UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


			☒			~~Quarterly Report pursuant to Section~~QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) ~~of the Securities Exchange Act of~~OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023


			☐			~~Transition Report pursuant to Section~~TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) ~~of the Securities Exchange Act of~~OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file Number: 0-10546

DISTRIBUTION SOLUTIONS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-2229304

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8770 W. Bryn Mawr Avenue, Suite 900,

Chicago,

Illinois

60631

(Address of principal executive offices)

(Zip Code)

(773) 304-5050

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, $1.00 par value

DSGR

NASDAQ 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 every Interactive Data File required to be submitted 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 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 filer	☒
Non-accelerated filer	¨	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 number~~As of July 24, 2023, 23,349,735 shares ~~outstanding~~ of ~~the registrant’s~~ common stock, $1$1.00 par value, ~~as of October 24, 2022 was 19,400,005.~~were outstanding.

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		Page #
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	5

	Condensed Consolidated Balance Sheets as of ~~September~~June 30 ~~30, 2022~~, 2023 (Unaudited) and December 31, 20~~21 (Unaudited)~~2022	5

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six ~~Nine~~ Months Ended ~~September~~ June 30 ~~2022~~, 2023 and 20 2122 (Unaudited)	6

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and N ~~ine~~Six Months Ended ~~September~~June 30 ~~30, 2022~~, 2023 and 20 2122 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~Septem~~June 30 ~~ber~~ ~~30, 2022~~, 2023 and 20 2122 (Unaudited)	9

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3733

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	5752

Item 4.	Controls and Procedures	5752

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	5753

Item 1A.	Risk Factors	5753

~~Item 2~~.	~~Unregistered~~ ~~Sales~~ ~~of Equity Securities and Use of Proceeds~~	66

Item 6.	Exhibits	6655

	SIGNATURES	6956

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

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~~Terms such as “aim,” “anticipate,” “believe,” “contemplates,” “continues,” “could,” “ensure,” “estimate,” “expect,” “forecasts,” “if,” “intend,” “likely,” “may,” “might,” “objective,” “outlook,” “plan,” “positioned,” “potential,” “predict,” “probable,” “project,” “shall,” “should,” “strategy,” “will,” “would,” and variations of them and other words and terms of similar meaning 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 our business, financial condition and results of operations include:

•inventory obsolescence;

•work stoppages and other disruptions at transportation centers or shipping ports;

•the reliance of TestEquity Acquisition, ~~LLC's~~LLC ("~~TestEquity's"~~TestEquity") ~~reliance~~ on a significant supplier for a significant amount of its product inventory;

•changes in our customers, product mix and pricing strategy;

•disruptions of our information and communication systems;

•~~cyber attacks~~cyber-attacks or other information security incidents;

•the inability to successfully recruit, integrate and retain 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 implement changes in operating processes;

•~~the inability to successfully integrate acquisitions into our organization;~~various risks involved in any pursuit or completion by us of additional acquisitions;

•competition in the markets in which we operate;

•potential impairment charges for goodwill and other intangible assets;

•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 ~~cash~~borrowings available ~~through~~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, ~~arising from an inflationary economic environment,~~ could lead to higher financing costs;

•declines in the market price of our common ~~stock;~~stock (the "DSG common stock");

•the significant influence of Luther King Capital Management ~~Corporation’s significant influence~~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 regulations;

•changes in tax matters;

•~~the COVID-19 pandemic;~~

•~~the issuance of additional shares of~~risks arising from our ~~common stock~~ ~~in accordance with the earnout provisions of the Merger Agreements (as defined herein)~~ ~~to entities affiliated with Luther King Capital Management Corporation in connection with the Mergers (as defined herein);~~

•any 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 operations, and/or the failure to successfully combine those operations within our expected timetable;

•~~any difficulties in integrating the business operations of other businesses we may acquire, and/or the failure to successfully combine any such operations with our existing business;~~

•~~business uncertainties as a result of the Mergers;~~

•~~incurrence of additional transaction costs in connection with the Mergers;~~

•~~any inaccuracies in the Company’s estimates and judgments related to the acquisition accounting models used to record the purchase price allocation in connection with the Mergers;~~international operations;

•potential ~~impairment charges for goodwill and other intangible assets;~~

•~~risks arising from TestEquity’s and Gexpro Services’ international operations subjecting us to new and additional legal and regulatory regimes;~~

•~~stockholder litigation relating to the Mergers;~~

•limitations on our ability to use our net operating losses and certain other tax attributes generated prior to the Mergers (as defined below);

•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;

~~Table of Contents~~

•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

•~~all~~the other factors discussed in the ~~Company’s~~ “Risk Factors” section ~~set forth in~~of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and the “Risk Factors” section of this Quarterly Report on Form ~~10-Q for the quarterly period ended September 30, 2022.~~10-Q.

~~The Company undertakes~~

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We undertake no obligation to update ~~any such factors, assumptions and uncertainties~~ or ~~to publicly announce the results of any revisions to~~revise any forward-looking ~~statements~~statement contained herein, whether ~~as a result of new information, future~~to 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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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Distribution Solutions Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share data)

(Unaudited)


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	25,171	$	14,671	Cash and cash equivalents	$	44,244	$	24,554
Restricted cash	Restricted cash	181		—		Restricted cash	20,607		186
Accounts receivable, less allowance for doubtful accounts of $2,009 and $2,473, respectively		173,083		80,574
Accounts receivable, less allowances of $3,678 and $1,513, respectively						Accounts receivable, less allowances of $3,678 and $1,513, respectively	238,705		166,301
Inventories, net	Inventories, net	260,840		132,717		Inventories, net	326,236		264,374
Prepaid expenses and other current assets	Prepaid expenses and other current assets	26,769		8,098		Prepaid expenses and other current assets	32,999		22,773
Total current assets	Total current assets	486,044		236,060		Total current assets	662,791		478,188
Property, plant and equipment, net	Property, plant and equipment, net	64,765		9,079		Property, plant and equipment, net	113,329		64,395
Rental equipment, net	Rental equipment, net	25,489		24,727		Rental equipment, net	27,106		27,139
Goodwill	Goodwill	351,147		106,145		Goodwill	398,663		348,048
Deferred tax asset	Deferred tax asset	201		266		Deferred tax asset	7		189
Intangible assets, net	Intangible assets, net	236,869		96,608		Intangible assets, net	277,537		227,994
Cash value of life insurance	Cash value of life insurance	17,198		—		Cash value of life insurance	17,628		17,166
Right of use assets		44,682		19,662
Right of use operating lease assets						Right of use operating lease assets	65,772		46,755
Other assets	Other assets	6,320		747		Other assets	7,246		5,736
Total assets	Total assets	$	1,232,715	$	493,294	Total assets	$	1,570,079	$	1,215,610
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	96,886	$	47,958	Accounts payable	$	88,977	$	80,486
Current portion of long-term debt	Current portion of long-term debt	16,121		134,405		Current portion of long-term debt	32,386		16,352
Current portion of lease obligation		9,994		4,641
Earnout derivative liability		12,700		—
Related party payables		—		4,813
Current portion of lease liabilities						Current portion of lease liabilities	12,836		9,964

Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	58,663		23,126		Accrued expenses and other current liabilities	92,999		62,677
Total current liabilities	Total current liabilities	194,364		214,943		Total current liabilities	227,198		169,479
Long-term debt, less current portion, net	Long-term debt, less current portion, net	397,461		93,134		Long-term debt, less current portion, net	558,845		395,825
Security bonus plan		9,958		—
Deferred compensation		10,248		—
Lease obligation		38,169		16,132

Lease liabilities						Lease liabilities	57,735		39,828
Deferred tax liability	Deferred tax liability	32,258		2,742		Deferred tax liability	25,905		23,834
Other liabilities	Other liabilities	3,510		574		Other liabilities	24,403		23,649
Total liabilities	Total liabilities	685,968		327,525		Total liabilities	894,086		652,615
Commitments and contingencies (Note 18)
Commitments and contingencies (Note 14)						Commitments and contingencies (Note 14)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $1 par value:	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 — None	—		—		Authorized - 500,000 shares, issued and outstanding — None	—		—
Common stock, $1 par value:	Common stock, $1 par value:					Common stock, $1 par value:
Authorized - 35,000,000 shares Issued - 19,712,137 and 10,542,333 shares, respectively Outstanding - 19,400,005 and 10,294,824 shares, respectively		19,424		10,318
Authorized - 35,000,000 shares Issued - 23,667,064 and 19,730,362 shares, respectively Outstanding - 23,349,735 and 19,416,784 shares, respectively						Authorized - 35,000,000 shares Issued - 23,667,064 and 19,730,362 shares, respectively Outstanding - 23,349,735 and 19,416,784 shares, respectively	23,350		19,417
Capital in excess of par value	Capital in excess of par value	574,176		197,057		Capital in excess of par value	688,983		591,796
Retained deficit	Retained deficit	(23,853)		(33,142)		Retained deficit	(16,809)		(25,736)
Treasury stock – 312,132 and 247,509 shares, respectively		(12,475)		(10,033)
Treasury stock – 317,329 and 313,578 shares, respectively						Treasury stock – 317,329 and 313,578 shares, respectively	(12,697)		(12,526)
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(10,525)		1,569		Accumulated other comprehensive (loss) income	(6,834)		(9,956)
Total stockholders’ equity	Total stockholders’ equity	546,747		165,769		Total stockholders’ equity	675,993		562,995
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,232,715	$	493,294	Total liabilities and stockholders’ equity	$	1,570,079	$	1,215,610

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollars in thousands, except per share data)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022

Revenue	Revenue	$	347,151	$	132,090	$	822,572	$	391,069	Revenue	$	377,984	$	321,336	$	726,254	$	475,421
Cost of goods sold	Cost of goods sold	227,984		97,252		547,966		292,243		Cost of goods sold	241,961		206,781		457,360		319,982
Gross profit	Gross profit	119,167		34,838		274,606		98,826		Gross profit	136,023		114,555		268,894		155,439

Selling, general and administrative expenses	Selling, general and administrative expenses	97,140		29,347		245,478		85,614		Selling, general and administrative expenses	122,247		110,442		238,397		148,338
Operating income (loss)	Operating income (loss)	22,027		5,491		29,128		13,212		Operating income (loss)	13,776		4,113		30,497		7,101

Interest expense	Interest expense	(6,097)		(3,976)		(16,704)		(12,482)		Interest expense	(9,492)		(3,751)		(17,162)		(10,607)
Loss on extinguishment of debt	Loss on extinguishment of debt	—		—		(3,395)		—		Loss on extinguishment of debt	—		(2,814)		—		(3,395)
Change in fair value of earnout liabilities	Change in fair value of earnout liabilities	9,641		—		3,948		—		Change in fair value of earnout liabilities	36		(5,693)		(21)		(5,693)
Other income (expense), net	Other income (expense), net	(550)		(74)		224		(328)		Other income (expense), net	(761)		(182)		(1,736)		774

Income (loss) before income taxes	Income (loss) before income taxes	25,021		1,441		13,201		402		Income (loss) before income taxes	3,559		(8,327)		11,578		(11,820)
Income tax expense (benefit)	Income tax expense (benefit)	8,480		216		3,912		606		Income tax expense (benefit)	535		(3,612)		2,647		(4,568)

Net income (loss)	Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)	Net income (loss)	$	3,024	$	(4,715)	$	8,931	$	(7,252)

Basic income (loss) per share of common stock	Basic income (loss) per share of common stock	$	0.85	$	0.12	$	0.54	$	(0.02)	Basic income (loss) per share of common stock	$	0.14	$	(0.23)	$	0.42	$	(0.47)

Diluted income (loss) per share of common stock	Diluted income (loss) per share of common stock	$	0.84	$	0.12	$	0.53	$	(0.02)	Diluted income (loss) per share of common stock	$	0.14	$	(0.23)	$	0.41	$	(0.47)

Comprehensive income (loss)	Comprehensive income (loss)									Comprehensive income (loss)
Net income (loss)	Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)	Net income (loss)	$	3,024	$	(4,715)	$	8,931	$	(7,252)
Other comprehensive income (loss), net of tax:	Other comprehensive income (loss), net of tax:									Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	Foreign currency translation adjustment	(9,774)		175		(12,094)		172		Foreign currency translation adjustment	1,083		(2,491)		3,707		(2,320)
Other										Other	(385)		—		(585)		—
Comprehensive income (loss)	Comprehensive income (loss)	$	6,767	$	1,400	$	(2,805)	$	(32)	Comprehensive income (loss)	$	3,722	$	(7,206)	$	12,053	$	(9,572)

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share data)

(Unaudited)


		Common Stock			Capital in Excess of Par Value												Accumulated Other Comprehensive Income (Loss)					Total Stockholders' Equity			Common Stock					Capital in Excess of Par Value									Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
		Outstanding Shares	td Par Value				Retained Deficit				Treasury Stock										Outstanding Shares					td Par Value			Retained Deficit				Treasury Stock
Balance at December 31, 2021		10,294,824	$	10,318			$	197,057			$	(33,142)			$	(10,033)			$	1,569					$	165,769
Net income (loss)		—	—		—				(2,537)				—				—					(2,537)
Foreign currency translation adjustment		—	—		—				—				—				171					171

Shares issued		6,065	6		(6)				—				—				—					—
Tax withholdings related to net share settlements of stock-based compensation awards		(889)	—		33				—				(33)				—					—
Other		—	—		(95)				—				—				—					(95)
Balance at March 31, 2022		10,300,000	$	10,324	$	196,989			$	(35,679)			$	(10,066)			$	1,740				$	163,308
Balance at January 1, 2023																								Balance at January 1, 2023	19,416,784		$	19,417			$	591,796		$	(25,736)		$	(12,526)		$	(9,956)		$	562,995
Net income (loss)	Net income (loss)	—	—		—				(4,715)				—				—					(4,715)		Net income (loss)	—		—			—			5,907			—			—			5,907
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—				—				(2,491)					(2,491)		Foreign currency translation adjustment	—		—			—			—			—			2,624			2,624
Stock-based compensation	Stock-based compensation	—	—		573				—				—				—					573		Stock-based compensation	—		—			773			—			—			—			773
Stock-based compensation liability paid in shares																								Stock-based compensation liability paid in shares	—		—			227			—			—			—			227
Shares issued	Shares issued	25,682	24		(24)				—				—				—					—		Shares issued	11,144		11			(11)			—			—			—			—
Deemed consideration for reverse acquisition		9,120,167	9,120		342,371				—				—				—					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
Shares issued - earnout																								Shares issued - earnout	1,700,000		1,700			(1,700)			—			—			—			—
Tax withholdings related to net share settlements of stock-based compensation awards	Tax withholdings related to net share settlements of stock-based compensation awards	(1,867)	—		—				—				(78)				—					(78)		Tax withholdings related to net share settlements of stock-based compensation awards	(2,639)		(3)			3			—			(117)			—			(117)
Settlement of related party liability		—	—		5,276				—				—				—					5,276
Other	Other	—	—		(39)				—				—				—					(39)		Other	—		—			204			(4)			—			(200)			—
Balance at June 30, 2022		19,443,982	$	19,468	$	573,649			$	(40,394)			$	(10,144)			$	(751)				$	541,828
Balance at March 31, 2023																								Balance at March 31, 2023	21,125,289		$	21,125		$	591,292		$	(19,833)		$	(12,643)		$	(7,532)		$	572,409
Net income (loss)	Net income (loss)	—	—		—				16,541				—				—					16,541		Net income (loss)	—		—			—			3,024			—			—			3,024
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—				—				(9,774)					(9,774)		Foreign currency translation adjustment	—		—			—			—			—			1,083			1,083
Stock-based compensation	Stock-based compensation	—	—		489				—				—				—					489		Stock-based compensation	—		—			1,062			—			—			—			1,062
Issuance of common stock in rights offering, net of offering costs of $1,531																								Issuance of common stock in rights offering, net of offering costs of $1,531	2,222,222		2,222			96,247			—			—			—			98,469
Shares issued	Shares issued	17,992	18		(18)				—				—				—					—		Shares issued	3,336		4			(4)			—			—			—			—

Repurchase of common stock		(54,089)	(54)		54				—				(1,940)				—					(1,940)
Tax withholdings related to net share settlements of stock-based compensation awards	Tax withholdings related to net share settlements of stock-based compensation awards	(7,880)	(8)		8				—				(391)				—					(391)		Tax withholdings related to net share settlements of stock-based compensation awards	(1,112)		(1)			1			—			(54)			—			(54)

Other	Other	—	—		(6)				—				—				—					(6)		Other	—		—			385			—			—			(385)			—
Balance at September 30, 2022		19,400,005	$	19,424	$	574,176			$	(23,853)			$	(12,475)			$	(10,525)				$	546,747
Balance at June 30, 2023																								Balance at June 30, 2023	23,349,735		$	23,350		$	688,983		$	(16,809)		$	(12,697)		$	(6,834)		$	675,993

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)


		Common Stock			Capital in Excess of Par Value												Accumulated Other Comprehensive Income					Total Stockholders' Equity			Common Stock					Capital in Excess of Par Value									Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
		Outstanding Shares	td Par Value				Retained Deficit				Treasury Stock										Outstanding Shares					td Par Value			Retained Deficit				Treasury Stock
Balance at December 31, 2020		10,233,223	$	10,233			$	180,609			$	(28,090)			$	(9,015)			$	1,511					$	155,248
Balance at January 1, 2022																								Balance at January 1, 2022	10,294,824		$	10,318			$	197,057		$	(33,142)		$	(10,033)		$	1,569		$	165,769
Net income (loss)	Net income (loss)	—	—		—				(1,890)				—				—					(1,890)		Net income (loss)	—		—			—			(2,537)			—			—			(2,537)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—				—				168					168		Foreign currency translation adjustment	—		—			—			—			—			171			171
Shares issued		6,523	6		(6)				—				—				—					—
Tax withholdings related to net share settlements of stock-based compensation awards		(303)	—		13				—				(13)				—					—
Balance at March 31, 2021		10,239,443	$	10,239	$	180,616			$	(29,980)			$	(9,028)			$	1,679				$	153,526
Net income (loss)		—	—		—				461				—				—					461
Foreign currency translation adjustment		—	—		—				—				—				(171)					(171)
Shares issued		12,383	12		(12)				—				—				—					—
Balance at June 30, 2021		10,251,826	$	10,251	$	180,604			$	(29,519)			$	(9,028)			$	1,508				$	153,816
Net income (loss)		—	—		—				1,225				—				—					1,225
Foreign currency translation adjustment		—	—		—				—				—				175					175
Equity consideration for purchase of business		—	—		4,194				—				—				—					4,194
Capital contribution		—	—		9,233				—				—				—					9,233

Shares issued	Shares issued	1,355	2		(2)				—				—				—					—		Shares issued	6,065		6			(6)			—			—			—			—
Tax withholdings related to net share settlements of stock-based compensation awards	Tax withholdings related to net share settlements of stock-based compensation awards	(412)	—		20				—				(20)				—					—		Tax withholdings related to net share settlements of stock-based compensation awards	(889)		—			33			—			(33)			—			—
Other	Other	—	—		—				—				—				42					42		Other	—		—			(95)			—			—			—			(95)
Balance at September 30, 2021		10,252,769	$	10,253	$	194,049			$	(28,294)			$	(9,048)			$	1,725				$	168,685
Balance at March 31, 2022																								Balance at March 31, 2022	10,300,000		$	10,324		$	196,989		$	(35,679)		$	(10,066)		$	1,740		$	163,308
Net income (loss)																								Net income (loss)	—		—			—			(4,715)			—			—			(4,715)
Foreign currency translation adjustment																								Foreign currency translation adjustment	—		—			—			—			—			(2,491)			(2,491)
Stock-based compensation																								Stock-based compensation	—		—			573			—			—			—			573
Shares issued																								Shares issued	25,682		24			(24)			—			—			—			—
Deemed consideration for reverse acquisition																								Deemed consideration for reverse acquisition	9,120,167		9,120			342,371			—			—			—			351,491
Reclassification of issuable shares from earnout derivative liability																								Reclassification of issuable shares from earnout derivative liability	—		—			26,593			—			—			—			26,593
Fair value adjustment of stock-based compensation awards																								Fair value adjustment of stock-based compensation awards	—		—			1,910			—			—			—			1,910
Tax withholdings related to net share settlements of stock-based compensation awards																								Tax withholdings related to net share settlements of stock-based compensation awards	(1,867)		—			—			—			(78)			—			(78)
Settlement of related party liability																								Settlement of related party liability	—		—			5,276			—			—			—			5,276
Other																								Other	—		—			(39)			—			—			—			(39)
Balance at June 30, 2022																								Balance at June 30, 2022	19,443,982		$	19,468		$	573,649		$	(40,394)		$	(10,144)		$	(751)		$	541,828

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Operating activities
Net income (loss)	$	8,931	$	(7,252)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	30,306		22,335
Amortization of debt issue costs	1,002		421
Extinguishment of debt	—		3,395
Stock-based compensation	4,392		4,013
Deferred income taxes	86		(420)
Change in fair value of earnout liabilities	21		5,693
Gain on sale of rental equipment	(1,377)		(1,821)
Loss on sale of property, plant and equipment	215		—
Charge for step-up of acquired inventory	716		—
Net realizable value and reserve adjustment for obsolete and excess inventory	—		1,377

Bad debt expense	933		244
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(4,799)		(27,639)
Inventories	962		(28,983)
Prepaid expenses and other current assets	(6,405)		(13,777)
Accounts payable	(8,936)		(5,254)
Accrued expenses and other current liabilities	(624)		9,957
Other changes in operating assets and liabilities	2,041		(1,832)
Net cash provided by (used in) operating activities	27,464		(39,543)
Investing activities
Purchases of property, plant and equipment	(7,796)		(3,410)
Business acquisitions, net of cash acquired	(252,007)		(113,781)
Purchases of rental equipment	(5,990)		(4,878)
Proceeds from sale of rental equipment	2,969		6,783

Net cash provided by (used in) investing activities	(262,824)		(115,286)
Financing activities
Proceeds from revolving lines of credit	161,684		166,200
Payments on revolving lines of credit	(274,134)		(67,687)
Proceeds from term loans	305,000		377,552
Payments on term loans	(11,250)		(307,490)
Deferred financing costs	(3,419)		(11,415)

Proceeds from rights offering, net of offering costs of $1,531	98,469		—

Shares repurchased held in treasury	(171)		(78)
Payment of financing lease principal	(249)		(39)
Payment of earnout	(1,000)		—

Net cash provided by (used in) financing activities	274,930		157,043
Effect of exchange rate changes on cash and cash equivalents	541		1,181
Increase (decrease) in cash, cash equivalents and restricted cash	40,111		3,395
Cash, cash equivalents and restricted cash at beginning of period	24,740		14,671
Cash, cash equivalents and restricted cash at end of period	$	64,851	$	18,066
Cash and cash equivalents	$	44,244	$	17,872
Restricted cash	20,607		194
Total cash, cash equivalents and restricted cash	$	64,851	$	18,066

Nine Months Ended September 30,
2022 2021
Operating activities
Net income (loss) $ 9,289 $ (204)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization 31,314 13,649
Amortization of debt issue costs 1,419 899
Extinguishment of debt 3,395 —
Stock-based compensation 445 —
Change in fair value of earnout liability (3,948) —
Gain on sale of rental equipment (2,463) (1,918)
Charge for step-up of acquired inventory 2,703 —
Net realizable value and reserve adjustment for obsolete and excess inventory 5,551 (585)
Bad debt expense 564 1,136
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (30,795) 5,740
Inventories, net (43,857) 2,770
Prepaid expenses and other current assets (2,224) (953)
Accounts payable 1,687 (6,857)
Accrued expenses and other current liabilities 1,316 982
Other changes in operating assets and liabilities 6,324 2,478
Net cash provided by (used in) operating activities (19,280) 17,137
Investing activities
Purchases of property, plant and equipment (4,954) (2,907)
Business acquisitions, net of cash acquired (113,681) (19,721)
Purchases of rental equipment (7,913) (8,246)
Proceeds from sale of rental equipment 5,998 3,899
Net cash provided by (used in) investing activities (120,550) (26,975)
Financing activities
Proceeds from revolving lines of credit 302,044 20,500
Payments on revolving lines of credit (237,370) (11,200)
Proceeds from term loans 445,630 —
Payments on term loans (343,662) (7,321)
Deferred financing costs (11,956) —
Capital contribution — 9,233
Repurchase of common stock (1,940) —
Shares repurchased held in treasury (469) —
Payment of financing lease principal (457) —
Net cash provided by (used in) financing activities 151,820 11,212
Effect of exchange rate changes on cash and cash equivalents (1,309) 188
Increase (decrease) in cash, cash equivalents and restricted cash 10,681 1,562
Cash, cash equivalents and restricted cash at beginning of period 14,671 10,399
Cash, cash equivalents and restricted cash at end of period $ 25,352 $ 11,961
Cash and cash equivalents $ 25,171 $ 11,961
Restricted cash 181 —
Total cash, cash equivalents and restricted cash $ 25,352 $ 11,961

See notes to 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,					Six Months Ended June 30,
		2022		2021			2023		2022

Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information					Supplemental disclosure of cash flow information
Net cash paid for income taxes	Net cash paid for income taxes	$	11,553	$	510	Net cash paid for income taxes	$	5,444	$	6,267
Net cash paid for interest	Net cash paid for interest	$	12,093	$	11,727	Net cash paid for interest	$	8,334	$	10,600
Non-cash activities:	Non-cash activities:					Non-cash activities:
Fair value of common stock exchanged for reverse acquisition	Fair value of common stock exchanged for reverse acquisition	$	351,491	$	—	Fair value of common stock exchanged for reverse acquisition	$	—	$	351,491
Settlement of related party obligations	Settlement of related party obligations	$	5,276	$	—	Settlement of related party obligations	$	—	$	5,276
Additions of property, plant and equipment included in accounts payable						Additions of property, plant and equipment included in accounts payable	$	1,566	$	135
Right of use assets obtained in exchange for finance lease liabilities						Right of use assets obtained in exchange for finance lease liabilities	$	329	$	713
Right of use assets obtained in exchange for operating lease liabilities						Right of use assets obtained in exchange for operating lease liabilities	$	4,840	$	10,291

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

~~Effective May 5, 2022,~~ Distribution Solutions Group, Inc. ~~("DSG")~~, a Delaware corporation ~~changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG~~("DSG"), is a global specialty distribution company providing ~~value added~~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 ~~for the purpose of creating~~on April 1, 2022 to create a 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 the holding company, Distribution Solutions Group, Inc., and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

Recent Events

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 $270.4 million, net of cash, 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 using a combination of 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.

Rights Offering

On May 30, 2023, the Company issued 2,222,222 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 0.105 shares of DSG common stock at a subscription price of $45.00 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.

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Combination ~~Background~~with TestEquity and Gexpro Services

On December 29, 2021, DSG entered ~~into an:~~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, ~~Acquisition, LLC, a Delaware limited liability company and~~which was a wholly-owned subsidiary of the TestEquity Equityholder, ~~(“TestEquity”),~~ (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) ~~301 HW Opus Holdings, Inc., a Delaware corporation and~~Gexpro Services, which was a wholly-owned subsidiary of the Gexpro Services Stockholder, ~~(“Gexpro Services”),~~ (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”).

~~Each~~At the closing of the Mergers, each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the ~~Merger~~Mergers was converted into approximately 0.3618 shares and 0.7675 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, atin connection with the closing of the TestEquity Merger on the Merger Date, DSG: (i) issued to the TestEquity Equityholder 3,300,000 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 ~~provides~~provided that up to an additional 700,000 shares of DSG common stock ~~(the “TestEquity Holdback Shares”) may~~would be ~~issued~~potentially issuable to the TestEquity Equityholder ~~or forfeited~~ in accordance with, ~~two~~and subject to the terms and conditions of, the earnout provisions of the TestEquity Merger Agreement. On March 20, 2023, DSG issued 700,000 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 ~~amount of~~ TestEquity Holdback Shares ~~issuable under~~issued represented the ~~first earnout opportunity is based on, among other factors, the consummation~~maximum number of ~~a certain~~ additional acquisition by TestEquity during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any TestEquity Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in TestEquity

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EBITDA (as defined in the TestEquity Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the TestEquity Merger Agreement. As of September 30, 2022, 700,000 TestEquity Holdback Shares are expected toshares that could be issued under ~~the first earnout opportunity due to the consummation of the certain additional acquisition as referenced in~~ the TestEquity Merger Agreement, and ~~were remeasured~~no further shares are available for issuance, and ~~reclassified to equity at April 29, 2022 when~~no additional shares will be issued, in connection with the ~~additional acquisition was consummated.~~TestEquity Merger Agreement. Refer to Note ~~11 -~~8 – Earnout ~~Derivative Liability~~Liabilities for information about the earnout derivative liability related to the TestEquity Holdback Shares.

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, atin connection with the closing of the Gexpro Services Merger on the Merger Date, DSG: (i) issued to the Gexpro Services Stockholder 7,000,000 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 ~~provides~~provided that up to an additional 1,000,000 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 1,000,000 shares of DSG

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common stock to the Gexpro Services Stockholder (the “Gexpro Services Holdback Shares”) ~~may be issued~~pursuant to the ~~Gexpro Services Stockholder or forfeited in accordance with two~~terms of the earnout provisions of the Gexpro Services Merger Agreement. The ~~amount of~~ Gexpro Services Holdback Shares ~~issuable~~issued represented the maximum number of additional shares that could be issued under the first earnout opportunity is based on, among other factors, the consummation of one or more of three certain additional acquisitions by Gexpro Services during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any Gexpro Services Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in Gexpro Services EBITDA (as defined in the Gexpro Services Merger ~~Agreement)~~Agreement, and no further shares are available for issuance, and no additional shares will be issued, in ~~calendar year 2022 over calendar year 2021 subject to the calculations within~~connection with the Gexpro Services Merger Agreement.

As of April 1, 2022, approximately 538,000 of the Gexpro Services Holdback Shares ~~were~~had been expected to be issued under the first earnout opportunity ~~due~~in the Gexpro Services Merger Agreement based on certain earnout metrics related to the consummation of ~~the~~ certain additional acquisitions which were completed prior to the Merger Date. ~~The fair value~~Under the Gexpro Services Merger Agreement, if any Gexpro Services Holdback Shares remained after the calculation of the ~~remaining~~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 1,000,000 Gexpro Services Holdback Shares were issued under the earnout opportunities. The incremental 462,000 Gexpro Services Holdback Shares ~~available under~~that were issued in excess of the ~~second earnout opportunity are included in Earnout derivative liability in the Unaudited Condensed Consolidated Balance Sheets. Final issuance of the~~538,000 Gexpro Services Holdback Shares ~~under the second earnout opportunity is subject~~that were originally expected to ~~certain terms~~be issued had been remeasured at fair value immediately prior to and ~~conditions as specified in the Gexpro Services Merger Agreement.~~reclassified to equity at December 31, 2022. Refer to Note ~~11 -~~8 – Earnout ~~Derivative Liability~~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 ~~and financial position~~ 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 ~~20 -~~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 ~~tool kits~~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 Consolidation

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 ("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 was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owns a majority of the

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voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements ~~as of September 30, 2022 and December 31, 2021 and~~ for the ~~three and nine~~six months ended ~~September~~June 30, 2022 ~~and 2021~~ reflect the results of operations ~~and financial position~~ of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are 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 six months ended June 30, 2023 and the three months ended June 30, 2022. The unaudited condensed consolidated financial statements as of June 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. The consolidated financial statement impact of the one day difference arising from the different period ends for the quarter ended ~~September~~June 30, ~~2022~~2023 was not material.

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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 DSG have been prepared in accordance with accounting principles generally accepted in 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 GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with ~~the TestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc.~~DSG's audited consolidated financial statements and accompanying notes included in ~~the Company's Current~~its Annual Report on Form ~~8-K/A~~10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission ("SEC") ~~on June 15, 2022,~~ and the Lawson Products, Inc. ~~audited~~unaudited condensed consolidated financial statements and accompanying notes included in ~~DSG's Annual~~DSG’s Quarterly Report on Form ~~10-K filed~~10-Q for the ~~year~~quarterly period ended ~~December~~March 31, ~~2021.~~2022. All normal recurring adjustments have been made that are necessary to fairly state the results of operations for the interim periods. Operating results for the three and ~~nine~~six month ~~periods~~period ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

Note 2 -– Summary of Significant Accounting Policies

~~Revenue Recognition~~ — The majority of the Company’s revenue is generated through the sale of a broad range of specialized products and components, with revenue recognized upon transfer of control, title and risk of loss, which is generally upon shipment. Vendor Managed Inventory ("VMI") service revenue represents less than 5.0% of total revenue and is recognized as the services are performed. The Company offers VMI services only in conjunction with product sales. The Company does not bill product sales and services separately. A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services. A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed. The Company includes shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services. The Company accrues for returns based on historical evidence of return rates. The Company has adopted the practical expedient within ASC 340, ~~Other Assets and Deferred Costs~~ ("ASC 340") to recognize incremental costs to obtain a contract, primarily employee related costs, as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606, ~~Revenue from Contracts with Customers~~ ~~("ASC 606") from the associated lease component as the relevant criteria under ASC 842,~~ ~~Leases~~ ~~("ASC 842") are met.~~

~~Cash Equivalents~~— The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of the Company’s cash equivalents at September 30, 2022 and December 31, 2021 approximates fair value.

~~Allowance for Doubtful Accounts~~ — The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivableThere were no significant changes to the ~~amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves~~Company's accounting policies from those disclosed in DSG's Annual Report on Form 10-K for bad debts based on the Company’s historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the estimates of the recoverability of amounts due the Company could be revised.

~~Inventories~~— Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson and TestEquity segments and weighted average for the Gexpro Services segment. 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

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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.

~~Property, Plant and Equipment~~ — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles. The Company estimates useful lives of 10 to 40 years for buildings and improvements, the shorter of the useful life of the assets or term of the underlying leases for leasehold improvements, and 2 to 10 years for machinery and equipment, furniture and fixtures and vehicles. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. The costs of repairs, maintenance and minor renewals are charged to expense as incurred. Amortization of financing and capital leases is included in depreciation expense. When property, plant and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in the income from operations.

~~Rental Equipment~~ — Rental equipment is stated at cost less accumulated depreciation and amortization. Expense is computed primarily by the straight-line method over an estimated useful life of 3 to 7 years. Upon sale or retirement of such assets, the related cost and accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet, and gains or losses are reflected in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The costs of repairs, maintenance and minor renewals are charged to expense as incurred. When rental equipment is retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet and any gain or loss is included in the income from operations.

~~Cash Value of Life Insurance~~— The Company invests funds in life insurance policies for certain current and former employees. The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset in the Unaudited Condensed Consolidated Balance Sheets. The Company records these policies at their contractual value. The change in the cash surrender value of the life insurance policies, which is recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), is the change in the policies' contractual values.

~~Deferred Compensation~~ — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation. The deferred compensation is recorded in an account balance, which is a bookkeeping entry made by the Company to measure the amount due to the participant. The account balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that the participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds. The Company adjusts the deferred compensation liability to equal the contractual value of the participants’ account balances. These adjustments are the changes in contractual value of the individual plans and are recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

~~Stock-Based Compensation~~ — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period. Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash. The Company accounts for forfeitures of stock-based compensation in the period in which they occur.

~~Goodwill~~ ~~— The Company had $351.1 million of goodwill at September 30, 2022 and $106.1 million of goodwill at December 31, 2021. 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

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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.

~~Intangible Assets —~~ The Company's intangible assets primarily consist of trade names and customer relationships. Intangible assets are amortized over a weighted average of 8 to 15 year and 9 to 20 year estimated useful lives for trade names and customer relationships, respectively. The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.

~~Impairment of Long-Lived Assets —~~ The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Recoverability is measured by a comparison of the assets carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. No impairments occurred in ~~the first nine months of 2022 or during~~ the year ended December 31, ~~2021~~.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.

~~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. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e. greater than 50% likely) that some or all of the deferred tax assets will not be realized. The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

Earnings from the Company's foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to foreign withholding taxes and may subject the Company to U.S. federal and state taxes.

The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Income tax expense (benefit) in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

~~Leases~~— Leases are categorized as either operating or financing leases at commencement of the lease. For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement of the lease. Operating leases consist of the Company headquarters, distribution and service centers, and Bolt branches. Financing leases consist of equipment such as forklifts and copiers. The value of the lease assets and liabilities are the present value of the total cash payments for each lease. The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease. The Company reviews each lease to determine if there is a more appropriate discount rate to apply. Upon commencement of the lease, rent expense is recognized on a straight line basis for each operating lease. Each financing lease ROU asset is amortized on a straight line basis over the lease period. TestEquity and the Lawson Partsmaster business have equipment leasing programs for customers. These leases are classified as operating leases. The leased equipment is recognized in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheets and the leasing revenue is recognized on a straight line basis.

~~Earnings per Share~~— Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding performance awards, stock options, market stock units and restricted stock awards into common stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. Contingently issuable shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent). For diluted EPS, the contingently issuable shares should be included in the denominator of

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~~the diluted EPS calculation as of the beginning of the interim period in which the conditions are satisfied and the earnout arrangements have been resolved.~~

For the reverse acquisition period prior to April 1, 2022, the Company calculates the basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements by dividing the income of the accounting acquirer attributable to common shareholders in each of those periods by the accounting acquirer’s historical weighted-average number of common shares outstanding. The Company calculates the weighted-average number of common shares outstanding (the denominator of the EPS calculation), including the equity interests issued by the legal acquirer to effect the reverse acquisition, as the number of common shares outstanding from the beginning of that period to the acquisition date computed on the basis of the weighted-average number of common shares of the accounting acquirer outstanding during the period multiplied by an exchange ratio derived from the shares exchanged at the Merger Date.

~~Foreign Currency~~ ~~— The accounts of foreign subsidiaries are measured using the local currency as the functional currency. All balance sheet am~~ounts are translated into U.S. dollars using the exchange rates in effect at the applicable period end. Components of income or loss are translated using the average exchange rate for each reporting period.

Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S. dollars are reported as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets. Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.

Gains and losses resulting from foreign intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets.

~~Treasury Stock~~ ~~— The Company repurchased 54,089 shares of its common stock in 2022 and no shares of its common stock in 2021 through its previously announced stock repurchase plan. The Company repurchased 10,636 shares~~ ~~of its common stock i~~n 2022 from employees upon the vesting of restricted stock to offset the income taxes owed by those employees. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The cost of the common stock repurchased and held in treasury wa~~s 2.4 million~~ ~~in 2022.~~

~~Segment Information~~ ~~— ASC 280,~~ ~~Segment Reporting~~, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision-maker (“CODM”) is the Chief Executive Officer of DSG. The CODM reviews the financial performance and the results of operations of the segments when making decisions about allocating resources and assessing performance of the Company.

The Company has determined it has four operating segments: (i) Lawson, (ii) Gexpro Services, (iii) TestEquity and (iv) All Other. The Company’s three reportable segments include (i) Lawson, (ii) Gexpro Services and (iii) TestEquity. The Company’s CODM reviews the operating results of these reportable segments for the purpose of allocating resources and evaluating financial performance.

There are no intersegment revenues. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. Please see Note 20 - Segment Information for further details.

~~Acquisitions~~ — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

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~~Fair Value Measurements~~ ~~— The Company applies the guidance in ASC 820,~~ ~~Fair Value Measurements~~ to account for financial assets and liabilities measured on a recurring basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described below:

~~Level 1 - Unadjusted quoted prices for identical assets and liabilities in active markets.~~

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management's best estimate of fair value and that are significant to the fair value of the asset or liability

The carrying amount of accounts receivable, accounts payable, accrued expenses and other working capital balances are considered a reasonable estimate of their fair value due to the short-term maturity of these instruments. The carrying amount of debt is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. The Company’s earnout derivative liability and debt are recorded at fair value on a recurring basis and were estimated using Level 3 inputs.

~~Earnout Derivative Liability~~— The Company recorded an earnout derivative liability for the future contingent equity shares related to the TestEquity Holdback Shares and the Gexpro Services Holdback Shares provisions within the Merger Agreements. The contingently issuable shares are not indexed to Company common stock and, therefore, are accounted for as liability classified instruments in accordance with ASC 815-40, ~~Contracts in Entity’s Own Equity~~, as the events that determine the number of contingently issuable shares required to be released or issued, as the case may be, include events that are not solely indexed to the fair value of Company common stock. The contingently issuable shares were initially measured at the Merger Date and are subsequently measured at each reporting date until settled, or when they meet the criteria for equity classification. Changes in the fair value of the earnout derivative liability are recorded as a component of Change in fair value of earnout liability in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

~~The Company reassesses the classification of these~~ ~~derivative liabilities for earnout arrangements~~ ~~each balance sheet date. If the contingencies are resolved for the issuable shares, the earnout~~ ~~derivative~~ ~~liability~~ is ~~reclassified from the liability to equity as of the date of the event that caused the contingencies to be met.~~ ~~The earnout derivative liability is measured at fair value immediately prior to the reclassification to equity.~~ ~~If the~~ ~~earnout derivative liability~~ ~~is reclassified from a liability to equity, gains or losses recorded to account for the liability at fair value during the period that the contract was classified as a liability are not reversed.~~

The contingently issuable shares are included in the denominator of the basic earnings per share calculation as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent). For diluted earnings per share, the contingently issuable shares are included in the denominator of the diluted earnings per share calculation as of the beginning of the interim period in which the conditions are satisfied and the earnout arrangements have been resolved. See Note 16 - Earnings Per Share for further information.

~~Use of Estimates~~— Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported for service revenue, service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

~~Supplier Concentrations~~ — During the nine months ended September 30, 2022 and 2021, TestEquity purchases of inventory from one unrelated supplier accounted for 10.3% and 20.5% of the Company's total inventory purchases, respectively.

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~~Recent~~ Accounting Pronouncements - ~~Not Yet~~ 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 iswas 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 ~~is still evaluating~~adopted this guidance on January 1, 2023. The adoption had no material impact on the ~~effect the adoption~~Company's financial condition, results of ~~the new standard will have on its financial statements.~~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 ~~is still evaluating~~adopted this guidance on January 1, 2023. The adoption had no impact on the ~~effect~~Company's financial condition, results of operations or cash flows and will be applied to business combinations on or after the adoption ~~of the new standard will have on its financial statements.~~date.

Note 3 -– Business Acquisitions

~~Completion of Mergers~~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 10.3 million shares of DSG common stock on April 1, 2022 to the former owners of TestEquity and Gexpro Services. AnOn March 20, 2023, an additional 1.7 million shares of DSG common stock ~~remain potentially issuable upon meeting the conditions of certain earnout provisions.~~were issued. Refer to Note 1 -– Nature of Operations and Basis of Presentation for further information regarding the Mergers.

The business combination of Lawson, TestEquity and Gexpro Services combines three ~~value added~~value-added complementary distribution businesses. Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental MRO 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 1-1 – Nature of Operations and Basis of Presentation for more information on the nature of operations 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

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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 shares ~~exchanged~~	9,120,167
DSG common stock closing price per ~~common stock~~share on March 31, 2022	$	38.54
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 ~~fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change. Certain estimated~~

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~~values~~accounting for the ~~acquisition, including the valuation~~Mergers was complete as of intangibles and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition.December 31, 2022. Goodwill generated from the ~~acquisition~~Mergers is not deductible for tax purposes. The Company will continue to obtain information necessary to finalize the fair values, which may differ materially from these preliminary estimates. The final valuation will be completed within the one-year measurement period ending March 31, 2023, and any measurement period adjustments will be applied in the reporting period in which the adjustments are determined.

~~During the quarter ended~~ ~~September 30, 2022,~~ the Company recorded measurement period adjustments that resulted in a $1.7 million net decrease to goodwill. The measurement period adjustments were associated with adjustments to the fair value of certain property, plant and equipment assets, as well as changes in estimates related to leases.

The following table summarizes the ~~preliminary~~ allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed at the Merger Date ~~and~~ after applying measurement period adjustments:

(in thousands) Merger Date Measurement Period Adjustments Adjusted Total
Current assets $ 148,308 $ — $ 148,308
Property, plant and equipment 57,053 361 57,414
Right of use assets 17,571 687 18,258
Other intangible assets 119,060 — 119,060
Deferred tax liability, net of deferred tax asset (26,237) 39 (26,198)
Other assets 18,373 — 18,373
Current liabilities (71,097) (68) (71,165)
Long-term obligations (25,722) 20 (25,702)
Lease and financing obligations (29,474) 647 (28,827)
Derivative earnout liability (43,900) — (43,900)
Goodwill 189,466 (1,686) 187,780
Total consideration exchanged $ 353,401 $ — $ 353,401


(in thousands)	Final Purchase Price Allocation
Current assets	$	148,308
Property, plant and equipment	57,414
Right of use assets	18,258
Other intangible assets	119,060
Deferred tax liability, net of deferred tax asset	(19,394)
Other assets	18,373
Current liabilities	(71,165)
Long-term obligations	(25,746)
Lease and financing obligations	(28,827)
Derivative earnout liability	(43,900)

Goodwill	181,020
Total consideration exchanged	$	353,401

The ~~preliminary~~ allocation of consideration exchanged to other intangible assets acquired iswas as follows:


(in thousands)	Fair Value		Estimated Life (in years)
Customer relationships	$	76,050	19
Trade names	43,010		8
Total other intangible assets	$	119,060

The Company incurred transaction costs related to the Mergers of $2.4 million and $9.6 million for the three and nine months ended September 30, 2022, respectively and $0.6 million and $1.2 million for the three and nine months ended September 30, 2021, respectively.

~~Pro Forma Information~~

The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the Mergers and other acquisitions disclosed below occurred on January 1, 2021 for the 2022 acquisitions and January 1, 2020 for the 2021 acquisitions. 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 future results or the results that would have occurred had the Mergers been completed on the date indicated.

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
Revenue $ 347,151 $ 289,612 $ 986,572 $ 869,340
Net income 14,860 12,400 19,655 16,053

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Other Acquisitions

~~TestEquity~~DSG and ~~Gexpro Services~~its operating companies acquired other businesses during the first ~~nine~~six months of ~~2022~~2023 and the year ended December 31, ~~2021. The consideration exchanged for the acquired businesses included various combinations of cash, sellers notes, and forms of share based payments.~~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.

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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 $270.4 million, net of cash, 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 and six months ended June 30, 2023, $2.3 million was recorded as compensation expense over the service period for the retention bonuses as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

DSG funded the Hisco Transaction using a combination of 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 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:


(in thousands)	Hisco
Acquisition date	June 8, 2023
Current assets	$	131,950
Property, plant and equipment	48,326
Right of use assets	21,102
Other intangible assets:
Customer relationships	41,800
Trade names	25,600

Deferred tax liability, net of deferred tax asset	(2,544)
Other assets	2,495
Accounts payable	(16,689)
Lease liabilities	(22,372)
Accrued expenses and other liabilities	(8,961)

Goodwill	49,718
Total purchase consideration exchanged, net of cash acquired	$	270,425
Cash consideration	$	252,007
Deferred consideration	12,418
Contingent consideration	6,000
Total purchase consideration exchanged, net of cash acquired	$	270,425

Certain estimated values for the ~~acquisitions,~~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 ~~allocations are~~allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final ~~valuations~~valuation will be completed within the one-year measurement ~~periods~~period following the ~~respective~~ acquisition ~~dates,~~date, and any adjustments will be recorded in the period in which the adjustments are determined.

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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 $39.8 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 ~~first nine months of~~year ended December 31, 2022, TestEquity acquired Interworld Highway, LLC, ~~and~~ 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 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 the adjustments are determined. The purchase consideration for each business acquired and the ~~preliminary~~ allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:

(in thousands) Interworld Highway LLC Resolux Frontier National Test Equipment
Acquisition date April 29, 2022 January 3, 2022 March 31, 2022 June 1, 2022 Total
Current assets $ 15,018 $ 8,551 $ 3,381 $ 2,789 $ 29,739
Property, plant and equipment 313 459 1,065 642 2,479
Right of use assets — 1,125 9,313 — 10,438
Other intangible assets:
Customer relationships 6,369 11,400 9,300 2,100 29,169
Trade names 4,600 6,100 3,000 — 13,700
Other assets 10 1,745 — — 1,755
Accounts payable (8,856) (3,058) (778) (2,268) (14,960)
Accrued expenses and other liabilities — (939) (1,461) (1,169) (3,569)
Lease obligation — (1,125) (9,313) — (10,438)
Goodwill 37,236 6,498 11,667 5,701 61,102
Total purchase consideration exchanged, net of cash acquired $ 54,690 $ 30,756 $ 26,174 $ 7,795 $ 119,415

As of September 30, 2022, the Company updated the purchase price allocation for Frontier to reflect adjustments from the third-party valuation firm's preliminary report valuing Frontier's intangible assets which included changes in working capital, accrued expenses and other liabilities. The adjustments to these balances resulted in a $1.2 million increase to goodwill and $0.5 million increase to the total purchase consideration, net of cash acquired.

Also, as of September 30, 2022, the Company updated the purchase price allocation for National Test Equipment to reflect adjustments from the third-party valuation firm's preliminary report valuing National Test Equipment's intangible assets which included changes in working capital, accrued expenses and other liabilities. The adjustments to these balances resulted in a $0.3 million decrease to goodwill.


(in thousands)	Interworld Highway, LLC		Resolux		Frontier		National Test Equipment		Instrumex
Acquisition date	April 29, 2022		January 3, 2022		March 31, 2022		June 1, 2022		December 1, 2022		Total
Current assets	$	15,018	$	10,210	$	2,881	$	2,187	$	3,495	$	33,791
Property, plant and equipment	313		459		1,189		642		30		2,633
Right of use assets	—		1,125		9,313		—		—		10,438
Other intangible assets:
Customer relationships	6,369		11,400		9,300		2,100		800		29,969
Trade names	4,600		6,100		3,000		—		—		13,700

Other assets	10		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)		(153)		(7,533)
Lease liabilities	—		(1,125)		(9,313)		—		—		(10,438)

Goodwill	37,236		10,305		11,544		5,703		1,053		65,841
Total purchase consideration exchanged, net of cash acquired	$	54,690	$	30,755	$	25,674	$	7,192	$	3,934	$	122,245
Cash consideration	$	54,690	$	30,755	$	25,674	$	6,023	$	3,934	$	121,076
Seller's notes	—		—		—		1,169		—		1,169

Total purchase consideration exchanged, net of cash acquired	$	54,690	$	30,755	$	25,674	$	7,192	$	3,934	$	122,245

The consideration for the Frontier acquisition includes a potential earn-out payment 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. ~~The fair value of~~Refer to Note 8 – Earnout Liabilities for additional information on the contingent consideration arrangement was classified within Level 3 and was determined using a probability-based scenario analysis approach. As of March 31, 2022 and September 30, 2022, the fair value of the earn-out was $0.9 million and $1.6 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets.earn-out.

During the year ended December 31, 2021, TestEquity acquired MCS Test Group Limited ("MCS"), and Gexpro Services acquired Omni Fasteners Inc. ("Omni"), National Engineered Fasteners ("NEF") and State Industrial Supply ("SIS"). The accounting for the Omni and MCSAs a result of acquisitions ~~was complete as of June 30, 2022. Certain estimated values for the NEF and~~

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~~SIS acquisitions are preliminary, including goodwill and income taxes (including deferred taxes and associated valuation allowances). These values are subject to change as~~completed in 2022, the Company ~~completes its analysis~~recorded tax deductible goodwill of the fair value at the date of acquisition. The final valuations will be completed within the one-year measurement periods following the respective acquisition dates, and any adjustments will be recorded$53.6 million in ~~the period~~2022 that may result in ~~which the adjustments are determined.~~

The purchase consideration for each business acquired during 2021 and the allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:

(in thousands) Omni
NEF(1)
SIS MCS
Acquisition date June 8, 2021 November 1, 2021 December 31, 2021 July 31, 2021 Total
Current assets $ 2,259 $ 17,882 $ 3,541 $ 6,521 $ 30,203
Property, plant and equipment 600 589 125 — 1,314
Right of use assets — 1,774 799 — 2,573
Other intangible assets:
Customer relationships 2,530 5,007 4,800 2,621 14,958
Trade names 200 2,503 1,500 41 4,244
Other intangible assets 9 — 380 — 389
Other assets — 1,236 10 — 1,246
Accounts payable (50) (3,506) (1,464) (2,523) (7,543)
Accrued expenses and other liabilities — (3,332) — (685) (4,017)
Lease obligation — (1,774) (799) (2,573)
Goodwill 953 — 3,010 7,245 11,208
Gain on bargain purchase — (1,363) — — (1,363)
Total purchase consideration exchanged, net of cash acquired $ 6,501 $ 19,016 $ 11,902 $ 13,220 $ 50,639

~~(1)The consideration exchanged~~a tax benefit in ~~the NEF acquisition included a shared-based payment valued at $2.8 million with the remainder of the payment in cash.~~

A gain on bargain purchase related to the acquisition of NEF was recognized within Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the fourth quarter of 2021. The gain of $1.4 million was calculated as the excess of net assets recognized over the consideration transferred. The bargain purchase was primarily attributable to owners that were highly motivated to sell.

The Company incurred transaction costs related to the other acquisitions of $0.0 million and $1.2 million for the three and nine months ended September 30, 2022, respectively and $0.8 million and $1.8 million for the three and nine months ended September 30, 2021, respectively.future periods.

~~Other Acquisitions Pro Forma Information~~ - The pro forma information for other acquisitions was included in the estimated unaudited pro forma consolidated financial information for DSG, which is presented ~~above~~below underUnaudited Pro 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

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informational purposes only and is not necessarily indicative of future results or the results that would have occurred had the Mergers and other acquisitions been completed on the date indicated.


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Revenue	$	455,431	$	439,418	$	908,317	$	848,628


Net income	$	2,126	$	(5,173)	$	7,040	$	6,056

Actual Results of Business Acquisitions

The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the ~~third~~second quarter and first ~~nine~~six months of ~~2022~~2023 and ~~2021.~~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 June 30, 2023						Three Months Ended June 30, 2022
(in thousands)	Lawson		Other Acquisitions		Total		Lawson		Other Acquisitions		Total
Revenue	$	—	$	28,001	$	28,001	$	123,670	$	52,739	$	176,409
Net Income	$	—	$	(865)	$	(865)	$	3,084	$	5,316	$	8,400

	Six Months Ended June 30, 2023						Six Months Ended June 30, 2022
	Lawson		Other Acquisitions		Total		Lawson		Other Acquisitions		Total
Revenue	$	—	$	28,001	$	28,001	$	123,670	$	75,522	$	199,192
Net Income	$	—	$	(865)	$	(865)	$	3,084	$	8,285	$	11,369

~~Table~~The Company incurred transaction costs related to the Mergers and other completed and contemplated acquisitions of ~~Contents~~$5.1 million and $9.2 million for the three and six months ended June 30, 2023, respectively, and $6.1 million and $8.6 million for the three and six months ended June 30, 2022, respectively, which are included in Selling, general and administrative expenses in the

(in thousands) Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Lawson Other Acquisitions Total Lawson Other Acquisitions Total
Revenue $ 126,693 $ 71,216 $ 197,909 $ — $ 2,803 $ 2,803
Net Income $ 8,282 $ 4,363 $ 12,645 $ — $ 545 $ 545
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Lawson Other Acquisitions Total Lawson Other Acquisitions Total
Revenue $ 250,364 $ 146,742 $ 397,106 $ — $ 3,271 $ 3,271
Net Income $ 12,883 $ 12,651 $ 25,534 $ — $ 233 $ 233
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Note 4 -– Revenue Recognition

Under the definition of a contract as defined 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 ~~goods~~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 ~~goods~~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 ~~pre-determined~~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

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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 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.

22TestEquity 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.

~~Table~~

TestEquity generates revenue from contracts with customers through the sale of ~~Contents~~

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 ~~are~~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 ~~goods~~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 reversal 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 and 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.

~~TestEquity Segment~~

TestEquity’s contracts with customers generally represent a single performance obligation to sell its products. Revenues 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 good 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.

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TestEquity generates revenue from contracts with customers through the sale of new and used electronic test and measurement products. Typically, TestEquity has a purchase order or master service agreement with the customer that specifies the goods and/or services to be provided. TestEquity generally invoices customers as goods are shipped. Fees are typically due and payable 30 days after date of shipment. Generally, customers gain control of the goods 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.

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,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022

United States	United States	$	284,771	$	118,520	$	668,504	$	351,911	United States	$	307,258	$	261,071	$	591,369	$	386,327
Canada	Canada	36,879		2,357		82,931		10,151		Canada	36,193		36,372		72,654		46,169
Europe	Europe	13,391		3,400		35,377		6,916		Europe	17,540		9,889		34,456		17,971
Pacific Rim	Pacific Rim	2,549		3,146		7,711		9,582		Pacific Rim	1,054		5,585		2,991		10,624
Latin America	Latin America	8,501		2,278		24,853		7,097		Latin America	13,439		6,949		20,868		11,794
Other	Other	1,060		2,389		3,196		5,412		Other	2,500		1,470		3,916		2,536
Total revenue	Total revenue	$	347,151	$	132,090	$	822,572	$	391,069	Total revenue	$	377,984	$	321,336	$	726,254	$	475,421

Rental ~~Revenues~~Revenue

TestEquity rents new and used electronic test and measurement equipment to customers in ~~many~~multiple industries. These leases are classified as operating ~~leases.~~leases under ASC 842. Rental equipment is included in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheet, and rental ~~revenues~~revenue is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The unearned portion of rental payments received is recorded as deferred revenue. The TestEquity rental program generated $4.2 million and $3.3 million of revenue for the three months ended September 30, 2022 and 2021, respectively and $11.4 million and $9.1 million of revenue for the nine months ended September 30, 2022 and 2021, respectively. The unearned rental revenue related to customer prepayments on equipment leases

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of $0.3 million at ~~September~~June 30, ~~2022~~2023 and $~~0.5~~0.3 million at December 31, ~~2021, which is~~2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet and is expected to be earned in its entirety during the next twelve months.

Lawson leases parts washer machines to customers through its Torrents leasing program. These leases are classified as operating ~~leases.~~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. The Torrents machine leasing program generated $1.3 million of revenue for the three months ended September 30, 2022~~straight-line basis and ~~$2.5 million of revenue for the~~ ~~nine months ended~~ ~~September 30, 2022. The unearned rent revenue of $0.0 million at~~ ~~September 30, 2022~~ is included ~~as a component of Accrued expenses and other current liabilities~~in Revenue in the Unaudited Condensed Consolidated ~~Balance Sheet, is expected~~Statements of Operations and Comprehensive Income (Loss). The unearned rental revenue related to ~~be earned in its entirety during the next twelve months.~~customer prepayments on equipment leases was nominal at June 30, 2023 and December 31, 2022.

Rental revenue from operating leases:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Revenue from operating leases	$	4,822	$	4,304	$	10,923	$	7,932

Note 5 — – Supplemental Financial Statement Information

Restricted Cash

The Company has agreed to maintain restricted cash of $20.6 million under agreements with outside parties. An escrow account of $12.5 million was established in conjunction with the Hisco Transaction, to be released upon Hisco meeting certain working capital and other post closing requirements as of the one year post-acquisition date. The Company is restricted from withdrawing this balance without the prior consent of the sellers. The remaining balance of $8.1 million of restricted cash represents collateral for certain borrowings under the 2023 Credit Agreement, and the Company is restricted from withdrawing this balance without the prior consent of the respective lenders.

Inventories, net

Inventories, net, consisting of purchased ~~goods~~products and manufactured electronic equipment offered for resale, were as follows:


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Inventories, gross	Inventories, gross	$	270,330	$	140,544	Inventories, gross	$	339,879	$	275,072
Reserve for obsolete and excess inventory	Reserve for obsolete and excess inventory	(9,490)		(7,827)		Reserve for obsolete and excess inventory	(13,643)		(10,698)
Inventories, net	Inventories, net	$	260,840	$	132,717	Inventories, net	$	326,236	$	264,374

~~Changes in the reserve for obsolete and excess inventory were as follows:~~


~~(in thousands)~~	~~Amount~~
~~Balance at December 31, 2021~~	$	~~(7,827)~~
~~Additions charged to expense~~	~~(3,814)~~

~~Write-offs~~	~~2,151~~
~~Balance at September 30, 2022~~	$	~~(9,490)~~

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~~Note 6 -~~ Property, Plant and Equipment, net

Components of property, plant and equipment were as follows:


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Land	Land	$	9,447	$	1,700	Land	$	16,791	$	9,578
Buildings and improvements	Buildings and improvements	26,869		2,930		Buildings and improvements	49,982		27,199
Machinery and equipment	Machinery and equipment	20,137		4,389		Machinery and equipment	47,394		26,948
Capitalized software	Capitalized software	7,780		3,407		Capitalized software	10,055		7,889
Furniture and fixtures	Furniture and fixtures	6,119		2,700		Furniture and fixtures	8,406		6,346
Vehicles	Vehicles	1,697		798		Vehicles	2,015		1,713
Construction in progress(1)	Construction in progress(1)	8,222		12		Construction in progress(1)	3,644		3,140
Total	Total	80,271		15,936		Total	138,287		82,813
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(15,506)		(6,857)		Accumulated depreciation and amortization	(24,958)		(18,418)
Property, plant and equipment, net	Property, plant and equipment, net	$	64,765	$	9,079	Property, plant and equipment, net	$	113,329	$	64,395

(1)Construction in progress primarily ~~relates~~related to upgrades to certain of the Company's distribution facilities that we expect to place in service in the next 12 months.

Depreciation expense for property, plant and equipment was ~~$1.1~~$2.5 million and ~~$0.4~~$2.5 million for the ~~third~~second quarter of ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$4.0~~$6.0 million and ~~$0.9~~$3.1 million for the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~2022, respectively. Amortization expense for capitalized software was ~~$0.0~~$0.8 million and ~~$0.2~~$0.9 million for the ~~third~~second quarter of ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$1.0~~$1.5 million and ~~$0.6~~$1.1 million for the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~2022, respectively.

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~~Note 7 -~~ Rental Equipment, net

Rental equipment, net consisted of the following:


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Rental equipment	Rental equipment	$	59,974	$	46,500	Rental equipment	$	64,707	$	63,184
Accumulated depreciation	Accumulated depreciation	(34,485)		(21,773)		Accumulated depreciation	(37,601)		(36,045)
Rental equipment, net	Rental equipment, net	$	25,489	$	24,727	Rental equipment, net	$	27,106	$	27,139

Depreciation expense included in cost of sales for rental equipment was ~~$2.3~~$1.9 million and ~~$1.7~~$1.5 million for the ~~third~~second quarter of ~~2022~~2023 and ~~2021,~~2022, respectively and ~~$5.4~~$4.2 million and ~~$4.7~~$2.9 million for the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~2022, respectively. Refer to Note 4 -– Revenue Recognitionfor a discussion on the Company's activities as lessor.

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Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


(in thousand)	June 30, 2023		December 31, 2022
Accrued compensation	$	22,753	$	24,094
Deferred acquisition payments and accrued earnout liabilities	18,679		1,383
Accrued and withheld taxes, other than income taxes	8,779		4,885

Accrued customer rebates	5,592		5,053
Accrued stock-based compensation	5,484		3,340
Accrued interest	3,591		1,775
Accrued severance and acquisition related retention bonus	3,170		927
Accrued health benefits	1,793		1,306
Deferred revenue	1,170		2,313
Accrued income taxes	125		731
Other	21,863		16,870
Total accrued expenses and other current liabilities	$	92,999	$	62,677

Other Liabilities

Other liabilities consisted of the following:


(in thousand)	June 30, 2023		December 31, 2022
Security bonus plan	$	9,628	$	9,651
Deferred compensation	10,425		9,962
Other	4,350		4,036
Total other liabilities	$	24,403	$	23,649

Note ~~8 -~~ 6 – Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by segment were as follows:

(in thousands) Lawson TestEquity Gexpro Services All Other Total
Balance at December 31, 2021 $ — $ 70,112 $ 36,033 $ — $ 106,145
Acquisitions(1)
160,205 42,313 17,962 27,575 248,055
Impact of foreign exchange rates (403) — — (2,650) (3,053)
Balance at September 30, 2022 $ 159,802 $ 112,425 $ 53,995 $ 24,925 $ 351,147

~~(1)~~ ~~Refer to Note 3 - Business Acquisitions for information related to measurement period adjustments.~~



(in thousands)	Lawson		TestEquity		Gexpro Services		All Other		Total
Balance at December 31, 2022	$	155,773	$	114,104	$	55,421	$	22,750	$	348,048
Acquisitions	—		49,718		—		—		49,718
Impact of foreign exchange rates	142		—		228		527		897
Balance at June 30, 2023	$	155,915	$	163,822	$	55,649	$	23,277	$	398,663

~~Note 9 -~~ Intangible Assets

The gross carrying amount and accumulated amortization for definite-lived intangible assets were as follows:


		September 30, 2022						December 31, 2021							June 30, 2023						December 31, 2022
(in thousands)	(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names	Trade names	$	92,854	$	(14,641)	$	78,213	$	36,345	$	(8,356)	$	27,989	Trade names	$	118,123	$	(23,067)	$	95,056	$	92,286	$	(17,401)	$	74,885
Customer relationships	Customer relationships	193,093		(39,339)		153,754		89,062		(25,423)		63,639		Customer relationships	235,218		(56,889)		178,329		192,934		(44,481)		148,453
Other (1)	Other (1)	7,964		(3,062)		4,902		7,370		(2,390)		4,980		Other (1)	7,942		(3,790)		4,152		7,961		(3,305)		4,656
Total	Total	$	293,911	$	(57,042)	$	236,869	$	132,777	$	(36,169)	$	96,608	Total	$	361,283	$	(83,746)	$	277,537	$	293,181	$	(65,187)	$	227,994

(1) Other primarily consists of non-compete agreements.

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Amortization expense for definite-lived intangible assets was ~~$5.6~~$9.4 million and ~~$20.9~~$18.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, and ~~$2.4~~$9.9 million and ~~$7.5~~$15.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively. Amortization expense related to intangible assets was recorded in Selling, general and administrative expenses. ~~The remaining weighted-average useful lives of intangible assets as of September 30, 2022 was 6.9 years for trade names and 14.2 years for customer relationships.~~

The estimated aggregate amortization expense for the remaining year ~~2022~~2023 and each of the next five years are as follows:

(in thousands) Amortization
Remaining 2022 $ 8,039
2023 35,139
2024 34,621
2025 31,218
2026 28,520
2027 24,052
Thereafter 75,280
Total $ 236,869

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(in thousands)	Amortization
Remaining 2023	$	20,931
2024	43,022
2025	39,328
2026	36,330
2027	31,446
2028	27,502
Thereafter	78,978
Total	$	277,537

Note ~~10 -~~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 leasing activity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 were as follows (in thousands):


			Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
Lease Type	Lease Type	Classification	2022		2021		2022		2021		Lease Type	Classification	2023		2022		2023		2022

Operating Lease Expense (1)	Operating Lease Expense (1)	Operating expenses	$	4,519	$	1,504	$	10,581	$	4,391	Operating Lease Expense (1)	Operating expenses	$	4,519	$	3,896	$	9,399	$	5,524
Financing Lease Amortization	Financing Lease Amortization	Operating expenses	207		77		471		220		Financing Lease Amortization	Operating expenses	136		163		260		232
Financing Lease Interest	Financing Lease Interest	Interest expense	37		15		68		44		Financing Lease Interest	Interest expense	23		23		44		34
Financing Lease Expense	Financing Lease Expense		244		92		539		264		Financing Lease Expense		159		186		304		266
Net Lease Cost	Net Lease Cost		$	4,763	$	1,596	$	11,120	$	4,655	Net Lease Cost		$	4,678	$	4,082	$	9,703	$	5,790

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

The value of net assets and liabilities ~~generated by leasing activity~~related to our operating and finance leases as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 ~~were~~was as follows (in thousands):

Lease Type September 30, 2022 December 31, 2021
Total ROU operating lease assets (1)
$ 44,682 $ 19,662
Total ROU financing lease assets (2)
2,523 —
Total lease assets $ 47,205 $ 19,662
Total current operating lease obligation
$ 9,212 $ 4,641
Total current financing lease obligation
782 —
Total current lease obligations $ 9,994 $ 4,641
Total long term operating lease obligation
$ 36,771 $ 16,132
Total long term financing lease obligation
1,398 —
Total long term lease obligation $ 38,169 $ 16,132


Lease Type	June 30, 2023		December 31, 2022
Total ROU operating lease assets (1)	$	65,772	$	46,755
Total ROU financing lease assets (2)	1,587		1,519
Total lease assets	$	67,359	$	48,274

Total current operating lease liabilities	$	12,310	$	9,480
Total current financing lease liabilities	526		484
Total current lease liabilities	$	12,836	$	9,964

Total long term operating lease liabilities	$	56,827	$	38,898
Total long term financing lease liabilities	908		930
Total long term lease liabilities	$	57,735	$	39,828

(1)Operating lease assets are recorded net of accumulated amortization of ~~$11.8~~$20.2 million as of ~~September~~June 30, ~~2022~~2023 and ~~$2.8~~$14.8 million as of December 31, ~~2021~~2022

(2)Financing lease assets are recorded net of accumulated amortization as a component of Other assets in the Unaudited Condensed Consolidated Balance Sheet of ~~$1.0~~$1.1 million as of ~~September~~June 30, ~~2022~~2023 and ~~$0.0~~$0.9 million as of December 31, ~~2021~~2022

~~The value of lease liabilities generated by leasing activities as of September 30, 2022 were as follows (in thousands):~~

Maturity Date of Lease Liabilities Operating Leases Financing Leases Total
Year one $ 6,657 $ 332 $ 6,989
Year two 11,485 828 12,313
Year three 9,336 544 9,880
Year four 7,241 333 7,574
Year five 6,130 268 6,398
Subsequent years 15,504 117 15,621
Total lease payments 56,353 2,422 58,775
Less: Interest (10,369) (243) (10,612)
Present value of lease liabilities $ 45,984 $ 2,179 $ 48,163

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The value of lease liabilities related to our operating and finance leases as of June 30, 2023 was as follows (in thousands):


Maturity Date of Lease Liabilities	Operating Leases		Financing Leases		Total
Remaining 2023	$	8,913	$	331	$	9,244
2024	16,004		546		16,550
2025	14,920		361		15,281
2026	11,293		280		11,573
2027	9,406		77		9,483
Thereafter	29,573		—		29,573
Total lease payments	90,109		1,595		91,704
Less: Interest	(20,972)		(161)		(21,133)
Present value of lease liabilities	$	69,137	$	1,434	$	70,571

The weighted average lease terms and interest rates of leases held as of ~~September~~June 30, ~~2022~~2023 were as follows:

Lease Type

Weighted Average Term in Years

Weighted Average Interest Rate

Lease Type

Weighted Average Term in Years

Weighted Average Interest Rate

Operating Leases

5.8

6.8%

Operating Leases

6.9

7.7%

Financing Leases

3.3

6.3%

Financing Leases

3.0

6.8%

The cash outflows of leasing activity for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were as follows (in thousands):

~~Cash Flow Source~~

~~Classification~~

~~Amount~~

~~Operating cash flows from operating leases~~

~~Operating activities~~

~~(3,330)~~

~~Operating cash flows from financing leases~~

~~Operating activities~~

~~Financing cash flows from financing leases~~

~~Financing activities~~

~~(457)~~


		Six Months Ended June 30,
Cash Flow Source	Classification	2023		2022
Operating cash flows from operating leases	Operating activities	$	(6,710)	$	(5,182)
Operating cash flows from financing leases	Operating activities	(121)		(3)
Financing cash flows from financing leases	Financing activities	(249)		(39)

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

Note ~~11 -~~8 – Earnout ~~Derivative Liability~~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 Company estimated the initial fair value of the earnout derivative liability based on an aggregate of 1,162,000 additional shares available to be issued under the two earnout provisions of the Merger Agreements. The aggregate of 1,162,000 shares iswas comprised of 700,000 shares of DSG common stock that ~~are~~were contingently issuable to (or forfeitable by) the TestEquity Equityholder and 462,000 shares of DSG common stock that ~~are~~were contingently issuable to (or forfeitable by) the Gexpro Services ~~Stockholder.~~Stockholder, in each case as of the Merger Date. The additional 538,000 shares that were potentially issuable as of the ~~remaining potential shares of~~Merger Date under the ~~earnout~~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 iswas classified as a Level 3 instrument and iswas 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 ~~include~~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 ~~are~~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 $43.9 million, with an offsetting entry to additional paid-in capital. As of April 29, 2022 and December 31, 2022, 700,000 and 462,000 of the 1,162,000 shares, respectively, were reclassified to equity, as the ~~acquisition~~ contingencies had been determined to have

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been met. There was no remaining earnout derivative liability at December 31, 2022. Immediately prior to ~~reclassification, these~~the reclassifications, the respective shares were remeasured to fair value. For the ~~three and nine months~~year ended ~~September 30,~~December 31, 2022, the Company recorded income of ~~$10.3~~$0.3 million ~~and $4.6 million, respectively,~~ as a component of Change in fair value of earnout ~~liability~~liabilities in the Unaudited Consolidated Statements of ~~Income~~Operations and Comprehensive Income (Loss) due to changes in the fair value of the earnout derivative liability. ~~The~~

On March 20, 2023, all of the 1.7 million shares of DSG common stock available to be issued under the earnout ~~opportunity~~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 ~~remaining 462,000 shares~~first six months of 2023. The Company recorded expense of $5.7 million for ~~Gexpro Services expires on December 31, 2022. See Fair Value Measurements~~changes in ~~Note 2 -~~ ~~Summary~~the fair value of ~~Significant Accounting Policies~~the earn-out derivative liability for ~~further information.~~the six months ended June 30, 2022 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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 June 30, 2023, the fair value of the earn-out was $6.0 million and $6.2 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet. The Company recorded a loss of $0.2 million for changes in the fair value of the earn-out liability for the six months ended June 30, 2023 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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 June 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 six months ended June 30, 2023.

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 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 June 30, 2023, the fair value of the earn-out was $0.9 million, $1.7 million and $0.5 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 $0.2 million for changes in the fair value of the earn-out liability for the six months ended June 30, 2023 as a component of Change in fair value of earnout ~~derivative liability was as follows:~~


~~(in thousands)~~	~~Amount~~
~~Balance at December 31, 2021~~	$	—
~~Initial recognition on Merger Date~~	~~43,900~~
~~Change in fair value~~	~~(4,607)~~
~~Reclassifications to equity at fair value~~	~~(26,593)~~
~~Balance at September 30, 2022~~	$	~~12,700~~

liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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Note ~~12 - Accrued Expenses and Other Current Liabilities~~

~~Accrued expenses and other current liabilities consisted of the following:~~

(in thousand) September 30, 2022 December 31, 2021
Accrued stock-based compensation $ 2,060 $ —
Accrued compensation 20,772 5,997
Accrued and withheld taxes, other than income taxes 6,690 880
Accrued income taxes 319 4,170
Accrued customer rebates 4,290 2,657
Accrued severance 977 —
Accrued interest 4,553 1,515
Deferred revenue 1,120 485
Accrued health benefits 1,282 59
Other 16,600 7,363
Total accrued expenses and other current liabilities $ 58,663 $ 23,126

~~Note 13 -~~9 – Debt

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


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	June 30, 2023		December 31, 2022
Senior secured revolving credit facility	Senior secured revolving credit facility	$	123,925	$	—	Senior secured revolving credit facility	$	8,800	$	122,000
Senior secured term loan	Senior secured term loan	243,750		—		Senior secured term loan	234,375		243,750
Senior secured delayed draw term loan	Senior secured delayed draw term loan	50,000		—		Senior secured delayed draw term loan	48,125		50,000
Incremental term loan						Incremental term loan	305,000		—
Other revolving line of credit	Other revolving line of credit	1,121		—		Other revolving line of credit	2,135		1,352
Previous revolving credit facilities		—		38,707
Previous term loans		—		190,337

Total debt	Total debt	418,796		229,044		Total debt	598,435		417,102
Less current portion of long-term debt	Less current portion of long-term debt	(16,121)		(134,405)		Less current portion of long-term debt	(32,386)		(16,352)
Less deferred financing costs	Less deferred financing costs	(5,214)		(1,505)		Less deferred financing costs	(7,204)		(4,925)
Total long-term debt	Total long-term debt	$	397,461	$	93,134	Total long-term debt	$	558,845	$	395,825

Amended and Restated Credit Agreement ~~- April 1, 2022~~

On April 1, 2022, ~~(the "Closing Date"),~~ DSG and certain of its subsidiaries entered into an Amended and Restated Credit Agreement ~~(the “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.

~~The~~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, ~~and~~ (iii) a $305 million incremental term loan, (iv) a $50 million senior secured delayed draw term loan ~~facility. In addition, the Amended~~facility and ~~Restated Credit Agreement permits~~(v) the Company to increase the commitments ~~under the Amended and Restated Credit Agreement~~thereunder from time to time by up to $200 million in the aggregate, subject to, among other things, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the ~~Amended and Restated~~2023 Credit Agreement. ~~The revolving credit facility is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed.~~

On ~~April 1, 2022,~~June 8, 2023, in connection with the ~~Mergers,~~Hisco Transaction, the Company borrowed ~~$250.0~~the $305 million ~~of initial term loan facility loans and approximately $86.0 million of revolving credit facility loans~~ under the ~~Amended and Restated Credit Agreement.~~incremental term loan. These borrowings were used, among other things, to ~~1) repay all obligations and refinance~~partially fund the ~~Company's previous credit agreement, 2)~~Hisco Transaction, to repay certain existing indebtedness of ~~TestEquity~~Hisco, HISCO Acquisition Subsidiary I, Inc. and ~~Gexpro Services~~HISCOCAN Inc. and their respective subsidiaries 3)and to pay fees ~~and expenses in connection with the Mergers, and 4) finance the working capital needs and general corporate purposes of the Company.~~

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A $2.8 million loss on the extinguishment of debt for remaining unamortized deferred financing costs associated with the previous indebtedness was recorded in the second quarter of 2022 in connection with the payoff. The extinguishment is recorded in Loss on extinguishment of debt in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Amended and Restated Credit Agreement requires that the proceeds of any revolving credit facility loans be used for working capital and general corporate purposes (including, without limitation, permitted acquisitions), and requires that the proceeds of any delayed draw term loan facility be used solely to finance the payment of consideration for (i) the potential acquisition by TestEquity of a certain business that had been previously identified to DSG as a potential acquisition candidate by TestEquity prior to the date of the TestEquity Merger Agreement and (ii) other acquisitions permitted under the Amended and Restated Credit Agreement, and for any fees, costs and expenses incurred in connection ~~therewith. On April 29, 2022,~~with the ~~Company borrowed~~Hisco Transaction and the ~~$50.0 million available~~First Amendment. Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction.

Each of the loans under the ~~delayed draw term loan facility~~2023 Credit Agreement mature on April 1, 2027. The Company is required to ~~finance the acquisition~~repay principal of ~~Interworld Highway, LLC.~~approximately $7.6 million each quarter.

~~As of~~ ~~September 30, 2022~~, there were $243.8 million of term loan facility loans outstanding, $50.0 million of delayed draw term loans outstanding and approximately $123.9 million of revolving credit facility loans outstanding under the Amended and Restated Credit Agreement.Net of outstanding letters of credit, there was ~~$75.1~~$189.6 million of borrowing availability under the revolving credit facility as of ~~September~~June 30, ~~2022.~~2023. The weighted average interest rate from ~~April~~January 1, ~~2022~~2023 through ~~September~~June 30, ~~2022~~2023 was ~~4.3%~~7.4%.

The loans under the ~~Amended and Restated~~2023 Credit Agreement bear interest, at the Company’s option, at a rate equal to (i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the ~~Amended and Restated~~2023 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 ~~Amended and Restated~~2023 Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the ~~Amended and Restated~~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 ~~Amended and Restated~~2023 Credit Agreement. The Amended and Restated Credit Agreement further provides that the additional margin for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall be 1.5% per annum for Alternate Base Rate or Canadian Prime Rate loans and 2.5% per annum for all other loans.

Certain closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees are payable to the lenders and the agents under the Amended and Restated Credit Agreement, including a commitment fee on the daily unused amount of the revolving credit facility that will accrue at a rate ranging from 0.15% to 0.35% 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 Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides that such commitment fee for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall accrue at a rate of 0.3% per annum.

In addition, the Amended and Restated Credit Agreement provides that the delayed draw term loan facility shall accrue a ticking fee at a rate ranging from 0.15% to 0.35% 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 Amended and Restated Credit Agreement, and that such ticking fee shall be payable during the period from the Closing Date to the date on which the lenders’ delayed draw term loan facility commitments terminate. The Amended and Restated Credit Agreement further provides that the ticking fee for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter after the Closing Date shall accrue at a rate of 0.3% per annum. The fees outlined above are reported as interest expense and vary depending on the total net leverage ratio as defined in the Amended and Restated Credit Agreement. Fees from the Closing Date through September 30,On April 1, 2022, ~~were $0.1 million.~~

~~In connection with the Amended and Restated Credit Agreement,~~ deferred financing costs of $4.0 million were ~~incurred.~~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

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First Amendment. Deferred financing costs are amortized over the life of the debt instrument and reported as interest expense. As of ~~September~~June 30, ~~2022,~~2023, total deferred financing costs net of accumulated amortization were ~~$8.4~~$9.9 million of which ~~$5.2~~$7.2 million are included in Long-term debt, less current portion, net (related to the senior secured term loan, ~~and~~ senior secured delayed draw term loan and incremental term loan) and ~~$3.2~~$2.7 million are included in Other assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance ~~Sheets.~~

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Each of the loans under the Amended and Restated Credit Agreement mature on April 1, 2027, at which time all outstanding loans, together with all accrued and unpaid interest, must be repaid and the revolving credit facility commitments will terminate. The Company is required to repay principal on the term loans each quarter in the following amounts (subject to potential adjustment): (i) $3,125,000, in the case of the initial term loan facility, and (ii) an amount equal to 1.25% of the funded delayed draw term loan facility, in the case of the delayed draw term loan facility. The Company is also required to prepay the term loans with the net cash proceeds from any disposition of certain assets (subject to reinvestment rights) or from the incurrence of any unpermitted debt. The Company may borrow, repay and reborrow the revolving loans until April 1, 2027, prepay any of the term loans, and terminate any of the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions and the reimbursement of certain lender costs in the case of prepayments of certain types of loans.

Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations of the Company and its U.S. subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the Company and certain of the Company’s U.S. subsidiaries and the obligations of each of the Company’s Canadian subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the Company and certain of its U.S. and Canadian subsidiaries.

Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations under the Amended and Restated Credit Agreement are secured by a first priority security interest in and lien on substantially all assets of the Company, each other borrower and each guarantor.Sheet.

The ~~Amended and Restated~~2023 Credit Agreement contains various ~~affirmative~~ 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 ~~Amended and Restated~~2023 Credit Agreement.

The Company was in compliance with all ~~affirmative and~~ financial covenants ~~as of~~ ~~September 30, 2022~~.

~~The Amended and Restated Credit Agreement contains various events of default (subject to exceptions, thresholds and grace periods as~~ set forth in the ~~Amended and Restated Credit Agreement). Under certain circumstances, a default interest rate will apply on all obligations at a rate equal to 2.0% per annum above the applicable interest rate.~~

~~Previous Credit Agreements~~

~~Gexpro Services - January 3, 2022 Gexpro Services Credit Agreement~~

On January 3, 2022, Gexpro Services entered into a credit agreement ("2022 Gexpro Services Credit Agreement") with a financial institution under which Gexpro Services obtained an initial $137 million term loan ("2022 Gexpro Services Term Loan"), a $25 million revolving line of credit ("2022 Gexpro Services Revolver") and a delayed $83 million term loan ("2022 Gexpro Services Delayed Term Loan"), together the "2022 Gexpro Services Facilities". The proceeds of the 2022 Gexpro Services Term Loan and 2022 Gexpro Services Delayed Term Loan were used to fund the Resolux acquisition, repay all borrowings under the 2020 Gexpro Services Credit Agreements (as defined below) and seller’s promissory note from SIS acquisition (refer to Note 3 - Business Acquisitions for further details of these acquisitions). In connection with the 2022 Gexpro Services2023 Credit Agreement ~~deferred financing costs of $7.4 million were incurred.~~

~~Gexpro Services - February 24, 2020 Gexpro Services Term Loan Credit Agreement~~

On February 24, 2020, Gexpro Services entered into a credit agreement ("2020 Gexpro Services Term Loan Credit Agreement") under which Gexpro Services obtained a $60 million term loan ("2020 Gexpro Services Term Loan"). Also on February 24, 2020, Gexpro Services entered into a credit agreement ("2020 Gexpro Services Revolver Credit Agreement" and together with the 2020 Gexpro Services Term Loan Credit Agreement, "2020 Gexpro Services Credit Agreements") under which Gexpro Services obtained a $15 million revolving line of credit ("2020 Gexpro Services Revolver"). Availability of the 2020 Gexpro Services Revolver was reduced by issued and outstanding letters of credit, which were limited to $38.5 million. There were $0.7 million outstanding letters of credit as of December 31, 2021 and $37.7 million outstanding on the 2020 Gexpro Services Revolver. A loss on debt extinguishment of $0.6 million was recorded on January 3, 2022 in connection with the January 3, 2022 ~~Gexpro Services Credit Agreements.~~

~~TestEquity - 2017 TestEquity Credit Agreement~~

On April 28, 2017, TestEquity entered into a credit agreement ("2017 TestEquity Credit Agreement") with a financial institution under which TestEquity obtained a $101 million term loan ("2017 TestEquity Term Loan") and a $15.0 million

June 30,

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revolving line of credit ("2017 TestEquity Revolver"). Availability of the 2017 TestEquity Revolver was reduced by issued and outstanding letters of credit, which were limited to $2.0 million. There were no outstanding letters of credit as of December 31, 2021 and $1.0 million outstanding on the revolving line of credit. A loss on debt extinguishment of $0.2 million was recorded on April 1, 2022 in connection with the April 1, 2022 Amended and Restated Credit Agreement executed in connection with the consummation of the Mergers. 2023.

Note ~~14 -~~10 – Stock-Based Compensation

The Company recorded a stock-based compensation ~~benefit~~expense of ~~$3.6 million~~ $2.2 million and ~~expense of~~$4.4 million ~~$0.4 million~~for the three and ~~nine~~six months ended ~~September~~June 30, 2023, respectively, and $4.0 million and $4.0 million for the three and six months ended June 30, 2022, respectively~~, respectively.~~. A portion of the Company's stock-based awards are liability-classified. Accordingly, changes in the market value of ~~the Company's~~DSG common stock may result in a stock-based compensation expense or benefit in certain periods. A stock-based compensation liability of ~~$2.1~~$5.5 million as of ~~September~~June 30, ~~2022~~2023 and ~~$0.0~~$3.3 million as of December 31, ~~2021~~2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance ~~Sheets.~~

~~Equity Compensation Plans~~

The Company's Amended and Restated 2009 Equity Compensation Plan (“Equity Plan”) provides for the grant of nonqualified and incentive stock options, stock awards and stock units to officers and employees of the Company. The Equity Plan also provides for the grant of option rights and restricted stock to non-employee directors. Non-employee directors are limited to grants of no more than 20,000 shares of common stock in any calendar year and other than non-employee directors are limited to grants of no more than 125,000 shares of common stock in any calendar year. The Equity Plan is administered by the Compensation Committee of the Board of Directors, or its designee, which as administrator of the plan, has the authority to select plan participants, grant awards, and determine the terms and conditions of the awards.

The Company also has a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of Stock Performance Rights (“SPRs”) that allow non-employee directors, officers and key employees to receive cash awards, subject to certain restrictions, equal to the appreciation of the Company's common stock. The SPR Plan is administered by the Compensation Committee of the Board of Directors.

~~Stock Performance Rights~~

SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of Company common stock over the SPR exercise price when the SPRs are surrendered. Expense, equal to the fair market value of the SPR at the date of grant and remeasured each reporting period, is recorded ratably over the vesting period. Compensation expense is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The outstanding SPRs were granted with approximately a ~~seven~~ ~~year life and vest over~~ ~~one~~ to three years beginning on the first anniversary of the date of the grant. The SPRs are liability classified and included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.Sheet.

Restricted Stock Awards

For the six months ended June 30, 2023, the Company issued approximately 26,000 Restricted stock awards ("RSAs") ~~generally~~that vest over five years from the grant date with a ~~one~~ to ~~three~~ ~~year period beginning on the first anniversary~~grant date fair value of ~~the date of the grant.~~$1.3 million. Upon vesting, the vested ~~restricted stock awards~~RSAs are exchanged for an equal number of shares of ~~the Company’s~~DSG common stock. The participants have no voting or dividend rights with the ~~restricted stock awards.~~RSAs. The ~~restricted stock awards~~RSAs are valued at the closing price of ~~the Company~~DSG's common stock on the date of grant and the expense is recorded ratably over the vesting period. F~~or the~~ ~~three and nine months ended September 30, 2022, the Company issued 1,300 RSAs to key employees that vest through the fifth anniversary from the grant date with a grant date fair value of~~ ~~$0.1 million~~.

~~Market Stock Units~~

Market Stock Units ("MSUs") are exchangeable for between 0% to 150% of the Company's common shares at the end of the vesting period based on the trailing 60 day average closing price of Company common stock. The value of the MSUs is determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the Company common stock over the measurement period.

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Stock Options

For the ~~three and nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Company issued ~~6,000 and 248,000~~approximately 606,000 stock options ~~respectively,~~ to key employees that vest ~~through the fifth anniversary~~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 ~~$2.3 million~~.$8.3 million. Each stock option can be exchanged for one share of ~~Company~~DSG common stock at the stated exercise price. Upon vesting, stock options are recognized as a component of equity. Unrecognized compensation related to stock options as of ~~September~~June 30, ~~2022~~2023 was ~~$2.1 million.~~$9.2 million, which is expected to be recognized over a weighted-average period of 2.4 years.

~~Performance Awards~~Activity related to the Company’s stock options during 2023 was as follows:


	Number of Stock Options	Weighted Average Exercise Price
Outstanding on December 31, 2022	288,000	$	77.59

Granted	605,821	72.74


Outstanding on June 30, 2023	893,821	74.30

Exercisable on June 30, 2023	40,000	27.01

~~Performance Awards ("PAs")~~The weighted average fair value assumptions used in the Black-Scholes model for the stock options issued during 2023 were as follows:


Expected volatility			45.23%
Risk-free rate of return			3.6%
Expected term (in years)			6.2 years
Expected annual dividend			$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 ~~exchangeable~~expected to be

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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

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 ~~between 0% to 150%~~each share of ~~Company~~DSG common stock ~~or the equivalent amount in cash, based upon the achievement~~held by holders of ~~certain financial performance metrics at the end~~DSG common stock on record as of the ~~vesting period.~~close of business on May 1, 2023. Each subscription right entitled the holder to purchase 0.105 shares of DSG common stock at a subscription price of $45.00 per share. The ~~PAs are liability classified~~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 ~~included~~was fully subscribed (taking into account the exercise of over-subscription rights) and raised approximately $100 million and resulted in ~~Accrued expenses and other current liabilities~~ the issuance of 2,222,222 shares of DSG common stock, at a purchase price of $45.00 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 ~~Sheets.~~Sheet.

~~Except for~~DSG used the ~~stock options and RSAs above, no additional stock-based awards were issued during~~proceeds from the ~~nine months ended September 30, 2022.~~Rights Offering, in combination with borrowings under the 2023 Credit Agreement, to fund the Hisco Transaction.

~~Note 15 -~~ Stock Repurchase Program

~~In the second quarter of 2019,~~Under an existing stock repurchase program authorized by the Board of Directors, ~~authorized a program pursuant to which~~ the Company ~~was authorized to~~may repurchase ~~up to $7.5 million of Company~~its common stock from time to time in open market transactions, privately negotiated transactions or by other methods. ~~During the~~ ~~third quarter of 2022, the Company repurchased 54,089 shares of Company common stock at an average cost of $35.86 per share for a total cost of $1.9 million.~~ No shares were repurchased during the ~~first half of~~three and six months endedJune 30, 2023 or 2022 ~~or during~~under the ~~year ended~~ ~~December 31, 2021. Following these repurchases, the Company had~~ ~~$2.6 million~~ ~~remaining under its~~Company's stock repurchase ~~program as of September 30, 2022.~~ plan. T~~On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the Company had $7.6 million of~~he remaining availability for stock repurchases under the program ~~as of November 2, 2022.~~was $7.6 million at June 30, 2023.

Note ~~16 -~~12 – Earnings Per Share

As a result of the Mergers discussed in Note 1 - – Nature of Operations and Basis of Presentation, all historical per share data and number of shares and numbers of equity awards were retroactively adjusted. The following table provides the computation of basic and diluted earnings per share:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share and per share data)	(in thousands, except share and per share data)	2022		2021		2022		2021		(in thousands, except share and per share data)	2023		2022		2023		2022

Basic income per share:	Basic income per share:									Basic income per share:
Net income (loss)	Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)	Net income (loss)	$	3,024	$	(4,715)	$	8,931	$	(7,252)
Basic weighted average shares outstanding	Basic weighted average shares outstanding	19,439,996		10,252,770		17,143,814		10,252,760		Basic weighted average shares outstanding	21,810,618		20,343,028		21,467,599		15,347,943
Basic income (loss) per share of common stock	Basic income (loss) per share of common stock	$	0.85	$	0.12	$	0.54	$	(0.02)	Basic income (loss) per share of common stock	$	0.14	$	(0.23)	$	0.42	$	(0.47)

Diluted income per share:	Diluted income per share:									Diluted income per share:
Net income (loss)	Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)	Net income (loss)	$	3,024	$	(4,715)	$	8,931	$	(7,252)
Basic weighted average shares outstanding	Basic weighted average shares outstanding	19,439,996		10,252,770		17,143,814		10,252,760		Basic weighted average shares outstanding	21,810,618		20,343,028		21,467,599		15,347,943
Effect of dilutive securities	Effect of dilutive securities	213,358		315,158		313,253		—		Effect of dilutive securities	186,889		—		185,010		—

Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	19,653,354		10,567,928		17,457,067		10,252,760		Diluted weighted average shares outstanding	21,997,507		20,343,028		21,652,609		15,347,943
Diluted income (loss) per share of common stock	Diluted income (loss) per share of common stock	$	0.84	$	0.12	$	0.53	$	(0.02)	Diluted income (loss) per share of common stock	$	0.14	$	(0.23)	$	0.41	$	(0.47)
Anti-dilutive securities excluded from the calculation of diluted income per share	Anti-dilutive securities excluded from the calculation of diluted income per share	246,957		—		248,000		307,908		Anti-dilutive securities excluded from the calculation of diluted income per share	782		464,068		6,001		359,358

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Note ~~17 -~~13 – Income Taxes

The Company recorded income tax expense of $~~8.5~~0.5 million, a ~~33.9%~~15.0% effective tax rate for the three months ended ~~September~~June 30, ~~2022~~2023. Income tax ~~expense~~benefit of $~~0.2~~3.6 million, a ~~15.0%~~43.4% effective tax rate was recorded for the three months ended ~~September~~June 30, ~~2021~~2022. The effective tax rate for the three months ended ~~September~~June 30, 2023 was lower than the U.S. statutory rate primarily due to the release of a reserve for an uncertain tax benefit during the quarter. The effective tax rate for the three months ended June 30, 2022 was higher than the U.S. statutory rate primarily due to state taxes, ~~foreign operations, as well as~~ transaction costs, and other permanent items.

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The Company recorded income tax expense of ~~$3.9~~$2.6 million, a ~~29.6%~~22.9% effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023. Income tax ~~expense~~benefit of ~~of $0.6~~$4.6 million, a ~~150.7%~~38.6% effective tax rate was recorded for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~ 2022. The ~~change in the year over year~~ effective tax rate for the six months ended June 30, 2023was slightly higher than the U.S. statutory rate primarily due to state taxes, foreign operations, and other permanent items, offset by the ~~changes in~~release of a reserve for an uncertain tax benefit during the ~~valuation allowance in~~second quarter. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2021, merger~~2022 was higher than the U.S. statutory rate primarily due to state taxes, transaction costs, ~~incurred in the~~ ~~nine months ended~~ ~~September 30, 2022,~~ and ~~the~~ other permanent items.

~~creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 - Business Acquisitions.~~

Relative to the U.S. statutory rate, the effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was impacted by state taxes, foreign ~~operations,~~income and other permanent items, offset by the ~~expiration~~release of a reserve for an uncertain tax ~~positions, as well as liabilities and transaction expenses related to~~benefit during the ~~Mergers, and discrete tax items related to changes in the uncertain tax positions and prior period true-ups as a result of the completed Mergers.~~second quarter.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of ~~September~~June 30, ~~2022,~~2023, the Company is subject to U.S. federal income tax examinations for the years ~~2018~~2019 through 2021 and income tax examinations from various other jurisdictions for the years ~~2015~~2016 through ~~2021.~~2022.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.

Note ~~18 -~~14 – Commitments and Contingencies

~~Shareholder lawsuits~~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.~~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

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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 defendants filed motions to dismiss the Derivative Action, along with related supporting briefing materials, with the Delaware Chancery Court, and the plaintiffs filed briefing materials opposing those motions to dismiss. The Delaware Chancery Court has scheduled a hearing to be held on September 13, 2023, regarding the defendants’ motions to dismiss.

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

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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, 2022, 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 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~~Matter

In 2012, it was determined that a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM”) voluntary cleanup program.

A remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. At ~~September~~June 30, ~~2022~~2023 the Company had ~~less than~~approximately $0.1 million accrued for potential monitoring ~~costs.~~costs included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet. The costs for future monitoring are not significant and have been fully accrued. The Company does not expect to capitalize any amounts related to the remediation plan.

Purchase commitments

The Company enters into inventory purchase commitments with third parties in the ordinary course of ~~business. As~~business, and as of ~~September~~June 30, ~~2022, we~~2023, had contractual commitments to purchase approximately ~~$167~~$187 million of ~~product~~products from our suppliers and contractors, which is expected to be paid in the next twelve months.

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Note ~~19 -~~ 15 – Related Party Transactions

Management Services Agreements

Prior to the Mergers, a subsidiary of 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 December 31, 2021, $4.8 million was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets in connection with these management agreements. 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.

Consulting Services

Subsequent to the Mergers, individuals employed by LKCM Headwater Operations, LLC, a related party of ~~Luther King Capital Management Corporation (“LKCM”),~~LKCM, have provided the Company with certain consulting services in order to identify cost savings, revenue enhancements and operational synergies of the combined companies. As of ~~September~~June 30, ~~2022~~2023 expense of ~~$0.2~~$0.1 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 ~~Luther King Capital Management Corporation (“LKCM”)~~LKCM and J. Bryan King ~~(the~~(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

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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 ~~then stock outstanding.~~

stock. As a result of ~~and after~~ the ~~consummation~~issuance of 10.3 million shares at the closing of the Mergers ~~entities affiliated with LKCM~~ and J. Bryan King (the Chairman of the DSG board of directors) owned in the aggregate approximately 14,640,000 shares of DSG common stock as of the Merger Date, which shares represented approximately 75% of the shares of DSG common stock then outstanding after giving effect to the issuance of ~~shares as of~~ the ~~Merger Date in connection with the consummation of the Mergers. Such aggregate share amount does not include any of the up to 700,000~~ additional 1.7 million shares ~~of DSG common stock or any of the up to 1,000,000 additional shares of DSG common stock potentially issuable to the TestEquity Equityholder and the Gexpro Services Stockholder, respectively,~~ in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement ~~respectively, summarized~~on March 20, 2023, entities affiliated with LKCM and Mr. King beneficially owned in ~~Note~~the aggregate approximately 16.3 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 1.8 million additional shares of DSG common stock at a purchase price of $45.00 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 18.2 million shares of DSG common stock as of June 1, ~~- Nature~~2023, representing approximately 77.9% of ~~Operations and Basis~~the outstanding shares of ~~Presentation.~~DSG common stock as of June 30, 2023.

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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 2016 – Segment Information

~~As a result of the Mergers described in Note 1 - Nature of Operations and Basis of Presentation, the Company evaluated its~~Based on operational, reporting and management structures, ~~and~~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 ~~tool kits~~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.

~~In addition to these three reportable segments, the~~The Company also ~~identified~~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 ~~inconsequential~~ results of the Bolt Supply House ("Bolt") non-reportable segment. ~~Revenues~~Revenue within the All Other category ~~represent~~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 ~~their~~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.

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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,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Revenue	Revenue									Revenue
Lawson (1)	Lawson (1)	$	109,418	$	—	$	216,752	$	—	Lawson(1)	$	119,147	$	107,334	$	244,427	$	107,334
TestEquity	TestEquity	116,709		67,826		286,984		201,457		TestEquity	136,067		97,874		243,425		170,276
Gexpro Services	Gexpro Services	103,749		64,264		285,224		189,612		Gexpro Services	108,274		99,792		209,290		181,475
All Other(2)	All Other(2)	17,275		—		33,612		—		All Other(2)	14,496		16,336		29,112		16,336
Total revenue	Total revenue	$	347,151	$	132,090	$	822,572	$	391,069	Total revenue	$	377,984	$	321,336	$	726,254	$	475,421

Operating income (loss)	Operating income (loss)									Operating income (loss)
Lawson (1)	Lawson (1)	$	5,352	$	—	$	2,792	$	—	Lawson(1)	$	8,470	$	(2,562)	$	16,715	$	(2,562)
TestEquity	TestEquity	7,576		1,054		7,443		(308)		TestEquity	(3,182)		471		(3,156)		(133)
Gexpro Services	Gexpro Services	7,992		4,437		16,972		13,520		Gexpro Services	8,778		5,390		16,152		8,982
All Other		1,107		—		1,921		—
All Other(2)										All Other(2)	(290)		814		786		814
Total operating income (loss)	Total operating income (loss)	$	22,027	$	5,491	$	29,128	$	13,212	Total operating income (loss)	$	13,776	$	4,113	$	30,497	$	7,101

(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)

~~Note 21 - Subsequent Events~~

~~Shareholder Lawsuits~~

~~On October 3,~~Includes the operating results of All Other only subsequent to the Merger Date of April 1, 2022 ~~a shareholder derivative action was filed against certain directors~~ and ~~officers of~~not All Other operating results prior to the ~~Company and other related parties. Refer to~~ ~~Note 18 - Commitments and Contingencies for a description of the shareholder lawsuit.~~

~~Share Repurchase Program~~

~~On November 2, 2022, the Board of Directors authorized an increase in the existing repurchase program from $7.5 million to $12.5 million. Refer to~~ ~~Note 15 - Stock Repurchase Program for additional information regarding the repurchase program.~~

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 ~~TestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc. (conducting business as Gexpro Services)~~ audited consolidated financial statements, ~~and~~ accompanying notes and other information included in ~~the Company's Form 8-K/A as filed on June 15, 2022, and the Lawson Products, Inc. audited consolidated financial statements and accompanying notes included in DSG's~~our Annual Report on Form 10-K filed for the year ended December 31, ~~2021.~~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

Organization and ~~Business Combination~~Structure

~~Effective May 5, 2022,~~ Distribution Solutions Group, Inc. ("DSG"), ~~a Delaware corporation formerly known as Lawson Products, Inc., changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG~~ is a multi-platform specialty distribution company ~~structure~~ providing ~~value added~~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.

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 ~~markets.~~applications, pursuant to the Purchase Agreement dated March 30, 2023. The total purchase consideration exchanged for the Hisco Transaction was $270.4 million, net of cash, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. DSG ~~has three principal operating companies: Lawson Products, Inc. ("Lawson"~~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.

DSG funded the Hisco Transaction using a combination of 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”), ~~TestEquity Acquisition, LLC ("TestEquity")~~which amended the Amended and ~~301 HW Opus Holdings, Inc.~~Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”), ~~conducting~~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 ~~as Gexpro Services ("Gexpro Services").~~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 ~~the Mergers~~2022 for the purpose of creating a specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit ~~management.~~management teams. The DSG leadership team provides oversight to ~~the~~these separate leadership ~~teams of each of the operating companies.~~teams. This structure ~~enables~~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.

Refer to the section entitled "Organization" in Note 1 - Nature of Operations and Basis of Presentation in Part 1. Financial Statements, which section is incorporated herein by reference, for a description of the TestEquity Merger and Gexpro Services Merger consummated on April 1, 2022.Organic Growth Strategy

~~Our Three Principal Operating Companies~~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.

~~Lawson~~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 46.9 in the six months ended June 30, 2023 compared to 56.3 in the six months ended June 30, 2022.

Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations ("MRO") marketplace. Lawson distributes MRO products to its customers through a network of sales representatives throughout the U.S. and Canada.Sales Drivers

~~Background and Operations~~ - Lawson delivers quality products to customers and offers them extensive product knowledge, product application expertise and Vendor Managed Inventory ("VMI") services. Lawson competes for business primarily by offering a value-added service approach in which highly trained sales representatives manage the product inventory for customers. The VMI model makes it less likely that customers will run out of a product while optimizing their inventory levels. Lawson ships products to its customers in all 50 states, Puerto Rico, Canada, Mexico and the Caribbean.

~~Vision/Strategy~~ - Lawson's vision is to be its customers' first choice for maintenance, repair and operational solutions that improve their operating performance. Lawson plans to achieve its vision by working closely with customers to maintain and enhance their operations by providing them with quality products, superior service and innovative solutions and to grow both organically and through acquisitions.

~~Sales Drivers~~- The North American MRO market is highly fragmented. Lawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is impacted by the overall strength of the manufacturing sector of the U.S. ~~economy which has been affected by the COVID-19 pandemic. DSG believes~~

37economy.

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that the Purchasing Managers Index ("PMI") published by the Institute for Supply Management is an indicative measure of the relative strength of the economic environment of the industry in which Lawson operates. The PMI is a composite index of economic activity in the United States manufacturing sector. DSG believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. ~~The average monthly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in~~ ~~the third quarter of 2021.~~ Lawson's ~~sales are~~revenue is also influenced by the number of sales representatives and their productivity. Lawson plans to continue concentrating its efforts on increasing the productivity and size of its sales team. Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations. Lawson also ~~uses an~~is expanding its inside sales team to help drive field sales representative productivity and also utilizes an e-commerce site to generate sales.

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TestEquity Sales Drivers

~~TestEquity is a leading distributor of~~Across the test and measurement, equipment and solutions, electronic production supplies and tool kits from its leading manufacturing partners. TestEquity operates primarily through four brands, TestEquity, TEquipment, Jensen Tools and Techni-Tool, focusing primarily in North America with a network of sales representatives throughout the United States, Canada, Mexico and the United Kingdom.

~~Background and Operations~~ - Based out of Moorpark, California, TestEquity is a large, comprehensive provider of electronic test solutions in the United States supporting the aerospace, defense, automotive, electronics, education, and medical industries. TestEquity designs, rents and sells a full line of high-quality environmental test chambers. In addition to a large array of test and measurement products, TestEquity also offers calibration, refurbishment and rental solutions and a wide array of refurbished products. TestEquity continues to benefit from ubiquitous electronification of all types of products across most industries including IOT, EV, and 5G.

TEquipment is one of the top distributors for both test and measurement and electronic production supplies in the US. Going to market with an eCommerce focused strategy, TEquipment offers a range of 200,000 products and 500 manufacturer brands, most of which overlap with the rest of the TestEquity group. In addition to these products, the TEquipment web platform is also currently extending their range to include non-overlap products from the TestEquity platform.

Techni-Tool is one of the industry’s largest solder, soldering equipment and electronic production distributors. Techni-Tool offers a wide range of products to support electronic production as well as compliance testing. In addition to the approximately 80,000 brand specific products offered, Techni-Tool also provides vendor managed inventory solutions and dedicated technical support.

Jensen Tools, as a top distributor for the electronics MRO customer base, has access to approximately 400 suppliers and over 70,000 brand specific products. Jensen Tools offers private label Jensen branded hand tools that have been developed over years of customer usage and manufactured to a specified and demanding tolerance level and is viewed as a leader in the industry. Jensen Tools employs a dedicated team of engineering, operational and sales professionals who focus on designing and building quality tool kits for its customers.

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

~~Vision/Strategy~~ - TestEquity intends to grow sales organically, pursue acquisitions and continue to expand and improve its service offerings to its customers. In particular, TestEquity strives to improve its digital experience, with a consistent approach for all of its brands. TestEquity intends to seek to increase its market share through continued expansion of product lines and greater penetration of the eCommerce market, enabled through investment in key digital talent and leverage of the existing TestEquity and TEquipment platforms. TestEquity expects to benefit from its improved integrated organization and processes, driving improved gross margin and financial operating leverage.

~~Sales Drivers~~ ~~- Across both the test and measurement~~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. TestEquity believes that the PMI is an indicative measure of the relative strength of the economic environment of the industry in which TestEquity operates. The PMI index is a composite index of economic activity in the United States manufacturing sector. TestEquity believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. ~~The average monthly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021.~~

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TestEquity management focuses on the internal metric of Sales per Day (“SPD”) and Day Adjust Growth (“DAG”). The SPD calculates and compares TestEquity’s total sales divided by the number of selling days, adjusted for weekends and holidays. A selling day generally represents a business day in which TestEquity ships products to its customers. The DAG represents the percentage increase or decrease in the SPD for a defined period of time.

Specifically in respect of its electronic production supplies business, the current semi-conductor chip shortage ~~due in significant part to the COVID-19 pandemic,~~ is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process. TestEquity anticipates that recovery of this important part of its customers’ supply chain ~~may not~~will occur ~~until 2023.~~in late 2023 and early 2024.

~~Gexpro Services~~Through the Hisco Transaction, TestEquity will expand 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 ~~is a world-class~~Sales Drivers

The global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs. Gexpro Services provides comprehensive supply chain management solutions, including a full technology suite offering of vendor managed inventory, kitting, global logistics management, manufacturing localization and import expertise, value engineering and quality assurance.market is highly fragmented across Gexpro Services' ~~end-to-end~~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 management is designed to support manufacturing OEMs with their engineered material specifications, fulfillment, and quality requirements to improve their total cost of ownership. Gexpro Services has manufacturing and supply chain operations in over 32 Service Center sites across nine countries including key geographies in North America, South America, Asia, Europe, and the Middle East. Gexpro Services serves customers in six vertical markets, including renewables, industrial power, consumer and industrial, technology, transportation, and aerospace and defense.needs.

~~Background and Operations~~- Gexpro Services ~~was formed~~drives revenue through increasing wallet share with existing customers, customer-led geographic expansion, and new customer development in ~~November 2019 and, in February 2020, acquired the “Gexpro Services” business from French distributor Rexel S.A. via a carve-out acquisition.~~its six key vertical markets. Additionally, Gexpro Services ~~fully separated its “Gexpro Services” operations from Rexel and operates as a stand-alone organization with its own leadership team, operating activities, financial systems and team members.~~

~~As a top distributor and service provider to the OEM market, Gexpro Services has approximately 3,100 suppliers offering approximately 60,000 products. These products are inventoried and sourced~~drives revenue through ~~32 locations in North America, South America, Asia, Europe, and the Middle East.~~

~~Vision/Strategy- Gexpro Services intends to grow organically through market share expansion primarily through new product introduction, increased sales of products and services to existing customers and~~ expansion of its ~~customer base. Gexpro Services believes that~~installation and aftermarket services by leveraging its ~~services benefit its customers by helping them reduce their direct and indirect procurement costs and total cost~~portfolio of ownership for high volume, low value Class C parts, and that its services can help drive substantial cost savings for its customers. Additionally, Gexpro Services intends to grow its business through strategic, accretive acquisitions, and through continued improvement in service and product offerings to its customers.

~~Sales Drivers~~- Gexpro Services believes that the PMI Index is an indicative measure of the relative strength of the economic environment of the industry in which Gexpro Services operates. The PMI index is a composite index of economic activity in the United States manufacturing sector. Gexpro Services believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021

~~Key Factors Affecting our Results of Operations and Financial Condition~~recent acquisitions.

Supply Chain Disruptions

Along with the broader economy, we continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs. This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orderswhich offset some of the sales gains we recorded in 2022 compared to 2021. The supply chain disruptions have also led to higher product costs which have contributed to lower gross margins as a percentage of sales compared to the prior year.. We have instituted various price increases during ~~2021~~2022 and ~~2022~~2023 in response to rising supplier costs, as well as increased transportation and labor ~~costs.~~costs in order to manage our gross profit margins.

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Cyber ~~Security~~ Incident Litigation

InOn February 10, 2022, DSG ~~became aware~~disclosed that ~~its~~Lawson Products' computer network was the subject of a cyber incident potentially involving ~~unlawful access.~~unauthorized access to certain confidential information (the “Cyber Incident”). DSG engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network.

Because of the nature of the information that may have been compromised, DSG was required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and has taken other actions, such as offering credit monitoring services. At June 30, 2023 DSG, ~~has~~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. ~~As of~~ ~~September 30, 2022, DSG received notification from its cyber insurance provider that~~On April 4, 2023, a ~~portion of~~putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG. For more information about the ~~claim submitted for costs incurred was approved~~Cyber Incident Suit, please refer to Note 14 – Commitments and ~~therefore we recorded a receivable of $0.4 million which is included in Prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheet.~~Contingencies within Item 1. Financial Statements.

Critical Accounting Policies and Use of Estimates

~~We have disclosed our significant accounting policies in~~ ~~Note 2~~ - ~~Summary of Significant Accounting Policies~~ ~~to the~~The unaudited condensed consolidated financial ~~statements.~~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.

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Inventory Reserves - Inventories principally consist of finished ~~goods~~products stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and ~~TestEquity segments and~~primarily the weighted average method for the TestEquity and Gexpro Services ~~segment.~~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.

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~~June 30, ~~2022,~~2023, our inventory reserve was ~~$9.5~~$13.6 million, equal to approximately ~~3.5%~~4.0% of our gross inventory. A hypothetical change of one hundred basis points to our reserve as a ~~percent~~percentage of total inventory would have affected our cost of goods sold by ~~$2.7~~$3.4 million.

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

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

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Business Combinations - We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:

•intangible assets, including the valuation methodology (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 ~~revenues~~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; 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.

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

~~Revenue Recognition~~ - ~~For reporting purposes, the Lawson segment has two separate performance obligations including products and vendor managed inventory services. The allocation~~Table of product and service revenue as well as the estimation of service costs requires judgments and assumptions including the standalone selling prices, the period of time that it takes for the service obligation to be fulfilled and the amount of time spent on vendor managed inventory services during the sales process. Changes in various assumptions could increase or decrease the allocation of service revenue and related costs; however, would not materially impact total reported revenues or reported operating income.Contents

Factors Affecting Comparability to Prior Periods

Our results of operations for the six months ended June 30, 2023 are not directly comparable to prior results for the ~~periods presented~~six months ended June 30, 2022 due to the Mergers that were completed on April 1, 2022. The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owns a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements ~~as of September 30, 2022 and December 31, 2021 and~~ for the ~~three and nine~~six months ended ~~September~~June 30, 2022 ~~and 2021~~ reflect the results of operations ~~and financial position~~ of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included ~~only~~ subsequent ~~and not prior,~~ 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 six months ended June 30, 2023 and the three months ended June 30, 2022.

Non-GAAP Financial Measures

The Company's management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. 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 comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.

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Non-GAAP Adjusted EBITDA

Management believes Adjusted EBITDA is an important measure of the Company's operating performance. We define Adjusted EBITDA as operating income plus depreciation and amortization, stock-based compensation, severance costs, costs related to the execution and integration of the Mergers, ~~stock-based compensation, severance costs,~~ amortization of fair value step-up resulting from the Mergers, acquisition related costs (unrelated to the Mergers), and other non-recurring items. The following table provides our calculation of Adjusted EBITDA for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022(8)		2021		2022(8)		2021		(in thousands)	2023		2022		2023		2022(7)
Operating income (loss)	Operating income (loss)	$	22,027	$	5,491	$	29,128	$	13,212	Operating income (loss)	$	13,776	$	4,113	$	30,497	$	7,101
Depreciation and amortization	Depreciation and amortization	8,979		4,729		31,314		13,649		Depreciation and amortization	14,584		14,746		30,306		22,335

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

Stock-based compensation(1)	Stock-based compensation(1)	(3,568)		—		445		—		Stock-based compensation(1)	2,188		4,013		4,392		4,013
Severance costs(2)		944		15		2,353		34
Severance and acquisition related retention expenses(2)										Severance and acquisition related retention expenses(2)	2,437		953		2,788		1,409
Merger/integration costs(3)	Merger/integration costs(3)	2,364		630		9,597		1,158		Merger/integration costs(3)	150		5,790		1,373		7,232
Inventory net realizable value adjustment(4)		1,737		—		1,737		—
Inventory step-up(5)		1,082		118		2,867		118
Acquisition related costs(6)		38		762		1,212		1,797
Other non-recurring(7)		1,097		87		1,202		217

Inventory step-up(4)										Inventory step-up(4)	716		1,622		716		1,622
Acquisition related costs(5)										Acquisition related costs(5)	4,908		334		7,784		1,337
Other non-recurring(6)										Other non-recurring(6)	1,341		82		1,597		106
Adjusted EBITDA	Adjusted EBITDA	$	34,700	$	11,832	$	79,855	$	30,185	Adjusted EBITDA	$	40,100	$	31,653	$	79,453	$	45,155

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

(2) Includes severance expense from actions taken in ~~2022~~2023 and ~~2021,~~2022 not related to a formal restructuring ~~plan.~~plan and acquisition related retention expenses for the Hisco Transaction.

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

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

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

~~(6)~~(5) Expense for acquisition related costs, unrelated to the Mergers.

~~(7)~~(6) Other non-recurring costs ~~consists~~consist of ~~acquisition integration~~non-capitalized deferred financing costs incurred in conjunction with the 2023 Credit Agreement, certain non-recurring strategic projects and other non-recurring items.

~~(8)~~

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(7) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions.

Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments. See Note ~~20 -~~16 – Segment Information ~~of our unaudited condensed consolidated financial statements within Part I.~~ within Item 1. Financial ~~Information~~Statements for additional information about our reportable segments. The following table provides Adjusted EBITDA by reportable segment:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)	2023		2022		2023		2022
Adjusted EBITDA	Adjusted EBITDA									Adjusted EBITDA
Lawson(1)	Lawson(1)	$	9,670	$	—	$	19,077	$	—	Lawson(1)	$	16,070	$	9,405	$	34,520	$	9,405
TestEquity	TestEquity	10,122		5,524		24,260		11,462		TestEquity	9,493		8,647		17,152		14,138
Gexpro Services	Gexpro Services	12,485		6,308		32,409		18,723		Gexpro Services	13,142		11,915		24,816		19,926
All Other(2)	All Other(2)	2,423		—		4,109		—		All Other(2)	1,395		1,686		2,965		1,686
Consolidated Adjusted EBITDA	Consolidated Adjusted EBITDA	$	34,700	$	11,832	$	79,855	$	30,185	Consolidated Adjusted EBITDA	$	40,100	$	31,653	$	79,453	$	45,155

(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)

~~Table~~Includes the operating results of ~~Contents~~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~~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 ~~Part I.~~ Item 1. Financial ~~Information of the unaudited condensed consolidated financial statements~~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 ~~2021,~~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 ~~Reports~~Report on Form 10-Q filed for the quarterly ~~periods~~period ended ~~September 30, 2021 and~~ March 31, 2022.

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

(in thousands) Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Lawson Operating Income
GAAP Results(1)
Pre-Merger Results(2)
Adjusted
Results(3)
GAAP Results(1)
Pre-Merger Results(4)
Adjusted
Results(3)
Revenue $ 109,418 $ — $ 109,418 $ — $ 93,686 $ 93,686
Cost of goods sold 53,183 — 53,183 — 42,559 42,559
Gross profit 56,235 — 56,235 — 51,127 51,127
Selling, general and administrative expenses 50,883 — 50,883 — 47,639 47,639
Operating income (loss) $ 5,352 $ — $ 5,352 $ — $ 3,488 $ 3,488
Lawson Adjusted EBITDA(5)
$ 9,670 $ — $ 9,670 $ — $ 7,560 $ 7,560


(in thousands)	Six Months Ended June 30, 2023						Six Months Ended June 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	$	244,427	$	—	$	244,427	$	107,334	$	104,902	$	212,236
Cost of goods sold	107,140		—		107,140		50,552		49,371		99,923
Gross profit	137,287		—		137,287		56,782		55,531		112,313
Selling, general and administrative expenses	120,572		—		120,572		59,344		44,435		103,779
Operating income (loss)	$	16,715	$	—	$	16,715	$	(2,562)	$	11,096	$	8,534

Lawson Adjusted EBITDA(4)	$	34,520	$	—	$	34,520	$	9,405	$	8,042	$	17,447

(1)Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date. ~~For the three months ended~~ ~~September 30, 2021, the operating results of Lawson were not included in the Company’s GAAP operating results.~~ See Note 1-1 – Nature of Operations and Basis of Presentation and Note 3 -– Business Acquisitions within ~~Part I.~~ Item 1. Financial ~~Information of the unaudited condensed consolidated financial statements.~~Statements.

(2)~~All of Lawson’s results of operations for the three months ended September 30, 2022 occurred after the April 1, 2022 Merger Date.~~

~~(3)~~Lawson's results of operations adjusted for comparability on a period-over-period basis. These non-GAAP results represent Lawson’s total operating activities for the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022, regardless of the Merger ~~Date~~date (that is, they reflect both pre- and post-Merger results of Lawson).

~~(4)Lawson's results of operations for the three months ended~~ ~~September 30, 2021~~, which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting. See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements.

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

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(in thousands) Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Lawson Operating Income
GAAP Results(1)
Pre-Merger Results(2)
Adjusted
Results(3)
GAAP Results(1)
Pre-Merger Results(4)
Adjusted
Results(3)
Revenue $ 216,752 $ 104,902 $ 321,654 $ — $ 281,877 $ 281,877
Cost of goods sold 103,733 49,371 153,104 — 130,441 130,441
Gross profit 113,019 55,531 168,550 — 151,436 151,436
Selling, general and administrative expenses 110,227 44,435 154,662 — 141,249 141,249
Operating income (loss) $ 2,792 $ 11,096 $ 13,888 $ — $ 10,187 $ 10,187
Lawson Adjusted EBITDA(5)
$ 19,077 $ 8,042 $ 27,119 $ — $ 23,551 $ 23,551

~~(1)Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date. For the nine months ended~~ ~~September 30, 2021, the operating results of Lawson were not included in the Company's GAAP results.~~ ~~See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements.~~

~~(2)~~(3)Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting.

~~(3)~~Lawson's results of operations adjusted for comparability on a period-over-period basis. These non-GAAP results represent Lawson’s total operating activities for the nine months ended September 30, 2022 and ~~2021, regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).~~

(4)~~Lawson's results of operations for the nine months ended~~ ~~September 30, 2021~~, which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting. See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I. Item 1. Financial Information of the unaudited condensed consolidated financial statements.

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

Composition of Results of Operations

The following results of operations for the three and ~~nine~~six months ended ~~September~~June 30, 2023 and the three months ended June 30, 2022 include the combined operations of DSG. The following results of operations for the six months ended June 30, 2022 ~~and 2021~~ include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting ~~acquirer. The~~acquirer, and the results of DSG's legacy Lawson business have only been included ~~only~~for activity subsequent, and not prior, ~~to,~~ to the April 1, 2022 Merger Date.

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RESULTS OF OPERATIONS

Three Months Ended ~~September~~June 30, ~~2022~~2023 Compared to Three Months Ended ~~September~~June 30, ~~2021~~2022

Consolidated Results of Operations


		Three Months Ended September 30,							Three Months Ended June 30,
		2022			2021				2023			2022
(Dollars in thousands)	(Dollars in thousands)	Amount		% of Net Sales	Amount		% of Net Sales	(Dollars in thousands)	Amount		% of Revenue	Amount		% of Revenue

Revenue	Revenue							Revenue
Lawson	Lawson	$	109,418	31.5%	$	—	—%	Lawson	$	119,147	31.5%	$	107,334	33.4%
TestEquity	TestEquity	116,709		33.6%	67,826		51.3%	TestEquity	136,067		36.0%	97,874		30.5%
Gexpro		103,749		29.9%	64,264		48.7%
Gexpro Services								Gexpro Services	108,274		28.6%	99,792		31.1%
All Other	All Other	17,275		5.0%	—		—%	All Other	14,496		3.8%	16,336		5.1%
Total Revenue	Total Revenue	347,151		100.0%	132,090		100.0%	Total Revenue	377,984		100.0%	321,336		100.0%
Cost of goods sold	Cost of goods sold							Cost of goods sold
Lawson	Lawson	53,183		15.3%	—		—%	Lawson	52,769		14.0%	50,552		15.7%
TestEquity	TestEquity	89,704		25.8%	51,886		39.3%	TestEquity	104,827		27.7%	75,064		23.4%
Gexpro		73,794		21.3%	45,366		34.3%
Gexpro Services								Gexpro Services	75,928		20.1%	70,615		22.0%
All Other	All Other	11,303		3.3%	—		—%	All Other	8,437		2.2%	10,550		3.3%
Total Cost of goods sold	Total Cost of goods sold	227,984		65.7%	97,252		73.6%	Total Cost of goods sold	241,961		64.0%	206,781		64.4%
Gross profit	Gross profit	119,167		34.3%	34,838		26.4%	Gross profit	136,023		36.0%	114,555		35.6%

Selling, general and administrative expenses	Selling, general and administrative expenses							Selling, general and administrative expenses
Lawson	Lawson	50,883		14.7%	—		—%	Lawson	57,908		15.3%	59,344		18.5%
TestEquity	TestEquity	19,429		5.6%	14,886		11.3%	TestEquity	34,422		9.1%	22,339		7.0%
Gexpro		21,963		6.3%	14,461		10.9%
Gexpro Services								Gexpro Services	23,568		6.2%	23,787		7.4%
All Other	All Other	4,865		1.4%	—		—%	All Other	6,349		1.7%	4,972		1.5%
Total Selling, general and administrative expenses	Total Selling, general and administrative expenses	97,140		28.0%	29,347		22.2%	Total Selling, general and administrative expenses	122,247		32.4%	110,442		34.4%
Operating income (loss)	Operating income (loss)	22,027		6.3%	5,491		4.2%	Operating income (loss)	13,776		3.6%	4,113		1.3%

Interest expense	Interest expense	(6,097)		(1.8)%	(3,976)		(3.0)%	Interest expense	(9,492)		(2.5)%	(3,751)		(1.2)%
Loss on extinguishment of debt	Loss on extinguishment of debt	—		—%	—		—%	Loss on extinguishment of debt	—		—%	(2,814)		(0.9)%
Change in fair value of earnout liabilities	Change in fair value of earnout liabilities	9,641		2.8%	—		—%	Change in fair value of earnout liabilities	36		—%	(5,693)		(1.8)%
Other income (expense), net	Other income (expense), net	(550)		(0.1)%	(74)		(0.1)%	Other income (expense), net	(761)		(0.2)%	(182)		(0.1)%

Income (loss) before income taxes	Income (loss) before income taxes	25,021		7.2%	1,441		1.1%	Income (loss) before income taxes	3,559		0.9%	(8,327)		(2.6)%

Income tax expense (benefit)	Income tax expense (benefit)	8,480		2.4%	216		0.2%	Income tax expense (benefit)	535		0.1%	(3,612)		(1.1)%

Net income (loss)	Net income (loss)	$	16,541	4.8%	$	1,225	0.9%	Net income (loss)	$	3,024	0.8%	$	(4,715)	(1.5)%

Overview of Consolidated Results of Operations

Our consolidated ~~results of operations include~~revenue increased in the ~~financial impact of the Mergers that were completed on April 1, 2022. The increase in gross profit for the~~ ~~third~~second quarter of ~~2022~~2023 compared to the ~~third~~second quarter of ~~2021~~2022 primarily driven by acquisitions completed in 2023 and 2022 and organic sales growth. Consolidated was primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date and the exclusion of Lawson operations prior to the Merger Date as a result of the accounting treatment of the Mergers. Excluding Lawson and All Other gross profit ~~of $62.2 million for the~~ ~~third quarter~~ of ~~2022, gross profit for the~~ ~~third quarter~~ of ~~2022~~ ~~improv~~ed ~~$22.1 million~~and Selling, general and administrative expenses increased over the prior year ~~due to 2021 and 2022 acquisitions and growth in the organic businesses. Expenses for the third quarter of 2022 were impacted~~primarily driven by ~~transaction and integration costs related to the Mergers as well as~~ the inclusion of ~~Lawson operating results subsequent,~~the acquisitions completed in 2023 and ~~not prior to, the Merger Date.~~2022.

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

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Results by Reportable Segment

Lawson Segment


		Three Months Ended September 30,						Change					Three Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	109,418		$	—		$	109,418	—	%	Revenue	$	119,147		$	107,334		$	11,813	11.0	%
Cost of goods sold	Cost of goods sold	53,183			—			53,183		—	%	Cost of goods sold	52,769			50,552			2,217		4.4	%
Gross profit	Gross profit	56,235			—			$	56,235	—	%	Gross profit	66,378			56,782			9,596		16.9	%
Selling, general and administrative expenses	Selling, general and administrative expenses	50,883			—			50,883		—	%	Selling, general and administrative expenses	57,908			59,344			(1,436)		(2.4)	%
Operating income (loss)	Operating income (loss)	$	5,352		$	—		$	5,352	—	%	Operating income (loss)	$	8,470		$	(2,562)		$	11,032	N/M

Gross profit margin	Gross profit margin	51.4		%	—		%					Gross profit margin	55.7		%	52.9		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	9,670		$	—		$	9,670	—	%	Adjusted EBITDA(1)	$	16,070		$	9,405		$	6,665	70.9	%

(1)~~Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.~~

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

~~Supplemental Information~~

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. These non-GAAP Adjusted Results presented in the table below are referred to within this results of operations discussion as "Adjusted".

Three Months Ended September 30, Change from Adjusted 2021
(Dollars in thousands) 2022
Adjusted 2021(1)
Amount %
Revenue $ 109,418 $ 93,686 $ 15,732 16.8 %
Cost of goods sold 53,183 42,559 10,624 25.0 %
Gross profit 56,235 51,127 5,108 10.0 %
Selling, general and administrative expenses 50,883 47,639 3,244 6.8 %
Operating income (loss) $ 5,352 $ 3,488 $ 1,864 53.4 %
Gross profit margin 51.4 % 54.6 %
Adjusted EBITDA(2)
$ 9,670 $ 7,560 $ 2,110 27.9 %

~~(1)For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results of Lawson prior to the Merger Date. Refer to the section~~ ~~Factors Affecting Comparability to Prior Periods~~ ~~and the non-GAAP measures section~~ ~~Supplemental Information -~~ ~~Lawson Non-GAAP Adjusted Operating Income and Non-GAAP Adjusted EBITDA~~ ~~for more information related to the calculation of adjusted amounts.~~

~~(2)~~Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

~~Organic revenue~~Revenue increased ~~16.8%~~$11.8 million, or 11.0%, to ~~$109.4~~$119.1 million in the ~~third~~second quarter of 2023 compared to $107.3 million in the second quarter of 2022 ~~compared to adjusted revenue of $93.7 million in the~~ ~~third quarter~~ of ~~2021~~. The increase ~~in revenue over the comparable prior year quarter~~ was primarily driven by the realization of price increases enacted throughout ~~2021~~2022 and ~~2022~~2023 to offset rising supplier costs, increased quantity volumes and strengthening sales to ~~our~~Lawson's strategic and ~~Kent Automotive customers.~~ ~~Sales per sales representative per day improved approximately 24.4% over a year ago quarter on fewer sales representatives~~.governmental customers and automotive end market.

~~Reported gross~~Gross profit increased ~~$5.1~~$9.6 million to ~~$56.2~~$66.4 million in the ~~third~~second quarter of ~~2022~~2023 compared to ~~adjusted~~ gross profit of ~~$51.1~~$56.8 million in the prior year quarter primarily as a result of increased sales, ~~and the related~~ price increases, ~~put in place.~~

lower net freight expense

~~Table~~ and spreading operating expenses over a higher level of ~~Contents~~

sales. Lawson gross profit as a percent of ~~sales~~revenue was ~~51.4%~~55.7% in the ~~third~~second quarter of ~~2022~~2023 compared to ~~54.6% as adjusted~~52.9% in the prior year quarter. The gross profit margin percentage improvement for the ~~third~~second quarter of ~~2022~~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 ~~supply~~and supply chain disruptions, and a sales shift toward lower margin customers. Gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $0.8 million related to the M~~ergers. Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher supplier costs.~~

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses ~~increased~~decreased $1.4 million to ~~$50.9~~$57.9 million in the ~~third~~second quarter of ~~2022~~2023 compared to ~~the adjusted amount of $47.6~~$59.3 million in the prior year quarter. ~~Higher expenses in thethird quarter~~ ~~versus a year ago quarter were~~The decrease was primarily driven by lower stock-based compensation, acquisition related costs and legal expenses, partially offset by higher compensation expense incurred to support increased sales ~~higher severance~~ and ~~higher amortization expense related to the reverse merger accounting, partially offset by a stock-based compensation benefit.Additionally, Lawson incurred higher consulting expenses as it reviewed opportunities to increase sales productivity.~~health insurance costs.

Adjusted EBITDA

During the three months ended ~~September~~June 30, ~~2022,~~2023, Lawson generated Adjusted EBITDA of $~~9.7~~16.1 million, an increase of $~~2.1~~6.7 million, or ~~27.9%,~~70.9% from the same period a year ago ~~on an adjusted basis for pre-merger activity~~primarily driven ~~primarily~~ by increased ~~revenues.~~revenue and margins and lower Selling, general and administrative expenses.

Table of Contents

TestEquity Segment


		Three Months Ended September 30,						Change					Three Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	116,709		$	67,826		$	48,883	72.1	%	Revenue	$	136,067		$	97,874		$	38,193	39.0	%
Cost of goods sold	Cost of goods sold	89,704			51,886			37,818		72.9	%	Cost of goods sold	104,827			75,064			29,763		39.7	%
Gross profit	Gross profit	27,005			15,940			11,065		69.4	%	Gross profit	31,240			22,810			8,430		37.0	%
Selling, general and administrative expenses	Selling, general and administrative expenses	19,429			14,886			4,543		30.5	%	Selling, general and administrative expenses	34,422			22,339			12,083		54.1	%
Operating income (loss)	Operating income (loss)	$	7,576		$	1,054		$	6,522	618.8	%	Operating income (loss)	$	(3,182)		$	471		$	(3,653)	N/M

Gross profit margin	Gross profit margin	23.1		%	23.5		%					Gross profit margin	23.0		%	23.3		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	10,122		$	5,524		$	4,598	83.2	%	Adjusted EBITDA(1)	$	9,493		$	8,647		$	846	9.8	%

(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 $~~48.9~~38.2 million, or 39.0%, to $~~116.7~~136.1 million in the ~~three months ended September 30, 2022 from~~second quarter of 2023 compared to $~~67.8~~97.9 million in the ~~comparable period a year ago.~~ second quarter of 2022. The ~~growth~~increase was primarily driven by ~~the recovery~~$43.4 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $5.2 million decline in legacy TestEquity revenue due to a slowdown in the test and measurement market, ~~as business conditions improved after the easing~~primarily caused by tightening of ~~certain COVID-related restrictions, market gain share from supplier expansion~~capital budgets in ~~2021, the inclusion of~~ ~~$37.6 million~~ of aggregate revenue from the 2022 acquisition of TEquipment and National Test Equipment for three-month post-acquisition period and the 2021 acquisition of MCS. Excluding acquisitions, revenue grew approximately 16.9% driven by test and measurement revenue growth of approximately 18.8% as well as a 14.4% growth in revenue in the electronic production supplies business.TestEquity's customer base.

AsGross profit increased $8.4 million to $31.2 million in the second quarter of 2023 compared to gross profit of $22.8 million in the prior year quarter primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $11.1 million of additional gross profit in the second quarter of 2023. TestEquity gross profit as a percent of revenue ~~gross profit decreased to 23.1% for the three months ended September 30, 2022 from 23.5%~~was 23.0% in the ~~same period~~second quarter of 2023 compared to 23.3% in the prior ~~year.~~year quarter. The ~~decrease~~slight gross profit margin percentage decline for the second quarter of 2023 was ~~primarily driven by a change in sales mix~~ due to the ~~test and measurement acquisitions partially offset by increases in our higher margin electronic production supplies business.~~amortization of the fair value step-up of inventory of $0.7 million related to the Hisco Transaction.

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 $~~4.5~~12.1 million ~~driven primarily by the acquisitions during~~ to $34.4 million in the second quarter of 2023 compared to $22.3 million in the prior year quarter. Approximately $10.4 millionof the increased expenses was primarily driven by the acquisitions completed in 2023 and 2022 and ~~costs to support the organic growth~~approximately $2.1 million of the ~~existing base business.~~increased expenses was driven by increased acquisition expenses in the second quarter of 2023 of $4.1 million in connection with the Hisco Transaction compared to $2.0 million of merger and acquisition expenses in the prior year quarter.

Adjusted EBITDA

During the three months ended June 30, 2023, TestEquity generated Adjusted EBITDA of $9.5 million, an increase of $0.8 million, or 9.8% from the same period a year ago with approximately $3.0 million driven by the acquisitions completed in 2023 and 2022, offset by a reduction of $2.2 million in legacy TestEquity due to the decline in revenue.

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~~Adjusted EBITDA~~

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

Gexpro Services Segment


		Three Months Ended September 30,						Change					Three Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	103,749		$	64,264		$	39,485	61.4	%	Revenue	$	108,274		$	99,792		$	8,482	8.5	%
Cost of goods sold	Cost of goods sold	73,794			45,366			28,428		62.7	%	Cost of goods sold	75,928			70,615			5,313		7.5	%
Gross profit	Gross profit	29,955			18,898			11,057		58.5	%	Gross profit	32,346			29,177			3,169		10.9	%
Selling, general and administrative expenses	Selling, general and administrative expenses	21,963			14,461			7,502		51.9	%	Selling, general and administrative expenses	23,568			23,787			(219)		(0.9)	%
Operating income (loss)	Operating income (loss)	$	7,992		$	4,437		$	3,555	80.1	%	Operating income (loss)	$	8,778		$	5,390		$	3,388	62.9	%

Gross profit margin	Gross profit margin	28.9		%	29.4		%					Gross profit margin	29.9		%	29.2		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	12,485		$	6,308		$	6,177	97.9	%	Adjusted EBITDA(1)	$	13,142		$	11,915		$	1,227	10.3	%

(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue ~~for~~increased $8.5 million, or 8.5%, to $108.3 million in the ~~three months ended September 30, 2022 was~~ ~~$103.7 million.~~second quarter ~~This compares to revenue~~ of ~~$64.3 million~~2023 compared to ~~for the same period a year ago or an increase of 61.4%. During the three months ended September 30, 2022 revenue increased primarily due to acquisitions completed~~$99.8 million in ~~both 2021 and 2022. Of~~ the ~~$39.5 million~~ ~~increase over the~~ ~~third~~second quarter ~~a year ago,~~of ~~$30.8 million~~2022. The increase was primarily driven by organic growth in the ~~2021 and 2022 acquisitions. An~~base business through an expansion of products and services to existing customers as well as the addition of new ~~customers and price increases, drove organic growth of approximately 13.9%.~~customers.

Gross profit increased $3.2 million to$32.3 million in the second quarter of 2023 compared to gross profit of $29.2 million in the prior year quarter primarily due to increased revenue. Gexpro Services gross profit as a percent of revenue was ~~$30.0 million~~29.9% in the second quarter ~~or 28.9%~~ of ~~revenue for the three-month period ending September 30, 2022~~2023 compared to ~~$18.9 million~~ ~~or 29.4% for~~29.2% in the ~~same period a~~prior year ~~ago.~~quarter. The ~~improvement in~~ gross profit margin ~~dollars~~increase was driven by an improvement in the ~~2021 and 2022 acquisitions as well as improving~~ global supply chain ~~issues that were more prevalent during 2021. As a percentage of sales, gross profit decreased 50 basis points (bps) from lower gross~~and enhanced margin ~~profiles of acquired companies offset by price actions, strategic sourcing improvements, new supplier development, and a continued shift toward longer-term agreements with suppliers.~~management on its product offering.

Selling, General and Administrative ~~Expense~~Expenses

Selling, general and administrative ~~expense consists~~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 ~~our~~Gexpro Services’ business and service customers.

Selling, general, and administrative ~~expense for the three-month period ending September 30, 2022 was~~expenses remained flat with $~~22.0~~23.6 million of expenses in the second quarter of 2023 compared to $23.8 million ~~or 21.2% of revenue compared to~~ ~~$14.5 million~~ ~~or 22.5% of revenue for~~in the ~~same period last year. The~~ ~~$7.5 million~~ ~~increase was driven primarily by the inclusion of the 2021 and 2022 acquisitions, costs to support the organic revenue increase and costs related to the Gexpro Services Merger.~~prior year quarter.

Adjusted EBITDA

During the three months ended ~~September~~June 30, ~~2022,~~2023, Gexpro Services generated Adjusted EBITDA of ~~$12.5~~$13.1 million, an increase of $~~6.2~~1.2 million, or 10.3%, from the same period a year ago ~~with approximately~~ ~~$5.1 million~~primarily driven by ~~the 2021~~increases in revenue and ~~2022 acquisitions~~margins on flat Selling, general, and ~~organic growth in the existing base business.~~administrative expenses.

Consolidated Non-operating Income and Expense


	Three Months Ended June 30,				Change
(Dollars in thousands)	2023		2022		Amount		%

Interest expense	$	(9,492)	$	(3,751)	$	(5,741)	153.1	%
Loss on extinguishment of debt	$	—	$	(2,814)	$	2,814	(100.0)	%
Change in fair value of earnout liabilities	$	36	$	(5,693)	$	5,729	N/M
Other income (expense), net	$	(761)	$	(182)	$	(579)	318.1	%
Income tax expense (benefit)	$	535	$	(3,612)	$	4,147	(114.8)	%

N/M Not meaningful

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~~Consolidated Non-operating Income and Expense~~

Three Months Ended September 30, Change
(Dollars in thousands) 2022 2021 Amount %
Interest expense $ (6,097) $ (3,976) $ (2,121) 53.3 %
Change in fair value of earnout liabilities $ 9,641 $ — $ 9,641 — %
Other income (expense), net $ (550) $ (74) $ (476) — %
Income tax expense (benefit) $ 8,480 $ 216 $ 8,264 — %

~~N/M~~ ~~Not meaningful~~

Interest Expense

Interest expense ~~was~~increased $~~6.1~~5.7 million in the ~~third~~second quarter of ~~2022~~2023 compared to ~~$4.0 million~~ ~~of interest expense in~~ the prior year ~~quarter.~~quarter. The increase was primarily driven by higher interest rates and outstanding borrowings partially driven by the Hisco Transaction.

Loss on Extinguishment of Debt

The $2.8 million loss on extinguishment of debt in thesecond quarter of 2022was due to ~~a lower interest rate~~the write-off of previously capitalized financing costs as a result of the debt refinancing related to the ~~Mergers, offset by interest on higher outstanding borrowings related to the 2021 and 2022 acquisitions.~~Mergers.

Change in Fair Value of Earnout ~~Liability~~Liabilities

The ~~$9.6 million~~nominal benefit in the ~~third~~second quarter of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $5.7 million loss in the second 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. ~~Refer to Note 11 - Earnout Derivative Liability within Part I. Item 1. Financial Information to our unaudited condensed consolidated financial statements for information about the earnout liability.~~

Income Tax Expense (Benefit)

Income tax expense was ~~$8.5~~$0.5 million, a ~~33.9%~~15.0% effective tax rate for the three months ended ~~September~~June 30, ~~2022~~2023 compared to income tax ~~expense~~benefit of ~~$0.2~~$3.6 million and ~~an effective tax rate of 15.0% for the three months ended September 30, 2021. The~~a 43.4% effective tax rate for the three months ended ~~September~~June 30, ~~2022~~2022. The change in the year over year effective tax rate was ~~higher than the U.S. statutory rate~~ primarily due to ~~state taxes, foreign operations, as well as transaction expenses related to~~ the ~~Mergers and other permanent items.~~the release of a reserve for an uncertain tax benefit during the quarter.

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~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022

Consolidated Results of Operations


		Nine Months Ended September 30,									Six Months Ended June 30,
		2022				2021					2023				2022
(Dollars in thousands)	(Dollars in thousands)	Amount		% of Net Sales		Amount		% of Net Sales		(Dollars in thousands)	Amount		% of Net Sales		Amount		% of Net Sales

Revenue	Revenue									Revenue
Lawson(1)	Lawson(1)	$	216,752	26.4	%	$	—	—	%	Lawson(1)	$	244,427	33.7	%	$	107,334	22.6	%
TestEquity	TestEquity	286,984		34.9	%	201,457		51.5	%	TestEquity	243,425		33.5	%	170,276		35.8	%
Gexpro		285,224		34.7	%	189,612		48.5	%
Gexpro Services										Gexpro Services	209,290		28.8	%	181,475		38.2	%
All Other	All Other	33,612		4.1	%	—		—	%	All Other	29,112		4.0	%	16,336		3.4	%
Total Revenue	Total Revenue	822,572		100.0	%	391,069		100.0	%	Total Revenue	726,254		100.0	%	475,421		100.0	%
Cost of goods sold	Cost of goods sold									Cost of goods sold
Lawson(1)	Lawson(1)	103,733		12.6	%	—		—	%	Lawson(1)	107,140		14.8	%	50,552		10.6	%
TestEquity	TestEquity	220,247		26.8	%	157,358		40.2	%	TestEquity	186,828		25.7	%	130,543		27.5	%
Gexpro		202,133		24.6	%	134,885		34.5	%
Gexpro Services										Gexpro Services	146,439		20.2	%	128,337		27.0	%
All Other	All Other	21,853		2.7	%	—		—	%	All Other	16,953		2.3	%	10,550		2.2	%
Total Cost of goods sold	Total Cost of goods sold	547,966		66.6	%	292,243		74.7	%	Total Cost of goods sold	457,360		63.0	%	319,982		67.3	%
Gross profit	Gross profit	274,606		33.4	%	98,826		25.3	%	Gross profit	268,894		37.0	%	155,439		32.7	%

Selling, general and administrative expenses	Selling, general and administrative expenses									Selling, general and administrative expenses
Lawson(1)	Lawson(1)	110,227		13.4	%	—		—	%	Lawson(1)	120,572		16.6	%	59,344		12.5	%
TestEquity	TestEquity	59,294		7.2	%	44,407		11.4	%	TestEquity	59,753		8.2	%	39,866		8.4	%
Gexpro		66,119		8.0	%	41,207		10.5	%
Gexpro Services										Gexpro Services	46,699		6.4	%	44,156		9.3	%
All Other	All Other	9,838		1.2	%	—		—	%	All Other	11,373		1.6	%	4,972		1.0	%
Total Selling, general and administrative expenses	Total Selling, general and administrative expenses	245,478		29.8	%	85,614		21.9	%	Total Selling, general and administrative expenses	238,397		32.8	%	148,338		31.2	%

Operating income (loss)	Operating income (loss)	29,128		3.5	%	13,212		3.4	%	Operating income (loss)	30,497		4.2	%	7,101		1.5	%

Interest expense	Interest expense	(16,704)		(2.0)	%	(12,482)		(3.2)	%	Interest expense	(17,162)		(2.4)	%	(10,607)		(2.2)	%
Loss on extinguishment of debt	Loss on extinguishment of debt	(3,395)		(0.4)	%	—		—	%	Loss on extinguishment of debt	—		—	%	(3,395)		(0.7)	%
Change in fair value of earnout liabilities	Change in fair value of earnout liabilities	3,948		0.5	%	—		—	%	Change in fair value of earnout liabilities	(21)		—	%	(5,693)		(1.2)	%
Other income (expense), net	Other income (expense), net	224		—	%	(328)		(0.1)	%	Other income (expense), net	(1,736)		(0.2)	%	774		0.2	%

Income (loss) before income taxes	Income (loss) before income taxes	13,201		1.6	%	402		0.1	%	Income (loss) before income taxes	11,578		1.6	%	(11,820)		(2.5)	%

Income tax expense (benefit)	Income tax expense (benefit)	3,912		0.5	%	606		0.2	%	Income tax expense (benefit)	2,647		0.4	%	(4,568)		(1.0)	%

Net income (loss)	Net income (loss)	$	9,289	1.1	%	$	(204)	(0.1)	%	Net income (loss)	$	8,931	1.2	%	$	(7,252)	(1.5)	%

(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~~six months of ~~2022~~2023 compared to the first ~~nine~~six months of ~~2021~~2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger ~~Date. Excluding Lawson~~Date and ~~All Other gross profit of~~ the other acquisitions completed in 2023 and 2~~$124.8 million, gross profit for the first~~ ~~nine months~~ of ~~2022~~ ~~improved $51.0 million over the prior year.~~022. Expenses for the first ~~nine~~six months of 2023 compared to the first six months of 2022 were impacted by the inclusion of Lawson and the ~~2021~~other acquisitions completed in 2023 and ~~2022 acquisitions, and merger related costs.~~2022.

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

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Results by Reportable Segment

Lawson Segment


		Nine Months Ended September 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	216,752		$	—		$	216,752	—	%	Revenue	$	244,427		$	107,334		$	137,093	—	%
Cost of goods sold	Cost of goods sold	103,733			—			103,733		—	%	Cost of goods sold	107,140			50,552			56,588		—	%
Gross profit	Gross profit	113,019			—			113,019		—	%	Gross profit	137,287			56,782			80,505		—	%
Selling, general and administrative expenses	Selling, general and administrative expenses	110,227			—			110,227		—	%	Selling, general and administrative expenses	120,572			59,344			61,228		—	%
Operating income (loss)	Operating income (loss)	$	2,792		$	—		$	2,792	—	%	Operating income (loss)	$	16,715		$	(2,562)		$	19,277	—	%

Gross profit margin	Gross profit margin	52.1		%	—		%					Gross profit margin	56.2		%	52.9		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	19,077		$	—		$	19,077	—	%	Adjusted EBITDA(1)	$	34,520		$	9,405		$	25,115	267.0	%

(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~~six months of ~~2022~~2023 compared to the first ~~nine~~six months of ~~2021~~2022 was due to the inclusion of Lawson ~~revenue~~operations beginning on the Merger Date and not including any Lawson ~~revenue~~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 six months ended June 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 six months ended June 30, 2022presented in the table below are referred to within this supplemental results of operations discussion as "Adjusted".


		Nine Months Ended September 30,						Adjusted Change				Six Months Ended June 30,						Adjusted Change
(Dollars in thousands)	(Dollars in thousands)	Adjusted 2022(1)			Adjusted 2021(1)			Amount		%	(Dollars in thousands)	2023			Adjusted 2022(1)			Amount		%

Revenue	Revenue	$	321,654		$	281,877		$	39,777	14.1%	Revenue	$	244,427		$	212,236		$	32,191	15.2%
Cost of goods sold	Cost of goods sold	153,104			130,441			22,663		17.4%	Cost of goods sold	107,140			99,923			7,217		7.2%
Gross profit	Gross profit	168,550			151,436			17,114		11.3%	Gross profit	137,287			112,313			24,974		22.2%
Selling, general and administrative expenses	Selling, general and administrative expenses	154,662			141,249			13,413		9.5%	Selling, general and administrative expenses	120,572			103,779			16,793		16.2%
Operating income (loss)	Operating income (loss)	$	13,888		$	10,187		$	3,701	36.3%	Operating income (loss)	$	16,715		$	8,534		$	8,181	95.9%

Gross profit margin	Gross profit margin	52.4		%	53.7		%				Gross profit margin	56.2		%	52.9		%

Adjusted EBITDA(2)	Adjusted EBITDA(2)	$	27,119		$	23,551		$	3,568	15.2%	Adjusted EBITDA(2)	$	34,520		$	17,447		$	17,073	97.9%

(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

~~Adjusted revenue~~Revenue increased ~~14.1%~~$32.2 million, or 15.2%, to $~~321.7~~244.4 million ~~for~~in the first ~~nine~~six months of ~~2022~~2023 compared to adjusted revenue of $~~281.9~~212.2 million ~~for~~in the same period ~~a year ago.~~ of 2022. The increase ~~in adjusted revenue compared to the prior year~~ was primarily driven by the realization of price increases enacted throughout ~~2021~~2022 and ~~2022~~2023 to offset rising supplier costs, increased quantity volumes and strengthening sales to ~~our~~Lawson's strategic and ~~Kent Automotive customers.The~~ ~~nine months~~ ~~ended~~ ~~September 30, 2022 included 192 selling days, or one additional selling day over the same period a year ago.~~governmental customers and automotive end market.

~~Adjusted gross~~Gross profit increased $~~17.1~~25.0 million to $~~168.6~~137.3 million ~~for~~in the first ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to adjusted gross profit of $~~151.4~~112.3 million inin the ~~prior year~~same period of 2022 primarily as a result of increased sales, ~~and the related~~ price increases ~~put in place.~~, lower net freight expense and spreading operating expenses over a higher level of sales. Lawson gross profit as a percent of revenue was

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56.2% in the first six months of 2023 compared to adjusted gross profit as a percent of ~~sales was 52.4%~~adjusted revenue of 52.9% in the prior year period. The gross profit margin percentage improvement for the first ~~nine~~six months of 2023 was primarily the result of price increases, lower net freight costs and leveraging costs over a higher sales base. T of ~~2022~~ ~~compared to 53.7% in the prior year. The~~he adjusted 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 ~~an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and~~ the amortization of the fair value step-up of ~~$1.9~~inventory of $1.2 million related to the Mergers. ~~Excluding the $3.6 million of aggregate fair market and amortization adjustments related to the Mergers, adjusted gross profit was 53.5% of sales in thenine months~~ ~~ended~~ ~~September 30, 2022. Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher costs.~~

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $16.8 million to ~~$154.7~~$120.6 million ~~for~~ in the ~~nine~~first six months ~~ended~~ ~~September 30, 2022~~ of 2023 compared to ~~the~~ adjusted ~~amount~~Selling, general and administrative expenses of ~~$141.2~~$103.8 million in the same period ~~a year ago. Higher expense on a year-to-date basis versus a year ago were~~of 2022. The increase was primarily driven by ~~costs related to the Mergers,~~higher compensation expense incurred to support increased sales, ~~higher severance~~additional depreciation and ~~higher~~ amortization ~~expense~~as a result of the fair value step-up adjustments related to the reverse merger acquisition accounting and higher stock-based compensation in 2023 partially offset by lower acquisition related costs in 2023 and a stock-based ~~compensation.~~compensation benefit in 2022.

Adjusted EBITDA

During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, Lawson generated Adjusted EBITDA of~~$27.1~~ $34.5 million,, an increase of ~~$3.6~~$17.1 million, or 97.9% from the same period a year ago primarily driven by increased ~~revenues~~revenue and ~~margins.~~gross profit margin.

TestEquity Segment


		Nine Months Ended September 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	286,984		$	201,457		$	85,527	42.5	%	Revenue	$	243,425		$	170,276		$	73,149	43.0	%
Cost of goods sold	Cost of goods sold	220,247			157,358			62,889		40.0	%	Cost of goods sold	186,828			130,543			56,285		43.1	%
Gross profit	Gross profit	66,737			44,099			22,638		51.3	%	Gross profit	56,597			39,733			16,864		42.4	%
Selling, general and administrative expenses	Selling, general and administrative expenses	59,294			44,407			14,887		33.5	%	Selling, general and administrative expenses	59,753			39,866			19,887		49.9	%
Operating income (loss)	Operating income (loss)	$	7,443		$	(308)		$	7,751	(2516.6)	%	Operating income (loss)	$	(3,156)		$	(133)		$	(3,023)	N/M

Gross profit margin	Gross profit margin	23.3		%	21.9		%					Gross profit margin	23.3		%	23.3		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	24,260		$	11,462		$	12,798	111.7	%	Adjusted EBITDA(1)	$	17,152		$	14,138		$	3,014	21.3	%

(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 $73.1 million, or 43.0%, to $~~287.0~~243.4 million ~~for~~in the first ~~nine~~six months ~~ended~~of ~~September 30, 2022~~ ~~from~~ ~~$201.5~~2023 compared to $170.3 million ~~during~~in the same period in ~~2021~~2022. ~~This~~The increase was primarily driven by ~~the TEquipment and National Test Equipment acquisitions during the second quarter of 2022 and the acquisition of MCS in 2021, which generated aggregate revenue of~~ $~~62.8~~78.3 million ~~for the post-acquisition periods, as well as organic growth~~ of ~~11.4%~~revenue generated from acquisitions completed in 2023 and 2022 offset by a $5.2 million decline in legacy TestEquity due to a slowdown in the ~~existing base business.~~test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base.

Gross profit increased $~~22.6~~16.9 million to $~~66.7~~56.6 million in the first ~~nine~~six months of ~~2022~~2023 compared to $~~44.1~~39.7 million in the same period of ~~2021~~2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, ~~primarily due to acquisitions and increased levels in~~which generated $18.6 million of additional gross profit during the ~~base business. As~~first six months of 2023. TestEquity gross profit as a percent of revenue ~~gross profit improved~~was consistent at 23.3% in the first six months of 2023 compared to 23.3% in ~~2022~~ ~~as compared to 21.9% in~~ ~~2021~~the prior year period driven by an expansion of margins within the existing base business offset by the amortization of the fair value step-up of inventory of $0.7 million related to the Hisco Transactionand a shift in sales mix ~~toward higher~~from the lower gross margin ~~electronic production supplies.~~rates from the 2022 acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~increased~~ ~~$14.9 million~~ to ~~$59.3 million~~ in ~~2022~~ ~~from~~ ~~$44.4 million~~ in ~~2021. Approximately $9.6 million~~consist of ~~costs were due to the acquisitions made in 2021 and 2022. The remainder of the increase was driven primarily by an increase in merger and acquisition related costs of $1.8 million and additional~~ compensation and support for TestEquity's sales representatives and expenses to operate TestEquity's distribution ~~costs to support the organic revenue growth in the base business.~~

network and overhead expenses.

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Selling, general and administrative expenses increased $19.9 million to $59.8 millionin the first six months of 2023 compared to $39.9 million in the same period of 2022. Approximately $15.6 million of the increased expenses was primarily driven by the acquisitions completed in 2023 and 2022 and approximately $4.0 million of the increased expenses was driven by increased merger and acquisition expenses in the first six months of 2023 of $6.8 million in connection with the Hisco Transaction compared to $2.8 million of merger and acquisition expenses in the same period of 2022.

Adjusted EBITDA

During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, TestEquity generated Adjusted EBITDA of $~~24.3~~17.2 million, an increase of $~~12.8~~3.0 million, or 21.3% from the same period a year ago with approximately $~~6.0~~5.3 million ~~of the Adjusted EBITDA increase~~ driven by the acquisitions ~~closed during 2021~~completed in 2023 and ~~2022 and increases in revenues and margins on the base business.~~2022.

Gexpro Services Segment


		Nine Months Ended September 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	(Dollars in thousands)	2022			2021			Amount		%		(Dollars in thousands)	2023			2022			Amount		%

Revenue	Revenue	$	285,224		$	189,612		$	95,612	50.4	%	Revenue	$	209,290		$	181,475		$	27,815	15.3	%
Cost of goods sold	Cost of goods sold	202,133			134,885			67,248		49.9	%	Cost of goods sold	146,439			128,337			18,102		14.1	%
Gross profit	Gross profit	83,091			54,727			28,364		51.8	%	Gross profit	62,851			53,138			9,713		18.3	%
Selling, general and administrative expenses	Selling, general and administrative expenses	66,119			41,207			24,912		60.5	%	Selling, general and administrative expenses	46,699			44,156			2,543		5.8	%
Operating income (loss)	Operating income (loss)	$	16,972		$	13,520		$	3,452	25.5	%	Operating income (loss)	$	16,152		$	8,982		$	7,170	79.8	%

Gross profit margin	Gross profit margin	29.1		%	28.9		%					Gross profit margin	30.0		%	29.3		%

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	32,409		$	18,723		$	13,686	73.1	%	Adjusted EBITDA(1)	$	24,816		$	19,926		$	4,890	24.5	%

(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

Revenue and Gross Profit

Revenue ~~for~~increased $27.8 million, or 15.3%, to $209.3 million in the first ~~nine~~six months ~~ended~~ ~~September 30, 2022~~ ~~was~~ ~~$285.2 million. This compares to revenue~~ of 2023 compared to $~~189.6~~181.5 million ~~for~~in the same period ~~a year ago, or a 50.4% increase. There were~~of ~~four~~ ~~additional selling days in the~~ ~~nine months~~ ~~ended~~ ~~September 30,~~ 2022 ~~versus the same period a year ago~~. ~~A selling day generally represents a business day in which Gexpro Services ships products to its customers. Average daily sales increased 47.3% over the same period a year ago,~~The increase was primarily ~~as a result~~driven by $3.2 million of revenue generated from the ~~2021 and 2022 acquisitions~~Frontier acquisition completed at the end of the first quarter of ~~$80.7 million~~2022 ~~for the post-acquisition periods~~ and organic growth in the base business ~~of 7.9%~~ through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit ~~was~~increased $~~83.1~~9.7 million ~~or 29.1% of revenue for~~to $62.9 million in the first ~~nine~~six months ~~ended~~of ~~September 30, 2022~~2023 compared to ~~gross profit of~~ $~~54.7~~53.1 million ~~or 28.9%~~in ~~for~~ the same period ~~a year ago. The~~of 2022. Gexpro Services gross profit ~~increase~~as a percent of revenue was ~~driven~~30.0% in the first six months of 2023 compared to 29.3% in the prior year period driven by ~~the 2021 and 2022 acquisitions and~~an improvement in the global supply chain ~~over 2021 activities as well as customer price increases put in place.~~and margin management on its product offering.

Selling, General and Administrative ~~Expense~~Expenses

Selling, general and administrative ~~expense consists~~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 ~~the~~Gexpro Services' business and service customers.

Selling, general, and administrative ~~expense for~~expenses increased $2.5 million to $46.7 million in the first ~~nine~~six months ended ~~September~~June 30, ~~2022~~ ~~was~~ ~~$66.1 million~~2023 compared to $~~41.2~~44.2 million ~~for~~in the same period ~~a year ago.~~of 2022. The increase ~~of $24.9 million over a year ago~~ was primarily driven by $2.4 million of additional expenses from the ~~inclusion~~Frontier acquisition completed at the end of the ~~2021 and 2022 acquisitions of $16.4 million. The remainder of the increase was driven primarily by an increase in merger related costs~~first quarter of ~~$2.8 million~~2022 and ~~and~~ additional compensation and product fulfillment costs to support the organic ~~growth of the existing base business.~~growth.

Adjusted EBITDA

During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, Gexpro Services generated Adjusted EBITDA of $~~32.4~~24.8 million, an increase of ~~$13.7~~$4.9 million, or 24.5% from the same period a year ago ~~with approximately~~ ~~$12.9 million~~primarily driven by ~~the acquisitions closed during 2021~~increased revenue and ~~2022 and increases in revenues and margins on the organic base business.~~gross profit margin.

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Consolidated Non-operating Income and Expense


		Nine Months Ended September 30,				Change					Six Months Ended June 30,				Change
(Dollars in thousands)	(Dollars in thousands)	2022		2021		Amount		%		(Dollars in thousands)	2023		2022		Amount		%

Interest expense	Interest expense	$	(16,704)	$	(12,482)	$	(4,222)	33.8	%	Interest expense	$	(17,162)	$	(10,607)	$	(6,555)	61.8	%
Loss on extinguishment of debt	Loss on extinguishment of debt	$	(3,395)	$	—	$	(3,395)	—	%	Loss on extinguishment of debt	$	—	$	(3,395)	$	3,395	N/M
Change in fair value of earnout liabilities	Change in fair value of earnout liabilities	$	3,948	$	—	$	3,948	—	%	Change in fair value of earnout liabilities	$	(21)	$	(5,693)	$	5,672	N/M
Other income (expense), net	Other income (expense), net	$	224	$	(328)	$	552	(168.3)	%	Other income (expense), net	$	(1,736)	$	774	$	(2,510)	(324.3)	%
Income tax expense (benefit)	Income tax expense (benefit)	$	3,912	$	606	$	3,306	545.5	%	Income tax expense (benefit)	$	2,647	$	(4,568)	$	7,215	N/M

Interest Expense

Interest expense increased ~~$4.2~~$6.6 million in the first ~~nine~~six months of 2023 compared to the same period of 2022 primarily due to an increase in interest rates and higher borrowings ~~offset by a lower interest rate with the debt refinancing~~ related to the ~~Mergers.~~Mergers and the other 2022 and 2023 acquisitions.

Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt in the ~~first nine~~six months of ended June 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 ~~Liability~~Liabilities

The ~~$3.9 million~~ ~~benefit~~nominal loss in the first ~~nine~~six months of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $5.7 million loss in the first six months of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements. ~~Refer to Note 11 - Earnout Derivative Liability within Part I. Item 1. Financial Information to our unaudited condensed consolidated financial statements for information about the earnout liability.~~

~~Other Income (Expense), Net~~

~~Other expense, net increased $0.6 million in the first nine months of 2022 compared to the prior year primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date.~~

Income Tax Expense (Benefit)

Income tax expense was ~~$3.9~~$2.6 million, a ~~29.6%~~22.9% effective tax rate for the first ~~nine~~six months of ~~2022~~2023 compared to an income tax ~~expense~~benefit of ~~$0.6~~$4.6 million and a ~~150.7%~~38.6% effective tax rate for the first ~~nine~~six months of ~~2021.~~2022. The change in the year over year effective tax rate was primarily due to ~~changes in~~lower transaction costs and the ~~valuation allowance in the first nine months~~release of ~~2021, merger costs incurred in the first nine months of~~a reserve for an uncertain tax benefit. The 2022 ~~and~~income tax was also impacted by the creation of a consolidated group for federal income tax purposes as a result of the completion of the ~~Mergers referenced in Note 3 - Business Acquisitions~~ ~~within Part I. Item 1. Financial Information to our unaudited condensed consolidated financial statements~~. Relative to the U.S. statutory rate, the effective tax rate for the first nine months of 2022 was impacted by state taxes, foreign operations, and the expiration of uncertain tax positions, as well as liabilities and transaction expenses related to the Mergers, and discrete tax items related to changes in the uncertain tax positions and prior period true-ups as a result of the completed Mergers.

~~Liquidity and Capital Resources~~LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were ~~$25.2~~$44.2 million on ~~September~~June 30, ~~2022~~2023 compared to ~~$14.7~~$24.6 million on December 31, ~~2021.~~2022.

The Company believes its current balances of cash and cash equivalents, availability under its ~~Amended and Restated~~2023 Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of ~~September~~June 30, ~~2022,~~2023, liquidity for the Company was ~~$100.3~~$233.8 million comprised of ~~$25.2~~$44.2 million of cash and cash equivalents and ~~$75.1~~$189.6 million of borrowing availability remaining, net of outstanding letters of credit, under the 2023 ~~Amended and Restated~~ Credit Agreement.

On June 2, 2023, the Company raised approximately $100 million from the Rights Offering, in which 2,222,222 shares of DSG common stock were sold at a purchase price of $45.00 per share. On June 8, 2023, the Company borrowed the $305.0 million under the incremental term loan of the 2023 Credit Agreement. The Company used these combined proceeds primarily to fund 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 ~~Amended and Restated~~2023 Credit Agreement mature in April 2027. Principal payments on the ~~Amended and Restated~~2023 Credit Agreement for the next twelve months are ~~$15.0 million.~~$30.3 million. Refer to Note ~~13 -~~9 – Debt within ~~Part I.~~ Item 1. Financial ~~Information~~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 our liquidity.

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Sources and Uses of Cash

The following table presents a summary of our cash flows:


(in thousands)	(in thousands)	September 30, 2022		September 30, 2021		Change		(in thousands)	June 30, 2023		June 30, 2022		Change
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	$	(19,280)	$	17,137	$	(36,417)	Net cash provided by (used in) operating activities	$	27,464	$	(39,543)	$	67,007
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	$	(120,550)	$	(26,975)	$	(93,575)	Net cash provided by (used in) investing activities	$	(262,824)	$	(115,286)	$	(147,538)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	$	151,820	$	11,212	$	140,608	Net cash provided by (used in) financing activities	$	274,930	$	157,043	$	117,887

Cash Provided by (Used in) Operating Activities

Net cash ~~used~~provided by operations for the ~~nine~~six months ended ~~September~~June 30, 2023 was $27.5 million primarily due to net income including non-cash items, partially offset by investments in trade working capital to support higher sales and other net cash flow items.

Net cash used in operations for the six months ended June 30, 2022 was ~~$19.3~~$39.5 million, excluding non-cash items, primarily due to increased accounts receivables ~~and inventories~~ driven by higher sales and increased inventories due to increased supplier costs driven by inflation and global supply chain disruptions.

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

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$120.6~~$262.8 million, primarily due to the Hisco Transaction, as ~~a result~~well as purchases of property, plant and equipment and rental equipment which was partially offset by the ~~other acquisitions completed during the first nine months~~sale of ~~2022 by TestEquity and Gexpro as described in Note 3 - Business Acquisitions within Part I. Item 1. Financial Information.~~rental equipment.

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021was $27.0~~2022 was $115.3 million, primarily due to ~~business~~ acquisitions completed by TestEquity and ~~purchases of rental equipment.~~Gexpro Services.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities ~~was $151.8 million~~ for the ~~first nine~~six months ~~of 2022, primarily~~ended June 30, 2023 was $274.9 million due to proceeds ~~under~~from the ~~April 1, 2022 Amended~~2023 Credit Agreement and ~~Restated Credit Agreement~~the Rights Offering partially offset by repayment of previous ~~indebtedness. On April 29, 2022,~~indebtedness and principal payments on the term loans. In conjunction with the Hisco Transaction, the Company borrowed ~~the $50~~$305.0 million ~~available~~ under the ~~delayed draw~~incremental term loan facility ~~to finance~~on June 8, 2023 and raised approximately $100 million through the ~~acquisition~~Rights Offering closed during the second quarter of ~~Interworld Highway, LLC made by TestEquity. Deferred~~2023. During the first six months of 2023, deferred financing costs of ~~$12.0~~$3.4 million were incurred ~~during~~related to the ~~first nine months of 2022 in connection with the April 1, 2022 Amended and Restated~~2023 Credit Agreement and ~~January 3, 2022 Gexpro Services Credit Agreement.~~offering costs of $1.5 million were incurred related to the Rights Offering.

Net cash provided by financing activities for the ~~nine~~six months ended ~~September~~ June 30, ~~2021~~2022 was ~~$11.2~~$157.0 million, primarily due to ~~increased borrowings on the Company's revolving lines of credit partially offset by payments on the Company's~~proceeds from term loans and ~~a capital contribution~~revolving credit facilities to finance the ~~MCS acquisition.~~Mergers and other acquisitions, partly offset by repayment of previous indebtedness. Deferred financing costs of $11.4 million were incurred during the first six months of 2022 related to these financing activities.

Financing and Capital Requirements

Credit Facility

On ~~April 1, 2022,~~June 8, 2023, in connection with the ~~closing of the Mergers,~~Hisco Transaction, DSG entered into ~~an Amended~~the First Amendment, which amended and ~~Restated~~replaced the previous April 1, 2022 credit agreement with the 2023 Credit Agreement, ~~which~~and provided for a $305.0 million incremental term loan facility. The 2023 Credit Agreement also provides 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.

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 ~~13 -~~9 – Debt within ~~Part I.~~ Item 1. Financial ~~Information~~Statements for a description of the ~~agreement.~~2023 Credit Agreement.

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On ~~September~~June 30, ~~2022,~~2023, we had ~~$418.8~~$598.4 million in outstanding borrowings under the 2023 Credit Agreement and ~~$75.1~~$189.6 million of borrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit ~~facility.~~facility component.

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As of ~~September~~June 30, ~~2022,~~2023, we were in compliance with all ~~affirmative and~~ financial covenants under our ~~Amended and Restated~~2023 Credit Agreement.

While we were in compliance with our financial covenants as of ~~September~~June 30, ~~2022,~~2023, failure to meet the covenant requirements of the ~~Amended and Restated~~2023 Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness and could have a material adverse effect on our business, financial condition and results of operations.

~~Contractual Obligations~~Purchase Commitments

As of ~~September~~June 30, ~~2022,~~2023, we had contractual commitments to purchase approximately ~~$167~~$187 million of ~~product~~products from our suppliers and contractors ~~which is expected to be paid in~~over the next twelve months.

Capital Expenditures

During the six months endedJune 30, 2023, total capital expenditures for property, plant and equipment and rental equipment were $13.8 million excluding proceeds from the sale of rental equipment. The Company expects to spend approximately $6 million to $8 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.

~~On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the~~The Company had $7.6 million of remaining availability for stock repurchases under the program as of ~~November 3, 2022.~~June 30, 2023. See Note 11 – Stockholders' Equity~~Note 15 - Stock Repurchase Program~~ with~~within Part I.~~in Item 1. Financial ~~Information~~Statements for further information.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 of Part I has been omitted from 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 our~~These disclosure controls and procedures ~~were effective such~~are designed to ensure that ~~the~~ information relating to DSG, including DSG'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) 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 June 30, 2023 because of the previously reported material weakness in internal control over financial reporting, as described below.

Ongoing 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

The Mergers that were completed on April 1, 2022, had a material impact on the financial position, results of operations, and cash flows of the combined company from April 1, 2022 through September 30, 2022. We have implemented new processes and internal controls as a result of the Mergers to assist us in the preparation and disclosure of financial information. Given the significance and timing of the ~~Mergers~~Hisco Transaction and the complexity of systems and business processes, we intend to exclude the ~~TestEquity and Gexpro Services~~Hisco operating ~~companies~~company from our assessment and report on internal control over financial reporting for the year ending December 31, ~~2022.~~2023. Other than asthe 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 our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEMS 2, 3, 4 and 5 of Part II are not applicable and have been omitted from this report.

ITEM 1. LEGAL PROCEEDINGS

See Note ~~18 -~~ 14 – Commitments and Contingencies to our unaudited condensed consolidated financial statements, included inwithin ~~Part I.~~ Item 1. Financial ~~Information,~~Statements, which is incorporated herein by reference, for a description of certain of our pending legal ~~proceedings.~~proceedings, which are incorporated herein by reference. In addition, the Company is involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any currently pending litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

~~Our operating results depend upon many~~Other than the risk factors ~~and are subject to various risks and uncertainties, including those~~ discussed ~~below. The~~below, there have been no material ~~risks and uncertainties known to us and described below may negatively affect~~changes from the risk factors disclosed in the “Risk Factors” section in our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair or otherwise adversely affect our business, financial condition and results of operations, and may give rise to or amplify many ofAnnual Report on Form 10-K for the ~~risks discussed below.~~year ended December 31, 2022.

Business Risks

~~A significant portion of our inventory may become obsolete.~~

Our business strategy requires us to carry a significant amount of inventory to meet rapid processing of customer orders. If our inventory forecasting and production planning processes result in inventory levels exceeding the levels demanded by customers or should our customers decrease their orders with us, our operating results could be adversely affected due to costs of carrying the inventory and additional inventory write-downs for excess and obsolete inventory.

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

Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our business, financial condition and results of operations. Similarly, other supply chain disruptions have impacted our ability to maintain certain core products in inventory and deliver products to customers on a timely basis, and may continue to impact our ability to do so. Such supply chain disruptions may adversely affect our business, financial condition and results of operations.

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

TestEquity relies on a single supplier for a significant amount of its product inventory, including electronic test and measurement equipment. Any disruptions in that particular supplier’s business, operations or financial condition, or TestEquity’s relationship with this significant supplier, could have a material adverse effect on our business, financial condition and results of operations.

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

From time to time, our businesses have experienced overall changes in the product mix demand of customers. When customers or product mix changes, there can be no assurance that we will be able to maintain our gross profit margins. Changes in our customers, product mix, volume of orders or prices charged, along with additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline. Our gross profit margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.

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

We depend on our information and communication systems to process orders, purchase and manage inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable collections and serve our customers. Disruptions in the operation of information and communication systems can occur due to a variety of factors including power outages, hardware failure, programming faults and human error. Disruptions in the operation of our information and communication systems, whether over a short or an extended period of time or affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition and results of operations.

~~Cyber attacks~~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.~~employees and other persons and entities.

Our technologies, systems, networks and ~~networks~~data and information processes (and those of our business partners) have been, and may in the future be, the target of ~~cyber attacks~~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.~~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. ~~As cyber threats continue to evolve, we may be required to~~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 ~~inability~~interpretation and application of such laws, including federal, state and international laws, relating to ~~successfully recruit, integrate~~the collection, use, retention, disclosure, security and ~~retain productive sales representatives~~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 ~~adversely affect~~have a materially adverse impact on our business, and ~~operating results.~~

We have committed to a plan to increase the size of our sales force. A successful expansion in our sales force requires us to identify under-served territories that offer the greatest potential growth opportunity, locatemay divert management and recruit talented sales representatives, provide them with the proper training, and successfully integrate them into our organization. This expansion will require significant investment in capital and resources. The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our business, financial condition and results of operations.

It is also critical to retain the experienced and productive sales representatives that have historically contributed to the successes of our businesses. Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our business, financial condition and results of operations.

~~Failure to retain talented employees, managers and executives could negatively impact our~~employee attention from other business and ~~operating results.~~

~~Our success depends on, among other things, our ability to attract, develop~~growth initiatives. Further, an information privacy or security incident could result in legal or reputational risks and ~~retain talented employees, including executives and other key managers. The loss of certain key executives and managers or the failure to attract and develop talented employees~~ could have a ~~material~~materially adverse ~~effect~~impact on our business, financial condition and results of operations.

~~The inability~~Any pursuit or completion by DSG of ~~management to successfully implement changes in operating processes could lead to disruptions in our operations.~~

We strive to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations. The implementation of changes to our current operationsadditional acquisition opportunities would involve ~~a risk~~risks that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies. Failure to successfully manage the implementation of these changes could lead to disruptions in our operations.

~~The inability to successfully integrate additional acquisitions into our organization~~ could adversely affect our ~~operations~~business, financial condition and ~~operating results.~~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. ~~Further, we~~We may fail to successfully identify the right opportunities and/or to successfully integrate the acquired businesses, operations, technologies, systems and/or personnel with those of DSG, which could adversely affect our business, financial condition and results of operations. See also the section entitled “Item 1A. Risk Factors – TestEquity Merger and Gexpro Services Merger Risks” for a discussion of various additional risk factors relating to our completed business combination with TestEquity and Gexpro Services.

~~We operate in highly competitive markets.~~

The marketplaces in which we operate are highly competitive. Our competitors include large and small companies with similar or greater market presence, name recognition, and financial, marketing, and other resources. We believe the competition will continue to challenge our business with their product selection, financial resources and services.

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

A portion of our sales are derived from the United States military and other governmental and tax-supported entities. These entities are largely dependent upon government budgets and require adherence to certain laws and regulations. A decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, could lead to reduced sales or an increase in compliance costs which would adversely affect our business, financial condition and results of operations.

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~~Debt Financing Risks~~

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

We incurred a significant amount of indebtedness in connection with the Mergers, and our significant indebtedness includes a significant amount of indebtedness under our Amended and Restated Credit Agreement.In addition, we may be able to incur a significant amount of additional indebtedness, subject to the terms and restrictions of our Amended and Restated Credit Agreement. Our indebtedness could have significant consequences on our future operations, including:

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

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

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

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

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

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

Our ability to meet our payment and other obligations under our debt instruments will depend on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure that we will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our indebtedness obligations and to fund other liquidity needs.

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

Our business requires investment in working capital and fixed assets. We expect to fund these investments from cash generated from operations and funds available from our Amended and Restated Credit Agreement. Failure to generate sufficient cash flow from operations or from our credit agreement could cause us to have insufficient funds to operate our business. Adequate funds may not be available when needed or may not be available on favorable terms.

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

Our Amended and Restated Credit Agreement contains financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness. In addition, prior to the closing of the TestEquity Merger, TestEquity was in default of certain debt covenants of its term loan and revolving line of credit agreements. In connection therewith, on September 6, 2019, February 28, 2020, March 27, 2020, October 9, 2020 and June 30, 2021, TestEquity entered into forbearance agreements with its lender. Such term loan and revolving line of credit agreements were terminated in connection with the closing of the TestEquity Merger.

If we require more liquidity than is available to us under our Amended and Restated Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us. Should funding be insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

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~~Government efforts to combat inflation, along with other interest rate pressures arising from an inflationary economic environment, could lead to higher financing costs.~~

Inflation has risen on a global basis, the United States has been experiencing historically high levels of inflation, and government entities have taken various actions to combat inflation, such as raising interest rate benchmarks. Government entities may continue their efforts, or implement additional efforts, to combat inflation, which could include among other things continuing to raise interest rate benchmarks and/or maintaining interest rate benchmarks at elevated levels. Such government efforts, along with other interest rate pressures arising from an inflationary economic environment, could lead to higher financing costs and have material adverse effect on our business, financial condition and results of operations.

Common Stock Risks

~~The market price of our common stock may decline.~~

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

Entities affiliated with ~~Luther King Capital Management Corporation~~LKCM and J. Bryan King beneficially own a significant majority of the outstanding ~~shares of~~ DSG common stock and, therefore, have significant influence over our ~~company, and this influence~~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 ~~J. Bryan King~~ and various other persons and entities (as amended through June ~~17, 2022)~~2, 2023), entities affiliated with ~~Luther King Capital Management Corporation ("LKCM")~~LKCM beneficially owned in the aggregate approximately ~~14.6~~18.2 million shares of DSG common stock as of June ~~15, 2022,~~1, 2023, representing approximately ~~75%~~77.9% of the outstanding shares of DSG common stock as of ~~September~~June 30, ~~2022.~~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,~~company.” ~~as that term is defined by Rule 5615(c)~~Under Nasdaq Listing Rules, a listed company of which more than 50% of the ~~NASDAQ Listing Rules~~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 ~~5615(c)~~5605(b), (d) and (e) of the ~~NASDAQ~~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 ~~for~~to the DSG board of ~~directors’~~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.

~~Legal and Regulatory Risks~~

~~A violation of federal, state or local environmental protection regulations could lead to significant penalties and fines or other remediation costs.~~

Our product offerings include a wide variety of industrial chemicals and other products which are subject to a multitude of federal, state and local regulations. These environmental protection laws change frequently and affect the composition, handling, transportation, storage and disposal of these products. Failure to comply with these regulations could lead to severe penalties and fines for each violation.

Additionally, a facility we own in Decatur, Alabama, was found to contain hazardous substances in the soil and groundwater as a result of historical operations prior to our ownership. We retained an environmental consulting firm to further investigate the contamination, including measurement and monitoring of the site. The Company concluded that further remediation was required, and accordingly, has made an accrual for the estimated cost of this environmental matter. A

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remediation plan was approved by the Alabama Department of Environmental Management and the remediation of the affected area is ongoing. Additional procedures may be required that could negatively impact our business, financial condition and results of operations.

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

Our results of operations could be affected by changes in tax rates, audits by taxing authorities or changes in laws, regulations and their interpretation. Changes in applicable tax laws and regulations could affect our ability to realize our deferred tax assets, which could adversely affect our results of operations.

~~COVID-19 and Other Infectious Disease Risks~~

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

The COVID-19 pandemic has resulted in lost revenue to our company, limitations on our ability to source high demand product, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, a slow-down of customer demand for our products and limitations on the ability of some customers to pay us on a timely basis. The impact of the COVID-19 pandemic on our operational and financial performance includes affecting our ability to execute our business strategies and initiatives in the expected time frame. The extent of the effect of the COVID-19 pandemic on us will depend on future developments, including the duration and spread of the COVID-19 pandemic and related restrictions on travel, transports and person to person contact, all of which are uncertain and cannot be predicted at the present time. On a broader scale, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our sales, workforce, supply chains, results of operations, and financial condition.

If the COVID-19 pandemic worsens, some or all of our facilities (including distribution facilities and/or branch locations) could be required to temporarily close, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.

Our sales results may be negatively impacted in the future by any social distancing guidelines and government mandated shelter in place orders that would prevent our sales representatives from visiting customers in person, or that would otherwise reduce customer visits to our branch locations. The reduction of operations and temporary shut down by many of our customers in response to COVID-19 has also negatively impacted our sales and ability to collect on existing credit balances, and we may continue to be impacted by those and additional reductions and shut downs until the pandemic ends.

Further, vendors who are negatively impacted by COVID-19 may temporarily shut down operations or have difficulty obtaining inventory, which could negatively impact our ability to fulfill customer orders. As a result, the Company may be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic.

Certain items on our balance sheet require judgments on their valuation, including intangible assets and goodwill. These valuations are based on assumptions that take future financial performance into account. COVID-19 may have a negative impact to our future financial performance that would require us to revise assumptions about future financial performance and impair the value of these assets. It is reasonably possible that estimates made based on future operating results and cash flows of the Company may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

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

~~TestEquity Merger and Gexpro Services Merger Risks~~

~~Completion of the Mergers resulted in the issuance of~~Entities affiliated with LKCM beneficially own a significant number of shares of DSG common stock, and ~~may result in~~any sales of any such shares or the ~~issuance~~possibility of ~~a significant number of additional shares of DSG common stock, which~~any such sales could have a negative effect on the price of DSG common stock.

~~We issued an aggregate of~~ ~~10.3 million~~ ~~shares of DSG common stock on April 1, 2022 in connection with the closing of the Mergers. In addition, we could be obligated to issue up to an aggregate of~~ ~~1.7 million~~ ~~additional shares of DSG common~~

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~~stock in accordance with the earnout provisions of the Merger Agreements.As of~~ ~~September 30, 2022, approximately~~ ~~1,238,000 additional shares of DSG common stock are expected to be issued to entities~~Entities affiliated with LKCM ~~in accordance with and subject to certain terms and conditions of thefirst earnout provision of the Merger Agreements. The remaining 462,000 additional shares of DSG common stock would be available to be issued to entities affiliated with LKCM or forfeited in in accordance with and subject to~~ ~~certain terms and conditions of~~ ~~thesecond earnout provision of the Merger Agreements. The issuance of such~~beneficially own a significant number of shares of DSG common stock could have a negative effect on the market price of DSG common stock. Such downward pressure could also encourage short sales by certain investors, which could place further downward pressure on the market price of DSG common stock.

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

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

The Mergers involve the combination of businesses that previously operated as independent businesses. We have been devoting, and will continue to need to devote, significant management attention and resources to combining certain business operations of TestEquity and Gexpro Services with our legacy business operations and attending to other post-closing matters. This may decrease the time our management team will have to manage our businesses, service existing customers, attract new customers and develop new products, services and strategies. One potential consequence of such distractions could be the failure of management to realize other opportunities that could be beneficial to us.

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

Furthermore, it is possible that the Mergers could result in the loss of key employees. If we are not able to fully realize the anticipated savings and synergies in a timely manner, or the cost to achieve these synergies is greater than expected, we may not fully realize the anticipated benefits (or any benefits) of the Mergers, or it may take longer than expected to realize any benefits. The failure to fully or timely realize the anticipated benefits could have a negative effect on the market price of DSG common stock.

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

Uncertainty about the effect of the Mergers on employees, customers, suppliers and others having business relationships with our company may have a material and adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the closing of the Mergers. These uncertainties could also cause our customers and suppliers and others that deal with us to seek to change existing business relationships with us. Employee retention and recruitment may be challenging for the combined company as employees and prospective employees may experience uncertainty about their future roles with the combined company. Furthermore, no assurance can be given that after the Mergers we will be able to attract or retain key management personnel or other key employees to the same extent that legacy Lawson, TestEquity and Gexpro Services had been previously able to attract or retain their own employees. The departure of existing key employees or the failure of potential key employees to accept employment with the combined company, despite our retention and recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.

~~We have incurred and may continue to incur significant transaction costs in connection with the Mergers.~~

We have incurred and may continue to incur significant, non-recurring costs in connection with consummating the Mergers. Non-recurring transaction costs include, but are not limited to, fees paid to legal, accounting and financial advisors, filing fees and other costs. Additional unanticipated costs may be incurred in the combination process.

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

~~As a result of the closing of the Mergers on April 1, 2022~~, we have an amount of goodwill and other intangible assets on our balance sheet that is significantly greater than the amount of goodwill and other intangible assets on our December 31, 2021 consolidated balance sheet. In ac~~cordance with GAAP, our management periodically assesses our goodwill and other intangible~~

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assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, an inability to effectively integrate acquired businesses, unexpected significant changes, planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments could materially and adversely affect our results of operations in the periods recognized, which could result in an adverse effect on the market price of DSG common stock.

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

TestEquity has business operations and/or sales in a number of foreign countries, including Canada, Mexico and the United Kingdom, and Gexpro Services has business operations and/or sales in a number of foreign countries, including Hungary and China. As a result of the completion of the Mergers, we are subject to a wider array of foreign legal and regulatory regimes (including tax regimes) than those to which we were subject prior to the completion of the Mergers. Compliance with diverse legal and regulatory requirements, including in connection with the movement or repatriation of cash, may be costly, time-consuming and require significant resources. Violations could result in significant fines or monetary damages, sanctions, prohibitions or restrictions on doing business and damage to our reputation. In addition, operating in foreign countries requires us to manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and regulations with respect to such jurisdictions, including anti-corruption laws or regulations applicable to DSG, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”). The U.S., U.K. and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, the UKBA, and other laws, rules, sanctions, embargoes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Any violation of these legal requirements, even if prohibited by our policies, procedures and controls, could subject us to criminal or civil enforcement actions, penalties for non-compliance or otherwise have an adverse effect on our business and reputation.

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

DSG and members of the DSG board of directors currently are, and may in the future be, parties, among others, to litigation related to the Merger Agreements and the Mergers. Among other remedies, the stockholders in the pending litigation seek, and other stockholders could seek, monetary damages. The outcome of any legal proceedings are difficult to predict and any such lawsuits could result in substantial costs to us. The existence of litigation relating to the Mergers may also be costly and distracting to management. Further, the defense or settlement of any lawsuit or claim may adversely affect our business, financial condition, results of operations and cash flows. ~~See Note 18 -~~ ~~Commitments and Contingencies to our condensed consolidated financial statements, included in~~ ~~Part I. Item 1. Financial Statements, for a description of certain of our pending legal proceedings relating to the Mergers, which are incorporated herein by reference.~~

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

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

TestEquity and Gexpro Services were private companies before the Mergers and may not have had in place the financial organization, reporting and controls which are required for a U.S. public company. The cost of implementing this type of financial organization, reporting and controls in respect of TestEquity and Gexpro Services and integrating their financial reporting processes with our financial reporting processes may be significant. If there are limitations in TestEquity’s or Gexpro Services’ financial organization, reporting and controls, or if we are unable to effectively integrate their financial reporting processes with our financial reporting processes, we could have, among other things, material weaknesses in our internal controls, violate our indebtedness covenants, miss an SEC reporting deadline or otherwise fail to comply with an applicable law or regulation.

~~General Risks~~

~~Our results of operations may be adversely impacted by a downturn in the economy or in certain sectors of the economy.~~

Any decline or uncertainty in the strength of the economy may lead to a decrease in customer spending and may cause certain customers to cancel or delay placing orders. Some of our customers may file for bankruptcy protection, preventing us

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from collecting on accounts receivable and may result in our stocking excess inventory. Contractions in the credit markets may also cause some of our customers to experience difficulties in obtaining financing, leading to lower sales, delays in the collection of receivables and result in an increase in bad debt expense.

Adverse economic conditions could also affect our key suppliers and contractors. This could lead us to incur additional expenses or result in delays in shipping products to our customers. Economic uncertainty can make it difficult to accurately predict future order activity and affect our ability to effectively manage inventory levels. There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our existing financing arrangements, including our credit agreement.

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

Increases in the cost of raw materials used in our products (e.g., steel, brass, copper), increases in tariffs and increases in energy costs, as well as other inflationary pressures, will raise the production costs of our vendors. Those vendors have typically looked to pass the higher costs along to us through price increases. If we are unable to fully pass such increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins and financial condition. On the other hand, a decrease in oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales. Changes in trade policies could affect our sourcing of product and ability to secure sufficient product and/or impact the cost or price of our products, with potentially negative impacts on our reported gross profits and results of operations.

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

Our businesses have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs. This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders. In addition, we have been and may continue to be impacted by labor shortages. This results in challenges in fulfilling customer orders and can have a negative impact on our operating results as we may be required to utilize higher-cost temporary labor. We have also experienced and continue to experience inflationary pressure in other areas that adversely impact our cost of goods sold and other costs and expenses. While we have instituted various price increases during 2022 in response to rising supplier costs, as well as increased transportation and labor costs, there can be no assurance that future cost increases can be partially or fully passed on to customers, or that the timing of such sales price increases will match our supplier cost increases. As a result, we are unable to predict the impact of these constraints on our business, financial condition and results of operations.

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

A number of our subsidiaries are located and operate in foreign countries and use those foreign currencies as their functional currency. Operating results denominated in foreign currencies are translated into U.S. dollars when consolidated into our financial statements. Therefore, we are exposed to market risk relating to the change in the value of such foreign currencies (including the Canadian dollar, the Mexican peso, the British pound sterling, the Euro, the Danish krone, the Brazil real, the Chinese renminbi, and the Turkish lira) relative to the U.S. dollar that could adversely affect our financial condition and operating results.

~~In addition, t~~he revolving credit facility under our Amended and Restated Credit Agreement is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed between us and our lenders.~~Any borrowings in Canadian dollars or any other foreign currency would expose us to market risk relating to the change in the value of such foreign currency in relation to the U.S. dollar.~~

~~Table of Contents~~

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~There were no sales of unregistered equity securities during the~~ ~~third quarter of 2022.~~

~~Repurchases of Equity Securities~~

In the second quarter of 2019, the Board of Directors authorized a program pursuant to which the Company was authorized to repurchase up to $7.5 million of DSG common stock from time to time in open market transactio~~ns, privately negotiated transactions or by other methods. During the~~ ~~third quarter of 2022, the Company repurchased 54,089 shares of DSG common stock at an average cost of $35.86 per share for a total cost of $1.9 million.~~ ~~The Company had~~ ~~$2.6 million~~ ~~remaining under its stock repurchase program as of September 30, 2022.~~ On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the Company had $7.6 million of remaining availability for stock repurchases under the program as of November 2, 2022.

The following table summarizes repurchases of DSG common stock for the three months ended September 30, 2022 under the repurchase program described above and excludes shares withheld from employees to satisfy tax withholding requirements on option exercises and other equity-based transactions.

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
July 1 through July 31, 2022 — $ — — $ 4,512,000
August 1 through August 31, 2022 — — — 4,512,000
September 1 through September 30, 2022 54,089 $ 35.86 54,089 2,572,000 (1)
Total 54,089 — 54,089

~~(1)The Company had approximately $7,572,000~~ ~~of remaining availability for stock repurchases under its stock repurchase program as of November 2, 2022, after the Board of Directors increased the existing program on November 2, 2022~~.

ITEM 6. EXHIBITS


Exhibit #
~~2.1†~~			~~Agreement and Plan~~Description of ~~Merger, dated as of December 29, 2021, by and among LKCM TE Investors, LLC, TestEquity Acquisition, LLC, Lawson Products, Inc. and Tide Sub, LLC, incorporated herein by reference to~~ Exhibit ~~2.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.~~
~~2.2†~~			Agreement and Plan of Merger, dated as of December 29, 2021, by and among 301 HW Opus Investors, LLC, 301 HW Opus Holdings, Inc., Lawson Products, Inc. and Gulf Sub, Inc., incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
3.1			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 May 5, 2022,, 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 June 30, 2022.
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*10.1			Lawson Products, Inc. Executive Deferral Plan (as Amended and Restated Effective November 1, 2015), incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.Subscription Agen
10.2*t			Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017), incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021. A
10.3*			Amendment of the Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017), dated December 23, 2020, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2020.
10.4*			Form Letter regarding Stock Performance Rights, incorporated by reference to Exhibit 10(c)(16) to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2004.

~~Table of Contents~~


10.5*			Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed May 3, 2019.
10.6*			First Amendment to the Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 000-10546) filed May 3, 2019.
10.7*			Amendment to the Lawson Products, Inc. 2009 Equity Compensation Plan (as Amended and Restated Effective May 14, 2019), dated December 23, 2020, incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2020.
10.8*			Form of Award Agreement under the 2009 Equity Compensation Plan (Target Units, SPRs and Restricted Units), incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.9*			Form of Award Agreement under the 2009 Equity Compensation Plan (MSU Target Units, ROIC Target Units and Restricted Units), incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.10*			Form of Award Agreement under the 2009 Equity Compensation Plan (MSU Target Units, ROIC Target Units and Restricted Units), incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.11*			Lawson Products, Inc. 2021 Annual Incentive Plan Summary, incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.12*			~~Form of Indemnification Agreement for Directors and Officers, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed September 19, 2008.~~
10.13*			Form of Change in Control Agreement for Officers, incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.14*			~~Employment Agreement~~greement, dated as of ~~August 14, 2017~~May 8 , 2023, by and ~~between Lawson Products,~~among Distribution S olutions Group, Inc., ~~an Illinois corporation, and Michael G. DeCata, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed August 17, 2017.~~
10.15*			Amendment No.1 to the Employment Agreement entered into on April 11, 2018 between Lawson Products, Inc., an Illinois corporation, and Michael G. DeCata, incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 000-10546) filed April 11, 2018.
10.16*			Employment Agreement dated as of August 29, 2012 by and between Lawson Products, Inc., an Illinois corporation, and Ron Knutson, incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 000-10546) filed September 4, 2012.
10.17*			Retirement and Consulting Agreement, dated as of March 2, 2021, by and between Lawson Products, Inc., an Illinois corporation, and Neil Jenkins, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed March 5, 2021.
~~10.18~~			~~Voting Agreement, dated as of December 29, 2021, by and among Lawson Products,~~Computershare Inc. and ~~Luther King Capital Management Corporation, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.~~
~~10.19†~~			Amended and Restated Credit Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., the subsidiaries of Lawson Products, Inc. party thereto, the Lenders party thereto and JPMorgan Chase Bank,Computershare Trust Company, N.A., ~~as Administrative Agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 4, 2022~~.
~~10.20~~			~~Registration Rights Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., 301 HW Opus Investors, LLC and LKCM TE Investors, LLC,~~ incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed ~~April 4, 2022~~.May 9 , 2023.
10.21*10.2†			~~Retirement~~ Ame n ded and ~~Consulting~~ Restated Credit Agreement, dated as of ~~April 4, 2022,~~June 8, 2023, by and ~~between Lawson Products,~~among Distribution Solutions Group, Inc., ~~an Illinois corporation,~~the subsidiaries of Distribution Solutions Group, In c . party thereto , the Lenders party thereto and ~~Michael G. DeCata,~~JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to ~~Exhibit 10.1 to~~ the Company’s Current Report on Form 8-K (File No. 000-10546) filed ~~April 8, 2022~~.
10.22*			~~Employment Agreement, dated as of April 4, 2022, by and between Lawson Products, Inc., an Illinois corporation, and Cesar A. Lanuza~~,June ~~incorporated by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended June 30, 2022.~~9, 2023.
31.1**			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2**			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32***			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

~~Table of Contents~~


101			The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2022,~~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.INS			Inline 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.SCH**			Inline XBRL Taxonomy Extension Schema Document
101.CAL**			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**			Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104			The cover page from the Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2022,~~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 ~~SEC~~U.S. Securities and Exchange Commission upon request.

* ~~Indicates management employment contracts or compensatory plans or arrangements.~~

** Filed herewith.

*** Furnished herewith.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		DISTRIBUTION SOLUTIONS GROUP, INC.
		(Registrant)

Dated:	~~November~~August 3, ~~2022~~2023	/s/ J. Bryan King
		J. Bryan King Chairman, President and Chief Executive Officer (principal executive officer)


Dated:	~~November~~August 3, ~~2022~~2023	/s/ Ronald J. Knutson
		Ronald J. Knutson Executive Vice President, ~~and~~ Chief Financial Officer and Treasurer (principal financial officer)


Dated:	~~November~~August 3, ~~2022~~2023	/s/ David S. Lambert
		David S. Lambert Vice President, Controller and Chief Accounting Officer (principal accounting officer)

6956


(in thousands)	Merger Date		Measurement Period Adjustments		Adjusted Total
Current assets	$	148,308	$	—	$	148,308
Property, plant and equipment	57,053		361		57,414
Right of use assets	17,571		687		18,258
Other intangible assets	119,060		—		119,060
Deferred tax liability, net of deferred tax asset	(26,237)		39		(26,198)
Other assets	18,373		—		18,373
Current liabilities	(71,097)		(68)		(71,165)
Long-term obligations	(25,722)		20		(25,702)
Lease and financing obligations	(29,474)		647		(28,827)
Derivative earnout liability	(43,900)		—		(43,900)

Goodwill	189,466		(1,686)		187,780
Total consideration exchanged	$	353,401	$	—	$	353,401


(in thousands)	Interworld Highway LLC		Resolux		Frontier		National Test Equipment
Acquisition date	April 29, 2022		January 3, 2022		March 31, 2022		June 1, 2022		Total
Current assets	$	15,018	$	8,551	$	3,381	$	2,789	$	29,739
Property, plant and equipment	313		459		1,065		642		2,479
Right of use assets	—		1,125		9,313		—		10,438
Other intangible assets:
Customer relationships	6,369		11,400		9,300		2,100		29,169
Trade names	4,600		6,100		3,000		—		13,700

Other assets	10		1,745		—		—		1,755
Accounts payable	(8,856)		(3,058)		(778)		(2,268)		(14,960)

Accrued expenses and other liabilities	—		(939)		(1,461)		(1,169)		(3,569)
Lease obligation	—		(1,125)		(9,313)		—		(10,438)



Goodwill	37,236		6,498		11,667		5,701		61,102
Total purchase consideration exchanged, net of cash acquired	$	54,690	$	30,756	$	26,174	$	7,795	$	119,415


(in thousands)	Omni		NEF(1)		SIS		MCS
Acquisition date	June 8, 2021		November 1, 2021		December 31, 2021		July 31, 2021		Total
Current assets	$	2,259	$	17,882	$	3,541	$	6,521	$	30,203
Property, plant and equipment	600		589		125		—		1,314
Right of use assets	—		1,774		799		—		2,573
Other intangible assets:
Customer relationships	2,530		5,007		4,800		2,621		14,958
Trade names	200		2,503		1,500		41		4,244
Other intangible assets	9		—		380		—		389
Other assets	—		1,236		10		—		1,246
Accounts payable	(50)		(3,506)		(1,464)		(2,523)		(7,543)

Accrued expenses and other liabilities	—		(3,332)		—		(685)		(4,017)
Lease obligation	—		(1,774)		(799)				(2,573)



Goodwill	953		—		3,010		7,245		11,208
Gain on bargain purchase	—		(1,363)		—		—		(1,363)
Total purchase consideration exchanged, net of cash acquired	$	6,501	$	19,016	$	11,902	$	13,220	$	50,639


(in thousands)	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
	Lawson		Other Acquisitions		Total		Lawson		Other Acquisitions		Total
Revenue	$	126,693	$	71,216	$	197,909	$	—	$	2,803	$	2,803
Net Income	$	8,282	$	4,363	$	12,645	$	—	$	545	$	545

	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Lawson		Other Acquisitions		Total		Lawson		Other Acquisitions		Total
Revenue	$	250,364	$	146,742	$	397,106	$	—	$	3,271	$	3,271
Net Income	$	12,883	$	12,651	$	25,534	$	—	$	233	$	233


(in thousands)	Amortization
Remaining 2022	$	8,039
2023	35,139
2024	34,621
2025	31,218
2026	28,520
2027	24,052
Thereafter	75,280
Total	$	236,869


	Three Months Ended September 30,						Change from Adjusted 2021
(Dollars in thousands)	2022			Adjusted 2021(1)			Amount		%

Revenue	$	109,418		$	93,686		$	15,732	16.8	%
Cost of goods sold	53,183			42,559			10,624		25.0	%
Gross profit	56,235			51,127			5,108		10.0	%
Selling, general and administrative expenses	50,883			47,639			3,244		6.8	%
Operating income (loss)	$	5,352		$	3,488		$	1,864	53.4	%

Gross profit margin	51.4		%	54.6		%

Adjusted EBITDA(2)	$	9,670		$	7,560		$	2,110	27.9	%


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
July 1 through July 31, 2022	—	$	—	—	$	4,512,000
August 1 through August 31, 2022	—	—		—	4,512,000
September 1 through September 30, 2022	54,089	$	35.86	54,089	2,572,000		(1)
Total	54,089	—		54,089