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Item 1A. Risk Factors

2023-03-14 compared with 2022-02-24 · 190 added, 218 removed, 57 unchanged (88% of the section changed)

RISK FACTORS.

In addition to the other information in this Annual Report on Form 10-K for the fiscal year ended December 31, 2021, the following factors should be considered in evaluating Lawson's business.

Our operating results depend upon many factors and are subject to various risks and uncertainties.

The material risks and uncertainties known to us and described below may negatively affect our business operations or affect our financial results.

Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations or affect our financial results.

Our operating results depend upon many factors and are subject to various risks and uncertainties, including those discussed below.

The material risks and uncertainties known to us and described below may negatively affect our business, financial condition and results of operations.

Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair or otherwise adversely affect our business, financial condition and results of operations, and may give rise to or amplify many of the risks discussed below.

Business Risks

A significant portion of our inventory may become obsolete.

Our business strategy requires us to carry a significant amount of inventory in order to meet rapid processing of customer orders.

If our inventory forecasting and production planning processes result in inventory levels exceeding the levels demanded by customers or should our customers decrease their orders with us, our operating results could be adversely affected due to costs of carrying the inventory and additional inventory write-downs for excess and obsolete inventory.

Our business strategy requires us to carry a significant amount of inventory to meet rapid processing of customer orders.

For example, in 2022, our adjusted gross profit was negatively 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.

Work stoppages and other disruptions at transportation centers or shipping ports, along with other supply chain disruptions, may adversely affect our ability to obtain inventory and make deliveries to our customers.

Our ability to rapidly process customer orders is an integral component of our overall business strategy.

Interruptions at our company operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our results of operations.

Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism, trade restrictions, government-imposed quotas or other events, could adversely affect our ability to maintain core products in inventory or deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our business, financial condition and results of operations.

Similarly, other supply chain disruptions have impacted our ability to maintain certain core products in inventory and deliver products to customers on a timely basis, and may continue to impact our ability to do so.

Such supply chain disruptions may adversely affect our business, financial condition and results of operations.

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

From time to time, we have experienced overall changes in the product mix demand of our customers.

When customers or product mix changes, there can be no assurance that we will be able to maintain our historical gross profit margins.

Changes in these items, as well as volume of orders, prices charged, additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline.

Our gross margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.

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

TestEquity relies on a single supplier for a significant amount of its product inventory, including electronic test and measurement equipment.

During 2022 and 2021, the aggregate dollar amount of TestEquity’s purchases from that supplier represented approximately 25% and 41%, respectively, of the aggregate dollar amount of TestEquity’s purchases of product inventory from all of TestEquity’s suppliers during such periods.

Any disruptions in that supplier’s business, operations or financial condition, or TestEquity’s relationship with this supplier, could have a material adverse effect on our business, financial condition and results of operations.

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

From time to time, our businesses have experienced overall changes in the product mix demand of customers.

When customers or product mix changes, there can be no assurance that we will be able to maintain our gross profit margins.

Changes in our customers, product mix, volume of orders or prices charged, along with additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline.

Our gross profit margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.

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

We depend on our information and communication systems to process orders, purchase and manage inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable collections and serve our customers.

Disruptions in the operation of information and communication systems can occur due to a variety of factors including power outages, hardware failure, programming faults and human error.

Disruptions in the operation of information and communication systems can occur due to a variety of factors including power

outages, hardware failure, programming faults and human error.

Disruptions in the operation of our information and communication systems, whether over a short or an extended period of time or affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition and results of operations.

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

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

We are increasingly dependent on digital technology to process and record financial and operating data and communicate with our employees and business partners.

During the normal course of business we receive, retain and transmit certain confidential information that our customers provide to purchase products or services or to otherwise communicate with us.

Our technologies, systems and networks (and those of our business partners) have been and may in the future be the target of cyber attacks and/or information security incidents that may have resulted in, or may in the future result in, the unauthorized release, misuse, loss or destruction of proprietary, personal and other information, or other disruption of our business operations.

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

It is possible that certain confidential business information and personnel

records may have been compromised.

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

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

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

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

During the normal course of business we receive, retain and transmit certain confidential information that our customers provide to purchase products or services or to otherwise communicate with us, as well as certain information about our employees and other persons and entities.

Our technologies, systems, networks and data and information processes (and those of our business partners) have been, and may in the future be, the target of cyber-attacks and/or information security incidents that may have resulted in, or may in the future result in, the unauthorized release, misuse, loss or destruction of proprietary, personal and other information, or other disruption of our business operations, including compromise of our email systems.

For example, in February 2022, DSG became aware that its computer network was the subject of a cyber incident potentially involving unlawful access.

Because of the nature of the information that may have been compromised, we were required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and have taken other actions, such as offering credit monitoring services.

In addition, from time to time our email systems (and those of our business partners communicating with us) have been subjected to malicious attacks, including phishing attacks.

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

The techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognizable until launched against a target or until a breach has already occurred.

Accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures.

As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and fix any information security vulnerabilities.

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

We maintain and have access to data and information that is subject to privacy and security laws, data protection laws and applicable regulations.

The interpretation and application of such laws, including federal, state and international laws, relating to the collection, use, retention, disclosure, security and transfer of personally identifiable data in the United States (including but not limited to the California Consumer Privacy Act and the California Privacy Rights Act), Europe (including but not limited to the European Union's General Data Protection Regulation) and elsewhere, are uncertain and evolving.

Despite our efforts to protect such information, cyber incidents or misplaced or lost data could have a materially adverse impact on our business, and may divert management and employee attention from other business and growth initiatives.

Further, an information privacy or security incident could result in legal or reputational risks and could have a materially adverse impact on our business, financial condition and results of operations.

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

We have committed to a plan to increase the size of our sales force.

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This expansion will require significant investment in capital and resources.

The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our operating results.

It is also critical to retain the experienced and productive sales representatives that have historically contributed to our success.

Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our financial and operating results.

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

The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our business, financial condition and results of operations.

It is also critical to retain the experienced and productive sales representatives that have historically contributed to the successes of our businesses.

Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our business, financial condition and results of operations.

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

The Mergers involve the combination of businesses that previously operated as independent businesses.

Management has devoted and will continue to devote, significant attention and resources to combine certain business operations of TestEquity and Gexpro Services with our legacy business operations.

This may divert the time and attention of our management team and diminish their time to manage our businesses, service existing customers, attract new customers, develop new products, services and strategies and identify other beneficial opportunities.

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

Furthermore, it is possible that the Mergers could result in the loss of key employees.

If we are not able to fully realize the anticipated savings and synergies from the Mergers in a timely manner, or the cost to achieve these synergies is greater than expected, we may not fully realize the anticipated benefits (or any benefits) of the Mergers, or it may take longer than expected to realize any benefits.

The failure to fully or timely realize the anticipated benefits could have a negative effect on the market price of DSG common stock.

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

Our success depends on, among other things, our ability to attract, develop and retain talented employees, including executives and other key managers.

The loss of certain key executives and managers or the failure to attract and develop talented employees could have a material adverse effect on our business.

The loss of certain key executives and managers or the failure to attract and develop talented employees could have a material adverse effect on our business, financial condition and results of operations.

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

We are continually striving to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations.

The implementation of changes to our current operations involve a risk that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies.

We strive to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations.

The implementation of changes to our current operations involves a risk that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies.

Failure to successfully manage the implementation of these changes could lead to disruptions in our operations.

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One of our growth strategies is to actively pursue additional acquisition opportunities which complement our business model.

However, there are risks associated with pursuing acquisitions, which include the incurrence of significant transaction costs without the guarantee that such transactions will be completed.

Further, we may fail to successfully identify the right opportunities and/or to successfully integrate the acquired businesses, operations, technologies, systems and/or personnel with those of Lawson, which could adversely affect our operations and our operating results.

The Company operates in highly competitive markets.

The MRO marketplace is highly competitive.

However, there are risks associated with pursuing acquisitions, which include the incurrence of significant transaction costs without the guarantee that such transactions will be completed and the risk that we may not realize the anticipated benefits of the acquisition once it is completed.

We may fail to successfully identify the right opportunities and/or to successfully integrate the acquired businesses, operations, technologies, systems and/or personnel with those of DSG, which could adversely affect our business, financial condition and results of operations.

See also the section entitled “Item 1A.

Risk Factors – TestEquity Merger and Gexpro Services Merger Risks” for a discussion of various additional risk factors relating to our completed business combination with TestEquity and Gexpro Services.

We operate in highly competitive markets.

The marketplaces in which we operate are highly competitive.

Our competitors include large and small companies with similar or greater market presence, name recognition, and financial, marketing, and other resources.

We believe the competition will continue to challenge our business with their product selection, financial resources and services.

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

A portion of our sales are derived from the United States military and other governmental and tax-supported entities.

These entities are largely dependent upon government budgets and require adherence to certain laws and regulations.

A decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, could lead to reduced sales or an increase in compliance costs which would adversely affect our financial position and results of operations.

Financial Risks

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

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

As a result of the closing of the Mergers on April 1, 2022 , we have an amount of goodwill and other intangible assets on our balance sheet that is significantly greater than the amount of goodwill and other intangible assets on our December 31, 2021 consolidated balance sheet.

In ac cordance with GAAP, our management periodically assesses our goodwill and other intangible assets to determine if they are impaired.

Significant negative industry or economic trends, disruptions to our business, an inability to effectively integrate acquired businesses, unexpected significant changes, planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets.

relating to such impairments could materially and adversely affect our results of operations in the periods recognized, which could result in an adverse effect on the market price of DSG common stock.

Changes that affect governmental and other tax-supported entities, including but not limited to changes arising from the ongoing conflict in Ukraine, could negatively impact our revenue and earnings.

A portion of our revenue is derived from the United States military and other governmental and tax-supported entities.

These entities are largely dependent upon government budgets and require adherence to certain laws and regulations, including sanctions.

In February 2022, armed conflict escalated between Russia and Ukraine and resulted in sanctions against Russia and Belarus by the U.S.

and other countries.

Such sanctions to date include restrictions on selling or importing goods, services, or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business, and financial organizations in Russia and Belarus.

Although we have not, do not currently and do not plan to conduct business operations in Russia, Belarus, or Ukraine, it is not possible to predict the broader consequences of this ongoing conflict, which could include further sanctions, embargoes, increases or decreases in military spending or other geopolitical instability.

Any decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, arising from the ongoing conflict in Ukraine or otherwise, could lead to reduced revenue or an increase in compliance costs which would adversely affect our business, financial condition and results of operations.

Debt Financing Risks

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

We have $417.1 million of indebtedness as of December 31, 2022, which includes a significant amount of indebtedness under our Amended and Restated Credit Agreement (as defined herein).

In addition, we may be able to incur a significant amount of additional indebtedness, subject to the terms and restrictions of our Amended and Restated Credit Agreement.

Our indebtedness could have significant consequences on our future operations, including:

• events of default if we fail to comply with the financial and other covenants contained in the Amended and Restated Credit Agreement and/or other agreements governing our debt instruments, which could result in all of the debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;

• reducing the availability of our cash flow to fund working capital, capital expenditures, investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

• limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy;

• limiting our ability to buy back common stock or pay dividends;

• placing us at a competitive disadvantage compared to any of our competitors that have less debt or are less leveraged;

• increasing our vulnerability to the impact of adverse economic and industry conditions.

Our ability to meet our payment and other obligations under our debt instruments will depend on our ability to generate significant cash flow in the future.

This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control.

We cannot assure that we will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our indebtedness obligations and to fund other liquidity needs.

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

Our business requires investment in working capital and fixed assets.

We fund these investments from cash generated from operations and funds available from our Credit Agreement.

Failure to generate sufficient cash flow from operations or from our Credit Agreement could cause us to have insufficient funds to operate our business.

We expect to fund these investments from cash generated from operations and borrowings available under our Amended and Restated Credit Agreement.

Failure to generate sufficient cash flow from operations or from our Amended and Restated Credit Agreement could cause us to have insufficient funds to operate our business.

Adequate funds may not be available when needed or may not be available on favorable terms.

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

Our Credit Agreement contains financial and other restrictive covenants.

Our business, financial condition and operating results could be materially adversely affected if we failed to meet the covenant requirements of our Amended and Restated Credit Agreement.

Our Amended and Restated Credit Agreement contains financial and other restrictive covenants.

These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs.

Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our existing indebtedness.

If we require more liquidity than is currently available to us under our Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us.

Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, result in events of default and accelerate the date on which our indebtedness must be repaid.

If we require more liquidity than is available to us under our Amended and Restated Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us.

Should funding be insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Government efforts to combat inflation, along with other interest rate pressures, could lead to higher financing costs.

Inflation has risen on a global basis, the United States has been experiencing historically high levels of inflation, and government entities have taken various actions to combat inflation, such as raising interest rate benchmarks.

Government entities may continue their efforts, or implement additional efforts, to combat inflation, which could include among other things continuing to raise interest rate benchmarks and/or maintaining interest rate benchmarks at elevated levels.

Such government efforts, along with other interest rate pressures, could lead to higher financing costs and have material adverse effect on our business, financial condition and results of operations.

Common Stock Risks

The market price of our common stock may decline.

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

Luther King Capital Management has significant influence over the Company, and this influence could delay or deter a change in control or other business combination or otherwise cause us to take actions with which you may disagree.

On December 31, 2021, Luther King Capital Management ("LKCM") beneficially owned 47.7% of the outstanding common stock of the Company.

Bryan King, a director of the Company, is the Principal of LKCM.

As a result, LKCM has significant influence over the outcome of matters requiring a stockholder vote, including the election of directors, and the approval of significant matters and its interests may not align with the interests of other stockholders.

This concentration of ownership could also have the effect of delaying, determining or preventing a change of control or other business combination that might be beneficial to our stockholders.

Entities affiliated with LKCM and J.

Bryan King beneficially own a significant majority of the outstanding DSG common stock and, therefore, have significant influence over our Company, which could delay or deter a change in control or other business combination or otherwise cause us to take actions with which you may disagree.

Based on a Schedule 13D filed with the SEC by LKCM and various other persons and entities (as amended through June 17, 2022), entities affiliated with LKCM beneficially owned in the aggregate approximately 14.6 million shares of DSG common stock as of June 15, 2022, representing approximately 75% of the outstanding shares of DSG common stock as of February 28, 2023.

Bryan King, Chairman and Chief Executive Officer of the Company, is a Principal of LKCM.

As a result, LKCM has significant influence over the outcome of matters requiring a stockholder vote, including the election of directors and the approval of other significant matters, and LKCM’s interests may not align with the interests of other stockholders.

This concentration of ownership could also have the effect of delaying or preventing a change of control or other business combination that might be beneficial to our stockholders.

In addition, as a result of this concentrated ownership interest of DSG common stock, DSG believes that it qualifies as a “controlled company.” Under NASDAQ Listing Rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and, accordingly, DSG believes that, if it so desired, it would be generally exempt from the requirements of Rule 5605(b), (d) and (e) of the Nasdaq Listing Rules that among other things would otherwise require DSG to have:

• a majority of the DSG board of directors comprised of independent directors;

• a compensation committee comprised solely of independent directors;

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

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

We issued an aggregate of 10.3 million shares of DSG common stock on April 1, 2022 in connection with the closing of the Mergers.

In addition, we could be obligated to issue up to an aggregate of 1.7 million additional shares of DSG common stock in accordance with the earnout provisions of the Merger Agreements.

As of February 28, 2023, approximately 1.7 million additional shares of DSG common stock are expected to be issued to entities affiliated with LKCM in accordance with, and subject to customary terms and conditions of, the earnout provisions of the Merger Agreements.

The issuance of such a significant number of shares of DSG common stock could have a negative effect on the market price of DSG common stock.

In addition, in accordance with the Merger Agreements, DSG granted to certain entities affiliated with LKCM certain registration rights with respect to the shares of DSG common stock that DSG has issued, and would be required to issue, in connection with the Mergers.

Any sales of those shares, or the anticipation of the possibility of such sales, could create downward pressure on the market price of DSG common stock.

Legal and Regulatory Risks

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A remediation plan was approved by the Alabama Department of Environmental Management and the remediation of the affected area is ongoing.

Additional procedures may be required that could negatively impact our operating results.

Additional procedures may be required that could negatively impact our business, financial condition and results of operations.

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

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Changes in applicable tax laws and regulations could affect our ability to realize our deferred tax assets, which could adversely affect our results of operations.

Risk Factors Relating to COVID-19 and Other Infectious Diseases

The coronavirus strain that began to spread in 2020 ("COVID-19") has created a worldwide pandemic which has continued to affect our business and could have further undetermined material adverse effects on our revenues, operating results and financial condition.

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

The impact of the COVID-19 pandemic on our operational and financial performance includes affecting our ability to execute our business strategies and initiatives in the expected time frame.

The extent of the effect of the COVID-19 pandemic on us will depend on future developments, including the duration and spread of the COVID-19 pandemic and related restrictions on travel, transports and person to person contact, all of which are uncertain and cannot be predicted at the present time.

On a broader scale, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets.

An extended period of global supply chain and economic disruption could materially affect our sales, workforce, supply chains, results of operations, and financial condition.

Our business was defined by the state of Illinois as an essential business, allowing us to operate during the pandemic when other companies faced temporary closures during the first year of the pandemic.

If the COVID-19 pandemic worsens and our status as an essential business changes, our business could be required to temporarily close as well as any or all of our facilities (including distribution facilities and/or the Bolt branch locations), which would negatively impact our operations.

Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.

Our sales results may be negatively impacted in the future by any social distancing guidelines and government mandated shelter in place orders that would prevent our sales representatives from visiting customers in person, or that would otherwise reduce customer visits to our Bolt branch locations.

The reduction of operations and temporary shut down by many of our customers in response to COVID-19 has also negatively impacted our sales and ability to collect on existing credit balances, and we may continue to be impacted by those reductions and shut downs until the pandemic ends.

Further, vendors who are negatively impacted by COVID-19 may temporarily shut down operations or have difficulty obtaining inventory, which could negatively impact our ability to fulfill customer orders.

As a result, the Company may be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic.

Certain items on our balance sheet require judgments on their valuation, including intangible assets and goodwill.

These valuations are based on assumptions that take future financial performance into account.

COVID-19 may have a negative impact to our future financial performance that would require us to revise assumptions about future financial performance and impair the value of these assets.

It is reasonably possible that estimates made based on future operating results and cash flows of the Company may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

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

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

TestEquity has business operations and/or sales in a number of foreign countries, including Canada, Mexico, Germany and the United Kingdom.

Gexpro Services has business operations and/or sales in a number of foreign countries, including Hungary and China.

Lawson has business operations in Canada.

As a result of the completion of the Mergers, we are subject to a wider array of foreign legal and regulatory regimes (including tax regimes) than what we were subject to prior to the completion of the Mergers.

Compliance with diverse legal and regulatory requirements, including in connection with the movement or repatriation of cash, may be costly and time-consuming and require significant resources.

Violations could result in significant fines or monetary damages, sanctions, prohibitions or restrictions on doing business and damage to our reputation.

In addition, operating in foreign countries requires us to manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and regulations with respect to such jurisdictions, including anti-corruption laws or regulations applicable to DSG, such as the U.S.

Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”).

The U.S., U.K.

and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the

FCPA, the UKBA, and other laws, rules, sanctions, embargoes and regulations, including those established by the Office of Foreign Assets Control.

Any violation of these legal requirements, even if prohibited by our policies, procedures and controls, could subject us to criminal or civil enforcement actions or penalties for non-compliance or otherwise have an adverse effect on our business and reputation.

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

At December 31, 2022 , the Company had $24.2 million of U.S.

federal net operating loss carryforwards which are subject to expiration beginning in 2026 and $28.7 million of various state net operating loss carryforwards which expire at varying dates between 2023 and 2034.

As a result of the Mergers, DSG’s ability to use its net operating losses and certain other tax attributes generated prior to the Mergers may be subject to limitations , which may adversely impact on our future tax liability and cash flows .

Public Health Emergencies Risks

Public health emergencies, whether domestic or international, such as the COVID-19 pandemic, may materially adversely affect our business, financial condition and results of operations.

Pandemics, epidemics or disease outbreaks in the U.S.

or globally may have a material adverse effect on our business, employees, suppliers, customers, and the general economy.

The full effect and estimated length of these disruptions could be difficult to predict by the Company given such an event is affected by a number of factors, many of which could be outside of our control.

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

TestEquity Merger and Gexpro Services Merger Risks

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

Uncertainty about the effect of the Mergers on employees, customers, suppliers and others having business relationships with us may have a material and adverse effect on our businesses.

These uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the closing of the Mergers.

These uncertainties could also cause our customers, suppliers and other contractors to change or sever existing business relationships with us.

Employee retention and recruitment may be challenging for the combined company as existing employees and prospective employees may experience uncertainty about their future roles with the combined company.

Furthermore, no assurance can be given that after the Mergers we will be able to attract or retain key management personnel or other key employees to the same extent that legacy Lawson, TestEquity and Gexpro Services had been able to attract or retain their own employees.

The departure of existing key employees or the failure of potential key employees to accept employment with the combined company, despite our retention and recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.

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

DSG and members of the DSG board of directors currently are, and may in the future be, parties, among others, to litigation related to the Merger Agreements and the Mergers.

Among other remedies, the stockholders in the pending litigation seek, and other stockholders could seek, monetary damages.

The outcome of any legal proceedings are difficult to predict and any such lawsuits could result in substantial costs to us.

The existence of litigation relating to the Mergers may also be costly and distracting to management.

Further, the resources and costs to defend or settle any lawsuit or claim may adversely affect our business, financial condition, results of operations and cash flows.

See Note 15 – Commitments and Contingencies to our consolidated financial statements, included in Item 8.

Financial Statements, for a description of certain of our pending legal proceedings relating to the Mergers, which are incorporated herein by reference.

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

We are required to evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results

from such evaluation could result in a loss of investor confidence in our financial reports and could have an adverse effect on our stock price.

TestEquity and Gexpro Services were private companies before the Mergers and may not have had in place the financial organization, reporting and controls which are required for a U.S.

public company.

The cost of implementing this type of financial organization, reporting and controls in respect of TestEquity and Gexpro Services and integrating their financial reporting processes with our financial reporting processes may be significant.

If there are limitations in TestEquity’s or Gexpro Services’ financial organization, reporting and controls, or if we are unable to effectively integrate their financial reporting processes with our financial reporting processes, we could have, among other things, material weaknesses in our internal controls, violate our indebtedness covenants, miss an SEC reporting deadline or otherwise fail to comply with an applicable law or regulation.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of our expanding business operations, primarily related to our merger in April 2022, we have experienced an increase in complex and non-routine accounting transactions and control activities necessary to properly present consolidated results.

Specifically, in our TestEquity operating segment, we did not have sufficient technical accounting resources and personnel (i) to help ensure proper application of U.S.

GAAP in the accounting for certain areas primarily related to accounting for business acquisitions and the disposal of rental equipment, or (ii) to effectively design and execute our process level controls around (a) revenue recognition, (b) account reconciliations, (c) accounting policies, and (d) proper segregation of duties.

Although these control deficiencies did not result in any material misstatement of our consolidated financial statements, it could lead to a material misstatement of account balances or disclosures.

Accordingly, management has concluded that these control deficiencies constitute a material weakness at December 31, 2022.

Management has identified the steps necessary to remediate the material weakness, however, the material weakness has not been remediated as of December 31, 2022.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting.

This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

Each year, we must prepare or update the process documentation and perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective.

Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming exercise that needs to be re-evaluated frequently.

We and our independent auditors may in the future discover areas of our internal controls that need further attention and improvement, particularly with respect to any other businesses that we decide to acquire in the future.

Implementing any appropriate changes to our internal controls may require specific compliance training, entail substantial costs in order to modify our existing accounting systems or those of the companies that we acquire, and take a material period of time to complete.

However, such changes may not be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could harm our ability to operate our business.

Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

Investor perception that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely, consistent basis may adversely affect our stock price.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could also potentially subject us to sanctions or investigations by the SEC, NASDAQ or other regulatory authorities.

General Risks

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Any decline or uncertainty in the strength of the economy may lead to a decrease in customer spending and may cause certain customers to cancel or delay placing orders.

In the first quarter of 2020, the economy experienced a significant decline due to the response of businesses and state governments to the onset of the COVID-19 pandemic.

Subsequently, the economy partially recovered from the initial downturn.

Some of our customers may file for bankruptcy protection, preventing us from collecting on accounts receivable and may result in our stocking excess inventory.

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Adverse economic conditions could also affect our key suppliers and contractors.

This could lead to us incurring additional expenses or result in delays in shipping products to our customers.

This could lead us to incur additional expenses or result in delays in shipping products to our customers.

Economic uncertainty can make it difficult to accurately predict future order activity and affect our ability to effectively manage inventory levels.

There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our present Credit Agreement.

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

Increases in the cost of raw materials used in our products (e.g., steel, brass, copper), tariffs and increases in energy costs will raise the production costs of our vendors.

There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our existing financing arrangements, including our credit agreement.

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

Increases in the cost of raw materials used in our products (e.g., steel, brass, copper), quotas imposed on any cross border supplies within our businesses, increases in tariffs, increases in natural gas, electricity and other energy costs and increases in freight and other costs necessary to produce and transport our products, as well as other inflationary pressures, will raise the production costs of our vendors.

Those vendors have typically looked to pass the higher costs along to us through price increases.

If we are unable to fully pass such increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins.

Low oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales.

If we are unable to fully pass such increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins and financial condition.

On the other hand, a decrease in oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales.

Changes in trade policies could affect our sourcing of product and ability to secure sufficient product and/or impact the cost or price of our products, with potentially negative impacts on our reported gross profits and results of operations.

Supply chain constraints, inflationary pressure, and labor shortages could impact our cost of goods, which may result in lower gross margins.

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

Our businesses have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs.

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders.

This could result in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders.

In addition, we have been and may continue to be impacted by labor shortages.

This results in challenges in fulfilling customer orders and can have a negative impact on our operating results as we may be required to utilize higher-cost temporary labor.

While we have instituted various price increases during 2021 in response to rising supplier costs, as well as increased transportation and labor costs, there can be no assurance that future cost increases or decreases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases or decreases will match our supplier cost increases or decreases.

This could result in challenges in fulfilling customer orders and can have a negative impact on our operating results as we may be required to utilize higher-cost temporary labor.

We have also experienced and continue to experience inflationary pressure in other areas that adversely impact our cost of goods sold and other costs and expenses.

While we have instituted various price increases during 2022 in response to rising supplier costs, as well as increased transportation and labor costs, there can be no assurance that future cost increases can be partially or fully passed on to customers, or that the timing of such sales price increases will match our supplier cost increases.

As a result, we are unable to predict the impact of these constraints on our business, financial condition and results of operations.

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

Two of our subsidiaries are located and operate in Canada using the Canadian dollar as its functional currency.

A number of our subsidiaries are located and operate outside the United States, and each uses the currency in such foreign country as its functional currency.

Operating results denominated in foreign currencies are translated into U.S.

dollars when consolidated into our financial statements.

Therefore, we are exposed to market risk relating to the change in the value of the Canadian dollar relative to the U.S.

dollar that could adversely affect our financial position and operating results.

Risk Factors Relating to the Merger Transactions

Except as contemplated by the earnout provisions in the Merger Agreements, the number of shares of Lawson common stock to be issued in the Transactions will not be adjusted if there is a change in the value of the businesses or assets of Lawson, TestEquity and/or Gexpro Services before the Transactions are completed.

Although Lawson will not be required to consummate the TestEquity Merger or the Gexpro Services Merger if there has been any “Material Adverse Effect” (as specified in the TestEquity Merger Agreement or the Gexpro Services Merger Agreement, respectively) with respect to TestEquity or Gexpro Services, respectively, Lawson will not be permitted to terminate either of the Merger Agreements or re-solicit the vote of Lawson’s stockholders because of any changes in the market price of Lawson common stock or any changes in the value of TestEquity or Gexpro Services that do not constitute such a “Material Adverse Effect” with respect to TestEquity or Gexpro Services, respectively.

Completion of the Transactions will result in the issuance of a significant number of additional shares of Lawson common stock, which could have a negative effect on the price of Lawson common stock.

The Transactions will result in the issuance of an aggregate of up to 12,000,000 shares of Lawson common stock in connection with the Transactions.

The issuance of such a significant number of shares of Lawson common stock could have a negative effect on the market price of Lawson common stock.

Such downward pressure could also encourage short sales by certain investors, which could place further downward pressure on the market price of Lawson common stock.

In addition, Lawson has agreed to grant the TestEquity Equityholder and the Gexpro Services Stockholder with certain registration rights with respect to the shares of Lawson common stock that Lawson would issue in the Transactions.

Any sales of those shares, or the anticipation of the possibility of such sales, could create downward pressure on the market price of Lawson common stock.

As a result of the issuance of Lawson common stock in the Transactions, entities affiliated with LKCM and J.

Bryan King (including the TestEquity Equityholder and the Gexpro Services Stockholder) will beneficially own a significant majority of the outstanding shares of Lawson common stock.

After giving pro forma effect to the issuance of shares of Lawson common stock in connection with the Transactions, entities affiliated with LKCM and Mr.

King (including the TestEquity Equityholder and the Gexpro Services Stockholder) would beneficially own in the aggregate a significant majority of the outstanding shares of Lawson common stock, ranging from (1) approximately 75% (assuming the issuance of only the minimum aggregate number of shares of Lawson common stock issuable in connection with the Mergers) to (2) approximately 77% (assuming the issuance of the maximum aggregate number of shares of Lawson common stock issuable in connection with the Mergers, including the full issuance of the maximum earnout shares potentially issuable) of the outstanding shares of Lawson common stock.

This would be up from the approximately 47.7% of the outstanding shares of Lawson common stock that entities affiliated with LKCM and Mr.

King beneficially owned as of December 31, 2021.

Thus, entities affiliated with LKCM and Mr.

King, as a group, would be able to exercise an even more significant influence over matters requiring a stockholder vote, including the election of directors and the approval of other significant matters, than they are currently able to exercise.

The interests of LKCM and such other affiliated entities and persons may not align with the interests of other stockholders.

This concentration of ownership could also have the effect of delaying or preventing a change of control or other business combination that might be beneficial to Lawson’s stockholders.

In addition, as a result of this issuance, Lawson expects that it will qualify as a “controlled company,” as that term is defined by Rule 5615(c) of the NASDAQ Listing Rules and, accordingly, Lawson believes that it will be generally exempt from the requirements of Rule 5615(c) of the NASDAQ Listing Rules that would otherwise require Lawson to have:

• a majority of the Lawson board of directors comprised of independent directors;

• a compensation committee comprised solely of independent directors;

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

As a result of the issuance of Lawson common stock in the Transactions, existing stockholders will experience substantial dilution of their ownership percentage and voting power (except that entities affiliated with LKCM and Mr.

King will, on a collective basis, significantly increase their beneficial ownership and voting percentage of outstanding Lawson common stock).

If the Transactions are completed and Lawson issues shares of Lawson common stock in the Transactions, existing stockholders will experience substantial dilution of their ownership percentage and voting power (except that entities affiliated with LKCM and Mr.

King will, on a collective basis, significantly increase their beneficial ownership and voting percentage of outstanding Lawson common stock).

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

The Mergers involve the combination of businesses that currently operate as independent businesses.

Lawson will be required to devote significant management attention and resources to combining certain business operations of TestEquity and Gexpro Services with Lawson’s business operations.

In addition, the pursuit of the Transactions and the preparation for the completion of the Transactions have placed, and will continue to place, a significant burden on the management and internal resources of Lawson, TestEquity and Gexpro Services.

There is a significant degree of difficulty and management distraction inherent in the process of closing the Transactions, which could cause an interruption of, or loss of momentum in, the activities of each company’s existing businesses, regardless of whether the Transactions are eventually completed.

Both before and after the closing of the Transactions, the management teams of Lawson, TestEquity and Gexpro Services will be required to devote considerable amounts of time to this process, which may decrease the time they will have to manage their respective existing businesses, service existing customers, attract new customers and develop new products, services and strategies.

One potential consequence of such distractions could be the failure of management to realize other opportunities that could be beneficial to Lawson, TestEquity or Gexpro Services, respectively.

If Lawson’s, TestEquity’s or Gexpro Services’ management is not able to effectively manage the process leading up to and following the closing of the Transactions, or if any significant business activities are interrupted as a result of the process, the businesses of Lawson, TestEquity and/or Gexpro Services could suffer.

Furthermore, it is possible that the closing process could result in the loss of key employees of Lawson, TestEquity or Gexpro Services.

If Lawson is not able to successfully complete the Transactions and fully realize the anticipated savings and synergies in a timely manner, or the cost to achieve these synergies is greater than expected, Lawson may not fully realize the anticipated benefits (or any benefits) of the Transactions, or it may take longer than expected to realize any benefits.

The failure to fully or timely realize the anticipated benefits could have a negative effect on the market price of Lawson common stock.

Each of Lawson, TestEquity and Gexpro Services will be subject to business uncertainties and contractual restrictions while the Transactions are pending that could materially and adversely affect each of the companies and their businesses.

Uncertainty about the effect of the Transactions on employees, customers, suppliers and others having business relationships with Lawson, TestEquity and/or Gexpro Services may have a material and adverse effect on Lawson, TestEquity and/or Gexpro Services, regardless of whether the Transactions are eventually completed, and, consequently, on the Combined Company.

These uncertainties may impair Lawson’s, TestEquity’s and/or Gexpro Services’ ability to attract, retain and motivate key personnel until the Transactions are completed, or the Merger Agreements are terminated, and for a period of time thereafter.

These uncertainties could also cause customers, suppliers and others that deal with Lawson, TestEquity or Gexpro Services to seek to change existing business relationships with Lawson, TestEquity or Gexpro Services.

Employee retention and recruitment may be challenging for Lawson, TestEquity and Gexpro Services during the pendency of the Transactions, as employees and prospective employees may experience uncertainty about their future roles with the Combined Company.

Furthermore, no assurance can be given that after the Transactions the Combined Company will be able to attract or retain key management personnel or other key employees to the same extent that Lawson, TestEquity and Gexpro Services have been previously able to attract or retain their own employees.

For each of Lawson, TestEquity and Gexpro Services, the

departure of existing key employees or the failure of potential key employees to accept employment with the Combined Company, despite Lawson’s, TestEquity’s and Gexpro Services’ retention and recruiting efforts, could have a material adverse impact on Lawson’s and the Combined Company’s business, financial condition and operating results, regardless of whether the Transactions are eventually completed.

In addition, the Merger Agreements restrict Lawson from making certain acquisitions and taking other specified actions without the consent of TestEquity or Gexpro Services until the respective Merger is consummated or the respective Merger Agreement is terminated.

These restrictions may prevent Lawson from pursuing otherwise attractive business opportunities and making other changes to its business before completion of the Transactions or termination of the Merger Agreements.

Lawson may fail to complete the Transactions if certain closing conditions, many of which are outside Lawson’s control, are not satisfied.

The completion of the Transactions is subject to multiple closing conditions, including the receipt of the requisite Lawson stockholder approvals under the Merger Agreements and the receipt of proceeds of debt financing in an amount sufficient for the payment of certain payoff indebtedness, transaction expenses and other fees and expenses in connection with the Mergers.

Many of these closing conditions are outside of Lawson’s control.

If any of these conditions is not satisfied or waived, the Transactions may not be completed and Lawson may not realize the anticipated benefits of the Transactions.

Lawson can make no assurances that the Transactions will be completed on the terms or timeline currently contemplated, or at all.

Failure to complete the Transactions could result in material adverse consequences to Lawson’s business and operations.

If the conditions to the closing of the Transactions are not met, or if the Transactions are not completed for any other reason, Lawson would be subject to a number of risks, including the following:

• The market price of Lawson common stock may decline;

• Lawson and its stockholders would not realize the anticipated benefits of the Transactions, including any anticipated synergies from combining the businesses of Lawson, TestEquity and Gexpro Services;

• Lawson may be required to pay a termination fee of $4.0 million if the TestEquity Merger Agreement is terminated under certain circumstances;

• Lawson may be required to pay a termination fee of $6.0 million if the Gexpro Services Merger Agreement is terminated under certain circumstances;

• Lawson would remain liable for significant transaction costs that would be payable even if the Transactions are not completed.

For these and other reasons, failure to complete the Transactions could adversely affect Lawson’s business, financial condition, results of operations and stock price.

Lawson has incurred and will continue to incur significant transaction costs in connection with the Transactions.

Lawson has incurred and expects to continue to incur significant, non-recurring costs in connection with consummating the Transactions.

Non-recurring transaction costs include, but are not limited to, fees paid to legal, accounting and financial advisors, filing fees and other costs.

Additional unanticipated costs may be incurred in the combination process.

Some of these costs will be incurred even if Lawson does not complete the Transactions.

Lawson’s estimates and judgments related to the acquisition accounting models used to record the purchase price allocation may be inaccurate.

Lawson’s management will make significant accounting judgments and estimates for the application of acquisition accounting under GAAP and the underlying valuation models.

The Combined Company’s business, operating results and financial condition could be materially and adversely impacted in future periods if Lawson’s accounting judgments and estimates related to these models prove to be inaccurate.

The Combined Company may be required to recognize impairment charges for goodwill and other intangible assets.

As a result of the Trans actions, the Combined Company is expected to have an amount of goodwill and other intangible assets on its balance sheet that is significantly greater than the amount of goodwill and other intangible assets on Lawson’s December 31, 2021 consolidated balance sheet.

In ac cordance with GAAP, Lawson’s management periodically assesses Lawson’s goodwill and other intangible assets to determine if they are impaired.

Significant negative industry or economic trends, disruptions to the Combined Company’s business, an inability to effectively integrate acquired businesses, unexpected significant changes, planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets.

Any charges relating to such impairments could materially and adversely affect the Combined Company’s results of operations in the periods recognized, which could result in an adverse effect on the market price of Lawson common stock.

TestEquity’s and Gexpro Services’ international operations will subject the Combined Company to additional legal and regulatory regimes if the Mergers are completed.

TestEquity currently has business operations and/or sales in a number of foreign countries, including Canada, Mexico and the United Kingdom, and Gexpro Services currently has business operations and/or sales in a number of foreign countries, including Hungary and China.

If the Mergers are consummated, Lawson and/or certain subsidiaries within the Combined Company will be subject to a wider array of foreign legal and regulatory regimes (including tax regimes) than those to which Lawson and/or certain of its subsidiaries are currently subject, and the amount of revenue generated outside of the United States by the Combined Company will be significantly more than the revenue generated outside the United States by Lawson currently.

Compliance with diverse legal and regulatory requirements, including in connection with the movement or repatriation of cash, may be costly, time-consuming and require significant resources.

Violations could result in significant fines or monetary damages, sanctions, prohibitions or restrictions on doing business and damage to the Combined Company’s reputation.

In addition, operating in additional countries around the world will require the Combined Company to manage the potential conflicts between locally accepted business practices in any given jurisdiction and Lawson’s obligations to comply with laws and regulations with respect to such jurisdictions, in addition to the jurisdictions where Lawson currently operates, including anti-corruption laws or regulations applicable to Lawson, such as the U.S.

Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”).

The U.S., U.K.

and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, the UKBA, and other laws, rules, sanctions, embargoes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”).

Any violation of these legal requirements, even if prohibited by Lawson’s policies, procedures and controls, could subject the Combined Company to criminal or civil enforcement actions, penalties for non-compliance or otherwise have an adverse effect on its business and reputation.

Litigation relating to the Transactions could prevent or delay the closing of the Transactions and/or result in the payment of damages following the closing of the Transactions.

Lawson and members of the Lawson board of directors are and may in the future be parties, among others, to litigation related to the Merger Agreements and the Transactions.

Among other remedies, the stockholders in the pending litigation seek, and other stockholders could seek, damages and/or seek to enjoin the Transactions.

The outcome of any legal proceedings are difficult to predict and any such lawsuits could prevent or delay the closing of the Transactions and/or result in substantial costs to Lawson.

The existence of litigation relating to the Transactions may also create uncertainty relating to the Transactions and may be costly and distracting to management.

Further, the defense or settlement of any lawsuit or claim that remains unresolved at the time the Mergers are completed may adversely affect the Combined Company’s business, financial condition, results of operations and cash flows.

See Note 15 - Commitments and Contingencies to our consolidated financial statements, included in Part II.

Financial Statements and Supplementary Data, for a description of certain of our pending legal proceedings relating to the Transactions, which are incorporated herein by reference.

If any pending or future lawsuit challenging the Transactions is successful in obtaining an injunction preventing the parties to the Merger Agreements from consummating the Transactions, such injunction may delay or prevent the consummation of the Transactions.

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

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

TestEquity and Gexpro Services are private companies and may not have in place the financial organization, reporting and controls which are required for a U.S.

public company.

Furthermore, if the limitations in TestEquity’s or Gexpro Services’ financial organization, reporting and controls, or any failure to effectively integrate their financial reporting processes with those of Lawson, cause the Combined Company to miss an SEC reporting deadline or otherwise not comply with an applicable law or regulation, the Combined Company might, among other things, have a material weakness in its internal controls or violate its indebtedness covenants.

Risk Factors Relating to the Debt Financing Expected to be Incurred in Connection with the Mergers

The Combined Company is expected to have a significant amount of indebtedness, which could adversely affect the Combined Company’s business, financial condition, and results of operations following the Transactions.

Lawson expects that the Combined Company will have a significant amount of indebtedness after the completion of the Transactions, which is expected to include new indebtedness under the anticipated arrangements described in the section ent itled “Debt Financing Commitment Letter” in Part I.

In addition, Lawson would have the ability to incur a significant amount of additional indebtedness.

The Combined Company’s indebtedness could have significant consequences on the Combined Company’s future operations, including:

• events of default if the Combined Company fails to comply with the financial and other covenants contained in the agreements governing the Combined Company’s debt instruments, which could result in all of the debt becoming immediately due and payable or require the Combined Company to negotiate an amendment to financial or other covenants that could cause the Combined Company to incur additional fees and expenses;

• reducing the availability of the Combined Company’s cash flow to fund working capital, capital expenditures, investments, acquisitions and other general corporate purposes, and limiting the Combined Company’s ability to obtain additional financing for these purposes;

• limiting the Combined Company’s flexibility in planning for, or reacting to, and increasing the Combined Company’s vulnerability to, changes in its business, the industries in which the Combined Company operates, and the overall economy;

• limiting the Combined Company’s ability to buy back common stock or pay dividends;

• placing the Combined Company at a competitive disadvantage compared to any of the Combined Company’s competitors that have less debt or are less leveraged;

• increasing the Combined Company’s vulnerability to the impact of adverse economic and industry conditions.

The Combined Company’s ability to meet its payment and other obligations under its debt instruments will depend on the Combined Company’s ability to generate significant cash flow in the future.

This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond the Combined Company’s control.

Lawson cannot assure that the Combined Company will generate cash flow from operations, or that future borrowings will be available to the Combined Company, in an amount sufficient to enable the Combined Company to meet its indebtedness obligations and to fund other liquidity needs following the completion of the Transactions.

Failure to adequately fund the Combined Company’s operating and working capital needs through cash generated from operations and cash available through the Combined Company’s financing arrangements could negatively impact the Combined Company’s ability to invest in its business and maintain its capital structure.

The Combined Company’s business will require investment in working capital and fixed assets.

Lawson expects the Combined Company to fund these investments from cash generated from operations and funds available from the Combined

Company’s anticipated new financing arrangements.

Failure to generate sufficient cash flow from operations or from such anticipated new financing arrangements could cause the Combined Company to have insufficient funds to operate its business.

Adequate funds may not be available when needed or may not be available on favorable terms.

Failure to meet the covenant requirements of the Combined Company’s financing arrangements could lead to higher financing costs and increased restrictions and reduce or eliminate the Combined Company’s ability to borrow funds.

Lawson expects that the Combined Company’s anticipated new financing arrangements will contain financial and other restrictive covenants.

These covenants could adversely affect the Combined Company by limiting its financial and operating flexibility as well as its ability to plan for and react to market conditions and to meet its capital needs.

Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate the Combined Company’s ability to borrow funds, or accelerate the payment of the Combined Company’s indebtedness.

TestEquity has been in default of certain debt covenants of its term loan and revolving line of credit agreements.

In connection therewith, on September 6, 2019, February 28, 2020, March 27, 2020, October 9, 2020 and June 30, 2021, TestEquity entered into forbearance agreements with its lender.

Such term loan and revolving line of credit agreements are expected to be terminated in connection with the closing of the TestEquity Merger.

If the Combined Company requires more liquidity than is expected to be available to it under its financing arrangements, the Combined Company may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to the Combined Company.

Should funding be insufficient at any time in the future, the Combined Company may be unable to develop or enhance its products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on the Combined Company’s business, financial condition and results of operations.

Therefore, we are exposed to market risk relating to the fluctuation of value of such foreign currencies (including the Canadian dollar, Mexican peso, British pound sterling, the Euro, Danish krone, Brazilian real, Chinese renminbi, and Turkish lira) relative to the U.S.

dollar that could adversely affect our financial condition and operating results.

In addition, t he revolving credit facility under our Amended and Restated Credit Agreement is available to be drawn in U.S.

dollars, Canadian dollars and any other additional currencies that may be agreed between us and our lenders.

Any borrowings in Canadian dollars or any other foreign currency would expose us to market risk relating to the change in the value of such foreign currency in relation to the U.S.

UNRESOLVED STAFF COMMENTS.

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

What changed 10-K

Item 1A. Risk Factors