Distribution Solutions Group, Inc. 10-Q

ITEM 1 - FINANCIAL STATEMENTS Distribution Solutions Group, Inc. Condensed Consolidated Balance Sheets (Dollars in thousands, except share data) (Unaudited) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 80,456 $ 24,554 Restricted cash 20,703 186 Accounts receivable, less allowances of $ 2,288 and $ 1,513 , respectively 238,543 166,301 Inventories, net 313,337 264,374 Prepaid expenses and other current assets 36,538 22,773 Total current assets 689,577 478,188 Property, plant and equipment, net 111,949 64,395 Rental equipment, net 26,320 27,139 Goodwill 397,762 348,048 Deferred tax asset 55 189 Intangible assets, net 265,319 227,994 Cash value of life insurance 18,001 17,166 Right of use operating lease assets 79,791 46,755 Other assets 7,194 5,736 Total assets $ 1,595,968 $ 1,215,610 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 107,140 $ 80,486 Current portion of long-term debt 32,335 16,352 Current portion of lease liabilities 13,241 9,964 Accrued expenses and other current liabilities 97,191 62,677 Total current liabilities 249,907 169,479 Long-term debt, less current portion, net 550,526 395,825 Lease liabilities 70,353 39,828 Deferred tax liability 24,452 23,834 Other liabilities 24,621 23,649 Total liabilities 919,859 652,615 Commitments and contingencies (Note 14) Stockholders’ equity (1) : Preferred stock, $ 1 par value: Authorized - 500,000 shares, issued and outstanding — None — — Common stock, $ 1 par value: Authorized - 70,000,000 shares Issued - 47,479,256 and 39,460,724 shares, respectively Outstanding - 46,844,598 and 38,833,568 shares, respectively 46,845 38,834 Capital in excess of par value 670,287 572,379 Retained deficit ( 18,377 ) ( 25,736 ) Treasury stock – 634,658 and 627,156 shares, respectively ( 12,697 ) ( 12,526 ) Accumulated other comprehensive income (loss) ( 9,949 ) ( 9,956 ) Total stockholders’ equity 676,109 562,995 Total liabilities and stockholders’ equity $ 1,595,968 $ 1,215,610 (1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two -for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details. See notes to Condensed Consolidated Financial Statements (Unaudited) 5 Table of Contents Distribution Solutions Group, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Dollars in thousands, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue $ 438,909 $ 347,151 $ 1,165,163 $ 822,572 Cost of goods sold 293,612 227,984 750,972 547,966 Gross profit 145,297 119,167 414,191 274,606 Selling, general and administrative expenses 132,514 97,140 370,911 245,478 Operating income (loss) 12,783 22,027 43,280 29,128 Interest expense ( 12,895 ) ( 6,097 ) ( 30,057 ) ( 16,704 ) Loss on extinguishment of debt — — — ( 3,395 ) Change in fair value of earnout liabilities 667 9,641 646 3,948 Other income (expense), net ( 1,133 ) ( 550 ) ( 2,869 ) 224 Income (loss) before income taxes ( 578 ) 25,021 11,000 13,201 Income tax expense (benefit) 990 8,480 3,637 3,912 Net income (loss) $ ( 1,568 ) $ 16,541 $ 7,363 $ 9,289 Basic income (loss) per share of common stock (1) $ ( 0.03 ) $ 0.43 $ 0.17 $ 0.27 Diluted income (loss) per share of common stock (1) $ ( 0.03 ) $ 0.42 $ 0.17 $ 0.27 Comprehensive income (loss) Net income (loss) $ ( 1,568 ) $ 16,541 $ 7,363 $ 9,289 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ( 3,579 ) ( 9,774 ) 128 ( 12,094 ) Other 464 — ( 121 ) — Comprehensive income (loss) $ ( 4,683 ) $ 6,767 $ 7,370 $ ( 2,805 ) (1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two -for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details. See notes to Condensed Consolidated Financial Statements (Unaudited) 6 Table of Contents Distribution Solutions Group, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Dollars in thousands, except share data) (Unaudited) Common Stock (1) Capital in Excess of Par Value (1) Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Outstanding Shares $ 1 Par Value Retained Deficit Treasury Stock Balance at January 1, 2023 38,833,568 $ 38,834 $ 572,379 $ ( 25,736 ) $ ( 12,526 ) $ ( 9,956 ) $ 562,995 Net income (loss) — — — 5,907 — — 5,907 Foreign currency translation adjustment — — — — — 2,624 2,624 Stock-based compensation — — 773 — — — 773 Stock-based compensation liability paid in shares — — 227 — — — 227 Shares issued 22,288 22 ( 22 ) — — — — Shares issued - earnout 3,400,000 3,400 ( 3,400 ) — — — — Tax withholdings related to net share settlements of stock-based compensation awards ( 5,278 ) ( 5 ) 5 — ( 117 ) — ( 117 ) Other — — 204 ( 4 ) — ( 200 ) — Balance at March 31, 2023 42,250,578 $ 42,251 $ 570,166 $ ( 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 4,444,444 4,444 94,025 — — — 98,469 Shares issued 6,672 7 ( 7 ) — — — — Tax withholdings related to net share settlements of stock-based compensation awards ( 2,224 ) ( 2 ) 2 — ( 54 ) — ( 54 ) Other — — 385 — — ( 385 ) — Balance at June 30, 2023 46,699,470 $ 46,700 $ 665,633 $ ( 16,809 ) $ ( 12,697 ) $ ( 6,834 ) $ 675,993 Net income (loss) — — — ( 1,568 ) — — ( 1,568 ) Foreign currency translation adjustment — — — — — ( 3,579 ) ( 3,579 ) Stock-based compensation — — 1,119 — — — 1,119 Shares issued 520 1 ( 1 ) — — — — Shares issued through employee share purchases 144,608 144 3,109 — — — 3,253 Compensation expense related to employee share purchases — — 427 — — — 427 Other — — — — — 464 464 Balance at September 30, 2023 46,844,598 $ 46,845 $ 670,287 $ ( 18,377 ) $ ( 12,697 ) $ ( 9,949 ) $ 676,109 (1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two -for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details . See notes to Condensed Consolidated Financial Statements (Unaudited) 7 Table of Contents Distribution Solutions Group, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Dollars in thousands) (Unaudited) Common Stock (1) Capital in Excess of Par Value (1) Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Outstanding Shares $ 1 Par Value Retained Deficit Treasury Stock Balance at January 1, 2022 20,589,648 $ 20,636 $ 186,739 $ ( 33,142 ) $ ( 10,033 ) $ 1,569 $ 165,769 Net income (loss) — — — ( 2,537 ) — — ( 2,537 ) Foreign currency translation adjustment — — — — — 171 171 Shares issued 12,129 11 ( 11 ) — — — — Tax withholdings related to net share settlements of stock-based compensation awards ( 1,777 ) — 33 — ( 33 ) — — Other — — ( 95 ) — — — ( 95 ) Balance at March 31, 2022 20,600,000 $ 20,647 $ 186,666 $ ( 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 51,364 52 ( 52 ) — — — — Deemed consideration for reverse acquisition 18,240,334 18,240 333,251 — — — 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 ( 3,734 ) ( 4 ) 4 — ( 78 ) — ( 78 ) Settlement of related party liability — — 5,276 — — — 5,276 Other — — ( 39 ) — — — ( 39 ) Balance at June 30, 2022 38,887,964 $ 38,935 $ 554,182 $ ( 40,394 ) $ ( 10,144 ) $ ( 751 ) $ 541,828 Net income (loss) — — — 16,541 — — 16,541 Foreign currency translation adjustment — — — — — ( 9,774 ) ( 9,774 ) Stock-based compensation — — 489 — — — 489 Shares issued 35,984 36 ( 36 ) — — — — Repurchase of common stock ( 108,178 ) ( 108 ) 108 — ( 1,940 ) — ( 1,940 ) Tax withholdings related to net share settlements of stock-based compensation awards ( 15,760 ) ( 16 ) 16 — ( 391 ) — ( 391 ) Other — — ( 6 ) — — — ( 6 ) Balance at September 30, 2022 38,800,010 $ 38,847 $ 554,753 $ ( 23,853 ) $ ( 12,475 ) $ ( 10,525 ) $ 546,747 (1) The accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted to reflect the two -for-one stock split completed in August 2023. See Note 1 – Nature of Operations and Basis of Presentation for details. See notes to Condensed Consolidated Financial Statements (Unaudited) 8 Table of Contents Distribution Solutions Group, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Nine Months Ended September 30, 2023 2022 Operating activities Net income (loss) $ 7,363 $ 9,289 Adjustments to reconcile to net cash used in operating activities: Depreciation and amortization 47,316 31,314 Amortization of debt issue costs 1,662 1,419 Extinguishment of debt — 3,395 Stock-based compensation 5,441 445 Compensation expense related to employee share purchases 427 — Change in fair value of earnout liabilities ( 646 ) ( 3,948 ) Gain on sale of rental equipment ( 1,929 ) ( 2,463 ) Gain on sale of property, plant and equipment ( 86 ) — Charge for step-up of acquired inventory 2,866 2,703 Net realizable value and reserve adjustment for obsolete and excess inventory — 5,551 Bad debt expense 1,045 564 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 8,329 ) ( 30,795 ) Inventories 9,639 ( 43,857 ) Prepaid expenses and other current assets ( 7,288 ) ( 2,224 ) Accounts payable 10,552 1,687 Accrued expenses and other current liabilities 5,587 1,316 Other changes in operating assets and liabilities 433 6,324 Net cash provided by (used in) operating activities 74,053 ( 19,280 ) Investing activities Purchases of property, plant and equipment ( 11,180 ) ( 4,954 ) Business acquisitions, net of cash acquired ( 252,007 ) ( 113,681 ) Purchases of rental equipment ( 7,735 ) ( 7,913 ) Proceeds from sale of rental equipment 4,202 5,998 Net cash provided by (used in) investing activities ( 266,720 ) ( 120,550 ) Financing activities Proceeds from revolving lines of credit 174,587 302,044 Payments on revolving lines of credit ( 295,816 ) ( 237,370 ) Proceeds from term loans 305,000 445,630 Payments on term loans ( 11,250 ) ( 343,662 ) Deferred financing costs ( 3,419 ) ( 11,956 ) Proceeds from rights offering, net of offering costs of $ 1,531 98,469 — Repurchase of common stock — ( 1,940 ) Shares repurchased held in treasury ( 171 ) ( 469 ) Proceeds from employees for share purchases 3,253 — Payment of financing lease principal ( 358 ) ( 457 ) Payment of earnout ( 1,000 ) — Net cash provided by (used in) financing activities 269,295 151,820 Effect of exchange rate changes on cash and cash equivalents ( 209 ) ( 1,309 ) Increase (decrease) in cash, cash equivalents and restricted cash 76,419 10,681 Cash, cash equivalents and restricted cash at beginning of period 24,740 14,671 Cash, cash equivalents and restricted cash at end of period $ 101,159 $ 25,352 Cash and cash equivalents $ 80,456 $ 25,171 Restricted cash 20,703 181 Total cash, cash equivalents and restricted cash $ 101,159 $ 25,352 See notes to Condensed Consolidated Financial Statements (Unaudited) 9 Table of Contents Distribution Solutions Group, Inc. Condensed Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) (Unaudited) Nine Months Ended September 30, 2023 2022 Supplemental disclosure of cash flow information Net cash paid for income taxes $ 9,370 $ 11,553 Net cash paid for interest $ 26,187 $ 12,093 Net cash paid for interest on supply chain financing $ 1,753 $ 579 Non-cash activities: 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 $ 521 $ 73 Right of use assets obtained in exchange for finance lease liabilities $ 396 $ 886 Right of use assets obtained in exchange for operating lease liabilities $ 19,879 $ 12,773 See notes to Condensed Consolidated Financial Statements (Unaudited) 10 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Nature of Operations and Basis of Presentation Organization 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: Lawson Products, Inc., an Illinois corporation ("Lawson"), TestEquity Acquisition, LLC, a Delaware limited liability company ("TestEquity"), and 301 HW Opus Holdings, Inc., a Delaware corporation conducting business as Gexpro Services ("Gexpro Services"). The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined on April 1, 2022 to create a global specialty distribution company. A summary of the Mergers (as defined below), including the legal entities party to the transactions and the stock consideration, is presented below. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc., and all entities consolidated in the accompanying unaudited condensed consolidated financial statements. Recent Events Stock Split On August 15, 2023, DSG announced that its Board of Directors approved and declared a two -for-one stock split (the “Stock Split”) which entitled each stockholder of record as of the close of business on August 25, 2023 to receive one additional share of DSG common stock for each share of DSG common stock then-held. The additional shares were distributed after the close of trading on August 31, 2023, and shares of DSG common stock began trading at the split-adjusted basis on September 1, 2023. Accordingly, all share and per share amounts have been retroactively adjusted to reflect the impact of the Stock Split for all periods presented herein. In order to implement the Stock Split, on August 31, 2023, DSG filed a Third Amended and Restated Certificate of Incorporation of DGS with the Secretary of State of the State of Delaware to increase the number of authorized shares of DSG common stock from 35,000,000 to 70,000,000 , which became effective on that date. HIS Company, Inc. Acquisition 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 $ 268.5 million, net of cash acquired of $ 12.2 million, 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 with borrowings under 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. 11 Table of Contents Rights Offering On May 30, 2023, the Company issued 4,444,444 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 0.0525 shares of DSG common stock at a subscription price of $ 22.50 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 On December 29, 2021, DSG entered into: • an Agreement and Plan of Merger (the “TestEquity Merger Agreement”) by and among (i) LKCM TE Investors, LLC, a Delaware limited liability company (the “TestEquity Equityholder”), (ii) TestEquity, which was a wholly-owned subsidiary of the TestEquity Equityholder, (iii) DSG and (iv) Tide Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of DSG (“Merger Sub 1”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 1 would merge with and into TestEquity, with TestEquity surviving the merger as a wholly-owned subsidiary of DSG (the “TestEquity Merger”); and • an Agreement and Plan of Merger (the “Gexpro Services Merger Agreement” and, together with the TestEquity Merger Agreement, the “Merger Agreements”) by and among (i) 301 HW Opus Investors, LLC, a Delaware limited liability company (the “Gexpro Services Stockholder”), (ii) Gexpro Services, which was a wholly-owned subsidiary of the Gexpro Services Stockholder, (iii) DSG and (iv) Gulf Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of DSG (“Merger Sub 2”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 2 would merge with and into Gexpro Services, with Gexpro Services surviving the merger as a wholly-owned subsidiary of DSG (the “Gexpro Services Merger” and, together with the TestEquity Merger, the “Mergers”). At the closing of the Mergers, each outstanding share of TestEquity and Gexpro Services common stock outstanding immediately prior to the closing of the Mergers was converted into approximately 0.1809 shares and 0.3838 shares, respectively, of DSG common stock, based on the ratio of outstanding shares of each entity immediately prior to the Mergers to the number of shares of DSG common stock acquired in the Mergers. Completion of the TestEquity Merger On April 1, 2022 (the "Merger Date"), the TestEquity Merger was consummated pursuant to the TestEquity Merger Agreement. In accordance with the TestEquity Merger Agreement, Merger Sub 1 merged with and into TestEquity, with TestEquity surviving as a wholly-owned subsidiary of DSG. In accordance with and under the terms of the TestEquity Merger Agreement, in connection with the closing of the TestEquity Merger on the Merger Date, DSG: (i) issued to the TestEquity Equityholder 6,600,000 shares of DSG common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity. The TestEquity Merger Agreement provided that up to an additional 1,400,000 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 1,400,000 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 Liabilities for information about the earnout derivative liability related to the TestEquity Holdback Shares. 12 Table of Contents Completion of the Gexpro Services Merger On the Merger Date, the Gexpro Services Merger was consummated pursuant to the Gexpro Services Merger Agreement. In accordance with the Gexpro Services Merger Agreement, Merger Sub 2 merged with and into Gexpro Services, with Gexpro Services surviving as a wholly-owned subsidiary of DSG. In accordance with and under the terms of the Gexpro Services Merger Agreement, in connection with the closing of the Gexpro Services Merger on the Merger Date, DSG: (i) issued to the Gexpro Services Stockholder 14,000,000 shares of DSG common stock, (ii) on behalf of Gexpro Services, paid certain indebtedness of Gexpro Services and (iii) on behalf of Gexpro Services, paid certain specified transaction expenses of Gexpro Services. The Gexpro Services Merger Agreement provided that up to an additional 2,000,000 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 2,000,000 shares of DSG common stock to the Gexpro Services Stockholder (the “Gexpro Services Holdback Shares”) pursuant to the terms of the earnout provisions of the Gexpro Services Merger Agreement. The Gexpro Services Holdback Shares issued represented the maximum number of additional shares that could be issued under the Gexpro Services Merger Agreement, and no further shares are available for issuance, and no additional shares will be issued, in connection with the Gexpro Services Merger Agreement. As of April 1, 2022, approximately 1,076,000 of the Gexpro Services Holdback Shares had been expected to be issued under the first earnout opportunity in the Gexpro Services Merger Agreement based on certain earnout metrics related to the consummation of certain additional acquisitions which were completed prior to the Merger Date. Under the Gexpro Services Merger Agreement, if any Gexpro Services Holdback Shares remained after the calculation of the first earnout opportunity, there was a second earnout opportunity under the Gexpro Services Merger Agreement based on certain earnout performance metrics. On March 20, 2023, all 2,000,000 Gexpro Services Holdback Shares were issued under the earnout opportunities. The incremental 924,000 Gexpro Services Holdback Shares that were issued in excess of the 1,076,000 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 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 of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date. For more information about the Mergers, refer to Note 3 – Business Acquisitions. Nature of Operations A summary of the nature of operations for each of DSG's operating companies is presented below. Information regarding DSG's reportable segments is presented in Note 16 – Segment Information. 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, 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 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 ("ASC") 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. This determination 13 Table of Contents 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 nine months ended September 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 nine months ended September 30, 2023 and the three months ended September 30, 2022. The unaudited condensed consolidated financial statements as of September 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. Gexpro Services operates on a calendar year-end for annual reporting purposes. However, quarterly financial statements for Gexpro Services are prepared on financial close dates that may differ from that of the Company. For the quarter ended September 30, 2023, there was no difference in the period end. The Company utilizes the exchange rates in effect at Gexpro Services’ reporting date and the appropriate weighted-average rate for its fiscal reporting period. The accompanying unaudited condensed consolidated financial statements of DSG have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with DSG's audited consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission ("SEC") and the Lawson Products, Inc. unaudited condensed consolidated financial statements and accompanying notes included in DSG’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022. A ll normal recurring adjustments have been made that are necessary to fairly state the results of operations for the interim periods. Operating results for the three and nine month period ended September 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 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 In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which revises the requirements for how an entity should measure credit losses on financial instruments. The pronouncement was effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis. The Company adopted this guidance on January 1, 2023. The adoption had no 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): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires an entity to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The pronouncement is effective in fiscal years beginning after December 15, 2022 and early adoption is permitted. 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 and will be applied to business combinations on or after the adoption date. Note 3 – Business Acquisitions 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 20.6 million shares of DSG common stock on April 1, 2022 to the former owners of TestEquity and Gexpro Services. On March 20, 2023, an additional 3.4 million shares of DSG common stock were issued. Refer to Note 1 – Nature of Operations and Basis of Presentation for further information regarding the Mergers. 14 Table of Contents The business combination of Lawson, TestEquity and Gexpro Services combines three value-added complementary distribution businesses. Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental MRO marketplace. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical OEM products. Refer to Note 1 – Nature of Operations and Basis of Presentation for more information on the nature of operations for these businesses. 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. These estimates were determined through established and generally accepted valuation techniques. Allocation of Consideration Exchanged Under the acquisition method of accounting, the estimated consideration exchanged was calculated as follows: (in thousands, except share data) April 1, 2022 Number of DSG common shares 18,240,334 DSG common stock closing price per share on March 31, 2022 $ 19.27 Fair value of shares exchanged $ 351,491 Other consideration (1) 1,910 Total consideration exchanged $ 353,401 (1) Fair value adjustment of stock-based compensation awards. Due to the publicly traded nature of shares of DSG common stock, the equity issuance of shares of DSG common stock based on this value was considered to be a more reliable measurement of the fair market value of the transaction compared to the equity interests of the accounting acquirer. The allocation of consideration exchanged to the tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the Merger Date. The accounting for the Mergers was complete as of December 31, 2022. Goodwill generated from the Mergers is no t deductible for tax purposes. The following table summarizes the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed at the Merger Date after applying measurement period adjustments: (in thousands) Final Purchase Price Allocation Current assets $ 148,308 Property, plant and equipment 57,414 Right of use assets 18,258 Other intangible assets 119,060 Deferred tax liability, net of deferred tax asset ( 19,394 ) Other assets 18,373 Current liabilities ( 71,165 ) Long-term obligations ( 25,746 ) Lease and financing obligations ( 28,827 ) Derivative earnout liability ( 43,900 ) Goodwill 181,020 Total consideration exchanged $ 353,401 15 Table of Contents The allocation of consideration exchanged to other intangible assets acquired was as follows: (in thousands) Fair Value Estimated Life (in years) Customer relationships $ 76,050 19 Trade names 43,010 8 Total other intangible assets $ 119,060 Other Acquisitions DSG and its operating companies acquired other businesses during the first nine 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. 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 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. The total purchase consideration exchanged for the Hisco Transaction was $ 268.5 million, net of cash acquired of $ 12.2 million, 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. 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. For the three and nine months ended September 30, 2023, $ 10.1 million and $ 12.4 million, respectively, 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 with borrowings under 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 Purchase Agreement allowed certain eligible Hisco employees to invest all or a portion of their respective closing payment in DSG common stock at $ 22.50 per share, up to an aggregate value of DSG common stock issued to such eligible Hisco employees of $ 25.0 million. During the three and nine months ended September 30, 2023, the Company issued 144,608 shares of DSG common stock to the eligible Hisco employees and received approximately $ 3.25 million. For the three and nine months ended September 30, 2023, approximately $ 0.4 million was recorded as compensation expense for the discount between the prevailing market price of the DSG common stock on the date of purchase and the purchase price of $ 22.50 per share as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). 16 Table of Contents 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: Hisco (in thousands) June 8, 2023 Acquisition Date Measurement Period Adjustments Adjusted Total Current assets $ 131,950 $ ( 2,565 ) $ 129,385 Property, plant and equipment 48,326 — 48,326 Right of use assets 21,102 1,188 22,290 Other intangible assets: Customer relationships 41,800 ( 200 ) 41,600 Trade names 25,600 — 25,600 Deferred tax liability, net of deferred tax asset ( 2,544 ) 40 ( 2,504 ) Other assets 2,495 — 2,495 Accounts payable ( 16,689 ) — ( 16,689 ) Lease liabilities ( 22,372 ) 293 ( 22,079 ) Accrued expenses and other liabilities ( 8,961 ) — ( 8,961 ) Goodwill 49,718 ( 713 ) 49,005 Total purchase consideration exchanged, net of cash acquired $ 270,425 $ ( 1,957 ) $ 268,468 Cash consideration $ 252,007 $ — $ 252,007 Deferred consideration 12,418 3,943 16,361 Contingent consideration 6,000 ( 5,900 ) 100 Total purchase consideration exchanged, net of cash acquired $ 270,425 $ ( 1,957 ) $ 268,468 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. Following the initial fair value measurement, the Company updated the purchase price allocation for Hisco primarily related to the ongoing review of the opening balance sheet and contractual working capital adjustments and revised certain assumptions used in estimating the fair value of the contingent consideration. The adjustments to these balances resulted in a $ 0.7 million decrease to goodwill and a $ 2.0 million decrease to the total purchase consideration, net of cash acquired. 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 $ 42.9 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 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 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 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: 17 Table of Contents (in thousands) Interworld Highway, LLC Resolux Frontier National Test Equipment Instrumex Acquisition date April 29, 2022 January 3, 2022 March 31, 2022 June 1, 2022 December 1, 2022 Total Current assets $ 15,018 $ 10,210 $ 2,881 $ 2,187 $ 3,495 $ 33,791 Property, plant and equipment 313 459 1,189 642 30 2,633 Right of use assets — 1,125 9,313 — — 10,438 Other intangible assets: Customer relationships 6,369 11,400 9,300 2,100 800 29,969 Trade names 4,600 6,100 3,000 — — 13,700 Other assets 10 86 — — 14 110 Accounts payable ( 8,856 ) ( 3,058 ) ( 778 ) ( 196 ) ( 1,305 ) ( 14,193 ) Current portion of long-term debt — — — ( 2,073 ) — ( 2,073 ) Accrued expenses and other liabilities — ( 4,747 ) ( 1,462 ) ( 1,171 ) ( 626 ) ( 8,006 ) Lease liabilities — ( 1,125 ) ( 9,313 ) — — ( 10,438 ) Long-term debt — — — — ( 2,105 ) ( 2,105 ) Goodwill 37,236 10,305 11,544 5,703 1,989 66,777 Total purchase consideration exchanged, net of cash acquired $ 54,690 $ 30,755 $ 25,674 $ 7,192 $ 2,292 $ 120,603 Cash consideration $ 54,690 $ 30,755 $ 25,674 $ 6,023 $ 1,818 $ 118,960 Seller's notes — — — 1,169 — 1,169 Deferred consideration — — — — 474 474 Total purchase consideration exchanged, net of cash acquired $ 54,690 $ 30,755 $ 25,674 $ 7,192 $ 2,292 $ 120,603 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. Refer to Note 8 – Earnout Liabilities for additional information on the earn-out. Following the initial fair value measurement, the Company updated the purchase price allocation for Instrumex in 2023 related to accrued expenses and other liabilities and long-term debt. The adjustments to these balances resulted in a $ 0.9 million increase to goodwill and a $ 1.6 million decrease to the total purchase consideration, net of cash acquired. 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. 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 September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue $ 438,909 $ 457,958 $ 1,347,226 $ 1,320,226 Net income $ ( 1,568 ) $ 13,056 $ 8,175 $ 12,147 18 Table of Contents Actual Results of Business Acquisitions The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the third quarter and first nine months of 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 September 30, 2023 Three Months Ended September 30, 2022 (in thousands) Lawson Other Acquisitions Total Lawson Other Acquisitions Total Revenue $ — $ 104,796 $ 104,796 $ 126,693 $ 71,216 $ 197,909 Net Income $ — $ ( 7,388 ) $ ( 7,388 ) $ 8,282 $ 4,363 $ 12,645 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (in thousands) Lawson Other Acquisitions Total Lawson Other Acquisitions Total Revenue $ — $ 132,797 $ 132,797 $ 250,364 $ 146,742 $ 397,106 Net Income $ — $ ( 8,253 ) $ ( 8,253 ) $ 12,883 $ 12,651 $ 25,534 The Company incurred transaction and integration costs (credits) related to the Mergers and other completed and contemplated acquisitions of $( 0.1 ) million and $ 9.1 million for the three and nine months ended September 30, 2023, respectively, and $ 2.4 million and $ 10.8 million for the three and nine months ended September 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 Under the definition of a contract as defined by ASC 606, the Company considers contracts to be created at the time an order to purchase product and services is agreed upon regardless of whether there is a written contract. Revenue from customers is recognized when obligations under the terms of a contract are satisfied; 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 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. Price is typically based on market conditions, competition, changes in the industry and product availability. 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 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. The Company records revenue net of certain taxes, such as sales taxes, that are assessed by governmental authorities on the Company’s customers. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met. The Company does not incur significant costs to obtain contracts. Incidental items that are immaterial in the context of the contract are recognized as expenses. Sales of products and services to customers are invoiced and settled on a monthly basis. ASC 606 requires an entity to present a contract liability in instances where the customer is entitled to a volume rebate based on purchases made during the period. The Company is not usually subject to obligations for warranties, rebates, returns or refunds except in the case of rebates for select customers if predetermined purchase thresholds are met as discussed for the TestEquity segment below. The Company does not typically receive payment in advance of satisfying its obligations under the terms of its sales contracts with customers; therefore, liabilities related to such payment are not significant to the Company. Accounts receivable represents the Company’s unconditional right to receive consideration from its customers. Lawson Segment The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation, and accordingly, two separate revenue streams. Although Lawson has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no 19 Table of Contents price allocation between these obligations. Lawson does not price its offerings based on any allocation between these obligations. Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer; either at the time the product is shipped or the time the product has been received by the customer. Lawson does not commit to long-term contracts to sell customers a certain minimum quantity of products. Lawson offers a VMI service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided over a short period of time after control of the purchased product has been transferred to the customer. Since certain obligations pursuant to the VMI service agreement have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided and the related performance obligations have been satisfied. TestEquity Segment TestEquity’s contracts with customers generally represent a single performance obligation to sell its products. Revenue from contracts with customers reflect the transaction prices for contracts reduced by variable consideration. TestEquity provides a rebate to select customers if pre-determined purchase thresholds are met. 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. Sales returns are generally accepted by TestEquity; however, sales returns are not material to the Company’s operations. TestEquity provides an assurance type warranty which is not sold separately and does not represent a separate performance obligation. 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. For consigned inventory, revenue is recognized when inventory is removed from TestEquity’s stock location and control passes to the customer. Gexpro Services Segment Gexpro Services’ contracts with customers generally represent a single performance obligation to sell its products. Revenue from sales of Gexpro Services’ products is recognized upon transfer of control to the customer, which is typically when the product has been shipped from its distribution facilities. The transaction price is the amount of consideration to which Gexpro Services expects to be entitled in exchange for transferring 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. The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Gexpro Services’ products are marketed and sold primarily to original equipment manufacturers globally. Sales of products are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets. Payment terms on invoiced amounts range from 10 to 120 days. In instances where the timing of revenue recognition differs from the timing of the right to invoice, the Company has determined that a significant financing component does not exist. 20 Table of Contents Disaggregated consolidated revenue by geographic area (based on the location to which the product is shipped to): Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 United States $ 344,920 $ 284,771 $ 936,289 $ 668,504 Canada 35,727 36,879 108,380 82,931 Europe 20,805 13,391 55,261 35,377 Pacific Rim 2,477 2,549 5,468 7,711 Latin America 31,971 8,501 52,839 24,853 Other 3,009 1,060 6,926 3,196 Total revenue $ 438,909 $ 347,151 $ 1,165,163 $ 822,572 Rental Revenue TestEquity rents new and used electronic test and measurement equipment to customers in multiple industries. These leases are classified as operating leases under ASC 842. Rental equipment is included in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheet, and rental revenue is included in Revenue in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) . The unearned rental revenue related to customer prepayments on equipment leases was nominal at September 30, 2023 and December 31, 2022 . 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 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 September 30, 2023 and December 31, 2022 . Rental revenue from operating leases: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue from operating leases $ 4,323 $ 5,542 $ 12,831 $ 13,879 Note 5 – Supplemental Financial Statement Information Restricted Cash The Company has agreed to maintain restricted cash of $ 20.7 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 $ 8.2 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 products and manufactured electronic equipment offered for resale, were as follows: (in thousands) September 30, 2023 December 31, 2022 Inventories, gross $ 329,221 $ 275,072 Reserve for obsolete and excess inventory ( 15,884 ) ( 10,698 ) Inventories, net $ 313,337 $ 264,374 21 Table of Contents Property, Plant and Equipment, net Components of property, plant and equipment were as follows: (in thousands) September 30, 2023 December 31, 2022 Land $ 16,753 $ 9,578 Buildings and improvements 50,009 27,199 Machinery and equipment 48,235 26,948 Capitalized software 9,140 7,889 Furniture and fixtures 10,707 6,346 Vehicles 1,703 1,713 Construction in progress (1) 3,804 3,140 Total 140,351 82,813 Accumulated depreciation and amortization ( 28,402 ) ( 18,418 ) Property, plant and equipment, net $ 111,949 $ 64,395 (1) Construction in progress primarily related to upgrades to certain of the Company's information technology systems that we expect to place in service in the next 12 months. Depreciation expense for property, plant and equipment was $ 3.5 million and $ 1.1 million for the third quarter of 2023 and 2022, respectively, and $ 9.5 million and $ 4.0 million for the first nine months of 2023 and 2022, respectively. Amortization expense for capitalized software was $ 0.5 million and $ 0.0 million for the third quarter of 2023 and 2022, respectively, and $ 2.0 million and $ 1.0 million for the first nine months of 2023 and 2022, respectively. Rental Equipment, net Rental equipment, net consisted of the following: (in thousands) September 30, 2023 December 31, 2022 Rental equipment $ 63,310 $ 63,184 Accumulated depreciation ( 36,990 ) ( 36,045 ) Rental equipment, net $ 26,320 $ 27,139 Depreciation expense included in cost of sales for rental equipment was $ 1.7 million and $ 2.3 million for the third quarter of 2023 and 2022, respectively and $ 5.9 million and $ 5.4 million for the first nine months of 2023 and 2022, respectively. Refer to Note 4 – Revenue Recognition for a discussion on the Company's activities as lessor. 22 Table of Contents Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: (in thousands) September 30, 2023 December 31, 2022 Accrued compensation $ 27,532 $ 24,094 Deferred acquisition payments and accrued earnout liabilities 16,461 1,383 Accrued severance and acquisition related retention bonus 12,648 927 Accrued and withheld taxes, other than income taxes 8,758 4,885 Accrued stock-based compensation 5,055 3,340 Accrued customer rebates 4,710 5,053 Accrued interest 3,592 1,775 Accrued health benefits 1,743 1,306 Deferred revenue 1,136 2,313 Accrued income taxes 734 731 Other 14,822 16,870 Total accrued expenses and other current liabilities $ 97,191 $ 62,677 Other Liabilities Other liabilities consisted of the following: (in thousands) September 30, 2023 December 31, 2022 Security bonus plan $ 9,109 $ 9,651 Deferred compensation 10,854 9,962 Other 4,658 4,036 Total other liabilities $ 24,621 $ 23,649 Note 6 – Goodwill and Intangible Assets Goodwill Changes in the carrying amount of goodwill by segment were as follows: (in thousands) Lawson TestEquity Gexpro Services All Other Total Balance at December 31, 2022 $ 155,773 $ 114,104 $ 55,421 $ 22,750 $ 348,048 Acquisitions (1) — 49,941 — — 49,941 Impact of foreign exchange rates ( 11 ) — ( 174 ) ( 42 ) ( 227 ) Balance at September 30, 2023 $ 155,762 $ 164,045 $ 55,247 $ 22,708 $ 397,762 (1) Refer to Note 3 – Business Acquisitions for information related to measurement period adjustments . Intangible Assets The gross carrying amount and accumulated amortization for definite-lived intangible assets were as follows: September 30, 2023 December 31, 2022 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value Trade names $ 117,780 $ ( 26,498 ) $ 91,282 $ 92,286 $ ( 17,401 ) $ 74,885 Customer relationships 234,346 ( 64,276 ) 170,070 192,934 ( 44,481 ) 148,453 Other (1) 7,974 ( 4,007 ) 3,967 7,961 ( 3,305 ) 4,656 Total $ 360,100 $ ( 94,781 ) $ 265,319 $ 293,181 $ ( 65,187 ) $ 227,994 (1) Other primarily consists of non-compete agreements. 23 Table of Contents Amortization expense for definite-lived intangible assets was $ 11.3 million and $ 29.9 million for the three and nine months ended September 30, 2023, respectively, and $ 5.6 million and $ 20.9 million for the three and nine months ended September 30, 2022, respectively. Amortization expense related to intangible assets was recorded in Selling, general and administrative expenses. The estimated aggregate amortization expense for the remaining year 2023 and each of the next five years are as follows: (in thousands) Amortization Remaining 2023 $ 8,952 2024 42,856 2025 39,191 2026 36,217 2027 31,409 2028 27,537 Thereafter 79,157 Total $ 265,319 Note 7 – Leases Activities as Lessee The Company leases property used for warehousing, distribution centers, office space, branch locations, equipment and vehicles. The expenses generated by leasing activity for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Lease Type Classification 2023 2022 2023 2022 Operating Lease Expense (1) Operating expenses $ 5,850 $ 4,519 $ 14,980 $ 10,581 Financing Lease Amortization Operating expenses 133 207 393 471 Financing Lease Interest Interest expense 23 37 65 68 Financing Lease Expense 156 244 458 539 Net Lease Cost $ 6,006 $ 4,763 $ 15,438 $ 11,120 (1) Includes short term lease expense, which is immaterial. 24 Table of Contents The value of net assets and liabilities related to our operating and finance leases as of September 30, 2023 and December 31, 2022 was as follows (in thousands): Lease Type September 30, 2023 December 31, 2022 Total ROU operating lease assets (1) $ 79,791 $ 46,755 Total ROU financing lease assets (2) 1,514 1,519 Total lease assets $ 81,305 $ 48,274 Total current operating lease liabilities $ 12,711 $ 9,480 Total current financing lease liabilities 530 484 Total current lease liabilities $ 13,241 $ 9,964 Total long term operating lease liabilities $ 69,558 $ 38,898 Total long term financing lease liabilities 795 930 Total long term lease liabilities $ 70,353 $ 39,828 (1) Operating lease assets are recorded net of accumulated amortization of $ 23.2 million as of September 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 $ 1.3 million as of September 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 September 30, 2023 was as follows (in thousands): Maturity Date of Lease Liabilities Operating Leases Financing Leases Total Remaining 2023 $ 5,030 $ 165 $ 5,195 2024 18,477 558 19,035 2025 18,179 364 18,543 2026 14,406 282 14,688 2027 12,326 95 12,421 Thereafter 40,120 5 40,125 Total lease payments 108,538 1,469 110,007 Less: Interest ( 26,269 ) ( 144 ) ( 26,413 ) Present value of lease liabilities $ 82,269 $ 1,325 $ 83,594 The weighted average lease terms and interest rates of leases held as of September 30, 2023 were as follows: Lease Type Weighted Average Term in Years Weighted Average Interest Rate Operating Leases 6.8 7.8 % Financing Leases 2.8 6.9 % The cash outflows of leasing activity for the nine months ended September 30, 2023 and 2022 were as follows (in thousands): Nine Months Ended September 30, Cash Flow Source Classification 2023 2022 Operating cash flows from operating leases Operating activities $ ( 9,083 ) $ ( 3,330 ) Operating cash flows from financing leases Operating activities ( 186 ) 37 Financing cash flows from financing leases Financing activities ( 358 ) ( 457 ) Refer to Note 4 – Revenue Recognition f or a discussion on the Company's activities as lessor. 25 Table of Contents 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. The Company estimated the initial fair value of the earnout derivative liability based on an aggregate of 2,324,000 additional shares available to be issued under the two earnout provisions of the Merger Agreements. The aggregate of 2,324,000 shares was comprised of 1,400,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the TestEquity Equityholder and 924,000 shares of DSG common stock that were contingently issuable to (or forfeitable by) the Gexpro Services Stockholder, in each case as of the Merger Date. The additional 1,076,000 shares that were potentially issuable as of the Merger Date under the earnouts were not recorded as an earnout derivative liability as the acquisition contingency for these shares was determined to have been met at the Merger Date. The Company's earnout derivative liability was classified as a Level 3 instrument and was measured at fair value on a recurring basis. The fair value of the earnout derivative liability was measured using the Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis for the year ended December 31, 2022. Inputs to that model included the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock. The significant unobservable inputs used in the fair value measurement of the earnout derivative liability were the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement. The estimated aggregate fair value of the earnout derivative liability recorded on the 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, 1,400,000 and 924,000 of the 2,324,000 shares, respectively, were reclassified to equity, as the contingencies had been determined to have been met. 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 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 3.4 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 nine months of 2023. For the three and nine months ended September 30, 2022, the Company recorded income of $ 10.3 million and $ 4.6 million, respectively, as a component of Change in fair value of earnout liabilities in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) due to changes in the fair value of the earn-out derivative liability. 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 September 30, 2023, the fair value of the earn-out was $ 6.0 million and $ 0.1 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Unaudited Condensed Consolidated Balance Sheet. 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 September 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 nine months ended September 30, 2023. 26 Table of Contents 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 September 30, 2023, the fair value of the earn-out was $ 0.9 million, $ 1.7 million and $ 0.0 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 $ 0.7 million for changes in the fair value of the earn-out liability for the nine months ended September 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) September 30, 2023 December 31, 2022 Senior secured revolving credit facility $ — $ 122,000 Senior secured term loan 234,375 243,750 Senior secured delayed draw term loan 48,125 50,000 Incremental term loan 305,000 — Other revolving line of credit 2,085 1,352 Total debt 589,585 417,102 Less current portion of long-term debt ( 32,335 ) ( 16,352 ) Less deferred financing costs ( 6,724 ) ( 4,925 ) Total long-term debt $ 550,526 $ 395,825 Amended and Restated Credit Agreement 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. 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”). 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. 27 Table of Contents Net of outstanding letters of credit, there w as $ 198.3 million of borrowi ng availability under the revolving credit facility as of September 30, 2023. The weighted average interest rate from January 1, 2023 through September 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 September 30, 2023, total deferred financing costs net of accumulated amortization were $ 9.2 million of which $ 6.7 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 $ 2.5 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 September 30, 2023. Note 10 – Stock-Based Compensation The Company recorded stock-based compensation expense of $ 1.0 million and $ 5.4 million for the three and nine months ended September 30, 2023, respectively, and a benefit of $ 3.6 million and expense of $ 0.4 million for the three and nine months ended September 30, 2022, respectively . A portion of the Company's stock-based awards are liability-classified. Accordingly, changes in the market value of DSG common stock may result in stock-based compensation expense or benefit in certain periods. A stock-based compensation liability of $ 5.1 million a s of September 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. Impact of Stock Split The equity compensation plans contain anti-dilution provisions whereby in the event of any change in the capitalization of the Company (including in the event of a stock split), the number and type of awards underlying outstanding stock-based compensation awards must be adjusted, as appropriate, in order to prevent dilution or enhancement of rights. The impact of these provisions resulted in a modification of all outstanding stock-based compensation awards upon the Stock Split. As the fair value of the awards immediately after the Stock Split did not change when compared to the fair value of such awards immediately prior to the Stock Split, no incremental compensation costs were recognized as a result of such modifications. In addition, there was no change to the vesting conditions or classification of each of the outstanding stock-based compensation awards. Restricted Stock Awards For the nine months ended September 30, 2023, the Company issued approximately 53,000 Restricted stock awards ("RSAs") that vest over five years from the grant date with a grant date fair value of $ 1.2 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 shares of DSG common stock on the date of grant and the expense is recorded ratably over the vesting period. Stock Options For the nine months ended September 30, 2023, the Company issued approximately 1,354,000 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 $ 9.6 million. 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 28 Table of Contents to stock options as of September 30, 2023 was $ 10.0 million, which is expected to be recognized over a weighted-average period of 2.3 years. Activity related to the Company’s stock options during 2023 was as follows: Number of Stock Options Weighted Average Exercise Price Outstanding on December 31, 2022 576,000 $ 38.80 Granted 1,353,706 37.05 Outstanding on September 30, 2023 1,929,706 37.50 Exercisable on September 30, 2023 180,800 29.74 The weighted average fair value assumptions used in the Black-Scholes model for the stock options issued during 2023 were as follows: Expected volatility 45.2 % to 45.5 % Risk-free rate of return 3.6 % to 4.5 % Expected term (in years) 6.2 years to 6.5 years Expected annual dividend $ 0 The expected volatility was based on the historic volatility of the Company's stock price commensurate with the expected life of the stock options. The risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the stock options. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method allowed by the SEC, which approximates our historical experience. The estimated annual dividend was based on the recent dividend payout trend. Note 11 – Stockholders' Equity Stock Split On August 15, 2023, DSG announced that its Board of Directors approved and declared the Stock Split which entitled each stockholder of record as of the close of business on August 25, 2023 to receive one additional share of DSG common stock for each share of DSG common stock then-held. The additional shares were distributed after the close of trading on August 31, 2023, and shares of DSG common stock began trading at the split-adjusted basis on September 1, 2023. Accordingly, all share and per share amounts presented herein have been retroactively adjusted to reflect the impact of the Stock Split. Stockholders’ equity has been retroactively adjusted, where applicable, to give effect to the Stock Split for all periods presented by reclassifying the par value of the additional shares issued in connection with the Stock Split to Common stock from Capital in excess of par value. 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 0.0525 shares of DSG common stock at a subscription price of $ 22.50 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 4,444,444 shares of DSG common stock, at a purchase price of $ 22.50 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. 29 Table of Contents 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 and nine months ended September 30, 2023 under the Company's stock repurchase plan. During the third quarter of 2022, the Company repurchased 108,178 shares of Company common stock under the repurchase plan at an average cost of $ 17.93 per share for a total cost of $ 1.9 million. T he remaining availability for stock repurchases under the program was $ 7.6 million at September 30, 2023. Note 12 – Earnings Per Share As a result of the Stock Split and Mergers discussed in Note 1 – Nature of Operations and Basis of Presentation , all historical per share data, number of shares and numbers of equity awards were retroactively adjusted. The following table provides the computation of basic and diluted earnings per share: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data) 2023 2022 2023 2022 Basic income per share: Net income (loss) $ ( 1,568 ) $ 16,541 $ 7,363 $ 9,289 Basic weighted average shares outstanding 46,737,443 38,879,992 44,216,541 34,287,628 Basic income (loss) per share of common stock $ ( 0.03 ) $ 0.43 $ 0.17 $ 0.27 Diluted income per share: Net income (loss) $ ( 1,568 ) $ 16,541 $ 7,363 $ 9,289 Basic weighted average shares outstanding 46,737,443 38,879,992 44,216,541 34,287,628 Effect of dilutive securities — 426,716 380,878 626,506 Diluted weighted average shares outstanding 46,737,443 39,306,708 44,597,419 34,914,134 Diluted income (loss) per share of common stock $ ( 0.03 ) $ 0.42 $ 0.17 $ 0.27 Anti-dilutive securities excluded from the calculation of diluted income per share 448,910 493,914 — 496,000 Note 13 – Income Taxes The Company recorded income tax expense of $ 1.0 million , a ( 171.3 )% effective tax rate for the three months ended September 30, 2023 . Income tax expense of $ 8.5 million , a 33.9 % effective tax rate was recorded for the three months ended September 30, 2022 . The effective tax rate for the three months ended September 30, 2023 was higher than the U.S. statutory rate primarily due to adjustments to uncertain tax positions, a book loss for the current quarter, and other permanent items. The effective tax rate for the three months ended September 30, 2022 was higher than the U.S. statutory rate primarily due to state taxes, transaction costs, and other permanent items. The Company recorded income tax expense of $ 3.6 million , a 33.1 % effective tax rate for the nine months ended September 30, 2023 . Income tax expense of $ 3.9 million , a 29.6 % effective tax rate was recorded for the nine months ended September 30, 2022 . The effective tax rate for the nine months ended September 30, 2023 was 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. The effective tax rate for the nine months ended September 30, 2022 was higher than the U.S. statutory rate primarily due to state taxes, transaction costs, and other permanent items. The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of September 30, 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. Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes. 30 Table of Contents Note 14 – Commitments and Contingencies Merger Litigation In February 2022, three purported DSG stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of DSG (collectively, the “Books and Records Demands”). One stated purpose of the Books and Records Demands was to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG Board of Directors’ approval of the Mergers. On March 16, 2022, one of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Robert Garfield v. Lawson Products, Inc., Case No. 2022-0252, in the Court of Chancery of the State of Delaware against DSG (the “Garfield Action”). On March 22, 2022, another of the purported DSG stockholders who previously made a Books and Records Demand filed a lawsuit entitled Jeffrey Edelman v. Lawson Products, Inc., Case No. 2022-0270, in the Court of Chancery of the State of Delaware against DSG (the “Edelman Action”). The Garfield Action and the Edelman Action, which were consolidated and re-captioned as Lawson Products, Inc. Section 220 Litigation, Case No. 2022-0270, are collectively referred to as the “Books and Records Actions.” The Books and Records Actions sought to compel inspection of certain books and records of DSG to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the DSG Board of Directors’ approval of the Mergers. Following briefing, the Delaware Court of Chancery held a trial on July 14, 2022 to adjudicate the Books and Records Actions. At the conclusion of the trial, the Court ruled orally that the stockholders’ demands would be granted only in one respect (production of documents sufficient to show the identities of any guarantors of debt of the acquired companies) and the Court denied the remainder of the stockholders’ requests. The Court’s ruling was memorialized in an order issued on July 20, 2022. Thereafter, DSG produced excerpts of certain documents as required by the Court's ruling and subsequent order. On October 3, 2022, the plaintiffs in the Books and Records Actions filed a shareholder derivative action (the “Derivative Action”) entitled Jeffrey Edelman and Robert Garfield v. John Bryan King et al., Case No. 2022-0886, in the Court of Chancery of the State of Delaware (the "Delaware Chancery Court"). The Derivative Action names as defendants J. Bryan King, Lee S. Hillman, Bianca A. Rhodes, Mark F. Moon, Andrew B. Albert, I. Steven Edelson and Ronald J. Knutson (collectively, “Director and Officer Defendants”), and LKCM Headwater Investments II, L.P., LKCM Headwater II Sidecar Partnership, L.P., Headwater Lawson Investors, LLC, PDLP Lawson, LLC, LKCM Investment Partnership, L.P., LKCM Micro-Cap Partnership, L.P., LKCM Core Discipline, L.P. and Luther King Capital Management Corporation (collectively, the “LKCM Defendants”). Purporting to act on behalf of DSG, in the Derivative Action the plaintiffs allege, among other things, various claims of alleged breach of fiduciary duty against the Director and Officer Defendants and the LKCM Defendants in connection with the Mergers. The Derivative Action seeks, among other things, money damages, equitable relief and the costs of the Derivative Action, including reasonable attorneys’, accountants’ and experts’ fees. On October 24, 2022, the plaintiffs voluntarily dismissed PDLP Lawson, LLC and LKCM Investment Partnership, L.P. from the Derivative Action without prejudice. The Delaware Chancery Court held a hearing on September 13, 2023, to hear arguments on the defendants’ motions to dismiss. At the conclusion of the hearing, in rulings issued on September 13, 2023, and September 19, 2023, the entire complaint was dismissed with prejudice for failure to state a claim. On October 16, 2023, the plaintiffs filed a notice of appeal from the dismissal of their claims with respect to all defendants other than the members of the Special Committee (Messrs. Hillman, Albert and Edelson) and Mr. Moon. The Delaware Supreme Court has not set a date for the hearing on the plaintiffs’ appeal of the ruling. DSG disagrees with and intends to vigorously defend against the Derivative Action. The Derivative Action could result in additional costs to DSG, including costs associated with the indemnification of directors and officers. At this time, DSG is unable to predict the ultimate outcome of the Derivative Action or, if the outcome is adverse, to reasonably estimate an amount or range of reasonably possible loss, if any, associated with the Derivative Action. Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for these matters. No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Mergers. Cyber Incident Litigation On February 10, 2022, DSG disclosed that its computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG entitled Lardone Davis, on behalf of himself and all others similarly situated, 31 Table of Contents v. Lawson Products, Inc., Case No. 1:23-cv-02118, in the United States District Court for the Northern District of Illinois, Eastern Division. The plaintiff in this case, who purports to represent the class of individuals harmed by alleged actions and/or omissions by DSG in connection with the Cyber Incident, asserts a variety of common law and statutory claims seeking monetary damages, injunctive relief and other related relief related to the potential unauthorized access by third parties to personal identifiable information and protected health information. DSG disagrees with and intends to vigorously defend against the Cyber Incident Suit. The Cyber Incident Suit could result in additional costs and losses to DSG, although, at this time, DSG is unable to reasonably estimate the amount or range of reasonably possible loss, if any, that might result from adverse judgments, settlements, fines, penalties or other resolution of these proceedings based on the early stage of this proceeding, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. Accordingly, no amounts have been recorded in the unaudited condensed consolidated financial statements for the Cyber Incident Suit. No assurance can be given that additional lawsuits will not be filed against DSG and/or its directors and officers and/or other persons or entities in connection with the Cyber Incident. Environmental Matter In 2012, it was determined that a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM”) voluntary cleanup program. A remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. At September 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. The Company does not expect to capitalize any amounts related to the remediation plan. Purchase commitments The Company enters into inventory purchase commitments with third parties in the ordinary course of business, and as of September 30, 2023, had contractual commitments to purchase approximately $ 200 million of products from our suppliers and contractors, which is expected to be paid in the next twelve months. Note 15 – Related Party Transactions Management Services Agreements Prior to the Mergers, a subsidiary of TestEquity was party to a management agreement with Luther King Capital Management Corporation (“LKCM”) for certain advisory and consulting services (the “TestEquity Management Agreement”), and a subsidiary of Gexpro Services was party to a management agreement with LKCM for certain advisory and consulting services (the “Gexpro Services Management Agreement”). In connection with the closing of the Mergers on April 1, 2022, (i) all of the TestEquity subsidiary’s rights, liabilities and obligations under the TestEquity Management Agreement were novated to, transferred to and assumed by the TestEquity Equityholder, and LKCM released the TestEquity subsidiary from all obligations and claims under the TestEquity Management Agreement, and (ii) all of the Gexpro Services subsidiary’s rights, liabilities and obligations under the Gexpro Services Management Agreement were novated to, transferred to and assumed by the Gexpro Services Stockholder, and LKCM released the Gexpro Services subsidiary from all obligations and claims under the Gexpro Services Management Agreement (collectively, the “Novations”). During the first three months of 2022, expense of $ 0.5 million was recorded within Selling, general and administrative expenses within the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (Loss), reflecting expenses accrued under these management agreements from January 1, 2022 through the April 1, 2022 Merger Date. As of April 1, 2022, the prior obligation of $ 5.3 million was effectively settled and considered to be a deemed equity contribution by LKCM recorded to additional paid in capital. As a result of the Novations, no additional expense under these management agreements has been incurred subsequent to the Mergers. 32 Table of Contents 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. For the nine months ended September 30, 2023, expense of $ 0.4 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 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. King was a director of the TestEquity Equityholder. In addition, as of the Merger Date, Mark F. Moon (a member of the DSG Board of Directors) was a director of, and held a direct or indirect equity interest in, the TestEquity Equityholder. Immediately prior to the Mergers, entities affiliated with LKCM and Mr. King, including private investment partnerships for which LKCM serves as investment manager, owned a majority of the ownership interests in the Gexpro Services Stockholder (which in turn owned all of the then outstanding stock of Gexpro Services). Immediately prior to the Mergers, entities affiliated with LKCM and Mr. King beneficially owned approximately 48 % of the then-outstanding shares of DSG common stock. As a result of the issuance of 20.6 million shares at the closing of the Mergers and the issuance of the additional 3.4 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 32.6 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 3.6 million additional shares of DSG common stock at a purchase price of $ 22.50 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 36.4 million shares of DSG common stock as of June 1, 2023, representing approximately 77.6 % of the outstanding shares of DSG common stock as of September 30, 2023 . Board of Directors M. 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 Based on operational, reporting and management structures, the Company has identified three reportable segments based on the nature of the products and services and type of customer for those products and services. A description of our reportable segments is as follows: 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, 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. 33 Table of Contents The Company also has an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and includes the results of the Bolt Supply House ("Bolt") non-reportable segment. Revenue within the All Other category represents the results of Bolt. Bolt generates revenue primarily from the sale of MRO products to its walk-up customers and service to its customers through its 14 branch locations. Bolt does not provide VMI services for its customers or provide services in addition to product sales to customers. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract. Financial information for the Company's reportable segments is presented below. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue Lawson (1) $ 114,477 $ 109,418 $ 358,903 $ 216,752 TestEquity 207,657 116,709 451,082 286,984 Gexpro Services 103,232 103,749 312,523 285,224 All Other (2) 13,543 17,275 42,655 33,612 Total revenue $ 438,909 $ 347,151 $ 1,165,163 $ 822,572 Operating income (loss) Lawson (1) $ 10,643 $ 5,352 $ 27,358 $ 2,792 TestEquity ( 5,027 ) 7,576 ( 8,183 ) 7,443 Gexpro Services 7,332 7,992 23,484 16,972 All Other (2) ( 165 ) 1,107 621 1,921 Total operating income (loss) $ 12,783 $ 22,027 $ 43,280 $ 29,128 (1) Includes the operating results of Lawson only subsequent to the Merger Date of April 1, 2022 and not Lawson operating results prior to the Mergers. (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. 34 Table of Contents