What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-10 · 265 added, 126 removed, 274 unchanged (59% of the section changed)

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("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.

The Mergers that were consummated on April 1, 2022 resulted in the combination of Lawson, TestEquity and Gexpro Services.

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

Financial Statements.

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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.

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.

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

Recent Events

HIS Company, Inc.

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.

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

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

In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco, creating one of the largest suppliers serving the electronics design, production, and repair industries.

Accordingly, Hisco results are included in the TestEquity reportable segment.

DSG funded the Hisco Transaction using a combination of borrowings under its 2023 Credit Agreement and proceeds raised from the Rights Offering, both discussed below.

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

Debt Amendment

On June 8, 2023, the Company 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.

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

Rights Offering

On May 30, 2023, the Company raised approximately $100 million pursuant to a Rights Offering of transferable subscription rights to holders of DSG common stock as of the close of business on May 1, 2023.

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

DSG Vision and Strategic Focus

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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.

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

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

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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

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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 .

A measure of the PMI index above 50 is generally viewed as indicating an expansion of the manufacturing sector while a measure below 50 is generally viewed as representing a contraction.

The average monthly PMI wa s 46.9 in the six months ended June 30, 2023 compared to 56.3 in the six months ended June 30, 2022 .

Lawson Sales Drivers

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Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations.

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

Lawson also is expanding its inside sales team to help drive field sales representative productivity and also utilizes an e-commerce site to generate sales.

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.

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

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

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

Through the Hisco Transaction, TestEquity will expand its product offerings, including adhesives, chemicals and tapes as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags.

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

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

Gexpro Services Sales Drivers

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Cyber Incident Litigation

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

On February 10, 2022, DSG disclosed that Lawson Products' 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.

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.

At June 30, 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.

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

Inventory Reserves - Inventories principally consist of finished products 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 March 31, 2023, our inventory reserve was $12.9 million, equal to approximately 4.5% of our gross inventory.

At June 30, 2023, our inventory reserve was $13.6 million, equal to approximately 4.0% 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 $3.4 million.

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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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Factors Affecting Comparability to Prior Periods

Our results of operations are not directly comparable to prior results for the periods presented due to the Mergers that were completed on April 1, 2022.

Our results of operations for the six months ended June 30, 2023 are not directly comparable to prior results for the six months ended June 30, 2022 due to the Mergers that were completed on April 1, 2022.

The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805").

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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.

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.

Non-GAAP Financial Measures

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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:

The following table provides our calculation of Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022:

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

Three Months Ended March 31,

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

(in thousands) 2023 2022 2023 2022 (7)

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Stock-based compensation (1)

Severance costs (2)

2,188 4,013 4,392 4,013

Severance and acquisition related retention expenses (2)

2,437 953 2,788 1,409

Merger/integration costs (3)

150 5,790 1,373 7,232

Inventory step-up (4)

716 1,622 716 1,622

Acquisition related costs (5)

4,908 334 7,784 1,337

Other non-recurring (6)

1,341 82 1,597 106

Adjusted EBITDA $ 40,100 $ 31,653 $ 79,453 $ 45,155

(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.

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

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

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

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

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

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

(6) Other non-recurring costs consist of non-capitalized deferred financing costs incurred in conjunction with the 2023 Credit Agreement, certain non-recurring strategic projects 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.

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The following table provides Adjusted EBITDA by reportable segment:

Three Months Ended March 31,

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

(in thousands) 2023 2022 2023 2022

Adjusted EBITDA

$ 16,070 $ 9,405 $ 34,520 $ 9,405

TestEquity 9,493 8,647 17,152 14,138

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All Other (2)

1,395 1,686 2,965 1,686

Consolidated Adjusted EBITDA $ 40,100 $ 31,653 $ 79,453 $ 45,155

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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 March 31, 2023 Three Months Ended March 31, 2022

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

Lawson Operating Income 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 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.

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(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 March 31, 2023 and 2022 , regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).

These non-GAAP results represent Lawson’s total operating activities for the six months ended June 30, 2023 and 2022 , regardless of the Merger date (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.

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 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.

The following results of operations for the three and six months ended June 30, 2023 and the three months ended June 30, 2022 include the combined operations of DSG.

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

RESULTS OF OPERATIONS

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

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

Consolidated Results of Operations

Three Months Ended March 31,

Three Months Ended June 30,

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

$ 125,280 36.0% $ — —%

Lawson $ 119,147 31.5% $ 107,334 33.4%

TestEquity 136,067 36.0% 97,874 30.5%

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All Other 14,496 3.8% 16,336 5.1%

14,615 4.2% — —%

Total Revenue 377,984 100.0% 321,336 100.0%

Cost of goods sold

Lawson 52,769 14.0% 50,552 15.7%

TestEquity 104,827 27.7% 75,064 23.4%

Gexpro Services 75,928 20.1% 70,615 22.0%

All Other 8,437 2.2% 10,550 3.3%

Total Cost of goods sold 241,961 64.0% 206,781 64.4%

Gross profit 136,023 36.0% 114,555 35.6%

Selling, general and administrative expenses

Lawson 57,908 15.3% 59,344 18.5%

TestEquity 34,422 9.1% 22,339 7.0%

Gexpro Services 23,568 6.2% 23,787 7.4%

All Other 6,349 1.7% 4,972 1.5%

Total Selling, general and administrative expenses 122,247 32.4% 110,442 34.4%

Operating income (loss) 13,776 3.6% 4,113 1.3%

Interest expense (9,492) (2.5)% (3,751) (1.2)%

Loss on extinguishment of debt — —% (2,814) (0.9)%

Change in fair value of earnout liabilities 36 —% (5,693) (1.8)%

Other income (expense), net (761) (0.2)% (182) (0.1)%

Income (loss) before income taxes 3,559 0.9% (8,327) (2.6)%

Income tax expense (benefit) 535 0.1% (3,612) (1.1)%

Net income (loss) $ 3,024 0.8% $ (4,715) (1.5)%

Overview of Consolidated Results of Operations

Our consolidated revenue increased in the second quarter of 2023 compared to the second quarter of 2022 primarily driven by acquisitions completed in 2023 and 2022 and organic sales growth.

Consolidated gross profit and Selling, general and administrative expenses increased over the prior year primarily driven by the inclusion of the acquisitions completed in 2023 and 2022.

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 June 30, Change

(Dollars in thousands) 2023 2022 Amount %

Revenue $ 119,147 $ 107,334 $ 11,813 11.0 %

Cost of goods sold 52,769 50,552 2,217 4.4 %

Gross profit 66,378 56,782 9,596 16.9 %

Selling, general and administrative expenses 57,908 59,344 (1,436) (2.4) %

Operating income (loss) $ 8,470 $ (2,562) $ 11,032 N/M

Gross profit margin 55.7 % 52.9 %

Adjusted EBITDA (1)

$ 16,070 $ 9,405 $ 6,665 70.9 %

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

Revenue and Gross Profit

Revenue increased $11.8 million, or 11.0%, to $119.1 million in the second quarter of 2023 compared to $107.3 million in the second 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 $9.6 million to $66.4 million in the second quarter of 2023 compared to gross profit of $56.8 million in the prior year quarter primarily as a result of increased sales, price increases, lower net freight expense and spreading operating expenses over a higher level of sales.

Lawson gross profit as a percent of revenue was 55.7% in the second quarter of 2023 compared to 52.9% in the prior year quarter.

The gross profit margin percentage improvement for the second quarter of 2023 was primarily the result of price increases and leveraging operating costs over a higher sales base.

The prior year quarter was negatively impacted by increased supplier costs from inflation and supply chain disruptions, and a sales shift toward lower margin customers.

Selling, General and Administrative Expenses

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 decreased $1.4 million to $57.9 million in the second quarter of 2023 compared to $59.3 million in the prior year quarter.

The decrease was primarily driven by lower stock-based compensation, acquisition related costs and legal expenses, partially offset by higher compensation expense incurred to support increased sales and health insurance costs.

Adjusted EBITDA

During the three months ended June 30, 2023, Lawson generated Adjusted EBITDA of $16.1 million , an increase of $6.7 million , or 70.9% from the same period a year ago primarily driven by increased revenue and margins and lower Selling, general and administrative expenses .

TestEquity Segment

Three Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

Revenue $ 136,067 $ 97,874 $ 38,193 39.0 %

Cost of goods sold 104,827 75,064 29,763 39.7 %

Gross profit 31,240 22,810 8,430 37.0 %

Selling, general and administrative expenses 34,422 22,339 12,083 54.1 %

Operating income (loss) $ (3,182) $ 471 $ (3,653) N/M

Gross profit margin 23.0 % 23.3 %

Adjusted EBITDA (1)

$ 9,493 $ 8,647 $ 846 9.8 %

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

Revenue and Gross Profit

Revenue increased $38.2 million, or 39.0%, to $136.1 million in the second quarter of 2023 compared to $97.9 million in the second quarter of 2022 .

The increase was primarily driven by $43.4 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $5.2 million decline in legacy TestEquity revenue due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base.

Gross profit increased $8.4 million to $31.2 million in the second quarter of 2023 compared to gross profit of $22.8 million in the prior year quarter primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $11.1 million of additional gross profit in the second quarter of 2023.

TestEquity gross profit as a percent of revenue was 23.0% in the second quarter of 2023 compared to 23.3% in the prior year quarter.

The slight gross profit margin percentage decline for t he second quarter of 2023 was due to the amortization of the fair value step-up of inventory of $0.7 million related to the Hisco Transaction .

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $12.1 million to $34.4 million in the second quarter of 2023 compared to $22.3 million in the prior year quarter.

Approximately $10.4 million of the increased expenses was primarily driven by the acquisitions completed in 2023 and 2022 and approximately $2.1 million of the increased expenses was driven by increased acquisition expenses in the second quarter of 2023 of $4.1 million in connection with the Hisco Transaction compared to $2.0 million of merger and acquisition expenses in the prior year quarter.

Adjusted EBITDA

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

Gexpro Services Segment

Three Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

Revenue $ 108,274 $ 99,792 $ 8,482 8.5 %

Cost of goods sold 75,928 70,615 5,313 7.5 %

Gross profit 32,346 29,177 3,169 10.9 %

Selling, general and administrative expenses 23,568 23,787 (219) (0.9) %

Operating income (loss) $ 8,778 $ 5,390 $ 3,388 62.9 %

Gross profit margin 29.9 % 29.2 %

Adjusted EBITDA (1)

$ 13,142 $ 11,915 $ 1,227 10.3 %

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

Revenue and Gross Profit

Revenue increased $8.5 million, or 8.5%, to $108.3 million in the second quarter of 2023 compared to $99.8 million in the second quarter of 2022 .

The increase was primarily driven by 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 $3.2 million to $32.3 million in the second quarter of 2023 compared to gross profit of $29.2 million in the prior year quarter primarily due to increased revenue.

Gexpro Services gross profit as a percent of revenue was 29.9% in the second quarter of 2023 compared to 29.2% in the prior year quarter.

The gross profit margin increase was driven by an improvement in the global supply chain and enhanced margin management on its product offering.

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 remained flat with $23.6 million of expenses in the second quarter of 2023 compared to $23.8 million in the prior year quarter.

Adjusted EBITDA

During the three months ended June 30, 2023, Gexpro Services generated Adjusted EBITDA of $13.1 million , an increase of $1.2 million, or 10.3%, from the same period a year ago primarily driven by increases in revenue and margins on flat Selling, general, and administrative expenses.

Consolidated Non-operating Income and Expense

Three Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

Interest expense $ (9,492) $ (3,751) $ (5,741) 153.1 %

Loss on extinguishment of debt $ — $ (2,814) $ 2,814 (100.0) %

Change in fair value of earnout liabilities $ 36 $ (5,693) $ 5,729 N/M

Other income (expense), net $ (761) $ (182) $ (579) 318.1 %

Income tax expense (benefit) $ 535 $ (3,612) $ 4,147 (114.8) %

N/M Not meaningful

Interest Expense

Interest expense increased $5.7 million in the second quarter of 2023 compared to the prior year quarter .

The increase was primarily driven by higher interest rates and outstanding borrowings partially driven by the Hisco Transaction .

Loss on Extinguishment of Debt

The $2.8 million loss on extinguishment of debt in the second quarter of 2022 was due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.

Change in Fair Value of Earnout Liabilities

The nominal benefit in the second quarter of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction.

The $5.7 million loss in the second quarter of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Income Tax Expense (Benefit)

Income tax expense was $0.5 million, a 15.0% effective tax rate for the three months ended June 30, 2023 compared to income tax benefit of $3.6 million and a 43.4% effective tax rate for the three months ended June 30, 2022.

The change in the year over year effective tax rate was primarily due to the the release of a reserve for an uncertain tax benefit during the quarter.

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

Consolidated Results of Operations

Six Months Ended June 30,

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

$ 244,427 33.7 % $ 107,334 22.6 %

TestEquity 243,425 33.5 % 170,276 35.8 %

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All Other 29,112 4.0 % 16,336 3.4 %

Total Revenue 726,254 100.0 % 475,421 100.0 %

Cost of goods sold

107,140 14.8 % 50,552 10.6 %

TestEquity 186,828 25.7 % 130,543 27.5 %

Gexpro Services 146,439 20.2 % 128,337 27.0 %

All Other 16,953 2.3 % 10,550 2.2 %

Total Cost of goods sold 457,360 63.0 % 319,982 67.3 %

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All Other 11,373 1.6 % 4,972 1.0 %

5,023 1.4% — —%

Total Selling, general and administrative expenses 238,397 32.8 % 148,338 31.2 %

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Net income (loss) $ 8,931 1.2 % $ (7,252) (1.5) %

(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.

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

Overview of Consolidated Results of Operations

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

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.

Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022 and the other acquisitions completed in 2023 and 2022.

The increase in gross profit for the first six months of 2023 compared to the first six months of 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date and the other acquisitions completed in 2023 and 2 022.

Expenses for the first six months of 2023 compared to the first six months of 2022 were impacted by the inclusion of Lawson and the other acquisitions completed in 2023 and 2022.

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

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Lawson Segment

Three Months Ended March 31, Change

Six Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

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(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 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.

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

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations for 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

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations for the six months ended June 30, 2022 were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented.

These non-GAAP Adjusted Results for the six months ended June 30, 2022 presented in the table below are referred to within this supplemental results of operations discussion as "Adjusted".

Six Months Ended June 30, Adjusted Change

(Dollars in thousands) 2023 Adjusted 2022 (1)

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$ 34,520 $ 17,447 $ 17,073 97.9%

(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.

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

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

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

Revenue and Gross Profit

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 .

Revenue increased $32.2 million , or 15.2%, to $244.4 million in the first six months of 2023 compared to adjusted revenue of $212.2 million in the same period of 2022 .

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.

Gross profit increased $25.0 million to $137.3 million in the first six months ended June 30, 2023 compared to adjusted gross profit of $112.3 million i n the same period of 2022 primarily as a result of increased sales, price increases , lower net freight expense and sp reading operating expenses over a higher level of sales.

Lawson gross profit as a percent of revenue was

56.2% in the first six months of 2023 compared to adjusted gross profit as a percent of adjusted revenue of 52.9% in the prior year period.

The gross profit margin percentage improvement for the first six months of 2023 was primarily the result of price increases, lower net freight costs and leveraging costs over a higher sales base.

T he adjusted gross profit margin percentage for the same period of 2022 was impacted by increased supplier costs from inflation and supply chain disruptions and a sales shift toward lower margin customers.

Adjusted gross profit margin for 2022 was also impacted by the amortization of the fair value step-up of inventory of $1.2 million related to the Mergers.

Selling, General and Administrative Expenses

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.

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

Selling, general and administrative expenses increased $16.8 million to $120.6 million in the first six months of 2023 compared to adjusted Selling, general and administrative expenses of $103.8 million in the same period of 2022.

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 related to the reverse merger acquisition accounting and higher stock-based compensation in 2023 partially offset by lower acquisition related costs in 2023 and a stock-based compensation benefit in 2022.

Adjusted EBITDA

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.

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

TestEquity Segment

Three Months Ended March 31, Change

Six Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

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Selling, general and administrative expenses 59,753 39,866 19,887 49.9 %

Operating income (loss) $ 26 $ (604) $ 630 (104.3) %

Operating income (loss) $ (3,156) $ (133) $ (3,023) N/M

Gross profit margin 23.3 % 23.3 %

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Revenue and Gross Profit

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.

Revenue increased $73.1 million , or 43.0%, to $243.4 million in the first six months of 2023 compared to $170.3 million in the same period in 2022 .

The increase was primarily driven by $78.3 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $5.2 million decline in legacy TestEquity due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base.

Gross profit increased $16.9 million to $56.6 million in the first six months of 2023 compared to $39.7 million in the same period of 2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $18.6 million of additional gross profit during the first six months of 2023 .

TestEquity gross profit as a percent of revenue was consistent at 23.3% in the first six months of 2023 compared to 23.3% in the prior year period driven by an expansion of margins within the existing base business offset by the amortization of the fair value step-up of inventory of $0.7 million related to the Hisco Transaction and 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 $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.

Selling, general and administrative expenses increased $19.9 million to $59.8 million in the first six months of 2023 compared to $39.9 million in the same period of 2022 .

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

Adjusted EBITDA

During the 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.

During the six months ended June 30, 2023 , TestEquity generated Adjusted EBITDA of $17.2 million , an increase of $3.0 million, or 21.3% from the same period a year ago with approximately $5.3 million driven by the acquisitions completed in 2023 and 2022.

Gexpro Services Segment

Three Months Ended March 31, Change

Six Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

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Revenue and Gross Profit

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.

Revenue increased $27.8 million , or 15.3%, to $209.3 million in the first six months of 2023 compared to $181.5 million in the same period of 2022 .

The increase was primarily driven by $3.2 million of revenue generated from the Frontier acquisition completed at the end of the first quarter of 2022 and organic growth in the base business through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit increased $9.7 million to $62.9 million in the first six months of 2023 compared to $53.1 million in the same period of 2022 .

Gexpro Services gross profit as a percent of revenue was 30.0% in the first six months of 2023 compared to 29.3% in the prior year period d riven by an improvement in the global supply chain and margin management on its product offering.

Selling, General and Administrative Expenses

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.

Selling, general, and administrative expenses increased $2.5 million to $46.7 million in the first six months ended June 30, 2023 compared to $44.2 million in the same period of 2022.

The increase was primarily driven by $2.4 million of additional expenses from the Frontier acquisition completed at the end of the first quarter of 2022 and additional compensation and product fulfillment costs to support the organic growth.

Adjusted EBITDA

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.

During the six months ended June 30, 2023 , Gexpro Services generated Adjusted EBITDA of $24.8 million , an increase of $4.9 million, or 24.5% from the same period a year ago primarily driven by increased revenue and gross profit margin .

Consolidated Non-operating Income and Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

(Dollars in thousands) 2023 2022 Amount %

Interest expense $ (17,162) $ (10,607) $ (6,555) 61.8 %

Loss on extinguishment of debt $ — $ (3,395) $ 3,395 N/M

Change in fair value of earnout liabilities $ (21) $ (5,693) $ 5,672 N/M

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

Other income (expense), net $ (1,736) $ 774 $ (2,510) (324.3) %

Income tax expense (benefit) $ 2,647 $ (4,568) $ 7,215 N/M

N/M Not meaningful

Interest Expense

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 $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 $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.

Interest expense increased $6.6 million in the first six months of 2023 compared to the same period of 2022 primarily due to an increase in interest rates and higher borrowings related to the Mergers and the other 2022 and 2023 acquisitions.

Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt in the six months ended June 30, 2022 was primarily due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.

Change in Fair Value of Earnout Liabilities

The nominal loss in the first six months of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction.

The $5.7 million loss in the first six months of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements.

Income Tax Expense (Benefit)

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.

Income tax expense was $2.6 million, a 22.9% effective tax rate for the first six months of 2023 compared to an income tax benefit of $4.6 million and a 38.6% effective tax rate for the first six months of 2022.

The change in the year over year effective tax rate was primarily due to lower transaction costs and the release of a reserve for an uncertain tax benefit.

The 2022 income tax was also impacted by the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers.

LIQUIDITY AND CAPITAL RESOURCES

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 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.

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

The Company believes its current balances of cash and cash equivalents, availability under its 2023 Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months.

As of June 30, 2023, liquidity for the Company was $233.8 million comprised of $44.2 million of cash and cash equivalents and $189.6 million of bo rrowing availability remaining, net of outstanding letters of credit, under the 2023 Credit Agreement.

On June 2, 2023, the Company raised approximately $100 million from the Rights Offering, in which 2,222,222 shares of DSG common stock were sold at a purchase price of $45.00 per share.

On June 8, 2023, the Company borrowed the $305.0 million under the incremental term loan of the 2023 Credit Agreement.

The Company used these combined proceeds primarily to fund the Hisco Transaction and to pay down its revolving credit facility.

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

Our current 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.

Our current debt obligations under the 2023 Credit Agreement mature in April 2027.

Principal payments on the 2023 Credit Agreement for the next twelve months are $30.3 million .

Refer to Note 9 – Debt within Item 1.

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The following table presents a summary of our cash flows:

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

(in thousands) June 30, 2023 June 30, 2022 Change

Net cash provided by (used in) operating activities $ 27,464 $ (39,543) $ 67,007

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Cash Provided by (Used in) Operating Activities

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.

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

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

Cash Provided by (Used in) Investing Activities

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.

Net cash used in investing activities for the six months ended June 30, 2023 was $262.8 million, primarily due to the Hisco Transaction, as well as 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 six months ended June 30, 2022 was $115.3 million, primarily due to acquisitions completed by TestEquity and Gexpro Services.

Cash Provided by (Used in) Financing Activities

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.

Net cash provided by financing activities for the six months ended June 30, 2023 was $274.9 million due to proceeds from the 2023 Credit Agreement and the Rights Offering partially offset by repayment of previous indebtedness and principal payments on the term loans.

In conjunction with the Hisco Transaction, the Company borrowed $305.0 million under the incremental term loan facility on June 8, 2023 and raised approximately $100 million through the Rights Offering closed during the second quarter of 2023.

During the first six months of 2023, deferred financing costs of $3.4 million were incurred related to the 2023 Credit Agreement and offering costs of $1.5 million were incurred related to the Rights Offering.

Net cash provided by financing activities for the six months ended June 30, 2022 was $157.0 million, primarily due to proceeds from term loans and revolving credit facilities to finance the Mergers and other acquisitions, partly offset by repayment of previous indebtedness.

Deferred financing costs of $11.4 million were incurred during the first six months of 2022 related to these financing activities.

Financing and Capital Requirements

Credit Facility

On April 1, 2022, 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.

On June 8, 2023, in connection with the Hisco Transaction, DSG entered into the First Amendment, which amended and replaced the previous April 1, 2022 credit agreement with the 2023 Credit Agreement, and provided for a $305.0 million incremental term loan facility.

The 2023 Credit Agreement also provides for the Company to increase the commitments from time to time by up to $200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants.

The 2023 Credit Agreement includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility, a $305 million incremental term loan and a $50 million senior secured delayed draw term loan facility.

Refer to Note 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.

Financial Statements for a description of the 2023 Credit Agreement.

On June 30, 2023, we had $598.4 million in outstanding borrowings under the 2023 Credit Agreement and $189.6 million of bo rrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component.

As of June 30, 2023, we were in compliance with all financial covenants under our 2023 Credit Agreement.

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

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.

As of June 30, 2023, we had contractual commitments to purchase approximately $187 million of products 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.

During the six months ended June 30, 2023, t otal capital expenditures for property, plant and equipment and rental equipment were $13.8 million excluding proceeds from the sale of rental equipment.

The Company expects to spend approxi mately $6 million to $8 million for capit al 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.

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.

The Company had $7.6 million of remaining availability for stock repurchases under the program as of June 30, 2023.

See Note 11 – Stockholders' Equity 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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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 2. Management’s Discussion and Analysis