What changed in this filing

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Item 1. Financial Statements

2023-08-03 compared with 2023-05-10 · 311 added, 187 removed, 611 unchanged (45% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Current assets:

47 unchanged sentences

(Dollars in thousands, except per share data)

Three Months Ended March 31,

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

2023 2022 2023 2022

Revenue $ 377,984 $ 321,336 $ 726,254 $ 475,421

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

Net income (loss) — — — 3,024 — — 3,024

Foreign currency translation adjustment — — — — — 1,083 1,083

Stock-based compensation — — 1,062 — — — 1,062

Issuance of common stock in rights offering, net of offering costs of $ 1,531

2,222,222 2,222 96,247 — — — 98,469

Shares issued 3,336 4 ( 4 ) — — — —

Tax withholdings related to net share settlements of stock-based compensation awards ( 1,112 ) ( 1 ) 1 — ( 54 ) — ( 54 )

Other — — 385 — — ( 385 ) —

Balance at June 30, 2023 23,349,735 $ 23,350 $ 688,983 $ ( 16,809 ) $ ( 12,697 ) $ ( 6,834 ) $ 675,993

See notes to Condensed Consolidated Financial Statements (Unaudited)

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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

See notes to Condensed Consolidated Financial Statements (Unaudited)

2 unchanged sentences

(Dollars in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Operating activities

6 unchanged sentences

Deferred income taxes 86 ( 420 )

Change in fair value of earnout liability 57 —

Change in fair value of earnout liabilities 21 5,693

Gain on sale of rental equipment ( 1,377 ) ( 1,821 )

Loss on sale of property, plant and equipment 215 —

Charge for step-up of acquired inventory 716 —

Net realizable value and reserve adjustment for obsolete and excess inventory — 1,377

20 unchanged sentences

Deferred financing costs ( 3,419 ) ( 11,415 )

Proceeds from rights offering, net of offering costs of $ 1,531

Shares repurchased held in treasury ( 171 ) ( 78 )

13 unchanged sentences

(Dollars in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental disclosure of cash flow information

2 unchanged sentences

Non-cash activities:

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

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

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

Settlement of related party obligations $ — $ 5,276

Additions of property, plant and equipment included in accounts payable $ 1,566 $ 135

Right of use assets obtained in exchange for finance lease liabilities $ 329 $ 713

Right of use assets obtained in exchange for operating lease liabilities $ 4,840 $ 10,291

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Note 1 – Nature of Operations and Basis of Presentation

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.

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

DSG has three principal operating companies:

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

Recent Events

HIS Company, Inc.

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

DSG completed the Hisco Transaction on June 8, 2023.

The total purchase consideration exchanged for the Hisco Transaction was $ 270.4 million, net of cash, at closing, with a potential additional earn-out payment subject to Hisco achieving certain performance targets.

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

In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco.

DSG funded the Hisco Transaction using a combination of its amended and restated credit facility and proceeds raised from the Rights Offering (as defined below) with existing stockholders, both discussed below.

Refer to Note 3 – Business Acquisitions for further details about Hisco and the Hisco Transaction.

Debt Amendment

On June 8, 2023, the Company and certain of its subsidiaries entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”), by and among the Company, certain subsidiaries of the Company as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.

The First Amendment provides for a $ 305 million incremental term loan and for the Company to increase the commitments from time to time by up to $ 200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants.

Refer to Note 9 – Debt for additional information about the 2023 Credit Agreement.

Rights Offering

On May 30, 2023, the Company issued 2,222,222 shares of DSG common stock for approximately $ 100 million pursuant to a subscription rights offering (the "Rights Offering").

The Rights Offering provided one transferable subscription right for each share of DSG common stock held by holders of DSG common stock on record as of the close of business on May 1, 2023.

Each subscription right entitled the holder to purchase 0.105 shares of DSG common stock at a subscription price of $ 45.00 per share.

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

In addition, holders of subscription rights who fully exercised their subscription rights were entitled to oversubscribe for additional shares of DSG common stock, subject to proration.

Refer to Note 11 – Stockholders' Equity for additional information about the Rights Offering.

Combination with TestEquity and Gexpro Services

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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.

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.

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

Completion of the Gexpro Services Merger

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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.

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.

3 unchanged sentences

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.

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

Accounting for the Mergers

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

Accordingly, periods prior to the April 1, 2022 Merger Date reflect the results of operations 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 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.

3 unchanged sentences

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

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

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.

TestEquity is a distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, automotive and medical industries.

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

Basis of Presentation and Consolidation

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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 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.

Accordingly, the unaudited condensed consolidated financial statements for the six months ended June 30, 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 only included subsequent to the April 1, 2022 Merger Date.

The combined operations of all three entities are included in the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2023 and the three months ended June 30, 2022.

The unaudited condensed consolidated financial statements as of June 30, 2023 and December 31, 2022 reflect the financial position of TestEquity, Gexpro Services and DSG's legacy Lawson business on a consolidated basis.

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

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 March 31, 2023 was not material.

The consolidated financial statement impact of the one day difference arising from the different period ends for the quarter ended June 30, 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.

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A ll normal recurring adjustments have been made that are necessary to fairly state the results of operations for the interim periods.

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

Operating results for the three and six month period ended June 30, 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

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.

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

Accounting Pronouncements - Adopted

3 unchanged sentences

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.

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

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

2 unchanged sentences

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.

The adoption had no impact on the Company's financial condition, results of operations or cash flows and will be applied to business combinations on or after the adoption date.

Note 3 – Business Acquisitions

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.

Combination with TestEquity and Gexpro Services

On April 1, 2022, the Mergers with TestEquity and Gexpro Services were completed via all-stock merger transactions.

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

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The Mergers were accounted for as a reverse merger under the acquisition method of accounting for business combinations, whereby TestEquity and Gexpro Services were identified as the accounting acquirers and were treated as a combined entity for financial reporting purposes, and DSG was identified as the accounting acquiree.

Accordingly, under the acquisition method of accounting, the purchase price was allocated to DSG's tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition-date fair values.

Accordingly, under the

acquisition method of accounting, the purchase price was allocated to DSG's tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition-date fair values.

These estimates were determined through established and generally accepted valuation techniques.

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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 :

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

(in thousands) Final Purchase Price Allocation

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Total other intangible assets $ 119,060

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 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 acquisitions completed during 2022.

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

related tax effects.

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

Three Months Ended March 31,

(in thousands) 2022

Revenue $ 308,790

Net income $ 7,270

Other Acquisitions

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.

DSG and its operating companies acquired other businesses during the first six months of 2023 and the year ended December 31, 2022.

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

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

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 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.

Purchase of HIS Company, Inc.

On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of Hisco, a distributor of specialty products serving industrial technology applications, pursuant to the Purchase Agreement dated March 30, 2023.

In connection with this transaction, DSG combined the operations of TestEquity and Hisco further expanding the product and service offerings at TestEquity, as well as all of our operating businesses under DSG.

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

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

The total purchase consideration exchanged for the Hisco Transaction was $ 270.4 million, net of cash, with a potential additional earn-out payment subject to Hisco achieving certain performance targets.

Refer to Note 8 – Earnout Liabilities for additional information on the earn-out.

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

DSG funded the Hisco Transaction using a combination of its 2023 Credit Agreement and proceeds raised from the Rights Offering.

Refer to Note 9 – Debt for information about the 2023 Credit Agreement and Note 11 – Stockholders' Equity for details on the Rights Offering.

The following table summarizes the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:

(in thousands) Hisco

Acquisition date June 8, 2023

Current assets $ 131,950

Property, plant and equipment 48,326

Right of use assets 21,102

Other intangible assets:

Customer relationships 41,800

Trade names 25,600

Deferred tax liability, net of deferred tax asset ( 2,544 )

Other assets 2,495

Accounts payable ( 16,689 )

Lease liabilities ( 22,372 )

Accrued expenses and other liabilities ( 8,961 )

Goodwill 49,718

Total purchase consideration exchanged, net of cash acquired $ 270,425

Cash consideration $ 252,007

Deferred consideration 12,418

Contingent consideration 6,000

Total purchase consideration exchanged, net of cash acquired $ 270,425

Certain estimated values for the Hisco Transaction, including the valuation of intangibles, property, plant and equipment, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition.

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

The customer relationships and trade names intangibles assets have estimated useful lives of 12 years and 8 years, respectively.

As a result of the Hisco Transaction, the Company recorded tax deductible goodwill of $ 39.8 million in 2023 that may result in a tax benefit in future periods and is primarily attributable to the benefits we expect to derive from expected synergies including expanded product and service offerings and cross-selling opportunities.

Purchases of Other Companies in 2022

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

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

The accounting for the Interworld Highway, LLC, Resolux, Frontier and National Test Equipment acquisitions was complete within the one-year measurement periods following the respective acquisition dates.

Certain estimated values for the Instrumex acquisition, including working capital and other liability adjustments, are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition.

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

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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.

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 (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.

Refer to Note 8 – Earnout Liabilities for additional information on the earn-out.

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 .

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

Unaudited Pro Forma Information

The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the Mergers and other acquisitions disclosed above occurred on January 1, 2022 for the acquisition completed during 2023 and January 1, 2021 for the acquisitions completed during 2022.

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

This information is presented for

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

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

(in thousands) 2023 2022 2023 2022

Revenue $ 455,431 $ 439,418 $ 908,317 $ 848,628

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

Actual Results of Business Acquisitions

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

The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the second quarter and first six months of 2023 and 2022.

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

Three Months Ended March 31, 2022

(in thousands) Lawson Other Acquisitions Total

Three Months Ended June 30, 2023 Three Months Ended June 30, 2022

(in thousands) Lawson Other Acquisitions Total Lawson Other Acquisitions Total

Revenue $ — $ 28,001 $ 28,001 $ 123,670 $ 52,739 $ 176,409

Net Income $ — $ ( 865 ) $ ( 865 ) $ 3,084 $ 5,316 $ 8,400

Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

Lawson Other Acquisitions Total Lawson Other Acquisitions Total

Revenue $ — $ 28,001 $ 28,001 $ 123,670 $ 75,522 $ 199,192

Net Income $ — $ ( 865 ) $ ( 865 ) $ 3,084 $ 8,285 $ 11,369

The Company incurred transaction costs related to the Mergers and other completed and contemplated acquisitions of $ 5.1 million and $ 9.2 million for the three and six months ended June 30, 2023, respectively, and $ 6.1 million and $ 8.6 million for the three and six months ended June 30, 2022, respectively, which are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Note 4 – Revenue Recognition

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this generally occurs with the delivery of products or services.

Revenue from customers is measured as the amount of consideration the Company expects to receive in exchange for the delivery of goods or services.

Revenue from customers is measured as the amount of consideration the Company expects to receive in exchange for the delivery of products or services.

Contracts may last from one month to one year or more and may have renewal terms that extend indefinitely at the option of either party.

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Volumes fluctuate primarily as a result of customer demand and product availability.

Consistent with the way the Company manages its businesses, the Company refers to sales under service agreements, which includes both goods (such as parts, equipment and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of the Company’s operations.

Consistent with the way the Company manages its businesses, the Company refers to sales under service agreements, which includes both products (such as parts, equipment and equipment upgrades) and related services (such as monitoring, maintenance and repairs) as sales of “services,” which is an important part of the Company’s operations.

The Company has no significant financing components in its contracts with customers.

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

The rebate consideration is not in exchange for a distinct good or service.

The rebate consideration is not in exchange for a distinct product or service.

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

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

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

Typically, TestEquity has a purchase order or master service agreement with the customer that specifies the goods and/or services to be provided.

TestEquity generally invoices customers as goods are shipped.

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

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

TestEquity generates revenue from contracts with customers through the sale of new and used electronic test and measurement products, industrial and electronic production supplies, and adhesive solutions.

Typically, TestEquity has a purchase order or master service agreement with the customer that specifies the products and/or services to be provided.

TestEquity generally invoices customers as products are shipped.

Payment terms on invoiced amounts are typically due and payable 30 days after the date of shipment.

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

For the majority of transactions, TestEquity recognizes revenue at the time of shipment, when control passes to the customer.

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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.

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

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

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

Three Months Ended March 31,

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

(in thousands) 2023 2022 2023 2022

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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.

The unearned rental revenue related to customer prepayments on equipment leases of $ 0.3 million at June 30, 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 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 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.

The leased machines are included in Rental equipment, net, in the Unaudited Condensed Consolidated Balance Sheet, and the leasing revenue is recognized on a straight-line basis and is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) .

The unearned rental revenue related to customer prepayments on equipment leases was nominal at June 30, 2023 and December 31, 2022 .

Rental revenue from operating leases:

Three Months Ended March 31,

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

(in thousands) 2023 2022 2023 2022

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Note 5 – Supplemental Financial Statement Information

Restricted Cash

The Company has agreed to maintain restricted cash of $ 20.6 million under agreements with outside parties.

An escrow account of $ 12.5 million was established in conjunction with the Hisco Transaction, to be released upon Hisco meeting certain working capital and other post closing requirements as of the one year post-acquisition date.

The Company is restricted from withdrawing this balance without the prior consent of the sellers.

The remaining balance of $ 8.1 million of restricted cash represents collateral for certain borrowings under the 2023 Credit Agreement, and the Company is restricted from withdrawing this balance without the prior consent of the respective lenders.

Inventories, net

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

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

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

(in thousands) June 30, 2023 December 31, 2022

Inventories, gross $ 339,879 $ 275,072

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Inventories, net $ 326,236 $ 264,374

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

(in thousands) Amount

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

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

Write-offs 40

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

Property, Plant and Equipment, net

Components of property, plant and equipment were as follows:

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

(in thousands) June 30, 2023 December 31, 2022

Land $ 16,791 $ 9,578

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Property, plant and equipment, net $ 113,329 $ 64,395

(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 $ 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.

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

Depreciation expense for property, plant and equipment was $ 2.5 million and $ 2.5 million for the second quarter of 2023 and 2022, respectively, and $ 6.0 million and $ 3.1 million for the first six months of 2023 and 2022, respectively.

Amortization expense for capitalized software was $ 0.8 million and $ 0.9 million for the second quarter of 2023 and 2022, respectively, and $ 1.5 million and $ 1.1 million for the first six months of 2023 and 2022, respectively.

Rental Equipment, net

Rental equipment, net consisted of the following:

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

(in thousands) June 30, 2023 December 31, 2022

Rental equipment $ 64,707 $ 63,184

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Rental equipment, net $ 27,106 $ 27,139

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.

Depreciation expense included in cost of sales for rental equipment was $ 1.9 million and $ 1.5 million for the second quarter of 2023 and 2022, respectively and $ 4.2 million and $ 2.9 million for the first six months of 2023 and 2022, respectively.

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

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

(in thousand) June 30, 2023 December 31, 2022

Accrued compensation $ 22,753 $ 24,094

Deferred acquisition payments and accrued earnout liabilities 18,679 1,383

Accrued and withheld taxes, other than income taxes 8,779 4,885

Accrued customer rebates 5,592 5,053

Accrued stock-based compensation 5,484 3,340

Accrued interest 3,591 1,775

Accrued severance and acquisition related retention bonus 3,170 927

Accrued health benefits 1,793 1,306

Deferred revenue 1,170 2,313

Accrued income taxes 125 731

Other 21,863 16,870

Total accrued expenses and other current liabilities $ 92,999 $ 62,677

Other Liabilities

Other liabilities consisted of the following:

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

(in thousand) June 30, 2023 December 31, 2022

Security bonus plan $ 9,628 $ 9,651

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

Acquisitions — 49,718 — — 49,718

Impact of foreign exchange rates 142 — 228 527 897

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

Balance at June 30, 2023 $ 155,915 $ 163,822 $ 55,649 $ 23,277 $ 398,663

Intangible Assets

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

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

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

Amortization expense for definite-lived intangible assets was $ 9.4 million and $ 18.6 million for the three and six months ended June 30, 2023, respectively, and $ 9.9 million and $ 15.3 million for the three and six months ended June 30, 2022, respectively.

Amortization expense related to intangible assets was recorded in Selling, general and administrative expenses.

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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 months ended March 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended March 31,

The expenses generated by leasing activity for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):

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

Lease Type Classification 2023 2022 2023 2022

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

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

The value of net assets and liabilities related to our operating and finance leases as of June 30, 2023 and December 31, 2022 was as follows (in thousands):

Lease Type June 30, 2023 December 31, 2022

Total ROU operating lease assets (1)

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Total long term lease liabilities $ 57,735 $ 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):

(1) Operating lease assets are recorded net of accumulated amortization of $ 20.2 million as of June 30, 2023 a nd $ 14.8 million as of December 31, 2022

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

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

Maturity Date of Lease Liabilities Operating Leases Financing Leases Total

Year one $ 11,172 $ 551 $ 11,723

Year two 11,939 529 12,468

Year three 10,464 372 10,836

Year four 7,152 290 7,442

Year five 5,822 79 5,901

Subsequent years 12,125 — 12,125

Remaining 2023 $ 8,913 $ 331 $ 9,244

2024 16,004 546 16,550

2025 14,920 361 15,281

2026 11,293 280 11,573

2027 9,406 77 9,483

Thereafter 29,573 — 29,573

Total lease payments 90,109 1,595 91,704

1 unchanged sentence

Present value of lease liabilities $ 69,137 $ 1,434 $ 70,571

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

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

Lease Type Weighted Average Term in Years Weighted Average Interest Rate

1 unchanged sentence

Financing Leases 3.0 6.8 %

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

Three Months Ended March 31,

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

Six Months Ended June 30,

Cash Flow Source Classification 2023 2022

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

Note 8 – Earnout Derivative Liability

Note 8 – Earnout Liabilities

Combination with TestEquity and Gexpro Services

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

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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.

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

There was no remaining earnout derivative liability at December 31, 2022.

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

For the year ended December 31, 2022, the Company recorded income of $ 0.3 million as a component of Change in fair value of earnout 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

Balance at December 31, 2021 $ —

Initial recognition on Merger Date 43,900

Change in fair value ( 276 )

Reclassifications to equity at fair value ( 43,624 )

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.

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

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

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

The Company recorded expense of $ 5.7 million for changes in the fair value of the earn-out derivative liability for the six months ended June 30, 2022 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Hisco Acquisition

The Hisco Transaction includes a potential earn-out payment of up to $ 12.6 million, subject to Hisco achieving certain performance targets.

The earn-out payment is calculated based on the gross profit of Hisco and its affiliates for the twelve months ending October 31, 2023, subject to certain adjustments and exclusions set forth in the Purchase Agreement.

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

As of June 8, 2023 (the Hisco Transaction date) and June 30, 2023, the fair value of the earn-out was $ 6.0 million and $ 6.2 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

The Company recorded a loss of $ 0.2 million for changes in the fair value of the earn-out liability for the six months ended June 30, 2023 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Prior to the Hisco Transaction by DSG, Hisco had a preexisting contingent consideration arrangement from an acquisition Hisco made during 2022.

DSG assumed this liability with a potential earn-out payment of up to $ 3.8 million, subject to the achievement of certain EBITDA performance targets for the twelve months ending December 27, 2023, subject to certain adjustments and exclusions set forth in the purchase agreement.

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

As of June 8, 2023 (the Hisco acquisition date) and June 30, 2023, the fair value of the earn-out was $ 1.5 million and $ 1.5 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

There was no change in the fair value of the earn-out liability for the six months ended June 30, 2023.

Frontier Acquisition

The consideration for the Frontier acquisition includes a potential earn-out payment of up to $ 3.0 million based upon the achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2024, with payments made annually beginning in 2023 and ending in 2025.

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

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

As of March 31, 2022 (the Frontier acquisition date), December 31, 2022 and June 30, 2023, the fair value of the earn-out was $ 0.9 million, $ 1.7 million and $ 0.5 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheet.

The Company recorded income of $ 0.2 million for changes in the fair value of the earn-out liability for the six months ended June 30, 2023 as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Note 9 – Debt

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

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

(in thousands) June 30, 2023 December 31, 2022

Senior secured revolving credit facility $ 8,800 $ 122,000

1 unchanged sentence

Senior secured delayed draw term loan 48,125 50,000

Incremental term loan 305,000 —

Other revolving line of credit 2,135 1,352

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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.

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

Pursuant to the Amended and Restated Credit Agreement, the Company's previous credit agreement was amended and restated in its entirety.

The Amended and Restated Credit Agreement provides for (i) a $ 200 million senior secured revolving credit facility, with a $ 25 million letter of credit sub-facility and a $ 10 million swingline loan sub-facility, (ii) a $ 250 million senior secured initial term loan facility and (iii) a $ 50 million senior secured delayed draw term loan facility.

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.

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.

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

The First Amendment provides for a $ 305 million incremental term loan.

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

On June 8, 2023, in connection with the Hisco Transaction, the Company borrowed the $ 305 million under the incremental term loan.

These borrowings were used, among other things, to partially fund the Hisco Transaction, to repay certain existing indebtedness of Hisco, HISCO Acquisition Subsidiary I, Inc.

and HISCOCAN Inc.

and their respective subsidiaries and to pay fees and expenses incurred in connection with the Hisco Transaction and the First Amendment.

Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction.

Each of the loans under the 2023 Credit Agreement mature on April 1, 2027.

The Company is required to repay principal of approximately $ 7.6 million each quarter.

Net of outstanding letters of credit, there w as $ 189.6 million of borrowi ng availability under the revolving credit facility as of June 30, 2023.

The weighted average interest rate from January 1, 2023 through June 30, 2023 was 7.4 %.

The loans under the 2023 Credit Agreement bear interest, at the Company’s option, at a rate equal to (i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the 2023 Credit Agreement), plus, in each case, an additional margin ranging from 0.0 % to 1.75 % per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the 2023 Credit Agreement), plus, in each case, an additional margin ranging from 1.0 % to 2.75 % per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Credit Agreement.

On April 1, 2022, deferred financing costs of $ 4.0 million were incurred in connection with the original Amended and Restated Credit Agreement, and on June 8, 2023, deferred financing costs of $ 3.4 million were incurred in connection with the

First Amendment.

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

As of 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.

As of June 30, 2023, total deferred financing costs net of accumulated amortization were $ 9.9 million of which $ 7.2 million are included in Long-term debt, less current portion, net (related to the senior secured term loan, senior secured delayed draw term loan and incremental term loan) and $ 2.7 million are included in Other assets (related to the senior secured revolving credit facility) in the Unaudited Condensed Consolidated Balance Sheet.

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

The Company was in compliance with all financial covenants set forth in the 2023 Credit Agreement as of June 30, 2023.

Note 10 – Stock-Based Compensation

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 .

The Company recorded stock-based compensation expense of $ 2.2 million and $ 4.4 million for the three and six months ended June 30, 2023, respectively, and $ 4.0 million and $ 4.0 million for the three and six months ended June 30, 2022, respectively .

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

Accordingly, changes in the market value of the Company's common stock may result in 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.

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

A stock-based compensation liability of $ 5.5 million a s of June 30, 2023 and $ 3.3 million as of December 31, 2022 was included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

Restricted Stock Awards

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.

For the six months ended June 30, 2023, the Company issued approximately 26,000 Restricted stock awards ("RSAs") that vest over five years from the grant date with a grant date fair value of $ 1.3 million.

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

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

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

The RSAs are valued at the closing price of DSG's common stock on the date of grant and the expense is recorded ratably over the vesting period.

Stock Options

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.

For the six months ended June 30, 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.

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

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

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

Unrecognized compensation related 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:

Unrecognized compensation related to stock options as of June 30, 2023 was $ 9.2 million, which is expected to be recognized over a weighted-average period of 2.4 years.

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

Number of Stock Options Weighted Average Exercise Price

1 unchanged sentence

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:

Outstanding on June 30, 2023 893,821 74.30

Exercisable on June 30, 2023 40,000 27.01

The weighted average fair value assumptions used in the Black-Scholes model for the stock options issued during 2023 were as follows:

Expected volatility 45.23 %

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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 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

Note 11 – Stockholders' Equity

Rights Offering

On May 9, 2023, the Company commenced a Rights Offering to raise gross proceeds of up to approximately $ 100 million.

The Rights Offering provided one transferable subscription right for each share of DSG common stock held by holders of DSG common stock on record as of the close of business on May 1, 2023.

Each subscription right entitled the holder to purchase 0.105 shares of DSG common stock at a subscription price of $ 45.00 per share.

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

In addition, holders of subscription rights who fully exercised their subscription rights were entitled to oversubscribe for additional shares of DSG common stock, subject to proration.

The Rights Offering closed on May 30, 2023 and was fully subscribed (taking into account the exercise of over-subscription rights) and raised approximately $ 100 million and resulted in the issuance of 2,222,222 shares of DSG common stock, at a purchase price of $ 45.00 per share.

The Company incurred transaction costs related to the issuance of DSG common stock for the Rights Offering of $ 1.5 million, which were recorded against Capital in excess of par value in the Unaudited Condensed Consolidated Balance Sheet .

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

Stock Repurchase Program

Under an existing stock repurchase program authorized by the Board of Directors, the Company may repurchase its common stock from time to time in open market 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.

No shares were repurchased during the three and six months ended June 30, 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 June 30, 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 March 31,

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

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

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Note 13 – Income Taxes

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.

The Company recorded income tax expense of $ 0.5 million , a 15.0 % effective tax rate for the three months ended June 30, 2023 .

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

The effective tax rate for the three months ended June 30, 2023 was lower than the U.S.

statutory rate primarily due to the release of a reserve for an uncertain tax benefit during the quarter.

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

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

The Company recorded income tax expense of $ 2.6 million , a 22.9 % effective tax rate for the six months ended June 30, 2023 .

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

The effective tax rate for the six months ended June 30, 2023 was slightly higher than the U.S.

statutory rate primarily due to state taxes, foreign operations, and other permanent items, offset by the release of a reserve for an uncertain tax benefit during the second quarter.

The effective tax rate for the six months ended June 30, 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 three months ended March 31, 2023 was impacted by state taxes, foreign operations, and other permanent items.

statutory rate, the effective tax rate for the six months ended June 30, 2023 was impacted by state taxes, foreign income and other permanent items, offset by the release of a reserve for an uncertain tax benefit during the second quarter.

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

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

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

As of June 30, 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 2016 through 2022.

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

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

Purporting to act on behalf of DSG, in the Derivative Action the plaintiffs allege, among other things, various

claims of alleged breach of fiduciary duty against the Director and Officer Defendants and the LKCM Defendants in connection with the Mergers.

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

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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 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.

At June 30, 2023 the Company had approximately $ 0.1 million accrued for potential monitoring costs included in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet.

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

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Purchase commitments

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

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.

The Company enters into inventory purchase commitments with third parties in the ordinary course of business, and as of June 30, 2023, had contractual commitments to purchase approximately $ 187 million of products 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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Consulting Services

Subsequent to the Mergers, individuals employed by LKCM Headwater Operations, LLC, a related party of Luther King Capital Management Corporation (“LKCM”), have provided the Company with certain consulting services in order to identify cost savings, revenue enhancements and operational synergies of the combined companies.

As of 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.

Subsequent to the Mergers, individuals employed by LKCM Headwater Operations, LLC, a related party of LKCM, have provided the Company with certain consulting services in order to identify cost savings, revenue enhancements and operational synergies of the combined companies.

As of June 30, 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

Immediately prior to the Mergers, entities affiliated with Luther King Capital Management Corporation (“LKCM”) and J.

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).

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

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

As of the Merger Date, Mr.

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

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

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

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

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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 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.

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

As a result of the issuance of 10.3 million shares at the closing of the Mergers 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 Mr.

King beneficially 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.

Rights Offering

Certain entities affiliated with LKCM and J.

Bryan King exercised their basic subscription rights and over-subscription rights in the Rights Offering and purchased approximately 1.8 million additional shares of DSG common stock at a purchase price of $ 45.00 per share.

Following the completion of the Rights Offering on May 30, 2023, entities affiliated with LKCM and Mr.

King beneficially owned in the aggregate approximately 18.2 million shares of DSG common stock as of June 1, 2023, representing approximately 77.9 % of the outstanding shares of DSG common stock as of June 30, 2023.

Board of Directors

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

Note 16 – Segment Information

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

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

• TestEquity is a distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, automotive and medical industries.

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

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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 March 31,

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

(in thousands) 2023 2022 2023 2022

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All Other (2)

14,496 16,336 29,112 16,336

Total revenue $ 377,984 $ 321,336 $ 726,254 $ 475,421

Operating income (loss)

$ 8,470 $ ( 2,562 ) $ 16,715 $ ( 2,562 )

TestEquity ( 3,182 ) 471 ( 3,156 ) ( 133 )

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All Other (2)

( 290 ) 814 786 814

Total operating income (loss) $ 13,776 $ 4,113 $ 30,497 $ 7,101

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(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