What changed in this filing

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Item 1. Financial Statements

2022-11-03 compared with 2022-08-09 · 261 added, 236 removed, 782 unchanged (39% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Current assets:

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Total liabilities 685,968 327,525

Commitments and contingencies (Note 18)

Stockholders’ equity:

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See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollars in thousands, except per share data)

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

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

2022 2021 2022 2021

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Selling, general and administrative expenses 97,140 29,347 245,478 85,614

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

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

Interest expense ( 6,097 ) ( 3,976 ) ( 16,704 ) ( 12,482 )

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

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

Other (expense) income, net ( 182 ) ( 186 ) 774 ( 254 )

(Loss) income before income taxes ( 8,327 ) 1,020 ( 11,820 ) ( 1,039 )

Income tax (benefit) expense ( 3,612 ) 559 ( 4,568 ) 390

Net (loss) income $ ( 4,715 ) $ 461 $ ( 7,252 ) $ ( 1,429 )

Basic (loss) income per share of common stock $ ( 0.23 ) $ 0.04 $ ( 0.47 ) $ ( 0.14 )

Diluted (loss) income per share of common stock $ ( 0.23 ) $ 0.04 $ ( 0.47 ) $ ( 0.14 )

Comprehensive (loss) income

Net (loss) income $ ( 4,715 ) $ 461 $ ( 7,252 ) $ ( 1,429 )

Other comprehensive (loss) income, net of tax:

Loss on foreign currency translation ( 2,491 ) ( 171 ) ( 2,320 ) ( 3 )

Comprehensive (loss) income $ ( 7,206 ) $ 290 $ ( 9,572 ) $ ( 1,432 )

Change in fair value of earnout liabilities 9,641 — 3,948 —

Other income (expense), net ( 550 ) ( 74 ) 224 ( 328 )

Income (loss) before income taxes 25,021 1,441 13,201 402

Income tax expense (benefit) 8,480 216 3,912 606

Net income (loss) $ 16,541 $ 1,225 $ 9,289 $ ( 204 )

Basic income (loss) per share of common stock $ 0.85 $ 0.12 $ 0.54 $ ( 0.02 )

Diluted income (loss) per share of common stock $ 0.84 $ 0.12 $ 0.53 $ ( 0.02 )

Comprehensive income (loss)

Net income (loss) $ 16,541 $ 1,225 $ 9,289 $ ( 204 )

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustment ( 9,774 ) 175 ( 12,094 ) 172

Comprehensive income (loss) $ 6,767 $ 1,400 $ ( 2,805 ) $ ( 32 )

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

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Outstanding Shares $ 1 Par Value

Retained Earnings Treasury Stock

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 loss — — — ( 2,537 ) — — ( 2,537 )

Gain for foreign currency translation — — — — — 171 171

Net income (loss) — — — ( 2,537 ) — — ( 2,537 )

Foreign currency translation adjustment — — — — — 171 171

Shares issued 6,065 6 ( 6 ) — — — —

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Balance at March 31, 2022 10,300,000 $ 10,324 $ 196,989 $ ( 35,679 ) $ ( 10,066 ) $ 1,740 $ 163,308

Net loss — — — ( 4,715 ) — — ( 4,715 )

Loss for foreign currency translation — — — — — ( 2,491 ) ( 2,491 )

Net income (loss) — — — ( 4,715 ) — — ( 4,715 )

Foreign currency translation adjustment — — — — — ( 2,491 ) ( 2,491 )

Stock-based compensation — — 573 — — — 573

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Balance at June 30, 2022 19,443,982 $ 19,468 $ 573,649 $ ( 40,394 ) $ ( 10,144 ) $ ( 751 ) $ 541,828

Net income (loss) — — — 16,541 — — 16,541

Foreign currency translation adjustment — — — — — ( 9,774 ) ( 9,774 )

Stock-based compensation — — 489 — — — 489

Shares issued 17,992 18 ( 18 ) — — — —

Repurchase of common stock ( 54,089 ) ( 54 ) 54 — ( 1,940 ) — ( 1,940 )

Tax withholdings related to net share settlements of stock-based compensation awards ( 7,880 ) ( 8 ) 8 — ( 391 ) — ( 391 )

Other — — ( 6 ) — — — ( 6 )

Balance at September 30, 2022 19,400,005 $ 19,424 $ 574,176 $ ( 23,853 ) $ ( 12,475 ) $ ( 10,525 ) $ 546,747

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

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Outstanding Shares $1 Par Value

Retained Earnings Treasury Stock

Retained Deficit Treasury Stock

Balance at December 31, 2020 10,233,223 $ 10,233 $ 180,609 $ ( 28,090 ) $ ( 9,015 ) $ 1,511 $ 155,248

Net loss — — — ( 1,890 ) — — ( 1,890 )

Gain for foreign currency translation — — — — — 168 168

Net income (loss) — — — ( 1,890 ) — — ( 1,890 )

Foreign currency translation adjustment — — — — — 168 168

Shares issued 6,523 6 ( 6 ) — — — —

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Balance at March 31, 2021 10,239,443 $ 10,239 $ 180,616 $ ( 29,980 ) $ ( 9,028 ) $ 1,679 $ 153,526

Net income — — — 461 — — 461

Loss for foreign currency translation — — — — — ( 171 ) ( 171 )

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 1,355 2 ( 2 ) — — — —

Tax withholdings related to net share settlements of stock-based compensation awards ( 412 ) — 20 — ( 20 ) — —

Other — — — — — 42 42

Balance at September 30, 2021 10,252,769 $ 10,253 $ 194,049 $ ( 28,294 ) $ ( 9,048 ) $ 1,725 $ 168,685

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

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(Dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities

Net loss $ ( 7,252 ) $ ( 1,429 )

Net income (loss) $ 9,289 $ ( 204 )

Adjustments to reconcile to net cash used in operating activities:

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Stock-based compensation 445 —

Deferred income taxes ( 420 ) ( 58 )

Change in fair value of earnout liability ( 3,948 ) —

Gain on sale of rental equipment ( 2,463 ) ( 1,918 )

Reserve for obsolete and excess inventory 1,377 578

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:

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable ( 30,795 ) 5,740

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Other changes in operating assets and liabilities 6,324 2,478

Net cash (used in) provided by operating activities ( 39,543 ) 8,912

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

Investing activities

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Proceeds from sale of rental equipment 5,998 3,899

Net cash used in investing activities ( 115,286 ) ( 12,089 )

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

Financing activities

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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 financing activities 157,043 3,755

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 in cash, cash equivalents and restricted cash 3,395 603

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

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See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

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(Dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental disclosure of cash flow information

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Settlement of related party obligations $ 5,276 $ —

Additions of property, plant and equipment included in accounts payable 135 67

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Notes to Condensed Consolidated Financial Statements (Unaudited)

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• 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 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 outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Merger can be derived by converted into approximately 0.3618 shares and 0.7675 shares, respectively, of Company common stock.

Each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Merger 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

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The amount of TestEquity Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation 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 EBITDA (as defined in the TestEquity Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the

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calculations within the TestEquity Merger Agreement.

As of June 30, 2022, 700,000 TestEquity Holdback Shares are expected to 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 and reclassified to equity at April 29, 2022 when the additional acquisition was consummated.

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

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 to 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 and reclassified to equity at April 29, 2022 when the additional acquisition was consummated.

Refer to Note 11 - Earnout Derivative Liability for information about the earnout derivative liability related to the TestEquity Holdback Shares.

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Information regarding DSG's reportable segments is presented in Note 20 - Segment Information.

Lawson sells and distributes specialty products to the industrial, commercial, institutional and government MRO market and uses sales representatives to provide Vendor Managed Inventory ("VMI") services to Lawson's customers.

Through The Bolt Supply House business, customers in Western Canada have access to products at 14 branch locations in Alberta, Saskatchewan, Manitoba and British Columbia, Canada.

Under its Kent Automotive brand, Lawson provides collision and mechanical repair products to the automotive aftermarket.

Lawson ships from several strategically located distribution centers to customers in all 50 states, Puerto Rico, Canada, Mexico, and the Caribbean.

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, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.

TestEquity operates primarily through four brands, TestEquity, TEquipment, Jensen Tools and Techni-Tool.

TestEquity also designs a full line of environmental test chambers.

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 Original Equipment Manufacturer (OEM) products.

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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.

Basis of Presentation and Consolidation

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Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree.

This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owns a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control.

Accordingly, the unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

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 months ended September 30, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

The Company and its consolidated subsidiaries, except for Gexpro Services, operate on a calendar year-end.

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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 two day difference arising from the different period ends for the quarter ended June 30, 2022 was not material.

The consolidated financial statement impact of the one day difference arising from the different period ends for the quarter ended September 30, 2022 was not material.

The Company utilizes the exchange rates in effect at Gexpro Services’ reporting date and the appropriate weighted-average rate for its fiscal reporting period.

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A ll 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 six month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Operating results for the three and nine month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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.

VMI service revenue represents less than 5 % of total revenue and is recognized as the services are performed.

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.

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The Company accrues for returns based on historical evidence of return rates.

The Company has adopted the practical expedient within 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 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 from the associated lease component as the relevant criteria under ASC 842 are met.

Cash Equivalents — The Company considers all highly 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 June 30, 2022 and December 31, 2021 approximates fair value.

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.

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For all other customers, the Company recognizes reserves 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

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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.

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 inventory based on historical experience and monitoring of current inventory activity.

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.

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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 (Loss) Income.

The costs of repairs, maintenance and minor renewals are charged to expense as incurred.

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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 on our Unaudited Condensed Consolidated Balance Sheets.

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 General and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, is the change in the policies' contractual values.

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.

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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 General and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

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.

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The Company accounts for forfeitures of stock-based compensation in the period in which they occur.

Goodwill — The Company had $ 355.4 million of goodwill at June 30, 2022 and $ 106.1 million of goodwill at December 31, 2021.

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.

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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

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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 fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed.

If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process.

The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value.

If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

If the carrying

value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

Intangible Assets — The Company's intangible assets primarily consist of trade names and customer relationships.

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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 six months of 2022 or during the year ended December 31, 2021 .

No impairments occurred in the first nine months of 2022 or during the year ended December 31, 2021 .

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

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

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.

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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

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units and restricted stock awards into common stock.

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 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 diluted EPS, the contingently issuable shares should be included in the denominator of

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 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.

For the three and six months ended June 30, 2022 no options to purchase shares of common stock were excluded from the computation of diluted earnings per share because none of the options were in the money.

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.

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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 repurc hased 2,756 of its common stock i n 2022 from employees upon the vesting of restricted stock to offset the income taxes owed by those employees.

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 repurc hased 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 — The Financial Accounting Standards Board ("FASB") ASC 280, Segment Reporting , establishes standards for reporting information about operating segments.

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.

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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

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date fair values of the assets acquired and the liabilities assumed.

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.

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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 is recorded at fair value on a recurring basis and was estimated using Level 3 inputs.

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 the common stock of the Company 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 common stock of the Company.

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

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 were met.

The earnout derivative liability is measured at fair value immediately prior to the reclassification to equity.

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Actual results could differ from these estimates.

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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.

Recent Accounting Pronouncements - Not Yet Adopted

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On April 1, 2022, the Mergers were completed via all-stock merger transactions.

Pursuant to the Merger Agreements, DSG issued an aggregate of 10.3 million shares of its common stock to the former owners of TestEquity and Gexpro Services.

Pursuant to the Merger Agreements, DSG issued an aggregate of 10.3 million shares of DSG common stock to the former owners of TestEquity and Gexpro Services.

An additional 1.7 million shares of DSG common stock remain potentially issuable upon meeting the conditions of certain earnout provisions.

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 brings together three value added complementary distribution businesses.

The business combination of Lawson, TestEquity and Gexpro Services combines three value added complementary distribution businesses.

Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental MRO marketplace.

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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 Original Equipment Manufacturer ("OEM") products.

Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical OEM products.

Refer to Note 1- Nature of Operations and Basis of Presentation for more information on the nature of operations for these businesses.

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Certain estimated

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values for the acquisition, including the valuation 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.

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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.

The preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed as of the Merger Date is summarized as follows:

(in thousands) Total

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

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Total other intangible assets $ 119,060

The Company incurred transaction costs related to the Mergers of $ 5.8 million and $ 7.2 million for the three and six months ended June 30, 2022, respectively and $ 0.4 million and $ 0.5 million for the three and six months ended June 30, 2021, respectively.

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

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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 June 30, Six Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

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Other Acquisitions

TestEquity and Gexpro Services acquired other businesses during the first six months of 2022 and year ended December 31, 2021.

TestEquity and Gexpro Services acquired other businesses during the first nine months of 2022 and 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.

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

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estimated acquisition-date fair values.

For each acquisition, the allocation of consideration exchanged to the assets acquired and liabilities assumed was based on estimated acquisition-date fair values.

Certain estimated values for the acquisitions, including the valuation of intangibles, contingent consideration, 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.

The final valuations will be completed within the one-year measurement periods following the respective acquisition dates, and any adjustments will be recorded in the period in which the adjustments are determined.

During the first six months of 2022, TestEquity acquired Interworld Highway, LLC and National Test Equipment, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc.

During the first nine months of 2022, TestEquity acquired Interworld Highway, LLC and National Test Equipment, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc.

("Frontier").

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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.

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 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 June 30, 2022, the fair value of the earn-out was $ 0.9 million and $ 0.9 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

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.

During the year ended December 31, 2021, TestEquity acquired MCS Test Group Limited ("MCS"), and Gexpro Services acquired Omni Fasteners Inc.

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The accounting for the Omni and MCS acquisitions was complete as of June 30, 2022.

Certain estimated values for the NEF and SIS acquisitions are preliminary, including goodwill, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances).

Certain estimated values for the NEF and

SIS acquisitions are preliminary, including goodwill and income taxes (including deferred taxes and associated valuation allowances).

These values are subject to change as the Company completes its analysis of the fair value at the date of acquisition.

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

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)

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(1) The consideration exchanged 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 (Loss) Income 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 $ 0.3 million and $ 1.3 million for the three and six months ended June 30, 2022, respectively and $ 0.8 million and $ 1.0 million for the three and six months ended June 30, 2021, respectively.

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.

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 under Pro Forma Information .

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 second quarter and first six months of 2022 and 2021.

The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the third quarter and first nine months of 2022 and 2021.

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.

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

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

Lawson Other Acquisitions Total Lawson Other Acquisitions Total

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Net Income $ 8,282 $ 4,363 $ 12,645 $ — $ 545 $ 545

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

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

Lawson Other Acquisitions Total Lawson Other Acquisitions Total

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Net Income $ 12,883 $ 12,651 $ 25,534 $ — $ 233 $ 233

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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 or not there is a written contract.

Revenue from customers is recognized when obligations under the terms of a contract are satisfied;

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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.

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Gexpro Services’ products are marketed and sold primarily to original equipment manufacturers globally.

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TestEquity provides an assurance type warranty which is not sold separately and does not represent a separate performance obligation.

Contractual rebate obligations were $ 0.1 million at June 30, 2022, and are expected to be paid or expire in their entirety during fiscal year ended December 31, 2022.

TestEquity generates revenue from contracts with customers through the sale of new and used electronic test and measurement products.

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For consigned inventory, revenue is recognized when inventory is removed from TestEquity’s stock location and control passes to the customer.

The Company has elected not to disclose the disaggregated components of revenue and cost of sales in its Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and in the related notes to the condensed consolidated financial statements.

Disaggregated revenue by geographic area (based on the location to which the product is shipped to):

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

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

(in thousands) 2022 2021 2022 2021

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These leases are classified as operating leases.

Rental equipment is included in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheet, and rental revenues is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income .

Rental revenues are recognized in the month they are due on the accrual basis of accounting.

The unearned portion of rental payments received is accrued as deferred revenue.

The TestEquity rental program generated $ 3.2 million and $ 2.6 million of revenue for the three months ended June 30, 2022 and 2021, respectively and $ 6.8 million and $ 5.4 million of revenue for the six months ended June 30, 2022 and 2021, respectively.

The unearned rental revenue related to customer prepayments on equipment leases of $ 0.4 million at June 30, 2022 and $ 0.5 million at December 31, 2021, which is included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet, is expected to be earned in its entirety during the next twelve months.

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

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

Lawso n leases parts washer machines to customers through its Torrents leasing program.

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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 $ 1.1

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million of revenue for the three months ended June 30, 2022 and $ 1.1 million of revenue for the six months ended June 30, 2022.

The unearned rent revenue of $ 0.7 million at June 30, 2022 is included as a component of Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet, is expected to be earned in its entirety during the next twelve months.

The Torrents machine leasing program generated $ 1.3 million of revenue for the three months ended September 30, 2022 and $ 2.5 million of revenue for the nine months ended September 30, 2022.

The unearned rent revenu e of $ 0.0 million at September 30, 2022 is included as a component of Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet, is expected to be earned in its entirety during the next twelve months.

Note 5 — Inventories

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

(in thousands) June 30, 2022 December 31, 2021

(in thousands) September 30, 2022 December 31, 2021

Inventories, gross $ 270,330 $ 140,544

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Write-offs 2,151

Balance at June 30, 2022 $ ( 9,204 )

Balance at September 30, 2022 $ ( 9,490 )

Note 6 - Property, Plant and Equipment

Components of property, plant and equipment were as follows:

(in thousands) June 30, 2022 December 31, 2021

(in thousands) September 30, 2022 December 31, 2021

Land $ 9,447 $ 1,700

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Property, plant and equipment, net $ 64,765 $ 9,079

Depreciation expense for property, plant, and equipment was $ 2.5 million and $ 0.3 million for the second quarter of 2022 and 2021, respectively and $ 3.1 million and $ 0.5 million for the first six months of 2022 and 2021, respectively.

Amortization expense for capitalized software was $ 0.9 million and $ 0.2 million for the second quarter of 2022 and 2021, respectively and $ 1.1 million and $ 0.4 million for the first six months of 2022 and 2021, respectively.

(1) Construction in progress primarily relates 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 million and $ 0.4 million for the third quarter of 2022 and 2021, respectively, and $ 4.0 million and $ 0.9 million for the first nine months of 2022 and 2021, respectively.

Amortization expense for capitalized software was $ 0.0 million and $ 0.2 million for the third quarter of 2022 and 2021, respectively, and $ 1.0 million and $ 0.6 million for the first nine months of 2022 and 2021, respectively.

Note 7 - Rental Equipment

Rental equipment, net consisted of the following:

(in thousands) June 30, 2022 December 31, 2021

(in thousands) September 30, 2022 December 31, 2021

Rental equipment $ 59,974 $ 46,500

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Rental equipment, net $ 25,489 $ 24,727

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Depreciation expense included in cost of sales for rental equipment was $ 1.5 million and $ 1.5 million for the second quarter of 2022 and 2021, respectively and $ 2.9 million and $ 3.0 million for the first six months of 2022 and 2021, respectively.

Depreciation expense included in cost of sales for rental equipment was $ 2.3 million and $ 1.7 million for the third quarter of 2022 and 2021, respectively, and $ 5.4 million and $ 4.7 million for the first nine months of 2022 and 2021, respectively.

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

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Acquisitions (1)

160,205 42,313 17,962 27,575 248,055

Impact of foreign exchange rates ( 403 ) — — ( 2,650 ) ( 3,053 )

Balance at June 30, 2022 $ 172,333 $ 113,319 $ 52,945 $ 16,843 $ 355,440

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.

Note 9 - Intangible Assets

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

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

Amortization expense for definite-lived intangible assets was $ 9.7 million and $ 15.1 million for the three and six months ended June 30, 2022, respectively and $ 2.5 million and $ 5.0 million for the three and six months ended June 30, 2021, respectively.

Amortization expense related to intangible assets was recorded in General and administrative expenses.

The remaining weighted-average useful lives of intangible assets as of June 30, 2022 was 7.0 years for trade names and 14.3 years for customer relationships.

Amortization expense for definite-lived intangible assets was $ 5.6 million and $ 20.9 million for the three and nine months ended September 30, 2022, respectively, and $ 2.4 million and $ 7.5 million for the three and nine months ended September 30, 2021, 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 and each of the next five years are as follows:

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Total $ 236,869

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Note 10 - Leases

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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 six months ended June 30, 2022 and 2021 were as follows (in thousands):

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

The expenses generated by leasing activity for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):

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

Lease Type Classification 2022 2021 2022 2021

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

The value of net assets and liabilities generated by leasing activity of June 30, 2022 and December 31, 2021 were as follows (in thousands):

Lease Type June 30, 2022 December 31, 2021

The value of net assets and liabilities generated by leasing activity of September 30, 2022 and December 31, 2021 were as follows (in thousands):

Lease Type September 30, 2022 December 31, 2021

Total ROU operating lease assets (1)

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Total long term lease obligation $ 38,169 $ 16,132

(1) Operating lease assets are recorded net of accumulated amortization of $ 6.4 million as of June 30, 2022 and $ 2.8 million as of December 31, 2021

(2) Financing lease assets are recorded net of accumulated amortization of $ 0.1 million as of June 30, 2022 and $ 0.0 million as of December 31, 2021

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

(1) Operating lease assets are recorded net of accumulated amortization of $ 11.8 million as of September 30, 2022 a nd $ 2.8 million as of December 31, 2021

(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 million as of September 30, 2022 and $ 0.0 million as of December 31, 2021

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

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Present value of lease liabilities $ 45,984 $ 2,179 $ 48,163

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

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

Lease Type Weighted Average Term in Years Weighted Average Interest Rate

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Financing Leases 3.3 6.3 %

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

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

Cash Flow Source Classification Amount

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On the Merger Date, the Company recorded an earnout derivative liability for the two earnout provisions within the Merger Agreements.

The Company estimated the fair value of the earnout derivative liability based on an aggregate of 1,162,000 additional shares expected to be issued under the two earnout provisions of the Merger Agreements.

The aggregate of 1,162,000 shares is comprised of 700,000 shares of DSG common stock that are contingently issuable (or forfeitable) to the TestEquity Equityholder and 462,000 shares of DSG common stock that are contingently issuable (or forfeitable) to the Gexpro Services Stockholder.

The Company estimated the 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 is comprised of 700,000 shares of DSG common stock that are contingently issuable to (or forfeitable by) the TestEquity Equityholder and 462,000 shares of DSG common stock that are contingently issuable to (or forfeitable by) the Gexpro Services Stockholder.

The additional 538,000 shares of the remaining potential shares of the earnout were not recorded as an earnout derivative liability as the acquisition contingency for these shares was met at the Merger Date.

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As of April 29, 2022, 700,000 of the 1,162,000 shares were reclassified to equity, as the acquisition contingencies had been met.

Immediately prior to reclassification, these shares were remeasured to fair value, resulting in a loss of $ 5.7 million being recorded as a component of Change in fair value of earnout derivative liability in the Unaudited Consolidated Statements of Income and Comprehensive Income.” The earnout opportunity for the remaining 462,000 shares for Gexpro Services expires on December 31, 2022.

Immediately prior to reclassification, these shares were remeasured to fair value.

For the three and nine months ended September 30, 2022, the Company recorded income of $ 10.3 million and $ 4.6 million, respectively, as a component of Change in fair value of earnout liability in the Unaudited Consolidated Statements of Income and Comprehensive Income due to changes in the fair value of the earnout derivative liability.

The earnout opportunity for the remaining 462,000 shares for Gexpro Services expires on December 31, 2022.

See Fair Value Measurements in Note 2 - Summary of Significant Accounting Policies for further information.

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Reclassifications to equity at fair value ( 26,593 )

Balance at June 30, 2022 $ 23,000

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Balance at September 30, 2022 $ 12,700

Note 12 - Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

(in thousand) June 30, 2022 December 31, 2021

(in thousand) September 30, 2022 December 31, 2021

Accrued stock-based compensation $ 2,060 $ —

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

(in thousands) June 30, 2022 December 31, 2021

(in thousands) September 30, 2022 December 31, 2021

Senior secured revolving credit facility $ 123,925 $ —

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dollars, Canadian dollars and any other additional currencies that may be agreed.

On the Closing Date, the Company borrowed $ 250 million of initial term loan facility loans and approximately $ 86 million of revolving credit facility loans under the Amended and Restated Credit Agreement.

On April 1, 2022, in connection with the Mergers, the Company borrowed $ 250.0 million of initial term loan facility loans and approximately $ 86.0 million of revolving credit facility loans under the Amended and Restated Credit Agreement.

These borrowings were used to 1) repay all obligations and refinance the Company's previous credit agreement, 2) repay certain existing indebtedness of TestEquity and Gexpro Services and their respective subsidiaries, 3) 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 (Loss) Income.

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, the Company borrowed the $ 50 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC made by TestEquity.

As of June 30, 2022 , there were $ 247 million of term loan facility loans outstanding, $ 50 million of delayed draw term loans outstanding and approximately $ 113 million of revolving credit facility loans outstanding under the Amended and Restated Credit Agreement.

Net of outstanding letters of credit, there w as $ 85.9 million of borrowi ng availability under the revolving credit facility as of June 30, 2022.

The weighted average interest rate from the Closing Date through June 30, 2022 was 3.61 %.

On April 29, 2022, the Company borrowed the $ 50.0 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC.

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 w as $ 75.1 million of borrowi ng availability under the revolving credit facility as of September 30, 2022.

The weighted average interest rate from April 1, 2022 through September 30, 2022 was 4.3 %.

The loans under the Amended and Restated 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 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 Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the Amended and Restated 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 Credit Agreement.

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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 June 30, 2022 were $ 0.1 million.

Fees from the Closing Date through September 30, 2022 were $ 0.1 million.

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

Deferred financing costs are amortized over the life of the debt instrument and reported as interest expense.

As of June 30, 2022, deferred financing costs net of accumulated amortization were $ 9.2 million of which $ 5.7 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 $ 3.5 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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As of September 30, 2022, deferred financing costs net of accumulated amortization were $ 8.4 million of which $ 5.2 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 $ 3.2 million are included in Other assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance Sheets.

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.

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The Amended and Restated 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 Credit Agreement.

The Company was in compliance with all financial covenants as of June 30, 2022 .

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).

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Gexpro Services - January 3, 2022 Gexpro Services Credit Agreement

On January 3, 2022, prior to the Gexpro Services Merger, 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 Agreement (as defined below) and seller’s promissory note from SIS acquisition (refer to Note 3 - Business Acquisitions for further details of these acquisitions).

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 Services 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") with a financial institution 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") with a financial institution under which Gexpro Services obtained a $ 15 million revolving line of credit ("2020 Gexpro Services Revolver").

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.

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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

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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 $ 0.0 million outstanding letters of credit as of December 31, 2021 and $ 1.0 million outstanding on the revolving line of credit.

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 .

Note 14 - Stock-Based Compensation

The Company recorded stock-based compensation expense of $ 4.0 million and $ 4.0 million for the three and six months ended June 30, 2022, respectively.

A portion of stock-based compensation related to the change in the market value of the Company's common stock.

A stock-based compensation liability of $ 11.0 million a s of June 30, 2022 and $ 0.0 million as of December 31, 2021 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

The Company recorded a stock-based compensation benefit of $ 3.6 million and expense of $ 0.4 million for the three and nine months ended September 30, 2022 , respectively.

A portion of the Company's stock-based awards are liability-classified.

Accordingly, changes in the market value of the Company's common stock may result in a stock-based benefit in certain periods.

A stock-based compensation liability of $ 2.1 million a s of September 30, 2022 and $ 0.0 million as of December 31, 2021 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

Equity Compensation Plans

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The Equity Plan also provides for the grant of option rights and restricted stock to non-employee directors.

As of June 30, 2022 , the Company had approximately 164,000 shares of common stock still available under the Equity Plan.

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.

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Stock Performance Rights

SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of the Company's common stock over the SPR exercise price when the SPRs are surrendered.

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 (Loss) Income.

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.

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Restricted Stock Awards

Restricted stock awards ("RSAs") generally vest over a one to three years period beginning on the first anniversary of the date of the grant.

Upon vesting, the vested restricted stock awards are exchanged for an equal number of the Company’s common stock.

Restricted stock awards ("RSAs") generally vest over a one to three year period beginning on the first anniversary of the date of the grant.

Upon vesting, the vested restricted stock awards are exchanged for an equal number of shares of the Company’s common stock.

The participants have no voting or dividend rights with the restricted stock awards.

The restricted stock awards are valued at the closing price of the common stock on the date of grant and the expense is recorded ratably over the vesting period.

The restricted stock awards are valued at the closing price of the Company 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 the Company's 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 common stock over the measurement period.

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Stock Options

In April 2022, the Company issued 242,000 stock options to key employees that vest through the fifth anniversary from the grant date.

For the three and nine months ended September 30, 2022, the Company issued 6,000 and 248,000 stock options, respectively, to key employees that vest through the fifth anniversary 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 .

Each stock option can be exchanged for one share of the Company’s common stock at the stated exercise price.

Each stock option can be exchanged for one share of Company 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 June 30, 2022 was $ 2.1 million.

Unrecognized compensation related to stock options as of September 30, 2022 was $ 2.1 million.

Performance Awards

Performance Awards ("PAs") are exchangeable for between 0 % to 150 % of the Company's common shares, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics at the end of the vesting period.

Performance Awards ("PAs") are exchangeable for between 0 % to 150 % of Company common stock, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics at the end of the vesting period.

The PAs are liability classified and included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

Except for the stock options above, no additional stock-based awards were issued during the six months ended June 30, 2022.

Except for the stock options and RSAs above, no additional stock-based awards were issued during the nine months ended September 30, 2022.

Note 15 - Stock Repurchase Program

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 Company 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 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 2022 or during the year ended December 31, 2021.

Following these repurchases, 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.

Note 16 - Earnings Per Share

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The following table provides the computation of basic and diluted earnings per share:

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

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

(in thousands, except share and per share data) 2022 2021 2022 2021

Basic income per share:

Net (loss) income $ ( 4,715 ) $ 461 $ ( 7,252 ) $ ( 1,429 )

Net income (loss) $ 16,541 $ 1,225 $ 9,289 $ ( 204 )

Basic weighted average shares outstanding 19,439,996 10,252,770 17,143,814 10,252,760

Basic (loss) income per share of common stock $ ( 0.23 ) $ 0.04 $ ( 0.47 ) $ ( 0.14 )

Basic income (loss) per share of common stock $ 0.85 $ 0.12 $ 0.54 $ ( 0.02 )

Diluted income per share:

Net (loss) income $ ( 4,715 ) $ 461 $ ( 7,252 ) $ ( 1,429 )

Net income (loss) $ 16,541 $ 1,225 $ 9,289 $ ( 204 )

Basic weighted average shares outstanding 19,439,996 10,252,770 17,143,814 10,252,760

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Diluted weighted average shares outstanding 19,653,354 10,567,928 17,457,067 10,252,760

Diluted (loss) income per share of common stock $ ( 0.23 ) $ 0.04 $ ( 0.47 ) $ ( 0.14 )

Diluted income (loss) per share of common stock $ 0.84 $ 0.12 $ 0.53 $ ( 0.02 )

Anti-dilutive securities excluded from the calculation of diluted income per share 246,957 — 248,000 307,908

Note 17 - Income Taxes

The Company recorded income tax benefit of $ 3.6 million , a 43.4 % effective tax rate for the three months ended June 30, 2022 .

Income tax expense of $ 0.6 million , a 54.8 % effective tax rate was recorded for the three months ended June 30, 2021 .

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

The Company recorded income tax expense of $ 8.5 million , a 33.9 % effective tax rate for the three months ended September 30, 2022 .

Income tax expense of $ 0.2 million , a 15.0 % effective tax rate was recorded for the three months ended September 30, 2021 .

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

statutory rate primarily due to state taxes, foreign operations, as well as transaction costs and other permanent items.

The Company recorded income tax benefit of $ 4.6 million, a 38.6 % effective tax rate for the six months ended June 30, 2022.

Income tax expense of $ 0.4 million, a 37.5 % effective tax rate, was recorded for the six months ended June 30, 2021.

The change in the year over year effective tax rate was primarily due to the changes in the valuation allowance in the six months ended June 30, 2021, merger costs incurred in the six months ended June 30, 2022, and the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 - Business Acquisitions.

The Company recorded income tax expense of $ 3.9 million, a 29.6 % effective tax rate for the nine months ended September 30, 2022.

Income tax expense of $ 0.6 million, a 150.7 % effective tax rate, was recorded for the nine months ended September 30, 2021.

The change in the year over year effective tax rate was primarily due to the changes in the valuation allowance in the nine months ended September 30, 2021, merger costs incurred in the nine months ended September 30, 2022, and the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 - Business Acquisitions.

Relative to the U.S.

statutory rate, the effective tax rate for the six months ended June 30, 2022 was impacted by state taxes, foreign operations, and the expiration of uncertain tax positions, as well as liabilities and transaction expenses related to the Mergers, and discrete tax items related to changes in the uncertain tax positions and prior period true-ups as a result of the completed Mergers.

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statutory rate, the effective tax rate for the nine months ended September 30, 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.

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 June 30, 2022, the Company is subject to U.S.

As of September 30, 2022, the Company is subject to U.S.

federal income tax examinations for the years 2018 through 2021 and income tax examinations from various other jurisdictions for the years 2015 through 2021.

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Shareholder lawsuits

Between January 25, 2022 and March 7, 2022, seven lawsuits were filed in federal district courts against DSG, the members of the DSG board of directors and, in some cases, the TestEquity Equityholder, TestEquity, Merger Sub 1, the Gexpro Services Stockholder, Gexpro Services and Merger Sub 2 in connection with the Mergers.

Between February 24, 2022 and April 28, 2022, all of these lawsuits were voluntarily dismissed by the respective plaintiffs.

The plaintiffs in these lawsuits have made a demand to DSG for payment of attorneys’ fees and expenses in connection with these lawsuits.

In addition, on each of February 2, 2022, February 14, 2022 and February 15, 2022, 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 is 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.

In addition, 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.

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.

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2022-0270, in the Court of Chancery of the State of Delaware against DSG (the “Edelman Action”).

The Garfield Action and the Edelman Action are collectively referred to as the “Books and Records Actions.” The Books and Records Actions seek 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.

Pursuant to a stipulation approved by the Delaware Court of Chancery on March 24, 2022, the Books and Records Actions were held in abeyance until May 23, 2022.

Following the parties’ inability to reach a resolution of the Books and Records Actions, the Delaware Court of Chancery scheduled briefing followed by a trial on July 14, 2022 to adjudicate the Books and Records Actions.

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.

DSG and the members of its board of directors disagree with and intend to vigorously defend against the Books and Records Actions and any other claim, if asserted, arising from the Books and Records Demands.

Due to the inherent uncertainties of these matters, DSG is not able to predict either the outcome of these matters on its business, financial condition and results of operations, or a range of reasonably possible losses, if any, at this time.

Thereafter, DSG produced excerpts of certain documents as required by the Court's ruling and subsequent order.

On October 3, 2022, the plaintiffs in the Books and Records Actions filed a shareholder derivative action (the “Derivative Action”) entitled Jeffrey Edelman and Robert Garfield v.

John Bryan King et al., Case No.

2022-0886, in the Court of Chancery of the State of Delaware.

The Derivative Action names as defendants J.

Bryan King, Lee S.

Hillman, Bianca A.

Rhodes, Mark F.

Moon, Andrew B.

Steven Edelson and Ronald J.

Knutson (collectively, “Director and Officer Defendants”), and LKCM Headwater Investments II, L.P., LKCM Headwater II Sidecar Partnership, L.P., Headwater Lawson Investors, LLC, PDLP Lawson, LLC, LKCM Investment Partnership, L.P., LKCM Micro-Cap Partnership, L.P., LKCM Core Discipline, L.P.

and Luther King Capital Management Corporation (collectively, the “LKCM Defendants”).

Purporting to act on behalf of DSG, in the Derivative Action the plaintiffs allege, among other things, various claims of alleged breach of fiduciary duty against the Director and Officer Defendants and the LKCM Defendants in connection with the Mergers.

The Derivative Action seeks, among other things, money damages, equitable relief and the costs of the Derivative Action, including reasonable attorneys’, accountants’ and experts’ fees.

On October 24, 2022, the plaintiffs voluntarily dismissed PDLP Lawson, LLC and LKCM Investment Partnership, L.P.

from the Derivative Action without prejudice.

DSG disagrees with and intends to vigorously defend against the Derivative Action.

The Derivative Action could result in additional costs to DSG, including costs associated with the indemnification of directors and officers.

At this time, DSG is unable to predict the ultimate outcome of the Derivative Action or, if the outcome is adverse, to reasonably estimate an amount

or range of reasonably possible loss, if any, associated with the Derivative Action.

Accordingly, no amounts have been recorded in the 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.

Environmental matter

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The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area.

At June 30, 2022 the Company had less than $ 0.1 million accrued for potential monitoring costs.

At September 30, 2022 the Company had less than $ 0.1 million accrued for potential monitoring costs.

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.

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Purchase commitments

The Company enters into inventory purchase commitments with third parties in the ordinary course of business.

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

Note 19 - Related Party Transactions

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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 six 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 (Loss) Income, reflecting expenses accrued under these management agreements from January 1, 2022 through the April 1, 2022 Merger Date.

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.

During the first three months of 2022, expense of $ 0.5 million was recorded under 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”), 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 30, 2022 expense of $ 0.2 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

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Bryan King (the Chairman of the DSG board of directors), including private investment partnerships for which LKCM serves as investment manager, owned a majority of the ownership interests in the TestEquity Equityholder (which in turn owned all of the outstanding equity interests of TestEquity as of immediately prior to the completion of the TestEquity Merger).

As of the Merger Date, Mr.

Merger Date, Mr.

King was a director of the TestEquity Equityholder.

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• Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and government maintenance, repair and operations market.

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• TestEquity is a distributor of test and measurement equipment and solutions, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.

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Bolt generates revenue primarily from the sale of MRO products to its walk-up customers and service to its customers through their 14 branch locations.

Bolt Supply does not provide VMI services for its customers or provide services in addition to product sales to customers.

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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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 June 30, Six Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

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Total revenue $ 347,151 $ 132,090 $ 822,572 $ 391,069

Operating Income

Operating income (loss)

$ 5,352 $ — $ 2,792 $ —

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All Other 1,107 — 1,921 —

Total operating income $ 4,113 $ 5,468 $ 7,101 $ 7,721

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

(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.

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Note 21 - Subsequent Events

Shareholder Lawsuits

On October 3, 2022, a shareholder derivative action was filed against certain directors and officers of 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.

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

What changed 10-Q

Item 1. Financial Statements