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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-04-28 · 599 added, 131 removed, 28 unchanged (96% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sales Drivers

The North American MRO market is highly fragmented.

We compete 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 strength of the manufacturing sector of the U.S.

economy which has been significantly affected by the COVID-19 pandemic.

One measure used to evaluate the strength of the industrial products market is the Purchasing Managers Index (PMI) published by the Institute for Supply Management.

The 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.

References to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc.

and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

Organization 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 a specialty distribution company structure providing value added distribution solutions to the maintenance, repair and 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 complementary 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 operating 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 expansion through both business acquisitions and organic growth.

Refer to the section entitled "Organization" in Note 1 - Nature of Operations and Basis of Presentation in Part 1.

Financial Statements, which section is incorporated herein by reference, for description of the TestEquity Merger and Gexpro Services Merger consummated on April 1, 2022.

Our Three Principal Operating Companies

Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations ("MRO") marketplace.

Lawson distributes MRO products to its customers through a network of sales representatives throughout the U.S.

Background and Operations

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 VMI 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 Caribbean.

Vision/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 with customers to maintain and enhance their operations by providing them with quality products, superior service and innovative solutions.

Sales Drivers - The North American MRO market is highly fragmented.

Lawson competes for business with several national distributors as well as a large number of regional and local distributors.

The MRO business is impacted by the overall

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strength of the manufacturing sector of the U.S.

economy which has been affected by the COVID-19 pandemic.

DSG believes that the Purchasing Managers Index ("PMI") published by the Institute for Supply Management is an 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.

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 57.8 in the first quarter of 2022 compared to 61.4 in the first quarter of 2021.

Our sales are also influenced by the number of sales representatives and their productivity.

Our average sales rep headcount for the first quarter of 2022 was 1,026 sales representatives.

This is compared to the average sales representative headcount of 1,083 sales representatives in the first quarter of 2021.

Lawson segment sales representative productivity, measured as sales per rep per business day, increased 16.4% to $1.583 thousand in the first quarter of 2022 compared to $1.360 thousand in the prior year quarter.

The increase in sales rep productivity was primarily driven by the realization of price increases instituted throughout 2021 and in the first quarter of 2022 and increased sales with fewer sales reps.

These price increases were enacted to primarily offset rising supplier costs caused by inflation and increased transportation and labor costs.

We plan to continue concentrating our efforts on increasing the productivity and size of our sales team.

DSG 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 wa s 54.8 in the second quarter of 2022 compared to 60.8 in the second quarter of 2021.

Lawson's sales are also influenced by the number of sales representatives and their productivity.

Lawson plans to continue concentrating its 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 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 mont hly 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 Results of Operations and Financial Condition

Supply Chain Disruptions

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We have instituted various price increases during 2021 and 2022 in response to rising supplier costs, as well as increased transportation and labor costs.

Further discussion in included within the financial discussion of the Management's Discussion and Analysis of Financial Condition and Results of Operations .

TestEquity and Gexpro Services Mergers

Refer to the section entitled "Recent Events" in Note 1 - Summary of Significant Accounting Policies and Other Information included in Part I.

Financial Statements, which section is incorporated herein by reference, for a description of the TestEquity Merger and Gexpro Services Merger consummated on April 1, 2022.

Cyber Security Incident

In February 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 in the past.

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 has not incurred material costs and at this time, is unable to estimate the total cost of any remediation that may be required .

COVID-19 Pandemic

Impact 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.

We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, 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 has 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 manner with an emphasis on maintaining our strong financial position.

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

The condensed consolidated financial statements were prepared in accordance with GAAP.

A discussion of our critical accounting policies and estimates is contained in our 2021 annual report on Form 10-K within Part II, Item 7 and Item 8, Note 2.

Please refer to these disclosures for further information regarding our critical accounting polices and use of estimates.

There have been no significant changes to our previously disclosed critical accounting polices and use of estimates.

Non-GAAP Financial Measure - Adjusted Operating Income

We have 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;

property, plant and equipment;

pre-existing liabilities or legal claims;

• 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 may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods.

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These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.

Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation, severance expense, and other non-recurring items in the period in which these items are incurred.

Operating income was $12.1 million for the first quarter of 2022 compared to $4.8 million for the first quarter of 2021.

Excluding stock-based compensation, severance expense, acquisition costs and other non-recurring items, adjusted non-GAAP operating income was $7.1 million in the first quarter of 2022 compared to $7.2 million in the first quarter of 2021.

The decrease in non-GAAP adjusted operating income in the first quarter 2022 compared to the prior year quarter was driven by increased supplier costs, higher selling expenses due to higher sales, and higher health insurance costs compared to the prior quarter.

These items were partially offset by higher sales driven primarily by the realization of price increases instituted throughout 2021 and in the first quarter of 2022 to offset rising costs.

Reconciliation of GAAP Operating Income to Non-GAAP Adjusted Operating Income (Unaudited)

Three Months Ended

(Dollars in thousands) 2022 2021

Operating income as reported per GAAP $ 12,076 $ 4,810

Stock-based compensation (benefit) expense (1)

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 plus depreciation and amortization, costs related to the execution of the Mergers, stock-based compensation, severance costs, amortization of fair value step-up resulting from the Mergers, acquisition related costs, and other non-recurring items.

The following table provides our calculation of Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:

Reconciliation of Operating Income to Non-GAAP Adjusted EBITDA (Unaudited)

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 (7)

2021 2022 (7)

Severance expense (2)

Costs related to merger agreements (3)

Employee acquisition costs (4)

Inventory reserves (5)

Non-GAAP adjusted operating income $ 7,081 $ 7,211

(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price.

Operating income $ 4,113 $ 5,468 $ 7,101 $ 7,721

Depreciation and amortization 14,746 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

(1) Expense primarily for stock-based compensation, of which a portion varies with the Company’s stock price.

(2) Includes severance expense from actions taken in 2022 and 2021.

(3) Primarily costs related to the negotiation, review and execution of the merger agreements relating to Lawson’s business combination with TestEquity and Gexpro Services consummated on April 1, 2022.

(4) Includes retention costs for actions taken in 2021 related to the Partsmaster acquisition.

(5) Includes expense for 2021 Partsmaster inventory rationalization plan and write-down of personal protective equipment inventory to net realizable value.

Three months ended March 31, 2022 compared to three months ended March 31, 2021

(Dollars in thousands) Amount % of

Net Sales Amount % of

(3) Merger transaction costs related to the negotiation, review and execution of the Merger 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 accordance with GAAP accounting guidance for reverse acquisitions.

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.

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) 2022 2021 2022 2021

Adjusted EBITDA

$ 9,405 $ — $ 9,405 $ —

TestEquity 8,647 3,680 14,138 5,938

Gexpro Services 11,915 7,464 19,926 12,416

All Other 1,686 — 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.

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, 2022 Three Months Ended June 30, 2021

Lawson Operating Income GAAP Results (1)

Pre-Merger Results (2)

GAAP Results (1)

Pre-Merger Results (4)

Revenue $ 107,334 $ — $ 107,334 $ — $ 94,861 $ 94,861

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Gross profit 56,782 — 56,782 — 49,901 49,901

Operating expenses:

Selling expenses 26,310 22.3 % 23,802 23.0 %

General and administrative expenses 22,112 18.8 % 25,948 25.0 %

Operating expenses 48,422 41.1 % 49,750 48.0 %

Selling, general and administrative expenses 59,344 — 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.

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, 2022 Six Months Ended June 30, 2021

Lawson Operating Income GAAP Results (1)

Pre-Merger Results (2)

GAAP Results (1)

Pre-Merger Results (4)

Revenue $ 107,334 $ 104,902 $ 212,236 $ — $ 188,191 $ 188,191

Cost of goods sold 50,552 49,371 99,923 — 87,882 87,882

Gross profit 56,782 55,531 112,313 — 100,309 100,309

Selling, general and administrative expenses 59,344 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.

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 June 30, 2022 Compared to Three Months Ended June 30, 2021

Consolidated Results of Operations

Three Months Ended June 30,

(Dollars in thousands) Amount % of Net Sales Amount % of Net Sales

Lawson $ 107,334 33.4% $ — —%

TestEquity 97,874 30.5% 67,856 50.6%

Gexpro 99,792 31.1% 66,296 49.4%

All Other 16,336 5.1% — —%

Total Revenue 321,336 100.0% 134,152 100.0%

Cost of goods sold

Lawson 50,552 15.7% — —%

TestEquity 75,064 23.4% 53,452 39.8%

Gexpro 70,615 22.0% 46,959 35.0%

All Other 10,550 3.3% — —%

Total Cost of goods sold 206,781 64.4% 100,411 74.8%

Gross profit 114,555 35.6% 33,741 25.2%

Selling, general and administrative expenses

Lawson 59,344 18.5% — —%

TestEquity 22,339 7.0% 14,401 10.7%

Gexpro 23,787 7.4% 13,872 10.3%

All Other 4,972 1.5% — —%

Total Selling, general and administrative expenses 110,442 34.3% 28,273 21.1%

Operating income 4,113 1.3% 5,468 4.1%

Interest expense (3,751) (1.2)% (4,262) (3.2)%

Other income, net 204 0.2 % 372 0.4 %

Income before income taxes

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

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 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 the 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 second quarter of 2022 , gross profit for the second quarter of 2022 improv ed $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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Results by Reportable Segment

Lawson Segment

Three Months Ended June 30, Change

(Dollars in thousands) 2022 2021 Amount %

Revenue $ 107,334 $ — $ 107,334 — %

Cost of goods sold 50,552 — 50,552 — %

Gross profit 56,782 — $ 56,782 — %

Selling, general and administrative expenses 59,344 — 59,344 — %

Operating loss $ (2,562) $ — $ (2,562) — %

Gross profit margin 52.9 % — %

Adjusted EBITDA (1)

$ 9,405 $ — $ 9,405 — %

Income tax expense 3,199 2.7 % 1,263 1.2 %

Net income $ 8,986 7.6 % $ 3,596 3.5 %

Revenue and Gross Profits

Three Months Ended March 31, Increase

(1) 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 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)

Revenue $ 107,334 $ 94,861 $ 12,473 13.1 %

Cost of goods sold 50,552 44,960 5,592 12.4 %

Gross profit 56,782 49,901 6,881 13.8 %

Selling, general and administrative expenses 59,344 47,458 11,886 25.0 %

Operating (loss) income $ (2,562) $ 2,443 $ (5,005) (204.9) %

Gross profit margin 52.9 % 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 13.1% to $107.3 million in the second quarter of 2022 compared to adjusted revenue of $94.9 million in the second quarter of 2021 .

The increase in revenue over the comparable prior year quarter 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.

Sales per rep per day improved approximately 20% over a year ago quarter on fewer sales reps .

Reported gross profit increased $6.9 million to $56.8 million in the second quarter of 2022 compared to adjusted gross profit of $49.9 million in the prior year quarter primarily as a result of increased sales and the related price increases put in place.

Lawson gross profit as a percent of sales was 52.9% in the second quarter of 2022 compared to 52.6% as adjusted in the prior year quarter.

The gross margin percentage for the second quarter of 2022 was impacted by increased supplier costs from

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inflation, supply chain disruptions, a sales shift toward lower margin customers, and the amortization of the fair value step-up of $1.6 million related to the Mergers.

Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher costs.

Selling, General and Administrative Expenses

Selling expenses consist of compensation and support for our sales representatives as well as expenses to operate our distribution network and overhead expenses.

Selling, general and administrative expenses increased to $59.3 million in the second quarter of 2022 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) 2022 2021 Amount %

Lawson $ 104,902 $ 93,330 $ 11,572 12.4%

Bolt Supply 12,975 10,226 2,749 26.9%

Consolidated $ 117,877 $ 103,556 $ 14,321 13.8%

Lawson $ 55,531 $ 50,408 $ 5,123 10.2%

Bolt Supply 4,967 4,152 815 19.6%

Consolidated $ 60,498 $ 54,560 $ 5,938 10.9%

Revenue $ 97,874 $ 67,856 $ 30,018 44.2%

Cost of goods sold 75,064 53,452 21,612 40.4%

Gross profit 22,810 14,404 8,406 58.4%

Selling, general and administrative expenses 22,339 14,401 7,938 55.1%

Operating income $ 471 $ 3 $ 468 15600.0%

Gross profit margin 23.3 % 21.2 %

Lawson 52.9 % 54.0 %

Bolt Supply 38.3 % 40.6 %

Consolidated 51.3 % 52.7 %

Total sales increased 13.8% to $117.9 million in the first quarter of 2022 compared to $103.6 million in the first quarter of 2021.

The increase in sales compared to the prior year quarter was primarily driven by the realization of price increases enacted throughout 2021 and in the first quarter of 2022 to offset rising supplier costs and one additional selling day in 2022.

Bolt Supply sales improved 26.9% compared to the prior year quarter driven by realization of prior period price increases enacted to offset rising supplier costs, continued strength in branch location sales and a recovery of direct sales to oil and gas customers.

The first quarter 2022 had one more selling day than the prior year quarter.

Reported gross profit increased $5.9 million to $60.5 million in the first quarter of 2022 compared to $54.6 million in the prior year quarter primarily as a result of increased sales.

Consolidated gross profit as a percent of sales was 51.3% in the first quarter of 2022 compared to 52.7% in the prior year quarter.

Gross margin percentage for the first quarter 2022 was impacted by increased supplier costs from inflation, supply chain disruptions and a sales shift toward lower margin customers.

Price increases enacted throughout 2021 and the first quarter of 2022 have partially offset the negative impacts of these higher costs.

The Lawson segment gross margin, defined as margin generated by Lawson MRO as a percent of sales was 52.9% in the first quarter 2022 compared to 54.0% a year ago quarter.

The realization of customer price increases, along with product sourcing and labor allocation, partially offset increased supplier costs in the current year quarter.

The decrease in Bolt Supply gross margin as a percent of sales compared to the prior year quarter was also driven by increased sales to lower margin customers in the oil and gas industry.

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

Three Months Ended March 31, Increase

Selling, general and administrative expenses 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) 2022 2021 Amount %

Selling expenses

Lawson $ 25,370 $ 22,891 $ 2,479 10.8%

Bolt Supply 940 911 29 3.2%

Consolidated $ 26,310 $ 23,802 $ 2,508 10.5%

General and administrative expenses

Lawson $ 19,065 $ 23,261 $ (4,196) (18.0)%

Bolt Supply 3,047 2,687 360 13.4%

Consolidated $ 22,112 $ 25,948 $ (3,836) (14.8)%

Selling expenses consist of compensation and support for our sales representatives.

Selling expenses increased to $26.3 million in the first quarter of 2022 compared to $23.8 million in the prior year quarter.

Higher selling expense in the first quarter 2022 compared to the prior year quarter was primarily driven by costs incurred to support the increased sales and increased health insurance costs.

As a percent of sales, selling expenses decreased to 22.3% from 23.0% in the first quarter of 2021 driven by expenses allocated over a larger sales base.

General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business.

General and administrative expenses decreased to $22.1 million in the first quarter of 2022 from $25.9 million in the prior year quarter.

The decrease in general and administrative expenses was driven by a stock-based compensation benefit of $8.6 million in the first quarter 2022 compared to expense of $1.0 million in the prior year quarter.

A portion of our stock based compensation fluctuates with our stock price.

This benefit was partially offset by costs of $3.0 million incurred in the first quarter of 2022 related to the Mergers with TestEquity and Gexpro Services, which were consummated on April 1, 2022.

Excluding stock-based compensation, severance and acquisition related costs, general and administrative expense increased by $2.7 million compared to the prior year quarter.

This increase was driven primarily by higher employee related costs including additional health insurance claims of approximately $1.5 million.

Revenue $ 99,792 $ 66,296 $ 33,496 50.5%

Cost of goods sold 70,615 46,959 23,656 50.4%

Gross profit 29,177 19,337 9,840 50.9%

Selling, general and administrative expenses 23,787 13,872 9,915 71.5%

Operating income $ 5,390 $ 5,465 $ (75) (1.4)%

Gross profit margin 29.2 % 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 2021 and 2022 acquisitions.

An expansion of products 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 revenue compared to $13.9 million or 20.9% of revenue for the same period last year.

The $9.9 million increase was driven primarily by the inclusion of the 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 $4.5 million 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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Consolidated Non-operating Income and Expense

Three Months Ended June 30, Change

(Dollars in thousands) 2022 2021 Amount %

Interest expense $ (3,751) $ (4,262) $ 511 (12.0)%

Interest expense was $0.1 million in the first quarter of 2022 compared to $0.3 million of interest expense in the prior year quarter.

Other Income, Net

Other income, net decreased $0.2 million in the first quarter of 2022 over the prior year quarter primarily due to Canadian currency exchange rate effect.

Income Tax Expense

Income tax expense was $3.2 million, resulting in a 26.3% effective tax rate for the three months ended March 31, 2022 compared to income tax expense of $1.3 million and an effective tax rate of 26.0% for the three months ended March 31, 2021.

The effective tax rate in both periods is higher than the U.S.

statutory rate primarily due to state taxes and other permanent items.

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 $3.8 million in the second 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 the 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.

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.

Income Tax (Benefit) Expense

Income tax benefit was $3.6 million, a 43.4% effective tax rate for the three months ended June 30, 2022 compared to income tax expense of $0.6 million and an effective tax rate of 54.8% for the three months ended June 30, 2021.

The effective tax rate for the three months ended June 30, 2022 was higher than the U.S.

statutory rate primarily due to state taxes, foreign operations, as well as transaction expenses related to the Mergers and other permanent items.

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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Consolidated Results of Operations

Six Months Ended June 30,

(Dollars in thousands) Amount % of Net Sales Amount % of Net Sales

$ 107,334 22.6 % $ — — %

TestEquity 170,276 35.8 % 133,631 51.6 %

Gexpro 181,475 38.2 % 125,348 48.4 %

All Other 16,336 3.4 % — — %

Total Revenue 475,421 100.0 % 258,979 100.0 %

Cost of goods sold

50,552 10.6 % — — %

TestEquity 130,543 27.5 % 105,472 40.7 %

Gexpro 128,337 27.0 % 89,519 34.6 %

All Other 10,550 2.2 % — — %

Total Cost of goods sold 319,982 67.3 % 194,991 75.3 %

Gross profit 155,439 32.7 % 63,988 24.7 %

Selling, general and administrative expenses

59,344 12.5 % — — %

TestEquity 39,866 8.4 % 29,521 11.4 %

Gexpro 44,156 9.3 % 26,746 10.3 %

All Other 4,972 1.0 % — — %

Total Selling, general and administrative expenses 148,338 31.2 % 56,267 21.7 %

Operating income 7,101 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), net 774 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 the first 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 improv ed $28.8 million o ver 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) 2022 2021 Amount %

Revenue $ 107,334 $ — $ 107,334 —%

Cost of goods sold 50,552 — 50,552 —%

Gross profit 56,782 — 56,782 —%

Selling, general and administrative expenses 59,344 — 59,344 —%

Operating loss $ (2,562) $ — $ (2,562) —%

Gross profit margin 52.9 % — %

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

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)

Revenue $ 212,236 $ 188,191 $ 24,045 12.8%

Cost of goods sold 99,923 87,882 12,041 13.7%

Gross profit 112,313 100,309 12,004 12.0%

Selling, general and administrative expenses 103,779 93,610 10,169 10.9%

Operating income $ 8,534 $ 6,699 $ 1,835 27.4%

Gross profit margin 52.9 % 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

Adjusted revenue increased 12.8% to $212.2 million for the first six months of 2022 compared to adjusted revenue of $188.2 million for the same period a year ago.

The increase in adjusted revenue compared to the prior 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 June 30, 2022 include d 128 selling days, or 1 addition al selling day over the same period a year ago.

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Adjusted gross profit increased $12.0 million to $112.3 million for the six months ended June 30, 2022 compared to $100.3 million in the prior year primarily as a result of increased sales and the related price increases put in place.

Lawson adjusted gross profit as a percent of sales was 52.9% for the first six months of 2022 compared to 53.3% in the prior 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 the fair value step up of $1.6 million related to the Mergers.

Selling, General and Administrative Expenses

Selling expenses consist of compensation and support for our sales representatives as well as expenses to operate our distribution network and overhead expenses.

Adjusted selling, general and administrative expenses increased to $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.

Adjusted EBITDA

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

TestEquity Segment

Six Months Ended June 30, Change

(Dollars in thousands) 2022 2021 Amount %

Revenue $ 170,276 $ 133,631 $ 36,645 27.4%

Cost of goods sold 130,543 105,472 25,071 23.8%

Gross profit 39,733 28,159 11,574 41.1%

Selling, general and administrative expenses 39,866 29,521 10,345 35.0%

Operating loss $ (133) $ (1,362) $ 1,229 (90.2)%

Gross profit margin 23.3 % 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 million to $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 base 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) 2022 2021 Amount %

Revenue $ 181,475 $ 125,348 $ 56,127 44.8%

Cost of goods sold 128,337 89,519 38,818 43.4%

Gross profit 53,138 35,829 17,309 48.3%

Selling, general and administrative expenses 44,156 26,746 17,410 65.1%

Operating income $ 8,982 $ 9,083 $ (101) (1.1)%

Gross profit margin 29.3 % 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 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 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 of $17.4 million over a year ago was primarily driven by the inclusion of the 202 1 and 2022 acquisitions of $8.7 million.

The remainder of the increase was driven primarily by an increase in merger related costs of $2.5 million and additional compensation and product fulfillment costs to support the organic growth of the existing 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 revenues and margins on the base business.

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Consolidated Non-operating Income and Expense

Six Months Ended June 30, Change

(Dollars in thousands) 2022 2021 Amount %

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 $2.1 million in the first six 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 2022 was primarily 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 first 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.

Financial Information to our Unaudited Condensed Consolidated Financial Statements for information about the earnout liability.

Other Income (Expense), Net

Other expense, net increased $1.0 million in the first six months of 2022 compared to the prior year primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date.

Income Tax (Benefit) Expense

Income tax benefit was $4.6 million, a 38.6% effective tax rate for the first six months of 2022 compared to income tax expense of $0.4 million and a 37.5% effective tax rate for the first six months of 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.

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

Available cash and cash equivalents were $5.5 million on March 31, 2022 compared to $4.2 million on December 31, 2021.

Net cash used by operations for the three months ended March 31, 2022 was $0.2 million, 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.

The increased operating cash outflows were partially offset by operating cash inflows generated by realization of pricing actions taken to offset increased supplier costs.

Capital expenditures were $2.1 million and $0.8 million for the three month period ended March 31, 2022 and 2021, respectively, primarily for improvements to our distribution centers and information technology.

Cash provided by financing activities was $3.6 million for the first three months of 2022, primarily due to a net drawdown of $3.7 million on our Old Revolving Credit Facility due to increased working capital requirements and costs associated with the TestEquity Merger and Gexpro Services Merger.

In 2019, o ur Board of Directors authorized a program in which we may repurchase up to $7.5 million 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 three months of 2022 under this plan.

The Company anticipates that outstanding stock performance rights with a value of $4.2 million at March 31, 2022 will be paid out within the next twelve months prior to expiration.

Old Revolving Credit Facility

On March 31, 2022, we had $15.6 million in outstanding borrowings and $83.4 million of borrowing availability remaining, net of outstanding letters of credit, under our Old Revolving Credit Facility.

Along with certain standard terms and conditions of our 2019 Credit Agreement governing our Old Revolving Credit Facility, we were able to borrow up to 3.25 times our EBITDA, as defined, and required to maintain a minimum fixed charge ratio, as defined, of 1.15.

As of March 31, 2022, we were in compliance with all financial covenants.

While we were in compliance with our financial covenants included in our 2019 Credit Agreement for the quarter ended March 31, 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 Amended and Restated 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.

Amended and Restated Credit Agreement

Subsequent to quarter end, on April 1, 2022, in connection with the TestEquity Merger and Gexpro Services Merger, Lawson entered into an Amended and Restated Credit Agreement.

Refer to Note 9 - Credit Agreement which is incorporated herein by reference, for a description of the agreement.

Cash and cash equivalents were $17.9 million on June 30, 2022 compared to $14.7 million on December 31, 2021.

The 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 bo rrowing 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.

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, 2022 June 30, 2021 Change

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 six months ended June 30, 2021 was $8.9 million, primarily due to decreased accounts receivable and inventories partially offset by increased accounts payable and prepaid expenses.

Cash Used in Investing Activities

Cash used in investing activities for the six months ended June 30, 2022 was $115.3 million, primarily as a result of the 2022 other acquisitions by TestEquity and Gexpro as described in Note 3 - Business Acquisitions within Part I.

Financial Information.

Net cash used in investing activities for the six months ended June 30, 2021was $12.1 million, primarily due to business acquisitions and purchases of rental equipment.

Cash Provided by Financing Activities

Cash provided by financing activities was $157.0 million for the first six months of 2022, primarily due to proceeds under the April 1, 2022 Amended and Restated Credit Agreement partially offset by repayment of previous indebtedness.

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.

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 Agreement and January 3, 2022 Gexpro Services Credit Agreement.

Cash provided by financing activities for the six months ended June 30, 2021 was $3.8 million, primarily due to increased borrowings on the Company's revolving lines of credit partially offset by payments on the Company's term loans.

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Material Cash Requirements

The Company anticipates that outstanding stock performance rights with a value of $5.4 million at June 30, 2022 will be paid out within the next twelve months prior to expiration.

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.

Financial Information for a description of the agreement.

On June 30, 2022, we had $411.4 million in outstanding borrowings and $85.9 million of bo rrowing availability remaining, net of outstanding letters of credit, under the revolving credit facility.

As of June 30, 2022, we were in compliance with all financial covenants under our Amended and Restated Credit Agreement.

While we were in compliance with our financial covenants as of June 30, 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.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis