend on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure that we will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our indebtedness obligations and to fund other liquidity needs.

Failure to adequately fund our operating and working capital needs through cash generated from operations and cash available through our Amended and Restated Credit Agreement could negatively impact our ability to invest in our business and maintain our capital structure.

Our business requires investment in working capital and fixed assets. We expect to fund these investments from cash generated from operations and funds available from our Amended and Restated Credit Agreement. Failure to generate sufficient cash flow from operations or from our credit agreement could cause us to have insufficient funds to operate our business. Adequate funds may not be available when needed or may not be available on favorable terms.

Failure to meet the covenant requirements of our Amended and Restated Credit Agreement could lead to higher financing costs and increased restrictions and reduce or eliminate our ability to borrow funds.

Our Amended and Restated Credit Agreement contains financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness. In addition, prior to the closing of the TestEquity Merger, TestEquity was in default of certain debt covenants of its term loan and revolving line of credit agreements. In connection therewith, on September 6, 2019, February 28, 2020, March 27, 2020, October 9, 2020 and June 30, 2021, TestEquity entered into forbearance agreements with its lender. Such term loan and revolving line of credit agreements were terminated in connection with the closing of the TestEquity Merger.

If we require more liquidity than is available to us under our Amended and Restated Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us. Should funding be insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Prolonged periods of inflation could require government efforts to combat inflation which could lead to higher financing costs.
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Inflation has risen on a global basis and the United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, government efforts may be required to combat inflation such as raising the interest rate benchmark which could lead to higher financing costs and have material adverse effect on our business, financial condition and results of operations.

Common Stock Risks

The market price of our common stock may decline.

The price of our common stock could decrease if our financial performance is inadequate or does not meet investors' expectations, if there is deterioration in the overall market for equities, if large amounts of shares are sold in the market, if there is index trading, or if investors have concerns that our business, financial condition, results of operations and capital requirements are negatively impacted by an economic downturn or any other adverse development.

Entities affiliated with Luther King Capital Management Corporation and J. Bryan King beneficially own a significant majority of the outstanding shares of DSG common stock and therefore have significant influence over our company, and this influence could delay or deter a change in control or other business combination or otherwise cause us to take actions with which you may disagree.

Based on a Schedule 13D filed with the SEC by LKCM, J. Bryan King and various other persons and entities (as amended through June 17, 2022), entities affiliated with Luther King Capital Management Corporation ("LKCM") beneficially owned in the aggregate approximately 14.6 million shares of DSG common stock as of June 15, 2022, representing approximately 75% of the outstanding shares of DSG common stock as of June 30, 2022.J. Bryan King, Chairman and Chief Executive Officer of the Company, is a Principal of LKCM. As a result, LKCM has significant influence over the outcome of matters requiring a stockholder vote, including the election of directors and the approval of other significant matters, and LKCM’s interests may not align with the interests of other stockholders. This concentration of ownership could also have the effect of delaying or preventing a change of control or other business combination that might be beneficial to our stockholders.

In addition, as a result of this concentrated ownership interest, DSG believes that it qualifies as a “controlled company,” as that term is defined by Rule 5615(c) of the NASDAQ Listing Rules and, accordingly, DSG believes that, if it so desired, it would be generally exempt from the requirements of Rule 5615(c) of the NASDAQ Listing Rules that would otherwise require DSG to have:

•a majority of the DSG board of directors comprised of independent directors;
•a compensation committee comprised solely of independent directors; and
•director nominees selected, or recommended for the DSG board of directors’ selection, either by (1) independent directors constituting a majority of the DSG board of directors’ independent directors in a vote in which only independent directors participate or (2) a nominating committee comprised solely of independent directors.

Legal and Regulatory Risks

A violation of federal, state or local environmental protection regulations could lead to significant penalties and fines or other remediation costs.

Our product offerings include a wide variety of industrial chemicals and other products which are subject to a multitude of federal, state and local regulations. These environmental protection laws change frequently and affect the composition, handling, transportation, storage and disposal of these products. Failure to comply with these regulations could lead to severe penalties and fines for each violation.

Additionally, a facility we own in Decatur, Alabama, was found to contain hazardous substances in the soil and groundwater as a result of historical operations prior to our ownership. We retained an environmental consulting firm to further investigate the contamination, including measurement and monitoring of the site. The Company concluded that further remediation was required, and accordingly, has made an accrual for the estimated cost of this environmental matter. A remediation plan was approved by the Alabama Department of Environmental Management and the remediation of the affected area is ongoing. Additional procedures may be required that could negatively impact our business, financial condition and results of operations.

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Our results of operations could be affected by changes in taxation.

Our results of operations could be affected by changes in tax rates, audits by taxing authorities or changes in laws, regulations and their interpretation. Changes in applicable tax laws and regulations could affect our ability to realize our deferred tax assets, which could adversely affect our results of operations.

COVID-19 and Other Infectious Disease Risks

The coronavirus strain ("COVID-19") created a worldwide pandemic which has continued to affect our business and could have further undetermined material adverse effects on our revenues, operating results and financial condition.

The COVID-19 pandemic has resulted in lost revenue to our company, limitations on our ability to source high demand product, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, a slow-down of customer demand for our products and limitations on the ability of some customers to pay us on a timely basis. The impact of the COVID-19 pandemic on our operational and financial performance includes affecting our ability to execute our business strategies and initiatives in the expected time frame. The extent of the effect of the COVID-19 pandemic on us will depend on future developments, including the duration and spread of the COVID-19 pandemic and related restrictions on travel, transports and person to person contact, all of which are uncertain and cannot be predicted at the present time. On a broader scale, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our sales, workforce, supply chains, results of operations, and financial condition.

If the COVID-19 pandemic worsens, some or all of our facilities (including distribution facilities and/or branch locations) could be required to temporarily close, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.

Our sales results may be negatively impacted in the future by any social distancing guidelines and government mandated shelter in place orders that would prevent our sales representatives from visiting customers in person, or that would otherwise reduce customer visits to our branch locations. The reduction of operations and temporary shut down by many of our customers in response to COVID-19 has also negatively impacted our sales and ability to collect on existing credit balances, and we may continue to be impacted by those and additional reductions and shut downs until the pandemic ends.

Further, vendors who are negatively impacted by COVID-19 may temporarily shut down operations or have difficulty obtaining inventory, which could negatively impact our ability to fulfill customer orders. As a result, the Company may be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic.

Certain items on our balance sheet require judgments on their valuation, including intangible assets and goodwill. These valuations are based on assumptions that take future financial performance into account. COVID-19 may have a negative impact to our future financial performance that would require us to revise assumptions about future financial performance and impair the value of these assets. It is reasonably possible that estimates made based on future operating results and cash flows of the Company may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

In addition, the increased number of employees working remotely as a result of COVID-19 can exacerbate the risks mentioned in regards to internal controls and cybersecurity.

TestEquity Merger and Gexpro Services Merger Risks

Completion of the Mergers resulted in the issuance of a significant number of shares of DSG common stock, and may result in the issuance of a significant number of additional shares of DSG common stock, which could have a negative effect on the price of DSG common stock.

We issued an aggregate of 10.3 million shares of DSG common stock on April 1, 2022 in connection with the closing of the Mergers. In addition, we could be obligated to issue up to an aggregate of 1.7 million additional shares of DSG common stock in accordance with the earnout provisions of the Merger Agreements.As of June 30, 2022, approximately 1,238,000 additional shares of DSG common stock are expected to be issued to entities affiliated with LKCM in accordance with and subject to certain terms and conditions of thefirst earnout provision of the Merger Agreements. The remaining 462,000 additional shares of DSG common stock would be available to be issued to entities affiliated with LKCM or forfeited in in
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accordance with and subject to certain terms and conditions of thesecond earnout provision of the Merger Agreements. The issuance of such a significant number of shares of DSG common stock could have a negative effect on the market price of DSG common stock. Such downward pressure could also encourage short sales by certain investors, which could place further downward pressure on the market price of DSG common stock.

In addition, in accordance with the Merger Agreements, DSG granted to certain entities affiliated with LKCM certain registration rights with respect to the shares of DSG common stock that DSG has issued, and would be required to issue, in connection with the Mergers. Any sales of those shares, or the anticipation of the possibility of such sales, could create downward pressure on the market price of DSG common stock.

There may be difficulties in integrating certain operations of TestEquity’s and Gexpro Services’ respective businesses with our legacy operations, and the failure to successfully combine those operations within our expected timetable could adversely affect our future results and the market price of our common stock.

The Mergers involve the combination of businesses that previously operated as independent businesses. We have been devoting, and will continue to need to devote, significant management attention and resources to combining certain business operations of TestEquity and Gexpro Services with our legacy business operations and attending to other post-closing matters. This may decrease the time our management team will have to manage our businesses, service existing customers, attract new customers and develop new products, services and strategies. One potential consequence of such distractions could be the failure of management to realize other opportunities that could be beneficial to us.

If our management is not able to effectively manage the process following the closing of the Mergers, or if any significant business activities are interrupted as a result of the process, our businesses could suffer.

Furthermore, it is possible that the Mergers could result in the loss of key employees. If we are not able to fully realize the anticipated savings and synergies in a timely manner, or the cost to achieve these synergies is greater than expected, we may not fully realize the anticipated benefits (or any benefits) of the Mergers, or it may take longer than expected to realize any benefits. The failure to fully or timely realize the anticipated benefits could have a negative effect on the market price of DSG common stock.

We are subject to business uncertainties as a result of the Mergers that could materially and adversely affect our businesses.

Uncertainty about the effect of the Mergers on employees, customers, suppliers and others having business relationships with our company may have a material and adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the closing of the Mergers. These uncertainties could also cause our customers and suppliers and others that deal with us to seek to change existing business relationships with us. Employee retention and recruitment may be challenging for the combined company as employees and prospective employees may experience uncertainty about their future roles with the combined company. Furthermore, no assurance can be given that after the Mergers we will be able to attract or retain key management personnel or other key employees to the same extent that legacy Lawson, TestEquity and Gexpro Services had been previously able to attract or retain their own employees. The departure of existing key employees or the failure of potential key employees to accept employment with the combined company, despite our retention and recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.

We have incurred and may continue to incur significant transaction costs in connection with the Mergers.

We have incurred and may continue to incur significant, non-recurring costs in connection with consummating the Mergers. Non-recurring transaction costs include, but are not limited to, fees paid to legal, accounting and financial advisors, filing fees and other costs. Additional unanticipated costs may be incurred in the combination process.

DSG’s estimates and judgments related to the acquisition accounting models used to record the purchase price allocation in connection with the Mergers may be inaccurate.

DSG’s management has made and expects to continue to make significant accounting judgments and estimates for the application of acquisition accounting under GAAP and the underlying valuation models in connection with the Mergers. Our business, financial condition and results of operations could be materially and adversely impacted in future periods if our accounting judgments and estimates related to these models prove to be inaccurate.

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We may be required to recognize impairment charges for goodwill and other intangible assets.

As a result of the closing of the Mergers on April 1, 2022, we have an amount of goodwill and other intangible assets on our balance sheet that is significantly greater than the amount of goodwill and other intangible assets on our December 31, 2021 consolidated balance sheet. In accordance with GAAP, our management periodically assesses our goodwill and other intangible assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, an inability to effectively integrate acquired businesses, unexpected significant changes, planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments could materially and adversely affect our results of operations in the periods recognized, which could result in an adverse effect on the market price of DSG common stock.

TestEquity’s and Gexpro Services’ international operations subject us to additional legal and regulatory regimes.

TestEquity has business operations and/or sales in a number of foreign countries, including Canada, Mexico and the United Kingdom, and Gexpro Services has business operations and/or sales in a number of foreign countries, including Hungary and China. As a result of the completion of the Mergers, we are subject to a wider array of foreign legal and regulatory regimes (including tax regimes) than those to which we were subject prior to the completion of the Mergers. Compliance with diverse legal and regulatory requirements, including in connection with the movement or repatriation of cash, may be costly, time-consuming and require significant resources. Violations could result in significant fines or monetary damages, sanctions, prohibitions or restrictions on doing business and damage to our reputation. In addition, operating in foreign countries requires us to manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and regulations with respect to such jurisdictions, including anti-corruption laws or regulations applicable to DSG, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”). The U.S., U.K. and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, the UKBA, and other laws, rules, sanctions, embargoes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Any violation of these legal requirements, even if prohibited by our policies, procedures and controls, could subject us to criminal or civil enforcement actions, penalties for non-compliance or otherwise have an adverse effect on our business and reputation.

Litigation relating to the Mergers could result in the payment of damages following the closing of the Mergers.

DSG and members of the DSG board of directors are and may in the future be parties, among others, to litigation related to the Merger Agreements and the Mergers. Among other remedies, the stockholders in the pending litigation seek, and other stockholders could seek, damages. The outcome of any legal proceedings are difficult to predict and any such lawsuits could result in substantial costs to us. The existence of litigation relating to the Mergers may also be costly and distracting to management. Further, the defense or settlement of any lawsuit or claim may adversely affect our business, financial condition, results of operations and cash flows. See Note 17 - Commitments and Contingencies to our condensed consolidated financial statements, included in Part I. Item 1. Financial Statements, for a description of certain of our pending legal proceedings relating to the Mergers, which are incorporated herein by reference.

As a result of the Mergers, DSG’s ability to use its net operating losses and certain other tax attributes generated prior to the Mergers may be subject to limitations.

As a result of the Mergers, DSG’s ability to use its net operating losses and certain other tax attributes generated prior to the Mergers may be subject to limitations.

TestEquity and Gexpro Services were private companies before the Mergers and may not have had in place the financial organization, reporting and internal controls necessary for a public company.

TestEquity and Gexpro Services were private companies before the Mergers and may not have had in place the financial organization, reporting and controls which are required for a U.S. public company. The cost of implementing this type of financial organization, reporting and controls in respect of TestEquity and Gexpro Services and integrating their financial reporting processes with our financial reporting processes may be significant. If there are limitations in TestEquity’s or Gexpro Services’ financial organization, reporting and controls, or if we are unable to effectively integrate their financial reporting processes with our financial reporting processes, we could have, among other things, material weaknesses in our internal controls, violate our indebtedness covenants, miss an SEC reporting deadline or otherwise not comply with an applicable law or regulation.

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General Risks

Our results of operations may be adversely impacted by a downturn in the economy or in certain sectors of the economy.

Any decline or uncertainty in the strength of the economy may lead to a decrease in customer spending and may cause certain customers to cancel or delay placing orders. Some of our customers may file for bankruptcy protection, preventing us from collecting on accounts receivable and may result in our stocking excess inventory. Contractions in the credit markets may also cause some of our customers to experience difficulties in obtaining financing, leading to lower sales, delays in the collection of receivables and result in an increase in bad debt expense.

Adverse economic conditions could also affect our key suppliers and contractors. This could lead to us incurring additional expenses or result in delays in shipping products to our customers. Economic uncertainty can make it difficult to accurately predict future order activity and affect our ability to effectively manage inventory levels. There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our existing financing arrangements, including our credit agreement.

Changes in energy costs, tariffs and the cost of raw materials used in our products, and other inflationary pressures, could impact our cost of goods and distribution and occupancy expenses, which may result in lower operating margins.

Increases in the cost of raw materials used in our products (e.g., steel, brass, copper), increases in tariffs and increases in energy costs, as well as other inflationary pressures, will raise the production costs of our vendors. Those vendors have typically looked to pass the higher costs along to us through price increases. If we are unable to fully pass such increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins and financial condition. On the other hand, a decrease in oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales. Changes in trade policies could affect our sourcing of product and ability to secure sufficient product and/or impact the cost or price of our products, with potentially negative impacts on our reported gross profits and results of operations.

Supply chain constraints, inflationary pressure, and labor shortages could impact our cost of goods and other costs and expenses, which may result in lower gross margins and/or otherwise materially adversely affect our business, financial condition and results of operations.

Our businesses have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs. This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders. In addition, we have been and may continue to be impacted by labor shortages. This results in challenges in fulfilling customer orders and can have a negative impact on our operating results as we may be required to utilize higher-cost temporary labor. We have also experienced and continue to experience inflationary pressure in other areas that adversely impact our cost of goods sold and other costs and expenses. While we have instituted various price increases during 2022 in response to rising supplier costs, as well as increased transportation and labor costs, there can be no assurance that future cost increases can be partially or fully passed on to customers, or that the timing of such sales price increases will match our supplier cost increases. As a result, we are unable to predict the impact of these constraints on our business, financial condition and results of operations.

The Company is exposed to the risk of foreign currency changes.

A number of our subsidiaries are located and operate in foreign countries and use those foreign currencies as their functional currency. Operating results denominated in foreign currencies are translated into U.S. dollars when consolidated into our financial statements. Therefore, we are exposed to market risk relating to the change in the value of such foreign currencies (including the Canadian dollar, the Mexican peso, the British pound sterling, the Euro, the Danish krone, the Brazil real, the Chinese renminbi, and the Turkish lira) relative to the U.S. dollar that could adversely affect our financial condition and operating results.

In addition, the revolving credit facility under our Amended and Restated Credit Agreement is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed between us and our lenders.Any borrowings in Canadian dollars or any other foreign currency would expose us to market risk relating to the change in the value of such foreign currency in relation to the U.S. dollar.

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ITEM 6. EXHIBITS
 
Exhibit #  
3.12.1†
Agreement and Plan of Merger, dated as of December 29, 2021, by and among LKCM TE Investors, LLC, TestEquity Acquisition, LLC, Lawson Products, Inc. and Tide Sub, LLC, incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
2.2†
Agreement and Plan of Merger, dated as of December 29, 2021, by and among 301 HW Opus Investors, LLC, 301 HW Opus Holdings, Inc., Lawson Products, Inc. and Gulf Sub, Inc., incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
3.1**
Amended and Restated Certificate of Incorporation of the Company, incorporatedas amended by reference to Exhibit 3.1the Certificate of Amendment to the Company's Current Report on Form 8-K (File No. 000-10546) datedAmended and Restated Certificate of Incorporation of the Company effective as of May 18, 2020.5, 2022.
3.2
Amended and Restated By-Laws of the Company effective as of May 5, 2022, incorporated by reference to Exhibit 3.2 to the Company'sCompany’s Current Report on Form 8-K (File No. 000-10546) datedfiled May 18, 2020.5, 2022.
10.110.
10.2
10.3
10.4*
Lawson Products, Inc. Executive Deferral Plan (as Amended and Restated Effective November 1, 2015)., incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.510.2*
Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017)., incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
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10.610.3*
Amendment of the Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017), dated December 23, 2020, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2020.
10.710.4*
Form Letter regarding Stock Performance Rights, incorporated by reference to Exhibit 10(c)(16) to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2004.
10.810.5*
Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled May 3, 2019.
10.910.6*
First Amendment to the Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled May 3, 2019.
10.1010.7*
Amendment to the Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), dated December 23, 2020, incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2020.
10.1110.8*
Form of Award Agreement under the 2009 Equity Compensation Plan (Target Units, SPRs and Restricted Units)., incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1210.9*
Form of Award Agreement under the 2009 Equity Compensation Plan (MSU Target Units, ROIC Target Units and Restricted Units)., incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1310.10*
Form of Award Agreement under the 2009 Equity Compensation Plan (MSU Target Units, ROIC Target Units and Restricted Units)., incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1410.11*
Lawson Products, Inc. 2021 Annual Incentive Plan Summary.Summary, incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1510.12*
Form of Indemnification Agreement for Directors and Officers, incorporated by reference to Exhibit 10.0110.1 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled September 15,19, 2008.
10.1610.13*
Form of Change in Control Agreement for Officers.Officers, incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1710.14*
Employment Agreement dated as of August 14, 2017 by and between Lawson Products, Inc., an Illinois corporation, and Michael G. DeCata, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled August 14,17, 2017.
10.1810.15*
Amendment No.1 to the Employment Agreement entered into on April 11, 2018 between the CompanyLawson Products, Inc., an Illinois corporation, and Michael G. DeCata, incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled April 11, 2018.
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10.1910.16*
Employment Agreement dated as of August 29, 2012 by and between Lawson Products, Inc., an Illinois corporation, and Ron Knutson, incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 000-10546) dated August 29,filed September 4, 2012.
10.2010.17*
Retirement and Consulting Agreement, dated as of March 2, 2021, by and between the CompanyLawson Products, Inc., an Illinois corporation, and Neil Jenkins, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) datedfiled March 5, 2021.
31.110.18
Voting Agreement, dated as of December 29, 2021, by and among Lawson Products, Inc. and Luther King Capital Management Corporation, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
10.19†
Amended and Restated Credit Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., the subsidiaries of Lawson Products, Inc. party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 4, 2022.
10.20
Registration Rights Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., 301 HW Opus Investors, LLC and LKCM TE Investors, LLC, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 4, 2022.
10.21*
Retirement and Consulting Agreement, dated as of April 4, 2022, by and between Lawson Products, Inc., an Illinois corporation, and Michael G. DeCata, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 8, 2022.
10.22*,**
Employment Agreement, dated as of April 4, 2022, by and between Lawson Products, Inc., an Illinois corporation, and Cesar A. Lanuza.
31.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.231.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
3232***
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002
101The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2021,2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of IncomeOperations and Comprehensive (Loss) Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
101.INS
XBRL Instance Document
101.SCH**XBRL Taxonomy Extension Schema Document
101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**XBRL Taxonomy Extension Label Linkbase Document
101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from the Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2021,2022, formatted in Inline XBRL
101.INSXBRL Instance Document
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101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

† Certain schedules and/or similar attachments omitted pursuant to Item 601(a)(5) of Regulation S-K promulgated by the U.S. Securities and Exchange Commission. The Company agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the SEC upon request.
* Indicates management employment contracts or compensatory plans or arrangements.
**Filed herewith.
***Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 LAWSON PRODUCTS,DISTRIBUTION SOLUTIONS GROUP, INC.
 (Registrant)
Dated:October 28, 2021August 9, 2022 /s/ Michael G. DeCataJ. Bryan King
 Michael G. DeCataJ. Bryan King
PresidentChairman and Chief Executive Officer
(principal executive officer)
Dated:October 28, 2021August 9, 2022 /s/ Ronald J. Knutson
 Ronald J. Knutson
Executive Vice President and Chief Financial Officer and Treasurer
(principal financial officer)
Dated:October 28, 2021August 9, 2022/s/ David S. Lambert
David S. Lambert
Vice President, Controller and Chief Accounting Officer
(principal accounting officer)

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