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Item 1. Financial Statements

2023-05-10 compared with 2022-11-03 · 285 added, 530 removed, 513 unchanged (61% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

1 unchanged sentence

Restricted cash 188 186

Accounts receivable, less allowance for doubtful accounts of $ 2,009 and $ 2,473 , respectively

Accounts receivable, less allowances of $ 2,058 and $ 1,513 , respectively

172,688 166,301

8 unchanged sentences

Cash value of life insurance 17,500 17,166

Right of use assets 44,682 19,662

Right of use operating lease assets 46,403 46,755

Other assets 5,520 5,736

4 unchanged sentences

Current portion of long-term debt 16,094 16,352

Current portion of lease obligation 9,994 4,641

Earnout derivative liability 12,700 —

Related party payables — 4,813

Current portion of lease liabilities 10,744 9,964

Accrued expenses and other current liabilities 55,426 62,677

1 unchanged sentence

Long-term debt, less current portion, net 395,215 395,825

Security bonus plan 9,958 —

Deferred compensation 10,248 —

Lease obligation 38,169 16,132

Lease liabilities 39,061 39,828

Deferred tax liability 24,123 23,834

21 unchanged sentences

(Dollars in thousands, except per share data)

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

2022 2021 2022 2021

Three Months Ended March 31,

Revenue $ 348,270 $ 154,085

16 unchanged sentences

Foreign currency translation adjustment 2,624 171

Other ( 200 ) —

Comprehensive income (loss) $ 8,331 $ ( 2,366 )

6 unchanged sentences

Retained Deficit Treasury Stock

Balance at December 31, 2021 10,294,824 $ 10,318 $ 197,057 $ ( 33,142 ) $ ( 10,033 ) $ 1,569 $ 165,769

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

Foreign currency translation adjustment — — — — — 171 171

Shares issued 6,065 6 ( 6 ) — — — —

Tax withholdings related to net share settlements of stock-based compensation awards ( 889 ) — 33 — ( 33 ) — —

Other — — ( 95 ) — — — ( 95 )

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

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

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

Stock-based compensation — — 573 — — — 573

Shares issued 25,682 24 ( 24 ) — — — —

Deemed consideration for reverse acquisition 9,120,167 9,120 342,371 — — — 351,491

Reclassification of issuable shares from earnout derivative liability — — 26,593 — — — 26,593

Fair value adjustment of stock-based compensation awards — — 1,910 — — — 1,910

Tax withholdings related to net share settlements of stock-based compensation awards ( 1,867 ) — — — ( 78 ) — ( 78 )

Settlement of related party liability — — 5,276 — — — 5,276

Other — — ( 39 ) — — — ( 39 )

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

Balance at January 1, 2023 19,416,784 $ 19,417 $ 591,796 $ ( 25,736 ) $ ( 12,526 ) $ ( 9,956 ) $ 562,995

Net income (loss) — — — 5,907 — — 5,907

1 unchanged sentence

Stock-based compensation — — 773 — — — 773

Stock-based compensation liability paid in shares — — 227 — — — 227

Shares issued 11,144 11 ( 11 ) — — — —

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

Shares issued - earnout 1,700,000 1,700 ( 1,700 ) — — — —

Tax withholdings related to net share settlements of stock-based compensation awards ( 2,639 ) ( 3 ) 3 — ( 117 ) — ( 117 )

Other — — 204 ( 4 ) — ( 200 ) —

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

Balance at March 31, 2023 21,125,289 $ 21,125 $ 591,292 $ ( 19,833 ) $ ( 12,643 ) $ ( 7,532 ) $ 572,409

See notes to Condensed Consolidated Financial Statements (Unaudited)

2 unchanged sentences

(Dollars in thousands)

Common Stock Capital in Excess of Par Value Accumulated Other Comprehensive Income Total Stockholders' Equity

Common Stock Capital in Excess of Par Value Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity

Outstanding Shares $ 1 Par Value

Retained Deficit Treasury Stock

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

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

Foreign currency translation adjustment — — — — — 168 168

Shares issued 6,523 6 ( 6 ) — — — —

Tax withholdings related to net share settlements of stock-based compensation awards ( 303 ) — 13 — ( 13 ) — —

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

Net income (loss) — — — 461 — — 461

Foreign currency translation adjustment — — — — — ( 171 ) ( 171 )

Shares issued 12,383 12 ( 12 ) — — — —

Balance at June 30, 2021 10,251,826 $ 10,251 $ 180,604 $ ( 29,519 ) $ ( 9,028 ) $ 1,508 $ 153,816

Balance at January 1, 2022 10,294,824 $ 10,318 $ 197,057 $ ( 33,142 ) $ ( 10,033 ) $ 1,569 $ 165,769

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

Foreign currency translation adjustment — — — — — 171 171

Equity consideration for purchase of business — — 4,194 — — — 4,194

Capital contribution — — 9,233 — — — 9,233

Shares issued 6,065 6 ( 6 ) — — — —

1 unchanged sentence

Other — — ( 95 ) — — — ( 95 )

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

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

See notes to Condensed Consolidated Financial Statements (Unaudited)

2 unchanged sentences

(Dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities

5 unchanged sentences

Stock-based compensation 2,204 —

Deferred income taxes 612 —

Change in fair value of earnout liability 57 —

Gain on sale of rental equipment ( 889 ) ( 736 )

Charge for step-up of acquired inventory 2,703 —

Loss on sale of property, plant and equipment 151 —

Net realizable value and reserve adjustment for obsolete and excess inventory 2,158 636

2 unchanged sentences

Accounts receivable ( 6,015 ) ( 12,534 )

Inventories, net ( 43,857 ) 2,770

Inventories ( 7,243 ) ( 12,126 )

Prepaid expenses and other current assets ( 2,941 ) ( 110 )

15 unchanged sentences

Deferred financing costs — ( 7,939 )

Capital contribution — 9,233

Repurchase of common stock ( 1,940 ) —

Shares repurchased held in treasury ( 117 ) —

Payment of financing lease principal ( 123 ) ( 73 )

Payment of earnout ( 1,000 ) —

Net cash provided by (used in) financing activities ( 2,394 ) 68,795

10 unchanged sentences

(Dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental disclosure of cash flow information

2 unchanged sentences

Non-cash activities:

Fair value of common stock exchanged for reverse acquisition $ 351,491 $ —

Settlement of related party obligations $ 5,276 $ —

Additions of assets under a finance lease liability $ 383 $ —

Additions of assets under an operating lease liability $ 2,496 $ 1,202

See notes to Condensed Consolidated Financial Statements (Unaudited)

1 unchanged sentence

Note 1 – Nature of Operations and Basis of Presentation

Effective May 5, 2022, Distribution Solutions Group, Inc.

("DSG"), a Delaware corporation, changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG is a global specialty distribution company providing value added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets.

Distribution Solutions Group, Inc.

("DSG"), a Delaware corporation, is a global specialty distribution company providing value-added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets.

DSG has three principal operating companies:

Lawson Products, Inc.

("Lawson"), TestEquity Acquisition, LLC ("TestEquity") and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services").

The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined for the purpose of creating a specialty distribution company.

Lawson Products, Inc., an Illinois corporation ("Lawson"), TestEquity Acquisition, LLC, a Delaware limited liability company ("TestEquity"), and 301 HW Opus Holdings, Inc., a Delaware corporation conducting business as Gexpro Services ("Gexpro Services").

The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined on April 1, 2022 to create a specialty distribution company.

A summary of the Mergers (as defined below), including the legal entities party to the transactions and the stock consideration, is presented below.

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

Business Combination Background

On December 29, 2021, DSG entered into an:

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

• 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 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.

Combination with TestEquity and Gexpro Services

On December 29, 2021, DSG entered into:

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

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

At the closing of the Mergers, each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Mergers was converted into approximately 0.3618 shares and 0.7675 shares, respectively, of DSG common stock, based on the ratio of outstanding shares of each entity immediately prior to the Mergers to the number of shares of DSG common stock acquired in the Mergers.

Completion of the TestEquity Merger

On April 1, 2022 (the "Merger Date"), the TestEquity Merger was consummated pursuant to the TestEquity Merger Agreement.

In accordance with and under the terms of the TestEquity Merger Agreement, at the closing of the TestEquity Merger, DSG:

In accordance with the TestEquity Merger Agreement, Merger Sub 1 merged with and into TestEquity, with TestEquity surviving as a wholly-owned subsidiary of DSG.

In accordance with and under the terms of the TestEquity Merger Agreement, in connection with the closing of the TestEquity Merger on the Merger Date, DSG:

(i) issued to the TestEquity Equityholder 3,300,000 shares of DSG common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity.

The TestEquity Merger Agreement provides that an additional 700,000 shares of DSG common stock (the “TestEquity Holdback Shares”) may be issued to the TestEquity Equityholder or forfeited in accordance with two earnout provisions of the TestEquity Merger Agreement.

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 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.

The TestEquity Merger Agreement provided that up to an additional 700,000 shares of DSG common stock would be potentially issuable to the TestEquity Equityholder in accordance with, and subject to the terms and conditions of, the earnout provisions of the TestEquity Merger Agreement.

On March 20, 2023, DSG issued 700,000 shares of DSG common stock to the TestEquity Equityholder (the "TestEquity Holdback Shares") pursuant to the terms of the earnout provisions of the TestEquity

Merger Agreement.

The TestEquity Holdback Shares issued represented the maximum number of additional shares that could be issued under the TestEquity Merger Agreement, and no further shares are available for issuance, and no additional shares will be issued, in connection with the TestEquity Merger Agreement.

Refer to Note 8 – Earnout Derivative Liability for information about the earnout derivative liability related to the TestEquity Holdback Shares.

1 unchanged sentence

On the Merger Date, the Gexpro Services Merger was consummated pursuant to the Gexpro Services Merger Agreement.

In accordance with and under the terms of the Gexpro Services Merger Agreement, at the closing of the Gexpro Services Merger, DSG:

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

In accordance with and under the terms of the Gexpro Services Merger Agreement, in connection with the closing of the Gexpro Services Merger on the Merger Date, DSG:

(i) issued to the Gexpro Services Stockholder 7,000,000 shares of DSG common stock, (ii) on behalf of Gexpro Services, paid certain indebtedness of Gexpro Services and (iii) on behalf of Gexpro Services, paid certain specified transaction expenses of Gexpro Services.

The Gexpro Services Merger Agreement provides that an additional 1,000,000 shares of DSG common stock (the “Gexpro Services Holdback Shares”) may be issued to the Gexpro Services Stockholder or forfeited in accordance with two earnout provisions of the Gexpro Services Merger Agreement.

The amount of Gexpro Services Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of one or more of three certain additional acquisitions by Gexpro Services during the period beginning after December 29, 2021 and ending 90 days after the Merger Date.

If any Gexpro Services Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in Gexpro Services EBITDA (as defined in the Gexpro Services Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the Gexpro Services Merger Agreement.

As of April 1, 2022, approximately 538,000 Gexpro Services Holdback Shares were expected to be issued under the first earnout opportunity due to the consummation of the certain additional acquisitions which were completed prior to the Merger Date.

The fair value of the remaining 462,000 Gexpro Services Holdback Shares available under the second earnout opportunity are included in Earnout derivative liability in the Unaudited Condensed Consolidated Balance Sheets.

Final issuance of the Gexpro Services Holdback Shares under the second earnout opportunity is subject to certain terms and conditions as specified in the Gexpro Services Merger Agreement.

The Gexpro Services Merger Agreement provided that up to an additional 1,000,000 shares of DSG common stock would be potentially issuable to the Gexpro Services Stockholder in accordance with, and subject to the terms and conditions of, the earnout provisions of the Gexpro Services Merger Agreement.

On March 20, 2023, DSG issued 1,000,000 shares of DSG common stock to the Gexpro Services Stockholder (the “Gexpro Services Holdback Shares”) pursuant to the terms of the earnout provisions of the Gexpro Services Merger Agreement.

The Gexpro Services Holdback Shares issued represented the maximum number of additional shares that could be issued under the Gexpro Services Merger Agreement, and no further shares are available for issuance, and no additional shares will be issued, in connection with the Gexpro Services Merger Agreement.

As of April 1, 2022, approximately 538,000 of the Gexpro Services Holdback Shares had been expected to be issued under the first earnout opportunity in the Gexpro Services Merger Agreement based on certain earnout metrics related to the consummation of certain additional acquisitions which were completed prior to the Merger Date.

Under the Gexpro Services Merger Agreement, if any Gexpro Services Holdback Shares remained after the calculation of the first earnout opportunity, there was a second earnout opportunity under the Gexpro Services Merger Agreement based on certain earnout performance metrics.

On March 20, 2023, all 1,000,000 Gexpro Services Holdback Shares were issued under the earnout opportunities.

The incremental 462,000 Gexpro Services Holdback Shares that were issued in excess of the 538,000 Gexpro Services Holdback Shares that were originally expected to be issued had been remeasured at fair value immediately prior to and reclassified to equity at December 31, 2022.

Refer to Note 8 – Earnout Derivative Liability for information about the earnout derivative liability related to the Gexpro Services Holdback Shares.

Accounting for the Mergers

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

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

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

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

Nature of Operations

7 unchanged sentences

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

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

voting rights of the combined entity, and therefore, only DSG experienced a change in control.

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

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 for the three months ended March 31, 2023 and 2022 reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are included only in the unaudited condensed consolidated financial statements for the three months ended March 31, 2023 for activity subsequent to the April 1, 2022 Merger Date.

The unaudited condensed consolidated financial statements as of March 31, 2023 and December 31, 2022 reflect the financial position of TestEquity, Gexpro Services and DSG's legacy Lawson business on a consolidated basis.

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

1 unchanged sentence

However, quarterly financial statements for Gexpro Services are prepared on financial close dates that may differ from that of the Company.

The consolidated financial statement impact of the one day difference arising from the different period ends for the quarter ended September 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 March 31, 2023 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.

1 unchanged sentence

Accordingly, they do not contain all disclosures required by GAAP for complete consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the TestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc.

audited consolidated financial statements and accompanying notes included in the Company's Current Report on Form 8-K/A filed with the U.S.

Securities and Exchange Commission ("SEC") on June 15, 2022, and the Lawson Products, Inc.

audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2021.

These unaudited condensed consolidated financial statements should be read in conjunction with DSG's audited consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S.

Securities and Exchange Commission ("SEC") and the Lawson Products, Inc.

unaudited condensed consolidated financial statements and accompanying notes included in DSG’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.

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 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.

Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Note 2 – Summary of Significant Accounting Policies

Revenue Recognition — The majority of the Company’s revenue is generated through the sale of a broad range of specialized products and components, with revenue recognized upon transfer of control, title and risk of loss, which is generally upon shipment.

Vendor Managed Inventory ("VMI") service revenue represents less than 5.0 % of total revenue and is recognized as the services are performed.

The Company offers VMI services only in conjunction with product sales.

The Company does not bill product sales and services separately.

A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services.

A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed.

The Company includes shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.

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

The Company has adopted the practical expedient within ASC 340, Other Assets and Deferred Costs ("ASC 340") to recognize incremental costs to obtain a contract, primarily employee related costs, as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less.

The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease.

The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606, Revenue from Contracts with Customers ("ASC 606") from the associated lease component as the relevant criteria under ASC 842, Leases ("ASC 842") are met.

Cash Equivalents — The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents.

The carrying amount of the Company’s cash equivalents at September 30, 2022 and December 31, 2021 approximates fair value.

Allowance for Doubtful Accounts — The Company evaluates the collectability of accounts receivable based on a combination of factors.

In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount the Company reasonably believes will be collected.

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 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.

Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors.

As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence.

Property, Plant and Equipment — Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles.

The Company estimates useful lives of 10 to 40 years for buildings and improvements, the shorter of the useful life of the assets or term of the underlying leases for leasehold improvements, and 2 to 10 years for machinery and equipment, furniture and fixtures and vehicles.

Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method.

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

Amortization of financing and capital leases is included in depreciation expense.

When property, plant and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in the income from operations.

Rental Equipment — Rental equipment is stated at cost less accumulated depreciation and amortization.

Expense is computed primarily by the straight-line method over an estimated useful life of 3 to 7 years.

Upon sale or retirement of such assets, the related cost and accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet, and gains or losses are reflected in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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

When rental equipment is retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet and any gain or loss is included in the income from operations.

Cash Value of Life Insurance — The Company invests funds in life insurance policies for certain current and former employees.

The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset in the Unaudited Condensed Consolidated Balance Sheets.

The Company records these policies at their contractual value.

The change in the cash surrender value of the life insurance policies, which is recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), is the change in the policies' contractual values.

Deferred Compensation — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation.

The deferred compensation is recorded in an account balance, which is a bookkeeping entry made by the Company to measure the amount due to the participant.

The account balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that the participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds.

The Company adjusts the deferred compensation liability to equal the contractual value of the participants’ account balances.

These adjustments are the changes in contractual value of the individual plans and are recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period.

Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash.

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

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

Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired.

The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit.

The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units.

If the Company determines that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed.

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

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

If the carrying

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

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

Intangible assets are amortized over a weighted average of 8 to 15 year and 9 to 20 year estimated useful lives for trade names and customer relationships, respectively.

The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.

Impairment of Long-Lived Assets — The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable.

Recoverability is measured by a comparison of the assets carrying amount to their expected future undiscounted net cash flows.

If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value.

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

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

Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse.

A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e.

greater than 50% likely) that some or all of the deferred tax assets will not be realized.

The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income.

In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies.

The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs.

Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.

Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

Earnings from the Company's foreign subsidiaries are considered to be indefinitely reinvested.

A distribution of these non-U.S.

earnings in the form of dividends or otherwise would subject the Company to foreign withholding taxes and may subject the Company to U.S.

federal and state taxes.

The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits.

Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Income tax expense (benefit) in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Leases — Leases are categorized as either operating or financing leases at commencement of the lease.

For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement of the lease.

Operating leases consist of the Company headquarters, distribution and service centers, and Bolt branches.

Financing leases consist of equipment such as forklifts and copiers.

The value of the lease assets and liabilities are the present value of the total cash payments for each lease.

The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease.

The Company reviews each lease to determine if there is a more appropriate discount rate to apply.

Upon commencement of the lease, rent expense is recognized on a straight line basis for each operating lease.

Each financing lease ROU asset is amortized on a straight line basis over the lease period.

TestEquity and the Lawson Partsmaster business have equipment leasing programs for customers.

These leases are classified as operating leases.

The leased equipment is recognized in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheets and the leasing revenue is recognized on a straight line basis.

Earnings per Share — Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

Diluted earnings per share is computed using the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period.

Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding performance awards, stock options, market stock units and restricted stock awards into common stock.

The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method.

Contingently issuable shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent).

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

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

For the reverse acquisition period prior to April 1, 2022, the Company calculates the basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements by dividing the income of the accounting acquirer attributable to common shareholders in each of those periods by the accounting acquirer’s historical weighted-average number of common shares outstanding.

The Company calculates the weighted-average number of common shares outstanding (the denominator of the EPS calculation), including the equity interests issued by the legal acquirer to effect the reverse acquisition, as the number of common shares outstanding from the beginning of that period to the acquisition date computed on the basis of the weighted-average number of common shares of the accounting acquirer outstanding during the period multiplied by an exchange ratio derived from the shares exchanged at the Merger Date.

Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency.

All balance sheet am ounts are translated into U.S.

dollars using the exchange rates in effect at the applicable period end.

Components of income or loss are translated using the average exchange rate for each reporting period.

Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S.

dollars are reported as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets.

Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.

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

Treasury Stock — The Company repurchased 54,089 shares of its common stock in 2022 and no shares of its common stock in 2021 through its previously announced stock repurchase plan.

The Company 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 — ASC 280, Segment Reporting , establishes standards for reporting information about operating segments.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision-maker (“CODM”) is the Chief Executive Officer of DSG.

The CODM reviews the financial performance and the results of operations of the segments when making decisions about allocating resources and assessing performance of the Company.

The Company has determined it has four operating segments:

(i) Lawson, (ii) Gexpro Services, (iii) TestEquity and (iv) All Other.

The Company’s three reportable segments include (i) Lawson, (ii) Gexpro Services and (iii) TestEquity.

The Company’s CODM reviews the operating results of these reportable segments for the purpose of allocating resources and evaluating financial performance.

There are no intersegment revenues.

The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.

Please see Note 20 - Segment Information for further details.

Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Fair Value Measurements — The Company applies the guidance in ASC 820, Fair Value Measurements to account for financial assets and liabilities measured on a recurring basis.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The three levels of the fair value hierarchy are described below:

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

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

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

The carrying amount of accounts receivable, accounts payable, accrued expenses and other working capital balances are considered a reasonable estimate of their fair value due to the short-term maturity of these instruments.

The carrying amount of debt is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics.

The Company’s earnout derivative liability and debt are recorded at fair value on a recurring basis and were estimated using Level 3 inputs.

Earnout Derivative Liability — The Company recorded an earnout derivative liability for the future contingent equity shares related to the TestEquity Holdback Shares and the Gexpro Services Holdback Shares provisions within the Merger Agreements.

The contingently issuable shares are not indexed to Company common stock and, therefore, are accounted for as liability classified instruments in accordance with ASC 815-40 , Contracts in Entity’s Own Equity , as the events that determine the number of contingently issuable shares required to be released or issued, as the case may be, include events that are not solely indexed to the fair value of Company common stock.

The contingently issuable shares were initially measured at the Merger Date and are subsequently measured at each reporting date until settled, or when they meet the criteria for equity classification.

Changes in the fair value of the earnout derivative liability are recorded as a component of Change in fair value of earnout liability in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company reassesses the classification of these derivative liabilities for earnout arrangements each balance sheet date.

If the contingencies are resolved for the issuable shares, the earnout derivative liability is reclassified from the liability to equity as of the date of the event that caused the contingencies to be met.

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

If the earnout derivative liability is reclassified from a liability to equity, gains or losses recorded to account for the liability at fair value during the period that the contract was classified as a liability are not reversed.

The contingently issuable shares are included in the denominator of the basic earnings per share calculation as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent).

For diluted earnings per share, the contingently issuable shares are included in the denominator of the diluted earnings per share calculation as of the beginning of the interim period in which the conditions are satisfied and the earnout arrangements have been resolved.

See Note 16 - Earnings Per Share for further information.

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

Actual results could differ from these estimates.

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

Recent Accounting Pronouncements - Not Yet Adopted

There were no significant changes to the Company's accounting policies from those disclosed in DSG's Annual Report on Form 10-K for the year ended December 31, 2022.

See Note 2 of the 2022 consolidated financial statements included in DGS's Annual Report on Form 10-K for the year ended December 31, 2022 for further details of the Company's significant accounting policies.

Accounting Pronouncements - Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which revises the requirements for how an entity should measure credit losses on financial instruments.

The pronouncement is effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis.

The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.

The pronouncement was effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis.

The Company adopted this guidance on January 1, 2023.

The adoption had no impact on the Company's financial condition, results of operations or cash flows.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

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The pronouncement is effective in fiscal years beginning after December 15, 2022 and early adoption is permitted.

The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.

The Company adopted this guidance on January 1, 2023.

The adoption had no impact on the Company's financial condition, results of operations or cash flows.

Note 3 – Business Acquisitions

HIS Company, Inc.

- Purchase Agreement

On March 30, 2023, DSG entered into a Stock Purchase Agreement (the “Purchase Agreement”), with various parties for the acquisition by DSG, on the terms and subject to the conditions therein, of all of the issued and outstanding capital stock of HIS Company, Inc., a Texas corporation (“Hisco”, the "Hisco Transaction"), a distributor of specialty products serving industrial technology applications.

Hisco, an employee-owned company, operates in 38 locations across North America, including its Precision Converting facilities that provide value-added fabrication and its Adhesive Materials Group that provides an array of custom repackaging solutions.

Hisco offers customers a broad range of products, including adhesives, chemicals and tapes, as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags.

Hisco also offers vendor-managed inventory and RFID programs with specialized warehousing for chemical management, logistics services and cold storage.

DSG intends to combine the operations of TestEquity and Hisco to further expand the product and service offerings at TestEquity, as well as all of our operating businesses under DSG.

Contingent upon closing of the Hisco Transaction, DSG has agreed to pay $ 269.1 million at closing, with a potential additional earn-out payment of up to $ 12.6 million, subject to Hisco achieving certain performance targets.

DSG also agreed to pay $ 37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for twelve or more months after the closing of the Hisco Transaction.

The completion of the Hisco Transaction is subject to regulatory and customary closing conditions.

DSG intends to finance a portion of the purchase price through a combination of (i) the incurrence of additional indebtedness pursuant to DSG's Amended and Restated Credit Agreement dated April 1, 2022 by and among DSG, certain subsidiaries of DSG as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent;

and (ii) the issuance of additional shares of DSG common stock pursuant to a rights offering (the "Rights Offering") to existing holders of DSG common stock as of the record date therefor.

The Rights Offering is expected to raise an aggregate amount of approximately $ 100 million and will be conducted pursuant to DSG's effective registration statement on Form S-3.

The subscription rights will be transferable but will not be listed for trading on any stock exchange or market.

Luther King Capital Management and its affiliates currently own approximately 77 % of DSG’s outstanding stock and have indicated an intention to fully subscribe for their pro rata portion in the Rights Offering, as well as for their pro rata portion of any rights remaining unsubscribed at the completion of the subscription period.

Completion of Mergers

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 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.

Pursuant to the Merger Agreements, DSG issued an aggregate of 10.3 million shares of DSG common stock on April 1, 2022 to the former owners of TestEquity and Gexpro Services.

On March 20, 2023, an additional 1.7 million shares of DSG common stock were issued.

Refer to Note 1 – Nature of Operations and Basis of Presentation for further information regarding the Mergers.

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(in thousands, except share data) April 1, 2022

Number of DSG common shares exchanged 9,120,167

DSG closing price per common stock on March 31, 2022 $ 38.54

Number of DSG common shares 9,120,167

DSG common stock closing price per share on March 31, 2022 $ 38.54

Fair value of shares exchanged $ 351,491

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The allocation of consideration exchanged to the tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the Merger Date.

The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change.

Certain estimated

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.

Goodwill generated from the acquisition is no t deductible for tax purposes.

The Company will continue to obtain information necessary to finalize the fair values, which may differ materially from these preliminary estimates.

The final valuation will be completed within the one-year measurement period ending March 31, 2023, and any measurement period adjustments will be applied in the reporting period in which the adjustments are determined.

During the quarter ended September 30, 2022, the Company recorded measurement period adjustments that resulted in a $ 1.7 million net decrease to goodwill.

The measurement period adjustments were associated with adjustments to the fair value of certain property, plant and equipment assets, as well as changes in estimates related to leases.

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

(in thousands) Merger Date Measurement Period Adjustments Adjusted Total

The accounting for the Mergers was complete as of December 31, 2022.

Goodwill generated from the Mergers is no t deductible for tax purposes.

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

(in thousands) Final Purchase Price Allocation

Current assets $ 148,308

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Total consideration exchanged $ 353,401

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

The allocation of consideration exchanged to other intangible assets acquired was as follows:

(in thousands) Fair Value Estimated Life

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Total other intangible assets $ 119,060

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

Pro Forma Information

The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the Mergers and other acquisitions disclosed below occurred on January 1, 2021 for the 2022 acquisitions and January 1, 2020 for the 2021 acquisitions.

The unaudited pro forma information reflects adjustments including amortization on acquired intangible assets, interest expense, and the related tax effects.

The Company incurred transaction costs related to the Mergers of $ 1.2 million for the three months ended March 31, 2023 and $ 1.4 million for the three months ended March 31, 2022, which are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Unaudited Pro Forma Information

The unaudited pro forma information reflects adjustments including amortization on acquired intangible assets, interest expense, and the

related tax effects.

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

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

Three Months Ended March 31,

(in thousands) 2022

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Other Acquisitions

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.

Through the TestEquity and Gexpro Services operating companies, the Company acquired other businesses during the year ended December 31, 2022.

The consideration exchanged for the acquired businesses included various combinations of cash and sellers notes.

The acquisitions were accounted for under ASC 805, the acquisition method of accounting.

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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 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.

The final valuations will be completed within the respective 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 year ended December 31, 2022, TestEquity acquired Interworld Highway, LLC, National Test Equipment, and Instrumex, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc.

("Frontier").

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

(in thousands) Interworld Highway LLC Resolux Frontier National Test Equipment

Acquisition date April 29, 2022 January 3, 2022 March 31, 2022 June 1, 2022 Total

The accounting for the Interworld Highway, LLC, Resolux and Frontier acquisitions was complete as of December 31, 2022.

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

(in thousands) Interworld Highway, LLC Resolux Frontier National Test Equipment Instrumex

Acquisition date April 29, 2022 January 3, 2022 March 31, 2022 June 1, 2022 December 1, 2022 Total

Current assets $ 15,018 $ 10,210 $ 2,881 $ 2,187 $ 3,495 $ 33,791

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Accounts payable ( 8,856 ) ( 3,058 ) ( 778 ) ( 196 ) ( 1,305 ) ( 14,193 )

Current portion of long term debt — — — ( 2,073 ) — ( 2,073 )

Accrued expenses and other liabilities — ( 4,747 ) ( 1,462 ) ( 1,171 ) ( 153 ) ( 7,533 )

Lease obligation — ( 1,125 ) ( 9,313 ) — ( 10,438 )

Lease liabilities — ( 1,125 ) ( 9,313 ) — — ( 10,438 )

Goodwill 37,236 10,305 11,544 5,703 1,053 65,841

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

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.

Cash consideration $ 54,690 $ 30,755 $ 25,674 $ 6,023 $ 3,934 $ 121,076

Seller's notes — — — 1,169 — 1,169

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

Following the initial fair value measurement, the Company updated the purchase price allocations as follows:

• National Test Equipment was adjusted to reflect 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, with payments made annually beginning in 2023 and ending in 2025.

During the first quarter of 2023, a $ 1.0 million earn-out payment was made based on the achievement of certain milestones in 2022.

The fair value of the contingent consideration arrangement was classified within Level 3 and was determined using a probability-based scenario analysis approach.

As of March 31, 2022 and September 30, 2022, the fair value of the earn-out was $ 0.9 million and $ 1.6 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

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

("Omni"), National Engineered Fasteners ("NEF") and State Industrial Supply ("SIS").

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

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.

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)

Acquisition date June 8, 2021 November 1, 2021 December 31, 2021 July 31, 2021 Total

Current assets $ 2,259 $ 17,882 $ 3,541 $ 6,521 $ 30,203

Property, plant and equipment 600 589 125 — 1,314

Right of use assets — 1,774 799 — 2,573

Other intangible assets:

Customer relationships 2,530 5,007 4,800 2,621 14,958

Trade names 200 2,503 1,500 41 4,244

Other intangible assets 9 — 380 — 389

Other assets — 1,236 10 — 1,246

Accounts payable ( 50 ) ( 3,506 ) ( 1,464 ) ( 2,523 ) ( 7,543 )

Accrued expenses and other liabilities — ( 3,332 ) — ( 685 ) ( 4,017 )

Lease obligation — ( 1,774 ) ( 799 ) ( 2,573 )

Goodwill 953 — 3,010 7,245 11,208

Gain on bargain purchase — ( 1,363 ) — — ( 1,363 )

Total purchase consideration exchanged, net of cash acquired $ 6,501 $ 19,016 $ 11,902 $ 13,220 $ 50,639

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

A gain on bargain purchase related to the acquisition of NEF was recognized within Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the fourth quarter of 2021.

The gain of $ 1.4 million was calculated as the excess of net assets recognized over the consideration transferred.

The bargain purchase was primarily attributable to owners that were highly motivated to sell.

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

As of March 31, 2022 (the Frontier acquisition date), December 31, 2022 and March 31, 2023, the fair value of the earn-out was $ 0.9 million, $ 1.7 million and $ 0.7 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets.

Changes in the fair value of the earn-out 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 incurred transaction costs related to the other completed and potential acquisitions of $ 2.9 million for the three months ended March 31, 2023 and $ 0.8 million for the three months ended March 31, 2022.

As a result of acquisitions completed in 2022, the Company recorded tax deductible goodwill of $ 53.6 million in 2022 that may result in a tax benefit in future periods.

Other Acquisitions Pro Forma Information – The pro forma information for other acquisitions was included in the estimated unaudited pro forma consolidated financial information for DSG, which is presented above 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 third quarter and first nine 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 first quarter 2022.

The results of DSG's legacy Lawson business are included only subsequent to the April 1, 2022 Merger Date, and the results for other acquisitions are only included subsequent to their respective acquisition dates provided above.

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

Lawson Other Acquisitions Total Lawson Other Acquisitions Total

Revenue $ 126,693 $ 71,216 $ 197,909 $ — $ 2,803 $ 2,803

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

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

Lawson Other Acquisitions Total Lawson Other Acquisitions Total

Three Months Ended March 31, 2022

(in thousands) Lawson Other Acquisitions Total

Revenue $ — $ 7,645 $ 7,645

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ASC 606 requires an entity to present a contract liability in instances where the customer is entitled to a volume rebate based on purchases made during the period.

The Company is not usually subject to obligations for warranties, rebates, returns or refunds except in the case of rebates for select customers if pre-determined purchase thresholds are met as discussed for the TestEquity segment below.

The Company does not typically receive payment in advance of satisfying its obligations under the terms of its sales contracts with customers;

The Company is not usually subject to obligations for warranties, rebates, returns or refunds except in the case of rebates for select customers if predetermined purchase thresholds are met as discussed for the TestEquity segment below.

The Company does not typically receive payment in advance of satisfying its obligations under the terms of its

sales contracts with customers;

therefore, liabilities related to such payment are not significant to the Company.

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Since certain obligations pursuant to the VMI service agreement have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided and the related performance obligations have been satisfied.

Gexpro Services Segment

Gexpro Services’ contracts with customers generally represent a single performance obligation to sell its products.

Revenue from sales of Gexpro Services’ products are recognized upon transfer of control to the customer, which is typically when the product has been shipped from its distribution facilities.

The transaction price is the amount of consideration to which Gexpro Services expects to be entitled in exchange for transferring goods to the customer.

Revenue is recorded based on the transaction price, which includes fixed consideration and an estimate of variable consideration such as, early payment/volume discounts and rebates.

The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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

Sales of products are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.

Payment terms on invoiced amounts range from 10 to 120 days.

In instances where the timing of revenue recognition differs from the timing of the right to invoice, the Company has determined that a significant financing component does not exist.

TestEquity Segment

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

Revenues from contracts with customers reflect the transaction prices for contracts reduced by variable consideration.

Revenue from contracts with customers reflect the transaction prices for contracts reduced by variable consideration.

TestEquity provides a rebate to select customers if pre-determined purchase thresholds are met.

1 unchanged sentence

Variable consideration is estimated using the expected-value method considering all reasonably available information, including TestEquity’s historical experience and current expectations, and is reflected in the transaction price when sales are recorded.

Sales returns are generally accepted by TestEquity, however, sales returns are not material to the Company’s operations.

Sales returns are generally accepted by TestEquity;

however, sales returns are not material to the Company’s operations.

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

2 unchanged sentences

TestEquity generally invoices customers as goods are shipped.

Fees are typically due and payable 30 days after date of shipment.

Fees are typically due and payable 30 days after the date of shipment.

Generally, customers gain control of the goods upon providing the product to the carrier, or when services are completed.

1 unchanged sentence

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

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

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

Gexpro Services Segment

Gexpro Services’ contracts with customers generally represent a single performance obligation to sell its products.

Revenue from sales of Gexpro Services’ products is recognized upon transfer of control to the customer, which is typically when the product has been shipped from its distribution facilities.

The transaction price is the amount of consideration to which Gexpro Services expects to be entitled in exchange for transferring goods to the customer.

Revenue is recorded based on the transaction price, which includes fixed consideration and an estimate of variable consideration such as, early payment/volume discounts and rebates.

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

Sales of products are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.

Payment terms on invoiced amounts range from 10 to 120 days.

In instances where the timing of revenue recognition differs from the timing of the right to invoice, the Company has determined that a significant financing component does not exist.

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

Three Months Ended March 31,

(in thousands) 2023 2022

6 unchanged sentences

Total revenue $ 348,270 $ 154,085

Rental Revenues

TestEquity rents new and used electronic test and measurement equipment, to customers in many industries.

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 Income (Loss) .

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

The TestEquity rental program generated $ 4.2 million and $ 3.3 million of revenue for the three months ended September 30, 2022 and 2021, respectively and $ 11.4 million and $ 9.1 million of revenue for the nine months ended September 30, 2022 and 2021, respectively.

The unearned rental revenue related to customer prepayments on equipment leases

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.

Rental Revenue

TestEquity rents new and used electronic test and measurement equipment to customers in multiple industries.

These leases are classified as operating leases under ASC 842.

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

The unearned rental revenue related to customer prepayments on equipment leases of $ 0.3 million at March 31, 2023 and $ 0.3 million at December 31, 2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet and is expected to be earned in its entirety during the next twelve months.

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

These leases are classified as operating leases.

These leases are classified as operating leases under ASC 842.

The leased machines are included in Rental equipment, net, in the Unaudited Condensed Consolidated Balance Sheet, and the leasing revenue is recognized on a straight-line basis.

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

The unearned rental revenu e, which was included as a component of Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet, was nominal at March 31, 2023 and is expected to be earned during the next twelve months.

Rental revenue from operating leases:

Three Months Ended March 31,

(in thousands) 2023 2022

Revenue from operating leases $ 6,100 $ 3,541

Note 5 – Supplemental Financial Statement Information

Inventories, net

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

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

(in thousands) March 31, 2023 December 31, 2022

Inventories, gross $ 282,837 $ 275,072

4 unchanged sentences

Balance at December 31, 2022 $ ( 10,698 )

Additions charged to expense ( 3,814 )

Provision charged to expense (net) ( 2,198 )

Write-offs 40

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

Note 6 - Property, Plant and Equipment

Balance at March 31, 2023 $ ( 12,856 )

Property, Plant and Equipment, net

Components of property, plant and equipment were as follows:

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

(in thousands) March 31, 2023 December 31, 2022

Land $ 9,595 $ 9,578

9 unchanged sentences

(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

Depreciation expense for property, plant and equipment was $ 3.5 million and $ 0.6 million for the first quarter of 2023 and 2022, respectively.

Amortization expense for capitalized software was $ 0.7 million and $ 0.2 million for the first quarter of 2023 and 2022, respectively.

Rental Equipment, net

Rental equipment, net consisted of the following:

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

(in thousands) March 31, 2023 December 31, 2022

Rental equipment $ 63,546 $ 63,184

1 unchanged sentence

Rental equipment, net $ 27,168 $ 27,139

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.

Depreciation expense included in cost of sales for rental equipment was $ 2.3 million and $ 1.7 million for the first quarter of 2023 and 2022, respectively.

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

Note 8 - Goodwill

Other Liabilities

Other liabilities consisted of the following:

(in thousand) March 31, 2023 December 31, 2022

Security bonus plan $ 9,769 $ 9,651

Deferred compensation 10,321 9,962

Other 4,322 4,036

Total other liabilities $ 24,412 $ 23,649

Note 6 – Goodwill and Intangible Assets

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

1 unchanged sentence

Balance at December 31, 2022 $ 155,773 $ 114,104 $ 55,421 $ 22,750 $ 348,048

Acquisitions (1)

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

Impact of foreign exchange rates 11 — 94 59 164

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

Balance at March 31, 2023 $ 155,784 $ 114,104 $ 55,515 $ 22,809 $ 348,212

Intangible Assets

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

4 unchanged sentences

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

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 for definite-lived intangible assets was $ 9.2 million for the three months ended March 31, 2023 and $ 5.2 million for the three months ended March 31, 2022.

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 2023 and each of the next five years are as follows:

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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 nine months ended September 30, 2022 and 2021 were as follows (in thousands):

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

The expenses generated by leasing activity for the three months ended March 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended March 31,

Lease Type Classification 2023 2022

6 unchanged sentences

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

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

The value of net assets and liabilities related to our operating and finance leases as of March 31, 2023 and December 31, 2022 was as follows (in thousands):

Lease Type March 31, 2023 December 31, 2022

Total ROU operating lease assets (1)

2 unchanged sentences

Total lease assets $ 48,159 $ 48,274

Total current operating lease obligation

Total current operating lease liabilities

$ 10,159 $ 9,480

Total current financing lease obligation

Total current lease obligations $ 9,994 $ 4,641

Total long term operating lease obligation

Total current financing lease liabilities

Total current lease liabilities $ 10,744 $ 9,964

Total long term operating lease liabilities

$ 38,014 $ 38,898

Total long term financing lease obligation

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

(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):

Total long term financing lease liabilities

Total long term lease liabilities $ 39,061 $ 39,828

(1) Operating lease assets are recorded net of accumulated amortization of $ 13.6 million as of March 31, 2023 a nd $ 10.8 million as of December 31, 2022

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

The value of lease liabilities related to our operating and finance leases as of March 31, 2023 was as follows (in thousands):

Maturity Date of Lease Liabilities Operating Leases Financing Leases Total

8 unchanged sentences

Present value of lease liabilities $ 48,173 $ 1,632 $ 49,805

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

The weighted average lease terms and interest rates of leases held as of March 31, 2023 were as follows:

Lease Type Weighted Average Term in Years Weighted Average Interest Rate

1 unchanged sentence

Financing Leases 3.4 6.9 %

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

Cash Flow Source Classification Amount

The cash outflows of leasing activity for the three months ended March 31, 2023 were as follows (in thousands):

Three Months Ended March 31,

Cash Flow Source Classification 2023 2022

Operating cash flows from operating leases Operating activities $ ( 3,524 ) $ ( 1,797 )

1 unchanged sentence

Financing cash flows from financing leases Financing activities ( 123 ) ( 73 )

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

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

Note 8 – Earnout Derivative Liability

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 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.

The Company's earnout derivative liability is classified as a Level 3 instrument and is measured at fair value on a recurring basis.

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

The aggregate of 1,162,000 shares was comprised of 700,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the TestEquity Equityholder and 462,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the Gexpro Services Stockholder, in each case as of the Merger Date.

The additional 538,000 shares that were potentially issuable as of the Merger Date under the earnouts were not recorded as an earnout derivative liability as the acquisition contingency for these shares was determined to have been met at the Merger Date.

The Company's earnout derivative liability was classified as a Level 3 instrument and was measured at fair value on a recurring basis.

The fair value of the earnout derivative liability was measured using the Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis for the year ended December 31, 2022.

Inputs to that model include the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock.

The significant unobservable inputs used in the fair value measurement of the earnout derivative liability are the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods.

Inputs to that model included the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock.

The significant unobservable inputs used in the fair value measurement of the earnout derivative liability were the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods.

Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

The estimated aggregate fair value of the earnout derivative liability recorded on the Merger Date was $ 43.9 million, with an offsetting entry to additional paid-in capital.

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.

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.

The change in the fair value of the earnout derivative liability was as follows:

The estimated aggregate fair value of the earnout derivative liability recorded on the April 1, 2022 Merger Date was $ 43.9 million, with an offsetting entry to additional paid-in capital.

As of April 29, 2022 and December 31, 2022, 700,000 and 462,000 of the 1,162,000 shares, respectively, were reclassified to equity, as the contingencies had been determined to have been met.

Immediately prior to the reclassifications, the respective shares were remeasured to fair value.

For the year ended December 31, 2022, the Company recorded income of $ 0.3 million as a component of Change in fair value of earnout liability in the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) due to changes in the fair value of the earnout derivative liability.

The change in the fair value of the earnout derivative liability for the year ended December 31, 2022 was as follows:

(in thousands) Amount

3 unchanged sentences

Reclassifications to equity at fair value ( 43,624 )

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) September 30, 2022 December 31, 2021

Accrued stock-based compensation $ 2,060 $ —

Accrued compensation 20,772 5,997

Accrued and withheld taxes, other than income taxes 6,690 880

Accrued income taxes 319 4,170

Accrued customer rebates 4,290 2,657

Accrued severance 977 —

Accrued interest 4,553 1,515

Deferred revenue 1,120 485

Accrued health benefits 1,282 59

Other 16,600 7,363

Total accrued expenses and other current liabilities $ 58,663 $ 23,126

Balance at December 31, 2022 $ —

On March 20, 2023, all of the 1.7 million shares of DSG common stock stock available to be issued under the earnout provisions within the Merger Agreements were issued in accordance with the two earnout provisions within the Merger Agreements.

As the remaining additional shares had been reclassified to equity as of December 31, 2022, there was no change in fair value for the first quarter of 2023.

Note 9 – Debt

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

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

(in thousands) March 31, 2023 December 31, 2022

Senior secured revolving credit facility $ 128,600 $ 122,000

2 unchanged sentences

Other revolving line of credit 1,094 1,352

Previous revolving credit facilities — 38,707

Previous term loans — 190,337

Total debt 415,944 417,102

2 unchanged sentences

Total long-term debt $ 395,215 $ 395,825

Amended and Restated Credit Agreement - April 1, 2022

Amended and Restated Credit Agreement

On April 1, 2022 (the "Closing Date"), DSG and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among DSG, certain subsidiaries of DSG as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.

2 unchanged sentences

In addition, the Amended and Restated Credit Agreement permits the Company to increase the commitments under the Amended and Restated Credit Agreement from time to time by up to $ 200 million in the aggregate, subject to, among other things, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the Amended and Restated Credit Agreement.

The revolving credit facility is available to be drawn in U.S.

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

On April 1, 2022, 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.

A $ 2.8 million loss on the extinguishment of debt for remaining unamortized deferred financing costs associated with the previous indebtedness was recorded in the second quarter of 2022 in connection with the payoff.

The extinguishment is recorded in Loss on extinguishment of debt in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Amended and Restated Credit Agreement requires that the proceeds of any revolving credit facility loans be used for working capital and general corporate purposes (including, without limitation, permitted acquisitions), and requires that the proceeds of any delayed draw term loan facility be used solely to finance the payment of consideration for (i) the potential acquisition by TestEquity of a certain business that had been previously identified to DSG as a potential acquisition candidate by TestEquity prior to the date of the TestEquity Merger Agreement and (ii) other acquisitions permitted under the Amended and Restated Credit Agreement, and for any fees, costs and expenses incurred in connection therewith.

On April 29, 2022, 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 %.

Each of the loans under the Amended and Restated Credit Agreement mature on April 1, 2027.

Net of outstanding letters of credit, there w as $ 69.8 million of borrowi ng availability under the revolving credit facility as of March 31, 2023.

The weighted average interest rate from January 1, 2023 through March 31, 2023 was 7.1 %.

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.

The Amended and Restated Credit Agreement further provides that the additional margin for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall be 1.5 % per annum for Alternate Base Rate or Canadian Prime Rate loans and 2.5 % per annum for all other loans.

Certain closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees are payable to the lenders and the agents under the Amended and Restated Credit Agreement, including a commitment fee on the daily unused amount of the revolving credit facility that will accrue at a rate ranging from 0.15 % to 0.35 % per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement further provides that such commitment fee for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall accrue at a rate of 0.3 % per annum.

In addition, the Amended and Restated Credit Agreement provides that the delayed draw term loan facility shall accrue a ticking fee at a rate ranging from 0.15 % to 0.35 % per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement, and that such ticking fee shall be payable during the period from the Closing Date to the date on which the lenders’ delayed draw term loan facility commitments terminate.

The Amended and Restated Credit Agreement further provides that the ticking fee for the period from the Closing Date until the Company’s delivery of its financial statements and compliance certificate for the first full quarter after the Closing Date shall accrue at a rate of 0.3 % per annum.

The fees outlined above are reported as interest expense and vary depending on the total net leverage ratio as defined in the Amended and Restated Credit Agreement.

Fees from the Closing Date through September 30, 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 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.

The Company is required to repay principal on the term loans each quarter in the following amounts (subject to potential adjustment):

(i) $ 3,125,000 , in the case of the initial term loan facility, and (ii) an amount equal to 1.25 % of the funded delayed draw term loan facility, in the case of the delayed draw term loan facility.

The Company is also required to prepay the term loans with the net cash proceeds from any disposition of certain assets (subject to reinvestment rights) or from the incurrence of any unpermitted debt.

The Company may borrow, repay and reborrow the revolving loans until April 1, 2027, prepay any of the term loans, and terminate any of the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions and the reimbursement of certain lender costs in the case of prepayments of certain types of loans.

Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations of the Company and its U.S.

subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the Company and certain of the Company’s U.S.

subsidiaries and the obligations of each of the Company’s Canadian subsidiaries under the Amended and Restated Credit Agreement are guaranteed by the Company and certain of its U.S.

and Canadian subsidiaries.

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

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 affirmative and financial covenants as of September 30, 2022 .

The Amended and Restated Credit Agreement contains various events of default (subject to exceptions, thresholds and grace periods as set forth in the Amended and Restated Credit Agreement).

Under certain circumstances, a default interest rate will apply on all obligations at a rate equal to 2.0 % per annum above the applicable interest rate.

Previous Credit Agreements

Gexpro Services - January 3, 2022 Gexpro Services Credit Agreement

On January 3, 2022, Gexpro Services entered into a credit agreement ("2022 Gexpro Services Credit Agreement") with a financial institution under which Gexpro Services obtained an initial $ 137 million term loan ("2022 Gexpro Services Term Loan"), a $ 25 million revolving line of credit ("2022 Gexpro Services Revolver") and a delayed $ 83 million term loan ("2022 Gexpro Services Delayed Term Loan"), together the "2022 Gexpro Services Facilities".

The proceeds of the 2022 Gexpro Services Term Loan and 2022 Gexpro Services Delayed Term Loan were used to fund the Resolux acquisition, repay all borrowings under the 2020 Gexpro Services Credit Agreements (as defined below) and seller’s promissory note from SIS acquisition (refer to Note 3 - Business Acquisitions for further details of these acquisitions).

In connection with the 2022 Gexpro 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") under which Gexpro Services obtained a $ 60 million term loan ("2020 Gexpro Services Term Loan").

Also on February 24, 2020, Gexpro Services entered into a credit agreement ("2020 Gexpro Services Revolver Credit Agreement" and together with the 2020 Gexpro Services Term Loan Credit Agreement, "2020 Gexpro Services Credit Agreements") under which Gexpro Services obtained a $ 15 million revolving line of credit ("2020 Gexpro Services Revolver").

Availability of the 2020 Gexpro Services Revolver was reduced by issued and outstanding letters of credit, which were limited to $ 38.5 million.

There were $ 0.7 million outstanding letters of credit as of December 31, 2021 and $ 37.7 million outstanding on the 2020 Gexpro Services Revolver.

A loss on debt extinguishment of $ 0.6 million was recorded on January 3, 2022 in connection with the January 3, 2022 Gexpro Services Credit Agreements.

TestEquity - 2017 TestEquity Credit Agreement

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

revolving line of credit ("2017 TestEquity Revolver").

Availability of the 2017 TestEquity Revolver was reduced by issued and outstanding letters of credit, which were limited to $ 2.0 million.

There were no outstanding letters of credit as of December 31, 2021 and $ 1.0 million outstanding on the revolving line of credit.

A loss on debt extinguishment of $ 0.2 million was recorded on April 1, 2022 in connection with the April 1, 2022 Amended and Restated Credit Agreement executed in connection with the consummation of the Mergers .

As of March 31, 2023, deferred financing costs net of accumulated amortization were $ 7.5 million of which $ 4.6 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 $ 2.9 million are included in Other assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance Sheets.

The Amended and Restated Credit Agreement contains various covenants, including financial maintenance covenants requiring the Company to maintain compliance with a consolidated minimum interest coverage ratio and a maximum total net leverage ratio, each determined in accordance with the terms of the Amended and Restated Credit Agreement.

The Company was in compliance with all financial covenants set forth in the Amended and Restated Credit Agreement as of March 31, 2023.

Note 10 – Stock-Based Compensation

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.

The Company recorded stock-based compensation expense of $ 2.2 million and $ 0.0 million for the three months ended March 31, 2023 and March 31, 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

The Company's Amended and Restated 2009 Equity Compensation Plan (“Equity Plan”) provides for the grant of nonqualified and incentive stock options, stock awards and stock units to officers and employees of the Company.

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

Non-employee directors are limited to grants of no more than 20,000 shares of common stock in any calendar year and other than non-employee directors are limited to grants of no more than 125,000 shares of common stock in any calendar year.

The Equity Plan is administered by the Compensation Committee of the Board of Directors, or its designee, which as administrator of the plan, has the authority to select plan participants, grant awards, and determine the terms and conditions of the awards.

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

The SPR Plan is administered by the Compensation Committee of the Board of Directors.

Stock Performance Rights

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

Expense, equal to the fair market value of the SPR at the date of grant and remeasured each reporting period, is recorded ratably over the vesting period.

Compensation expense is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The outstanding SPRs were granted with approximately a seven year life and vest over one to three years beginning on the first anniversary of the date of the grant.

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

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

A stock-based compensation liability of $ 4.5 million a s of March 31, 2023 and $ 3.3 million as of December 31, 2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

Restricted Stock Awards

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 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 Company common stock.

The value of the MSUs is determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the Company common stock over the measurement period.

For the three months ended March 31, 2023, the Company issued 10,000 Restricted stock awards ("RSAs") that vest over five years from the grant date with a grant date fair value of $ 0.4 million.

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

The participants have no voting or dividend rights with the RSAs.

The RSAs 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.

Stock Options

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.

For the three months ended March 31, 2023, the Company issued approximately 606,000 stock options to key employees that vest over five years from the grant date.

The fair value was determined using a Black-Scholes valuation model with a grant date fair value of $ 8.3 million .

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Upon vesting, stock options are recognized as a component of equity.

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

Unrecognized compensation related to stock options as of March 31, 2023 was $ 9.8 million, which is expected to be recognized over a weighted-average period of 2.5 years.

Activity related to the Company’s stock options during the three months ended March 31, 2023 was as follows:

Number of Stock Options Weighted Average Exercise Price

Outstanding on December 31, 2022 288,000 $ 77.59

Granted 605,821 72.74

Outstanding on March 31, 2023 893,821 74.30

Exercisable on March 31, 2023 40,000 27.01

The weighted average fair value assumptions used in the Black-Scholes model for the stock options issued during the three months ended March 31, 2023 were as follows:

Expected volatility 45.23 %

Risk-free rate of return 3.6 %

Expected term (in years) 6.2 years

Expected annual dividend $ 0

The expected volatility was based on the historic volatility of the Company's stock price commensurate with the expected life of the stock options.

The risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the stock options.

The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method allowed by the SEC, which approximates our historical experience.

The estimated annual dividend was based on the recent dividend payout trend.

Note 11 – 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.

Under an existing stock repurchase program authorized by the Board of Directors, the Company may repurchase its common stock from time to time in open market transactio ns, privately negotiated transactions or by other methods.

No shares were repurchased during the three months ended March 31, 2023 or 2022 under the Company's stock repurchase plan.

T he remaining availability for stock repurchases under the program was $ 7.6 million at March 31, 2023.

Note 12 – Earnings Per Share

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

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

Three Months Ended March 31,

(in thousands, except share and per share data) 2023 2022

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Note 13 – Income Taxes

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 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.

The Company recorded income tax expense of $ 2.1 million , a 26.3 % effective tax rate for the three months ended March 31, 2023 .

Income tax expense of $ 1.0 million , a 27.4 % effective tax rate was recorded for the three months ended March 31, 2022 .

The effective tax rate for the three months ended March 31, 2023 was higher than the U.S.

statutory rate primarily due to state taxes, foreign operations, and other permanent items.

The effective tax rate for the three months ended March 31, 2022 was higher than the U.S.

statutory rate primarily due to state taxes, transaction costs, and other permanent items.

Relative to the U.S.

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.

statutory rate, the effective tax rate for the three months ended March 31, 2023 was impacted by state taxes, foreign operations, and other permanent items.

The Company and its subsidiaries are subject to U.S.

federal income tax, as well as income tax of multiple state and foreign jurisdictions.

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

As of March 31, 2023, the Company is subject to U.S.

federal income tax examinations for the years 2019 through 2021 and income tax examinations from various other jurisdictions for the years 2015 through 2021.

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Note 14 – Commitments and Contingencies

Shareholder lawsuits

Merger Litigation

In February 2022, three purported DSG stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of DSG (collectively, the “Books and Records Demands”).

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John Bryan King et al., Case No.

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

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

The Derivative Action names as defendants J.

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from the Derivative Action without prejudice.

The defendants filed motions to dismiss the Derivative Action, along with related supporting briefing materials, with the Delaware Chancery Court, and the plaintiffs filed briefing materials opposing those motions to dismiss.

The Delaware Chancery Court has scheduled a hearing to be held on September 13, 2023, regarding the defendants’ motions to dismiss.

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

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

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

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.

At this time, DSG is unable to predict the ultimate outcome of the Derivative Action or, if the outcome is adverse, to reasonably estimate an amount or range of reasonably possible loss, if any, associated with the Derivative Action.

Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for these matters.

No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Mergers.

Cyber Incident Litigation

On February 10, 2022, DSG disclosed that its computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”).

On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG entitled Lardone Davis, on behalf of himself and all others similarly situated v.

Lawson Products, Inc., Case No.

1:23-cv-02118, in the United States District Court for the Northern District of Illinois, Eastern Division.

The plaintiff in this case, who purports to represent the class of individuals harmed by alleged actions and/or omissions by DSG in connection with the Cyber Incident, asserts a variety of common law and statutory claims seeking monetary damages, injunctive relief and other related relief related to the potential unauthorized access by third parties to personal identifiable information and protected health information.

DSG disagrees with and intends to vigorously defend against the Cyber Incident Suit.

The Cyber Incident Suit could result in additional costs and losses to DSG, although, at this time, DSG is unable to reasonably estimate the amount or range of reasonably possible loss, if any, that might result from adverse judgments, settlements, fines, penalties or other resolution of these proceedings based on the early stage of this proceeding, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues.

Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for the Cyber Incident Suit.

No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Cyber Incident.

Environmental Matter

In 2012, it was determined a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership.

In 2012, it was determined that a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership.

The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM”) voluntary cleanup program.

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

At March 31, 2023 the Company had less than $ 0.1 million accrued for potential monitoring costs included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets.

The costs for future monitoring are not significant and have been fully accrued.

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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.

As of March 31, 2023, we had contractual commitments to purchase approximately $ 174 million of product from our suppliers and contractors which is expected to be paid in the next twelve months.

Note 15 – Related Party Transactions

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During the first three months of 2022, expense of $ 0.5 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss), reflecting expenses accrued under these management agreements from January 1, 2022 through the April 1, 2022 Merger Date.

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

As of April 1, 2022, the prior obligation of $ 5.3 million was effectively settled and considered to be a deemed equity contribution by LKCM recorded to additional paid in capital.

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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.

As of March 31, 2023 expense of $ 0.1 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss), reflecting expenses accrued for these consulting services.

TestEquity and Gexpro Services Mergers

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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).

Merger Date, Mr.

As of the Merger Date, Mr.

King was a director of the TestEquity Equityholder.

In addition, as of the Merger Date, Mark F.

Moon (a member of the DSG board of directors) was a director of, and held a direct or indirect equity interest in, the TestEquity Equityholder.

member of the DSG board of directors) was a director of, and held a direct or indirect equity interest in, the TestEquity Equityholder.

Immediately prior to the Mergers, entities affiliated with LKCM and Mr.

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Immediately prior to the Mergers, entities affiliated with LKCM and Mr.

King owned approximately 48 % of the shares of DSG common then stock outstanding.

As a result of and after the consummation of the Mergers, entities affiliated with LKCM and J.

Bryan King (the Chairman of the DSG board of directors) owned in the aggregate approximately 14,640,000 shares of DSG common stock as of the Merger Date, which shares represented approximately 75 % of the shares of DSG common stock then outstanding after giving effect to the issuance of shares as of the Merger Date in connection with the consummation of the Mergers.

Such aggregate share amount does not include any of the up to 700,000 additional shares of DSG common stock or any of the up to 1,000,000 additional shares of DSG common stock potentially issuable to the TestEquity Equityholder and the Gexpro Services Stockholder, respectively, in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement, respectively, summarized in Note 1 - Nature of Operations and Basis of Presentation.

King owned approximately 48 % of the shares of DSG common stock then outstanding.

As a result of and after the consummation of the Mergers, the issuance of 10.3 million shares at the closing on the Merger Date and the issuance of the additional 1.7 million shares in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement on March 20, 2023, entities affiliated with LKCM and J.

Bryan King (the Chairman of the DSG board of directors) owned in the aggregate approximately 16.3 million shares of DSG common stock representing approximately 77.4 % of the outstanding shares of DSG common stock as of March 31, 2023.

Note 16 – Segment Information

As a result of the Mergers described in Note 1 - Nature of Operations and Basis of Presentation, the Company evaluated its operational, reporting and management structures and identified three reportable segments based on the nature of the products and services and type of customer for those products and services.

Based on operational, reporting and management structures, the Company has identified three reportable segments based on the nature of the products and services and type of customer for those products and services.

A description of our reportable segments is as follows:

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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.

In addition to these three reportable segments, the Company also identified an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the inconsequential results of the Bolt Supply House ("Bolt") non-reportable segment.

Revenues within the All Other category represent the results of Bolt.

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

The Company also has an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and includes the results of the Bolt Supply House ("Bolt") non-reportable segment.

Revenue within the All Other category represents the results of Bolt.

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

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

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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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

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Operating income (loss)

$ 5,352 $ — $ 2,792 $ —

TestEquity 26 ( 604 )

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(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.

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.

(2) Includes the operating results of All Other only subsequent to the Merger Date of April 1, 2022 and not All Other operating results prior to the Mergers.

Note 17 – Subsequent Event

On May 8, 2023, the Company filed a Current Report on Form 8-K, providing (i) audited consolidated financial statements of Hisco for the year ended October 31, 2022 and (ii) unaudited pro forma condensed combined financial information to give effect to the Mergers and the Hisco Transaction as of the periods shown in the financial information and subject to the assumptions and adjustments described in the accompanying notes.

On May 9, 2023, the Company commenced a Rights Offering of transferable subscription rights (“Subscription Rights”) to holders of DSG common stock as of the close of business on May 1, 2023, for an aggregate Rights Offering value of up to $ 100 million.

The Rights Offering is being conducted pursuant to a prospectus supplement dated on May 9, 2023.

The Rights Offering will expire at 5:00pm Eastern Time on May 30, 2023 (the “Expiration Date”), unless extended at the Company’s sole discretion.

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