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dsgr-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


			☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For quarterly period ended September 30, 2022


			☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file Number: 0-10546

DISTRIBUTION SOLUTIONS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-2229304

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8770 W. Bryn Mawr Avenue, Suite 900,

Chicago,

Illinois

60631

(Address of principal executive offices)

(Zip Code)

(773) 304-5050

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, $1.00 par value

DSGR

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	☒
Non-accelerated filer	¨	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 24, 2022 was 19,400,005.

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		Page #
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	5

	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited)	5

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 20 21 (Unaudited)	6

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and N ine Months Ended September 30, 2022 and 20 21 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended Septem ber 30, 2022 and 20 21 (Unaudited)	9

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	57

Item 4.	Controls and Procedures	57

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 6.	Exhibits	66

	SIGNATURES	69

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“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “aim,” “anticipate,” “believe,” “contemplates,” “continues,” “could,” “ensure,” “estimate,” “expect,” “forecasts,” “if,” “intend,” “likely,” “may,” “might,” “objective,” “outlook,” “plan,” “positioned,” “potential,” “predict,” “probable,” “project,” “shall,” “should,” “strategy,” “will,” “would,” and other words and terms of similar meaning and expression are intended to identify forward-looking statements. Forward-looking statements can also be identified by the fact that they do not relate strictly to historical or current facts. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact our business, financial condition and results of operations include:

•inventory obsolescence;

•work stoppages and other disruptions at transportation centers or shipping ports;

•TestEquity Acquisition, LLC's ("TestEquity's") reliance on a significant supplier for a significant amount of its product inventory;

•changes in our customers, product mix and pricing strategy;

•disruptions of our information and communication systems;

•cyber attacks or other information security incidents;

•the inability to successfully recruit, integrate and retain productive sales representatives;

•failure to retain talented employees, managers and executives;

•the inability of management to successfully implement changes in operating processes;

•the inability to successfully integrate acquisitions into our organization;

•competition in the markets in which we operate;

•changes that affect governmental and other tax-supported entities;

•our significant amount of indebtedness;

•failure to adequately fund our operating and working capital needs through cash generated from operations and cash available through our credit facility;

•failure to meet the covenant requirements of our credit facility;

•government efforts to combat inflation, along with other interest rate pressures arising from an inflationary economic environment, could lead to higher financing costs;

•declines in the market price of our common stock;

•Luther King Capital Management Corporation’s significant influence over the Company in light of its ownership percentage;

•violations of environmental protection regulations;

•changes in tax matters;

•the COVID-19 pandemic;

•the issuance of additional shares of our common stock in accordance with the earnout provisions of the Merger Agreements (as defined herein) to entities affiliated with Luther King Capital Management Corporation in connection with the Mergers (as defined herein);

•any difficulties in integrating the business operations of TestEquity and 301 HW Opus Holdings, Inc., which conducts business as Gexpro Services ("Gexpro Services"), with our legacy Lawson operations, and/or the failure to successfully combine those operations within our expected timetable;

•any difficulties in integrating the business operations of other businesses we may acquire, and/or the failure to successfully combine any such operations with our existing business;

•business uncertainties as a result of the Mergers;

•incurrence of additional transaction costs in connection with the Mergers;

•any inaccuracies in the Company’s estimates and judgments related to the acquisition accounting models used to record the purchase price allocation in connection with the Mergers;

•potential impairment charges for goodwill and other intangible assets;

•risks arising from TestEquity’s and Gexpro Services’ international operations subjecting us to new and additional legal and regulatory regimes;

•stockholder litigation relating to the Mergers;

•limitations on our ability to use our net operating losses and certain other tax attributes generated prior to the Mergers;

•TestEquity and/or Gexpro Services may not have in place the financial organization, reporting and internal controls necessary for a public company;

•a downturn in the economy or in certain sectors of the economy;

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•changes in energy costs, tariffs and the cost of raw materials used in our products, and other inflationary pressures;

•supply chain constraints, inflationary pressure and labor shortages;

•foreign currency exchange rate changes; and

•all other factors discussed in the Company’s “Risk Factors” section set forth in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022.

The Company undertakes no obligation to update any such factors, assumptions and uncertainties or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Distribution Solutions Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share data)

(Unaudited)


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	25,171	$	14,671
Restricted cash	181		—
Accounts receivable, less allowance for doubtful accounts of $2,009 and $2,473, respectively	173,083		80,574
Inventories, net	260,840		132,717
Prepaid expenses and other current assets	26,769		8,098
Total current assets	486,044		236,060
Property, plant and equipment, net	64,765		9,079
Rental equipment, net	25,489		24,727
Goodwill	351,147		106,145
Deferred tax asset	201		266
Intangible assets, net	236,869		96,608
Cash value of life insurance	17,198		—
Right of use assets	44,682		19,662
Other assets	6,320		747
Total assets	$	1,232,715	$	493,294
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	96,886	$	47,958
Current portion of long-term debt	16,121		134,405
Current portion of lease obligation	9,994		4,641
Earnout derivative liability	12,700		—
Related party payables	—		4,813
Accrued expenses and other current liabilities	58,663		23,126
Total current liabilities	194,364		214,943
Long-term debt, less current portion, net	397,461		93,134
Security bonus plan	9,958		—
Deferred compensation	10,248		—
Lease obligation	38,169		16,132
Deferred tax liability	32,258		2,742
Other liabilities	3,510		574
Total liabilities	685,968		327,525
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred stock, $1 par value:
Authorized - 500,000 shares, issued and outstanding — None	—		—
Common stock, $1 par value:
Authorized - 35,000,000 shares Issued - 19,712,137 and 10,542,333 shares, respectively Outstanding - 19,400,005 and 10,294,824 shares, respectively	19,424		10,318
Capital in excess of par value	574,176		197,057
Retained deficit	(23,853)		(33,142)
Treasury stock – 312,132 and 247,509 shares, respectively	(12,475)		(10,033)
Accumulated other comprehensive (loss) income	(10,525)		1,569
Total stockholders’ equity	546,747		165,769
Total liabilities and stockholders’ equity	$	1,232,715	$	493,294

See notes to Condensed Consolidated Financial Statements (Unaudited)

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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,
	2022		2021		2022		2021

Revenue	$	347,151	$	132,090	$	822,572	$	391,069
Cost of goods sold	227,984		97,252		547,966		292,243
Gross profit	119,167		34,838		274,606		98,826

Selling, general and administrative expenses	97,140		29,347		245,478		85,614
Operating income (loss)	22,027		5,491		29,128		13,212

Interest expense	(6,097)		(3,976)		(16,704)		(12,482)
Loss on extinguishment of debt	—		—		(3,395)		—
Change in fair value of earnout liabilities	9,641		—		3,948		—
Other income (expense), net	(550)		(74)		224		(328)

Income (loss) before income taxes	25,021		1,441		13,201		402
Income tax expense (benefit)	8,480		216		3,912		606

Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)

Basic income (loss) per share of common stock	$	0.85	$	0.12	$	0.54	$	(0.02)

Diluted income (loss) per share of common stock	$	0.84	$	0.12	$	0.53	$	(0.02)

Comprehensive income (loss)
Net income (loss)	$	16,541	$	1,225	$	9,289	$	(204)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(9,774)		175		(12,094)		172
Comprehensive income (loss)	$	6,767	$	1,400	$	(2,805)	$	(32)

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share data)

(Unaudited)


	Common Stock			Capital in Excess of Par Value						Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Outstanding Shares	$1 Par Value				Retained Deficit		Treasury Stock
Balance at December 31, 2021	10,294,824	$	10,318	$	197,057	$	(33,142)	$	(10,033)	$	1,569	$	165,769
Net income (loss)	—	—		—		(2,537)		—		—		(2,537)
Foreign currency translation adjustment	—	—		—		—		—		171		171

Shares issued	6,065	6		(6)		—		—		—		—
Tax withholdings related to net share settlements of stock-based compensation awards	(889)	—		33		—		(33)		—		—
Other	—	—		(95)		—		—		—		(95)
Balance at March 31, 2022	10,300,000	$	10,324	$	196,989	$	(35,679)	$	(10,066)	$	1,740	$	163,308
Net income (loss)	—	—		—		(4,715)		—		—		(4,715)
Foreign currency translation adjustment	—	—		—		—		—		(2,491)		(2,491)
Stock-based compensation	—	—		573		—		—		—		573
Shares issued	25,682	24		(24)		—		—		—		—
Deemed consideration for reverse acquisition	9,120,167	9,120		342,371		—		—		—		351,491
Reclassification of issuable shares from earnout derivative liability	—	—		26,593		—		—		—		26,593
Fair value adjustment of stock-based compensation awards	—	—		1,910		—		—		—		1,910
Tax withholdings related to net share settlements of stock-based compensation awards	(1,867)	—		—		—		(78)		—		(78)
Settlement of related party liability	—	—		5,276		—		—		—		5,276
Other	—	—		(39)		—		—		—		(39)
Balance at June 30, 2022	19,443,982	$	19,468	$	573,649	$	(40,394)	$	(10,144)	$	(751)	$	541,828
Net income (loss)	—	—		—		16,541		—		—		16,541
Foreign currency translation adjustment	—	—		—		—		—		(9,774)		(9,774)
Stock-based compensation	—	—		489		—		—		—		489
Shares issued	17,992	18		(18)		—		—		—		—


Repurchase of common stock	(54,089)	(54)		54		—		(1,940)		—		(1,940)
Tax withholdings related to net share settlements of stock-based compensation awards	(7,880)	(8)		8		—		(391)		—		(391)

Other	—	—		(6)		—		—		—		(6)
Balance at September 30, 2022	19,400,005	$	19,424	$	574,176	$	(23,853)	$	(12,475)	$	(10,525)	$	546,747

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

(Unaudited)


	Common Stock			Capital in Excess of Par Value						Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Outstanding Shares	$1 Par Value				Retained Deficit		Treasury Stock
Balance at December 31, 2020	10,233,223	$	10,233	$	180,609	$	(28,090)	$	(9,015)	$	1,511	$	155,248
Net income (loss)	—	—		—		(1,890)		—		—		(1,890)
Foreign currency translation adjustment	—	—		—		—		—		168		168
Shares issued	6,523	6		(6)		—		—		—		—
Tax withholdings related to net share settlements of stock-based compensation awards	(303)	—		13		—		(13)		—		—
Balance at March 31, 2021	10,239,443	$	10,239	$	180,616	$	(29,980)	$	(9,028)	$	1,679	$	153,526
Net income (loss)	—	—		—		461		—		—		461
Foreign currency translation adjustment	—	—		—		—		—		(171)		(171)
Shares issued	12,383	12		(12)		—		—		—		—
Balance at June 30, 2021	10,251,826	$	10,251	$	180,604	$	(29,519)	$	(9,028)	$	1,508	$	153,816
Net income (loss)	—	—		—		1,225		—		—		1,225
Foreign currency translation adjustment	—	—		—		—		—		175		175
Equity consideration for purchase of business	—	—		4,194		—		—		—		4,194
Capital contribution	—	—		9,233		—		—		—		9,233
Shares issued	1,355	2		(2)		—		—		—		—
Tax withholdings related to net share settlements of stock-based compensation awards	(412)	—		20		—		(20)		—		—
Other	—	—		—		—		—		42		42
Balance at September 30, 2021	10,252,769	$	10,253	$	194,049	$	(28,294)	$	(9,048)	$	1,725	$	168,685

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021

Operating activities
Net income (loss)	$	9,289	$	(204)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	31,314		13,649
Amortization of debt issue costs	1,419		899
Extinguishment of debt	3,395		—
Stock-based compensation	445		—

Change in fair value of earnout liability	(3,948)		—
Gain on sale of rental equipment	(2,463)		(1,918)
Charge for step-up of acquired inventory	2,703		—
Net realizable value and reserve adjustment for obsolete and excess inventory	5,551		(585)

Bad debt expense	564		1,136
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(30,795)		5,740
Inventories, net	(43,857)		2,770
Prepaid expenses and other current assets	(2,224)		(953)
Accounts payable	1,687		(6,857)
Accrued expenses and other current liabilities	1,316		982
Other changes in operating assets and liabilities	6,324		2,478
Net cash provided by (used in) operating activities	(19,280)		17,137
Investing activities
Purchases of property, plant and equipment	(4,954)		(2,907)
Business acquisitions, net of cash acquired	(113,681)		(19,721)
Purchases of rental equipment	(7,913)		(8,246)
Proceeds from sale of rental equipment	5,998		3,899

Net cash provided by (used in) investing activities	(120,550)		(26,975)
Financing activities
Proceeds from revolving lines of credit	302,044		20,500
Payments on revolving lines of credit	(237,370)		(11,200)
Proceeds from term loans	445,630		—
Payments on term loans	(343,662)		(7,321)
Deferred financing costs	(11,956)		—
Capital contribution	—		9,233
Repurchase of common stock	(1,940)		—
Shares repurchased held in treasury	(469)		—
Payment of financing lease principal	(457)		—


Net cash provided by (used in) financing activities	151,820		11,212
Effect of exchange rate changes on cash and cash equivalents	(1,309)		188
Increase (decrease) in cash, cash equivalents and restricted cash	10,681		1,562
Cash, cash equivalents and restricted cash at beginning of period	14,671		10,399
Cash, cash equivalents and restricted cash at end of period	$	25,352	$	11,961
Cash and cash equivalents	$	25,171	$	11,961
Restricted cash	181		—
Total cash, cash equivalents and restricted cash	$	25,352	$	11,961

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Distribution Solutions Group, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021

Supplemental disclosure of cash flow information
Net cash paid for income taxes	$	11,553	$	510
Net cash paid for interest	$	12,093	$	11,727
Non-cash activities:
Fair value of common stock exchanged for reverse acquisition	$	351,491	$	—
Settlement of related party obligations	$	5,276	$	—

See notes to Condensed Consolidated Financial Statements (Unaudited)

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 — Nature of Operations and Basis of Presentation

Organization

Effective May 5, 2022, Distribution Solutions Group, Inc. ("DSG"), a Delaware corporation, changed its corporate name from “Lawson Products, Inc.” to “Distribution Solutions Group, Inc.” DSG is a global specialty distribution company providing value added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets. DSG has three principal operating companies: Lawson Products, Inc. ("Lawson"), TestEquity Acquisition, LLC ("TestEquity") and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services"). The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined for the purpose of creating a specialty distribution company. A summary of the Mergers (as defined below), including the legal entities party to the transactions and the stock consideration, is presented below.

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

Business Combination Background

On December 29, 2021, DSG entered into an:

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

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

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

Completion of the TestEquity Merger

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

In accordance with and under the terms of the TestEquity Merger Agreement, at the closing of the TestEquity Merger, DSG: (i) issued to the TestEquity Equityholder 3,300,000 shares of DSG common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity.

The TestEquity Merger Agreement provides that an additional 700,000 shares of DSG common stock (the “TestEquity Holdback Shares”) may be issued to the TestEquity Equityholder or forfeited in accordance with two earnout provisions of the TestEquity Merger Agreement. The amount of TestEquity Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of a certain additional acquisition by TestEquity during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any TestEquity Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in TestEquity

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EBITDA (as defined in the TestEquity Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the TestEquity Merger Agreement. As of September 30, 2022, 700,000 TestEquity Holdback Shares are expected to be issued under the first earnout opportunity due to the consummation of the certain additional acquisition as referenced in the TestEquity Merger Agreement and were remeasured and reclassified to equity at April 29, 2022 when the additional acquisition was consummated. Refer to Note 11 - Earnout Derivative Liability for information about the earnout derivative liability related to the TestEquity Holdback Shares.

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

The Gexpro Services Merger Agreement provides that an additional 1,000,000 shares of DSG common stock (the “Gexpro Services Holdback Shares”) may be issued to the Gexpro Services Stockholder or forfeited in accordance with two earnout provisions of the Gexpro Services Merger Agreement. The amount of Gexpro Services Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of one or more of three certain additional acquisitions by Gexpro Services during the period beginning after December 29, 2021 and ending 90 days after the Merger Date. If any Gexpro Services Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in Gexpro Services EBITDA (as defined in the Gexpro Services Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the Gexpro Services Merger Agreement. As of April 1, 2022, approximately 538,000 Gexpro Services Holdback Shares were expected to be issued under the first earnout opportunity due to the consummation of the certain additional acquisitions which were completed prior to the Merger Date. The fair value of the remaining 462,000 Gexpro Services Holdback Shares available under the second earnout opportunity are included in Earnout derivative liability in the Unaudited Condensed Consolidated Balance Sheets. Final issuance of the Gexpro Services Holdback Shares under the second earnout opportunity is subject to certain terms and conditions as specified in the Gexpro Services Merger Agreement. Refer to Note 11 - Earnout Derivative Liability for information about the earnout derivative liability related to the Gexpro Services Holdback Shares.

TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree. Accordingly, periods prior to the Merger Date reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

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 20 - 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, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.

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

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

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voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date.

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. The consolidated financial statement impact of the one day difference arising from the different period ends for the quarter ended September 30, 2022 was not material. The 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 the TestEquity Acquisition, LLC and 301 HW Opus Holdings, Inc. audited consolidated financial statements and accompanying notes included in the Company's Current Report on Form 8-K/A filed with the U.S. Securities and Exchange Commission ("SEC") on June 15, 2022, and the Lawson Products, Inc. audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2021. All normal recurring adjustments have been made that are necessary to fairly state the results of operations for the interim periods. Operating results for the three and nine month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Note 2 - Summary of Significant Accounting Policies

Revenue Recognition — The majority of the Company’s revenue is generated through the sale of a broad range of specialized products and components, with revenue recognized upon transfer of control, title and risk of loss, which is generally upon shipment. Vendor Managed Inventory ("VMI") service revenue represents less than 5.0% of total revenue and is recognized as the services are performed. The Company offers VMI services only in conjunction with product sales. The Company does not bill product sales and services separately. A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services. A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed. The Company includes shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services. The Company accrues for returns based on historical evidence of return rates. The Company has adopted the practical expedient within ASC 340, Other Assets and Deferred Costs ("ASC 340") to recognize incremental costs to obtain a contract, primarily employee related costs, as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606, Revenue from Contracts with Customers ("ASC 606") from the associated lease component as the relevant criteria under ASC 842, Leases ("ASC 842") are met.

Cash Equivalents — The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of the Company’s cash equivalents at September 30, 2022 and December 31, 2021 approximates fair value.

Allowance for Doubtful Accounts — The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on the Company’s historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the estimates of the recoverability of amounts due the Company could be revised.

Inventories — Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson and TestEquity segments and weighted average for the Gexpro Services segment. To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete

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inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence.

Property, Plant and Equipment — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles. The Company estimates useful lives of 10 to 40 years for buildings and improvements, the shorter of the useful life of the assets or term of the underlying leases for leasehold improvements, and 2 to 10 years for machinery and equipment, furniture and fixtures and vehicles. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. The costs of repairs, maintenance and minor renewals are charged to expense as incurred. Amortization of financing and capital leases is included in depreciation expense. When property, plant and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in the income from operations.

Rental Equipment — Rental equipment is stated at cost less accumulated depreciation and amortization. Expense is computed primarily by the straight-line method over an estimated useful life of 3 to 7 years. Upon sale or retirement of such assets, the related cost and accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet, and gains or losses are reflected in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The costs of repairs, maintenance and minor renewals are charged to expense as incurred. When rental equipment is retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the Unaudited Condensed Consolidated Balance Sheet and any gain or loss is included in the income from operations.

Cash Value of Life Insurance — The Company invests funds in life insurance policies for certain current and former employees. The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset in the Unaudited Condensed Consolidated Balance Sheets. The Company records these policies at their contractual value. The change in the cash surrender value of the life insurance policies, which is recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), is the change in the policies' contractual values.

Deferred Compensation — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation. The deferred compensation is recorded in an account balance, which is a bookkeeping entry made by the Company to measure the amount due to the participant. The account balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that the participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds. The Company adjusts the deferred compensation liability to equal the contractual value of the participants’ account balances. These adjustments are the changes in contractual value of the individual plans and are recorded as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period. Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash. The Company accounts for forfeitures of stock-based compensation in the period in which they occur.

Goodwill — The Company had $351.1 million of goodwill at September 30, 2022 and $106.1 million of goodwill at December 31, 2021. Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If the Company determines that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying

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

Intangible Assets — The Company's intangible assets primarily consist of trade names and customer relationships. Intangible assets are amortized over a weighted average of 8 to 15 year and 9 to 20 year estimated useful lives for trade names and customer relationships, respectively. The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.

Impairment of Long-Lived Assets — The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Recoverability is measured by a comparison of the assets carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. No impairments occurred in the first nine months of 2022 or during the year ended December 31, 2021.

Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e. greater than 50% likely) that some or all of the deferred tax assets will not be realized. The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

Earnings from the Company's foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to foreign withholding taxes and may subject the Company to U.S. federal and state taxes.

The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Income tax expense (benefit) in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Leases — Leases are categorized as either operating or financing leases at commencement of the lease. For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement of the lease. Operating leases consist of the Company headquarters, distribution and service centers, and Bolt branches. Financing leases consist of equipment such as forklifts and copiers. The value of the lease assets and liabilities are the present value of the total cash payments for each lease. The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease. The Company reviews each lease to determine if there is a more appropriate discount rate to apply. Upon commencement of the lease, rent expense is recognized on a straight line basis for each operating lease. Each financing lease ROU asset is amortized on a straight line basis over the lease period. TestEquity and the Lawson Partsmaster business have equipment leasing programs for customers. These leases are classified as operating leases. The leased equipment is recognized in Rental equipment, net in the Unaudited Condensed Consolidated Balance Sheets and the leasing revenue is recognized on a straight line basis.

Earnings per Share — Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding performance awards, stock options, market stock units and restricted stock awards into common stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. Contingently issuable shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent). For diluted EPS, the contingently issuable shares should be included in the denominator of

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

For the reverse acquisition period prior to April 1, 2022, the Company calculates the basic EPS for each comparative period before the acquisition date presented in the consolidated financial statements by dividing the income of the accounting acquirer attributable to common shareholders in each of those periods by the accounting acquirer’s historical weighted-average number of common shares outstanding. The Company calculates the weighted-average number of common shares outstanding (the denominator of the EPS calculation), including the equity interests issued by the legal acquirer to effect the reverse acquisition, as the number of common shares outstanding from the beginning of that period to the acquisition date computed on the basis of the weighted-average number of common shares of the accounting acquirer outstanding during the period multiplied by an exchange ratio derived from the shares exchanged at the Merger Date.

Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency. All balance sheet amounts are translated into U.S. dollars using the exchange rates in effect at the applicable period end. Components of income or loss are translated using the average exchange rate for each reporting period.

Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S. dollars are reported as a component of Accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets. Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.

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

Treasury Stock — The Company repurchased 54,089 shares of its common stock in 2022 and no shares of its common stock in 2021 through its previously announced stock repurchase plan. The Company repurchased 10,636 shares of its common stock in 2022 from employees upon the vesting of restricted stock to offset the income taxes owed by those employees. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The cost of the common stock repurchased and held in treasury was 2.4 million in 2022.

Segment Information — ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision-maker (“CODM”) is the Chief Executive Officer of DSG. The CODM reviews the financial performance and the results of operations of the segments when making decisions about allocating resources and assessing performance of the Company.

The Company has determined it has four operating segments: (i) Lawson, (ii) Gexpro Services, (iii) TestEquity and (iv) All Other. The Company’s three reportable segments include (i) Lawson, (ii) Gexpro Services and (iii) TestEquity. The Company’s CODM reviews the operating results of these reportable segments for the purpose of allocating resources and evaluating financial performance.

There are no intersegment revenues. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. Please see Note 20 - Segment Information for further details.

Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

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Fair Value Measurements — The Company applies the guidance in ASC 820, Fair Value Measurements to account for financial assets and liabilities measured on a recurring basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are described below:

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

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

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

The carrying amount of accounts receivable, accounts payable, accrued expenses and other working capital balances are considered a reasonable estimate of their fair value due to the short-term maturity of these instruments. The carrying amount of debt is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. The Company’s earnout derivative liability and debt are recorded at fair value on a recurring basis and were estimated using Level 3 inputs.

Earnout Derivative Liability — The Company recorded an earnout derivative liability for the future contingent equity shares related to the TestEquity Holdback Shares and the Gexpro Services Holdback Shares provisions within the Merger Agreements. The contingently issuable shares are not indexed to Company common stock and, therefore, are accounted for as liability classified instruments in accordance with ASC 815-40, Contracts in Entity’s Own Equity, as the events that determine the number of contingently issuable shares required to be released or issued, as the case may be, include events that are not solely indexed to the fair value of Company common stock. The contingently issuable shares were initially measured at the Merger Date and are subsequently measured at each reporting date until settled, or when they meet the criteria for equity classification. Changes in the fair value of the earnout derivative liability are recorded as a component of Change in fair value of earnout liability in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company reassesses the classification of these derivative liabilities for earnout arrangements each balance sheet date. If the contingencies are resolved for the issuable shares, the earnout derivative liability is reclassified from the liability to equity as of the date of the event that caused the contingencies to be met. The earnout derivative liability is measured at fair value immediately prior to the reclassification to equity. If the earnout derivative liability is reclassified from a liability to equity, gains or losses recorded to account for the liability at fair value during the period that the contract was classified as a liability are not reversed.

The contingently issuable shares are included in the denominator of the basic earnings per share calculation as of the date that all necessary conditions have been satisfied (i.e., when issuance of the shares is no longer contingent). For diluted earnings per share, the contingently issuable shares are included in the denominator of the diluted earnings per share calculation as of the beginning of the interim period in which the conditions are satisfied and the earnout arrangements have been resolved. See Note 16 - Earnings Per Share for further information.

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

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

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Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises the requirements for how an entity should measure credit losses on financial instruments. The pronouncement is effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis. The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.

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

Note 3 - Business Acquisitions

Completion of Mergers

On April 1, 2022, the Mergers were completed via all-stock merger transactions. Pursuant to the Merger Agreements, DSG issued an aggregate of 10.3 million shares of DSG common stock to the former owners of TestEquity and Gexpro Services. An additional 1.7 million shares of DSG common stock remain potentially issuable upon meeting the conditions of certain earnout provisions. Refer to Note 1 - Nature of Operations and Basis of Presentation for further information regarding the Mergers.

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 exchanged	9,120,167
DSG closing price per common stock on March 31, 2022	$	38.54
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 fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change. Certain estimated

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values for the acquisition, including the valuation of intangibles and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. Goodwill generated from the acquisition is not deductible for tax purposes. The Company will continue to obtain information necessary to finalize the fair values, which may differ materially from these preliminary estimates. The final valuation will be completed within the one-year measurement period ending March 31, 2023, and any measurement period adjustments will be applied in the reporting period in which the adjustments are determined.

During the quarter ended September 30, 2022, the Company recorded measurement period adjustments that resulted in a $1.7 million net decrease to goodwill. The measurement period adjustments were associated with adjustments to the fair value of certain property, plant and equipment assets, as well as changes in estimates related to leases.

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


(in thousands)	Merger Date		Measurement Period Adjustments		Adjusted Total
Current assets	$	148,308	$	—	$	148,308
Property, plant and equipment	57,053		361		57,414
Right of use assets	17,571		687		18,258
Other intangible assets	119,060		—		119,060
Deferred tax liability, net of deferred tax asset	(26,237)		39		(26,198)
Other assets	18,373		—		18,373
Current liabilities	(71,097)		(68)		(71,165)
Long-term obligations	(25,722)		20		(25,702)
Lease and financing obligations	(29,474)		647		(28,827)
Derivative earnout liability	(43,900)		—		(43,900)

Goodwill	189,466		(1,686)		187,780
Total consideration exchanged	$	353,401	$	—	$	353,401

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

The Company incurred transaction costs related to the Mergers of $