UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.D.C. 20549
FORM 10-Q
 
(Mark One)
ý☒Quarterly Report under SectionQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172023
or
¨☐Transition Report under SectionTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             


Commission file Number: 0-10546
LAWSON PRODUCTS,
DISTRIBUTION SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware36-2229304
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
8770 W. Bryn Mawr Avenue,301 Commerce Street, Suite 900, Chicago, Illinois1700,Fort Worth,60631Texas76102
(Address of principal executive offices)(Zip Code)
(773) 304-5050
(888) 611-9888
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $1.00 par valueDSGRNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerý☒
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company¨☒
Emerging growth company
¨

☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The numberAs of October 23, 2023, 46,845,970 shares outstanding of the registrant’s common stock, $1$1.00 par value, as of October 20, 2017 was 8,888,028.were outstanding.

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TABLE OF CONTENTS
Page #
PART I - FINANCIAL INFORMATION
Page #
PART I - FINANCIAL INFORMATION5
Item 1.
4
Condensed Consolidated Balance Sheets as of September 30, 20172023 (Unaudited) and December 31, 20162022
45
6
57
69
711
1335
1854
1854
PART II - OTHER INFORMATION
55
55
57
1958
2059


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Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:


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


the effect of general economic and market conditions;
the ability to generate sufficient cash to fund our operating requirements;
the ability to meet the covenant requirements of our line of credit;
the market price of our common stock may decline;
•inventory obsolescence;
•work stoppages and other disruptions at transportation centers or shipping ports;
changing customer demand•the reliance of TestEquity Acquisition, LLC ("TestEquity") on a significant supplier for a significant amount of its product inventory;
•changes in our customers, product mix and product mixes;pricing strategy;
increases in energy and commodity prices;
decreases in demand from oil and gas customers due to lower oil prices;
•disruptions of our information and communication systems;
cyber attacks•cyber-attacks or other information security breaches;incidents;
failure•the inability to successfully recruit, integrate and retain a talented workforce including productive sales representatives;
•difficulties in integrating the business operations of TestEquity and 301 HW Opus Holdings, Inc., which conducts business as Gexpro Services ("Gexpro Services"), with our legacy Lawson Products, Inc. operations, and/or the failure to successfully combine those operations within our expected timetable;
•failure to retain talented employees, managers and executives;
•the inability of management to successfully makeimplement changes in operating processes;
•various risks involved in any pursuit or integrate acquisitions intocompletion by us of additional acquisitions;
•competition in the organization;markets in which we operate;
failure to manage change within the organization;•potential impairment charges for goodwill and other intangible assets;
highly competitive market;
•changes that affect governmental and other tax-supported entities;
•our significant amount of indebtedness;
•failure to adequately fund our operating and working capital needs through cash generated from operations and borrowings available under our credit facility;
•failure to meet the covenant requirements of our credit facility;
•government efforts to combat inflation, along with other interest rate pressures, could lead to higher financing costs;
•declines in the market price of our common stock (the "DSG common stock");
•the significant influence of Luther King Capital Management Corporation ("LKCM") over the Company in light of its ownership percentage;
•any sales of shares of DSG common stock held by entities affiliated with LKCM or the possibility of any such sales;
•violations of environmental protection or other governmental regulations;
negative •changes related toin tax matters;
•risks arising from our international operations;
•potential limitations on our ability to use our net operating losses and certain other tax attributes generated prior to the Mergers (as defined below);
all•public health emergencies;
•business uncertainties as a result of the Mergers;
•stockholder litigation relating to the Mergers;
•TestEquity and/or Gexpro Services may not have in place the financial organization, reporting and internal controls necessary for a public company;
•a downturn in the economy or in certain sectors of the economy;
•changes in energy costs, tariffs, transportation costs and the cost of raw materials used in our products, and other inflationary pressures;
•supply chain constraints, inflationary pressure and labor shortages;
•foreign currency exchange rate changes; and
•the other factors discussed in the Company’s “Risk Factors” set forth in itssection of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022 and the “Risk Factors” section of this Quarterly Report on Form 10-Q.


The Company undertakes
3

We undertake no obligation to update any such factors or to publicly announce the results of any revisions torevise any forward-looking statementsstatement contained herein, whether as a result of new information, futureto reflect events or otherwise.circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or otherwise, except as may be required under applicable law.




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Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)

September 30, 2017
December 31, 2016
   September 30, 2023December 31, 2022
ASSETS(Unaudited)

ASSETS
Current assets:


Current assets:
Cash and cash equivalents$19,043

$10,421
Cash and cash equivalents$80,456 $24,554 
Restricted cash800

800
Restricted cash20,703 186 
Accounts receivable, less allowance for doubtful accounts of $460 and $454, respectively37,290

30,200
Accounts receivable, less allowances of $2,288 and $1,513, respectivelyAccounts receivable, less allowances of $2,288 and $1,513, respectively238,543 166,301 
Inventories, net43,341

42,561
Inventories, net313,337 264,374 
Miscellaneous receivables and prepaid expenses3,755

3,788
Prepaid expenses and other current assetsPrepaid expenses and other current assets36,538 22,773 
Total current assets104,229

87,770
Total current assets689,577 478,188 
   
Property, plant and equipment, net26,844

30,907
Property, plant and equipment, net111,949 64,395 
Rental equipment, netRental equipment, net26,320 27,139 
GoodwillGoodwill397,762 348,048 
Deferred tax assetDeferred tax asset55 189 
Intangible assets, netIntangible assets, net265,319 227,994 
Cash value of life insurance11,623

10,051
Cash value of life insurance18,001 17,166 
Goodwill5,789
 5,520
Deferred income taxes20

20
Right of use operating lease assetsRight of use operating lease assets79,791 46,755 
Other assets905

1,039
Other assets7,194 5,736 
Total assets$149,410

$135,307
Total assets$1,595,968 $1,215,610 




LIABILITIES AND STOCKHOLDERS’ EQUITY


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:


Current liabilities:
Revolving line of credit$—
 $841
Accounts payable12,207

11,307
Accounts payable$107,140 $80,486 
Accrued expenses and other liabilities30,831

27,289
Current portion of long-term debtCurrent portion of long-term debt32,335 16,352 
Current portion of lease liabilitiesCurrent portion of lease liabilities13,241 9,964 
Accrued expenses and other current liabilitiesAccrued expenses and other current liabilities97,191 62,677 
Total current liabilities43,038

39,437
Total current liabilities249,907 169,479 
Long-term debt, less current portion, netLong-term debt, less current portion, net550,526 395,825 
   
Security bonus plan13,347

14,216
Financing lease obligation6,710
 7,543
Deferred compensation5,108

4,830
Deferred rent liability3,473

3,676
Lease liabilitiesLease liabilities70,353 39,828 
Deferred tax liabilityDeferred tax liability24,452 23,834 
Other liabilities5,071

4,472
Other liabilities24,621 23,649 
Total liabilities76,747

74,174
Total liabilities919,859 652,615 
   
Stockholders’ equity:


Commitments and contingencies (Note 14)Commitments and contingencies (Note 14)
Stockholders’ equity(1):
Stockholders’ equity(1):
Preferred stock, $1 par value:


Preferred stock, $1 par value:
Authorized - 500,000 shares, Issued and outstanding — None—

—
Authorized - 500,000 shares, issued and outstanding — NoneAuthorized - 500,000 shares, issued and outstanding — None— — 
Common stock, $1 par value:


Common stock, $1 par value:
Authorized - 35,000,000 shares
Issued - 8,921,302 and 8,864,929 shares, respectively
Outstanding - 8,888,028 and 8,832,623 shares, respectively		8,921

8,865
Authorized - 70,000,000 shares
Issued - 47,479,256 and 39,460,724 shares, respectively
Outstanding - 46,844,598 and 38,833,568 shares, respectively
Authorized - 70,000,000 shares
Issued - 47,479,256 and 39,460,724 shares, respectively
Outstanding - 46,844,598 and 38,833,568 shares, respectively
46,845 38,834 
Capital in excess of par value12,335

11,055
Capital in excess of par value670,287 572,379 
Retained earnings51,216

41,943
Treasury stock – 33,274 and 32,306 shares, respectively(711)
(691)
Retained deficitRetained deficit(18,377)(25,736)
Treasury stock – 634,658 and 627,156 shares, respectivelyTreasury stock – 634,658 and 627,156 shares, respectively(12,697)(12,526)
Accumulated other comprehensive income (loss)902

(39)Accumulated other comprehensive income (loss)(9,949)(9,956)
Total stockholders’ equity72,663

61,133
Total stockholders’ equity676,109 562,995 
Total liabilities and stockholders’ equity$149,410

$135,307
Total liabilities and stockholders’ equity$1,595,968 $1,215,610 

(1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two-for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details.


See notes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited)
4
5


Table of Contents

Lawson Products,Distribution Solutions Group, Inc.
Condensed Consolidated Statements of IncomeOperations and Comprehensive Income (Loss)
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Revenue$438,909 $347,151 $1,165,163 $822,572 
Cost of goods sold293,612 227,984 750,972 547,966 
Gross profit145,297 119,167 414,191 274,606 
Selling, general and administrative expenses132,514 97,140 370,911 245,478 
Operating income (loss)12,783 22,027 43,280 29,128 
Interest expense(12,895)(6,097)(30,057)(16,704)
Loss on extinguishment of debt— — — (3,395)
Change in fair value of earnout liabilities667 9,641 646 3,948 
Other income (expense), net(1,133)(550)(2,869)224 
Income (loss) before income taxes(578)25,021 11,000 13,201 
Income tax expense (benefit)990 8,480 3,637 3,912 
Net income (loss)$(1,568)$16,541 $7,363 $9,289 
Basic income (loss) per share of common stock(1)
$(0.03)$0.43 $0.17 $0.27 
Diluted income (loss) per share of common stock(1)
$(0.03)$0.42 $0.17 $0.27 
Comprehensive income (loss)
Net income (loss)$(1,568)$16,541 $7,363 $9,289 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(3,579)(9,774)128 (12,094)
Other464 — (121)— 
Comprehensive income (loss)$(4,683)$6,767 $7,370 $(2,805)
(1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two-for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details.

Three months ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
        
Net sales$75,651
 $70,199
 $225,274
 $209,258
Cost of goods sold29,646
 27,626
 89,249
 81,700
Gross profit46,005
 42,573
 136,025
 127,558

       
Operating expenses:       
Selling expenses24,354
 23,568
 72,964
 69,525
General and administrative expenses20,561
 16,616
 58,790
 54,446
Total SG&A44,915
 40,184
 131,754
 123,971
Gain on sale of property—
 —
 (5,422) —
Operating expenses44,915
 40,184
 126,332
 123,971
        
Operating income1,090
 2,389
 9,693
 3,587

       
Interest expense(133) (167) (393) (486)
Other income, net843
 66
 953
 439

       
Income before income taxes1,800
 2,288
 10,253
 3,540
Income tax expense479
 463
 802
 526

       
Net income$1,321
 $1,825
 $9,451
 $3,014

       
Basic income per share of common stock$0.15
 $0.21
 $1.07
 $0.34

       
Diluted income per share of common stock$0.14
 $0.20
 $1.04
 $0.34
        
Weighted average shares outstanding:       
Basic weighted average shares outstanding8,880
 8,785
 8,856
 8,778
Effect of dilutive securities outstanding253
 141
 256
 139
Diluted weighted average shares outstanding9,133
 8,926
 9,112
 8,917
        
Comprehensive income:       
Net income$1,321
 $1,825
 $9,451
 $3,014
Other comprehensive income (loss), net of tax       
Adjustment for foreign currency translation139
 (271) 941
 764
Net comprehensive income$1,460
 $1,554
 $10,392
 $3,778









See notes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited)
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Table of Contents

Distribution Solutions Group, Inc.
Lawson Products,Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share data)
(Unaudited)

Common Stock(1)
Capital in Excess of Par Value(1)
Accumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Outstanding Shares$1 Par ValueRetained DeficitTreasury Stock
Balance at January 1, 202338,833,568 $38,834 $572,379 $(25,736)$(12,526)$(9,956)$562,995 
Net income (loss)— — — 5,907 — — 5,907 
Foreign currency translation adjustment— — — — — 2,624 2,624 
Stock-based compensation— — 773 — — — 773 
Stock-based compensation liability paid in shares— — 227 — — — 227 
Shares issued22,288 22 (22)— — — — 
Shares issued - earnout3,400,000 3,400 (3,400)— — — — 
Tax withholdings related to net share settlements of stock-based compensation awards(5,278)(5)5 — (117)— (117)
Other— — 204 (4)— (200)— 
Balance at March 31, 202342,250,578 $42,251 $570,166 $(19,833)$(12,643)$(7,532)$572,409 
Net income (loss)— — — 3,024 — — 3,024 
Foreign currency translation adjustment— — — — — 1,083 1,083 
Stock-based compensation— — 1,062 — — — 1,062 
Issuance of common stock in rights offering, net of offering costs of $1,5314,444,444 4,444 94,025 — — — 98,469 
Shares issued6,672 7 (7)— — — — 
Tax withholdings related to net share settlements of stock-based compensation awards(2,224)(2)2 — (54)— (54)
Other— — 385 — — (385)— 
Balance at June 30, 202346,699,470 $46,700 $665,633 $(16,809)$(12,697)$(6,834)$675,993 
Net income (loss)— — — (1,568)— — (1,568)
Foreign currency translation adjustment— — — — — (3,579)(3,579)
Stock-based compensation— — 1,119 — — — 1,119 
Shares issued520 1 (1)— — — — 
Shares issued through employee share purchases144,608 144 3,109 — — — 3,253 
Compensation expense related to employee share purchases— — 427 — — — 427 
Other— — — — — 464 464 
Balance at September 30, 202346,844,598 $46,845 $670,287 $(18,377)$(12,697)$(9,949)$676,109 
(1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two-for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details.

See notes to Condensed Consolidated Financial Statements (Unaudited)
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Table of Contents
Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)

Common Stock(1)
Capital in Excess of Par Value(1)
Accumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Outstanding Shares$1 Par ValueRetained DeficitTreasury Stock
Balance at January 1, 202220,589,648 $20,636 $186,739 $(33,142)$(10,033)$1,569 $165,769 
Net income (loss)— — — (2,537)— — (2,537)
Foreign currency translation adjustment— — — — — 171 171 
Shares issued12,129 11 (11)— — — — 
Tax withholdings related to net share settlements of stock-based compensation awards(1,777)— 33 — (33)— — 
Other— — (95)— — — (95)
Balance at March 31, 202220,600,000 $20,647 $186,666 $(35,679)$(10,066)$1,740 $163,308 
Net income (loss)— — — (4,715)— — (4,715)
Foreign currency translation adjustment— — — — — (2,491)(2,491)
Stock-based compensation— — 573 — — — 573 
Shares issued51,364 52 (52)— — — — 
Deemed consideration for reverse acquisition18,240,334 18,240 333,251 — — — 351,491 
Reclassification of issuable shares from earnout derivative liability— — 26,593 — — — 26,593 
Fair value adjustment of stock-based compensation awards— — 1,910 — — — 1,910 
Tax withholdings related to net share settlements of stock-based compensation awards(3,734)(4)4 — (78)— (78)
Settlement of related party liability— — 5,276 — — — 5,276 
Other— — (39)— — — (39)
Balance at June 30, 202238,887,964 $38,935 $554,182 $(40,394)$(10,144)$(751)$541,828 
Net income (loss)— — — 16,541 — — 16,541 
Foreign currency translation adjustment— — — — — (9,774)(9,774)
Stock-based compensation— — 489 — — — 489 
Shares issued35,984 36 (36)— — — — 
Repurchase of common stock(108,178)(108)108 — (1,940)— (1,940)
Tax withholdings related to net share settlements of stock-based compensation awards(15,760)(16)16 — (391)— (391)
Other— — (6)— — — (6)
Balance at September 30, 202238,800,010 $38,847 $554,753 $(23,853)$(12,475)$(10,525)$546,747 
(1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two-for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details.

See notes to Condensed Consolidated Financial Statements (Unaudited)
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Table of Contents
Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

  Nine Months Ended September 30,
  2017 2016
     
Operating activities:    
Net income $9,451
 $3,014
     
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 4,940
 6,386
Stock-based compensation 2,722
 (1,332)
Gain on sale of property (5,422) —
Changes in operating assets and liabilities, net of acquisitions:    
Accounts receivable (7,046) (4,547)
Inventories (373) 3,209
Prepaid expenses and other assets (1,562) (388)
Accounts payable and other liabilities 738
 (1,345)
Other 307
 318
Net cash provided by operating activities $3,755
 $5,315
     
Investing activities:    
Purchases of property, plant and equipment $(1,228) $(2,572)
Proceeds from sale of property 6,177
 —
Business acquisitions —
 (2,576)
Net cash provided by (used in) investing activities $4,949
 $(5,148)
     
Financing activities:    
Net payments on revolving line of credit $(841) $(925)
Repurchase treasury shares (20) (18)
Net cash used in financing activities $(861) $(943)
     
Effect of exchange rate changes on cash and cash equivalents 779
 668
     
Increase (decrease) in cash and cash equivalents 8,622
 (108)
     
Cash and cash equivalents at beginning of period 10,421
 10,765
     
Cash and cash equivalents at end of period $19,043
 $10,657








Nine Months Ended September 30,
 20232022
Operating activities
Net income (loss)$7,363 $9,289 
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization47,316 31,314 
Amortization of debt issue costs1,662 1,419 
Extinguishment of debt— 3,395 
Stock-based compensation5,441 445 
Compensation expense related to employee share purchases427 — 
Change in fair value of earnout liabilities(646)(3,948)
Gain on sale of rental equipment(1,929)(2,463)
Gain on sale of property, plant and equipment(86)— 
Charge for step-up of acquired inventory2,866 2,703 
Net realizable value and reserve adjustment for obsolete and excess inventory— 5,551 
Bad debt expense1,045 564 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable(8,329)(30,795)
Inventories9,639 (43,857)
Prepaid expenses and other current assets(7,288)(2,224)
Accounts payable10,552 1,687 
Accrued expenses and other current liabilities5,587 1,316 
Other changes in operating assets and liabilities433 6,324 
Net cash provided by (used in) operating activities74,053 (19,280)
Investing activities
Purchases of property, plant and equipment(11,180)(4,954)
Business acquisitions, net of cash acquired(252,007)(113,681)
Purchases of rental equipment(7,735)(7,913)
Proceeds from sale of rental equipment4,202 5,998 
Net cash provided by (used in) investing activities(266,720)(120,550)
Financing activities
Proceeds from revolving lines of credit174,587 302,044 
Payments on revolving lines of credit(295,816)(237,370)
Proceeds from term loans305,000 445,630 
Payments on term loans(11,250)(343,662)
Deferred financing costs(3,419)(11,956)
Proceeds from rights offering, net of offering costs of $1,53198,469 — 
Repurchase of common stock— (1,940)
Shares repurchased held in treasury(171)(469)
Proceeds from employees for share purchases3,253 — 
Payment of financing lease principal(358)(457)
Payment of earnout(1,000)— 
Net cash provided by (used in) financing activities269,295 151,820 
Effect of exchange rate changes on cash and cash equivalents(209)(1,309)
Increase (decrease) in cash, cash equivalents and restricted cash76,419 10,681 
Cash, cash equivalents and restricted cash at beginning of period24,740 14,671 
Cash, cash equivalents and restricted cash at end of period$101,159 $25,352 
Cash and cash equivalents$80,456 $25,171 
Restricted cash20,703 181 
Total cash, cash equivalents and restricted cash$101,159 $25,352 
See notes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements (Unaudited)
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Distribution Solutions Group, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30,
 20232022
Supplemental disclosure of cash flow information
Net cash paid for income taxes$9,370 $11,553 
Net cash paid for interest$26,187 $12,093 
Net cash paid for interest on supply chain financing$1,753 $579 
Non-cash activities:
Fair value of common stock exchanged for reverse acquisition$— $351,491 
Settlement of related party obligations$— $5,276 
Additions of property, plant and equipment included in accounts payable$521 $73 
Right of use assets obtained in exchange for finance lease liabilities$396 $886 
Right of use assets obtained in exchange for operating lease liabilities$19,879 $12,773 

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 1 — – Nature of Operations and Basis of Presentation

Organization

Distribution Solutions Group, Inc., a Delaware corporation ("DSG"), is a global specialty distribution company providing value-added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets. DSG has three principal operating companies: Lawson Products, Inc., an Illinois corporation ("Lawson"), TestEquity Acquisition, LLC, a Delaware limited liability company ("TestEquity"), and 301 HW Opus Holdings, Inc., a Delaware corporation conducting business as Gexpro Services ("Gexpro Services"). The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined on April 1, 2022 to create a global specialty distribution company. A summary of the Mergers (as defined below), including the legal entities party to the transactions and the stock consideration, is presented below.

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

Recent Events

Stock Split

On August 15, 2023, DSG announced that its Board of Directors approved and declared a two-for-one stock split (the “Stock Split”) which entitled each stockholder of record as of the close of business on August 25, 2023 to receive one additional share of DSG common stock for each share of DSG common stock then-held. The additional shares were distributed after the close of trading on August 31, 2023, and shares of DSG common stock began trading at the split-adjusted basis on September 1, 2023. Accordingly, all share and per share amounts have been retroactively adjusted to reflect the impact of the Stock Split for all periods presented herein.

In order to implement the Stock Split, on August 31, 2023, DSG filed a Third Amended and Restated Certificate of Incorporation of DGS with the Secretary of State of the State of Delaware to increase the number of authorized shares of DSG common stock from 35,000,000 to 70,000,000, which became effective on that date.

HIS Company, Inc. Acquisition

On March 30, 2023, DSG entered into a Stock Purchase Agreement (the “Purchase Agreement”), with various parties for the acquisition of all of the issued and outstanding capital stock of HIS Company, Inc., a Texas corporation (“Hisco,” and the "Hisco Transaction"), a distributor of specialty products serving industrial technology applications. DSG completed the Hisco Transaction on June 8, 2023. The total purchase consideration exchanged for the Hisco Transaction was $268.5 million, net of cash acquired of $12.2 million, at closing, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. DSG will also pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction. In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco. DSG funded the Hisco Transaction with borrowings under its amended and restated credit facility and proceeds raised from the Rights Offering (as defined below) with existing stockholders, both discussed below. Refer to Note 3 – Business Acquisitions for further details about Hisco and the Hisco Transaction.

Debt Amendment

On June 8, 2023, the Company and certain of its subsidiaries entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”), by and among the Company, certain subsidiaries of the Company as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The First Amendment provides for a $305 million incremental term loan and for the Company to increase the commitments from time to time by up to $200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants. Refer to Note 9 – Debt for additional information about the 2023 Credit Agreement.

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Rights Offering

On May 30, 2023, the Company issued 4,444,444 shares of DSG common stock for approximately $100 million pursuant to a subscription rights offering (the "Rights Offering"). The Rights Offering provided one transferable subscription right for each share of DSG common stock held by holders of DSG common stock on record as of the close of business on May 1, 2023. Each subscription right entitled the holder to purchase 0.0525 shares of DSG common stock at a subscription price of $22.50 per share. The subscription rights were transferable, but were not listed for trading on any stock exchange or market. In addition, holders of subscription rights who fully exercised their subscription rights were entitled to oversubscribe for additional shares of DSG common stock, subject to proration. Refer to Note 11 – Stockholders' Equity for additional information about the Rights Offering.

Combination with TestEquity and Gexpro Services

On December 29, 2021, DSG entered into:

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

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

At the closing of the Mergers, each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Mergers was converted into approximately 0.1809 shares and 0.3838 shares, respectively, of DSG common stock, based on the ratio of outstanding shares of each entity immediately prior to the Mergers to the number of shares of DSG common stock acquired in the Mergers.

Completion of the TestEquity Merger

On April 1, 2022 (the "Merger Date"), the TestEquity Merger was consummated pursuant to the TestEquity Merger Agreement. In accordance with the TestEquity Merger Agreement, Merger Sub 1 merged with and into TestEquity, with TestEquity surviving as a wholly-owned subsidiary of DSG.

In accordance with and under the terms of the TestEquity Merger Agreement, in connection with the closing of the TestEquity Merger on the Merger Date, DSG: (i) issued to the TestEquity Equityholder 6,600,000 shares of DSG common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity.

The TestEquity Merger Agreement provided that up to an additional 1,400,000 shares of DSG common stock would be potentially issuable to the TestEquity Equityholder in accordance with, and subject to the terms and conditions of, the earnout provisions of the TestEquity Merger Agreement. On March 20, 2023, DSG issued 1,400,000 shares of DSG common stock to the TestEquity Equityholder (the "TestEquity Holdback Shares") pursuant to the terms of the earnout provisions of the TestEquity Merger Agreement. The TestEquity Holdback Shares issued represented the maximum number of additional shares that could be issued under the TestEquity Merger Agreement, and no further shares are available for issuance, and no additional shares will be issued, in connection with the TestEquity Merger Agreement. Refer to Note 8 – Earnout Liabilities for information about the earnout derivative liability related to the TestEquity Holdback Shares.

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Completion of the Gexpro Services Merger

On the Merger Date, the Gexpro Services Merger was consummated pursuant to the Gexpro Services Merger Agreement. In accordance with the Gexpro Services Merger Agreement, Merger Sub 2 merged with and into Gexpro Services, with Gexpro Services surviving as a wholly-owned subsidiary of DSG.

In accordance with and under the terms of the Gexpro Services Merger Agreement, in connection with the closing of the Gexpro Services Merger on the Merger Date, DSG: (i) issued to the Gexpro Services Stockholder 14,000,000 shares of DSG common stock, (ii) on behalf of Gexpro Services, paid certain indebtedness of Gexpro Services and (iii) on behalf of Gexpro Services, paid certain specified transaction expenses of Gexpro Services.

The Gexpro Services Merger Agreement provided that up to an additional 2,000,000 shares of DSG common stock would be potentially issuable to the Gexpro Services Stockholder in accordance with, and subject to the terms and conditions of, the earnout provisions of the Gexpro Services Merger Agreement. On March 20, 2023, DSG issued 2,000,000 shares of DSG common stock to the Gexpro Services Stockholder (the “Gexpro Services Holdback Shares”) pursuant to the terms of the earnout provisions of the Gexpro Services Merger Agreement. The Gexpro Services Holdback Shares issued represented the maximum number of additional shares that could be issued under the Gexpro Services Merger Agreement, and no further shares are available for issuance, and no additional shares will be issued, in connection with the Gexpro Services Merger Agreement.

As of April 1, 2022, approximately 1,076,000 of the Gexpro Services Holdback Shares had been expected to be issued under the first earnout opportunity in the Gexpro Services Merger Agreement based on certain earnout metrics related to the consummation of certain additional acquisitions which were completed prior to the Merger Date. Under the Gexpro Services Merger Agreement, if any Gexpro Services Holdback Shares remained after the calculation of the first earnout opportunity, there was a second earnout opportunity under the Gexpro Services Merger Agreement based on certain earnout performance metrics. On March 20, 2023, all 2,000,000 Gexpro Services Holdback Shares were issued under the earnout opportunities. The incremental 924,000 Gexpro Services Holdback Shares that were issued in excess of the 1,076,000 Gexpro Services Holdback Shares that were originally expected to be issued had been remeasured at fair value immediately prior to and reclassified to equity at December 31, 2022. Refer to Note 8 – Earnout Liabilities for information about the earnout derivative liability related to the Gexpro Services Holdback Shares.

Accounting for the Mergers

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

For more information about the Mergers, refer to Note 3 – Business Acquisitions.

Nature of Operations

A summary of the nature of operations for each of DSG's operating companies is presented below. Information regarding DSG's reportable segments is presented in Note 16 – Segment Information.

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

Basis of Presentation and SummaryConsolidation

The Mergers were accounted for as a reverse merger under the acquisition method of Significantaccounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting PoliciesStandards Codification ("ASC") 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. This determination

13

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 for the nine months ended September 30, 2022reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date. The combined operations of all three entities are included in the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and the three months ended September 30, 2022. The unaudited condensed consolidated financial statements as of September 30, 2023 and December 31, 2022 reflect the financial position of TestEquity, Gexpro Services and DSG's legacy Lawson business on a consolidated basis.

The Company and its consolidated subsidiaries, except for Gexpro Services, operate on a calendar year-end. Gexpro Services operates on a calendar year-end for annual reporting purposes. However, quarterly financial statements for Gexpro Services are prepared on financial close dates that may differ from that of the Company. For the quarter ended September 30, 2023, there was no difference in the period end. The Company utilizes the exchange rates in effect at Gexpro Services’ reporting date and the appropriate weighted-average rate for its fiscal reporting period.

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”)DSG have been prepared in accordance with accounting principles generally accepted accounting principlesin the United States ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. ReferenceGAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be made to the Company’sread in conjunction with DSG's audited consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2016. In2022 filed with the opinion ofU.S. Securities and Exchange Commission ("SEC") and the Company, allLawson Products, Inc. unaudited condensed consolidated financial statements and accompanying notes included in DSG’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022. All normal recurring adjustments have been made that are necessary to present fairly state the results of operations for the interim periods. Operating results for the three and nine month periodsperiod ended September 30, 20172023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2023.


Note 2 – Summary of Significant Accounting Policies

There were no significant changes to the Company's accounting policies from those disclosed in DSG's Annual Report on Form 10-K for the year ended December 31, 2022. See Note 2 of the 2022 consolidated financial statements included in DSG's Annual Report on Form 10-K for the year ended December 31, 2022 for further details of the Company's significant accounting policies.

Accounting Pronouncements - Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises the requirements for how an entity should measure credit losses on financial instruments. The pronouncement was effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis. The Company adopted this guidance on January 1, 2023. The adoption had no material impact on the Company's financial condition, results of operations or cash flows.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The pronouncement is effective in fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company adopted this guidance on January 1, 2023. The adoption had no impact on the Company's financial condition, results of operations or cash flows and will be applied to business combinations on or after the adoption date.

Note 3 – Business Acquisitions

Combination with TestEquity and Gexpro Services

On April 1, 2022, the Mergers with TestEquity and Gexpro Services were completed via all-stock merger transactions. Pursuant to the Merger Agreements, DSG issued an aggregate of 20.6 million shares of DSG common stock on April 1, 2022 to the former owners of TestEquity and Gexpro Services. On March 20, 2023, an additional 3.4 million shares of DSG common stock were issued. Refer to Note 1 – Nature of Operations and Basis of Presentation for further information regarding the Mergers.
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The Company operates in one reportable segment asbusiness combination of Lawson, TestEquity and Gexpro Services combines three value-added complementary distribution businesses. Lawson is a Maintenance, Repair and Operations ("MRO") distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repairMRO marketplace. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical OEM products. Refer to Note 1 – Nature of Operations and Basis of Presentation for more information on the nature of operations marketplace.for these businesses.


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

Allocation of Consideration Exchanged

Under the acquisition method of accounting, the estimated consideration exchanged was calculated as follows:
(in thousands, except share data)April 1, 2022
Number of DSG common shares18,240,334
DSG common stock closing price per share on March 31, 2022$19.27 
Fair value of shares exchanged$351,491 
Other consideration(1)
1,910 
Total consideration exchanged$353,401 
(1)Fair value adjustment of stock-based compensation awards.

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

The allocation of consideration exchanged to the tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the Merger Date. The accounting for the Mergers was complete as of December 31, 2022. Goodwill generated from the Mergers is not deductible for tax purposes.

The following table summarizes the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed at the Merger Date after applying measurement period adjustments:
(in thousands)Final Purchase Price Allocation
Current assets$148,308 
Property, plant and equipment57,414 
Right of use assets18,258 
Other intangible assets119,060 
Deferred tax liability, net of deferred tax asset(19,394)
Other assets18,373 
Current liabilities(71,165)
Long-term obligations(25,746)
Lease and financing obligations(28,827)
Derivative earnout liability(43,900)
Goodwill181,020 
Total consideration exchanged$353,401 

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The allocation of consideration exchanged to other intangible assets acquired was as follows:
(in thousands)Fair Value
Estimated Life
(in years)
Customer relationships$76,050 19
Trade names43,010 8
Total other intangible assets$119,060 

Other Acquisitions
DSG and its operating companies acquired other businesses during the first nine months of 2023 and the year ended December 31, 2022. The acquisitions were accounted for under ASC 805, the acquisition method of accounting. For each acquisition, the allocation of consideration exchanged to the assets acquired and liabilities assumed was based on estimated acquisition-date fair values.

Purchase of HIS Company, Inc.

On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of Hisco, a distributor of specialty products serving industrial technology applications, pursuant to the Purchase Agreement dated March 30, 2023. In connection with this transaction, DSG combined the operations of TestEquity and Hisco, further expanding the product and service offerings at TestEquity, as well as all of our operating businesses under DSG.

Hisco operates in 38 locations across North America, including its Precision Converting facilities that provide value-added fabrication and its Adhesive Materials Group that provides an array of custom repackaging solutions. Hisco offers customers a broad range of products, including adhesives, chemicals and tapes, as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags. Hisco also offers vendor-managed inventory and RFID programs with specialized warehousing for chemical management, logistics services and cold storage.

The total purchase consideration exchanged for the Hisco Transaction was $268.5 million, net of cash acquired of $12.2 million, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. Refer to Note 8 – Earnout Liabilities for additional information on the earn-out. DSG will also pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction. For the three months ended September 30, 2017 and 2016, stock options to purchase 80,000 and 40,000, respectively, of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 20172023, $10.1 million and 2016 stock options to purchase 66,667 and 40,000,$12.4 million, respectively, of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

Effective January 1, 2017, the Company adopted Accounting Standards Update 2016-09, “Compensation-Stock Compensation (Topic 718)” (“ASU 2016-09”). Prior to January 1, 2017, the Company recognized excess tax benefits or deficiencies of stock-basedwas recorded as compensation expense toover the extent that there were sufficient recognized excess tax benefits previously recognized,service period for the retention bonuses as a component of additional paid-in capital. ASU 2016-09 requiresSelling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

DSG funded the Hisco Transaction with borrowings under its 2023 Credit Agreement and proceeds raised from the Rights Offering. Refer to Note 9 – Debtfor information about the 2023 Credit Agreement and Note 11 – Stockholders' Equity for details on the Rights Offering.

The Purchase Agreement allowed certain eligible Hisco employees to invest all or a portion of their respective closing payment in DSG common stock at $22.50 per share, up to an aggregate value of DSG common stock issued to such eligible Hisco employees of $25.0 million. During the three and nine months ended September 30, 2023, the Company issued 144,608 shares of DSG common stock to accountthe eligible Hisco employees and received approximately $3.25 million. For the three and nine months ended September 30, 2023, approximately $0.4 million was recorded as compensation expense for excess tax benefitsthe discount between the prevailing market price of the DSG common stock on the date of purchase and tax deficienciesthe purchase price of $22.50 per share as discrete itemsa component of Selling, general and administrative expenses in the reportingUnaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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The following table summarizes the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:
Hisco
(in thousands)June 8, 2023
Acquisition Date		Measurement Period AdjustmentsAdjusted Total
Current assets$131,950 $(2,565)$129,385 
Property, plant and equipment48,326 — 48,326 
Right of use assets21,102 1,188 22,290 
Other intangible assets:
Customer relationships41,800 (200)41,600 
Trade names25,600 — 25,600 
Deferred tax liability, net of deferred tax asset(2,544)40 (2,504)
Other assets2,495 — 2,495 
Accounts payable(16,689)— (16,689)
Lease liabilities(22,372)293 (22,079)
Accrued expenses and other liabilities(8,961)— (8,961)
Goodwill49,718 (713)49,005 
Total purchase consideration exchanged, net of cash acquired$270,425 $(1,957)$268,468 
Cash consideration$252,007 $— $252,007 
Deferred consideration12,418 3,943 16,361 
Contingent consideration6,000 (5,900)100 
Total purchase consideration exchanged, net of cash acquired$270,425 $(1,957)$268,468 

Certain estimated values for the Hisco Transaction, including the valuation of intangibles, property, plant and equipment, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuation will be completed within the one-year measurement period following the acquisition date, and any adjustments will be recorded in the period in which they occur. The adoption was applied on a modified retrospective basis. All deferred tax assetsthe adjustments are determined.

Following the initial fair value measurement, the Company updated the purchase price allocation for Hisco primarily related to stock-based compensationthe ongoing review of the opening balance sheet and contractual working capital adjustments and revised certain assumptions used in estimating the fair value of the contingent consideration. The adjustments to these balances resulted in a $0.7 million decrease to goodwill and a $2.0 million decrease to the total purchase consideration, net of cash acquired.
The customer relationships and trade names intangibles assets have estimated useful lives of 12 years and 8 years, respectively. As a result of the Hisco Transaction, the Company recorded tax deductible goodwill of $42.9 million in 2023 that may result in a tax benefit in future periods and is primarily attributable to the benefits we expect to derive from expected synergies including expanded product and service offerings and cross-selling opportunities.

Purchases of Other Companies in 2022

During the year ended December 31, 2022, TestEquity acquired Interworld Highway, LLC, National Test Equipment, and Instrumex, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc. ("Frontier"). The consideration exchanged for these acquired businesses included various combinations of cash and sellers' notes. The accounting for the Interworld Highway, LLC, Resolux, Frontier and National Test Equipment acquisitions was complete within the one-year measurement periods following the respective acquisition dates. Certain estimated values for the Instrumex acquisition, including working capital and other liability adjustments, are fully reservednot yet finalized, and therefore, therethe preliminary purchase price allocation is no net effectsubject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuation will be completed within the one-year measurement period following the acquisition date, and any adjustments will be recorded in the period in which the adjustments are determined. The purchase consideration for each business acquired and the allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:
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(in thousands)Interworld Highway, LLCResoluxFrontierNational Test EquipmentInstrumex
Acquisition dateApril 29, 2022January 3, 2022March 31, 2022June 1, 2022December 1, 2022Total
Current assets$15,018 $10,210 $2,881 $2,187 $3,495 $33,791 
Property, plant and equipment313 459 1,189 642 30 2,633 
Right of use assets— 1,125 9,313 — — 10,438 
Other intangible assets:
Customer relationships6,369 11,400 9,300 2,100 800 29,969 
Trade names4,600 6,100 3,000 — — 13,700 
Other assets10 86 — — 14 110 
Accounts payable(8,856)(3,058)(778)(196)(1,305)(14,193)
Current portion of long-term debt— — — (2,073)— (2,073)
Accrued expenses and other liabilities— (4,747)(1,462)(1,171)(626)(8,006)
Lease liabilities— (1,125)(9,313)— — (10,438)
Long-term debt— — — — (2,105)(2,105)
Goodwill37,236 10,305 11,544 5,703 1,989 66,777 
Total purchase consideration exchanged, net of cash acquired$54,690 $30,755 $25,674 $7,192 $2,292 $120,603 
Cash consideration$54,690 $30,755 $25,674 $6,023 $1,818 $118,960 
Seller's notes— — — 1,169 — 1,169 
Deferred consideration— — — — 474 474 
Total purchase consideration exchanged, net of cash acquired$54,690 $30,755 $25,674 $7,192 $2,292 $120,603 

The consideration for the Frontier acquisition includes a potential earn-out payment of up to $3.0 million based upon the achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2024. Refer to Note 8 – Earnout Liabilities for additional information on the Company's balance sheetearn-out.

Following the initial fair value measurement, the Company updated the purchase price allocation for Instrumex in 2023 related to accrued expenses and other liabilities and long-term debt. The adjustments to these balances resulted in a $0.9 million increase to goodwill and a $1.6 million decrease to the first nine monthstotal purchase consideration, net of 2017.

cash acquired.
As a result of includingacquisitions completed in 2022, the incomeCompany recorded tax effects from excessdeductible goodwill of $53.6 million in 2022 that may result in a tax benefitsbenefit in income tax expense, the effects of the excess tax benefits are no longerfuture periods.

The pro forma information for other acquisitions was included in the calculationestimated unaudited pro forma consolidated financial information for DSG, which is presented below under UnauditedPro Forma Information.

Unaudited Pro Forma Information

The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the Mergers and other acquisitions disclosed above occurred on January 1, 2022 for the acquisition completed during 2023 and January 1, 2021 for the acquisitions completed during 2022. The unaudited pro forma information reflects adjustments including amortization on acquired intangible assets, interest expense, and the related tax effects. This information is presented for informational purposes only and is not necessarily indicative of diluted shares outstanding, resulting in an increasefuture results or the results that would have occurred had the Mergers and other acquisitions been completed on the date indicated.
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
Revenue$438,909 $457,958 $1,347,226 $1,320,226 
Net income$(1,568)$13,056 $8,175 $12,147 

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Actual Results of Business Acquisitions

The following table presents actual results attributable to our business combinations that were included in the number of diluted shares outstanding. The Company adopted this change inunaudited condensed consolidated financial statements for the method of calculating diluted shares outstanding on a prospective basis.

ASU 2016-09 also permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation to either estimate the total number of awards for which the requisite service period will not be rendered, as currently required, or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, the Company elected to change its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment to reduce retained earnings by $178 thousand, as of January 1, 2017.

Additionally, ASU 2016-09 addressed the presentation of employee taxes paid on the statement of cash flows. The Company is now required to present the cost of shares withheld from the employee to satisfy the employees’ income tax liability as a financing activity on the statement of cash flows rather than as an operating cash flow. The Company adopted this change retrospectively. The Company withheld shares with a value of $20 thousandthird quarter and $18 thousand to satisfy employee taxes in the first nine months of 20172023 and 2016, respectively.2022. The results of DSG's legacy Lawson business are included only subsequent to the April 1, 2022 Merger Date, and the results for other acquisitions are only included subsequent to their respective acquisition dates provided above.

Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(in thousands)LawsonOther AcquisitionsTotalLawsonOther AcquisitionsTotal
Revenue$— $104,796 $104,796 $126,693 $71,216 $197,909 
Net Income$— $(7,388)$(7,388)$8,282 $4,363 $12,645 
Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(in thousands)LawsonOther AcquisitionsTotalLawsonOther AcquisitionsTotal
Revenue$— $132,797 $132,797 $250,364 $146,742 $397,106 
Net Income$— $(8,253)$(8,253)$12,883 $12,651 $25,534 
ASU No. 2014-09, Revenue from Contracts with Customers

In May 2014,The Company incurred transaction and integration costs (credits) related to the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principleMergers and other completed and contemplated acquisitions of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle$(0.1) million and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The new standard is effective$9.1 million for the Company's interimthree and annual periods beginning with the first quarter of 2018. The standard is to be applied using one of two retrospective application methods.


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The Company has established a team to address the effect of the new accounting standard. The team has been reviewing the terms and conditions included in its contracts with customers and has developed a methodology to calculate the impact of the pronouncement on its consolidated financial statements. The Company has not yet determined the impact of adopting the standard. The Company expects to adopt ASU 2014-09 January 1, 2018 using the modified retrospective method. Under this method, a cumulative effect adjustment is recorded based on applying the guidance to the customer contracts that were not completed at the date of initial application. As a result, prior periods are not adjusted to reflect application of the new guidance.

Except for the changes described above, there have been no other material changes in the Company's significant accounting policies during the nine months ended September 30, 20172023, respectively, and $2.4 million and $10.8 million for the three and nine months ended September 30, 2022, respectively, which are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Note 4 – Revenue Recognition

Under the definition of a contract as compareddefined by ASC 606, the Company considers contracts to be created at the time an order to purchase product and services is agreed upon regardless of whether there is a written contract. Revenue from customers is recognized when obligations under the terms of a contract are satisfied; this generally occurs with the delivery of products or services. Revenue from customers is measured as the amount of consideration the Company expects to receive in exchange for the delivery of products or services. Contracts may last from one month to one year or more and may have renewal terms that extend indefinitely at the option of either party. Price is typically based on market conditions, competition, changes in the industry and product availability. Volumes fluctuate primarily as a result of customer demand and product availability. Consistent with the way the Company manages its businesses, the Company refers to sales under service agreements, which includes both products (such as parts, equipment and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of the Company’s operations. The Company has no significant financing components in its contracts with customers. The Company records revenue net of certain taxes, such as sales taxes, that are assessed by governmental authorities on the Company’s customers.

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

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

Lawson Segment

The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation, and accordingly, two separate revenue streams. Although Lawson has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no
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price allocation between these obligations. Lawson does not price its offerings based on any allocation between these obligations.

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

Lawson offers a VMI service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided over a short period of time after control of the purchased product has been transferred to the customer. Since certain obligations pursuant to the VMI service agreement have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided and the related performance obligations have been satisfied.

TestEquity Segment

TestEquity’s contracts with customers generally represent a single performance obligation to sell its products. Revenue from contracts with customers reflect the transaction prices for contracts reduced by variable consideration. TestEquity provides a rebate to select customers if pre-determined purchase thresholds are met. The rebate consideration is not in exchange for a distinct product or service. Variable consideration is estimated using the expected-value method considering all reasonably available information, including TestEquity’s historical experience and current expectations, and is reflected in the transaction price when sales are recorded. Sales returns are generally accepted by TestEquity; however, sales returns are not material to the Company’s operations. TestEquity provides an assurance type warranty which is not sold separately and does not represent a separate performance obligation.

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

Gexpro Services Segment

Gexpro Services’ contracts with customers generally represent a single performance obligation to sell its products. Revenue from sales of Gexpro Services’ products is recognized upon transfer of control to the customer, which is typically when the product has been shipped from its distribution facilities. The transaction price is the amount of consideration to which Gexpro Services expects to be entitled in exchange for transferring products to the customer. Revenue is recorded based on the transaction price, which includes fixed consideration and an estimate of variable consideration such as, early payment/volume discounts and rebates. The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant accountingreversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Gexpro Services’ products are marketed and sold primarily to original equipment manufacturers globally. Sales of products are subject to economic conditions and may fluctuate based on changes in the industry, trade policies describedand financial markets. Payment terms on invoiced amounts range from 10 to 120 days. In instances where the timing of revenue recognition differs from the timing of the right to invoice, the Company has determined that a significant financing component does not exist.

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Disaggregated consolidated revenue by geographic area (based on the location to which the product is shipped to):
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
United States$344,920 $284,771 $936,289 $668,504 
Canada35,727 36,879 108,380 82,931 
Europe20,805 13,391 55,261 35,377 
Pacific Rim2,477 2,549 5,468 7,711 
Latin America31,971 8,501 52,839 24,853 
Other3,009 1,060 6,926 3,196 
Total revenue$438,909 $347,151 $1,165,163 $822,572 

Rental Revenue

TestEquity rents new and used electronic test and measurement equipment to customers in our Annual Reportmultiple industries. These leases are classified as operating leases under ASC 842. Rental equipment is included in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheet, and rental revenue is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The unearned rental revenue related to customer prepayments on Form 10-K for the year endedequipment leases was nominal at September 30, 2023 and December 31, 2016.2022.


Lawson leases parts washer machines to customers through its Torrents leasing program. These leases are classified as operating leases under ASC 842. The leased machines are included in Rental equipment, net, in the Unaudited Condensed Consolidated Balance Sheet, and the leasing revenue is recognized on a straight-line basis and is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The unearned rental revenue related to customer prepayments on equipment leases was nominal at September 30, 2023 and December 31, 2022.

Rental revenue from operating leases:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
Revenue from operating leases$4,323 $5,542 $12,831 $13,879 

Note 2 — 5 – Supplemental Financial Statement Information

Restricted Cash


The Company has agreed to maintain $0.8restricted cash of $20.7 million under agreements with outside parties. An escrow account of $12.5 million was established in a money market accountconjunction with the Hisco Transaction, to be released upon Hisco meeting certain working capital and other post-closing requirements as collateral for an outside party that is providing certain commercial card processing services forof the Company.one year post-acquisition date. The Company is restricted from withdrawing this balance without the prior consent of the outside party duringsellers. The remaining balance of $8.2 million of restricted cash represents collateral for certain borrowings under the term2023 Credit Agreement, and the Company is restricted from withdrawing this balance without the prior consent of the agreement.respective lenders.


Note 3 — Inventories, net


Inventories, net, consisting primarily of purchased goods which areproducts and manufactured electronic equipment offered for resale, were as follows:
(in thousands)September 30, 2023December 31, 2022
Inventories, gross$329,221 $275,072 
Reserve for obsolete and excess inventory(15,884)(10,698)
Inventories, net$313,337 $264,374 
 (Dollars in thousands)
 September 30, 2017 December 31, 2016
Inventories, gross$48,740
 $48,038
Reserve for obsolete and excess inventory(5,399) (5,477)
Inventories, net$43,341
 $42,561

Note 4 - Sale of property

In the second quarter of 2017, the Company completed the sale of its distribution center located in Fairfield, New Jersey, primarily to utilize excess capacity within it's supply chain network. The Company received net cash proceeds of $6.2 million and recorded a gain on the transaction of $5.4 million.

Note 5 — Acquisitions and Goodwill

Primarily to expand its sales coverage, obtain experienced sales representatives and improve its presence in Canada, the Company completed three acquisitions in 2016. In March 2016, the Company acquired the assets of Perfect Products Company of Michigan ("Perfect Products"), an auto parts distributor for approximately $1.3 million in cash and $30 thousand in contingent consideration. In May 2016, the Company acquired the assets of F.B. Feeney Hardware ("F. B. Feeney") in Ontario, Canada, for approximately $1.3 million in cash and $0.1 million in contingent consideration. And, in November 2016, the Company acquired the assets of Mattic Industries Limited ("Mattic"), an industrial parts distributor located in western Canada, for approximately $3.5 million in cash and $0.3 million in contingent consideration.

The following table contains unaudited pro forma net sales and net income for Lawson Products assuming the Perfect Products, F.B Feeney and Mattic acquisitions closed on January 1, 2015.
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 (Dollars in thousands)
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net sales       
     Actual$75,651
 $70,199
 $225,274
 $209,258
     Pro forma75,651
 70,978
 225,274
 212,738
        
Net income       
     Actual$1,321
 $1,825
 $9,451
 $3,014
     Pro forma1,321
 2,048
 9,451
 3,662


8


Property, Plant and Equipment, net


The pro forma disclosuresComponents of property, plant and equipment were as follows:
(in thousands)September 30, 2023December 31, 2022
Land$16,753 $9,578 
Buildings and improvements50,009 27,199 
Machinery and equipment48,235 26,948 
Capitalized software9,140 7,889 
Furniture and fixtures10,707 6,346 
Vehicles1,703 1,713 
Construction in progress(1)
3,804 3,140 
Total140,351 82,813 
Accumulated depreciation and amortization(28,402)(18,418)
Property, plant and equipment, net$111,949 $64,395 
(1)Construction in progress primarily related to upgrades to certain of the Company's information technology systems that we expect to place in service in the table above include adjustmentsnext 12 months.

Depreciation expense for amortizationproperty, plant and equipment was $3.5 million and $1.1 million for the third quarter of intangible assets2023 and acquisition costs to reflect results that are more representative of the combined results of the transactions as if the Mattic, F.B Feeney2022, respectively, and Perfect Product acquisitions closed on January 1, 2015 rather than on the actual acquisition dates. This pro forma information utilizes certain estimates, is presented for illustrative purposes only$9.5 million and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.

Goodwill activity$4.0 million for the first nine months of 20172023 and 2016 is2022, respectively. Amortization expense for capitalized software was $0.5 million and $0.0 million for the third quarter of 2023 and 2022, respectively, and $2.0 million and $1.0 million for the first nine months of 2023 and 2022, respectively.

Rental Equipment, net

Rental equipment, net consisted of the following:
(in thousands)September 30, 2023December 31, 2022
Rental equipment$63,310 $63,184 
Accumulated depreciation(36,990)(36,045)
Rental equipment, net$26,320 $27,139 

Depreciation expense included in cost of sales for rental equipment was $1.7 million and $2.3 million for the table below:third quarter of 2023 and 2022, respectively and $5.9 million and $5.4 million for the first nine months of 2023 and 2022, respectively. Refer to Note 4 – Revenue Recognitionfor a discussion on the Company's activities as lessor.

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 (Dollars in thousands)
 Nine Months Ended September 30,
 2017 2016
Beginning balance$5,520
 $319
    Acquisition(73) 2,442
Impact of foreign exchange342
 12
Ending balance$5,789
 $2,773
Accrued Expenses and Other Current Liabilities


The reduction in acquisition activityAccrued expenses and other current liabilities consisted of $0.1 million in 2017 resulted from a non-cash adjustment to the estimated purchase price allocation to inventory originally recorded in 2016.following:

(in thousands)September 30, 2023December 31, 2022
Accrued compensation$27,532 $24,094 
Deferred acquisition payments and accrued earnout liabilities16,461 1,383 
Accrued severance and acquisition related retention bonus12,648 927 
Accrued and withheld taxes, other than income taxes8,758 4,885 
Accrued stock-based compensation5,055 3,340 
Accrued customer rebates4,710 5,053 
Accrued interest3,592 1,775 
Accrued health benefits1,743 1,306 
Deferred revenue1,136 2,313 
Accrued income taxes734 731 
Other14,822 16,870 
Total accrued expenses and other current liabilities$97,191 $62,677 

Other Liabilities

Other liabilities consisted of the following:
(in thousands)September 30, 2023December 31, 2022
Security bonus plan$9,109 $9,651 
Deferred compensation10,854 9,962 
Other4,658 4,036 
Total other liabilities$24,621 $23,649 
Note 6 — Loan Agreement– Goodwill and Intangible Assets


In 2012,Goodwill

Changes in the Company entered into a Loancarrying amount of goodwill by segment were as follows:
(in thousands)LawsonTestEquityGexpro ServicesAll OtherTotal
Balance at December 31, 2022$155,773 $114,104 $55,421 $22,750 $348,048 
Acquisitions(1)
— 49,941 — — 49,941 
Impact of foreign exchange rates(11)— (174)(42)(227)
Balance at September 30, 2023$155,762 $164,045 $55,247 $22,708 $397,762 
(1)Refer to Note 3 – Business Acquisitions for information related to measurement period adjustments.

Intangible Assets

The gross carrying amount and Security Agreement (“Loan Agreement”). The Loan Agreementaccumulated amortization for definite-lived intangible assets were as follows:
September 30, 2023December 31, 2022
(in thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
Trade names$117,780 $(26,498)$91,282 $92,286 $(17,401)$74,885 
Customer relationships234,346 (64,276)170,070 192,934 (44,481)148,453 
Other (1)
7,974 (4,007)3,967 7,961 (3,305)4,656 
Total$360,100 $(94,781)$265,319 $293,181 $(65,187)$227,994 
(1)    Other primarily consists of a $40.0non-compete agreements.
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Amortization expense for definite-lived intangible assets was $11.3 million revolving line of credit facility, which includes a $10.0and $29.9 million sub-facility for letters of credit. Certain termsthe three and nine months ended September 30, 2023, respectively, and $5.6 million and $20.9 million for the three and nine months ended September 30, 2022, respectively. Amortization expense related to intangible assets was recorded in Selling, general and administrative expenses.

The estimated aggregate amortization expense for the remaining year 2023 and each of the original Loan Agreement have been revisednext five years are as follows:
(in thousands)Amortization
Remaining 2023$8,952 
202442,856 
202539,191 
202636,217 
202731,409 
202827,537 
Thereafter79,157 
Total$265,319 

Note 7 – Leases

Activities as Lessee

The Company leases property used for warehousing, distribution centers, office space, branch locations, equipment and vehicles. The expenses generated by subsequent amendments.leasing activity for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
Lease TypeClassification2023202220232022
Operating Lease Expense (1)
Operating expenses$5,850 $4,519 $14,980 $10,581 
Financing Lease AmortizationOperating expenses133 207 393 471 
Financing Lease InterestInterest expense23 37 65 68 
Financing Lease Expense156 244 458 539 
Net Lease Cost$6,006 $4,763 $15,438 $11,120 
Effective October 3, 2017, the Company entered into a Consent(1)     Includes short term lease expense, which is immaterial.

24

The value of net assets and Ninth Amendment to Loan and Security Agreement that provides the creditor's consent, to the acquisition of all of the issued and outstanding shares of The Bolt Supply House Ltd. ("Bolt Supply House") (see Note 11 - Subsequent Events) and revised the Loan Facility to permit Bolt Supply House to continue its existing line of credit. Additionally, in October, the Company borrowed $16.3 million from its revolving line of credit facilityliabilities related to our operating and finance leases as of September 30, 2023 and December 31, 2022 was as follows (in thousands):
Lease TypeSeptember 30, 2023December 31, 2022
Total ROU operating lease assets (1)
$79,791 $46,755 
Total ROU financing lease assets (2)
1,514 1,519 
Total lease assets$81,305 $48,274 
Total current operating lease liabilities
$12,711 $9,480 
Total current financing lease liabilities
530 484 
Total current lease liabilities$13,241 $9,964 
Total long term operating lease liabilities
$69,558 $38,898 
Total long term financing lease liabilities
795 930 
Total long term lease liabilities$70,353 $39,828 
(1)Operating lease assets are recorded net of accumulated amortization of $23.2 million as of September 30, 2023 and $14.8 million as of December 31, 2022.
(2)Financing lease assets are recorded net of accumulated amortization as a component of Other assets in the Bolt Supply House acquisition.Unaudited Condensed Consolidated Balance Sheet of $1.3 million as of September 30, 2023 and $0.9 million as of December 31, 2022.


The Loan Agreement,value of lease liabilities related to our operating and finance leases as amended, expires in August 2020. Due to the lock box arrangement and a subjective acceleration clause contained in the Loan Agreement, any outstanding borrowings under the revolving line of credit are classifiedSeptember 30, 2023 was as a current liability.follows (in thousands):

Maturity Date of Lease LiabilitiesOperating LeasesFinancing LeasesTotal
Remaining 2023$5,030 $165 $5,195 
202418,477 558 19,035 
202518,179 364 18,543 
202614,406 282 14,688 
202712,326 95 12,421 
Thereafter40,120 5 40,125 
Total lease payments108,538 1,469 110,007 
Less: Interest(26,269)(144)(26,413)
Present value of lease liabilities$82,269 $1,325 $83,594 
Currently, credit available under the Loan Agreement, as amended, is based upon:

a)85% of the face amount of the Company’s eligible accounts receivable, generally less than 60 days past due, and

b)the lesser of 60% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months, or $20.0 million.


The applicableweighted average lease terms and interest rates for borrowings are at the Prime rate or, if the Company elects, the LIBOR rate plus 1.50% to 1.85% based on the Company’s debt to EBITDA ratio. The Loan Agreement is secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends are restricted to amounts not to exceed $7.0 million annually.

Atleases held as of September 30, 2017, the Company had no borrowings under its revolving line2023 were as follows:
Lease TypeWeighted Average Term in YearsWeighted Average Interest Rate
Operating Leases6.87.8%
Financing Leases2.86.9%

The cash outflows of credit facility and additional borrowing availability of $36.0 million. The Company paid interest of $0.4 million and $0.5 millionleasing activity for the nine months ended September 30, 20172023 and 2016, respectively.2022 were as follows (in thousands):
Nine Months Ended September 30,
Cash Flow SourceClassification20232022
Operating cash flows from operating leasesOperating activities$(9,083)$(3,330)
Operating cash flows from financing leasesOperating activities(186)37 
Financing cash flows from financing leasesFinancing activities(358)(457)

Refer to Note 4 – Revenue Recognition for a discussion on the Company's activities as lessor.

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Note 8 – Earnout Liabilities

Combination with TestEquity and Gexpro Services

On the Merger Date, the Company recorded an earnout derivative liability for the two earnout provisions within the Merger Agreements. The weighted averageCompany estimated the initial fair value of the earnout derivative liability based on an aggregate of 2,324,000 additional shares available to be issued under the two earnout provisions of the Merger Agreements. The aggregate of 2,324,000 shares was comprised of 1,400,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the TestEquity Equityholder and 924,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the Gexpro Services Stockholder, in each case as of the Merger Date. The additional 1,076,000 shares that were potentially issuable as of the Merger Date under the earnouts were not recorded as an earnout derivative liability as the acquisition contingency for these shares was determined to have been met at the Merger Date.

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

The estimated aggregate fair value of the earnout derivative liability recorded on the April 1, 2022 Merger Date was 3.91%$43.9 million, with an offsetting entry to additional paid-in capital. As of April 29, 2022 and December 31, 2022, 1,400,000 and 924,000 of the 2,324,000 shares, respectively, were reclassified to equity, as the contingencies had been determined to have been met. There was no remaining earnout derivative liability at December 31, 2022. Immediately prior to the reclassifications, the respective shares were remeasured to fair value. For the year ended December 31, 2022, the Company recorded income of $0.3 million as a component of Change in fair value of earnout liabilities in the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) due to changes in the fair value of the earnout derivative liability.

On March 20, 2023, all of the 3.4 million shares of DSG common stock available to be issued under the earnout provisions within the Merger Agreements were issued in accordance with the two earnout provisions within the Merger Agreements.

As the remaining additional shares had been reclassified to equity as of December 31, 2022, there was no change in fair value for the first nine months of 2023. For the three and nine months ended September 30, 2022, the Company recorded income of $10.3 million and $4.6 million, respectively, as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) due to changes in the fair value of the earn-out derivative liability.

Hisco Acquisition

The Hisco Transaction includes a potential earn-out payment of up to $12.6 million, subject to Hisco achieving certain performance targets. The earn-out payment is calculated based on the gross profit of Hisco and its affiliates for the twelve months ending October 31, 2023, subject to certain adjustments and exclusions set forth in the Purchase Agreement. The fair value of the contingent consideration arrangement was classified as a Level 3 instrument and was determined using a probability-based scenario analysis approach. As of June 8, 2023 (the Hisco Transaction date) and September 30, 2023, the fair value of the earn-out was $6.0 million and $0.1 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

Prior to the Hisco Transaction by DSG, Hisco had a preexisting contingent consideration arrangement from an acquisition Hisco made during 2022. DSG assumed this liability with a potential earn-out payment of up to $3.8 million, subject to the achievement of certain EBITDA performance targets for the twelve months ending December 27, 2023, subject to certain adjustments and exclusions set forth in the Purchase Agreement. The fair value of the contingent consideration arrangement was classified as a Level 3 instrument and was determined using a probability-based scenario analysis approach. As of June 8, 2023 (the Hisco acquisition date) and September 30, 2023, the fair value of the earn-out was $1.5 million and $1.5 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet. There was no change in the fair value of the earn-out liability for the nine months ended September 30, 20172023.

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Frontier Acquisition

The consideration for the Frontier acquisition includes a potential earn-out payment of up to $3.0 million based upon the achievement of certain milestones and 3.50%relative thresholds during the earn out measurement period which ends on December 31, 2024, with payments made annually beginning in 2023 and ending in 2025. During the first quarter of 2023, a $1.0 million earn-out payment was made based on the achievement of certain milestones in 2022. The fair value of the contingent consideration arrangement was classified as a Level 3 instrument and was determined using a probability-based scenario analysis approach. As of March 31, 2022 (the Frontier acquisition date), December 31, 2022 and September 30, 2023, the fair value of the earn-out was $0.9 million, $1.7 million and $0.0 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheet. The Company recorded income of $0.7 million for changes in the fair value of the earn-out liability for the nine months ended September 30, 2016.2023 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).



Note 9 – Debt


TableThe Company's outstanding long-term debt was comprised of Contents
the following:

(in thousands)September 30, 2023December 31, 2022
Senior secured revolving credit facility$— $122,000 
Senior secured term loan234,375 243,750 
Senior secured delayed draw term loan48,125 50,000 
Incremental term loan305,000 — 
Other revolving line of credit2,085 1,352 
Total debt589,585 417,102 
Less current portion of long-term debt(32,335)(16,352)
Less deferred financing costs(6,724)(4,925)
Total long-term debt$550,526 $395,825 
In addition
Amended and Restated Credit Agreement

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

On June 8, 2023, the Company and certain of its subsidiaries entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”). The First Amendment provides for a $305 million incremental term loan.

The 2023 Credit Agreement provides for (i) a $200 million senior secured revolving credit facility, with a $25 million letter of credit sub-facility and a $10 million swingline loan sub-facility, (ii) a $250 million senior secured initial term loan facility, (iii) a $305 million incremental term loan, (iv) a $50 million senior secured delayed draw term loan facility and (v) the Company to increase the commitments thereunder from time to time by up to $200 million in the aggregate, subject to, among other customary representations, warrantiesthings, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the 2023 Credit Agreement.

On June 8, 2023, in connection with the Hisco Transaction, the Company borrowed the $305 million under the incremental term loan. These borrowings were used, among other things, to partially fund the Hisco Transaction, to repay certain existing indebtedness of Hisco, HISCO Acquisition Subsidiary I, Inc. and HISCOCAN Inc. and their respective subsidiaries and to pay fees and expenses incurred in connection with the Hisco Transaction and the First Amendment. Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction.

Each of the loans under the 2023 Credit Agreement mature on April 1, 2027. The Company is required to meetrepay principal of approximately $7.6 million each quarter.
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Net of outstanding letters of credit, there was $198.3 million of borrowing availability under the revolving credit facility as of September 30, 2023. The weighted average interest rate from January 1, 2023 through September 30, 2023 was 7.4%.

The loans under the 2023 Credit Agreement bear interest, at the Company’s option, at a minimum trailing twelve month EBITDArate equal to fixed charges ratio,(i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the amended Loan2023 Credit Agreement), plus, in each case, an additional margin ranging from 0.0% to 1.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Credit Agreement ifor (ii) the excess borrowing capacity is below $10.0 million. Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the 2023 Credit Agreement), plus, in each case, an additional margin ranging from 1.0% to 2.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Credit Agreement.

On April 1, 2022, deferred financing costs of $4.0 million were incurred in connection with the original Amended and Restated Credit Agreement, and on June 8, 2023, deferred financing costs of $3.4 million were incurred in connection with the First Amendment. Deferred financing costs are amortized over the life of the debt instrument and reported as interest expense. As of September 30, 2017,2023, total deferred financing costs net of accumulated amortization were $9.2 million of which $6.7 million are included in Long-term debt, less current portion, net (related to the senior secured term loan, senior secured delayed draw term loan and incremental term loan) and $2.5 million are included in Other assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance Sheet.

The 2023 Credit Agreement contains various covenants, including financial maintenance covenants requiring the Company to maintain compliance with a consolidated minimum interest coverage ratio and a maximum total net leverage ratio, each determined in accordance with the terms of the 2023 Credit Agreement. The Company was in compliance with all financial covenants set forth in the 2023 Credit Agreement as of September 30, 2023.

Note 10 – Stock-Based Compensation

The Company recorded stock-based compensation expense of $1.0 million and $5.4 million for the three and nine months ended September 30, 2023, respectively, and a benefit of $3.6 million and expense of $0.4 million for the three and nine months ended September 30, 2022, respectively. A portion of the Company's borrowing capacity exceeded $10.0 million. Therefore,stock-based awards are liability-classified. Accordingly, changes in the market value of DSG common stock may result in stock-based compensation expense or benefit in certain periods. A stock-based compensation liability of $5.1 million as of September 30, 2023 and $3.3 million as of December 31, 2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

Impact of Stock Split

The equity compensation plans contain anti-dilution provisions whereby in the event of any change in the capitalization of the Company was(including in the event of a stock split), the number and type of awards underlying outstanding stock-based compensation awards must be adjusted, as appropriate, in order to prevent dilution or enhancement of rights. The impact of these provisions resulted in a modification of all outstanding stock-based compensation awards upon the Stock Split. As the fair value of the awards immediately after the Stock Split did not subjectchange when compared to this financial covenant, however, for informational purposes the fair value of such awards immediately prior to the Stock Split, no incremental compensation costs were recognized as a result of such modifications. In addition, there was no change to the financial covenantvesting conditions or classification of each of the outstanding stock-based compensation awards.

Restricted Stock Awards

For the nine months ended September 30, 2023, the Company issued approximately 53,000 Restricted stock awards ("RSAs") that vest over five years from the grant date with a grant date fair value of $1.2 million. Upon vesting, the vested RSAs are exchanged for an equal number of shares of DSG common stock. The participants have no voting or dividend rights with the RSAs. The RSAs are valued at the closing price of shares of DSG common stock on the date of grant and the expense is provided below:recorded ratably over the vesting period.

Stock Options

For the nine months ended September 30, 2023, the Company issued approximately 1,354,000 stock options to key employees that vest over five years from the grant date. The fair value was determined using a Black-Scholes valuation model with a grant date fair value of $9.6 million.Each stock option can be exchanged for one share of DSG common stock at the stated exercise price. Upon vesting, stock options are recognized as a component of equity. Unrecognized compensation related
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to stock options as of September 30, 2023 was $10.0 million, which is expected to be recognized over a weighted-average period of 2.3 years.

Activity related to the Company’s stock options during 2023 was as follows:
Number of Stock OptionsWeighted Average Exercise Price
Outstanding on December 31, 2022576,000 $38.80 
Granted1,353,706 37.05 
Outstanding on September 30, 20231,929,706 37.50 
Exercisable on September 30, 2023180,800 29.74 

The weighted average fair value assumptions used in the Black-Scholes model for the stock options issued during 2023 were as follows:
Quarterly Financial CovenantExpected volatilityRequirementActual45.2% to 45.5%
EBITDARisk-free rate of return3.6% to fixed charges ratio4.5%
Expected term (in years)6.2 years to 6.5 years
Expected annual dividend1.10 : 1.003.20 : 1.00$0


The expected volatility was based on the historic volatility of the Company's stock price commensurate with the expected life of the stock options. The risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the stock options. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method allowed by the SEC, which approximates our historical experience. The estimated annual dividend was based on the recent dividend payout trend.

Note 11 – Stockholders' Equity

Stock Split

On August 15, 2023, DSG announced that its Board of Directors approved and declared the Stock Split which entitled each stockholder of record as of the close of business on August 25, 2023 to receive one additional share of DSG common stock for each share of DSG common stock then-held. The additional shares were distributed after the close of trading on August 31, 2023, and shares of DSG common stock began trading at the split-adjusted basis on September 1, 2023. Accordingly, all share and per share amounts presented herein have been retroactively adjusted to reflect the impact of the Stock Split. Stockholders’ equity has been retroactively adjusted, where applicable, to give effect to the Stock Split for all periods presented by reclassifying the par value of the additional shares issued in connection with the Stock Split to Common stock from Capital in excess of par value.

Rights Offering

On May 9, 2023, the Company commenced a Rights Offering to raise gross proceeds of up to approximately $100 million. The Rights Offering provided one transferable subscription right for each share of DSG common stock held by holders of DSG common stock on record as of the close of business on May 1, 2023. Each subscription right entitled the holder to purchase 0.0525 shares of DSG common stock at a subscription price of $22.50 per share. The subscription rights were transferable, but were not listed for trading on any stock exchange or market. In addition, holders of subscription rights who fully exercised their subscription rights were entitled to oversubscribe for additional shares of DSG common stock, subject to proration.

The Rights Offering closed on May 30, 2023 and was fully subscribed (taking into account the exercise of over-subscription rights) and raised approximately $100 million and resulted in the issuance of 4,444,444 shares of DSG common stock, at a purchase price of $22.50 per share. The Company incurred transaction costs related to the issuance of DSG common stock for the Rights Offering of $1.5 million, which were recorded against Capital in excess of par value in the Unaudited Condensed Consolidated Balance Sheet.

DSG used the proceeds from the Rights Offering, in combination with borrowings under the 2023 Credit Agreement, to fund the Hisco Transaction.
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Stock Repurchase Program

Under an existing stock repurchase program authorized by the Board of Directors, the Company may repurchase its common stock from time to time in open market transactions, privately negotiated transactions or by other methods. No shares were repurchased during the three and nine months endedSeptember 30, 2023 under the Company's stock repurchase plan. During the third quarter of 2022, the Company repurchased 108,178 shares of Company common stock under the repurchase plan at an average cost of $17.93 per share for a total cost of $1.9 million. The remaining availability for stock repurchases under the program was $7.6 million at September 30, 2023.

Note 7 — Severance Reserve12 – Earnings Per Share


ChangesAs a result of the Stock Split and Mergers discussed in Note 1 – Nature of Operations and Basis of Presentation, all historical per share data, number of shares and numbers of equity awards were retroactively adjusted. The following table provides the Company’s reserve for severance ascomputation of September 30, 2017basic and 2016 were as follows:diluted earnings per share:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except share and per share data)2023202220232022
Basic income per share:
Net income (loss)$(1,568)$16,541 $7,363 $9,289 
Basic weighted average shares outstanding46,737,443 38,879,992 44,216,541 34,287,628 
Basic income (loss) per share of common stock$(0.03)$0.43 $0.17 $0.27 
Diluted income per share:
Net income (loss)$(1,568)$16,541 $7,363 $9,289 
Basic weighted average shares outstanding46,737,443 38,879,992 44,216,541 34,287,628 
Effect of dilutive securities— 426,716 380,878 626,506 
Diluted weighted average shares outstanding46,737,443 39,306,708 44,597,419 34,914,134 
Diluted income (loss) per share of common stock$(0.03)$0.42 $0.17 $0.27 
Anti-dilutive securities excluded from the calculation of diluted income per share448,910 493,914 — 496,000 
 (Dollars in thousands)
 Nine Months Ended September 30,
 2017 2016
Balance at beginning of period$1,710
 $697
Charged to earnings595
 714
Payments(1,625) (950)
Balance at end of period$680
 $461


The remaining severance liabilities outstanding as of September 30, 2017 will be substantially paid by the end of 2017.

Note 8 — Stock-Based Compensation13 – Income Taxes


The Company recorded stock-based compensationincome tax expense of $2.7$1.0 million and, a benefit of $1.3 million(171.3)% effective tax rate for the first nine months of 2017 and 2016, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock.

A summary of stock-based awards activity during the ninethree months ended September 30, 2017 follows:2023. Income tax expense of $8.5 million, a 33.9% effective tax rate was recorded for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2023 was higher than the U.S. statutory rate primarily due to adjustments to uncertain tax positions, a book loss for the current quarter, and other permanent items. 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, transaction costs, and other permanent items.


Stock Performance Rights ("SPRs")
SPRs entitle the recipient to receiveThe Company recorded income tax expense of $3.6 million, a cash payment equal to the excess of the market value of the Company's common stock over the SPR exercise price when the SPRs are surrendered. A liability of $9.0 million, reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses in the condensed consolidated balance sheets. Activity related to the Company’s SPRs33.1% effective tax rate for the nine months ended September 30, 20172023. Income tax expense of $3.9 million, a 29.6% effective tax rate was as follows:
 Number of SPRs Weighted Average Exercise Price
Outstanding on December 31, 2016946,701
 $19.60
Granted78,948
 25.12
Exercised(34,095) 12.99
Cancelled(30,000) 36.71
Outstanding on September 30, 2017961,554
 19.76


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Table of Contents

Restricted Stock Awards ("RSAs")
Each RSA is exchangeable for one share of the Company's common stock at the end of the vesting period. Activity related to the Company’s RSAs for the nine months ended September 30, 2017 was as follows:
Restricted Stock Awards
Outstanding on December 31, 201631,897
Granted83,920
Exchanged for shares(31,897)
Outstanding on September 30, 201783,920

Market Stock Units ("MSUs")
MSU's are exchangeable for the Company's common stock at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 150% of the underlying MSU, will be determined based upon the trailing sixty-day weighted average closing price of the Company's common stock upon vesting. Activity related to the Company’s MSUs for the nine months ended September 30, 2017 was as follows:
 Number of Market Stock Units Maximum Shares Potentially Issuable
Outstanding on December 31, 2016149,532
 224,298
Granted98,243
 147,065
Outstanding on September 30, 2017247,775
 371,363

Note 9 — Income Taxes

At each reporting date, Lawson’s management considers new evidence, both positive and negative, that could impact management’s view with regard to the realization of its deferred tax assets and the reversal of the corresponding valuation allowances. Although the Company has generated pre-tax profits over the past three quarters and has begun to utilize a small portion of its net operating loss carryforwards over the past two years, management feels that additional positive evidence is necessary in order to conclude that it is more likely than not that it will be able to realize its deferred tax assets. We believe that there is a reasonable possibility that within the next twelve months, sufficient evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. As of September 30, 2017, substantially all deferred tax assets remain subject to a tax valuation allowance.

If the Company continues to demonstrate that it can consistently generate income in future quarters, it may lead to a determination that there is sufficient positive evidence to conclude that it is more likely than not that the company will be able to utilize its deferred tax assets to offset future taxable income. This would lead to the reduction of all or a portion of the valuation allowance resulting in an income tax benefit for the period in which the reduction is recorded. The Company will continue to closely monitor all positive and negative evidence and will re-assess its position on a quarterly basis.

Although the Company is in this full tax valuation allowance position, income tax expenses of $0.8 million and $0.5 million were recorded for the nine months ended September 30, 2017 and 2016, respectively,2022. The effective tax rate for the nine months ended September 30, 2023 was higher than the U.S. statutory rate primarily due to reservesstate taxes, foreign operations, and other permanent items, offset by the release of a reserve for an uncertain tax positions, federal alternative minimumbenefit. The effective tax rate for the nine months ended September 30, 2022 was higher than the U.S. statutory rate primarily due to state taxes, transaction costs, and state taxes.other permanent items.

In 2017, the company increased its deferred tax assets and related valuation allowance by $7.2 million that may arise from future settlement of uncertain tax positions in Canada. There was no impact to the Company's consolidated statements of income and comprehensive income, balance sheets or statements of cash flows, as the company had valuation allowances equal to the value of the deferred tax assets.


The Company and its subsidiaries are subject to U.S. Federalfederal income tax, as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2017,2023, the Company is subject to U.S. Federalfederal income tax examinations for the years 20142019 through 20162021 and income tax examinations from various other jurisdictions for the years 20112016 through 2016.2022.


Earnings from the Company’s foreign subsidiarysubsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise wouldmay subject the Company to bothforeign withholding taxes and U.S. Federalfederal and state income taxes, as adjusted for foreign tax credits.

taxes.
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Note 14 – Commitments and Contingencies

Merger Litigation

In February 2022, three purported DSG stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of DSG (collectively, the “Books and Records Demands”). One stated purpose of the Books and Records Demands was to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG Board of Directors’ approval of the Mergers. On March 16, 2022, one of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Robert Garfield v. Lawson Products, Inc., Case No. 2022-0252, in the Court of Chancery of the State of Delaware against DSG (the “Garfield Action”). On March 22, 2022, another of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Jeffrey Edelman v. Lawson Products, Inc., Case No. 2022-0270, in the Court of Chancery of the State of Delaware against DSG (the “Edelman Action”). The Garfield Action and the Edelman Action, which were consolidated and re-captioned as Lawson Products, Inc. Section 220 Litigation, Case No. 2022-0270, are collectively referred to as the “Books and Records Actions.” The Books and Records Actions sought to compel inspection of certain books and records of DSG to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG Board of Directors’ approval of the Mergers. Following briefing, the Delaware Court of Chancery held a trial on July 14, 2022 to adjudicate the Books and Records Actions. At the conclusion of the trial, the Court ruled orally that the stockholders’ demands would be granted only in one respect (production of documents sufficient to show the identities of any guarantors of debt of the acquired companies) and the Court denied the remainder of the stockholders’ requests. The Court’s ruling was memorialized in an order issued on July 20, 2022. Thereafter, DSG produced excerpts of certain documents as required by the Court's ruling and subsequent order.

On October 3, 2022, the plaintiffs in the Books and Records Actions filed a shareholder derivative action (the “Derivative Action”) entitled Jeffrey Edelman and Robert Garfield v. John Bryan King et al., Case No. 2022-0886, in the Court of Chancery of the State of Delaware (the "Delaware Chancery Court"). The Derivative Action names as defendants J. Bryan King, Lee S. Hillman, Bianca A. Rhodes, Mark F. Moon, Andrew B. Albert, I. Steven Edelson and Ronald J. Knutson (collectively, “Director and Officer Defendants”), and LKCM Headwater Investments II, L.P., LKCM Headwater II Sidecar Partnership, L.P., Headwater Lawson Investors, LLC, PDLP Lawson, LLC, LKCM Investment Partnership, L.P., LKCM Micro-Cap Partnership, L.P., LKCM Core Discipline, L.P. and Luther King Capital Management Corporation (collectively, the “LKCM Defendants”). Purporting to act on behalf of DSG, in the Derivative Action the plaintiffs allege, among other things, various claims of alleged breach of fiduciary duty against the Director and Officer Defendants and the LKCM Defendants in connection with the Mergers. The Derivative Action seeks, among other things, money damages, equitable relief and the costs of the Derivative Action, including reasonable attorneys’, accountants’ and experts’ fees. On October 24, 2022, the plaintiffs voluntarily dismissed PDLP Lawson, LLC and LKCM Investment Partnership, L.P. from the Derivative Action without prejudice.

The Delaware Chancery Court held a hearing on September 13, 2023, to hear arguments on the defendants’ motions to dismiss. At the conclusion of the hearing, in rulings issued on September 13, 2023, and September 19, 2023, the entire complaint was dismissed with prejudice for failure to state a claim. On October 16, 2023, the plaintiffs filed a notice of appeal from the dismissal of their claims with respect to all defendants other than the members of the Special Committee (Messrs. Hillman, Albert and Edelson) and Mr. Moon. The Delaware Supreme Court has not set a date for the hearing on the plaintiffs’ appeal of the ruling.

DSG disagrees with and intends to vigorously defend against the Derivative Action. The Derivative Action could result in additional costs to DSG, including costs associated with the indemnification of directors and officers. At this time, DSG is unable to predict the ultimate outcome of the Derivative Action or, if the outcome is adverse, to reasonably estimate an amount or range of reasonably possible loss, if any, associated with the Derivative Action. Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for these matters. No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Mergers.

Cyber Incident Litigation

On February 10, — Contingent Liabilities2022, DSG disclosed that its computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG entitled Lardone Davis, on behalf of himself and all others similarly situated,

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v. Lawson Products, Inc., Case No. 1:23-cv-02118, in the United States District Court for the Northern District of Illinois, Eastern Division. The plaintiff in this case, who purports to represent the class of individuals harmed by alleged actions and/or omissions by DSG in connection with the Cyber Incident, asserts a variety of common law and statutory claims seeking monetary damages, injunctive relief and other related relief related to the potential unauthorized access by third parties to personal identifiable information and protected health information.

DSG disagrees with and intends to vigorously defend against the Cyber Incident Suit. The Cyber Incident Suit could result in additional costs and losses to DSG, although, at this time, DSG is unable to reasonably estimate the amount or range of reasonably possible loss, if any, that might result from adverse judgments, settlements, fines, penalties or other resolution of these proceedings based on the early stage of this proceeding, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for the Cyber Incident Suit. No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Cyber Incident.

Environmental Matter

In 2012, the Company identifiedit was determined that a Company owned site it owns in Decatur, Alabama, containscontained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, including the measurementprepare a remediation plan, and monitoring of the site. In August 2013,enroll the site was enrolled in Alabama'sthe Alabama Department of Environmental Management (“ADEM”) voluntary cleanup program. On October 30, 2014, the Company received estimates from its environmental consulting firm for three potential

A remediation solutions.plan was approved by ADEM in 2018. The estimates included a range of viable remedial approaches. The first solution included limited excavation and removal of the contaminated soil along with an extensive monitoring period. The second solution included the first solution plus the installation of a groundwater extraction system. The third scenario included the first and second solutions plus treatment injections to reduce the degradation time. The estimated expenditures over the life of the three scenarios ranged from $0.3 million to $1.4 million. As the Company had determined that a loss was probable and no scenario was more likely than the other at that time, a liability in the amount of $0.3 million was established in 2014.

During 2015, after further evidence had been collected and analyzed, the Company concluded that it was probable that future remediation would be required, and accordingly accrued an additional $0.9 million for the estimated costs.

In the third quarter of 2017 the Company received estimates from its environmental consulting firm for two new remediation solutions based on a chemical injection process. The first solution would consistplan consists of chemical injections throughout the entire site to directly eliminateaffected area, as well as subsequent monitoring of the hazardous substancesarea. The injection process was completed in the soilfirst quarter of 2019 and groundwater.the environmental consulting firm is monitoring the affected area. At September 30, 2023 the Company had approximately $0.1 million accrued for potential monitoring costs included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet. The second solution would consist of chemical injections around the perimeter of the site to prevent the migration of the hazardous chemicals off-site. Neither solution would require additional excavation or repairs to be made to the property. Additionally, the estimated requiredcosts for future monitoring period would be substantially reduced. The estimated expenditures over an 18 month period under the two injection scenarios ranged from $0.9 million to $2.0 million.are not significant and have been fully accrued. The Company does not expect to capitalize any amounts related to thesethe remediation options.plan.


Purchase commitments

The Company has determined that it will initially proceedenters into inventory purchase commitments with third parties in the methodordinary course of injecting chemicals around the perimeter of the site to prevent the migration of the hazardous chemicals off-site. Asbusiness, and as of September 30, 2017,2023, had contractual commitments to purchase approximately $1.0$200 million remains accrued for this remediationof products from our suppliers and contractors, which is expected to be paid in other long-term liabilities on the accompanying consolidated balance sheet. This estimate was based on the information provided to date and as the remediation efforts proceed, additional information may impact the final cost. As of September 30, 2017, agreement with Alabama’s voluntary cleanup program on viable treatment of the property has not yet been reached and the Company continues to evaluate potential remediation alternatives that could impact the ultimate cost of remediation.next twelve months.


Note 11 - Subsequent Events15 – Related Party Transactions


On October 3, 2017, Lawson Products completedManagement Services Agreements

Prior to the purchase of The Bolt Supply House Ltd. ("Bolt Supply House"), an industrial parts distributor located in Western Canada for approximately $32.1 million which was paid using a combination of cash on hand and borrowings of $16.3 million from the Company's existing revolving credit facility. The Bolt Supply House operates thirteen strategically located branches across Alberta, Manitoba and Saskatchewan, Canada. The Bolt Supply House will continue to operate separately under its own brand asMergers, a subsidiary of Lawson's Canadian operating company.TestEquity was party to a management agreement with Luther King Capital Management Corporation (“LKCM”) for certain advisory and consulting services (the “TestEquity Management Agreement”), and a subsidiary of Gexpro Services was party to a management agreement with LKCM for certain advisory and consulting services (the “Gexpro Services Management Agreement”). In connection with the closing of the Mergers on April 1, 2022, (i) all of the TestEquity subsidiary’s rights, liabilities and obligations under the TestEquity Management Agreement were novated to, transferred to and assumed by the TestEquity Equityholder, and LKCM released the TestEquity subsidiary from all obligations and claims under the TestEquity Management Agreement, and (ii) all of the Gexpro Services subsidiary’s rights, liabilities and obligations under the Gexpro Services Management Agreement were novated to, transferred to and assumed by the Gexpro Services Stockholder, and LKCM released the Gexpro Services subsidiary from all obligations and claims under the Gexpro Services Management Agreement (collectively, the “Novations”). During the first three months of 2022, expense of $0.5 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss), reflecting expenses accrued under these management agreements from January 1, 2022 through the April 1, 2022 Merger Date. As of April 1, 2022, the prior obligation of $5.3 million was effectively settled and considered to be a deemed equity contribution by LKCM recorded to additional paid in capital. As a result of the Novations, no additional expense under these management agreements has been incurred subsequent to the Mergers.



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Table of Contents

Consulting Services

Subsequent to the Mergers, individuals employed by LKCM Headwater Operations, LLC, a related party of LKCM, have provided the Company with certain consulting services in order to identify cost savings, revenue enhancements and operational synergies of the combined companies. For the nine months ended September 30, 2023, expense of $0.4 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss), reflecting expenses accrued for these consulting services.

TestEquity and Gexpro Services Mergers

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

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

Immediately prior to the Mergers, entities affiliated with LKCM and Mr. King beneficially owned approximately 48% of the then-outstanding shares of DSG common stock. As a result of the issuance of 20.6 million shares at the closing of the Mergers and the issuance of the additional 3.4 million shares in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement on March 20, 2023, entities affiliated with LKCM and Mr. King beneficially owned in the aggregate approximately 32.6 million shares of DSG common stock representing approximately 77.4% of the outstanding shares of DSG common stock as of March 31, 2023.

Rights Offering

Certain entities affiliated with LKCM and J. Bryan King exercised their basic subscription rights and over-subscription rights in the Rights Offering and purchased approximately 3.6 million additional shares of DSG common stock at a purchase price of $22.50 per share. Following the completion of the Rights Offering on May 30, 2023, entities affiliated with LKCM and Mr. King beneficially owned in the aggregate approximately 36.4 million shares of DSG common stock as of June 1, 2023, representing approximately 77.6% of the outstanding shares of DSG common stock as of September 30, 2023.

Board of Directors

M. Bradley Wallace, who became a director of the Company upon his election at the Company's 2023 annual stockholders meeting on May 19, 2023, is a Founding Partner of LKCM Headwater Investments, the private capital investment group of LKCM.

Note 16 – Segment Information

Based on operational, reporting and management structures, the Company has identified three reportable segments based on the nature of the products and services and type of customer for those products and services. A description of our reportable segments is as follows:

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

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The Company also has an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and includes the results of the Bolt Supply House ("Bolt") non-reportable segment. Revenue within the All Other category represents the results of Bolt. Bolt generates revenue primarily from the sale of MRO products to its walk-up customers and service to its customers through its 14 branch locations. Bolt does not provide VMI services for its customers or provide services in addition to product sales to customers. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.

Financial information for the Company's reportable segments is presented below. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment.

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
Revenue
Lawson(1)
$114,477 $109,418 $358,903 $216,752 
TestEquity207,657 116,709 451,082 286,984 
Gexpro Services103,232 103,749 312,523 285,224 
All Other(2)
13,543 17,275 42,655 33,612 
Total revenue$438,909 $347,151 $1,165,163 $822,572 
Operating income (loss)
Lawson(1)
$10,643 $5,352 $27,358 $2,792 
TestEquity(5,027)7,576 (8,183)7,443 
Gexpro Services7,332 7,992 23,484 16,972 
All Other(2)
(165)1,107 621 1,921 
Total operating income (loss)$12,783 $22,027 $43,280 $29,128 
(1)Includes the operating results of Lawson only subsequent to the Merger Date of April 1, 2022 and not Lawson operating results prior to the Mergers.
(2)    Includes the operating results of All Other only subsequent to the Merger Date of April 1, 2022 and not All Other operating results prior to the Mergers.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, the audited consolidated financial statements, accompanying notes and other information included in our Annual Report on Form 10-K filed for the year ended December 31, 2022 and the Lawson Products, Inc. unaudited condensed consolidated financial statements and accompanying notes included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.

References to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc. and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

Overview


The Maintenance, RepairOrganization and OperationsStructure

Distribution Solutions Group, Inc. ("DSG"), is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair and operations ("MRO"), the original equipment manufacturer ("OEM") and the industrial technologies markets. The Mergers that were consummated on April 1, 2022 resulted in the combination of Lawson, TestEquity and Gexpro Services. For a description of the Mergers, see Note 1 – Nature of Operations and Basis of Presentation within Item 1. Financial Statements.

We manage and report our operating results through three reportable segments: Lawson, TestEquity and Gexpro Services. A summary of our segments is presented below. For additional details about our segments, see Note 16 – Segment Information within Item 1. Financial Statements.

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

In addition to these three reportable segments, we have an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the results of a non-reportable segment.

Recent Events

HIS Company, Inc. Acquisition

On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of Hisco, a distributor of specialty products serving industrial technology applications, pursuant to the Purchase Agreement dated March 30, 2023. The total purchase consideration exchanged for the Hisco Transaction was $268.5 million, net of cash acquired of $12.2 million, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. DSG will also pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction.

In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco, creating one of the largest suppliers serving the electronics design, production, and repair industries. Accordingly, Hisco results are included in the TestEquity reportable segment after the date of acquisition.

DSG funded the Hisco Transaction with borrowings under its 2023 Credit Agreement and proceeds raised from the Rights Offering, both discussed below. Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction.

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Debt Amendment

On June 8, 2023, the Company entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”), by and among the Company, certain subsidiaries of the Company as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The First Amendment provides for a $305 million incremental term loan. Refer to Note 9 – Debt for additional information about the 2023 Credit Agreement.

Rights Offering

On May 30, 2023, the Company raised approximately $100 million pursuant to a Rights Offering of transferable subscription rights to holders of DSG common stock as of the close of business on May 1, 2023. Refer to Note 11 – Stockholders' Equity for additional information about the Rights Offering.

DSG Vision and Strategic Focus

The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in 2022 for the purpose of creating a global specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management teams. The DSG leadership team provides oversight to these separate leadership teams. This structure helps the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies. The combined company has the ability to utilize its combined financial resources to accelerate a strategy of expansion through both business acquisitions and organic growth.

Organic Growth Strategy

We intend to grow our businesses organically by exploring growth opportunities that provide different channels to reach customers, increase revenue and generate positive results. We plan to utilize our Company structure to grow organic revenue through collaborative selling across our customer bases and expanding the digital capabilities across our platform.

Acquisition Strategy

In addition to organic growth, we plan to actively pursue acquisition opportunities complementary to our businesses and that we believe will be financially accretive to our organization.

Sales Drivers

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 it operates. The PMI is a composite index of economic activity in the U.S. manufacturing sector. A measure of the PMI index above 50 is generally viewed as indicating an expansion of the manufacturing sector while a measure below 50 is generally viewed as representing a contraction. The average monthly PMI was 47.2 in the nine months ended September 30, 2023 compared to 54.9 in the nine months ended September 30, 2022.

Lawson Sales Drivers

The North American MRO market is highly fragmented. We competeLawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market

Lawson's revenue is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 58.6 in the third quarter of 2017 compared to 51.2 in the third quarter of 2016, indicating a strong U.S. manufacturing economy.

Our sales are also affectedinfluenced by the number of sales representatives and their productivity. Our sales force consisted of an average of 991Lawson plans to continue concentrating its efforts on increasing the productivity and 1,007 sales representatives during the third quarters of 2017 and 2016, respectively. Our sales rep productivity, measured as sales per rep per day, increased to $1,212 in the third quarter of 2017 from $1,089 in the third quarter of 2016. We anticipate moderate growth in the size of ourits sales force forteam. Additionally, Lawson drives revenue through the remainderexpansion of 2017products sold to existing customers as we concentrate our efforts on providing trainingwell as attracting new customers and supportadditional ship-to locations. Lawson also is expanding its inside sales team to continuehelp drive field sales representative productivity and also utilizes an e-commerce site to increasegenerate sales.

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TestEquity Sales Drivers

Across the productivitytest and measurement, industrial and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors.

Specifically in respect of our existing sales representatives.

In orderits electronic production supplies business, the current semi-conductor chip shortage is negatively impacting TestEquity’s business as such chips are key elements to utilize excess capacitythe electronic production process. TestEquity anticipates that recovery of our existingthis important part of its customers’ supply chain network, we completed a sale of our discontinued Fairfield distribution centerwill occur in the first nine monthshalf of 2017, resulting2024.

Through the Hisco Transaction, TestEquity expanded its product offerings, including adhesives, chemicals and tapes as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags. Hisco operates in 38 locations across North America, including its Precision Converting facilities that provide value-added fabrication and its Adhesive Materials Group that provides an array of custom repackaging solutions. Hisco also offers vendor-managed inventory and RFID programs with specialized warehousing for chemical management, logistics services and cold storage.

Gexpro Services Sales Drivers

The global supply chain solutions market is highly fragmented across Gexpro Services' key vertical segments. Gexpro Services’ competitors range from large global distributors and manufacturers to small regional domestic distributors and manufacturers. Gexpro Services' revenue is influenced by our OEMs’ production schedules, new product introduction launches, and service project needs.

Gexpro Services drives revenue through increasing wallet share with existing customers, customer-led geographic expansion, and new customer development in its six key vertical markets. Additionally, Gexpro Services drives revenue through expansion of its installation and aftermarket services by leveraging its portfolio of recent acquisitions.

Supply Chain Disruptions

We continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs. We have instituted various price increases during 2022 and 2023 in response to rising supplier costs, as well as increased transportation and labor costs in order to manage our gross profit margins.

Cyber Incident Litigation

On February 10, 2022, DSG disclosed that Lawson Products' computer network was the subject of a gaincyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). DSG engaged a cybersecurity forensics firm to assist in the investigation of $5.4 million.the incident and to assist in securing its computer network.


In October 2017Because of the nature of the information that may have been compromised, DSG was required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and has taken other actions, such as offering credit monitoring services. At September 30, 2023, DSG had not incurred material costs as a result of the Cyber Incident and, at this time, is unable to estimate the total cost of any remediation that may be required. On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG. For more information about the Cyber Incident Suit, refer to Note 14 – Commitments and Contingencies within Item 1. Financial Statements.

Critical Accounting Policies and Use of Estimates

The unaudited condensed consolidated financial statements were prepared in accordance with GAAP. A discussion of our critical accounting policies and estimates is contained within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in DSG's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to our previously disclosed critical accounting policies and use of estimates. The following provides information on the accounts requiring more significant estimates.

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

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

At September 30, 2023, our inventory reserve was $15.9 million, equal to approximately 4.8% of our gross inventory. A hypothetical change of one hundred basis points to our reserve as a percentage of total inventory would have affected our cost of goods sold by $3.2 million.

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

Goodwill Impairment - Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

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

Business Combinations - We allocate the purchase price paid for assets acquired The Bolt Supply House Ltd (See Note 11 - Subsequent Events) which will affect Lawson's operatingand liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:
•intangible assets, including the valuation methodology (the relief of royalty method for trade names and multi-period excess earnings method for customer relationships), estimations of future cash flows, discount rates, royalty rates, recurring revenue attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;
•deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances;
•inventory;
•property, plant and equipment;
•pre-existing liabilities or legal claims;
•contingent consideration, including estimating the likelihood and timing of achieving the relevant thresholds; and
•goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.

Factors Affecting Comparability to Prior Periods

Our results beginning withof operations for the fourth quarter of 2017.
Quarternine months ended September 30, 2017 compared2023 are not directly comparable to quarterprior results for the nine months ended September 30, 20162022 due to the Mergers that were completed on April 1, 2022. The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes,
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 2017 2016
($ in thousands)Amount 
% of
Net Sales
 Amount 
% of
Net Sales
        
Net sales$75,651
 100.0 % $70,199
 100.0 %
Cost of goods sold29,646
 39.2 % 27,626
 39.4 %
Gross profit46,005
 60.8 % 42,573
 60.6 %
        
Operating expenses:       
Selling expenses24,354
 32.2 % 23,568
 33.6 %
General and administrative expenses20,561
 27.2 % 16,616
 23.6 %
Operating expenses44,915
 59.4 % 40,184
 57.2 %
        
Operating income1,090
 1.4 % 2,389
 3.4 %
        
Interest expense(133) (0.1)% (167) (0.2)%
Other income, net843
 1.1 % 66
 0.1 %
        
Income before income taxes1,800
 2.4 % 2,288
 3.3 %
        
Income tax expense479
 0.7 % 463
 0.7 %
        
Net income$1,321
 1.7 % $1,825
 2.6 %



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Net Sales

Net sales increased 7.8%and DSG was identified as the accounting acquiree. This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owned 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 for the nine months ended September 30, 2022reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to $75.7 millionthe April 1, 2022 Merger Date. The combined operations of all three entities are included in the third quarter of 2017 compared to $70.2 million inunaudited condensed consolidated financial statements for the third quarter of 2016 with one less selling day. Average daily sales improved 9.5% to $1.201 million in the third quarter of 2017 compared to $1.097 million in the prior year quarter. The third quarters of 2017three and 2016 had 63 and 64 selling days, respectively. Sales were positively impacted by increased productivity of sales representativesnine months ended September 30, 2023 and the effectthree months ended September 30, 2022.

Non-GAAP Financial Measures

The Company's management believes that certain non-GAAP financial measures may provide users of acquisitions completedthis financial information with additional meaningful comparisons between current results and results in 2016, augmented byprior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall improvementcomparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the MRO marketplace.Company's reported results prepared in accordance with GAAP.

Non-GAAP Adjusted EBITDA

Management believes Adjusted EBITDA is an important measure of the Company's operating performance. We experienced strong growth in our large nationaldefine Adjusted EBITDA as operating income plus depreciation and regional accounts. Average daily salesamortization, stock-based compensation, severance and acquisition related retention costs, costs related to the execution and integration of the Mergers and other acquisitions, inventory net realizable value adjustments, amortization of fair value step-up resulting from the 2016Mergers and other acquisitions, grew 1.0%.and other non-recurring items. The following table provides our calculation of Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:


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

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023
2022(7)
2023
2022(7)
Operating income (loss)$12,783 $22,027 $43,280 $29,128 
Depreciation and amortization17,010 8,979 47,316 31,314 
Stock-based compensation(1)
1,049 (3,568)5,441 445 
Severance and acquisition related retention expenses(2)
10,478 944 13,266 2,353 
Merger and acquisition related costs(3)
(94)2,402 9,063 10,809 
Inventory net realizable value adjustment(4)
— 1,737 — 1,737 
Inventory step-up(5)
2,150 1,082 2,866 2,867 
Other non-recurring(6)
327 1,097 1,924 1,202 
Adjusted EBITDA$43,703 $34,700 $123,156 $79,855 
Gross profit increased to $46.0 million in the third quarter of 2017 compared to $42.6 million in the third quarter of 2016,(1)    Expense (benefit) primarily due to higher sales, and increased slightly as a percent of sales to 60.8% from 60.6% a year ago. The increase in gross profit margin from a year ago was primarily driven by volume related vendor concessions and lower bins and cabinets provided to our customers which were partially offset by higher sales to larger national customers, who typically generate lower product margins.

Selling Expenses

Selling expenses consist of compensation and support for our sales representatives. Selling expenses increased to $24.4 million in the third quarter of 2017 from $23.6 million in the prior year quarter due primarily to an increase in compensation costs resulting from higher sales, partially offset by lower health insurance expenses. Selling expenses as a percent of sales decreased to 32.2% from 33.6% in the third quarter of 2016, as fixed selling expenses were leveraged over a higher sales base.

General and Administrative Expenses

General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses increased to $20.6 million in the third quarter of 2017 from $16.6 million in the prior year quarter primarily due to $3.0 million of additional stock-based compensation, of which a portion varies with the companyCompany’s stock priceprice.
(2)    Includes severance expense from actions taken in 2023 and restoring incentive compensation accruals based on improved operating results.2022 not related to a formal restructuring plan and acquisition related retention expenses for the Hisco Transaction.

Interest Expense

Interest expense decreased slightly due to lower average borrowings outstanding.

Other Income, Net

Other income, net increased $0.8 million over the prior year quarter, due primarily(3)    Transaction and integration costs related to the effectMergers and other acquisitions.
(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 and acquisition accounting for additional acquisitions completed by Gexpro Services or TestEquity.
(6)    Other non-recurring costs consist of changesnon-capitalized deferred financing costs incurred in conjunction with the exchange rate on Canadian transactions.2023 Credit Agreement, certain non-recurring strategic projects and other non-recurring items.

Income Tax Expense

Primarily due to historical cumulative losses, substantially all(7)    Includes the operating results of our deferred tax assets are subject to a tax valuation allowance. Although we are in a full tax valuation allowance position, an income tax expense of $0.5 million and $0.5 million were recorded in the third quarters of 2017 and 2016, respectively, primarily due to reserves for uncertain tax positions, federal alternative minimum taxes and state taxes.

If the Company continues to demonstrate that it can consistently generate income, we may be able to make a determination that there is a sufficient amount of positive evidence to conclude that it is more likely thanLawson subsequent, but not that we will be able to utilize our deferred tax assets to offset future taxable income. This would leadprior, to the reduction of all or a portion of the valuation allowance resultingApril 1, 2022 Merger Date in an income tax benefitaccordance with GAAP accounting guidance for the period in which the reduction is recorded. We will continue to closely monitor all positive and negative evidence and will re-assess our position on a quarterly basis.reverse acquisitions.




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Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments. See Note 16 – Segment Information within Item 1. Financial Statements for additional information about our reportable segments. The following table provides Adjusted EBITDA by reportable segment:
Nine months
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
Adjusted EBITDA
Lawson(1)
$16,721 $9,670 $51,241 $19,077 
TestEquity14,298 10,122 31,450 24,260 
Gexpro Services11,552 12,485 36,368 32,409 
All Other(2)
1,132 2,423 4,097 4,109 
Consolidated Adjusted EBITDA$43,703 $34,700 $123,156 $79,855 
(1)Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions.
(2)    Includes the operating results of All Other subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions.

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

For management to discuss Lawson's operating results on a comparable basis, Lawson's historical, pre-merger components of operating income have been provided separately in the table below. In addition, Lawson's GAAP results of operations were adjusted to include the results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. Management believes this historical information provides the most meaningful basis of comparison for Lawson's operations, is more useful in identifying current business trends, and is important for the user of our financial statements in understanding Lawson's business. Refer to Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1. Financial Statements for information about the Mergers.

These non-GAAP 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 2022, 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 Quarterly Report on Form 10-Q filed for the quarterly period ended September 30, 2017 comparedMarch 31, 2022.

Lawson Non-GAAP Adjusted Results - Calculation of Supplemental Information (Unaudited)

(in thousands)Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
Lawson Operating Income
GAAP Results(1)
Pre-Merger Results
Adjusted
Results(2)
GAAP Results(1)
Pre-Merger Results(3)
Adjusted
Results(2)
Revenue$358,903 $— $358,903 $216,752 $104,902 $321,654 
Cost of goods sold155,533 — 155,533 103,733 49,371 153,104 
Gross profit203,370 — 203,370 113,019 55,531 168,550 
Selling, general and administrative expenses176,012 — 176,012 110,227 44,435 154,662 
Operating income (loss)$27,358 $— $27,358 $2,792 $11,096 $13,888 
Lawson Adjusted EBITDA(4)
$51,241 $— $51,241 $19,077 $8,042 $27,119 
(1)Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to September 30, 2016the April 1, 2022 Merger Date. See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1. Financial Statements.
 2017 2016
($ in thousands)Amount 
% of
Net Sales
 Amount 
% of
Net Sales
        
Net sales$225,274
 100.0 % $209,258
 100.0 %
Cost of goods sold89,249
 39.6 % 81,700
 39.0 %
Gross profit136,025
 60.4 % 127,558
 61.0 %
        
Operating expenses:       
Selling expenses72,964
 32.4 % 69,525
 33.2 %
General and administrative expenses58,790
 26.1 % 54,446
 26.1 %
Total S,G&A131,754
 58.5 % 123,971
 59.3 %
Gain on sale of property(5,422) (2.4)% —
 — %
Operating expenses126,332
 56.1 % 123,971
 59.3 %
        
Operating income9,693
 4.3 % 3,587
 1.7 %
        
Interest expense(393) (0.2)% (486) (0.2)%
Other income, net953
 0.5 % 439
 0.2 %
        
Income before income taxes10,253
 4.6 % 3,540
 1.7 %
        
Income tax expense802
 0.4 % 526
 0.3 %
        
Net income$9,451
 4.2 % $3,014
 1.4 %

Net Sales

Net sales(2)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 nine months ended September 30, 2017 increased 7.7%2023 and 2022, regardless of the Merger date (that is, they reflect both pre- and post-Merger results of Lawson).
(3)Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to $225.3 million from $209.3 millionthe April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting.
40

(4)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 nine months ended September 30, 2023 and the three months ended September 30, 2022 include the combined operations of DSG. The following results of operations for the nine months ended September 30, 2016. Average daily2022include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer, and the results of DSG's legacy Lawson business have only been included for activity subsequent, and not prior, to the April 1, 2022 Merger Date.

41

RESULTS OF OPERATIONS

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Consolidated Results of Operations
Three Months Ended September 30,
20232022
(Dollars in thousands)Amount% of RevenueAmount% of Revenue
Revenue
Lawson$114,477 26.1%$109,418 31.5%
TestEquity207,657 47.3%116,709 33.6%
Gexpro Services103,232 23.5%103,749 29.9%
All Other13,543 3.1%17,275 5.0%
Total Revenue438,909 100.0%347,151 100.0%
Cost of goods sold
Lawson48,395 11.0%53,183 15.3%
TestEquity164,589 37.5%89,704 25.8%
Gexpro Services72,990 16.6%73,794 21.3%
All Other7,638 1.7%11,303 3.3%
Total Cost of goods sold293,612 66.9%227,984 65.7%
Gross profit145,297 33.1%119,167 34.3%
Selling, general and administrative expenses
Lawson55,439 12.6%50,883 14.7%
TestEquity48,095 11.0%19,429 5.6%
Gexpro Services22,910 5.2%21,963 6.3%
All Other6,070 1.4%4,865 1.4%
Total Selling, general and administrative expenses132,514 30.2%97,140 28.0%
Operating income (loss)12,783 2.9%22,027 6.3%
Interest expense(12,895)(2.9)%(6,097)(1.8)%
Loss on extinguishment of debt— —%— —%
Change in fair value of earnout liabilities667 0.2%9,641 2.8%
Other income (expense), net(1,133)(0.3)%(550)(0.2)%
Income (loss) before income taxes(578)(0.1)%25,021 7.2%
Income tax expense (benefit)990 0.3%8,480 2.4%
Net income (loss)$(1,568)(0.4)%$16,541 4.8%

Overview of Consolidated Results of Operations

Our consolidated revenue increased $91.8 million in the third quarter of 2023 compared to the third quarter of 2022 primarily driven by $106.3 millionfrom acquisitions completed in 2023 and 2022 and organic sales improved 8.2%growth. Consolidated gross profit and Selling, general and administrative expenses also increased over the prior year primarily driven by the inclusion of the acquisitions completed in 2023 and 2022.

Refer to $1.179Results 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 September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$114,477 $109,418 $5,059 4.6 %
Cost of goods sold48,395 53,183 (4,788)(9.0)%
Gross profit66,082 56,235 9,847 17.5 %
Selling, general and administrative expenses55,439 50,883 4,556 9.0 %
Operating income (loss)$10,643 $5,352 $5,291 98.9 %
Gross profit margin57.7 %51.4 %
Adjusted EBITDA(1)
$16,721 $9,670 $7,051 72.9 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $5.1 million, or 4.6%, to $114.5 million in the third quarter of 2023 compared to $109.4 million in the third quarter of 2022. The increase was primarily driven by the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs and strengthening sales to Lawson's strategic and governmental customers and automotive end market.

Gross profit increased $9.8 million to $66.1 million in the third quarter of 2023 compared to gross profit of $56.2 million in the prior year quarter primarily as a result of increased sales, price increases, lower net freight expense and spreading fixed expenses for certain warehouse activities over a higher sales level. Lawson gross profit as a percent of revenue was 57.7% in the third quarter of 2023 compared to 51.4% in the prior year quarter. The gross profit margin percentage increase for the third quarter of 2023 was primarily the result of price increases and leveraging operating costs over a higher sales base. The prior year quarter was negatively impacted by increased supplier costs from inflation and supply chain disruptions, and a sales shift toward lower margin customers.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $4.6 million to $55.4 million in the third quarter of 2023 compared to $50.9 million in the prior year quarter. The increase was primarily driven by higher stock-based compensation as a benefit was realized in 2022, higher compensation expense incurred to support increased sales and health insurance costs in 2023 partially offset by lower acquisition related and non-recurring consulting costs costs.

Adjusted EBITDA

During the three months ended September 30, 2023, Lawson generated Adjusted EBITDA of $16.7 million, an increase of $7.1 million, or72.9% from the same period a year ago primarily driven by increased revenue and margins and leveraging of costs.

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TestEquity Segment
Three Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$207,657 $116,709 $90,948 77.9 %
Cost of goods sold164,589 89,704 74,885 83.5 %
Gross profit43,068 27,005 16,063 59.5 %
Selling, general and administrative expenses48,095 19,429 28,666 147.5 %
Operating income (loss)$(5,027)$7,576 $(12,603)N/M
Gross profit margin20.7 %23.1 %
Adjusted EBITDA(1)
$14,298 $10,122 $4,176 41.3 %
N/M Not meaningful
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $90.9 million, or 77.9%, to $207.7 million in the third quarter of 2023 compared to $116.7 million in the third quarter of 2022. The increase was primarily driven by $106.3 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $15.4 million decline in legacy TestEquity revenue primarily due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base.

Gross profit increased $16.1 million to $43.1 million in the third quarter of 2023 compared to gross profit of $27.0 million in the prior year quarter primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $20.5 million of additional gross profit in the third quarter of 2023. TestEquity gross profit as a percent of revenue was 20.7% in the third quarter of 2023 compared to 23.1% in the prior year quarter. The gross profit margin percentage decline for the third quarter of 2023 was primarily due to the amortization of the fair value step-up of inventory of $2.2 million related to the Hisco Transaction and a shift of customer sales mix.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $28.7 million to $48.1 million in the third quarter of 2023 compared to $19.4 million in the prior year quarter. This increase was due to approximately $27.2 millionof additional expenses, including depreciation and amortization, primarily driven by the acquisitions completed in 2023 and 2022, partially offset by lower merger and acquisition expenses in the third quarter of 2023 compared to the prior year quarter.

Adjusted EBITDA

During the three months ended September 30, 2023, TestEquity generated Adjusted EBITDA of $14.3 million, an increase of $4.2 million, or 41.3% from the same period a year ago with approximately $8.3 million driven by the acquisitions completed in 2023 and 2022, offset by a reduction of $4.1 million in legacy TestEquity due to the decline in revenue.

44

Gexpro Services Segment
Three Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$103,232 $103,749 $(517)(0.5)%
Cost of goods sold72,990 73,794 (804)(1.1)%
Gross profit30,242 29,955 287 1.0 %
Selling, general and administrative expenses22,910 21,963 947 4.3 %
Operating income (loss)$7,332 $7,992 $(660)(8.3)%
Gross profit margin29.3 %28.9 %
Adjusted EBITDA(1)
$11,552 $12,485 $(933)(7.5)%
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue decreased $0.5 million, or 0.5%, to $103.2 million in the third quarter of 2023 compared to $103.7 million in the third quarter of 2022. The decrease was primarily driven by the timing of project work in Gexpro Services' customer base as well as market softness in the technology vertical market.

Gross profit increased $0.3 million to$30.2 million in the third quarter of 2023 compared to gross profit of $30.0 million in the prior year quarter. Gexpro Services gross profit as a percent of revenue was 29.3% in the third quarter of 2023 compared to 28.9% in the prior year quarter primarily driven by an improvement in the global supply chain and enhanced margin management on Gexpro Services' product offerings.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist 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 Gexpro Services’ business and service customers.

Selling, general, and administrative expenses increased $0.9 million to $22.9 million in the third quarter of 2023 compared to $22.0 million in the prior year quarter. The increase was primarily driven by higher compensation and product fulfillment costs.

Adjusted EBITDA

During the three months ended September 30, 2023, Gexpro Services generated Adjusted EBITDA of $11.6 million, a decrease of $0.9 million, or 7.5%, from the same period a year ago primarily driven by flat revenue and an increase in Selling, general, and administrative expenses.

Consolidated Non-operating Income and Expense
Three Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Interest expense$(12,895)$(6,097)$(6,798)111.5 %
Change in fair value of earnout liabilities$667 $9,641 $(8,974)N/M
Other income (expense), net$(1,133)$(550)$(583)106.0 %
Income tax expense (benefit)$990 $8,480 $(7,490)(88.3)%
N/M Not meaningful

45

Interest Expense

Interest expense increased $6.8 million in the third quarter of 2023 compared to the prior year quarter. The increase was primarily driven by higher interest rates and outstanding borrowings partially driven by the Hisco Transaction.

Change in Fair Value of Earnout Liabilities

The benefit in the third quarter of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $9.6 million benefit in the third quarter of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Income Tax Expense (Benefit)

Income tax expense was $1.0 million, a (171.3)% effective tax rate for the three months ended September 30, 2023 compared to income tax expense of $8.5 million and a 33.9% effective tax rate for the three months ended September 30, 2022. The change in the year-over-year effective tax rate was primarily due to adjustments to uncertain tax positions, a book loss for the current quarter, and other permanent items.

46

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Consolidated Results of Operations
Nine Months Ended September 30,
20232022
(Dollars in thousands)Amount% of Net SalesAmount% of Net Sales
Revenue
Lawson(1)
$358,903 30.8 %$216,752 26.4 %
TestEquity451,082 38.7 %286,984 34.9 %
Gexpro Services312,523 26.8 %285,224 34.7 %
All Other42,655 3.7 %33,612 4.1 %
Total Revenue1,165,163 100.0 %822,572 100.0 %
Cost of goods sold
Lawson(1)
155,533 13.3 %103,733 12.6 %
TestEquity351,417 30.2 %220,247 26.8 %
Gexpro Services219,430 18.8 %202,133 24.6 %
All Other24,592 2.1 %21,853 2.7 %
Total Cost of goods sold750,972 64.5 %547,966 66.6 %
Gross profit414,191 35.5 %274,606 33.4 %
Selling, general and administrative expenses
Lawson(1)
176,012 15.1 %110,227 13.4 %
TestEquity107,848 9.3 %59,294 7.2 %
Gexpro Services69,609 6.0 %66,119 8.0 %
All Other17,442 1.5 %9,838 1.2 %
Total Selling, general and administrative expenses370,911 31.8 %245,478 29.8 %
Operating income (loss)43,280 3.7 %29,128 3.5 %
Interest expense(30,057)(2.6)%(16,704)(2.0)%
Loss on extinguishment of debt— — %(3,395)(0.4)%
Change in fair value of earnout liabilities646 0.1 %3,948 0.5 %
Other income (expense), net(2,869)(0.2)%224 — %
Income (loss) before income taxes11,000 0.9 %13,201 1.6 %
Income tax expense (benefit)3,637 0.3 %3,912 0.5 %
Net income (loss)$7,363 0.6 %$9,289 1.1 %
(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 and the other acquisitions completed in 2023 and 2022. The increase in gross profit for the first nine months of 2023 compared to the first nine months of 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date and the other acquisitions completed in 2023 and 2022. Expenses for the first nine months of 2023 compared to the first nine months of 2022 were impacted by the inclusion of Lawson and the other acquisitions completed in 2023 and 2022.

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

47

Results by Reportable Segment

Lawson Segment
Nine Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$358,903 $216,752 $142,151 — %
Cost of goods sold155,533 103,733 51,800 — %
Gross profit203,370 113,019 90,351 — %
Selling, general and administrative expenses176,012 110,227 65,785 — %
Operating income (loss)$27,358 $2,792 $24,566 — %
Gross profit margin56.7 %52.1 %
Adjusted EBITDA(1)
$51,241 $19,077 $32,164 168.6 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

The increase in revenue, gross profit and operating income for the first nine months of 2023 compared to the first nine months of 2022 was primarily due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date.

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations for the nine months ended September 30, 2022 were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. These non-GAAP Adjusted Results for the nine months ended September 30, 2022 presented in the table below are referred to within this supplemental results of operations discussion as "Adjusted".
Nine Months Ended September 30,Adjusted Change
(Dollars in thousands)2023
Adjusted 2022(1)
Amount%
Revenue$358,903 $321,654 $37,249 11.6%
Cost of goods sold155,533 153,104 2,429 1.6%
Gross profit203,370 168,550 34,820 20.7%
Selling, general and administrative expenses176,012 154,662 21,350 13.8%
Operating income (loss)$27,358 $13,888 $13,470 97.0%
Gross profit margin56.7 %52.4 %
Adjusted EBITDA(2)
$51,241 $27,119 $24,122 88.9%
(1)For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical unaudited 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.
(2)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $37.2 million, or 11.6%, to $358.9 million in the first nine months of 2023 compared to adjusted revenue of $321.7 million in the same period of 2022. The increase was primarily driven by the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs and strengthening sales to Lawson's strategic and governmental customers and automotive end market.

Gross profit increased $34.8 million to $203.4 million in the first nine months ended September 30, 2023 compared to adjusted gross profit of $168.6 million in the same period of 2022 primarily as a result of increased sales, price increases, lower net freight expense and spreading operating expenses over a higher sales level. Lawson gross profit as a percent of revenue was
48

56.7% in the first nine months of 2023 compared to adjusted gross profit as a percent of adjusted revenue of 52.4% in the prior year period. The gross profit margin percentage improvement for the first nine months of 2023 was primarily the result of price increases, lower net freight costs and leveraging costs over a higher sales base. Theadjusted gross profit margin percentage for the same period of 2022 was impacted by increased supplier costs from inflation and supply chain disruptions and a sales shift toward lower margin customers. Adjusted gross profit margin for 2022 was also impacted by the amortization of the fair value step-up of inventory of $1.9 million related to the Mergers.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $21.4 million to $176.0 million in the first nine months of 20172023 compared to $1.090adjusted Selling, general and administrative expenses of $154.7 million in the same period of 2022. The increase was primarily driven by higher compensation expense incurred to support increased sales, additional depreciation and amortization as a result of the fair value step-up adjustments related to the reverse merger acquisition accounting and higher stock-based compensation in 2023 due to a benefit realized in 2022, partially offset by lower acquisition related costs in 2023.

Adjusted EBITDA

During the nine months ended September 30, 2023, Lawson generated Adjusted EBITDA of $51.2 million, an increase of $24.1 million, or 88.9% from the same period a year ago primarily driven by increased revenue and gross profit margin.

TestEquity Segment
Nine Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$451,082 $286,984 $164,098 57.2 %
Cost of goods sold351,417 220,247 131,170 59.6 %
Gross profit99,665 66,737 32,928 49.3 %
Selling, general and administrative expenses107,848 59,294 48,554 81.9 %
Operating income (loss)$(8,183)$7,443 $(15,626)N/M
Gross profit margin22.1 %23.3 %
Adjusted EBITDA(1)
$31,450 $24,260 $7,190 29.6 %
N/M Not meaningful
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $164.1 million, or 57.2%, to $451.1 million in the first nine months of 2023 compared to $287.0 million in the same period in 2022. The increase was primarily driven by $180.9 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $16.8 million decline in legacy TestEquity due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base.

Gross profit increased $32.9 million to $99.7 million in the first nine months of 2023 compared to $66.7 million in the same period of 2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $38.3 million of additional gross profit during the first nine months of 2023. TestEquity gross profit as a percent of revenue decreased to 22.1% in the first nine months of 2023 compared to 23.3% in the prior year period.primarily due to the amortization of the fair value step-up of inventory of $2.9 million related to the Hisco Transaction and a shift in sales mix from the lower gross margin rates from the 2022 and 2023 acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and support for TestEquity's sales representatives and expenses to operate TestEquity's distribution network and overhead expenses.
49


Selling, general and administrative expenses increased $48.6 million to $107.8 millionin the first nine months of 2023 compared to $59.3 million in the same period of 2022. Approximately $42.3 million of the increased expenses, including depreciation and amortization, was primarily driven by the acquisitions completed in 2023 and 2022 and higher merger and acquisition expenses in the first nine months of 2023 compared to the same period a year ago.

Adjusted EBITDA

During the nine months ended September 30, 2023, TestEquity generated Adjusted EBITDA of $31.5 million, an increase of $7.2 million, or 29.6% from the same period a year ago with approximately $13.4 million driven by the acquisitions completed in 2023 and 2022, offset by a reduction of $6.2 million in legacy TestEquity due to the decline in revenue.

Gexpro Services Segment
Nine Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Revenue$312,523 $285,224 $27,299 9.6 %
Cost of goods sold219,430 202,133 17,297 8.6 %
Gross profit93,093 83,091 10,002 12.0 %
Selling, general and administrative expenses69,609 66,119 3,490 5.3 %
Operating income (loss)$23,484 $16,972 $6,512 38.4 %
Gross profit margin29.8 %29.1 %
Adjusted EBITDA(1)
$36,368 $32,409 $3,959 12.2 %
(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue increased $27.3 million, or 9.6%, to $312.5 million in the first nine months of 2023 compared to $285.2 million in the same period of 2022. The increase was primarily driven by growth in the base business through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit increased $10.0 million to $93.1 million in the first nine months of 2023 compared to $83.1 million in the same period of 2022. Gexpro Services gross profit as a percent of revenue was 29.8% in the first nine months of 2023 compared to 29.1% in the prior year period driven by an improvement in the global supply chain and margin management on its product offering.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist 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 Gexpro Services' business and service customers.

Selling, general, and administrative expenses increased $3.5 million to $69.6 million in the first nine months ended September 30, 2023 compared to $66.1 million in the same period of 2022. The increase was primarily driven by $1.7 million of additional expenses from the Frontier acquisition completed at the end of the first quarter of 2022 and additional compensation and product fulfillment costs to support the organic growth.

Adjusted EBITDA

During the nine months ended September 30, 2023, Gexpro Services generated Adjusted EBITDA of $36.4 million, an increase of $4.0 million, or 12.2% from the same period a year ago primarily driven by increased revenue and gross profit margin.

50

Consolidated Non-operating Income and Expense
Nine Months Ended September 30,Change
(Dollars in thousands)20232022Amount%
Interest expense$(30,057)$(16,704)$(13,353)79.9 %
Loss on extinguishment of debt$— $(3,395)$3,395 N/M
Change in fair value of earnout liabilities$646 $3,948 $(3,302)N/M
Other income (expense), net$(2,869)$224 $(3,093)N/M
Income tax expense (benefit)$3,637 $3,912 $(275)(7.0)%
N/M Not meaningful

Interest Expense

Interest expense increased $13.4 million in the first nine months of 20172023 compared to the same period of 2022 primarily due to an increase in interest rates and 2016 had 191higher borrowings related to the Mergers and 192 selling days, respectively.the other 2022 and 2023 acquisitions.
Sales
Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt in the nine months ended September 30, 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 Liabilities

The benefit in the first nine months of 2017 were positively impacted by increased productivity2023 related to the change in fair value of sales representativesthe earnout liabilities associated with the Frontier acquisition and the effect of acquisitions completed in 2016, augmented by the overall improvementHisco Transaction. The $3.9 million benefit in the MRO marketplace. The Company experienced growth in all major categories including regional, large national, Kent Automotive and governmental accounts. Average daily sales from the 2016 acquisitions grew 1.4%.

Gross Profit

Gross profit increased to $136.0 million in the first nine months of 2017 compared2022 primarily related to $127.6the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Other Income (Expense), Net

Other income (expense), net consists of effects of changes in foreign currency exchange rates, interest income, net and other non-operating income and expenditures. The $3.1 million change in the first nine months of 2016 and decreased as a percent2023 compared to the same period of sales to 60.4% from 61.0% a year ago. The decline in gross profit margin from a year ago2022 was primarily driven by higher sales to larger national customers, who typically generate lower product margins, the impact of the 2016 acquisitions, and transportation costs associated with the movement of certain inventorypartly due to the closure of the Fairfield, New Jersey, distribution center.unfavorable changes in foreign currency exchange rates and other insignificant changes in other non-operating income and expenditures.


Selling ExpensesIncome Tax Expense (Benefit)


Selling expenses increased to $73.0Income tax expense was $3.6 million, a 33.1% effective tax rate for the first nine months of 2017 from $69.52023 compared to an income tax expense of $3.9 million inand a 29.6% effective tax rate for the first nine months of 2016, due primarily to increased compensation costs on higher sales. Selling expenses as a percent of sales decreased to 32.4%2022. The change in the first nine months of 2017 from 33.2% in the first nine months of 2016, as fixed selling expenses were leveraged over a higher sales base.

General and Administrative Expenses

General and administrative expenses increased to $58.8 million in the first nine months of 2017 from $54.4 million in the prior year periodyear-over-year effective tax rate was primarily due to $4.1 million of additional stock-based compensation of which a portion varies with the company stock pricestate taxes, foreign income and restoring incentive compensation accruals due to improved operating results. These increase were offset partially by lower depreciation and acquisition related expenses.

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Gain on sale of property

In the second quarter of 2017, we received net cash proceeds of $6.2 million and recognized a gain of $5.4 million from the sale of our Fairfield, New Jersey distribution center.

Interest Expense

Interest expenses decreased $0.1 million in the first nine months of 2017, over the prior year, due primarily to lower average borrowings oustanding.

Other Income, Net

Other income, net increased $0.5 million in the first nine months of 2017, over the prior year, due primarily to the effect of favorable changes in the exchange rate on Canadian transactions.

Income Tax Expense

Primarily due to historical cumulative losses, substantially all of our deferred tax assets are subject to a tax valuation allowance. Although we are in a full tax valuation allowance position,other permanent items. The 2022 income tax expenseswas also impacted by the creation of $0.8 million and $0.5 million were recorded in the first nine months of both 2017 and 2016, primarily due to reservesa consolidated group for uncertainfederal income tax positions, federal alternative minimum taxes and state taxes.
If the Company continues to demonstrate that it can consistently generate income, we may be able to makepurposes as a determination that there is a sufficient amount of positive evidence to conclude that it is more likely than not that we will be able to utilize our deferred tax assets to offset future taxable income. This would lead to the reduction of all or a portionresult of the valuation allowance resulting in an income tax benefit forcompletion of the period in which the reduction is recorded. We will continueMergers.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $80.5 million on September 30, 2023 compared to closely monitor all positive and negative evidence and will re-assess our position$24.6 million on a quarterly basis.December 31, 2022.



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Liquidity and Capital Resources

Available cash and cash equivalents, were $19.0 million on availability under its 2023 Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of September 30, 2017 compared2023, the Company had $80.5 million of cash and cash equivalents and $198.3 million of borrowing availability remaining, net of outstanding letters of credit, under the 2023 Credit Agreement.

On June 2, 2023, the Company raised approximately $100 million from the Rights Offering, in which 4,444,444 shares of DSG common stock were sold at a purchase price of $22.50 per share. On June 8, 2023, the Company borrowed $305.0 million under the incremental term loan of the 2023 Credit Agreement. The Company used these combined proceeds primarily to $10.4fund the Hisco Transaction and to pay down its revolving credit facility.

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. Our current
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debt obligations under the 2023 Credit Agreement mature in April 2027. Required principal payments on the 2023 Credit Agreement for the next twelve months are $30.3 million. Refer to Note 9 – Debt within Item 1. Financial Statements for additional information related to our debt obligations. Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future, however, we cannot provide assurance that events beyond our control will not have a material adverse impact on December 31, 2016. our liquidity.

Sources and Uses of Cash

The following table presents a summary of our cash flows:
 Nine Months Ended September 30,
(in thousands)20232022Change
Net cash provided by (used in) operating activities$74,053 $(19,280)$93,333 
Net cash provided by (used in) investing activities$(266,720)$(120,550)$(146,170)
Net cash provided by (used in) financing activities$269,295 $151,820 $117,475 

Cash Provided by (Used in) Operating Activities

Net cash provided by operations was $3.8 million infor the nine months ended September 30, 2017, as cash generated by operating earnings2023 was $74.1 million primarily due to net income including non-cash items, partially offset by cash investedinvestments in trade working capital primarily to support the increasehigher sales and other net cash flow items.

Net cash used in sales. The $5.3 million of cash provided by operations infor the nine months ended September 30, 20162022 was $19.3 million, excluding non-cash items, primarily generateddue to increased accounts receivables driven by operating earnings.higher sales and increased inventories due to increased supplier costs driven by inflation and global supply chain disruptions.

In 2017, we completed the sale of our distribution center locatedCash Provided by (Used in) Investing Activities

Net cash used in Fairfield, New Jersey, receiving net cash proceeds of $6.2 million. Capital expenditures, primarilyinvesting activities for improvements to our distribution centers and information technology, were $1.2 million and $2.6 million in the nine month periods ended September 30, 2017 and 2016, respectively.

On September 30, 2017, we had no borrowings on our revolving line of credit and no dividends were paid to shareholders in the nine months ended September 30, 2017 and 2016. Dividends are currently restricted under the Loan Agreement to amounts not to exceed $7.02023 was $266.7 million, annually.

Subsequentprimarily due to the reporting periodHisco Transaction, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Net cash used in investing activities for the nine months ended September 30, 2022 was $120.6 million, primarily due to acquisitions completed by TestEquity and Gexpro Services, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2017, we completed2023 was $269.3 million due to proceeds from the acquisition2023 Credit Agreement and the Rights Offering partially offset by repayment of The Bolt Supply House Ltd. for forprevious indebtedness and principal payments on the term loans. In conjunction with the Hisco Transaction, the Company borrowed $305.0 million under the incremental term loan facility on June 8, 2023 and raised approximately $32.1$100 million which was paid by using a combinationthrough the Rights Offering closed during the second quarter of cash on hand2023. During the first nine months of 2023, deferred financing costs of $3.4 million were incurred related to the 2023 Credit Agreement and borrowingsoffering costs of $16.3$1.5 million from our existing revolving credit facility.were incurred related to the Rights Offering.


Loan Agreement

At September 30, 2017, we had additional borrowing availability of $36.0 million. We believeNet cash provided by operationsfinancing activities for the nine months ended September 30, 2022 was $151.8 million, primarily due to proceeds from term loans and funds available under our Loanrevolving credit facilities to finance the Mergers and other acquisitions, partly offset by repayment of previous indebtedness. Deferred financing costs of $12.0 million were incurred during the first nine months of 2022 related to these financing activities.

Financing and Capital Requirements

Credit Facility

On June 8, 2023, in connection with the Hisco Transaction, DSG entered into the First Amendment, which amended and replaced the Amended and Restated Credit Agreement are sufficientdated April 1, 2022 with the 2023 Credit Agreement, and provided for a $305.0 million incremental term loan facility. The 2023 Credit Agreement also provides for the Company to fund our operating requirements, strategic initiatives and capital improvements throughoutincrease the remainder
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In additioncommitments from time to other customary representations, warranties and covenants, if the excess borrowing capacity is below $10.0time by up to $200 million we are required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the amended Loanaggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants.

The 2023 Credit Agreement includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility, a $305 million incremental term loan and a $50 million senior secured delayed draw term loan facility. Refer to Note 9 – Debt within Item 1. Financial Statements for a description of the 2023 Credit Agreement.

On September 30, 2017, our borrowing capacity exceeded $10.02023, we had $589.6 million therefore, in outstanding borrowings under the 2023 Credit Agreement and $198.3 million of borrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component.

As of September 30, 2023, we were not subject to thisin compliance with all financial covenant. However, for informational purposes we have provided the result of the financial covenant below:
Quarterly Financial CovenantRequirementActual
EBITDA to fixed charges ratio1.10 : 1.003.20 : 1.00

covenants under our 2023 Credit Agreement. While we were in compliance with theour financial covenant for the quarter endedcovenants as of September 30, 2017,2023, failure to meet thisthe covenant requirementrequirements of the 2023 Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, or 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.



Purchase Commitments

As of September 30, 2023, we had contractual commitments to purchase approximately $200 million of products from our suppliers and contractors over the next twelve months.

Capital Expenditures

During the nine months endedSeptember 30, 2023, total capital expenditures for property, plant and equipment and rental equipment were $18.9 million excluding proceeds from the sale of rental equipment. The Company expects to spend approximately $3 million to $4 million for capital expenditures during the remainder of 2023 to support ongoing operations.

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.

During the third quarter of 2022, the Company repurchased 108,178 shares of Company common stock under the repurchase plan at an average cost of $17.93 per share for a total cost of $1.9 million. No shares were repurchased during 2023. The Company had $7.6 million of remaining availability for stock repurchases under the program as of September 30, 2023. See Note 11 – Stockholders' Equity within Item 1. Financial Statementsfor further information.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


There haveITEM 3 of Part I has been no material changes in market risk at September 30, 2017omitted from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.this report.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that ourThese disclosure controls and procedures were effective suchare designed to ensure that (i) the information relating to Lawson,DSG, including ourDSG's consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) include,includes, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective as of September 30, 2023 because of the previously reported material weakness in internal control over financial reporting, as described below.


ThereOngoing Remediation of Material Weaknesses in Internal Control over Financial Reporting

As previously disclosed under Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the year ended December 31, 2022, the Company’s management concluded that its internal control over financial reporting was not effective based on the material weakness identified. As a result of our expanding business operations, primarily related to the April 1, 2022 Mergers, 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. generally accepted accounting principles ("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.

The remediation efforts summarized below, which have been or will be implemented, are intended both to address the identified material weakness and to enhance the Company’s overall internal control environment.

Accounting Expertise and Personnel

•Management is assessing the accounting function and is planning to hire additional accounting personnel to improve the accounting capabilities and capacity, and to ensure internal control activities are maintained and performed.

Accounting Policies and Controls

•Management has expanded our training related to internal controls to include workshops designed to improve control awareness and educate all applicable personnel at the business unit level on internal control topics.
•Management has designed and implemented controls over the review of the accuracy and completeness of inputs provided to and outputs provided by third-party specialists, including the memorialization of accounting treatment conclusions for acquisitions.
•Management will strengthen accounting policies, specifically within complex, non-routine transactions, revenue recognition and accounting for business acquisitions, and verify procedures against U.S. GAAP.
•Management will design and implement entity level monitoring controls to support the review and preparation of complete and accurate financial information.

Segregation of Duties

•Management has evaluated logical access and eliminated known segregation of duties conflicts.
•Management has designed and is in the process of implementing periodic logical access review controls to monitor user access and proper segregation of duties.
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We have designed our remediation plan to address the material weakness mentioned above and strengthen our overall internal control over financial reporting. However, we will not be able to determine if the material weakness has been remediated until our efforts are completed and we have reassessed the procedures and controls put in place. We will continue to review our financial reporting controls and procedures. As we finalize and implement the remediation plan outlined above, we may also identify additional measures to address the material weakness or modify certain of the remediation procedures described above. We also may implement additional changes to our internal control over financial reporting as may be appropriate in the course of remediating the material weakness. Management will continue to take steps to remedy the material weakness to reinforce the overall design and capability of our control environment.

Changes in Internal Control over Financial Reporting

Given the significance and timing of the Hisco Transaction and the complexity of systems and business processes, we intend to exclude the Hisco operating company from our assessment and report on internal control over financial reporting for the year ending December 31, 2023. Other than the Hisco Transaction and our ongoing remediation efforts discussed above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during theour most recently completed fiscal quarter ended September 30, 2017 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.


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PART II
OTHER INFORMATION

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


ITEM 1. LEGAL PROCEEDINGS

See Note 14 – Commitments and Contingencies to our unaudited condensed consolidated financial statements, included within Item 1. Financial Statements, which is incorporated herein by reference, for a description of certain of our pending legal proceedings, which are incorporated herein by reference. In addition, the Company is involved in legal actions that arise in the ordinary course of business. 

ITEM 1A. RISK FACTORS

Other than the risk factors discussed below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2022.

Business Risks

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, 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 (the “Cyber Incident”). 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. For example, a putative class action lawsuit was filed
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against DSG in April 2023 asserting a variety of claims seeking monetary damages, injunctive relief and other related relief in connection with the Cyber Incident, which could result in additional legal and other costs.

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.

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.

Any pursuit or completion by DSG of additional acquisition opportunities would involve risks that could adversely affect our business, financial condition and results of operations.

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 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.

Common Stock Risks

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 September 8, 2023), entities affiliated with LKCM beneficially owned in the aggregate approximately 36.4 million shares of DSG common stock as of September 1, 2023, representing approximately 77.6% of the outstanding shares of DSG common stock as of September 30, 2023. J. Bryan King, Chairman and Chief Executive Officer of the Company, is a Principal of LKCM. In addition, M. Bradley Wallace, who became a director of the Company upon his election at the Company’s 2023 annual stockholders meeting on May 19, 2023, is a Founding Partner of LKCM Headwater Investments, the private capital investment group 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; and
•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.

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Entities affiliated with LKCM beneficially own a significant number of shares of DSG common stock, and any sales of any such shares or the possibility of any such sales could have a negative effect on the price of DSG common stock.

Entities affiliated with LKCM beneficially own a significant number of shares of DSG common stock.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 issued to those entities in connection with the Mergers. Any sales of any of the shares of DSG common stock held by any entities affiliated with LKCM (whether those shares were acquired by those entities in connection with the Mergers or in other transactions), or the anticipation of the possibility of any such sales, could create downward pressure on the market price of DSG common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Recent Sales of Unregistered Equity Securities

The Purchase Agreement for the Hisco Transaction allowed certain eligible Hisco employees to invest all or a portion of their respective closing payment in DSG common stock at $22.50 per share, up to an aggregate value of DSG common stock issued to such eligible Hisco employees of $25.0 million. On September 6, 2023, the Company issued to 19 eligible Hisco employees a total of 144,608 shares of DSG common stock in exchange for a total of approximately $3.25 million in cash. The issuance of these shares of DSG common stock was exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) of the Act and Rule 506(b) of Regulation D promulgated under the Act. Such shares are restricted securities, subject to restrictions on their transfer. See Note 3 – Business Acquisitions to our unaudited condensed consolidated financial statements, included within Item 1. Financial Statements, which is incorporated herein by reference, for a description of the Hisco Transaction, which is incorporated herein by reference.

Issuer Purchases of Equity Securities

There were no repurchases of any shares of DSG common stock during the three months ended September 30, 2023.

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Table of Contents
ITEM 6. EXHIBITS
Exhibit #Description of Exhibit
31.13.1
Amended and Restated Certificate of Incorporation of the Company, as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company effective as of August 31, 2023, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2023.
3.2
Amended and Restated By-Laws of the Company effective as of May 5, 2022, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed May 5, 2022.
10.1
Subscription Agent Agreement, dated as of May 8, 2023, by and among Distribution Solutions Group, Inc., Computershare Inc. and Computershare Trust Company, N.A., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed May 9, 2023.
10.2†
Amended and Restated Credit Agreement, dated as of June 8, 2023, by and among Distribution Solutions Group, Inc., the subsidiaries of Distribution Solutions Group, Inc. party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to the Company’s Current Report on Form 8-K (File No. 000-10546) filed June 9, 2023.
31.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.231.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
3232**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS101The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
101.INSInline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL and contained in Exhibit 101

† Certain schedules and/or similar attachments omitted pursuant to Item 601(a)(5) of Regulation S-K promulgated by the U.S. Securities and Exchange Commission. The Company agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the U.S. Securities and Exchange Commission upon request.
*Filed herewith.
**Furnished herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DISTRIBUTION SOLUTIONS GROUP, INC.
(Registrant)
Dated:November 2, 2023/s/ J. Bryan King
J. Bryan King
Chairman, President and Chief Executive Officer
(principal executive officer)
Dated:November 2, 2023/s/ Ronald J. Knutson
Ronald J. Knutson
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
Dated:November 2, 2023LAWSON PRODUCTS, INC./s/ David S. Lambert
(Registrant)David S. Lambert
Vice President, Controller and Chief Accounting Officer
(principal accounting officer)
Dated:October 26, 2017/s/ Michael G. DeCata
Michael G. DeCata
President and Chief Executive Officer
(principal executive officer)
Dated:October 26, 2017/s/ Ronald J. Knutson
Ronald J. Knutson
Executive Vice President, Chief Financial Officer, Treasurer and Controller
(principal financial and accounting officer)


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