What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-03 · 192 added, 404 removed, 208 unchanged (74% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(conducting business as Gexpro Services) audited consolidated financial statements and accompanying notes included in the Company's Form 8-K/A as filed on June 15, 2022, and the Lawson Products, Inc.

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

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

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

References to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc.

and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

Organization and Business Combination

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

("DSG"), a Delaware corporation formerly known as Lawson Products, Inc., changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG is a specialty distribution company structure 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 in the Mergers for the purpose of creating a specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management.

The DSG leadership team provides oversight to the separate leadership teams of each of the operating companies.

Organization and Structure

Distribution Solutions Group, Inc.

("DSG"), is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair and operations ("MRO"), the original equipment manufacturer ("OEM") and the industrial technologies markets.

The Mergers that were consummated in April 2022 resulted in the combination of Lawson, TestEquity and Gexpro Services.

For a description of the business combination, see Note 1 – Nature of Operations and Basis of Presentation within Item 1.

Financial Statements.

We manage and report our operating results through three reportable segments:

Lawson, TestEquity and Gexpro Services.

A summary of our segments is presented below.

For additional details about our segments, see Note 16 – Segment Information within Item 1.

Financial Statements.

Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and government MRO market.

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

Gexpro Services is a global supply chain solutions provider, specializing in developing and implementing vendor managed inventory ("VMI") and kitting programs to high-specification manufacturing customers.

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

DSG Vision and Strategic Focus

The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in 2022 for the purpose of creating a specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management teams.

The DSG leadership team provides oversight to these separate leadership teams.

This structure enables the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies.

The combined company has the ability to utilize its combined financial resources to accelerate a strategy of expansion through both business acquisitions and organic growth.

Refer to the section entitled "Organization" in Note 1 - Nature of Operations and Basis of Presentation in Part 1.

Financial Statements, which section is incorporated herein by reference, for a description of the TestEquity Merger and Gexpro Services Merger consummated on April 1, 2022.

Our Three Principal Operating Companies

Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations ("MRO") marketplace.

Lawson distributes MRO products to its customers through a network of sales representatives throughout the U.S.

Background and Operations - Lawson delivers quality products to customers and offers them extensive product knowledge, product application expertise and Vendor Managed Inventory ("VMI") services.

Lawson competes for business primarily by offering a value-added service approach in which highly trained sales representatives manage the product inventory for customers.

The VMI model makes it less likely that customers will run out of a product while optimizing their inventory levels.

Lawson ships products to its customers in all 50 states, Puerto Rico, Canada, Mexico and the Caribbean.

Vision/Strategy - Lawson's vision is to be its customers' first choice for maintenance, repair and operational solutions that improve their operating performance.

Lawson plans to achieve its vision by working closely with customers to maintain and enhance their operations by providing them with quality products, superior service and innovative solutions and to grow both organically and through acquisitions.

Sales Drivers - The North American MRO market is highly fragmented.

Organic Growth Strategy

We intend to grow our businesses organically by exploring growth opportunities that provide different channels to reach customers, increase revenue and generate positive results.

We plan to utilize our company structure to grow organic revenue through collaborative selling across our customer bases and expanding the digital capabilities across our platform.

Acquisition Strategy

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

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”), a leading distributor of specialty products serving industrial technology applications.

The transaction is expected to close in the second quarter of 2023, subject to regulatory and customary closing conditions.

For more information about the Hisco acquisition, including DSG’s anticipated financing of a portion of the purchase price for the transaction, refer to Note 3 – Business Acquisitions within Item 1.

Financial Statements.

Sales Drivers

DSG believes that the Purchasing Managers Index ("PMI") published by the Institute for Supply Management is an indicative measure of the relative strength of the economic environment of the industry in which it operates.

The PMI is a composite index of economic activity in the U.S.

manufacturing sector.

DSG believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

The average monthly PMI wa s 47.1 in the three months ended March 31, 2023 compared to 57.8 in the three months ended March 31, 2022 .

Lawson Sales Drivers

The North American MRO market is highly fragmented.

Lawson competes for business with several national distributors as well as a large number of regional and local distributors.

The MRO business is impacted by the overall strength of the manufacturing sector of the U.S.

economy which has been affected by the COVID-19 pandemic.

that the Purchasing Managers Index ("PMI") published by the Institute for Supply Management is an indicative measure of the relative strength of the economic environment of the industry in which Lawson operates.

The PMI is a composite index of economic activity in the United States manufacturing sector.

DSG believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

The average monthly PMI wa s 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021.

Lawson's sales are also influenced by the number of sales representatives and their productivity.

Lawson's revenue is also influenced by the number of sales representatives and their productivity.

Lawson plans to continue concentrating its efforts on increasing the productivity and size of its sales team.

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Lawson also uses an inside sales team and an e-commerce site to generate sales.

TestEquity is a leading distributor of test and measurement equipment and solutions, electronic production supplies and tool kits from its leading manufacturing partners.

TestEquity operates primarily through four brands, TestEquity, TEquipment, Jensen Tools and Techni-Tool, focusing primarily in North America with a network of sales representatives throughout the United States, Canada, Mexico and the United Kingdom.

Background and Operations - Based out of Moorpark, California, TestEquity is a large, comprehensive provider of electronic test solutions in the United States supporting the aerospace, defense, automotive, electronics, education, and medical industries.

TestEquity designs, rents and sells a full line of high-quality environmental test chambers.

In addition to a large array of test and measurement products, TestEquity also offers calibration, refurbishment and rental solutions and a wide array of refurbished products.

TestEquity continues to benefit from ubiquitous electronification of all types of products across most industries including IOT, EV, and 5G.

TEquipment is one of the top distributors for both test and measurement and electronic production supplies in the US.

Going to market with an eCommerce focused strategy, TEquipment offers a range of 200,000 products and 500 manufacturer brands, most of which overlap with the rest of the TestEquity group.

In addition to these products, the TEquipment web platform is also currently extending their range to include non-overlap products from the TestEquity platform.

Techni-Tool is one of the industry’s largest solder, soldering equipment and electronic production distributors.

Techni-Tool offers a wide range of products to support electronic production as well as compliance testing.

In addition to the approximately 80,000 brand specific products offered, Techni-Tool also provides vendor managed inventory solutions and dedicated technical support.

Jensen Tools, as a top distributor for the electronics MRO customer base, has access to approximately 400 suppliers and over 70,000 brand specific products.

Jensen Tools offers private label Jensen branded hand tools that have been developed over years of customer usage and manufactured to a specified and demanding tolerance level and is viewed as a leader in the industry.

Jensen Tools employs a dedicated team of engineering, operational and sales professionals who focus on designing and building quality tool kits for its customers.

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

Vision/Strategy - TestEquity intends to grow sales organically, pursue acquisitions and continue to expand and improve its service offerings to its customers.

In particular, TestEquity strives to improve its digital experience, with a consistent approach for all of its brands.

TestEquity intends to seek to increase its market share through continued expansion of product lines and greater penetration of the eCommerce market, enabled through investment in key digital talent and leverage of the existing TestEquity and TEquipment platforms.

TestEquity expects to benefit from its improved integrated organization and processes, driving improved gross margin and financial operating leverage.

Sales Drivers - Across both the test and measurement and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors.

TestEquity believes that the PMI is an indicative measure of the relative strength of the economic environment of the industry in which TestEquity operates.

The PMI index is a composite index of economic activity in the United States manufacturing sector.

TestEquity believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

The average mont hly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021.

TestEquity Sales Drivers

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

TestEquity management focuses on the internal metric of Sales per Day (“SPD”) and Day Adjust Growth (“DAG”).

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The DAG represents the percentage increase or decrease in the SPD for a defined period of time.

Specifically in respect of its electronic production supplies business, the current semi-conductor chip shortage, due in significant part to the COVID-19 pandemic, is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process.

TestEquity anticipates that recovery of this important part of its customers’ supply chain may not occur until 2023.

Gexpro Services

Gexpro Services is a world-class global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs.

Gexpro Services provides comprehensive supply chain management solutions, including a full technology suite offering of vendor managed inventory, kitting, global logistics management, manufacturing localization and import expertise, value engineering and quality assurance.

Gexpro Services' end-to-end project management is designed to support manufacturing OEMs with their engineered material specifications, fulfillment, and quality requirements to improve their total cost of ownership.

Gexpro Services has manufacturing and supply chain operations in over 32 Service Center sites across nine countries including key geographies in North America, South America, Asia, Europe, and the Middle East.

Gexpro Services serves customers in six vertical markets, including renewables, industrial power, consumer and industrial, technology, transportation, and aerospace and defense.

Background and Operations - Gexpro Services was formed in November 2019 and, in February 2020, acquired the “Gexpro Services” business from French distributor Rexel S.A.

via a carve-out acquisition.

Gexpro Services fully separated its “Gexpro Services” operations from Rexel and operates as a stand-alone organization with its own leadership team, operating activities, financial systems and team members.

As a top distributor and service provider to the OEM market, Gexpro Services has approximately 3,100 suppliers offering approximately 60,000 products.

These products are inventoried and sourced through 32 locations in North America, South America, Asia, Europe, and the Middle East.

Vision/Strategy - Gexpro Services intends to grow organically through market share expansion primarily through new product introduction, increased sales of products and services to existing customers and expansion of its customer base.

Gexpro Services believes that its services benefit its customers by helping them reduce their direct and indirect procurement costs and total cost of ownership for high volume, low value Class C parts, and that its services can help drive substantial cost savings for its customers.

Additionally, Gexpro Services intends to grow its business through strategic, accretive acquisitions, and through continued improvement in service and product offerings to its customers.

Sales Drivers - Gexpro Services believes that the PMI Index is an indicative measure of the relative strength of the economic environment of the industry in which Gexpro Services operates.

The PMI index is a composite index of economic activity in the United States manufacturing sector.

Gexpro Services believes that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

The average monthly PMI was 52.2 in the third quarter of 2022 compared to 60.2 in the third quarter of 2021

Key Factors Affecting our Results of Operations and Financial Condition

Specifically in respect of its electronic production supplies business, the current semi-conductor chip shortage is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process.

TestEquity anticipates that recovery of this important part of its customers’ supply chain will occur in late 2023 and early 2024.

Gexpro Services Sales Drivers

The global supply chain solutions market is highly fragmented across Gexpro Services' key vertical segments.

Gexpro Services’ competitors range from large global distributors and manufacturers to small regional domestic distributors and manufacturers.

Gexpro Services revenue is influenced by our OEMs’ production schedules, new product introduction launches, and service project needs.

Gexpro Services drives revenue through increasing wallet share with existing customers, customer-led geographic expansion, and new customer development in its six key vertical markets.

Additionally, Gexpro Services drives revenue through expansion of its installation and aftermarket services by leveraging its portfolio of recent acquisitions.

Supply Chain Disruptions

Along with the broader economy, we continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs .

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, which offset some of the sales gains we recorded in 2022 compared to 2021.

The supply chain disruptions have also led to higher product costs which have contributed to lower gross margins as a percentage of sales compared to the prior year.

We have instituted various price increases during 2021 and 2022 in response to rising supplier costs, as well as increased transportation and labor costs.

Cyber Security Incident

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

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

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

Cyber Incident Litigation

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

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

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

DSG has not incurred material costs and, at this time, is unable to estimate the total cost of any remediation that may be required.

As of September 30, 2022, DSG received notification from its cyber insurance provider that a portion of the claim submitted for costs incurred was approved and therefore we recorded a receivable of $0.4 million which is included in Prepaid expenses and other current assets in the Unaudited Condensed Consolidated Balance Sheet.

At March 31, 2023 DSG had not incurred material costs as a result of the Cyber Incident and, at this time, is unable to estimate the total cost of any remediation that may be required.

On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG.

For more information about the Cyber Incident Suit, please refer to Note 14 – Commitments and Contingencies within Item 1.

Financial Statements.

Critical Accounting Policies and Use of Estimates

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

The unaudited condensed consolidated financial statements were prepared in accordance with GAAP.

A discussion of our critical accounting policies and estimates is contained within Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in DSG's Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no significant changes to our previously disclosed critical accounting policies and use of estimates.

The following provides information on the accounts requiring more significant estimates.

Inventory Reserves - Inventories principally consist of finished 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.

Inventory Reserves - 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 segment and primarily the weighted average method for the TestEquity and Gexpro Services segments.

Most of our products are not exposed to the risk of obsolescence due to technology changes.

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In general, depending on the product category, we reserve inventory with low turnover at higher rates than inventory with higher turnover.

At September 30, 2022, our inventory reserve was $9.5 million, equal to approximately 3.5% of our gross inventory.

A hypothetical change of one hundred basis points to our reserve as a percent of total inventory would have affected our cost of goods sold by $2.7 million.

At March 31, 2023, our inventory reserve was $12.9 million, equal to approximately 4.5% of our gross inventory.

A hypothetical change of one hundred basis points to our reserve as a percentage of total inventory would have affected our cost of goods sold by $2.7 million.

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

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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.

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.

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This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:

• intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, recurring revenues attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;

• intangible assets, including the valuation methodology (the relief of royalty method for trade names and multi-period excess earnings method for customer relationships), estimations of future cash flows, discount rates, royalty rates, recurring revenue attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;

• deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances;

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We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.

Valuation of Earnout Derivative Liability - The Company's earnout derivative liability is classified as a Level 3 instrument and is measured at fair value on a recurring basis.

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

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

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

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

Revenue Recognition - For reporting purposes, the Lawson segment has two separate performance obligations including products and vendor managed inventory services.

The allocation of product and service revenue as well as the estimation of service costs requires judgments and assumptions including the standalone selling prices, the period of time that it takes for the service obligation to be fulfilled and the amount of time spent on vendor managed inventory services during the sales process.

Changes in various assumptions could increase or decrease the allocation of service revenue and related costs;

however, would not materially impact total reported revenues or reported operating income.

Factors Affecting Comparability to Prior Periods

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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 included only subsequent, and not prior, to the April 1, 2022 Merger Date.

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.

Non-GAAP Financial Measures

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Management believes Adjusted EBITDA is an important measure of the Company's operating performance.

We define Adjusted EBITDA as operating income plus depreciation and amortization, costs related to the execution of the Mergers, stock-based compensation, severance costs, amortization of fair value step-up resulting from the Mergers, acquisition related costs, and other non-recurring items.

The following table provides our calculation of Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021:

We define Adjusted EBITDA as operating income plus depreciation and amortization, stock-based compensation, severance costs, costs related to the execution and integration of the Mergers, amortization of fair value step-up resulting from the Mergers, acquisition related costs (unrelated to the Mergers), and other non-recurring items.

The following table provides our calculation of Adjusted EBITDA for the three months ended March 31, 2023 and 2022:

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

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

Three Months Ended March 31,

(in thousands) 2023 2022 (7)

2021 2022 (8)

Operating income (loss) $ 16,721 $ 2,988

Depreciation and amortization 15,722 7,589

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

Stock-based compensation (1)

(3,568) — 445 —

Severance costs (2)

944 15 2,353 34

Merger/integration costs (3)

2,364 630 9,597 1,158

Inventory net realizable value adjustment (4)

1,737 — 1,737 —

Inventory step-up (4)

1,082 118 2,867 118

Acquisition related costs (5)

38 762 1,212 1,797

Other non-recurring (6)

1,097 87 1,202 217

Adjusted EBITDA $ 39,353 $ 13,502

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

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

(2) Includes severance expense from actions taken in 2023 and 2022 not related to a formal restructuring plan.

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

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

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

(4) Inventory fair value step-up adjustments resulting from the acquisition accounting for additional acquisitions completed by Gexpro Services.

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

(7) Other non-recurring costs consists of acquisition integration costs and other non-recurring items.

(6) Other non-recurring costs consist of sales force optimization and other non-recurring items.

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

Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments.

See Note 20 - Segment Information of our unaudited condensed consolidated financial statements within Part I.

Financial Information for additional information about our reportable segments.

See Note 16 – Segment Information with in Item 1.

Financial Statements for additional information about our reportable segments.

The following table provides Adjusted EBITDA by reportable segment:

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

Three Months Ended March 31,

(in thousands) 2023 2022

Adjusted EBITDA

$ 9,670 $ — $ 19,077 $ —

TestEquity 7,659 5,491

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

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

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

For management to discuss Lawson's operating results on a comparable basis, Lawson's historical, pre-merger components of operating income have been provided separately in the table below.

In addition, Lawson's GAAP results of operations were adjusted to include the results prior to the Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented.

In addition, Lawson's GAAP results of operations were adjusted to include the results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented.

Management believes this historical information provides the most meaningful basis of comparison for Lawson's operations, is more useful in identifying current business trends, and is important for the user of our financial statements in understanding Lawson's business.

Refer to Note 1 - Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I.

Financial Information of the unaudited condensed consolidated financial statements for information about the Mergers.

These amounts are not considered to be prepared in accordance with GAAP, have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Mergers occurred at the beginning of 2021, and should not be viewed as a substitute for the results of operations presented in accordance with GAAP.

Lawson's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in DSG's Quarterly Reports on Form 10-Q filed for the quarterly periods ended September 30, 2021 and March 31, 2022.

Refer to Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1.

Financial Statements for information about the Mergers.

These non-GAAP amounts are not considered to be prepared in accordance with GAAP, have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Mergers occurred at the beginning of 2022, and should not be viewed as a substitute for the results of operations presented in accordance with

Lawson's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in DSG's Quarterly Report on Form 10-Q filed for the quarterly period ended March 31, 2022.

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

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

(in thousands) Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

Lawson Operating Income GAAP Results (1)

Pre-Merger Results (2)

Pre-Merger Results Adjusted

GAAP Results (1)

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(1) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date.

For the three months ended September 30, 2021 , the operating results of Lawson were not included in the Company’s GAAP operating results.

See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I.

Financial Information of the unaudited condensed consolidated financial statements.

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

For the three months ended March 31, 2022, the operating results of Lawson were not included in the Company's GAAP results.

See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1.

Financial Statements.

(2) Lawson's results of operations adjusted for comparability on a period-over-period basis.

These non-GAAP results represent Lawson’s total operating activities for the three months ended September 30, 2022 and 2021 , regardless of the Merger Date (that is, they reflect both pre- and post-Merger results of Lawson).

(4) Lawson's results of operations for the three months ended September 30, 2021 , which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting.

See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I.

Financial Information of the unaudited condensed consolidated financial statements.

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

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

Lawson Operating Income GAAP Results (1)

Pre-Merger Results (2)

GAAP Results (1)

Pre-Merger Results (4)

Revenue $ 216,752 $ 104,902 $ 321,654 $ — $ 281,877 $ 281,877

Cost of goods sold 103,733 49,371 153,104 — 130,441 130,441

Gross profit 113,019 55,531 168,550 — 151,436 151,436

Selling, general and administrative expenses 110,227 44,435 154,662 — 141,249 141,249

Operating income (loss) $ 2,792 $ 11,096 $ 13,888 $ — $ 10,187 $ 10,187

Lawson Adjusted EBITDA (5)

$ 19,077 $ 8,042 $ 27,119 $ — $ 23,551 $ 23,551

(1) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date.

For the nine months ended September 30, 2021, the operating results of Lawson were not included in the Company's GAAP results.

See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I.

Financial Information of the unaudited condensed consolidated financial statements.

These non-GAAP results represent Lawson’s total operating activities for the three months ended March 31, 2023 and 2022 , regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).

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

(3) Lawson's results of operations adjusted for comparability on a period-over-period basis.

These non-GAAP results represent Lawson’s total operating activities for the nine months ended September 30, 2022 and 2021 , regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).

(4) Lawson's results of operations for the nine months ended September 30, 2021 , which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting.

See Note 1- Nature of Operations and Basis of Presentation and Note 3 - Business Acquisitions within Part I.

Financial Information of the unaudited condensed consolidated financial statements.

See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1.

Financial Statements.

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

Composition of Results of Operations

The following results of operations for the three and nine months ended September 30, 2022 and 2021 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer.

The results of Lawson have been included only subsequent, and not prior to, to the April 1, 2022 Merger Date.

The following results of operations for the three months ended March 31, 2023 and 2022 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer.

The results of DSG's legacy Lawson business have been included only in the results of operations for the three months ended March 31, 2023 for activity subsequent, and not prior, to the April 1, 2022 Merger Date.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Consolidated Results of Operations

Three Months Ended September 30,

(Dollars in thousands) Amount % of Net Sales Amount % of Net Sales

Lawson $ 109,418 31.5% $ — —%

TestEquity 116,709 33.6% 67,826 51.3%

Gexpro 103,749 29.9% 64,264 48.7%

All Other 17,275 5.0% — —%

Total Revenue 347,151 100.0% 132,090 100.0%

Cost of goods sold

Lawson 53,183 15.3% — —%

TestEquity 89,704 25.8% 51,886 39.3%

Gexpro 73,794 21.3% 45,366 34.3%

All Other 11,303 3.3% — —%

Total Cost of goods sold 227,984 65.7% 97,252 73.6%

Gross profit 119,167 34.3% 34,838 26.4%

Selling, general and administrative expenses

Lawson 50,883 14.7% — —%

TestEquity 19,429 5.6% 14,886 11.3%

Gexpro 21,963 6.3% 14,461 10.9%

All Other 4,865 1.4% — —%

Total Selling, general and administrative expenses 97,140 28.0% 29,347 22.2%

Operating income (loss) 22,027 6.3% 5,491 4.2%

Interest expense (6,097) (1.8)% (3,976) (3.0)%

Loss on extinguishment of debt — —% — —%

Change in fair value of earnout liabilities 9,641 2.8% — —%

Other income (expense), net (550) (0.1)% (74) (0.1)%

Income (loss) before income taxes 25,021 7.2% 1,441 1.1%

Income tax expense (benefit) 8,480 2.4% 216 0.2%

Net income (loss) $ 16,541 4.8% $ 1,225 0.9%

Overview of Consolidated Results of Operations

Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022.

The increase in gross profit for the third quarter of 2022 compared to the third quarter of 2021 was primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date and the exclusion of Lawson operations prior to the Merger Date as a result of the accounting treatment of the Mergers.

Excluding Lawson and All Other gross profit of $62.2 million for the third quarter of 2022 , gross profit for the third quarter of 2022 improv ed $22.1 million over the prior year due to 2021 and 2022 acquisitions and growth in the organic businesses.

Expenses for the third quarter of 2022 were impacted by transaction and integration costs related to the Mergers as well as the inclusion of Lawson operating results subsequent, and not prior to, the Merger Date.

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

Results by Reportable Segment

Lawson Segment

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

Revenue $ 109,418 $ — $ 109,418 — %

Cost of goods sold 53,183 — 53,183 — %

Gross profit 56,235 — $ 56,235 — %

Selling, general and administrative expenses 50,883 — 50,883 — %

Operating income (loss) $ 5,352 $ — $ 5,352 — %

Gross profit margin 51.4 % — %

Adjusted EBITDA (1)

$ 9,670 $ — $ 9,670 — %

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

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

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented.

These non-GAAP Adjusted Results presented in the table below are referred to within this results of operations discussion as "Adjusted".

Three Months Ended September 30, Change from Adjusted 2021

(Dollars in thousands) 2022 Adjusted 2021 (1)

Revenue $ 109,418 $ 93,686 $ 15,732 16.8 %

Cost of goods sold 53,183 42,559 10,624 25.0 %

Gross profit 56,235 51,127 5,108 10.0 %

Selling, general and administrative expenses 50,883 47,639 3,244 6.8 %

Operating income (loss) $ 5,352 $ 3,488 $ 1,864 53.4 %

Gross profit margin 51.4 % 54.6 %

Adjusted EBITDA (2)

$ 9,670 $ 7,560 $ 2,110 27.9 %

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results of Lawson prior to the Merger Date.

Refer to the section Factors Affecting Comparability to Prior Periods and the non-GAAP measures section Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non-GAAP Adjusted EBITDA for more information related to the calculation of adjusted amounts.

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

Revenue and Gross Profit

Organic revenue increased 16.8% to $109.4 million in the third quarter of 2022 compared to adjusted revenue of $93.7 million in the third quarter of 2021 .

The increase in revenue over the comparable prior year quarter was primarily driven by the realization of price increases enacted throughout 2021 and 2022 to offset rising supplier costs and strengthening sales to our strategic and Kent Automotive customers.

Sales per sales representative per day improved approximately 24.4% over a year ago quarter on fewer sales representatives .

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

Lawson gross profit as a percent of sales was 51.4% in the third quarter of 2022 compared to 54.6% as adjusted in the prior year quarter.

The gross margin percentage for the third quarter of 2022 was impacted by increased supplier costs from inflation, sup ply chain disruptions and a sales shift toward lower margin customers.

Gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $0.8 million related to the M ergers.

Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher supplier costs.

Selling, General and Administrative Expenses

Selling expenses consist of compensation and support for our sales representatives as well as expenses to operate our distribution network and overhead expenses.

Selling, general and administrative expenses increased to $50.9 million in the third quarter of 2022 compared to the adjusted amount of $47.6 million in the prior year quarter.

Higher expenses in the third quarter versus a year ago quarter were primarily driven by compensation expense to support increased sales, higher severance and higher amortization expense related to the reverse merger accounting, partially offset by a stock-based compensation benefit.

Additionally, Lawson incurred higher consulting expenses as it reviewed opportunities to increase sales productivity.

Adjusted EBITDA

During the three months ended September 30, 2022, Lawson generated Adjusted EBITDA of $9.7 million , an increase of $2.1 million, or 27.9%, from the same period a year ago on an adjusted basis for pre-merger activity driven primarily by increased revenues.

TestEquity Segment

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

Revenue $ 116,709 $ 67,826 $ 48,883 72.1 %

Cost of goods sold 89,704 51,886 37,818 72.9 %

Gross profit 27,005 15,940 11,065 69.4 %

Selling, general and administrative expenses 19,429 14,886 4,543 30.5 %

Operating income (loss) $ 7,576 $ 1,054 $ 6,522 618.8 %

Gross profit margin 23.1 % 23.5 %

Adjusted EBITDA (1)

$ 10,122 $ 5,524 $ 4,598 83.2 %

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

Revenue and Gross Profit

Revenue increased $48.9 million to $116.7 million in the three months ended September 30, 2022 from $67.8 million in the comparable period a year ago.

The growth was primarily driven by the recovery of the test and measurement market as business conditions improved after the easing of certain COVID-related restrictions, market gain share from supplier expansion in 2021, the inclusion of $37.6 million of aggregate revenue from the 2022 acquisition of TEquipment and National Test Equipment for three-month post-acquisition period and the 2021 acquisition of MCS.

Excluding acquisitions, revenue grew approximately 16.9% driven by test and measurement revenue growth of approximately 18.8% as well as a 14.4% growth in revenue in the electronic production supplies business.

As a percent of revenue, gross profit decreased to 23.1% for the three months ended September 30, 2022 from 23.5% in the same period in the prior year.

The decrease was primarily driven by a change in sales mix due to the test and measurement acquisitions partially offset by increases in our higher margin electronic production supplies business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.5 million driven primarily by the acquisitions during the second quarter of 2022 and costs to support the organic growth of the existing base business.

Adjusted EBITDA

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

Gexpro Services Segment

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

Revenue $ 103,749 $ 64,264 $ 39,485 61.4 %

Cost of goods sold 73,794 45,366 28,428 62.7 %

Gross profit 29,955 18,898 11,057 58.5 %

Selling, general and administrative expenses 21,963 14,461 7,502 51.9 %

Operating income (loss) $ 7,992 $ 4,437 $ 3,555 80.1 %

Gross profit margin 28.9 % 29.4 %

Adjusted EBITDA (1)

$ 12,485 $ 6,308 $ 6,177 97.9 %

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

Revenue and Gross Profit

Revenue for the three months ended September 30, 2022 was $103.7 million.

This compares to revenue of $64.3 million for the same period a year ago or an increase of 61.4%.

During the three months ended September 30, 2022 revenue increased primarily due to acquisitions completed in both 2021 and 2022.

Of the $39.5 million increase over the third quarter a year ago, $30.8 million was driven by the 2021 and 2022 acquisitions.

An expansion of products and services to existing customers, the addition of new customers and price increases, drove organic growth of approximately 13.9%.

Gross profit was $30.0 million or 28.9% of revenue for the three-month period ending September 30, 2022 compared to $18.9 million or 29.4% for the same period a year ago.

The improvement in gross margin dollars was driven by the 2021 and 2022 acquisitions as well as improving global supply chain issues that were more prevalent during 2021.

As a percentage of sales, gross profit decreased 50 basis points (bps) from lower gross margin profiles of acquired companies offset by price actions, strategic sourcing improvements, new supplier development, and a continued shift toward longer-term agreements with suppliers.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate our business and service customers.

Selling, general, and administrative expense for the three-month period ending September 30, 2022 was $22.0 million or 21.2% of revenue compared to $14.5 million or 22.5% of revenue for the same period last year.

The $7.5 million increase was driven primarily by the inclusion of the 2021 and 2022 acquisitions, costs to support the organic revenue increase and costs related to the Gexpro Services Merger.

Adjusted EBITDA

During the three months ended September 30, 2022, Gexpro Services generated Adjusted EBITDA of $12.5 million , an increase of $6.2 million from the same period a year ago with approximately $5.1 million driven by the 2021 and 2022 acquisitions and organic growth in the existing base business.

Consolidated Non-operating Income and Expense

Three Months Ended September 30, Change

(Dollars in thousands) 2022 2021 Amount %

Interest expense $ (6,097) $ (3,976) $ (2,121) 53.3 %

Change in fair value of earnout liabilities $ 9,641 $ — $ 9,641 — %

Other income (expense), net $ (550) $ (74) $ (476) — %

Income tax expense (benefit) $ 8,480 $ 216 $ 8,264 — %

N/M Not meaningful

Interest Expense

Interest expense was $6.1 million in the third quarter of 2022 compared to $4.0 million of interest expense in the prior year quarter.

The increase was due to a lower interest rate as a result of the debt refinancing related to the Mergers, offset by interest on higher outstanding borrowings related to the 2021 and 2022 acquisitions.

Change in Fair Value of Earnout Liability

The $9.6 million benefit in the third quarter of 2022 related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Refer to Note 11 - Earnout Derivative Liability within Part I.

Financial Information to our unaudited condensed consolidated financial statements for information about the earnout liability.

Income Tax Expense (Benefit)

Income tax expense was $8.5 million, a 33.9% effective tax rate for the three months ended September 30, 2022 compared to income tax expense of $0.2 million and an effective tax rate of 15.0% 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 expenses related to the Mergers and other permanent items.

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Consolidated Results of Operations

Nine Months Ended September 30,

(Dollars in thousands) Amount % of Net Sales Amount % of Net Sales

Three Months Ended March 31,

(Dollars in thousands) Amount % of Revenue Amount % of Revenue

$ 125,280 36.0% $ — —%

TestEquity 107,359 30.8% 72,402 47.0%

Gexpro 285,224 34.7 % 189,612 48.5 %

Gexpro Services 101,016 29.0% 81,683 53.0%

All Other (2)

14,615 4.2% — —%

Total Revenue 348,270 100.0% 154,085 100.0%

2 unchanged sentences

TestEquity 82,002 23.5% 55,479 36.0%

Gexpro 202,133 24.6 % 134,885 34.5 %

Gexpro Services 70,511 20.2% 57,722 37.5%

All Other (2)

8,516 2.4% — —%

Total Cost of goods sold 215,399 61.8% 113,201 73.5%

3 unchanged sentences

TestEquity 25,331 7.3% 17,527 11.4%

Gexpro 66,119 8.0 % 41,207 10.5 %

Gexpro Services 23,131 6.6% 20,369 13.2%

All Other (2)

5,023 1.4% — —%

Total Selling, general and administrative expenses 116,150 33.4% 37,896 24.6%

7 unchanged sentences

Net income (loss) $ 5,907 1.7% $ (2,537) (1.6)%

(1) Includes the operating results of Lawson subsequent, but not prior, to the Merger Date of April 1, 2022.

(1) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date.

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

Overview of Consolidated Results of Operations

Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022.

The increase in gross profit for the first nine months of 2022 compared to the first nine months of 2021 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date.

Excluding Lawson and All Other gross profit of $124.8 million , gross profit for the first nine months of 2022 improv ed $51.0 million o ver the prior year.

Expenses for the first nine months of 2022 were impacted by the inclusion of Lawson, the 2021 and 2022 acquisitions, and merger related costs.

The increase in gross profit for the first quarter of 2023 compared to the first quarter of 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the April 1, 2022 Merger Date.

Expenses for the first quarter of 2023 compared to the first quarter of 2022 were impacted by the inclusion of Lawson operations only subsequent, and not prior, to the April 1 2022 Merger Date, and the inclusion of the acquisitions completed in 2022.

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

1 unchanged sentence

Lawson Segment

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

(Dollars in thousands) 2023 2022 Amount %

8 unchanged sentences

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

The increase in revenue, gross profit and operating income for the first nine months of 2022 compared to the first nine months of 2021 was due to the inclusion of Lawson revenue beginning on the Merger Date and not including any Lawson revenue prior to the Merger Date.

The increase in revenue, gross profit and operating income for the first quarter of 2023 compared to the first quarter of 2022 was due to the inclusion of Lawson operations beginning on the April 1, 2022 Merger Date and not including any Lawson operations prior to the April 1, 2022 Merger Date.

Supplemental Information

These non-GAAP Adjusted Results presented in the table below are referred to within this results of operations discussion as "Adjusted".

Nine Months Ended September 30, Adjusted Change

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations for three months ended March 31, 2022 were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented.

These non-GAAP Adjusted Results for the three months ended March 31, 2022 presented in the table below are referred to within this supplemental results of operations discussion as "Adjusted".

Three Months Ended March 31, Change from Adjusted 2022

(Dollars in thousands) 2023 Adjusted 2022 (1)

Adjusted 2021 (1)

Revenue $ 125,280 $ 104,902 $ 20,378 19.4 %

7 unchanged sentences

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical results of Lawson prior to the Merger Date.

Refer to the section Factors Affecting Comparability to Prior Periods and the non-GAAP measures section Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non- GAAP EBITDA for more information related to the calculation of adjusted amounts.

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

Revenue and Gross Profit

Adjusted revenue increased 14.1% to $321.7 million for the first nine months of 2022 compared to adjusted revenue of $281.9 million for the same period a year ago.

The increase in adjusted revenue compared to the prior year was primarily driven by the realization of price increases enacted throughout 2021 and 2022 to offset rising supplier costs and strengthening sales to our strategic and Kent Automotive customers.

The nine months ended September 30, 2022 included 192 selling days, or one additional selling day over the same period a year ago.

Adjusted gross profit increased $17.1 million to $168.6 million for the nine months ended September 30, 2022 compared to $151.4 million in the prior year primarily as a result of increased sales and the related price increases put in place.

adjusted gross profit as a percent of sales was 52.4% for the first nine months of 2022 compared to 53.7% in the prior year.

The adjusted gross margin percentage for 2022 was impacted by increased supplier costs from inflation, supply chain disruptions and a sales shift toward lower margin customers.

Adjusted gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $1.9 million related to the Mergers.

Excluding the $3.6 million of aggregate fair market and amortization adjustments related to the Mergers, adjusted gross profit was 53.5% of sales in the nine months ended September 30, 2022.

Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher costs.

Revenue increased $20.4 million, or 19.4%, to $125.3 million in the first quarter of 2023 compared to adjusted revenue of $104.9 million in the first quarter of 2022 .

The increase was primarily driven by the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs, increased quantity volumes and strengthening sales to Lawson's strategic and governmental customers and automotive end market.

Gross profit increased $15.4 million to $70.9 million in the first quarter of 2023 compared to adjusted gross profit of $55.5 million in the prior year quarter primarily as a result of increased sales and the related price increases put in place, lower net freight expense and spreading operating expenses over a higher level of sales.

Lawson gross profit as a percent of revenue was 56.6% in the first quarter of 2023 compared to Lawson gross profit as a percent of adjusted revenue of 52.9% in the prior year quarter.

The gross margin percentage improvement for the first quarter of 2023 was primarily the result of price increases enacted as the prior year quarter was impacted by increased supplier costs from inflation and supply chain disruptions, offset by a sales shift toward lower margin customers.

Selling, General and Administrative Expenses

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

Adjusted selling, general and administrative expenses increased to $154.7 million for the nine months ended September 30, 2022 compared to the adjusted amount of $141.2 million in same period a year ago.

Higher expense on a year-to-date basis versus a year ago were primarily driven by costs related to the Mergers, compensation expense to support increased sales, higher severance and higher amortization expense related to the reverse merger accounting, partially offset by lower stock-based compensation.

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

Selling, general and administrative expenses increased to $62.7 million in the first quarter of 2023 compared to the adjusted amount of $44.4 million in the prior year quarter.

The increase was primarily driven by higher compensation expense incurred to support increased sales, additional depreciation and amortization as a result of the fair value step-up adjustments resulting from the reverse merger acquisition accounting and stock-based compensation expense offset in part by a stock-based compensation benefit in the first quarter of 2022.

Adjusted EBITDA

During the nine months ended September 30, 2022 , Lawson generated Adjusted EBITDA of $27.1 million , an increase of $3.6 million from the same period a year ago driven by increased revenues and margins.

During the three months ended March 31, 2023, Lawson generated Adjusted EBITDA of $18.5 million , an increase of $10.4 million, or 129.4% from the same period a year ago driven by increased revenue and margins.

TestEquity Segment

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

(Dollars in thousands) 2023 2022 Amount %

9 unchanged sentences

Revenue and Gross Profit

Revenue increased to $287.0 million for the nine months ended September 30, 2022 from $201.5 million during the same period in 2021 .

This increase was primarily driven by the TEquipment and National Test Equipment acquisitions during the second quarter of 2022 and the acquisition of MCS in 2021, which generated aggregate revenue of $62.8 million for the post-acquisition periods, as well as organic growth of 11.4% in the existing base business.

Gross profit increased $22.6 million to $66.7 million in the first nine months of 2022 compared to $44.1 million in the same period of 2021 primarily due to acquisitions and increased levels in the base business.

As a percent of revenue, gross profit improved to 23.3% in 2022 as compared to 21.9% in 2021 driven by an expansion of margins within the existing base business and a shift in sales mix toward higher margin electronic production supplies.

Revenue increased $35.0 million, or 48.3%, to $107.4 million in the first quarter of 2023 compared to revenue of $72.4 million in the first quarter of 2022 .

The increase was primarily driven by $34.9 million of revenue generated from the acquisitions completed in the second quarter of 2022.

Gross profit increased $8.4 million to $25.4 million in the first quarter of 2023 compared to gross profit of $16.9 million in the prior year quarter.

The increase was primarily driven by the 2022 acquisitions which generated $7.6 million of additional gross profit in the first quarter of 2023.

TestEquity gross profit as a percent of revenue was 23.6% in the first quarter of 2023 compared to 23.4% in the prior year quarter.

The gross margin percentage for t he first quarter of 2023 was impacted by an expansion of margins within the existing base business offset by a shift in sales mix from the lower gross margin rates from the 2022 acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $14.9 million to $59.3 million in 2022 from $44.4 million in 2021 .

Approximately $9.6 million of costs were due to the acquisitions made in 2021 and 2022.

The remainder of the increase was driven primarily by an increase in merger and acquisition related costs of $1.8 million and additional compensation and distribution costs to support the organic revenue growth in the base business.

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

Selling, general and administrative expenses increased $7.8 million to $25.3 million in the first quarter of 2023 compared to $17.5 million in the prior year quarter.

Approximately $5.2 million of the increased expenses was primarily driven by the 2022 acquisitions and approximately $2.4 million of the increased expenses was driven by increased acquisition expenses in the first quarter of 2023 of $2.7 million in connection with the potential acquisition of Hisco compared to $0.3 million of acquisition expenses in the prior year quarter.

Adjusted EBITDA

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

During the three months ended March 31, 2023, TestEquity generated Adjusted EBITDA of $7.7 million, an increase of $2.2 million, or 39.5% from the prior year quarter with approximately $2.4 million driven by the 2022 acquisitions.

Gexpro Services Segment

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

(Dollars in thousands) 2023 2022 Amount %

9 unchanged sentences

Revenue and Gross Profit

Revenue for the nine months ended September 30, 2022 was $285.2 million .

This compares to revenue of $189.6 million for the same period a year ago, or a 50.4% increase.

There were four additional selling days in the nine months ended September 30, 2022 versus the same period a year ago .

A selling day generally represents a business day in which Gexpro Services ships products to its customers.

Average daily sales increased 47.3% over the same period a year ago, primarily as a result of revenue generated from the 2021 and 2022 acquisitions of $80.7 million for the post-acquisition periods and organic growth in the base business of 7.9% through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit was $83.1 million or 29.1% of revenue for the nine months ended September 30, 2022 compared to gross profit of $54.7 million or 28.9% for the same period a year ago.

The gross profit increase was driven by the 2021 and 2022 acquisitions and improvement in global supply chain over 2021 activities as well as customer price increases put in place.

Selling, General and Administrative Expense

Selling, general, and administrative expense for the nine months ended September 30, 2022 was $66.1 million compared to $41.2 million for the same period a year ago.

The increase of $24.9 million over a year ago was primarily driven by the inclusion of the 202 1 and 2022 acquisitions of $16.4 million.

The remainder of the increase was driven primarily by an increase in merger related costs of $2.8 million and additional compensation and product fulfillment costs to support the organic growth of the existing base business.

Revenue increased $19.3 million, or 23.7%, to $101.0 million in the first quarter of 2023 compared to revenue of $81.7 million in the first quarter of 2022 .

The increase was primarily driven by $4.0 million of revenue generated from the Frontier acquisition completed at the end of the first quarter of 2022 and 18.7% organic growth in the base business t hrough an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit increased $6.5 million to $30.5 million in the first quarter of 2023 compared to gross profit of $24.0 million in the prior year quarter.

Gexpro Services gross profit as a percent of revenue was 30.2% in the first quarter of 2023 compared to 29.3% in the prior year quarter.

The gross profit increase was driven by the 2022 acquisitions, an improvement in the global supply chain and sales price increases enacted.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate Gexpro Services’ business and service customers.

Selling, general, and administrative expenses increased to $23.1 million in the first quarter of 2023 compared to $20.4 million in the prior year quarter.

The increase of $2.8 million was primarily driven by $1.7 million of additional expenses from the 2022 acquisitions.

The remainder of the increase was due primarily to additional compensation and product fulfillment costs to support organic growth.

Adjusted EBITDA

During the nine months ended September 30, 2022 , Gexpro Services generated Adjusted EBITDA of $32.4 million , an increase of $13.7 million from the same period a year ago with approximately $12.9 million driven by the acquisitions closed during 2021 and 2022 and increases in revenues and margins on the organic base business.

During the three months ended March 31, 2023, Gexpro Services generated Adjusted EBITDA of $11.7 million , an increase of $3.7 million, or 45.7%, from the same period a year ago primarily driven by increases in revenue and margins.

Consolidated Non-operating Income and Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

(Dollars in thousands) 2023 2022 Amount %

Interest expense $ (7,670) $ (6,856) $ (814) 11.9 %

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

Change in fair value of earnout liabilities $ 3,948 $ — $ 3,948 — %

Other income (expense), net $ 224 $ (328) $ 552 (168.3) %

Income tax expense (benefit) $ 3,912 $ 606 $ 3,306 545.5 %

Change in fair value of earnout liabilities $ (57) $ — $ (57) N/M

Other income (expense), net $ (975) $ 956 $ (1,931) N/M

Income tax expense (benefit) $ 2,112 $ (956) $ 3,068 N/M

N/M Not meaningful

Interest Expense

Interest expense increased $4.2 million in the first nine months of 2022 primarily due to higher borrowings offset by a lower interest rate with the debt refinancing related to the Mergers.

Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt in the first nine months of 2022 was primarily due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.

Interest expense increased $0.8 million in the first quarter of 2023 compared to the prior year quarter .

The increase was due to higher outstanding borrowings as a result of the debt refinancing related to the Mergers, offset partially by a lower interest rate on the outstanding borrowings as a result of the debt refinancing related to the Mergers.

Change in Fair Value of Earnout Liability

The $3.9 million benefit in the first nine months of 2022 related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Refer to Note 11 - Earnout Derivative Liability within Part I.

Financial Information to our unaudited condensed consolidated financial statements for information about the earnout liability.

The $0.1 million expense in the first quarter of 2023 related to the change in fair value of the earnout liability associated with the Frontier earnout.

Other Income (Expense), Net

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

Other expense, net increased $1.9 million in the first quarter of 2023 compared to the prior year quarter primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date.

Income Tax Expense (Benefit)

Income tax expense was $3.9 million, a 29.6% effective tax rate for the first nine months of 2022 compared to income tax expense of $0.6 million and a 150.7% effective tax rate for the first nine months of 2021.

The change in the year over year effective tax rate was primarily due to changes in the valuation allowance in the first nine months of 2021, merger costs incurred in the first nine months of 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 within Part I.

Financial Information to our unaudited condensed consolidated financial statements .

Relative to the U.S.

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

Income tax expense was $2.1 million, a 26.3% effective tax rate for the three months ended March 31, 2023 compared to income tax expense of $1.0 million and a 27.4% effective tax rate for the three months ended March 31, 2022.

The change in the year over year effective tax rate was primarily due to the effect of lower transaction costs in 2023 compared to 2022.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash and cash equivalents were $31.1 million on March 31, 2023 compared to $24.6 million on December 31, 2022.

The Company believes its current balances of cash and cash equivalents, availability under its Amended and Restated Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months.

As of September 30, 2022, liquidity for the Company was $100.3 million comprised of $25.2 million of cash and cash equivalents and $75.1 million of bo rrowing availability remaining, net of outstanding letters of credit, under the Amended and Restated Credit Agreement.

As of March 31, 2023, liquidity for the Company was $100.9 million comprised of $31.1 million of cash and cash equivalents and $69.8 million of bo rrowing availability remaining, net of outstanding letters of credit, under the Amended and Restated Credit Agreement.

Our primary short-term and long-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, potential business acquisitions, strategic initiatives and general corporate purposes.

debt obligations under the Amended and Restated Credit Agreement mature in April 2027.

Our current debt obligations under the Amended and Restated Credit Agreement mature in April 2027.

Principal payments on the Amended and Restated Credit Agreement for the next twelve months are $15.0 million.

Refer to Note 13 - Debt within Part I.

Financial Information for additional information related to our debt obligations.

Refer to Note 9 – Debt within Item 1.

Financial Statements for additional information related to our debt obligations.

Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows.

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The following table presents a summary of our cash flows:

(in thousands) September 30, 2022 September 30, 2021 Change

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

Net cash provided by (used in) operating activities $ 13,858 $ (13,532) $ 27,390

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Cash Provided by (Used in) Operating Activities

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

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

Net cash provided by operations for the three months ended March 31, 2023 was $13.9 million primarily due to net income including non-cash items, partially offset by investments in trade working capital to support higher sales and other net cash flow items.

Net cash used in operations for the three months ended March 31, 2022 was $13.5 million, primarily due to increases in trade working capital and other net cash flow items.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $120.6 million, primarily as a result of the other acquisitions completed during the first nine months of 2022 by TestEquity and Gexpro as described in Note 3 - Business Acquisitions within Part I.

Financial Information.

Net cash used in investing activities for the nine months ended September 30, 2021was $27.0 million, primarily due to business acquisitions and purchases of rental equipment.

Net cash used in investing activities for the three months ended March 31, 2023 was $5.1 million, primarily due to purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Net cash used in investing activities for the three months ended March 31, 2022 was $57.6 million, primarily due to the other acquisitions completed during the first three months of 2023 by Gexpro Services as described in Note 3 – Business Acquisitions within Item 1.

Financial Statements.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $151.8 million for the first nine months of 2022, primarily due to proceeds under the April 1, 2022 Amended and Restated Credit Agreement partially offset by repayment of previous indebtedness.

On April 29, 2022, the Company borrowed the $50 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC made by TestEquity.

Deferred financing costs of $12.0 million were incurred during the first nine months of 2022 in connection with the April 1, 2022 Amended and Restated Credit Agreement and January 3, 2022 Gexpro Services Credit Agreement.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $11.2 million, primarily due to increased borrowings on the Company's revolving lines of credit partially offset by payments on the Company's term loans and a capital contribution to finance the MCS acquisition.

Net cash used in financing activities for the three months ended March 31, 2023 was $2.4 million, primarily due to principal payments on the term loans partially offset by net proceeds on the revolving credit facility.

Net cash provided by financing activities for the three months ended March 31, 2022 was $68.8 million, primarily due to net proceeds on term loans and revolving credit facilities as a result of the January 3, 2022 Gexpro Services refinancing that was used to fund the Resolux acquisition and repay previous indebtedness.

Financing and Capital Requirements

Credit Facility

On April 1, 2022, in connection with the closing of the Mergers, DSG entered into an Amended and Restated Credit Agreement, which includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility and a $50 million senior secured delayed draw term loan facility.

Refer to Note 13 - Debt within Part I.

Financial Information for a description of the agreement.

On September 30, 2022, we had $418.8 million in outstanding borrowings and $75.1 million of bo rrowing availability remaining, net of outstanding letters of credit, under the revolving credit facility.

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

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

Contractual Obligations

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.

On April 1, 2022, DSG entered into the Amended and Restated Credit Agreement, which includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility and a $50 million senior secured delayed draw term loan facility.

Refer to Note 9 – Debt within Item 1.

Financial Statements for a description of the Amended and Restated Credit Agreement.

On March 31, 2023, we had $415.9 million in outstanding borrowings and $69.8 million of bo rrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility.

As of March 31, 2023, we were in compliance with all financial covenants under our Amended and Restated Credit Agreement.

While we were in compliance with our financial covenants as of March 31, 2023, failure to meet the covenant requirements of the Amended and Restated Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness and could have a material adverse effect on our business, financial condition and results of operations.

Purchase Commitments

As of March 31, 2023, we had contractual commitments to purchase approximately $174 million of product from our suppliers and contractors over the next twelve months.

Capital Expenditures

During the three months ended March 31, 2023, t otal capital expenditures for property, plant and equipment and rental equipment were $6.9 million excluding proceeds from the sale of rental equipment.

The company expects to spend approxi mately $14 million to $16 million for capital expenditures during the remainder of 2023 to support ongoing operations.

Stock Repurchase Program

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The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors and depend on various factors including an evaluation of our stock price, corporate and regulatory requirements, capital availability and other market conditions.

On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the Company had $7.6 million of remaining availability for stock repurchases under the program as of November 3, 2022.

See Note 15 - Stock Repurchase Program within Part I.

Financial Information for further information.

The Company had $7.6 million of remaining availability for stock repurchases under the program as of March 31, 2023.

See Note 11 – Stock Repurchase Program with in Item 1.

Financial Statements for further information.

HIS Company, Inc.

- Purchase Agreem ent

On March 30, 2023, the Company agreed to purchase Hisco for $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 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis