What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-24 compared with 2021-02-26 · 221 added, 228 removed, 733 unchanged (38% of the section changed)

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The following information is presented in this item:

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ;

Chicago, Illinois ;

PCAOB ID# 243 )

Consolidated Balance Sheets as of December 31, 20 2 1 and 2020

Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 2 0 20 a nd 20 19

Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31 , 2020 and 2 019

Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 202 1 and 20 20

Consolidated Statements of Changes in Stockholders’ Equity for the Years ended De cember 31, 202 1 and 20 20

Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Stockholders and Board of Directors

Lawson Products, Inc.

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We have audited the accompanying consolidated balance sheets of Lawson Products, Inc.

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 24, 2022 expressed an unqualified opinion thereon.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment - Bolt Reporting Unit

As described in Note 8 to the consolidated financial statements, the Company’s consolidated goodwill balance as of December 31, 2020 was $35.2 million.

At December 31, 2020, the Bolt reporting unit’s (“Bolt”) goodwill balance was $13.8 million.

The Company tests for impairment annually on a reporting unit basis or more often when impairment indicators exist.

As a result of the COVID-19 pandemic and its impact on Bolt’s revenue and earnings during the first quarter of 2020, the Company performed interim goodwill impairment tests of Bolt.

The Company prepared a valuation of Bolt using both a market approach and an income approach.

The determination of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasts of future revenue and earnings.

We identified the valuation of Bolt during the interim impairment assessment of goodwill as a critical audit matter.

The principal considerations for our determination are:

(i) Bolt’s excess fair value over book value was less than 10% in the first quarter of 2020, as such, management’s estimates were more sensitive to the assumptions and judgments used, (ii) inherent uncertainties exist related to the Company’s forecasts and how various economic and other factors including the projected impact from the COVID-19 pandemic, could affect the Company’s forecasted assumptions of revenue and earnings included in the income approach, and (iii) the appropriateness and relative weighting of valuation methods, and the appropriateness of the selected comparable companies and market multiples used in the market approach.

Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the reasonableness of assumptions used in management’s income approach analysis by independently comparing the forecasts to:

(i) historical results, and (ii) market trends by obtaining multiple independent publicly available market reports and assessing the projected impact of the COVID-19 pandemic and the forecasted recovery period for the industry.

• Assessing the appropriateness of the market approach and evaluating the reasonableness of the comparable companies and market multiples selected.

• Utilizing personnel with specialized knowledge and skill in valuation to assist in:

(i) testing the underlying source information utilized in the market approach, (ii) assessing the appropriateness and relative weighting of valuation methods, (iii) evaluating the reasonableness of selected comparable companies and market multiples used in the market approach, and (iv) testing the mathematical accuracy of the Company’s calculations.

Business Combination- Partsmaster Intangible Assets Valuation

As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Partsmaster on August 31, 2020 for $35.3 million in cash plus assumed liabilities, which resulted in $7.7 million of intangible assets.

The Company applied significant judgment in estimating the fair value of the intangible assets acquired which involved the use of significant estimates and assumptions with respect to expected future cash flows and discount rates.

We identified the valuation of the intangible assets acquired in the Partsmaster business combination as a critical audit matter.

Management was required to make significant judgments and assumptions, including forecasted cash flows and discount rates, in determining the fair values of the intangible assets acquired which were identified as customer relationships and trade names.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Uncertain Tax Position

As described in Notes 2 and 10 to the consolidated financial statements, the Company recognizes the benefit of tax positions when a benefit is more likely than not to be sustained on its technical merits.

The Company has recorded unrecognized tax benefits of $3.9 million as of December 31, 2021.

The Company operates in multiple jurisdictions

and is subject to transfer pricing compliance for intercompany transactions that are subject to audit by taxing authorities.

The resolution of these audits may span multiple years.

Tax law is complex and often subject to varied interpretations.

We identified the determination of uncertain tax positions related to transfer pricing from intercompany transactions as a critical audit matter.

The principal considerations for our determination relate to:

(i) auditing assumptions applied to the interpretation of tax laws and legal rulings in multiple tax paying jurisdictions, (ii) determining whether a transfer pricing tax position’s technical merits are more likely than not to be sustained when measuring the amount of tax benefits that qualifies for recognition, and (iii) assessing whether intercompany transactions are based on the arm’s length standard that may produce a range of arm’s length outcomes.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the reasonableness of the forecasted cash flows through:

(i) evaluating historical results of Partsmaster (ii) assessing forecasted performance against market trends and guideline companies, and (iii) testing the mathematical accuracy of the Company’s calculations.

• Utilizing personnel with specialized knowledge and skill in valuation to assist in:

(i) evaluating the appropriateness of the selected comparable companies, (ii) evaluating the reasonableness of the discount rate used, and (iii) testing the mathematical accuracy of the Company’s calculations.

• Testing the design and operating effectiveness of certain controls over the recognition and measurement of uncertain tax positions related to transfer pricing.

• Utilizing personnel with specialized knowledge and skill in taxation to evaluate the appropriateness of management’s methods and assumptions used to estimate uncertain tax positions related to transfer pricing by:

(i) evaluating the reasonableness of the Company’s transfer pricing policies based on comparisons to comparable companies and precedents set by the various taxing authorities that govern the jurisdictions in which the Company operates, (ii) evaluating the reasonableness of the transfer pricing tax position’s technical merits and management’s judgements, assumptions, and conclusions reached regarding the more likely than not determination, and (iii) evaluating management’s conclusions reached on the ranges of arm’s length outcomes and results of the transfer pricing studies.

/s/BDO USA, LLP

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Deferred compensation

11,962 10,461

Deferred tax liability

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123,150 133,882

Commitments and contingencies – Note 16

Stockholders’ equity:

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( 10,033 ) ( 9,015 )

Accumulated other comprehensive income (loss) 699 ( 1 )

Accumulated other comprehensive income 544 699

Total stockholders’ equity

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Operating income

11,987 20,550

Interest expense

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Income before income taxes

11,919 20,785

Income tax expense

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Balance at January 1, 2020 9,043,771 $ 9,190 $ 18,077 $ 86,496 $ ( 5,761 ) $ ( 1 ) $ 108,001

Change in accounting principle (1)

— — — 15,113 — — 15,113

— — — 7,221 — — 7,221

Adjustment for foreign currency translation

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Balance at December 31, 2021 9,115,584 $ 9,363 $ 22,118 $ 111,015 $ ( 10,033 ) $ 544 $ 133,007

(1) The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach.

See Note 12 - Leases for further details.

See notes to Consolidated Financial Statements

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( 2,824 ) ( 167 )

Reserve for obsolete and excess inventory 2,450 675

Goodwill impairment — 1,918

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Accounts payable and other liabilities

5,788 ( 3,230 )

Net cash provided by operating activities

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Business acquisition, net of acquired cash

( 33,000 ) ( 2,300 )

Net cash used in investing activities

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Financing activities

Net payments on revolving lines of credit

( 2,271 ) ( 8,552 )

Net proceeds (payments) on revolving lines of credit 11,900 ( 2,271 )

Shares repurchased held in treasury

( 1,018 ) ( 3,254 )

Payment of financing fees

Payment of financing lease principal

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Proceeds from stock option exercises

Net cash used in financing activities

( 5,767 ) ( 13,890 )

Net cash provided by (used in) financing activities 10,660 ( 5,767 )

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents and restricted cash

23,094 ( 6,386 )

(Decrease) increase in cash and cash equivalents and restricted cash ( 25,012 ) 23,094

Cash, cash equivalents and restricted cash at beginning of year

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Net cash paid for interest

Additions of property, plant and equipment included in accounts payable 311 64

See notes to Consolidated Financial Statements

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The Lawson reportable segment distributes MRO products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") servic e to customers throughout the United States and Canada.

The Bolt reportable segment distributes MRO products primarily through its 14 bran ches located in Western Canada.

On August 31, 2020, the Company acquired Partsmaster, a distributor of MRO products.

Partsmaster is included in the Lawson reportable segment.

The Bolt reportable segment distributes MRO products primarily through its 14 branches l ocated in Western Canada.

Recent Events

On December 29, 2021, Lawson entered into:

• an Agreement and Plan of Merger (the “TestEquity Merger Agreement”) by and among (1) LKCM TE Investors, LLC (the “TestEquity Equityholder”), (2) TestEquity Acquisition, LLC, an indirect wholly-owned subsidiary of the TestEquity Equityholder (“TestEquity”), (3) Lawson and (4) Tide Sub, LLC, a wholly-owned subsidiary of Lawson (“Merger Sub 1”), pursuant to the terms and subject to the conditions of which Merger Sub 1 will merge with and into TestEquity, with TestEquity surviving the merger as a wholly-owned subsidiary of Lawson (the “TestEquity Merger”);

• an Agreement and Plan of Merger (the “Gexpro Services Merger Agreement” and, together with the TestEquity Merger Agreement, the “Merger Agreements”) by and among (1) 301 HW Opus Investors, LLC, (the “Gexpro Services Stockholder”), (2) 301 HW Opus Holdings, Inc., a wholly-owned subsidiary of the Gexpro Services Stockholder (“Gexpro Services”), (3) Lawson and (4) Gulf Sub, Inc., a wholly-owned subsidiary of Lawson (“Merger Sub 2”), pursuant to the terms and subject to the conditions of which Merger Sub 2 will merge with and into Gexpro Services, with Gexpro Services surviving the merger as a wholly-owned subsidiary of Lawson (the “Gexpro Services Merger” and, together with the TestEquity Merger, the “Mergers”).

The Mergers are intended to bring together three complementary distribution businesses under a holding company structure.

Pursuant to the Merger Agreements, Lawson has agreed to issue up to an aggregate of 12,000,000 shares of Lawson common stock in consideration for the Mergers as follows:

• TestEquity Merger:

In connection with the TestEquity Merger, 3,300,000 shares of Lawson common stock would be issued to the TestEquity Equityholder upon the closing of the TestEquity Merger, and up to an additional 700,000 shares of Lawson common stock would potentially be issuable to the TestEquity Equityholder on or after the closing date of the TestEquity Merger upon satisfaction of the conditions of, and in accordance with, two earnout mechanisms.

• Gexpro Services Merger:

In connection with the Gexpro Services Merger, 7,000,000 shares of Lawson common stock would be issued to the Gexpro Services Stockholder upon the closing of the Gexpro Services Merger, and up to an additional 1,000,000 shares of Lawson common stock would potentially be issuable to the Gexpro Services Stockholder on or after the closing date of the Gexpro Services Merger upon satisfaction of the conditions of, and in accordance with, two earnout mechanisms.

The consummation of the Mergers is subject to certain closing conditions, including, among others, (1) receipt of the requisite Lawson stockholder approvals under the Merger Agreements and (2) receipt of proceeds of debt financing in an amount sufficient for the payment of certain payoff indebtedness, transaction expenses and other fees and expenses in connection with the Mergers.

The Mergers, if completed, will be consummated substantially concurrently.

We refer to the transactions contemplated by the Merger Agreements, including the Mergers and the share issuances, as the “Transactions.”

The Merger Agreements contain certain termination rights for the parties, including, among other rights, termination rights if the Mergers are not completed on or before September 30, 2022 (subject to certain limitations) or any of the requisite Lawson stockholder approvals are not obtained at a duly convened stockholders meeting.

If the TestEquity Merger Agreement is terminated under certain circumstances, Lawson will be obligated to pay TestEquity a termination fee of

$ 4,000,000 , and if the Gexpro Services Merger Agreement is terminated under certain circumstances, Lawson will be obligated to pay Gexpro Services a termination fee of $ 6,000,000 .

Note 2 - Summary of Significant Accounting Policies

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All significant intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

Such reclassifications have no effect on net income as previously reported.

Revenue Recognition — The Company recognizes two revenue streams:

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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 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.

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Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method.

Amortization expense of capitalized software was $ 0.6 million for 2020 and 2019 respectively.

Amortization expense of capitalized software was $ 0.8 million for 2021 and $ 0.6 million for 2020.

Cash Value of Life Insurance — The Company has invested funds in life insurance policies on 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 consolidated balance sheet.

The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset on our Consolidated Balance Sheets.

The Company records these funds at 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, is the change in the policies' contractual values.

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 Consolidated Statements of Income and Comprehensive 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.

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Lawson 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.

On August 31, 2020, the Company acquired Partsmaster from NCH Corporation, and assumed certain liabilities, including non-qualified deferred compensation plans related to Partsmaster employees.

Effective December 31, 2020, Lawson accepted sponsorship of the portions of the non-qualified plans related to Partsmaster employees.

The plans were frozen effective January 1, 2021.

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 Consolidated Statements of Income and Comprehensive 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.

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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.

During the first and second quarter of fiscal 2020, the Company identified a triggering event due to adverse changes in the business climate related to COVID-19.

As a result, the Company performed interim quantitative impairment tests as of March 31, 2020 and June 30, 2020 on the goodwill in its Bolt reporting unit, which is also the Bolt reportable segment.

The Company compared the estimated fair value using the income approach and the market approach of the reporting unit with its estimated book value.

Based on the evaluation performed, the Company determined that goodwill was not impaired as the fair value of the reporting unit exceeded its respective carrying amounts.

The income approach calculations are dependent on several subjective factors including forecasts of future revenue and earnings and the discount rate.

The market approach is based on financial multiples of comparable companies.

After reviewing the financial performance of the reporting units compared to our projected results, as well as macroeconomic conditions as a whole including the effect of the COVD-19 pandemic, we determined that it is more likely than not that the fair value of the goodwill generated by the acquisition of Screw Products, which reporting unit is a part of the Lawson reportable segment, had been impaired.

As a result, we performed a quantitative impairment test as of December 1, 2020.

The Company bases its measurement of the fair value of the reporting unit using the income approach.

The income approach calculations are dependent on several subjective factors, including forecasts of future revenue and earnings and the discount rate.

Related to the Lawson MRO, Bolt, and Partsmaster reporting units, the Company performed a qualitative assessment as of December 1, 2021 and determined that it was more likely than not the fair value of the reporting units exceeded the carrying value of the reporting units.

The goodwill related to the Screw Products reporting unit was fully impaired in 2020.

Intangible Assets — The Company's intangible assets consist of trade names and customer relationships.

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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 tax positions.

Earnings from the Company's foreign subsidiaries are considered to be indefinitely reinvested.

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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.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Income tax expense in the Consolidated Statements of Income and Comprehensive Income.

Leases — Leases are categorized as either operating or financing leases at commencement.

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These leases are classified as operating leases.

The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

The leased machines are recognized as a component of Property, plant and equipment in the 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.

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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.

All balance sheet am ounts are translated into U.S.

dollars using the exchange rates in effect at the applicable period end.

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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 Consolidated Balance Sheets.

Treasury Stock — The Company repurchas ed 47,504 and 32,362 of its common stock in 2020 and 2019, respectively, th rough its previously announced stock repurchase plan.

The Company repurc hased 32,682 an d 64,252 shares of its common stock i n 2020 an d 2019, respectively from employees upon the vesting of restricted stock to offset the income taxes owed by

those employees.

Treasury Stock — The Company repurchas ed no shares of its common stock in 2021 through its previously announced stock repurchase plan.

The Company repurchased 47,504 of its common stock in 2020 th rough its previously announced stock repurchase plan.

The Company repurc hased 20,923 an d 32,682 shares of its common stock i n 2021 an d 2020, respectively 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.

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Actual results could differ from these estimates.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses, which revises the requirements for how an entity should measure credit losses on financial instruments.

Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses , which revises the requirements for how 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 the new guidance will be applied on a prospective basis.

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On August 31, 2020, the Company acquired Partsmaster from NCH Corporation.

Partsmaster is a leading maintenance, MRO solutions provider that serves approximately 16,000 customers with approximately 200 sales representatives.

Partsmaster is a leading MRO solutions provider that serves approximately 16,000 customers with approximately 200 sales representatives.

The acquisition was made primarily to expand the Company's sales coverage, expand product lines, add experienced sales representatives, and leverage the Company's infrastructure.

The purchase price was $ 35.3 million in cash plus the assumption of certain liabilities.

The Company paid $ 2.3 million of the purchase price in cash at closing and will pay the remaining $ 33.0 million in May 2021.

The payment obligation has been discounted to its present value and was recognized as an accrued acquisition liability of $ 32.4 million at the time of acquisition.

As of December 31, 2020, the discounted present value of the $ 33.0 million due in May 2021 is $ 32.7 million and is recorded in the Company's consolidated balance sheet as an accrued acquisition liability.

P ayment has been guaranteed under the Purchase Agreement, and includes the issuance of a $ 33.0 million irrevocable standby letter of credit.

The Company will satisfy the payment obligation with cash on hand with any remaining portion using its existing credit facility.

The purchase price of the acquisition was allocated to the fair value of Partsmasters' assets and liabilities on the acquisition date.

The purchase price was $ 35.3 million in cash plus the assumption of certain liabiliti es.

The Company paid $ 2.3 million 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 Consolidated Balance Sheet.

Interest expense of $ 0.3 million was recorded in the year ended December 31, 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 payment of the acquisition liability in May 2021.

The purchase price of the acquisition was allocated to the fair value of Partsmaster's assets and liabilities at the acquisition date.

The fair market value appraisals of the majority of the assets and liabilities was determined by a third party valuation firm using management estimates and assumptions including intangible assets of $ 5.0 million for customer relationships and $ 2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively.

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The entire amount of goodwill is expected to be deductible for tax purposes.

The appropriate fair values of the assets acquired and liabilities assumed are based on estimates and assumptions.

The Company continues to review preliminary estimates of various assets and liabilities including, but not limited to, pre-acquisition employee compensation liabilities and potential adjustments of certain accounts receivable balances as defined under the purchase agreement.

These preliminary estimates and assumptions could change during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed.

The Company recorded the fair value of accounts receivable after consideration of an estimate of cash flows not expected to be collected which was $ 0.4 million.

Partsmaster contributed $ 22.6 million of revenue and $ 0.8 million of operating income in the four months of 2020 post-acquisition.

A summary of the initial purchase price allocation of the acquisition is as follows (Dollars in thousands):

Cash paid and payable and liabilities assumed

Cash paid and payable $ 34,523

The accounting for this acquisition was completed as of June 30, 2021.

Partsmaster contributed $ 57.8 million of revenue and $ 1.6 million of operating income in the year ended December 31, 2021, compared to $ 22.6 million of revenue and $ 0.8 million of operating income in the four-month post-acquisition period of 2020.

A summary of the purchase price allocation of the acquisition is as follows (Dollars in thousands):

Cash paid and liabilities assumed

Cash paid $ 34,523

Accounts payable and accrued expenses 4,086

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Other assets 371

The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Partsmaster acquisition closed on January 1, 2019.

Pro Forma Year Ended December 31,

Revenue 396,679 435,486

Net Income 16,535 7,277

The pro forma disclosures in the table above include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 rather than on the actual acquisition date.

This 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.

The unaudited pro forma revenue and net income for the Company for the year ended December 31, 2020 assuming the Partsmaster acquisition closed on January 1, 2019, was $ 396.7 million and $ 16.5 million, respectively.

The pro forma disclosures include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 rather than on the actual acquisition date.

This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operations.

In addition, future results may vary significantly from the results reflected in the pro forma information.

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a product performance obligation and a service performance obligation.

Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price breakout between these obligations.

The Company does not price its offerings based on any breakout between these obligations.

Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price allocation between these obligations.

The Company does not price its offerings based on any allocation between these obligations.

Lawson generates revenue primarily from the sale of MRO products to its customers.

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Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.

In previous financial statements, the Company presented the disaggregated components of total revenue:

product revenue and service revenue, along with the cost of sales associated with each of these revenue streams as the service revenues exceeded 10% of consolidated sales.

Since the Company qualifies as a smaller reporting company, the Company has elected to discontinue disclosure of the disaggregated components of revenue and cost of sales in its consolidated statements of income and comprehensive income and in the related notes to the consolidated financial statements.

For the twelve months ended December 31, 2019, service revenue of $ 40.1 million was reported as service revenue which have now been combined as reported within total revenue.

The Company has elected not to disclose the disaggregated components of revenue and cost of sales in its Consolidated Statements of Income and Comprehensive Income and in the related notes to the consolidated financial statements.

Disaggregated revenue by product type follows:

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Lawson as Lessor

Prior to acquisition, Partsmaster leased 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.

Partsmaster leases parts washer machines to customers through its Torrents leasing program.

These leases are classified as operating leases.

The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

The Torrents machine leasing program generated $ 0.9 million of revenue in 2020 post-acquisition.

The leased machines are recognized as a component of Property, plant and equipment in the Consolidated Balance Sheets and the leasing revenue is recognized on a straight line basis.

The Torrents machine leasing program generated $ 3.5 million of revenue in 2021 compared to $ 0.9 million of revenue in 2020 post-acquisition.

The carrying value of the Torrents leasing assets as of December 31, 2021 is $ 1.2 million.

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.

Note 5 — Restricted Cash

The Company has agreed to maintain $ 0.8 million in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company.

The Company has also agreed to maintain $ 0.2 million in a guaranteed investment certificate as collateral for an outside party that is providing certain commercial credit card services for Bolt.

The Company has agreed to maintain $ 0.2 million 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 party 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 credit card processing services for the Company, however this agreement ended in the third quarter 2021 and the $ 0.8 million is now unrestricted.

Note 6 – Inventories, net

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Impact of foreign exchange 85 270 355

Adjustment to prior year allocation ( 10 ) — ( 10 )

Balance at December 31, 2019

7,369 $ 13,554 20,923

Impact of foreign exchange 85 270 355

Acquisition (1)

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21,352 13,824 35,176

(1) The $ 15.8 million addition to goodwill in 2020 was due to the preliminary allocation of the purchase price to acquire Partsmaster.

Impact of foreign exchange 32 105 137

Balance at December 31, 2021

$ 21,384 $ 13,929 $ 35,313

(1) The $ 15.8 million addition to goodwill in 2020 was due to the allocation of the purchase price from the Partsmaster acquisition.

(2) The Company performed a quantitative goodwill impairment analysis as of December 1, 2020 for the Screw Products reporting unit.

The Company engaged a third party valuation firm to determine the value of the Screw Products reporting unit, and determined that the carrying value of the net assets exceeded the fair value of the reporting unit, and accordingly, recognized an impairment charge of $ 1.9 million.

Although the Company believes the projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the future as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

The goodwill related to the Screw Products reporting unit was fully impaired in 2020.

Note 9 - Intangible assets

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$ 3,042 $ 3,858

$ 4,952 $ 5,856

Deferred income tax expense (benefit):

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Change in valuation allowance - current period activity

( 2.2 ) ( 4.5 )

Change in valuation allowance - reversal

Foreign rate differential 1.9 —

Stock compensation

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State and local taxes, net

Foreign income inclusion

Asset basis true-up 5.5 —

Meals & entertainment

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21.1 % 27.3 %

Global Intangible Low Taxed Income (GILTI) is a deemed amount of income derived from controlled foreign corporations (CFC) in which a US person is a 10% direct or indirect shareholder.

The Company owns two Canadian CFC’s, which are subject to GILTI inclusion.

However, the Company can utilize a foreign tax credit to fully offset a significant portion of all the tax from the GILTI inclusion based on foreign taxes paid in Canada.

At December 31, 2021, the Company had $ 3.5 million of U.S.

federal net operating loss carryforwards which are subject to expiration beginning in 2030 and $ 6.5 million of various state net operating loss carryforwards which expire at varying dates through 2034.

Certain valuation allowances pertaining to the deferred tax assets related to our Canadian operations remain as of December 31, 2020.

Lawson's Canadian operations have recently moved into a three-year cumulative income position.

Based on the history of our Canadian operations and their multi-year pre-tax losses through 2018, the Company does not believe there is sufficient positive evidence at this time to consider reversing the $ 1.2 million valuation allowance.

While forecasts may show future positive pre-tax income, future projected income is the least objective of the positive sources of evidence as

the projections are inherently subjective and not yet demonstrated.

The uncertainty of the continuing pandemic may further affect our Canadian business.

Based on this, the Company will maintain its valuation allowances related to Canada as of December 31, 2020.

The Company will continue to monitor all positive and negative evidence regarding the Canadian operations and will re-assess our position on a regular basis.

After recording pre-tax losses for many years, Lawson’s Canadian subsidiary recorded pre-tax profits in 2019 and 2020.

Lawson’s Canadian subsidiary continued to generate pre-tax profits in 2021 and have utilized some of the net operating loss carryforwards.

Based on available evidence, we now believe it is more likely than not that we will be able to utilize Lawson’s Canadian subsidiary deferred tax assets to offset future taxable income.

Lawson released the $ 1.2 million valuation allowance on the Lawson Canada deferred tax assets as of December 31, 2021.

As a result of acquisitions completed in recent years, the Company recorded $ 21.4 million of tax deductible goodwill that may result in a tax benefit in future periods.

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Compensation and benefits

11,407 10,980

Inventory reserve

Transaction costs 2,077 —

Accounts receivable reserve

Leased assets 1,302 1,061

Property, plant & equipment 2,046 —

Intangible assets 202 —

Total deferred tax assets

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Deferred tax liabilities:

Intangible assets

Intangible assets and goodwill 1,771 1,948

Lease liabilities

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Valuation allowance

( 1,257 ) ( 1,235 )

Net deferred tax assets $ 18,440 $ 15,641

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Due to the uncertainty of both timing and resolution of income tax examinations, the Company is unable to determine whether any amounts included in the December 31, 2021 balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months.

The unrecognized tax benefits are recorded as a component of Other liabilities in the Consolidated Balance Sheets.

Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

The unrecognized tax benefits are recorded as a component of Other

liabilities in the Consolidated Balance Sheets.

Interest and penalties related to unrecognized tax benefits are recorded as a component of Income tax expense in the Consolidated Statements of Income and Comprehensive Income.

Including the impact of interest and the impact of net operating losses, the unrecognized tax benefit is $ 3.9 million and $ 3.7 million as of December 31, 2021 and December 31, 2020, respectively, which is recorded in Other liabilities on the Consolidated Balance Sheets.

The Company and its subsidiaries are subject to U.S.

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Accrued and withheld taxes, other than income taxes

Accrued costs related to merger agreements 3,103 —

Accrued profit sharing

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and Canada, along with various equipment located in distribution centers and corporate headquarters.

The expenses and income generated by the leasing activity of Lawson as lessee for the years ended December 31, 2020 and December 31, 2019 were as follows:

The expenses generated by the leasing activity of Lawson as lessee for the years ended December 31, 2021 and December 31, 2020 were as follows:

(Dollars in Thousands)

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Consolidated Financing Lease Expense 207 254

Sublease Income (2)

Operating expenses — ( 160 )

Net Lease Cost

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(1) Includes short term lease expense, which is immaterial

(2) Sublease income from sublease of a portion of the Company headquarters.

The sublease was terminated in June 2019 and the Company has no other subleases

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of December 31, 2020 were as follows:

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of December 31, 2021 and December 31, 2020 were as follows:

(Dollars in Thousands)

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Financing cash flows from financing leases Financing activities 222

McCook Lease Adjustment

Subsequent to the adoption of ASC 842 in 2019 the Company recorded a non-cash transaction to establish $ 1.7 million of operating ROU assets, for which $ 1.7 million of operating lease liabilities were incurred.

Also, in 2019 the Company recorded a non-cash transaction to establish $ 0.4 million of financing ROU assets, for which $ 0.4 million of financing lease liabilities were incurred.

Lawson as Lessor

Prior to acquisition, Partsmaster leased 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 on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

The Torrents machine leasing program generated $ 0.9 million of revenue in 2020 post-acquisition.

The Company has adopted the practical expedient not 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.

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 4 - Revenue Recognition for a discussion on Lawson activities as lessor.

Note 13 – Credit Agreement

In October, 2019, the Company entered into a Credit Agreement (the "Credit Agreement") with J.P.

In October 2019, the Company entered into a Revolving Credit Agreement (the "Credit Agreement" or "Revolving Credit Facility") with J.P.

Morgan Chase Bank, N.A.

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as other lenders.

The Credit Agreement matures on October 11, 2024 and provides for $ 100.0 million of revolving commitments.

The Revolving Credit Facility matures on October 11, 2024 and provides $ 100.0 million of revolving commitments.

The Credit Agreement allows borrowing capacity to increase to $ 150.0 million subject to meeting certain criteria and additional commitments from its lenders.

The Credit Agreement consists of borrowings as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans as the Company requests.

The Credit Agreement consists of borrowings designated as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans at the Company's request.

The applicable interest rate spread is determined by the type of borrowing used and the Total Net Leverage Ratio as of the most recent fiscal quarter as defined in the Credit Agreement.

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The Credit Agreement also includes events of default for, among others, non-payment of obligations under the Credit Agreement, change of control, cross default to other indebtedness in an aggregate amount in excess of $ 5.0 million, failure to comply with covenants, and insolvency.

At December 31, 2020, the Company had no outstanding balances under its revolving line of credit facility and additional borrowing availability of $ 66.0 million.

The carrying amount of the Company’s debt at December 31, 2020 approximates its fair value.

The weighted average interest rate was 2.65 % in 2020.

The Company had $ 34.0 million of outstanding letters of credit as of December 31, 2020 primarily related to the acquisition of Partsmaster.

In addition to other customary representations, warranties and covenants, the results of the financial covenants are provided below:

Quarterly Financial Covenants Requirement Actual

EBITDA to fixed charges ratio 1.15 :

Total net leverage ratio 3.25 :

The Company was in compliance with all financial covenants as of December 31, 2021.

In the third quarter of 2020, the Company entered into an amendment to the Credit Agreement which among other items increased the letter of credit basket from $ 15.0 million to $ 40.0 million until August 31, 2021 and authorized the Company to incur indebtedness in an amount up to $ 36.0 million for the acquisition of Partsmaster.

Note 14 – Accrued Acquisition Liability

On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation.

As part of the purchase price the Company agreed to pay $ 33.0 million in May 2021.

The payment obligation has been discounted to its present value using an implied interest rate of 1.8 % and is recognized as a current liability of $ 32.7 million in the Company's consolidated balance sheet.

Payment has been guaranteed under the Purchase Agreement which includes the issuance of a $ 33.0 million irrevocable standby letter of credit.

The accrued acquisition liability is included as outstanding debt in the quarterly financial covenants.

See Note 13 - Credit Agreement for further details.

In the third quarter of 2020, the Company entered into an amendment to the Credit Agreement which among other items temporarily increased the allowed letter of credits from $ 15.0 million to $ 40.0 million until August 31, 2021 and authorized indebtedness not to exceed $ 36.0 million for the acquisition of Partsmaster.

Net of outstanding letters of credit, the Company had $ 87.1 million of borrowing availability under the Revolving Credit Facility as of December 31, 2021 and $ 66.0 million as of December 31, 2020.

Weighted average interest rates for the years ended December 31, 2021 and December 31, 2020 were 5.02 % and 2.65 %, respectively.

Fees 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 %, depending on the Total Net Leverage Ratio as defined in the Credit Agreement.

Fees for the years ended December 31, 2021 and December 31, 2020 were $ 0.3 million governing the Revolving Credit Facility.

In connection with the Revolving Credit Facility originated in 2019, deferred financing costs of $ 0.6 million were incurred.

Deferred financing costs are amortized over the life of the debt instrument and reported as interest e xpense.

As of December 31, 2021 and December 31, 2020 deferred financing costs net of accumulated amortization were $ 0.3 million and $ 0.4 million, respectively, and are included in Other assets in the Consolidated Balance Sheets .

Note 14 – Reserve for Severance

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$ 192 $ 1,251

The majority of remaining severance liabilities outstanding as of December 31, 2020 will be paid by the end of 2021, and are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

The majority of remaining severance liabilities outstanding as of December 31, 2021 will be paid by the end of 2022, and are included in Accrued expenses and other liabilities in the Consolidated Balance Sheets.

Note 15 - Commitments and Contingencies

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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.

Stockholder lawsuits

On January 25, 2022, a lawsuit entitled Shiva Stein v.

Lawson Products, Inc.

et al., Case No.

1:22-cv-00639, was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Stein Action”).

On January 27, 2022, a lawsuit entitled Matthew Hopkins v.

Lawson Products, Inc.

et al, Case No.

1:22-cv-00724, was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Hopkins Action”).

On February 7, 2022, a lawsuit entitled Ema Bell v.

Lawson Products, Inc.

et al, Case No.

1:22-cv-01056, was filed in the United States District Court for the Southern District of New York against Lawson, the members of the Lawson board of directors, LKCM TE Investors, LLC (the “TestEquity Equityholder”), TestEquity, Tide Sub, LLC, a wholly-owned subsidiary of Lawson (“Merger Sub 1”), 301 HW Opus Investors, LLC, (the “Gexpro Services Stockholder”), Gexpro Services and Gulf Sub, Inc., a wholly-owned subsidiary of Lawson (“Merger Sub 2”) (the “Bell Action”).

On February 11, 2022, a lawsuit entitled John Yurco v.

Lawson Products, Inc.

et al., Case No.

1:22-cv-01201, was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Yurco Action”).

The Stein Action, the Hopkins Action, the Bell Action and the Yurco Action are collectively referred to as the “Actions.” The Actions allege that the defendants violated Sections 14(a) (and Rule 14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with respect to the Transactions (as defined in Note 1) in the Company's proxy statement.

The Bell Action also alleges that the members of the Lawson board of directors breached their fiduciary duties in connection with the Transactions and that Lawson aided and abetted the members of its board of directors in such breach.

The Actions seek, among other things, injunctive relief, money damages and the costs of the Actions, including reasonable attorneys’ and experts’ fees.

Lawson and the members of its board of directors disagree with and intend to vigorously defend against the Actions.

If the Actions are not resolved favorably on a timely basis, the Actions could delay or prevent consummation of the Transactions and result in additional costs to Lawson, including costs associated with the indemnification of directors.

Additional plaintiffs may file lawsuits against Lawson and/or its directors and officers in connection with the Transactions.

At this time, the Company is unable to predict the ultimate outcome of the Actions or meaningfully quantify how the final resolution of the Actions may impact its business, financial condition and results of operations.

In addition, on each of February 2, 2022, February 14, 2022 and February 15, 2022, purported Lawson stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of Lawson (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 possibility of wrongdoing, mismanagement and/

or material non-disclosure related to the Special Committee’s (a Special Committee was formed to independently evaluate and negotiate the terms of the Merger Agreements and related Transactions) and the Lawson board of directors’ approval of the Transactions.

Lawson and the members of its board of directors disagree with and intend to vigorously defend against any claim, if asserted, arising from the Books and Records Demands.

Environmental matter

In 2012, the Company identified that a site it owns in Decatur, Alabama, contains 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 including the measurement and monitoring of the site and the site was enrolled in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.

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") voluntary cleanup program.

A remediation plan was approved by ADEM in 2018.

The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area for three consecutive periods.

The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area.

The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area.

At December 31, 2020 the Company has less than $ 0.1 million accrued for potential monitoring costs.

At December 31, 2021 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.

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The security bonuses for those converted employees continue to vest, but their accounts are no longer credited with a percentage of net commissions.

For financial reporting purposes, amounts are charged to operations

over the vesting period.

For financial reporting purposes, amounts are charged to operations over the vesting period.

Expenses incurred for the security bonus plan were $ 0.2 million and $ 0.3 million for the years ended December 31, 2021 and 2020, respectively.

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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 General and administrative expense.

Compensation expense is included in General and administrative expense in the Consolidated Statements of Income and Comprehensive 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.

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The estimated annual dividend was based on the recent dividend payout trend.

Compensation expense of $ 2.1 million was recorded in General and administrative expense for the year ended December 31, 2021.

A compensation benefit of less than $ 0.1 million was recorded as a reduction to General and administrative expense for the year ended December 31, 2020

Compensation expenses of $ 14.9 million was recorded in General and administrative expenses for the year ended December 31, 2019.

Cash in the amount of $ 0.2 million and $ 0.5 million was paid for SPR exercises in 2021 and 2020 , respectively.

A liability of $ 14.4 million reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses and other liabilities on the consolidated balance sheets.

A liability of $ 16.7 million reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses and other liabilities in the Consolidated Balance Sheets.

Activity related to the Company’s SPRs during the year ended December 31, 2021 was as follows:

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The SPRs outstanding had an intrinsic value of $ 16.0 million as of December 31, 2021.

Unrecognized compensation cost related to non-vested SPRs was $ 0.2 million at December 31, 2020, which will be recognized over a weighted average period of 1.0 years.

All SPRs for plan participants have vested as of December 31, 2021, so there is no unrecognized compensation associated with any SPRs.

During the year ended December 31, 2021, 8,460 SPRs with a fair value of $ 0.2 million vested.

At December 31, 2020, the weighted average remaining contractual term was 2.0 years for all outstanding SPRs and 1.8 years for all exercisable SPRs.

At December 31, 2021, the weighted average remaining contractual term was 1.1 years for all outstanding SPRs.

Restricted Stock Awards

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The restricted stock awards are valued at the closing price of the common stock on the date of grant and the expense is recorded ratably over the vesting period.

Compensation expenses of $ 1.2 million and $ 1.3 million related to the RSAs were recorded in General and administrative expenses for 2020 and 2019, respectively.

Compensation expense of $ 1.6 million and $ 1.2 million related to the RSAs was recorded in General and administrative expenses for 2021 and 2020, respectively.

Activity related to the Company’s RSAs during the year ended December 31, 2021 was as follows:

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Outstanding on December 31, 2021 72,229

As of December 31, 2020, there was $ 0.8 million of total unrecognized compensation cost related to RSAs that will be recognized over a weighted average period of 1.0 year.

As of December 31, 2021, there was $ 1.6 million of total unrecognized compensation cost related to RSAs that will be recognized over a weighted average period of 1.5 years .

The awards granted in 2021 had a weighted average grant date fair value of $ 48.86 per share.

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The value of the MSUs was 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 over the measurement period.

Expenses of $ 0.7 million and $ 1.2 million related to MSUs were recorded in General and administrative expenses in the years ended December 31, 2020 and 2019, respectively.

Expense of $ 0.7 million related to MSUs was recorded in General and administrative expenses in both years ended December 31, 2021 and 2020, respectively.

Activity related to the Company’s MSUs during the year ended December 31, 2021 was as follows:

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Each stock option can be exchanged for one share of the Company’s common stock at the stated exercise price.

Expense related to stock options was $ 0.1 million in both 2020 and 2019.

No stock option expense was recorded in 2021 and 2020.

There was no unrecognized compensation related to stock options as of December 31, 2021 as all compensation plans that included stock options were fully vested.

Upon vesting, stock options are recognized as a component of equity.

There were 80,000 stock options outstanding on December 31, 2020 with a weighted average exercise price of $ 27.70 .

Performance Awards ("PAs")

The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022.

PAs are exchangeable for the Company's common stock ranging from zero to 16,278 , or the equivalent amount in cash, based upon the achievement of certain financial performance metrics.

Expenses of $ 0.1 million related to the PAs were recorded in General and administrative expenses for the year ended December 31, 2020.

There were 80,000 fully vested stock options outstanding on December 31, 2021 with a weighted average exercise price of $ 27.70 .

Performance Awards

Performance Awards ("PAs") are exchangeable for between 0 % to 150 % of the Company's common shares, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics at the end of the vesting period.

Expense of $ 0.4 million and $ 0.1 million related to the PAs was recorded in General and administrative expenses for

the year ended December 31, 2021 and December 31, 2020, respectively.

Activity related to the Company’s PAs during the year ended December 31, 2021 was as follows:

Number of Performance Awards Maximum Shares Potentially Issuable

Outstanding on December 31, 2020 10,852 16,278

15,723 23,585

Outstanding on December 31, 2021 26,575 39,863

Note 18 – Segment Information

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Consolidated total $ 256,157 $ 256,304

Financial information related to the Company’s continuing operations by geographic area follows:

Financial information related to the Company’s operations by geographic area follows:

(Dollars in Thousands)

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(2) Long-lived assets primarily consist of property, plant and equipment, goodwill, intangibles, right of use assets and other assets.

Note 19 – Accrued Acquisition Liability

On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation.

As part of the purchase price, the Company agreed to pay $ 33.0 million in May 2021.

The payment obligation was discounted to its present value using an implied interest rate of 1.8 %.

A discounted current liability of $ 32.7 million was recognized as of December 31, 2020 in the Company's Consolidated Balance Sheet.

In May 2021, the Company paid the outstanding $ 33.0 million accrued acquisition liability.

Payment was guaranteed under the Purchase Agreement which included the issuance of a $ 33.0 million irrevocable standby letter of credit.

The letter of credit was released in June 2021 subsequent to payment of the liability in May 2021.

Interest expense of $ 0.3 million on the accrued acquisition liability was recorded in the year ended December 31, 2021, with all interest expense recognized prior to the payment of the accrued acquisition liability.

Note 20 – Stock Repurchase Program

In 2019, the Company's 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.

In 2020 and 2019, the Company purchased 47,504 and 32,362 shares of common stock at an average purchase price of $ 36.93 and $ 38.13 , respectively, under the repurchase program.

The Company did no t repurchase any shares under the stock repurchase program in 2021.

In 2020 the Company purchased 47,504 shares of common stock at an average purchase price of $ 36.93 under the repurchase program.

At December 31, 2021, the Company had approximately $ 4.5 million available under the repurchase plan.

Note 21 – Related Party Transact ions

During the twelve months ended December 31, 2020 the Company purchased approximately $ 0.9 million of inventory from a company owned by an immediate relative of a Board member at fair market value.

The Company paid substantially all of the amount owed in the third and fourth quarters and therefore immaterial remaining liabilities exist as of December 31, 2020.

Note 21 – Related Party Transactions

During the year ended December 31, 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 liabilities exist with respect to the related party transactions as of December 31, 2021.

As described in greater detail in Note 1 – Description of Business, on December 29, 2021 the Company entered into two merger agreements with TestEquity and Gexpro Services.

Lawson, TestEquity, and Gexpro Services are related parties due to common ownership between the three entities.

TestEquity and Gexpro Services are affiliated with Luther King Capital Management Corporation (“LKCM”) which, together with certain of its affiliated entities, is a significant stockholder of Lawson.

Note 22 – COVID-19 Risks and Uncertainties

There is substantial uncertainty as to the overall effect the COVID-19 pandemic will have on the results of the Company for 2021 and beyond.

Various events related to COVID-19 have resulted in lost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis.

Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely.

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.

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 2021 and the remainder in 2022.

The Company elected to defer a total of $ 3.5 million of employer side social security payments in accordance with the CARES Act.

The Company paid $ 1.7 million of accrued deferred payroll taxes in the fourth quarter of 2021, and the remaining balance is expected to be paid 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.

The Company has also utilized the Canadian Emergency Wage Subsidy ("CEWS") Act for both Lawson Canada and Bolt for assistance with hourly employee costs.

During 2020, the Company also utilized the Canadian Emergency Wage Subsidy ("CEWS") Act for both Lawson Canada and Bolt for assistance with hourly employee costs.

The CEWS is a program that provides a subsidy of certain eligible wages commencing March 15, 2020 through December 31, 2020 subject to meeting certain criteria.

During 2020 the Company recorded $ 1.4 million in subsidies from the CEWS program which is recognized as a reduction to selling, general and administrative expenses in the consolidated statement of income and comprehensive income.

In the first quarter of 2020, the government of the state of Illinois defined essential businesses, allowing Lawson to operate during the pandemic.

A change in this status could result in the temporary closure of our business.

Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, 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.

The pandemic is negatively impacting sales and operations currently and may negatively impact future financial results, liquidity and overall performance of the Company.

Additionally, it is reasonably possible that estimates made in the financial statements may be materially and adversely impacted in the future 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.

The Lawson MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales representatives to customer locations.

The Bolt business model relies on foot traffic in its branch locations.

The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted the ability of our sales reps to visit our customers and for foot traffic to return to our Bolt branch locations, resulting in an overall negative impact on our business.

The second quarter 2020 financial performance of the Company was substantially negatively impacted as state and local governments throughout the United States and Canada imposed strict COVID-19 related restrictions, including shutdowns of nonessential businesses and stay-at-home orders, particularly in April.

These restrictions were relaxed in May and June, and were further relaxed throughout the third quarter.

The economic climate in the third quarter improved as non-essential businesses reopened in both limited capacity and full capacity.

The relaxed restrictions resulted in increased customer contact and more consistent customer visits for Lawson MRO sales representatives, as well as increased customer visits to Bolt

branch locations.

The relaxed restrictions continued in the fourth quarter as well, which allowed for continued sequential improvement in operating and financial performance.

Despite the improved economic climate, the Company continues to be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic.

In the fourth quarter of 2020, the U.S.

Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus.

However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021.

The Company has taken several steps to mitigate the potential negative impacts of COVID-19.

The actions taken included, but are not limited to, furloughing employees, reducing base salaries for a period of time, canceling travel and award trips, temporarily consolidating its Suwanee distribution center operations into the McCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company.

In the third and fourth quarters the Company brought back various previously furloughed employees.

The Company reopened the Suwanee distribution center in a reduced capacity in the third quarter as overall business activity increased.

During 2020 and 2021 the Company recorded $ 1.4 million and $ 0.2 million, respectively, in subsidies from the CEWS program which is recognized as a reduction to selling, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income .

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.

Note 23 - Subsequent Event

Recent Cyber Incident

On February 8, 2022, Lawson became aware that its computer network was the subject of a cyber incident potentially involving unauthorized access.

It is possible that certain confidential business information and personnel records may have been compromised.

Lawson has engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network.

Depending on the nature of any information that may have been compromised, Lawson may be required to notify the parties whose information was compromised of the incident as well as various governmental agencies and may be required to take other actions in the future, such as offering credit monitoring services.

Lawson is continuing to investigate the incident as well as potential corrective and remedial actions to take in respect of the incident.

The Company is in the early stage of the investigation, and at this time, is unable to estimate the cost of any remediation that may be required .

Lawson Products, Inc.

6 unchanged sentences

Year ended December 31, 2020 $ 593 $ 578 $ ( 517 ) $ 654

$ 549 $ 623 $ ( 579 ) $ 593

Valuation allowance for deferred tax assets:

1 unchanged sentence

Year ended December 31, 2020 $ 1,235 $ 22 $ — $ 1,257

$ 2,569 $ — $ ( 1,334 ) $ 1,235

(1) Deductions reflect uncollected receivables written off, net of recoveries and translation adjustments.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data