What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-09 · 205 added, 220 removed, 407 unchanged (51% of the section changed)

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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"), a Delaware corporation formerly known as Lawson Products, Inc., changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG 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:

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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.

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.

Our Three Principal Operating Companies

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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.

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.

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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.

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 and to grow both organically and through acquisitions.

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.

The MRO business is impacted by the overall 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.

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.

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.

The average monthly PMI wa s 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021.

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

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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.

In addition to these products, the TEquipment web platform is also currently extending their range to include non-overlap products from the TestEquity platform.

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.

In addition to the approximately 80,000 brand specific 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 brand specific 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.

During the quarter, the final stage of moving Techni-Tool and Jensen Tools to the TestEquity platform was completed, meaning that customers for each of these brands now have full access to the 230,000 active products across TestEquity group.

Vision/Strategy - TestEquity intends to grow sales organically, pursue acquisitions and continue to expand and improve its service offerings to its customers.

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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.

The average mont hly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021.

TestEquity management focuses on the internal metric of Sales per Day (“SPD”) and Day Adjust Growth (“DAG”).

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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.

Specifically in respect of its electronic 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.

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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.

Gexpro Services 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.

Vision/Strategy - Gexpro Services intends to grow organically through market share expansion primarily through new product 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.

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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

The average monthly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021

Key Factors Affecting our Results of Operations and Financial Condition

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Along with the broader economy, we continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs .

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, which has offset some of the sales gains we recorded in 2022 compared to 2021.

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, which offset some of the sales gains we recorded in 2022 compared to 2021.

The supply chain disruptions have also led to higher product costs which have contributed to lower gross margins as a percentage of sales compared to the prior year.

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

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.

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

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

As of September 30, 2022, DSG received notification from its cyber insurance provider that a portion of the claim submitted for costs incurred was approved and therefore we recorded a receivable of $0.4 million which is included in Prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheet.

Critical Accounting Policies and Use of Estimates

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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.

At September 30, 2022, our inventory reserve was $9.5 million, equal to approximately 3.5% of our gross inventory.

A hypothetical change of one hundred basis points to our reserve as a percent of total inventory would have affected our cost of goods sold by $2.7 million.

Income Taxes - Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting.

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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.

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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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Accordingly, the unaudited condensed consolidated financial statements as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 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.

Non-GAAP Financial Measures

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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:

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2022 (8)

2021 2022 (8)

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

Operating income (loss) $ 22,027 $ 5,491 $ 29,128 $ 13,212

Depreciation and amortization 8,979 4,729 31,314 13,649

EBITDA 31,006 10,220 60,442 26,861

Stock-based compensation (1)

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944 15 2,353 34

Merger transaction costs (3)

Merger/integration costs (3)

2,364 630 9,597 1,158

Inventory net realizable value adjustment (4)

1,737 — 1,737 —

Inventory step-up (5)

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Adjusted EBITDA $ 34,700 $ 11,832 $ 79,855 $ 30,185

(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) Merger transaction costs related to the negotiation, review and execution of the Merger Agreements relating to the Mergers.

(1) Expense (benefit) 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, not related to a formal restructuring plan.

(3) Merger transaction costs related to the negotiation, review and execution of the Merger Agreements relating to the Mergers and subsequent integration costs.

(4) Inventory net realizable value adjustment recorded to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records.

(5) Inventory fair value step-up adjustment for Lawson resulting from the reverse merger acquisition accounting.

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The following table provides Adjusted EBITDA by reportable segment:

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2022 2021 2022 2021

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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's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in DSG's Quarterly Reports on Form 10-Q filed for the quarterly periods ended September 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

(in thousands) Three Months Ended September 30, 2022 Three Months Ended September 30, 2021

Lawson Operating Income GAAP Results (1)

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Selling, general and administrative expenses 50,883 — 50,883 — 47,639 47,639

Operating (loss) income $ (2,562) $ — $ (2,562) $ — $ 2,443 $ 2,443

Operating income (loss) $ 5,352 $ — $ 5,352 $ — $ 3,488 $ 3,488

Lawson Adjusted EBITDA (5)

$ 9,670 $ — $ 9,670 $ — $ 7,560 $ 7,560

(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.

(1) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date.

For the three months ended September 30, 2021 , the operating results of Lawson were not included in the Company’s GAAP operating results.

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.

(2) All of Lawson’s results of operations for the three months ended September 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.

These non-GAAP results represent Lawson’s total operating activities for the three months ended September 30, 2022 and 2021 , regardless of the Merger Date (that is, they reflect both pre- and post-Merger results of Lawson).

(4) Lawson's results of operations for the three months ended September 30, 2021 , which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's 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

(5) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of Adjusted EBITDA to operating income.

(in thousands) Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021

Lawson Operating Income GAAP Results (1)

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Selling, general and administrative expenses 110,227 44,435 154,662 — 141,249 141,249

Operating (loss) income $ (2,562) $ 11,096 $ 8,534 $ — $ 6,699 $ 6,699

Operating income (loss) $ 2,792 $ 11,096 $ 13,888 $ — $ 10,187 $ 10,187

Lawson Adjusted EBITDA (5)

$ 19,077 $ 8,042 $ 27,119 $ — $ 23,551 $ 23,551

(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.

(1) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date.

For the nine months ended September 30, 2021, the operating results of Lawson were not included in the Company's GAAP results.

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.

(2) Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's 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.

These non-GAAP results represent Lawson’s total operating activities for the nine months ended September 30, 2022 and 2021 , regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).

(4) Lawson's results of operations for the nine months ended September 30, 2021 , which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's 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.

(5) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of 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 following results of operations for the three and nine months ended September 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

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

Consolidated Results of Operations

Three Months Ended June 30,

Three Months Ended September 30,

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

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Total Selling, general and administrative expenses 97,140 28.0% 29,347 22.2%

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

Operating income (loss) 22,027 6.3% 5,491 4.2%

Interest expense (6,097) (1.8)% (3,976) (3.0)%

Loss on extinguishment of debt — —% — —%

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%

Change in fair value of earnout liabilities 9,641 2.8% — —%

Other income (expense), net (550) (0.1)% (74) (0.1)%

Income (loss) before income taxes 25,021 7.2% 1,441 1.1%

Income tax expense (benefit) 8,480 2.4% 216 0.2%

Net income (loss) $ 16,541 4.8% $ 1,225 0.9%

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.

The increase in gross profit for the third quarter of 2022 compared to the third 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 $62.2 million for the third quarter of 2022 , gross profit for the third quarter of 2022 improv ed $22.1 million over the prior year due to 2021 and 2022 acquisitions and growth in the organic businesses.

Expenses for the third quarter of 2022 were impacted by transaction and integration costs related to the Mergers 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

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 50,883 — 50,883 — %

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

Operating income (loss) $ 5,352 $ — $ 5,352 — %

Gross profit margin 51.4 % — %

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(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.

The increase in operations for the third quarter of 2022 compared to the third quarter of 2021 was due to the inclusion of Lawson revenue beginning on the Merger Date.

Supplemental Information

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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

Three Months Ended September 30, Change from Adjusted 2021

(Dollars in thousands) 2022 Adjusted 2021 (1)

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Selling, general and administrative expenses 50,883 47,639 3,244 6.8 %

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

Operating income (loss) $ 5,352 $ 3,488 $ 1,864 53.4 %

Gross profit margin 51.4 % 54.6 %

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$ 9,670 $ 7,560 $ 2,110 27.9 %

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results prior to the Merger Date.

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results of Lawson 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.

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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 .

Organic revenue increased 16.8% to $109.4 million in the third quarter of 2022 compared to adjusted revenue of $93.7 million in the third 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.

Sales per sales representative per day improved approximately 24.4% over a year ago quarter on fewer sales representatives .

Reported gross profit increased $5.1 million to $56.2 million in the third quarter of 2022 compared to adjusted gross profit of $51.1 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 51.4% in the third quarter of 2022 compared to 54.6% as adjusted in the prior year quarter.

The gross margin percentage for the third quarter of 2022 was impacted by increased supplier costs from inflation, sup ply chain disruptions and a sales shift toward lower margin customers.

Gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $0.8 million related to the M ergers.

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

Selling, general and administrative expenses increased to $50.9 million in the third quarter of 2022 compared to the adjusted amount of $47.6 million in the prior year quarter.

Higher expenses in the third quarter versus a year ago quarter were primarily driven by compensation expense to support increased sales, higher severance and higher amortization expense related to the reverse merger accounting, partially offset by a stock-based compensation benefit.

Additionally, Lawson incurred higher consulting expenses as it reviewed opportunities to increase sales 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.

During the three months ended September 30, 2022, Lawson generated Adjusted EBITDA of $9.7 million , an increase of $2.1 million, or 27.9%, from the same period a year ago on an adjusted basis for pre-merger activity driven primarily by increased revenues.

TestEquity Segment

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 19,429 14,886 4,543 30.5 %

Operating income $ 471 $ 3 $ 468 15600.0%

Operating income (loss) $ 7,576 $ 1,054 $ 6,522 618.8 %

Gross profit margin 23.1 % 23.5 %

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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.

Revenue increased $48.9 million to $116.7 million in the three months ended September 30, 2022 from $67.8 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 $37.6 million of aggregate revenue from the 2022 acquisition of TEquipment and National Test Equipment for three-month post-acquisition period and the 2021 acquisition of MCS.

Excluding acquisitions, revenue grew approximately 16.9% driven by test and measurement revenue growth of approximately 18.8% as well as a 14.4% growth in revenue in the electronic production supplies business.

As a percent of revenue, gross profit decreased to 23.1% for the three months ended September 30, 2022 from 23.5% in the same period in the prior year.

The decrease was primarily driven by a change in sales mix due to the test and measurement acquisitions partially offset by increases in our higher margin electronic production supplies business.

Selling, General and Administrative Expenses

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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Selling, general and administrative expenses increased $4.5 million driven primarily by the acquisitions during the second quarter of 2022 and costs to support the organic growth of the existing base business.

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.

During the three months ended September 30, 2022, TestEquity generated Adjusted EBITDA of $10.1 million, an increase of $4.6 million from the same period a year ago with approximately $3.4 million driven by the 2021 and 2022 acquisitions and growth in its organic business.

Gexpro Services Segment

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 21,963 14,461 7,502 51.9 %

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

Operating income (loss) $ 7,992 $ 4,437 $ 3,555 80.1 %

Gross profit margin 28.9 % 29.4 %

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Revenue and Gross Profit

Revenue for the three months ended June 30, 2022 was $99.8 million.

Revenue for the three months ended September 30, 2022 was $103.7 million.

This compares to revenue of $64.3 million for the same period a year ago or an increase of 61.4%.

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.

During the three months ended September 30, 2022 revenue increased primarily due to acquisitions completed in both 2021 and 2022.

Of the $39.5 million increase over the third quarter a year ago, $30.8 million was driven by the 2021 and 2022 acquisitions.

An expansion of products and services to existing customers, the addition of new customers and price increases, drove organic growth of approximately 13.9%.

Gross profit was $30.0 million or 28.9% of revenue for the three-month period ending September 30, 2022 compared to $18.9 million or 29.4% 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.

As a percentage of sales, gross profit decreased 50 basis points (bps) from lower gross margin profiles of acquired companies offset by price actions, strategic sourcing improvements, new supplier development, and a continued shift toward longer-term agreements with suppliers.

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.

Selling, general, and administrative expense for the three-month period ending September 30, 2022 was $22.0 million or 21.2% of revenue compared to $14.5 million or 22.5% of revenue for the same period last year.

The $7.5 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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During the three months ended September 30, 2022, Gexpro Services generated Adjusted EBITDA of $12.5 million , an increase of $6.2 million from the same period a year ago with approximately $5.1 million driven by the 2021 and 2022 acquisitions and organic growth in the existing base business.

Consolidated Non-operating Income and Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

Interest expense $ (6,097) $ (3,976) $ (2,121) 53.3 %

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)%

Change in fair value of earnout liabilities $ 9,641 $ — $ 9,641 — %

Other income (expense), net $ (550) $ (74) $ (476) — %

Income tax expense (benefit) $ 8,480 $ 216 $ 8,264 — %

N/M Not meaningful

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.

Interest expense was $6.1 million in the third quarter of 2022 compared to $4.0 million of interest expense in the prior year quarter.

The increase was due to a lower interest rate as a result of the debt refinancing related to the Mergers, offset by interest on higher outstanding borrowings related to the 2021 and 2022 acquisitions.

Change in Fair Value of Earnout Liability

The $9.6 million benefit in the third 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.

Income Tax Expense (Benefit)

Income tax expense was $8.5 million, a 33.9% effective tax rate for the three months ended September 30, 2022 compared to income tax expense of $0.2 million and an effective tax rate of 15.0% for the three months ended September 30, 2021.

The effective tax rate for the three months ended September 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

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Consolidated Results of Operations

Six Months Ended June 30,

Nine Months Ended September 30,

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

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Total Selling, general and administrative expenses 245,478 29.8 % 85,614 21.9 %

Operating income 7,101 1.5 % 7,721 3.0 %

Operating income (loss) 29,128 3.5 % 13,212 3.4 %

Interest expense (16,704) (2.0) % (12,482) (3.2) %

Loss on extinguishment of debt (3,395) (0.4) % — — %

Change in fair value of earnout derivative liability (5,693) (1.2) % — — %

Change in fair value of earnout liabilities 3,948 0.5 % — — %

Other income (expense), net 224 — % (328) (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.

Income (loss) before income taxes 13,201 1.6 % 402 0.1 %

Income tax expense (benefit) 3,912 0.5 % 606 0.2 %

Net income (loss) $ 9,289 1.1 % $ (204) (0.1) %

(1) Includes the operating results of Lawson subsequent, but not prior, to the Merger Date of April 1, 2022.

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.

The increase in gross profit for the first nine months of 2022 compared to the first nine 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 $124.8 million , gross profit for the first nine months of 2022 improv ed $51.0 million o ver the prior year.

Expenses for the first nine 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

Nine Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 110,227 — 110,227 — %

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

Operating income (loss) $ 2,792 $ — $ 2,792 — %

Gross profit margin 52.1 % — %

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$ 19,077 $ — $ 19,077 — %

(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.

(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 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.

The increase in revenue, gross profit and operating income for the first nine months of 2022 compared to the first nine 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

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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

Nine Months Ended September 30, Adjusted Change

(Dollars in thousands) Adjusted 2022 (1)

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Selling, general and administrative expenses 154,662 141,249 13,413 9.5%

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

Operating income (loss) $ 13,888 $ 10,187 $ 3,701 36.3%

Gross profit margin 52.4 % 53.7 %

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$ 27,119 $ 23,551 $ 3,568 15.2%

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results prior to the Merger Date.

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results of Lawson 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.

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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.

Adjusted revenue increased 14.1% to $321.7 million for the first nine months of 2022 compared to adjusted revenue of $281.9 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.

The nine months ended September 30, 2022 included 192 selling days, or one additional selling day over the same period a year ago.

Adjusted gross profit increased $17.1 million to $168.6 million for the nine months ended September 30, 2022 compared to $151.4 million in the prior year primarily as a result of increased sales and the related price increases put in place.

adjusted gross profit as a percent of sales was 52.4% for the first nine months of 2022 compared to 53.7% in the prior year.

The adjusted gross margin percentage for 2022 was impacted by increased supplier costs from inflation, supply chain disruptions and a sales shift toward lower margin customers.

Adjusted gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $1.9 million related to the Mergers.

Excluding the $3.6 million of aggregate fair market and amortization adjustments related to the Mergers, adjusted gross profit was 53.5% of sales in the nine months ended September 30, 2022.

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.

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.

Selling, general and administrative expense consist of compensation and support for Lawson sales representatives as well as expenses to operate Lawson's distribution network and overhead expenses.

Adjusted selling, general and administrative expenses increased to $154.7 million for the nine months ended September 30, 2022 compared to the adjusted amount of $141.2 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 and higher amortization expense related to the reverse merger accounting, partially offset by lower stock-based compensation.

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.

During the nine months ended September 30, 2022 , Lawson generated Adjusted EBITDA of $27.1 million , an increase of $3.6 million from the same period a year ago driven by increased revenues and margins.

TestEquity Segment

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 59,294 44,407 14,887 33.5 %

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

Operating income (loss) $ 7,443 $ (308) $ 7,751 (2516.6) %

Gross profit margin 23.3 % 21.9 %

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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.

Revenue increased to $287.0 million for the nine months ended September 30, 2022 from $201.5 million during the same period in 2021 .

This increase was primarily 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 $62.8 million for the post-acquisition periods, as well as organic growth of 11.4% in the existing base business.

Gross profit increased $22.6 million to $66.7 million in the first nine months of 2022 compared to $44.1 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 21.9% in 2021 driven by an expansion of margins within the existing base business and a shift in sales mix toward higher margin electronic production supplies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $14.9 million to $59.3 million in 2022 from $44.4 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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Approximately $9.6 million of costs were due to the acquisitions made in 2021 and 2022.

The remainder of the increase was driven primarily by an increase in merger and acquisition related costs of $1.8 million and additional compensation and distribution costs to support the organic revenue growth in the base business.

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).

During the nine months ended September 30, 2022 , TestEquity generated Adjusted EBITDA of $24.3 million , an increase of $12.8 million from the same period a year ago with approximately $6.0 million of the Adjusted EBITDA increase driven by the acquisitions closed during 2021 and 2022 and increases in revenues and margins on the base business.

Gexpro Services Segment

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Selling, general and administrative expenses 66,119 41,207 24,912 60.5 %

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

Operating income (loss) $ 16,972 $ 13,520 $ 3,452 25.5 %

Gross profit margin 29.1 % 28.9 %

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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 .

Revenue for the nine months ended September 30, 2022 was $285.2 million .

This compares to revenue of $189.6 million for the same period a year ago, or a 50.4% increase.

There were four additional selling days in the nine months ended September 30, 2022 versus the same period a year ago .

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.

Average daily sales increased 47.3% over the same period a year ago, primarily as a result of revenue generated from the 2021 and 2022 acquisitions of $80.7 million for the post-acquisition periods and organic growth in the base business of 7.9% through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit was $83.1 million or 29.1% of revenue for the nine months ended September 30, 2022 compared to gross profit of $54.7 million or 28.9% 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.

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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.

Selling, general, and administrative expense for the nine months ended September 30, 2022 was $66.1 million compared to $41.2 million for the same period a year ago.

The increase of $24.9 million over a year ago was primarily driven by the inclusion of the 202 1 and 2022 acquisitions of $16.4 million.

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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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During the nine months ended September 30, 2022 , Gexpro Services generated Adjusted EBITDA of $32.4 million , an increase of $13.7 million from the same period a year ago with approximately $12.9 million driven by the acquisitions closed during 2021 and 2022 and increases in revenues and margins on the organic base business.

Consolidated Non-operating Income and Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

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Loss on extinguishment of debt $ (3,395) $ — $ (3,395) — %

Change in fair value of earnout derivative liability $ (5,693) $ — $ (5,693) —%

Change in fair value of earnout liabilities $ 3,948 $ — $ 3,948 — %

Other income (expense), net $ 224 $ (328) $ 552 (168.3) %

Income tax (benefit) expense $ (4,568) $ 390 $ (4,958) (1,271.3)%

Income tax expense (benefit) $ 3,912 $ 606 $ 3,306 545.5 %

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.

Interest expense increased $4.2 million in the first nine months of 2022 primarily due to higher borrowings offset by a lower interest rate with 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.

The $3.4 million loss on extinguishment of debt in the first nine 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 Liability

The $3.9 million benefit in the first nine 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.

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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.

Other expense, net increased $0.6 million in the first nine 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 Expense (Benefit)

Income tax expense was $3.9 million, a 29.6% effective tax rate for the first nine months of 2022 compared to income tax expense of $0.6 million and a 150.7% effective tax rate for the first nine 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 nine months of 2021, merger costs incurred in the first nine 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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statutory rate, the effective tax rate for the first nine 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.

Liquidity and Capital Resources

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

Cash and cash equivalents were $25.2 million on September 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.

As of September 30, 2022, liquidity for the Company was $100.3 million comprised of $25.2 million of cash and cash equivalents and $75.1 million of bo rrowing availability remaining, net of outstanding letters of credit, under the Amended and Restated Credit Agreement.

Our primary short-term and long-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, potential business acquisitions, strategic initiatives and general corporate purposes.

debt obligations under the Amended and Restated Credit Agreement mature in April 2027.

Principal payments on the Amended and Restated Credit Agreement for the next twelve months are $15.0 million.

Refer to Note 13 - Debt within Part I.

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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.

We do not anticipate having difficulty in obtaining financing from those markets in the future, 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.

(in thousands) September 30, 2022 September 30, 2021 Change

Net cash provided by (used in) operating activities $ (19,280) $ 17,137 $ (36,417)

Net cash provided by (used in) investing activities $ (120,550) $ (26,975) $ (93,575)

Net cash provided by (used in) financing activities $ 151,820 $ 11,212 $ 140,608

Cash Provided by (Used in) Operating Activities

Net cash used by operations for the nine months ended September 30, 2022 was $19.3 million, excluding non-cash items, primarily due to increased accounts receivables and inventories driven by higher sales and increased supplier costs driven by inflation and global supply chain disruptions.

Net cash provided by operations for the nine months ended September 30, 2021 was $17.1 million, excluding non-cash items, primarily due to decreased accounts receivable and inventories partially offset by increased accounts payable.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $120.6 million, primarily as a result of the other acquisitions completed during the first nine months of 2022 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.

Net cash used in investing activities for the nine months ended September 30, 2021was $27.0 million, primarily due to business acquisitions and purchases of rental equipment.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $151.8 million for the first nine 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.

Deferred financing costs of $12.0 million were incurred during the first nine months of 2022 in connection with the April 1, 2022 Amended and Restated Credit Agreement and January 3, 2022 Gexpro Services Credit Agreement.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $11.2 million, primarily due to increased borrowings on the Company's revolving lines of credit partially offset by payments on the Company's term loans and a capital contribution to finance the MCS acquisition.

Financing and Capital Requirements

Credit Facility

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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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On September 30, 2022, we had $418.8 million in outstanding borrowings and $75.1 million of bo rrowing availability remaining, net of outstanding letters of credit, under the revolving credit facility.

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

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

Contractual Obligations

As of September 30, 2022, we had contractual commitments to purchase approximately $167 million of product from our suppliers and contractors which is expected to be paid in the next twelve months.

Stock Repurchase Program

The Company's Board of Directors previously authorized a stock repurchase program that permits the Company to repurchase its common stock.

The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors and depend on various factors including an evaluation of our stock price, corporate and regulatory requirements, capital availability and other market conditions.

On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the Company had $7.6 million of remaining availability for stock repurchases under the program as of November 3, 2022.

See Note 15 - Stock Repurchase Program within Part I.

Financial Information for further information.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis