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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One) |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the fiscal year ended December 31, 2023
or
o | 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 |  | (I.R.S. Employer
incorporation or organization) |  | Identification No.)

301 Commerce Street, Suite 1700, Fort Worth, Texas 76102
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(888) 611-9888
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 |  | The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (l) 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 þ No o
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 þ No o
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 o | Accelerated filer | þ
Non-accelerated filer o | Smaller reporting company | þ
| Emerging growth company | o

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 o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the registrant’s voting stock held by non-affiliates on June 30, 2023, based upon the closing price of the registrant's Common Stock on that date, was approximately $254,225,483.
As of February 29, 2024, 46,783,333 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference some portions of the registrant’s definitive proxy statement related to its 2024 Annual Stockholders’ Meeting, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. Except as expressly incorporated by reference, the registrant's definitive proxy statement shall not be deemed to be part of this report.

Table of Contents
TABLE OF CONTENTS

|  | Page #
Cautionary Statement Regarding Forward-Looking Statements | 3
PART I |
Item 1. | Business | 5
Item 1A. | Risk Factors | 14
Item 1B. | Unresolved Staff Comments | 24
Item 1 C. | Cybersecurity | 24
Item 2. | Properties | 25
Item 3. | Legal Proceedings | 25
Item 4. | Mine Safety Disclosures | 25
PART II |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 26
Item 6. | [RESERVED] | 26
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 42
Item 8. | Financial Statements and Supplementary Data | 43
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 88
Item 9A. | Controls and Procedures | 88
Item 9B. | Other Information | 92
Item 9C. | Disclosure Regarding Foreign Jurisdictions That Prevent Inspections | 92
PART III |
Item 10. | Directors, Executive Officers and Corporate Governance | 93
Item 11. | Executive Compensation | 93
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 93
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 94
Item 14. | Principal Account ant Fees and Services | 94
PART IV |
Item 15. | Exhibit and Financial Statement Schedules | 95
Item 16. | Form 10-K Summary | 80
| Signatures | 98

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Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties. Terms such as “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 variations of them and other words and terms of similar meaning and expression (and the negatives of such words and terms) 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 as of the date they are made 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;
•the reliance of TestEquity Acquisition, LLC ("TestEquity") 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;
•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 Products operations, and/or the failure to successfully combine those operations within our expected timetable;
•failure to retain talented employees, managers and executives;
•the inability of management to successfully implement changes in operating processes;
•various risks involved in any pursuit or completion by us of additional acquisitions;
•competition in the markets in which we operate;
•potential impairment charges for goodwill and other intangible assets;
•changes that affect governmental and other tax-supported entities;
•failure to maintain effective internal controls over financial reporting;
•our significant amount of indebtedness;
•failure to adequately fund our operating and working capital needs through cash generated from operations and borrowings available under our credit facility;
•failure to meet the covenant requirements of our credit facility;
•government efforts to combat inflation, along with other interest rate pressures, could lead to higher financing costs;
•declines in the market price of our common stock (the "DSG common stock");
•the significant influence of Luther King Capital Management Corporation ("LKCM") over the Company in light of its ownership percentage;
•any sales of shares of DSG common stock held by entities affiliated with LKCM or the possibility of any such sales;
•violations of environmental protection regulations;
•changes in tax matters;
•risks arising from our international operations;
•potential limitations on our ability to use our net operating losses and certain other tax attributes generated prior to the Mergers (as defined below);
•public health emergencies;
•business uncertainties as a result of the Mergers;
•stockholder litigation relating to the Mergers;
•a downturn in the economy or in certain sectors of the economy;
•changes in energy costs, tariffs, transportation costs and the cost of raw materials used in our products, and other inflationary pressures;
•supply chain constraints, inflationary pressure and labor shortages; and
•foreign currency exchange rate changes.
3

Table of Contents
A detailed discussion of various factors that could cause actual results to differ materially from those described in the forward-looking statements is set forth in Part 1, Item 1A, "Risk Factors" of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statement contained herein, whether to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or otherwise, except as may be required under applicable law.
4

Table of Contents
PART I
ITEM 1. BUSINESS.
Overview
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.
Through its collective businesses, DSG is dedicated to helping customers lower their total cost of operation by increasing productivity and efficiency with the right products, expert technical support, and fast, reliable delivery to be a one-stop solution provider. DSG serves approximately 180,000 distinct customers in several diverse end markets supported by approximately 3,700 dedicated employees and strong vendor partnerships. DSG ships from strategically located distribution and service centers to customers in North America, Europe, Asia, South America and the Middle East. DSG was originally incorporated in Illinois in 1952 and was reincorporated in Delaware in 1982.
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc., and all entities consolidated in the accompanying consolidated financial statements.
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”).
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.
5

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.
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 in Item 8. Financial Statements and Supplementary Data.
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
6

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 DSG 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 $267.3 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, creating one of the largest suppliers serving the electronics design, production, and repair industries. DSG funded the Hisco Transaction with borrowings under its amended and restated credit facility and proceeds raised from the Rights Offering with existing stockholders, discussed below. Refer to Note 3 – Business Acquisitions for further details about Hisco and the Hisco Transaction.
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 2023, the Company issued 144,608 shares of DSG common stock to the eligible Hisco employees and received approximately $3.3 million.
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 Amended 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 Amended Credit Agreement.
Rights Offering
On May 30, 2023, the Company issued 4,444,444 shares of DSG common stock for net proceeds of approximately $98.5 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.
DSG Vision and Strategic Focus
The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in 2022 for the purpose of creating a global specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty
7

distribution businesses under the leadership of their separate business unit management teams. The DSG leadership team provides oversight to these separate leadership teams. This structure helps the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies. The combined company has the ability to utilize its combined financial resources to accelerate a strategy of expansion through both business acquisitions and organic growth.
Organic Growth Strategy
We intend to grow our businesses organically by exploring growth opportunities that provide different channels to reach customers, increase revenue and generate positive results. We plan to utilize our Company structure to grow organic revenue through collaborative selling across our customer bases and expanding the digital capabilities across our platform.
Acquisition Strategy
In addition to organic growth, we plan to actively pursue acquisition opportunities complementary to our businesses and that we believe will be financially accretive to our organization.
Human Capital Resources - General Employee Information
Our organization supports a culture of continuous improvement and emphasizes the importance of addressing the needs of our customers. We require our employees to act with integrity in every aspect of our business while encouraging them to be results driven, team oriented and progressive.
As of December 31, 2023, our combined workforce included approximately 3,700 individuals, comprised of approximately 1,662 in sales and marketing, approximately 1,465 in operation and distribution and approximately 585 in management and administration. Approximately 1,685 individuals are within Lawson, 1,160 are within TestEquity, 712 are within Gexpro Services, with the remaining in corporate or other non-reportable segments.
Segments
The Company’s three reportable segments are (i) Lawson, (ii) Gexpro Services and (iii) TestEquity, which align with our principal operating businesses. The following is a discussion of these reportable segments. For more information about our segments, refer to Note 14 – Segment Information in Item 8. Financial Statements and Supplementary Data.
Lawson
Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and governmental MRO marketplace. Lawson primarily distributes MRO products to its customers through a network of sales representatives throughout the United States and Canada.
Background and Operations — Lawson delivers quality products to customers and offers them extensive product knowledge, product application expertise and Vendor Managed Inventory ("VMI") services. Lawson competes for business primarily by offering a value-added service approach wherein highly trained sales representatives manage the product inventory for customers. The VMI model makes it less likely that customers will run out of a product while optimizing their inventory levels. Lawson ships products to its customers in all 50 states, Puerto Rico, Canada, Mexico and the Caribbean.
Strategic Focus — Lawson's vision is to be its customers' first choice for MRO solutions that improve their operating performance. Lawson plans to achieve its vision by working closely with customers to maintain and enhance their operations by providing them with quality products, superior service and innovative solutions and to grow both organically and through acquisitions.
Industry and Competition — The MRO market is comprised of companies that buy and stock products in bulk and supply these products to customers on an as needed basis. The customer benefits from our knowledge and the convenience of ordering smaller quantities maintained by us.
There is a significant amount of competitive fragmentation by geography and product within the industry. We encounter competition from several national distributors and manufacturers and a large number of regional and local distributors. Some
8

competitors have greater financial and personnel resources, handle more extensive lines of merchandise, operate larger facilities and price some merchandise more competitively than we do.
Customers — During 2023, the Lawson segment sold products to over 59,000 distinct customers. Lawson's largest customer accounted for approximately 3% of consolidated revenue. In 2023, approximately 91% of Lawson's revenue was generated in the United States and approximately 9% in Canada. Although seasonality is not significant, due to fewer selling days and less activity during the holiday season, revenue in the fourth quarter is historically lower than the first three quarters of the year.
Lawson's customers operate in a variety of industries. Lawson's revenue percentages by customer end markets in 2023 were as follows:

End Markets |  | Percentage of Lawson Revenue
Manufacturing |  | 22%
Automotive |  | 21%
Government and Military |  | 12%
Construction |  | 8%
Equipment rental |  | 6%
Transportation |  | 6%
Agriculture |  | 4%
Mining |  | 3%
Other |  | 18%
|  | 100%

Lawson's customers include a wide range of purchasers of industrial supply products from small repair shops to large national and governmental accounts.
Products — Lawson's revenue percentages by product categories in 2023 were as follows:

Product Category |  | Percentage of Lawson Revenue
Fastening systems |  | 19%
Fluid power |  | 15%
Electrical |  | 12%
Aftermarket automotive supplies |  | 12%
Specialty chemicals |  | 12%
Cutting tools and abrasives |  | 8%
Safety |  | 4%
Welding and metal repair |  | 2%
Other |  | 16%
|  | 100%

Lawson offers over 110,000 different products of which over 78,000 products are maintained in distribution centers. Lawson strives to carry sufficient inventory to ensure product availability and rapid processing of customer orders. Accurate for ecasting of customer demand is essential to establish the proper level of inventory for each product. Inventory levels need to be sufficient to meet customer demand while avoiding the costs of stocking excess items.
During 2023, Lawson purchased products from approximately 2,100 suppliers and no single supplier accounted for more than 5% of these purchases. The loss of one core supplier could affect operations by hindering the ability to provide full service to customers.
Lawson's quality control department tests its product offerings to help ensure they meet our customers' specifications. Lawson recommends solutions to help customers maximize product performance and avoid costly product failures. Lawson's
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engineering department provides technical support for products and offers on-site problem solutions. It also develops and presents product safety and technical training seminars tailored to meet customers' needs.
Human Capital Resources — As of December 31, 2023, Lawson's workforce had 1,685 individuals: approximately 1,153 in sales and marketing of whom 870 are field sales representatives, 406 in operation and distribution and 126 in management and administration. Approximately 12% of the Lawson workforce is covered by two collective bargaining agreements. We believe that our relationships with our employees and their collective bargaining organizations are satisfactory.
Sales force growth is a strategic driver of the Lawson business, and increased sales coverage throughout the United States and Canada directly impacts Lawson's success as an organization. Lawson is focused on identifying and recruiting individuals who are a good fit with its sales organization and providing them with the tools needed to succeed, such as training about Lawson's products and on the successful and effective ways to call potential customers and maintain relationships with existing customers. Lawson's product training educates its sales team on the optimal uses of products, enabling them to provide the proper products and customized solutions to address customers' needs, including technical expertise and on-site problem resolution. During 2023 Lawson expanded its team of inside sales representatives to support customer demand.
Lawson's leadership team is also focused on reducing sales force turn-over and on offering growth opportunities for its sales representatives.
TestEquity
TestEquity is a leading distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, and converting, fabrication and adhesive solutions from its leading manufacturing partners. TestEquity operates primarily through its six distribution brands, namely TestEquity, Hisco, TEquipment, Techni-Tool, Jensen Tools and Instrumex, and is focused primarily in North America with a network of sales representatives throughout the United States, Canada, Mexico, Germany and the United Kingdom.
Background and Operations — Based out of Moorpark, California, TestEquity is a large, comprehensive provider of electronic test solutions in the United States supporting the aerospace and defense, wireless and communication, semiconductors, industrial electronics and automotive, and electronics manufacturing industries. TestEquity designs, rents and sells a full line of high-quality environmental test chambers. In addition to a large array of test and measurement products, TestEquity also offers calibration, refurbishment and rental solutions and a wide range of refurbished products. TestEquity continues to benefit from electronification of products across a range of industries including the internet of things ("IOT"), electric vehicles ("EV") and the 5th generation mobile network ("5G"). TestEquity offers over 300,000 products and 800 manufacturer brands with overlap across the following brands.
Hisco is a specialty distribution company serving the electronic assembly, aerospace and defense, medical and other industrial markets. Hisco also offers specialized warehousing for cold storage and vendor managed inventory services.
TEquipment (acquired as Interworld Highway, LLC) is one of the top distributors for both test and measurement and electronic production supplies in the United States with its e-commerce focused strategy, broad product range, amplified by access to core TestEquity products, and strong technical support for their customers.
Techni-Tool is one of the industry’s largest solder, soldering equipment and electronic production distributors. Techni-Tool offers a wide range of products to support electronic production as well as compliance testing. In addition to the brand specific products offered, Techni-Tool also provides VMI solutions and dedicated technical support.
Jensen Tools is a top distributor for the electronics MRO customer base. In addition to being a distributor of handheld tools from leading brands, Jensen Tools offers private label Jensen branded hand tools that have been developed over years of customer usage and manufactured to a specified and demanding tolerance level. Jensen Tools employs a dedicated team of engineering, operational and sales professionals who focus on designing and building quality tool kits for its customers.
Instrumex is a small refurbished test and measurement distributor, based in Munich Germany, with a global reach.
Strategic Focus — TestEquity intends to grow revenue both organically and through acquisitions and continuing to expand and improve its service offerings to its customers. In particular, TestEquity strives to improve its digital experience,
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with a consistent approach for all of its brands. TestEquity intends to seek to increase its market share through continued expansion of product lines and greater penetration of the e-commerce market, enabled through investment in key digital talent and leverage of the existing TestEquity and TEquipment platforms.
Industry and Competition — Across both the test and measurement and electronic production supplies businesses, the North American market is fragmented with competitors ranging from large global distributors to national and regional distributors. Some competitors have greater financial and personnel resources, handle more extensive lines of merchandise, operate larger facilities and price some merchandise more competitively than TestEquity.
Customers — TestEquity serves over 100,000 customers at 125,000 locations across the United States and abroad, primarily in Canada, Europe and Mexico with approximately 85% of TestEquity’s revenue in 2023 derived from customers in the United States. There is not significant seasonality in TestEquity’s business across its fiscal quarters. However, the number of business days in a quarter has an impact on TestEquity’s revenue and profitability.
TestEquity's revenue percentages by customer end markets in 2023 were as follows:

End Markets |  | Percentage of TestEquity Revenue
Industrial electronics and electronics manufacturing |  | 46%
Aerospace and defense |  | 17%
Education |  | 4%
Wireless and communications technology |  | 4%
Semi-conductor production |  | 3%
Other |  | 26%
|  | 100%

Products — Approximately 30,000 fast-moving products are typically held in inventory across forty-eight distribution centers available for next day delivery. TestEquity’s revenue percentages by product categories in 2023 were as follows:

Product Category |  | Percentage of TestEquity Revenue
Electronic production supplies |  | 54%
Test & measurement |  | 43%
Proprietary products |  | 3%
|  | 100%

TestEquity has 34 key suppliers that made up approximately 48% of TestEquity’s purchases in 2023. In total, TestEquity purchases from approximately 1,000 suppliers across the marketplace.
Human Capital Resources — TestEquity supports a culture of continuous improvement, integrity and diversity. TestEquity prides itself on its ability to meet its customers’ needs in a driven and progressive manner. As of December 31, 2023, TestEquity's workforce had 1,160 individuals, comprised of approximately 253 in sales and marketing, 544 in operation and distribution and 363 in administration and support.
Gexpro Services
Gexpro Services is a world-class global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs. Gexpro Services provides comprehensive supply chain management solutions, including a full technology suite offering of VMI, kitting, global logistics management, manufacturing localization and import expertise, value engineering and quality assurance. Gexpro Services' end-to-end project management is designed to support manufacturing OEMs with their engineered material specifications, fulfillment, and quality requirements to improve their total cost of ownership. Gexpro Services has manufacturing and supply chain operations in over 31 service center sites across ten countries including key geographies in North America, South America, Asia, Europe, and the Middle East. Gexpro Services serves customers in six vertical markets, including renewables, industrial power, consumer and industrial, technology, transportation, and aerospace and defense.
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Background and Operations — Gexpro Services was formed in November 2019 and, in February 2020, acquired the “Gexpro Services” business from French distributor Rexel S.A. via a carve-out acquisition.
As a top distributor and service provider to the OEM market, Gexpro Services has approximately 2,800 suppliers offering approximately 47,000 products. These products are inventoried and sourced through 31 locations in North America, South America, Asia, Europe and the Middle East.
Strategic Focus — Gexpro Services intends to grow organically through market share expansion primarily through new product introduction, increased sales of products and services to existing customers and expansion of its customer base. Gexpro Services believes that its services benefit its customers by helping them reduce their direct and indirect procurement costs and total cost of ownership for high volume, low value Class C parts, and that its services can help drive substantial cost savings for its customers. Additionally, Gexpro Services intends to grow its business through strategic, accretive acquisitions, and through continued improvement in service and product offerings to its customers.
Industry and Competition — Gexpro Services operates in a large, fragmented market with many competitors servicing OEMs as well as the MRO segment of the Class C product line. Competitors of Gexpro Services include large global distributors as well as national, regional and local distributors.
Customers — Gexpro Services serves over 1,900 customers in over 38 countries through its 30 facilities. In 2023, approximately 69% of Gexpro Services' revenues were generated in the United States. Through its customer base, Gexpro Services provides VMI services with over 100,000 installed bins which allow its customers to maintain the necessary on-hand inventory levels to support their production cycles. Gexpro Services’ value-added processes for its customers include VMI, packaging and kitting, engineering, product standardization when appropriate, sales and technical support, global sourcing and quality assurance.
Approximately 67% of Gexpro Services’ revenue in 2023 was from customers under long-term agreements. Gexpro Services’ largest customer represented approximately 21% of Gexpro Services’ 2023 total revenue while the top 20 customers represented approximately 75% of Gexpro Services’ 2023 total revenue.
Gexpro Services has existing customers in many different industry end markets. Gexpro Services' revenue percentages by customer end markets in 2023 were as follows:

End Markets |  | Percentage of Gexpro Services Revenue
Renewable energy |  | 29%
Industrial power |  | 22%
Transportation |  | 19%
Consumer and industrial |  | 15%
Aerospace and defense |  | 10%
Technology |  | 5%
|  | 100%

Products — Gexpro Services' revenue percentages by product categories in 2023 were as follows:

Product Category |  | Percentage of Gexpro Services Revenue
Hardware |  | 46%
Electrical |  | 26%
Mechanical |  | 16%
Fabrications |  | 12%
|  | 100%

Approximately 55% of Gexpro Services’ suppliers are based in the United States, which helps limit the risk of increased freight and logistics costs; however, many of these suppliers source their products from overseas. Gexpro Services maintains
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favorable and long-tenured relationships with approximately 2,800 suppliers, with the largest supplier representing approximately 3% of Gexpro Services’ total product purchases in 2023 while the top 10 suppliers represented approximately 19% of total product purchases in 2023.
Human Capital Resources — Gexpro Services supports a culture of continuous improvement, integrity and diversity. Gexpro Services prides itself on being a full value provider to its customers supported with a team committed to providing world-class customer service. As of December 31, 2023, Gexpro Services' workforce had 712 individuals, comprised of approximately 225 in sales and marketing, 417 in operation and distribution and 70 in management and administration.
Available Information
We file with, or furnish to, the Securities and Exchange Commission ("SEC") annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, as applicable, amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act. The public can obtain copies of these materials by accessing the SEC's website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC, we make copies of such materials available to the public free of charge through our website at www.distributionsolutionsgroup.com. Information on our website is not incorporated by reference into this report. We also make available on our website our Code of Ethics, Corporate Governance Principles and the charters of the committees of our Board of Directors.
Information About Our Executive Officers
The executive officers of DSG as of February 1, 2024 were as follows:

Name |  | Age |  | Year First Named to Present Office |  | Position
J. Bryan King |  | 52 |  | 2022 |  | Chairman, President and Chief Executive Officer
Ronald J. Knutson |  | 60 |  | 2014 |  | Executive Vice President, Chief Financial Officer and Treasurer
David S. Lambert |  | 50 |  | 2021 |  | Vice President, Controller and Chief Accounting Officer

Biographical information for the past five years relating to each of our executive officers is set forth below.
Mr. King was elected President and Chief Executive Officer in May 2022. Mr. King has also served as a member of the Board of Directors of the Company since 2017, and has served as Chairman of the Board of Directors of the Company since March 2019. Mr. King has a career in investment management spanning over three decades and has served as Chairman or managing partner of several industrial distribution companies. Mr. King is a Principal of Luther King Capital Management Corporation (“LKCM”), an SEC-registered investment adviser, and Founder and Managing Partner of LKCM Capital Group and LKCM Headwater Investments, the private capital investment group of LKCM.
Mr. Knutson has served as Executive Vice President, Chief Financial Officer and Treasurer since April 2014 and has served as Executive Vice President and Chief Financial Officer of the Company since July 2012.
Mr. Lambert has served as Vice President, Controller and Chief Accounting Officer of the Company since June 2021. Prior to joining the Company, Mr. Lambert served as the Corporate Controller, and previously the Assistant Controller, of Univar Solutions, a chemical distribution company, publicly traded on the NYSE from June 2017 through June 2021. Prior to that, Mr. Lambert served as the Director of Corporate Accounting and Reporting of Donnelley Financial Solutions, a financial compliance company, publicly traded on the NYSE from September 2016 through June 2017. Prior to these roles, Mr. Lambert held progressive roles within finance and accounting at several other publicly traded companies.
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ITEM 1A. RISK FACTORS.
Our operating results depend upon many factors and are subject to various risks and uncertainties, including those discussed below. The material risks and uncertainties known to us and described below may negatively affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair or otherwise adversely affect our business, financial condition and results of operations, and may give rise to or amplify many of the risks discussed below.
Business Risks
A significant portion of our inventory may become obsolete.
Our business strategy requires us to carry a significant amount of inventory to meet rapid processing of customer orders. If our inventory forecasting and production planning processes result in inventory levels exceeding the levels demanded by customers or should our customers decrease their orders with us, our operating results could be adversely affected due to costs of carrying the inventory and additional inventory write-downs for excess and obsolete inventory, which could materially adversely affect our business, financial condition and results of operations.
Work stoppages and other disruptions at transportation centers or shipping ports, along with other supply chain disruptions, may adversely affect our ability to obtain inventory and make deliveries to our customers.
Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism, trade restrictions, government-imposed quotas or other events, could adversely affect our ability to maintain core products in inventory or deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our business, financial condition and results of operations. Similarly, other supply chain disruptions have impacted our ability to maintain certain core products in inventory and deliver products to customers on a timely basis, and may continue to impact our ability to do so. Such supply chain disruptions may adversely affect our business, financial condition and results of operations.
TestEquity relies on a single supplier for a significant amount of its product inventory, and any disruptions in such supplier’s business, operations or financial condition, or TestEquity’s relationship with such supplier, could have a material adverse effect on our business, financial condition and results of operations.
TestEquity relies on a single supplier for a significant amount of its product inventory, including electronic test and measurement equipment. During 2023 and 2022, the aggregate dollar amount of TestEquity’s purchases from that supplier represented approximately 11% and 25%, respectively, of the aggregate dollar amount of TestEquity’s purchases of product inventory from all of TestEquity’s suppliers during such periods. Any disruptions in that supplier’s business, operations or financial condition, or TestEquity’s relationship with this supplier, could have a material adverse effect on our business, financial condition and results of operations.
Changes in our customers, product mix and pricing strategy could cause our gross profit margin percentage to decline in the future.
From time to time, our businesses have experienced overall changes in the product mix demand of customers. When customers or product mix changes, there can be no assurance that we will be able to maintain our gross profit margins. Changes in our customers, product mix, volume of orders or prices charged, along with additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline. Our gross profit margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.
Disruptions of our information and communication systems could adversely affect the Company.
We depend on our information and communication systems to process orders, purchase and manage inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable collections and serve our customers. Disruptions in the operation of information and communication systems can occur due to a variety of factors including power outages, hardware failure, programming faults and human error. Disruptions in the operation of our information and
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communication systems, whether over a short or an extended period of time or affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition and results of operations.
Cyber-attacks or other information security incidents could have a material adverse effect on our business strategy, results of operations or financial condition and subject us to additional legal costs.
We are increasingly dependent on digital technology to process and record financial and operating data and communicate with our employees and business partners. During the normal course of business we receive, retain and transmit certain confidential information that our customers provide to purchase products or services or to otherwise communicate with us, as well as certain potentially sensitive information about our employees and other persons and entities.
Our technologies, systems, networks and data and information processes (and those of our business partners) have been, and may in the future be, the target of cyber-attacks and/or information security incidents that may have resulted in, or may in the future result in, the unauthorized release, misuse, loss or destruction of proprietary, personal and other information, or other disruption of our business operations, including compromise of our email systems. For example, in February 2022, Lawson became aware that its computer network was the subject of a cyber incident potentially involving unlawful access (the “Cyber Incident”). Because of the nature of the information that may have been potentially compromised, which may have included personal identifiable information and protected health information, we were required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and have taken other actions, such as offering credit monitoring services. After this incident, we also reviewed our overall systems and processes, and implemented certain changes, including employee training, designed to improve our overall cybersecurity program, but we cannot assure you that these changes will be effective to prevent future incidents. In addition, from time to time our email systems (and those of our business partners communicating with us) have been subjected to malicious attacks, including phishing attacks.
Such attacks or incidents could have a material adverse effect on our business strategy, results of operations or financial condition and subject us to additional legal costs. For example, a putative class action lawsuit was filed against DSG in April 2023 asserting a variety of claims seeking monetary damages, injunctive relief and other related relief in connection with the Cyber Incident, which could result in additional legal and other costs.
The techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognizable until launched against a target or until a breach has already occurred. Accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition, we are exposed to growing and evolving risks arising from the use of Artificial Intelligence technologies by bad actors to commit fraud, misappropriate funds and facilitate cyberattacks. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and fix any information security vulnerabilities.
We maintain and have access to data and information that is subject to privacy and security laws, data protection laws and applicable regulations. The interpretation and application of such laws, including federal, state and international laws, relating to the collection, use, retention, disclosure, security and transfer of personally identifiable data in the United States (including but not limited to the California Consumer Privacy Act and the California Privacy Rights Act), Europe (including but not limited to the European Union's General Data Protection Regulation) and elsewhere, are uncertain and evolving. Despite our efforts to protect such information, cyber, privacy or security incidents, or misplaced or lost data could have a materially adverse impact on our business strategy, results of operations or financial condition and may divert management and employee attention from other business and growth initiatives.
The inability to successfully recruit, integrate and retain productive sales representatives could adversely affect our business, financial condition and operating results.
We have committed to a plan to increase the size of our sales force. A successful expansion in our sales force requires us to identify under-served territories that offer the greatest potential growth opportunity, locate and recruit talented sales representatives, provide them with the proper training, and successfully integrate them into our organization. This expansion will require significant investment in capital and resources. The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our business, financial condition and results of operations.
It is also critical to retain the experienced and productive sales representatives that have historically contributed to the successes of our businesses. Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our business, financial condition and results of operations.
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There may be difficulties in integrating certain operations of TestEquity’s and Gexpro Services’ respective businesses with our legacy operations, and the failure to successfully combine those operations within our expected timetable could adversely affect our future results and the market price of our common stock.
The Mergers involve the combination of businesses that previously operated as independent businesses. Management has devoted and will continue to devote, significant attention and resources to combine certain business operations of TestEquity and Gexpro Services with our legacy business operations. This may divert the time and attention of our management team and diminish their time to manage our businesses, service existing customers, attract new customers, develop new products, services and strategies and identify other beneficial opportunities.
If our management is not able to effectively manage the process following the closing of the Mergers, or if any significant business activities are interrupted as a result of this process, our businesses could suffer.
Furthermore, it is possible that the Mergers could result in the loss of key employees. If we are not able to fully realize the anticipated savings and synergies from the Mergers in a timely manner, or the cost to achieve these synergies is greater than expected, we may not fully realize the anticipated benefits (or any benefits) of the Mergers, or it may take longer than expected to realize any benefits. The failure to fully or timely realize the anticipated benefits could have a negative effect on the market price of DSG common stock.
Failure to retain talented employees, managers and executives could negatively impact our business and operating results.
Our success depends on, among other things, our ability to attract, develop and retain talented employees, including executives and other key managers. The loss of certain key executives and managers or the failure to attract and develop talented employees could have a material adverse effect on our business, financial condition and results of operations.
The inability of management to successfully implement changes in operating processes could lead to disruptions in our operations.
We strive to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations. The implementation of changes to our current operations involves a risk that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies. Failure to successfully manage the implementation of these changes could lead to disruptions in our operations.
Any pursuit or completion by DSG of additional acquisition opportunities would involve risks that could adversely affect our business, financial condition and results of operations.
One of our growth strategies is to actively pursue additional acquisition opportunities which complement our business model. However, there are risks associated with pursuing acquisitions, which include the incurrence of significant transaction costs without the guarantee that such transactions will be completed and the risk that we may not realize the anticipated benefits of the acquisition once it is completed. We may fail to successfully identify the right opportunities and/or to successfully integrate the acquired businesses, operations, technologies, systems and/or personnel with those of DSG, which could adversely affect our business, financial condition and results of operations. See also the section entitled “Item 1A. Risk Factors – TestEquity Merger and Gexpro Services Merger Risks” for a discussion of various additional risk factors relating to our completed business combination with TestEquity and Gexpro Services.
We operate in highly competitive markets.
The marketplaces in which we operate are highly competitive. Our competitors include large and small companies with similar or greater market presence, name recognition, and financial, marketing, and other resources. We believe the competition will continue to challenge our business with their product selection, financial resources and services.
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We may be required to recognize impairment charges for goodwill and other intangible assets.
As a result of the closing of the Mergers on April 1, 2022 and other acquisitions completed during 2023 and 2022, we have a significant amount of goodwill and other intangible assets on our consolidated balance sheet as of December 31, 2023. In ac cordance with generally accepted accounting principles in the United States ("GAAP"), our management periodically assesses our goodwill and other intangible assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, an inability to effectively integrate acquired businesses, unexpected significant changes, planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments could materially and adversely affect our results of operations in the periods recognized, which could result in an adverse effect on the market price of DSG common stock.
Changes that affect governmental and other tax-supported entities, including but not limited to changes arising from geopolitical instability and military hostilities, could negatively impact our revenue and earnings.
A portion of our revenue is derived from the United States military and other governmental and tax-supported entities. These entities are largely dependent upon government budgets and require adherence to certain laws and regulations, including sanctions. Such sanctions could include restrictions on selling or importing goods, services, or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business, and financial organizations. In addition, geopolitical instability and military hostilities, such as the current Hamas-Israel military conflict and the Russia-Ukraine military conflict, could negatively impact our business Although we have not, do not currently and do not plan to conduct business operations in Gaza, Israel, Russia, Belarus, or Ukraine, it is not possible to predict the broader consequences of these ongoing conflicts, which could include sanctions, embargoes, increases or decreases in military spending or other geopolitical instability. Any decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, arising from these ongoing conflicts or otherwise, could lead to reduced revenue or an increase in compliance costs which would adversely affect our business, financial condition and results of operations.
We are required to evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation, and any failure to maintain effective internal controls over financial reporting, could result in a loss of investor confidence in our financial reports and could have an adverse effect on our stock price.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules, we are required to include in each Annual Report on Form 10-K a report by our management on our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Each year, we must prepare or update the process documentation and perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules in providing this report. During this process, if our management identifie s one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. For example, management's report on our internal controls over financial reporting contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, identified a material weakness and concluded that we did not maintain effective internal controls over financial reporting as of December 31, 2022. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming exercise that needs to be re-evaluated frequently. We and our independent auditors may in the future discover areas of our internal controls that need further attention and improvement, particularly with respect to any other businesses that we decide to acquire in the future.
One of our growth strategies is to actively pursue additional acquisition opportunities which complement our business model. These acquired businesses are typically private companies and may not have in place the financial organization, reporting and controls which are required for a U.S. public company. The cost of implementing this type of financial organization, reporting and controls in respect of the acquired business and integrating their financial reporting processes with our financial reporting processes may be significant. If there are limitations in the acquired businesses' financial organization, reporting and controls, or if we are unable to effectively integrate their financial reporting processes with our financial reporting processes, we could have, among other things, material weaknesses in our internal controls, violate our indebtedness covenants, miss an SEC reporting deadline or otherwise fail to comply with an applicable law or regulation.
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Implementing any appropriate changes to our internal controls may require specific compliance training, entail substantial costs in order to modify our existing accounting systems or those of the companies that we acquire, and take a material period of time to complete. However, such changes may not be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could harm our ability to operate our business. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to maintain effective internal controls over financial reporting, or any investor perception that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely, consistent basis, may result in a loss of investor confidence in our financial reports and may adversely affect our stock price. Any failure to maintain effective internal controls over financial reporting or to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules could also potentially subject us to sanctions or investigations by the SEC, Nasdaq or other regulatory authorities.
Debt Financing Risks
We have a significant amount of indebtedness, and our significant indebtedness could adversely affect our business, financial condition and results of operations.
We have $574.7 million of indebtedness as of December 31, 2023, which includes a significant amount of indebtedness under our 2023 Amended Credit Agreement (as defined herein). In addition, we may be able to incur a significant amount of additional indebtedness, subject to the terms and restrictions of our 2023 Amended Credit Agreement. Our indebtedness could have significant consequences on our future operations, including:
•events of default if we fail to comply with the financial and other covenants contained in the 2023 Amended Credit Agreement and/or other agreements governing our debt instruments, which could result in all of the debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;
•reducing the availability of our cash flow to fund working capital, capital expenditures, investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
•limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy;
•limiting our ability to buy back common stock or pay dividends;
•placing us at a competitive disadvantage compared to any of our competitors that have less debt or are less leveraged; and
•increasing our vulnerability to the impact of adverse economic and industry conditions.
Our ability to meet our payment and other obligations under our debt instruments will depend on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure that we will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our indebtedness obligations and to fund other liquidity needs.
Failure to adequately fund our operating and working capital needs through cash generated from operations and borrowings available under our 2023 Amended Credit Agreement could negatively impact our ability to invest in our business and maintain our capital structure.
Our business requires investment in working capital and fixed assets. We expect to fund these investments from cash generated from operations and borrowings available under our 2023 Amended Credit Agreement. Failure to generate sufficient cash flow from operations or from our 2023 Amended Credit Agreement could cause us to have insufficient funds to operate our business. Adequate funds may not be available when needed or may not be available on favorable terms.
Our business, financial condition and operating results could be materially adversely affected if we failed to meet the covenant requirements of our 2023 Amended Credit Agreement.
Our 2023 Amended Credit Agreement contains financial and other restrictive covenants. These covenants could
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adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Failure to meet these covenant requirements could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, result in events of default and accelerate the date on which our indebtedness must be repaid.
If we require more liquidity than is available to us under our 2023 Amended Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us. Should funding be insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Government efforts to combat inflation, along with other interest rate pressures, could lead to higher financing costs.
Inflation has risen on a global basis, the United States has been experiencing historically high levels of inflation, and government entities have taken various actions to combat inflation, such as raising interest rate benchmarks. Government entities may continue their efforts, or implement additional efforts, to combat inflation, which could include among other things continuing to raise interest rate benchmarks and/or maintaining interest rate benchmarks at elevated levels. Such government efforts, along with other interest rate pressures, could lead to higher financing costs and have material adverse effect on our business, financial condition and results of operations.
Common Stock Risks
The market price of our common stock may decline.
The price of our common stock could decrease if our financial performance is inadequate or does not meet investors' expectations, if there is deterioration in the overall market for equities, if large amounts of shares are sold in the market, if there is index trading, or if investors have concerns that our business, financial condition, results of operations and capital requirements are negatively impacted by an economic downturn or any other adverse development.
Entities affiliated with LKCM and J. Bryan King beneficially own a significant majority of the outstanding DSG common stock and, therefore, have significant influence over our Company, which could delay or deter a change in control or other business combination or otherwise cause us to take actions with which you may disagree.
Based on a Schedule 13D filed with the SEC by LKCM and various other persons and entities (as amended through December 27, 2023), entities affiliated with LKCM beneficially owned in the aggregate approximately 36.4 million shares of DSG common stock as of December 26, 2023, representin g approximately 77.8% of the outstanding shares of DSG common stock as of December 31, 2023. J. Bryan King, Chairman and Chief Executive Officer of the Company, is a Principal of LKCM. In addition, 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 As a result, LKCM has significant influence over the outcome of matters requiring a stockholder vote, including the election of directors and the approval of other significant matters, and LKCM’s interests may not align with the interests of other stockholders. This concentration of ownership could also have the effect of delaying or preventing a change of control or other business combination that might be beneficial to our stockholders.
In addition, as a result of this concentrated ownership interest of DSG common stock, DSG believes that it qualifies as a “controlled company.” Under Nasdaq Listing Rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and, accordingly, DSG believes that, if it so desired, it would be generally exempt from the requirements of Rule 5605(b), (d) and (e) of the Nasdaq Listing Rules that among other things would otherwise require DSG to have:
•a majority of the DSG Board of Directors comprised of independent directors;
•a compensation committee comprised solely of independent directors; and
•director nominees be selected or recommended to the DSG Board of Directors for selection, either by (1) DSG's independent directors constituting a majority of the DSG Board of Directors’ independent directors in a vote in which only independent directors participate or (2) a nominating committee comprised solely of independent directors.
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Entities affiliated with LKCM beneficially own a significant number of shares of DSG common stock, and any sales of any such shares or the possibility of any such sales could have a negative effect on the price of DSG common stock.
Entities affiliated with LKCM beneficially own a significant number of shares of DSG common stock. In accordance with the Merger Agreements, DSG granted to certain entities affiliated with LKCM certain registration rights with respect to the shares of DSG common stock that DSG issued to those entities in connection with the Mergers. Any sales of any of the shares of DSG common stock held by any entities affiliated with LKCM (whether those shares were acquired by those entities in connection with the Mergers or in other transactions), or the anticipation of the possibility of any such sales, could create downward pressure on the market price of DSG common stock.
Legal and Regulatory Risks
A violation of federal, state or local environmental protection regulations could lead to significant penalties and fines or other remediation costs.
Our product offerings include a wide variety of industrial chemicals and other products which are subject to a multitude of federal, state and local regulations. These environmental protection laws change frequently and affect the composition, handling, transportation, storage and disposal of these products. Failure to comply with these regulations could lead to severe penalties and fines for each violation.
Additionally, a facility we own in Decatur, Alabama, was found to contain hazardous substances in the soil and groundwater as a result of historical operations prior to our ownership. We retained an environmental consulting firm to further investigate the contamination, including measurement and monitoring of the site. The Company concluded that further remediation was required, and accordingly, has made an accrual for the estimated cost of this environmental matter. A remediation plan was approved by the Alabama Department of Environmental Management and the remediation of the affected area is ongoing. Additional procedures may be required that could negatively impact our business, financial condition and results of operations.
Our results of operations could be affected by changes in taxation.
We are subject to income taxation at federal and state levels in the United States and to income taxation in numerous non-U.S. jurisdictions. Our results of operations could be adversely affected by changes in the Company’s effective tax rate as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets, audits by taxing authorities or changes in tax laws, regulations and their interpretation. From time-to-time changes in tax laws or regulations may be proposed or enacted that could adversely affect our overall tax liability. In addition, the Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended fundamental tax reform affecting the taxation of multinational corporations, including the Base Erosion and Profit Shifting (“BEPS”) project, which in part aims to address international corporate tax avoidance. On December 20, 2021, the OECD released Pillar Two Model Rules defining the global minimum tax rules, which contemplate a 15% minimum tax rate. The OECD continues to release additional guidance on these rules and the framework calls for law enactment by OECD and G20 members to take effect in 2024 or 2025. However, the detail of the proposals is subject to change and the impact on the Company will need to be determined by reference to the final rules. The Company is continuing to monitor the potential impact of the Pillar Two proposals and developments on our consolidated financial statements and related disclosures, including eligibility for any transitional safe harbor rules. As of December 31, 2023, among the jurisdictions where the Company operates, only the U.K. has enacted legislation adopting the Pillar Two Rules, effective in fiscal 2025. Changes in applicable tax laws and regulations could affect our ability to realize our deferred tax assets, which could adversely affect our results of operations.
Our international operations subject us to additional legal and regulatory regimes.
TestEquity has business operations and/or sales in a number of foreign countries, including Canada, Mexico, Germany and the United Kingdom. Gexpro Services has business operations and/or sales in a number of foreign countries, including Hungary and China. Lawson has business operations in Canada. Compliance with diverse legal and regulatory requirements, including in connection with the movement or repatriation of cash, may be costly and time-consuming and require significant resources. Violations could result in significant fines or monetary damages, sanctions, prohibitions or restrictions on doing business and damage to our reputation. In addition, operating in foreign countries requires us to manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and
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regulations with respect to such jurisdictions, including anti-corruption laws or regulations applicable to DSG, such as the U.S. Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “UKBA”). The U.S., U.K. and other foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, the UKBA, and other laws, rules, sanctions, embargoes and regulations, including those established by the Office of Foreign Assets Control. Any violation of these legal requirements, even if prohibited by our policies, procedures and controls, could subject us to criminal or civil enforcement actions or penalties for non-compliance or otherwise have an adverse effect on our business and reputation.
As a result of the Mergers, DSG’s ability to use its net operating losses and certain other tax attributes generated prior to the Mergers may be subject to limitations.
At December 31, 2023, the Company had $21.4 million of U.S. federal net operating loss carryforwards which are subject to expiration beginning in 2027 and $53.5 million of various state net operating loss carryforwards which expire at varying dates between 2024 and 2035. As a result of the Mergers, DSG’s ability to use its net operating losses and certain other tax attributes generated prior to the Mergers may be subject to limitations, which may adversely impact on our future tax liability and cash flows.
Public Health Emergencies Risks
Public health emergencies, whether domestic or international, such as the COVID-19 pandemic, may materially adversely affect our business strategy, financial condition or results of operations.
Pandemics, epidemics or disease outbreaks in the U.S. or globally, including new variants of COVID-19, may have a material adverse effect on our business strategy, financial condition or results of operations, as well as on our employees, suppliers, customers, and the general economy. The full effect and estimated length of these disruptions could be difficult to predict by the Company given such an event is affected by a number of factors, many of which could be outside of our control. For example, the COVID-19 pandemic resulted in lost revenue to our Company, limited our ability to source high demand product, limited our sales force to perform certain functions due to state or federal stay-at-home orders, resulted in a slow-down of customer demand for our products and limited the ability of some customers to pay us on a timely basis.
TestEquity Merger and Gexpro Services Merger Risks
We are subject to business uncertainties as a result of the Mergers that could materially and adversely affect our businesses.
Uncertainty about the effect of the Mergers on employees, customers, suppliers and others having business relationships with us may have a material and adverse effect on our businesses. These uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the closing of the Mergers. These uncertainties could also cause our customers, suppliers and other contractors to change or sever existing business relationships with us. Employee retention and recruitment may be challenging for the combined company as existing employees and prospective employees may experience uncertainty about their future roles with the combined company. Furthermore, no assurance can be given that after the Mergers we will be able to attract or retain key management personnel or other key employees to the same extent that legacy Lawson, TestEquity and Gexpro Services had been able to attract or retain their own employees. The departure of existing key employees or the failure of potential key employees to accept employment with the combined company, despite our retention and recruiting efforts, could have a material adverse impact on our business, financial condition and operating results.
Litigation relating to the Mergers could result in the payment of damages following the closing of the Mergers.
DSG and members of the DSG Board of Directors currently are, and may in the future be, parties, among others, to litigation related to the Merger Agreements and the Mergers. Among other remedies, the stockholders in the pending litigation seek, and other stockholders could seek, monetary damages. The outcome of any legal proceedings are difficult to predict and any such lawsuits could result in substantial costs to us. The existence of litigation relating to the Mergers may also be costly and distracting to management. Further, the resources and costs to defend or settle any lawsuit or claim may adversely affect our business, financial condition, results of operations and cash flows. See Note 15 – Commitments and Contingencies to our consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data, for a description of certain of our pending legal proceedings relating to the Mergers, which are incorporated herein by reference.
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General Risks
Our results of operations may be adversely impacted by a downturn in the economy or in certain sectors of the economy.
Any decline or uncertainty in the strength of the economy may lead to a decrease in customer spending and may cause certain customers to cancel or delay placing orders. Some of our customers may file for bankruptcy protection, preventing us from collecting on accounts receivable and may result in our stocking excess inventory. Contractions in the credit markets may also cause some of our customers to experience difficulties in obtaining financing, leading to lower sales, delays in the collection of receivables and result in an increase in bad debt expense.
Adverse economic conditions could also affect our key suppliers and contractors. This could lead us to incur additional expenses or result in delays in shipping products to our customers. Economic uncertainty can make it difficult to accurately predict future order activity and affect our ability to effectively manage inventory levels. There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our existing financing arrangements, including our credit agreement.
Changes in energy costs, tariffs, transportation costs and the cost of raw materials used in our products, and other inflationary pressures, could impact our cost of goods and distribution and occupancy expenses, which may result in lower operating margins.
Increases in the cost of raw materials used in our products (e.g., steel, brass, copper), quotas imposed on any cross border supplies within our businesses, increases in tariffs, increases in natural gas, electricity and other energy costs and increases in freight and other costs necessary to produce and transport our products, as well as other inflationary pressures, will raise the production costs of our vendors. Those vendors have typically looked to pass the higher costs along to us through price increases. If we are unable to fully pass such increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins and financial condition. On the other hand, a decrease in oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales. Changes in trade policies could affect our sourcing of product and ability to secure sufficient product and/or impact the cost or price of our products, with potentially negative impacts on our reported gross profits and results of operations.
Supply chain constraints, inflationary pressure and labor shortages could impact our cost of goods and other costs and expenses, which may result in lower gross profit margins and/or otherwise materially adversely affect our business, financial condition and results of operations.
Our businesses have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs. This could result in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders. In addition, we have been and may continue to be impacted by labor shortages. This could result in challenges in fulfilling customer orders and can have a negative impact on our operating results as we may be required to utilize higher-cost temporary labor. We have also experienced and continue to experience inflationary pressure in other areas that adversely impact our cost of goods sold and other costs and expenses. While we instituted various price increases during 2022 and 2023 in response to rising supplier costs, as well as increased transportation and labor costs, there can be no assurance that future cost increases can be partially or fully passed on to customers, or that the timing of such sales price increases will match our supplier cost increases. As a result, we are unable to predict the impact of these constraints on our business, financial condition and results of operations.
The Company is exposed to the risk of foreign currency changes.
A number of our subsidiaries are located and operate outside the United States, and each uses the currency in such foreign country as its functional currency. Operating results denominated in foreign currencies are translated into U.S. dollars when consolidated into our financial statements. Therefore, we are exposed to market risk relating to the fluctuation of value of such foreign currencies (including the Canadian dollar, Mexican peso, British pound sterling, the Euro, Danish krone, Brazilian real, Chinese renminbi, and Turkish lira) relative to the U.S. dollar that could adversely affect our financial condition and operating results.
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In addition, t he revolving credit facility under our 2023 Amended Credit Agreement is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed between us and our lenders. Any borrowings in Canadian dollars or any other foreign currency would expose us to market risk relating to the change in the value of such foreign currency in relation to the U.S. dollar.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 1C. CYBERSECURITY.
Risk Management & Strategy
We are focused on addressing the growing threat of cybersecurity risks that we face in today’s global business environment and have identified cybersecurity as an important enterprise risk. Our cybersecurity risk management program is part of our overall enterprise risk management program, and is focused on identifying, assessing, managing, and remediating material risks from cybersecurity incidents. We rely on risk-based security controls, including access limitations and contractual requirements on third-party service providers, as part of our overall approach of protecting the integrity, availability and confidentiality of our important systems and information. We have an established cyber incident response plan to respond to cyber incidents.
We continue to improve our cybersecurity program and processes by investing in preventative measures. We engage consultants and third-party service providers in connection with our cybersecurity risk testing and assessment. These third-party service providers assist us in evaluating our cybersecurity program, provide support for threat monitoring and detection, and scan for vulnerabilities and other cybersecurity events which may pose a significant risk to the Company. We also engage in cybersecurity training, with the employees of certain of our operating companies undergoing compulsory training that enables them to detect and report malware, ransomware and other malicious software or social engineering attempts that may compromise the Company’s information technology systems, and those employees are routinely assessed on this training. Employees are also generally required to complete compulsory training covering the handling of sensitive data. As the cyber landscape evolves, both in our technology systems and in the broader context of the internet and expanding connectivity, management continually updates its cybersecurity approach as part of its effort to safeguard the Company’s sensitive information and assets.
We have not experienced any cybersecurity incidents in the last two years, including as a result of the Cyber Incident, that have materially affected the business strategy, results of operations, or financial condition of the Company. For more information regarding how cybersecurity threats could materially affect our business strategy, results of operations or financial condition, see “Cyber-attacks or other information security incidents could have a material adverse effect on our business strategy, results of operations or financial condition and subject us to additional legal costs.” in Item 1A. Risk Factors.
Corporate Governance
Our Board of Directors has overall responsibility for risk oversight and has delegated the oversight of risks associated with cybersecurity to the Audit Committee. The Audit Committee reports to the Board on our cybersecurity risk management practices and performance, generally on a quarterly basis. The Audit Committee receives reports from senior members of management, including from each of our Chief Information Officers (“CIOs”) (which include the CIO of each of our principal operating companies: Lawson, TestEquity and Gexpro Services), and the internal audit department regarding the cybersecurity risk management program. Among other things, these reports have focused on the following:
•recent cyber risk and cybersecurity developments;
•cyber risk governance and oversight;
•assessments by third-party experts;
•key cyber risk metrics and activities; and
•major projects and initiatives.
We have also established a governance structure under each of the CIOs that oversee investments in systems, resources, and processes as part of the continued maturity of our cybersecurity posture. Our CIOs have collectively over seventy years of service in various roles in the cybersecurity and information technology areas, including over forty years in their current roles or within the industry.
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ITEM 2. PROPERTIES.
Our principal executive office is located in Fort Worth, Texas. As of December 31, 2023, we owned or leased multiple properties in the United States and abroad, including office spaces, distribution centers, warehouses and branch retail locations.
Owned and leased properties by reportable segment as of December 31, 2023 are summarized below.

| Number of Properties
| Lawson |  | TestEquity |  | Gexpro Services |  | All Other(1)
Offices | 1 |  |  | 7 |  |  | 3 |  |  | 1 |
Distribution centers/warehouses | 6 |  |  | 48 |  |  | 28 |  |  | 1 |
Branch locations | — |  |  | — |  |  | — |  |  | 14 |
Other (2) | 1 |  |  | — |  |  | — |  |  | — |
Total | 8 |  |  | 55 |  |  | 31 |  |  | 16 |

(1)Includes our principal executive office and properties used by the Bolt Supply House ("Bolt"), a non-reportable segment.
(2)In connection with the sale of a discontinued business, we have agreed to lease the facility prior to the sale of the property.
While we believe that our facilities are adequate to meet our current needs, we will continue to assess the location and operation of our facilities to determine whether they meet the strategic needs of our business.
ITEM 3. LEGAL PROCEEDINGS.
See Note 15 – Commitments and Contingencies to our consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data, which is incorporated herein by reference, for a description of certain of our pending legal proceedings, which are incorporated herein by reference. In addition, the Company is involved in legal actions that arise in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Stock Price Data
The DSG common stock is traded on the Nasdaq Global Select Market under the symbol of DSGR. On February 29, 2024, the closing sales price of our common stock was $31.41 and the number of stockholders of record was 281. We did not declare or pay dividends in either 2023 or 2022 and the Company currently has no plans to declare or pay dividends in the foreseeable future. Dividends are subject to certain restrictions based on terms detailed in our 2023 Amended Credit Agreement. Information about our equity compensation plans may be found in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this report which is hereby incorporated by reference.
Repurchases of Equity Securities
The Board of Directors previously authorized a stock repurchase program that permits the Company to repurchase DSG common stock from time to time in open market transactio ns, privately negotiated transactions or by other methods. I n December 2023 the Board of Directors increased the repurchase program by $25.0 million, bringing the total authorized to $37.5 million. We had $29.0 million of remaining availability under the stock repurchase program as of December 31, 2023. T he stock repurchase program does not have an expiration date.
The following table summarizes repurchases of DSG common stock for the three months ended December 31, 2023 under the repurchase program described above and excludes shares withheld from employees to satisfy tax withholding requirements on option exercises and other equity-based transactions.

Period |  | Total Number of Shares Purchased |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
October 1 through October 31, 2023 |  | — |  |  | $ | — |  |  | — |  |  | $ | 7,572,000 |
November 1 through November 30, 2023 |  | 116,430 |  |  | 26.03 |  |  | 116,430 |  |  | 4,541,000 |
December 1 through December 31, 2023 |  | 22,295 |  |  | 26.37 |  |  | 22,295 |  |  | 28,953,000 |
Total |  | 138,725 |  |  |  |  | 138,725 |  |  |

ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of DSG's financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report on Form 10-K, the audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2022 and the Lawson Products, Inc. unaudited condensed consolidated financial statements and accompanying notes included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.
References to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc. and all entities consolidated in the accompanying consolidated financial statements.
Overview
Organization and Structure
DSG is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair and operations (“MRO”), the original equipment manufacturer (“OEM”) and the industrial technologies markets. The Mergers that were consummated on April 1, 2022 resulted in the combination of Lawson, TestEquity and Gexpro Services. For a description of the Mergers, refer to Item 1. Business and Note 1 – Nature of Operations and Basis of Presentation in Item 8. Financial Statements and Supplementary Data.
We manage and report our operating results through three reportable segments: Lawson, TestEquity and Gexpro Services. A summary of our segments is presented below. For additional details about our segments, see Item 1. Business and Note 14 – Segment Information in Item 8. Financial Statements and Supplementary Data.
Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and government MRO market.
TestEquity is a distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, and converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the aerospace and defense, wireless and communication, semiconductors, industrial electronics and automotive, and electronics manufacturing industries.
Gexpro Services is a global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs.
In addition to these three reportable segments, we have an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the results of a non-reportable segment.
Recent Events
HIS Company, Inc. Acquisition
On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of Hisco, a distributor of specialty products serving industrial technology applications, pursuant to the Purchase Agreement dated March 30, 2023. The total purchase consideration exchanged for the Hisco Transaction was $267.3 million, net of cash acquired of $12.2 million, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. DSG will also pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction.
In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco, creating one of the largest suppliers serving the electronics design, production, and repair industries. Accordingly, Hisco results are included in the TestEquity reportable segment after the date of acquisition.
DSG funded the Hisco Transaction with borrowings under its 2023 Amended Credit Agreement and proceeds raised from the Rights Offering, both discussed below. Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction.
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Debt Amendment
On June 8, 2023, the Company entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Amended Credit Agreement”), by and among the Company, certain subsidiaries of the Company as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The First Amendment provides for a $305 million incremental term loan. Refer to Note 9 – Debt for additional information about the 2023 Amended Credit Agreement.
Rights Offering
On May 30, 2023, the Company raised gross proceeds of approximately $100 million pursuant to a Rights Offering of transferable subscription rights to holders of DSG common stock as of the close of business on May 1, 2023. Refer to Note 11 – Stockholders' Equity for additional information about the Rights Offering. 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 Consolidated Balance Sheets.
Sales Drivers
DSG believes that the Purchasing Managers Index ("PMI") published by the Institute for Supply Management is an indicative measure of the relative strength of the economic environment of the industry in which it operates. The PMI is a composite index of economic activity in the U.S. manufacturing sector. A measure of the PMI index above 50 is generally viewed as indicating an expansion of the manufacturing sector while a measure below 50 is generally viewed as representing a contraction. The average monthly PMI wa s 47.1 in the year ended December 31, 2023 compared to 53.5 in the year ended December 31, 2022.
Lawson Sales Drivers
The North American MRO market is highly fragmented. Lawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is impacted by the overall strength of the manufacturing sector of the U.S. economy.
Lawson's revenue is also influenced by the number of sales representatives and their productivity. Lawson plans to continue concentrating its efforts on increasing the productivity and size of its sales team. Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations. Lawson also is expanding its inside sales team to help drive field sales representative productivity and also utilizes an e-commerce site to generate sales.
TestEquity Sales Drivers
Across the test and measurement, industrial and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors.
Through the Hisco Transaction, TestEquity expanded its product offerings, including adhesives, chemicals and tapes as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags. Hisco operates in 38 locations across North America, including its Precision Converting facilities that provide value-added fabrication and its Adhesive Materials Group that provides an array of custom repackaging solutions. Hisco also offers vendor-managed inventory and Radio Frequency Identification ("RFID") programs with specialized warehousing for chemical management, logistics services and cold storage.
Gexpro Services Sales Drivers
The global supply chain solutions market is highly fragmented across Gexpro Services' key vertical segments. Gexpro Services’ competitors range from large global distributors and manufacturers to small regional domestic distributors and
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manufacturers. Gexpro Services' revenue is influenced by our OEMs’ production schedules, new product introduction launches, and service project needs.
Gexpro Services' strategy is to increase revenue through increasing wallet share with existing customers, customer-led geographic expansion, new customer development in its six key vertical markets and leveraging its portfolio of recent acquisitions to expand its installation and aftermarket services.
Supply Chain Disruptions
We continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs. We have instituted various price increases during 2022 and 2023 in response to rising supplier costs, as well as increased transportation and labor costs in order to manage our gross profit margins.
Cyber Incident Litigation
On February 10, 2022, DSG disclosed that Lawson Products' computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). DSG engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network.
Because of the nature of the information that may have been compromised, DSG was required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and has taken other actions, such as offering credit monitoring services. At December 31, 2023, DSG had not incurred material costs as a result of the Cyber Incident. On April 4, 2023, a putative class action lawsuit was filed against DSG related to the Cyber Incident (the “Cyber Incident Suit”). For more information about the Cyber Incident Suit, refer to Note 15 – Commitments and Contingencies within Item 8. Financial Statements and Supplementary Data.
Factors Affecting Comparability to Prior Periods
Our results of operations for the year ended December 31, 2023 are not directly comparable to prior results for the year ended December 31, 2022 due to the Mergers that were completed on April 1, 2022. The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805"). 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 owned a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the consolidated financial statements for the year ended December 31, 2022 reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis for the full year, 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 consolidated financial statements for the full year ended December 31, 2023.
Non-GAAP Financial Measures
The Company's management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.
Non-GAAP Adjusted EBITDA
Management believes Adjusted EBITDA is an important measure of the Company's operating performance and may provide investors with additional meaningful comparisons between current results and results in prior operating periods because Adjusted EBITDA excludes certain non-operational or non-cash items whose fluctuations from period to period do not necessarily correspond to changes in the operating performance of our business and consequently may impact the overall
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comparability from period to period. We define Adjusted EBITDA as operating income plus depreciation and amortization, stock-based compensation, severance and acquisition related retention costs, costs related to the execution and integration of the Mergers and other acquisitions, inventory net realizable value adjustments, amortization of fair value step-up resulting from the Mergers and other acquisitions and other non-recurring items. Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments. See Note 14 – Segment Information of our consolidated financial statements within Item 8. Financial Statements and Supplementary Data for additional information about our reportable segments.
The following table provides a reconciliation of Net income to Adjusted EBITDA on a consolidated basis and Operating income to Adjusted EBITDA by segment for the years ended December 31, 2023 and 2022. A reconciliation of Net income to Adjusted EBITDA by segment is not provided because management does not determine or review net income at the segment level and does not allocate non-operating costs and expenses to its segments, such as income taxes, interest expense, and various other non-operating income and expense.
Reconciliation of Net Income (Loss) to Non-GAAP Adjusted EBITDA (Unaudited)

| Year Ended December 31, 2023
(in thousands) | Lawson |  | TestEquity |  | Gexpro Services |  | All Other |  | Consolidated |  |
Net income (loss) |  |  |  |  |  |  |  |  | $ | (8,967) |  |  |
Income tax expense (benefit) |  |  |  |  |  |  |  |  | 6,960 |  |  |
Other income (expense), net |  |  |  |  |  |  |  |  | 2,982 |  |  |
Change in fair value of earnout liabilities |  |  |  |  |  |  |  |  | (758) |  |  |
Interest expense |  |  |  |  |  |  |  |  | 42,774 |  |  |
Operating income (loss) | $ | 32,498 |  |  | $ | (16,465) |  |  | $ | 27,000 |  |  | $ | (42) |  |  | $ | 42,991 |  |  |
Depreciation and amortization | 19,532 |  |  | 26,002 |  |  | 15,986 |  |  | 2,068 |  |  | 63,588 |  |  |
Stock-based compensation(1) | 7,940 |  |  | — |  |  | — |  |  | — |  |  | 7,940 |  |  |
Severance and acquisition related retention expenses(2) | 476 |  |  | 23,949 |  |  | 238 |  |  | 3 |  |  | 24,666 |  |  |
Merger and acquisition related costs(3) | 3,015 |  |  | 6,215 |  |  | 1,081 |  |  | 1,250 |  |  | 11,561 |  |  |
Inventory step-up(5) | — |  |  | 3,582 |  |  | — |  |  | — |  |  | 3,582 |  |  |
Other non-recurring(6) | 202 |  |  | — |  |  | 886 |  |  | 1,620 |  |  | 2,708 |  |  |
Adjusted EBITDA | $ | 63,663 |  |  | $ | 43,283 |  |  | $ | 45,191 |  |  | $ | 4,899 |  |  | $ | 157,036 |  |  |

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|  |  | Year Ended December 31, 2022
(in thousands) |  |  |  |  | Lawson(7) |  | TestEquity |  | Gexpro Services |  | All Other(7) |  | Consolidated
Net income (loss) |  |  |  |  |  |  |  |  |  |  |  |  | $ | 7,406 |
Income tax expense (benefit) |  |  |  |  |  |  |  |  |  |  |  |  | 5,531 |
Other income (expense), net |  |  |  |  |  |  |  |  |  |  |  |  | 670 |
Change in fair value of earnout liabilities |  |  |  |  |  |  |  |  |  |  |  |  | 483 |
Loss on extinguishment of debt |  |  |  |  |  |  |  |  |  |  |  |  | 3,395 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  | 24,301 |
Operating income (loss) |  |  |  |  | $ | 6,536 |  |  | $ | 11,375 |  |  | $ | 21,291 |  |  | $ | 2,584 |  |  | $ | 41,786 |
Depreciation and amortization |  |  |  |  | 10,594 |  |  | 17,480 |  |  | 15,175 |  |  | 1,937 |  |  | 45,186 |
Stock-based compensation(1) |  |  |  |  | 2,448 |  |  | — |  |  | — |  |  | — |  |  | 2,448 |
Severance and acquisition related retention expenses(2) |  |  |  |  | 1,429 |  |  | 1,095 |  |  | 266 |  |  | 6 |  |  | 2,796 |
Merger and acquisition related costs(3) |  |  |  |  | 4,698 |  |  | 4,786 |  |  | 5,957 |  |  | — |  |  | 15,441 |
Inventory net realizable value adjustment(4) |  |  |  |  | 1,737 |  |  | — |  |  | — |  |  | — |  |  | 1,737 |
Inventory step-up(5) |  |  |  |  | 1,943 |  |  | — |  |  | 163 |  |  | 761 |  |  | 2,867 |
Other non-recurring(6) |  |  |  |  | 1,199 |  |  | — |  |  | 354 |  |  | 44 |  |  | 1,597 |
Adjusted EBITDA |  |  |  |  | $ | 30,584 |  |  | $ | 34,736 |  |  | $ | 43,206 |  |  | $ | 5,332 |  |  | $ | 113,858 |

(1) Expense (benefit) primarily for stock-based compensation, of which a portion varies with the Company’s stock price.
(2) Includes severance expense from actions taken in 2023 and 2022 not related to a formal restructuring plan and acquisition related retention expenses for the Hisco Transaction.
(3) Transaction and integration costs related to the Mergers and other acquisitions.
(4) Inventory net realizable value adjustment recorded to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records.
(5) Inventory fair value step-up adjustment for Lawson resulting from the reverse merger acquisition accounting and acquisition accounting for additional acquisitions completed by Gexpro Services or TestEquity.
(6) Other non-recurring costs consist of non-capitalized deferred financing costs incurred in conjunction with the 2023 Amended Credit Agreement, certain non-recurring strategic projects and other non-recurring items.
(7) Includes the operating results of Lawson and All Other subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions.
Supplemental Information - Lawson Pro Forma Operating Income and Non-GAAP Adjusted EBITDA
For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include Lawson's historical pre-merger components of operating income, prior to the April 1, 2022 Merger Date, along with pre-merger pro forma adjustments prepared under SEC Regulation S-X Article 11, in order to reflect the total operating activities attributable to Lawson for each period presented. Management believes this supplemental information provides the most meaningful basis of comparison for Lawson's operations, is more useful in identifying current business trends, and is important for the users of our financial statements in understanding Lawson's business. Refer to Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 8. Financial Statements and Supplementary Data for information about the Mergers.
This supplemental information may not reflect the actual results we would have achieved had the Mergers occurred at the beginning of 2022, and should not be viewed as a substitute for the results of operations presented in accordance with GAAP. Lawson's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in the Lawson Products, Inc. Quarterly Report on Form 10-Q filed for the quarterly period ended March 31, 2022. The pro forma adjustments were obtained from the unaudited pro forma condensed combined financial information included in DSG's Current Report on Form 8-K/A filed on August 24, 2023.
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Lawson Pro Forma Results - Calculation of Supplemental Information (Unaudited)

(in thousands) | Year Ended December 31, 2023 |  | Year Ended December 31, 2022
Lawson Operating Income | GAAP Results(1) |  |  |  |  |  | GAAP Results(2) |  | Pre-Merger Results(3) |  |  |  | Pro-Forma Adjustments(4) |  | Pro Forma Results(5)
Revenue from external customers | $ | 468,379 |  |  |  |  |  |  | $ | 324,783 |  |  | $ | 104,902 |  |  |  |  | $ | — |  |  | $ | 429,685 |
Intersegment revenue | 332 |  |  |  |  |  |  | — |  |  | — |  |  |  |  | — |  |  | — |
Revenue | 468,711 |  |  |  |  |  |  | 324,783 |  |  | 104,902 |  |  |  |  | — |  |  | 429,685 |
Cost of goods sold | 203,251 |  |  |  |  |  |  | 154,030 |  |  | 49,371 |  |  |  |  | — |  |  | 203,401 |
Gross profit | 265,460 |  |  |  |  |  |  | 170,753 |  |  | 55,531 |  |  |  |  | — |  |  | 226,284 |
Selling, general and administrative expenses | 232,962 |  |  |  |  |  |  | 164,217 |  |  | 44,435 |  |  |  |  | 4,086 |  |  | 212,738 |
Operating income (loss) | $ | 32,498 |  |  |  |  |  |  | $ | 6,536 |  |  | $ | 11,096 |  |  |  |  | $ | (4,086) |  |  | $ | 13,546 |
Lawson Adjusted EBITDA(6) | $ | 63,663 |  |  |  |  |  |  | $ | 30,584 |  |  | $ | 8,042 |  |  |  |  |  |  | $ | 38,626 |

(1) Operating income prepared in accordance with GAAP. No pre-merger or pro-forma adjustments were necessary because these results represent Lawson’s total operating activities for the full year ended December 31, 2023.
(2) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date. See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 8. Financial Statements and Supplementary Data.
(3) Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date and were not included in the Company's GAAP operating results under reverse merger acquisition accounting.
(4) Pro-forma adjustments include the incremental expense related to the fair value adjustment of share-based compensation awards of $1.9 million and the net impact of $2.2 million from the elimination of historical depreciation and amortization expense and recognition of new depreciation expense on the fair value of property, plant and equipment and amortization expense related to identifiable intangible assets.
(5) Lawson's pro forma results of operations adjusted for comparability on a period-over-period basis. These results represent Lawson’s total operating activities for the year ended 2022, regardless of the Merger Date (that is, they reflect both pre- and post-Merger results of Lawson, including the pro forma adjustments related to the pre-Merger period).
(6) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of operating income to Adjusted EBITDA.
Composition of Results of Operations
The following results of operations for the year ended December 31, 2023 include the combined operations of DSG. The following results of operations for the year ended December 31, 2022 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer, for the full year, and the results of DSG's legacy Lawson business have only been included for activity subsequent, and not prior, to the April 1, 2022 Merger Date.
Segment revenue and Operating income (loss) by reportable segment includes sales to external customers and sales transactions between our segments, referred to as intersegment revenue, and the impact of those intersegment revenue transactions on operating activities. Reconciliations of segment revenue and Operating income (loss) to our consolidated results of operations in the consolidated financial statements are provided in Note 14 – Segment Information within Item 8. Financial Statements and Supplementary Data.
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RESULTS OF OPERATIONS FOR 2023 AS COMPARED TO 2022
Consolidated Results of Operations

| Year Ended December 31,
| 2023 |  | 2022
(Dollars in thousands) | Amount |  | % of Revenue |  | Amount |  | % of Revenue
Revenue |  |  |  |  |  |  |
Lawson(1) | $ | 468,711 |  |  | 29.8 | % |  | $ | 324,783 |  |  | 28.2 | %
TestEquity | 641,768 |  |  | 40.9 | % |  | 392,358 |  |  | 34.1 | %
Gexpro Services | 405,733 |  |  | 25.8 | % |  | 385,326 |  |  | 33.5 | %
All Other(2) | 55,890 |  |  | 3.6 | % |  | 48,955 |  |  | 4.3 | %
Intersegment revenue elimination | (1,700) |  |  | (0.1) | % |  | — |  |  | — | %
Total Revenue | 1,570,402 |  |  | 100.0 | % |  | 1,151,422 |  |  | 100.0 | %
Cost of goods sold |  |  |  |  |  |  |
Lawson(1) | 203,251 |  |  | 12.9 | % |  | 154,030 |  |  | 13.4 | %
TestEquity | 499,916 |  |  | 31.8 | % |  | 302,980 |  |  | 26.3 | %
Gexpro Services | 284,664 |  |  | 18.1 | % |  | 272,462 |  |  | 23.7 | %
All Other(2) | 32,396 |  |  | 2.1 | % |  | 31,052 |  |  | 2.7 | %
Intersegment cost of goods sold elimination | (1,700) |  |  | (0.1) | % |  | — |  |  | — | %
Total Cost of goods sold | 1,018,527 |  |  | 64.9 | % |  | 760,524 |  |  | 66.1 | %
Gross profit | 551,875 |  |  | 35.1 | % |  | 390,898 |  |  | 33.9 | %
Selling, general and administrative expenses |  |  |  |  |  |  |
Lawson(1) | 232,962 |  |  | 14.8 | % |  | 164,217 |  |  | 14.3 | %
TestEquity | 158,317 |  |  | 10.1 | % |  | 78,003 |  |  | 6.8 | %
Gexpro Services | 94,069 |  |  | 6.0 | % |  | 91,573 |  |  | 8.0 | %
All Other(2) | 23,536 |  |  | 1.5 | % |  | 15,319 |  |  | 1.3 | %
Total Selling, general and administrative expenses | 508,884 |  |  | 32.4 | % |  | 349,112 |  |  | 30.3 | %
Operating income (loss) | 42,991 |  |  | 2.7 | % |  | 41,786 |  |  | 3.6 | %
Interest expense | (42,774) |  |  | (2.7) | % |  | (24,301) |  |  | (2.1) | %
Loss on extinguishment of debt | — |  |  | — | % |  | (3,395) |  |  | (0.3) | %
Change in fair value of earnout liabilities | 758 |  |  | — | % |  | (483) |  |  | — | %
Other income (expense), net | (2,982) |  |  | (0.2) | % |  | (670) |  |  | (0.1) | %
Income (loss) before income taxes | (2,007) |  |  | (0.1) | % |  | 12,937 |  |  | 1.1 | %
Income tax expense (benefit) | 6,960 |  |  | 0.4 | % |  | 5,531 |  |  | 0.5 | %
Net income (loss) | $ | (8,967) |  |  | (0.6) | % |  | $ | 7,406 |  |  | 0.6 | %

(1) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date.
(2) Includes the operating results of All Other subsequent, but not prior, to the April 1, 2022 Merger Date.
Overview of Consolidated Results of Operations
Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022 and the other acquisitions completed in 2023 and 2022. The increase in gross profit for 2023 compared to 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date and the Hisco and other acquisitions completed in 2023 and 2 022. Expenses for 2023 were impacted by the other acquisitions completed in 2023 and 2022.
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Refer to Results by Reportable Segment below for a complete discussion of our results of operations.
Results by Reportable Segment
Lawson Segment

| Year Ended December 31, |  | Change
(Dollars in thousands) | 2023 |  | 2022 |  | Amount |  | %
Revenue from external customers | $ | 468,379 |  |  | $ | 324,783 |  |  | $ | 143,596 |  |  | 44.2 | %
Intersegment revenue | 332 |  |  | — |  |  | 332 |  |  | — | %
Revenue | $ | 468,711 |  |  | $ | 324,783 |  |  | $ | 143,928 |  |  | 44.3 | %
Cost of goods sold | 203,251 |  |  | 154,030 |  |  | 49,221 |  |  | 32.0 | %
Gross profit | 265,460 |  |  | 170,753 |  |  | 94,707 |  |  | 55.5 | %
Selling, general and administrative expenses | 232,962 |  |  | 164,217 |  |  | 68,745 |  |  | 41.9 | %
Operating income (loss) | $ | 32,498 |  |  | $ | 6,536 |  |  | $ | 25,962 |  |  | 397.2 | %
Gross profit margin | 56.6 | % |  | 52.6 | % |  |  |  |
Adjusted EBITDA(1) | $ | 63,663 |  |  | $ | 30,584 |  |  | $ | 33,079 |  |  | 108.2 | %

(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income to Adjusted EBITDA.
Revenue and Gross Profit
Revenue increased $143.6 million, or 44.2%, to $468.7 million in 2023 compared to revenue of $324.8 million in the same period of 2022 primarily due to $125.3 million of revenue in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date. The remaining increase was primarily driven by strengthening sales to Lawson's strategic and governmental customers and automotive end market customers from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.
Gross profit increased $94.7 million, or 55.5%, to $265.5 million in 2023 compared to gross profit of $170.8 million in the same period of 2022 primarily due to $70.9 million of gross profit in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date. The remaining increase was primarily the result of increased sales volume, price increases and lower net freight expense and spreading operating expenses over a higher sales level. Lawson gross profit as a percent of revenue was 56.6% in 2023 compared to gross profit as a percent of revenue of 52.6% in the prior year period. The gross profit margin percentage improvement for 2023 was primarily the result of price increases, lower net freight expense and leveraging operating expenses over a higher sales base. The gross profit margin percentage for the same period of 2022 was impacted by increased supplier costs from inflation and supply chain disruptions and a sales shift toward lower margin customers. Gross profit margin for 2022 was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of inventory of $1.9 million related to the Mergers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and support for Lawson sales representatives as well as expenses to operate Lawson's distribution network and overhead expenses.
Selling, general and administrative expenses increased $68.7 million to $233.0 million in 2023 compared to Selling, general and administrative expenses of $164.2 million in the same period of 2022 primarily due to $62.7 million of Selling, general and administrative expenses in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date.
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Adjusted EBITDA
During 2023, Lawson generated Adjusted EBITDA of $63.7 million, an increase of 108.2% or $33.1 million from the same period a year ago p rimarily due to $18.5 million of Adjusted EBITDA in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date and increased revenue and gross profit margin partially offset by an increase in Selling, general and administrative expenses.
Supplemental Information
For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include Lawson's historical pre-merger components of operating income, prior to the April 1, 2022 Merger Date, along with pre-merger pro forma adjustments prepared under SEC Regulation S-X Article 11, in order to reflect the total operating activities attributable to Lawson for each period presented. These pro forma results presented in the table below are referred to within this supplemental results of operations discussion as "pro forma".

| Year Ended December 31, |  | Change
(Dollars in thousands) | 2023 |  | Pro Forma 2022(1) |  | Amount |  | %
Revenue from external customers | $ | 468,379 |  |  | $ | 429,685 |  |  | $ | 38,694 |  |  | 9.1%
Intersegment revenue | 332 |  |  | — |  |  | 332 |  |  | —%
Revenue | $ | 468,711 |  |  | $ | 429,685 |  |  | $ | 39,026 |  |  | 9.1%
Cost of goods sold | 203,251 |  |  | 203,401 |  |  | (150) |  |  | (0.1)%
Gross profit | 265,460 |  |  | 226,284 |  |  | 39,176 |  |  | 17.3%
Selling, general and administrative expenses | 232,962 |  |  | 212,738 |  |  | 20,224 |  |  | 9.7%
Operating income (loss) | $ | 32,498 |  |  | $ | 13,546 |  |  | $ | 18,952 |  |  | 107.5%
Gross profit margin | 56.6 | % |  | 52.7 | % |  |  |  |
Adjusted EBITDA(2) | $ | 63,663 |  |  | $ | 38,626 |  |  | $ | 25,037 |  |  | 64.8%

(1)For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical unaudited results of Lawson prior to the Merger Date and certain pro-forma adjustments including the incremental expense related to the fair value adjustment of share-based compensation awards and incremental depreciation and amortization expense related to the fair value adjustments of property, plant and equipment and identifiable intangible assets. Refer to the section Factors Affecting Comparability to Prior Periods and the section Supplemental Information - Lawson Pro Forma Operating Income and Non-GAAP Adjusted EBITDA for more information related to the calculation of adjusted amounts.
(2)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income to Adjusted EBITDA.
Revenue and Gross Profit
Revenue increased $39.0 million, or 9.1%, to $468.7 million in 2023 compared to pro forma revenue of $429.7 million in the same period of 2022. The increase was primarily driven by strengthening sales to Lawson's strategic and governmental customers of $25.2 million and automotive end market customers of $13.5 million from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.
Gross profit increased $39.2 million to $265.5 million in 2023 compared to pro forma gross profit of $226.3 million in the same period of 2022 primarily as a result of increased sales volume and price increases, which contributed to an increase in gross profit of $29.4 million, lower net freight expense of $2.9 million, lower expense for write-offs of obsolete and excess inventory of $3.2 million and spreading operating expenses over a higher sales level. Lawson gross profit as a percent of revenue was 56.6% in 2023 compared to pro forma gross profit as a percent of pro forma revenue of 52.7% in the prior year period. The gross profit margin percentage improvement for 2023 was primarily the result of price increases, lower net freight costs, lower expense for write-offs of obsolete and excess inventory and leveraging operating costs over a higher sales base. The pro forma gross profit margin percentage for the same period of 2022 was impacted by increased supplier costs from inflation and supply chain disruptions and a sales shift toward lower margin customers. P ro forma gross profit margin for 2022 was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where
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the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of inventory of $1.9 million related to the Mergers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and support for Lawson sales representatives as well as expenses to operate Lawson's distribution network and overhead expenses.
Selling, general and administrative expenses increased $20.2 million to $233.0 million in 2023 compared to pro forma Selling, general and administrative expenses of $212.7 million in the same period of 2022. The increase was primarily driven by additional depreciation and amortization of $9.2 million as a result of the fair value step-up adjustments related to the reverse merger acquisition accounting and higher stock-based compensation of $12.2 million due to expense of $7.9 million in 2023 and a benefit of $4.2 million realized in 2022, partially offset by lower acquisition related costs of $4.7 million in 2023 compared to the same period of 2022.
Adjusted EBITDA
During 2023, Lawson generated Adjusted EBITDA of $63.7 million, an increase of 64.8% or $25.0 million from the same period a year ago primarily driven by increased revenue and gross profit margin partially offset by an increase in Selling, general and administrative expenses.
TestEquity Segment

| Year Ended December 31, |  | Change
(Dollars in thousands) | 2023 |  | 2022 |  | Amount |  | %
Revenue from external customers | $ | 641,643 |  |  | $ | 392,358 |  |  | $ | 249,285 |  |  | 63.5 | %
Intersegment revenue | 125 |  |  | — |  |  | 125 |  |  | — | %
Revenue | 641,768 |  |  | 392,358 |  |  | 249,410 |  |  | 63.6 | %
Cost of goods sold | 499,916 |  |  | 302,980 |  |  | 196,936 |  |  | 65.0 | %
Gross profit | 141,852 |  |  | 89,378 |  |  | 52,474 |  |  | 58.7 | %
Selling, general and administrative expenses | 158,317 |  |  | 78,003 |  |  | 80,314 |  |  | 103.0 | %
Operating income (loss) | $ | (16,465) |  |  | $ | 11,375 |  |  | $ | (27,840) |  |  | (244.7) | %
Gross profit margin | 22.1 | % |  | 22.8 | % |  |  |  |
Adjusted EBITDA(1) | $ | 43,283 |  |  | $ | 34,736 |  |  | $ | 8,547 |  |  | 24.6 | %

(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income (loss) to Adjusted EBITDA.
Revenue and Gross Profit
Revenue increased $249.4 million, or 63.6%, to $641.8 million in 2023 compared to $392.4 million in the same period in 2022. The increase was primarily driven by $273.4 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $24.0 million decline in legacy TestEquity revenue due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base and softening in the EPS end markets.
Gross profit increased $52.5 million to $141.9 million in 2023 compared to $89.4 million in the same period of 2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $57.9 million of additional gross profit during 2023 offset by a decline in legacy TestEquity revenue. TestEquity gross profit as a percent of revenue decreased to 22.1% in 2023 compared to 22.8% in the prior year primarily due to the amortization of the fair value step-up of inventory of $3.6 million related to the Hisco Transaction and a shift in sales mix from the lower gross margin rates from the 2022 and 2023 acquisitions.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and support for TestEquity's sales representatives and expenses to operate TestEquity's distribution network and overhead expenses.
Selling, general and administrative expenses increased $80.3 million to $158.3 million in 2023 compared to $78.0 million in the same period of 2022. Approximately $68.8 million of the increased expenses, including depreciation, was driven by the acquisitions completed in 2023 and 2022 of which $22.8 million was related to the Hisco retention bonuses. The remaining increase in Selling, general and administrative expenses of $11.5 million is primarily due to $4.6 million of additional amortization of intangible assets acquired through the Hisco acquisition, $1.4 million of higher acquisition related expenses and $5.5 million of higher expenses for health insurance, allowance for doubtful accounts and other professional services.
Adjusted EBITDA
During 2023, TestEquity generated Adjusted EBITDA of $43.3 million, an increase of $8.5 million from the same period a year ago with approximately $19.7 million driven by the acquisitions completed in 2023 and 2022 partially offset by $7.3 million due to lower gross profit margin on lower legacy TestEquity revenue and $3.9 million primarily due to higher expenses for health insurance, allowance for doubtful accounts and other professional services.
Gexpro Services Segment

| Year Ended December 31, |  | Change
(Dollars in thousands) | 2023 |  | 2022 |  | Amount |  | %
Revenue from external customers | $ | 404,490 |  |  | $ | 385,326 |  |  | $ | 19,164 |  |  | 5.0 | %
Intersegment revenue | 1,243 |  |  | — |  |  | 1,243 |  |  | — | %
Revenue | 405,733 |  |  | 385,326 |  |  | 20,407 |  |  | 5.3 | %
Cost of goods sold | 284,664 |  |  | 272,462 |  |  | 12,202 |  |  | 4.5 | %
Gross profit | 121,069 |  |  | 112,864 |  |  | 8,205 |  |  | 7.3 | %
Selling, general and administrative expenses | 94,069 |  |  | 91,573 |  |  | 2,496 |  |  | 2.7 | %
Operating income (loss) | $ | 27,000 |  |  | $ | 21,291 |  |  | $ | 5,709 |  |  | 26.8 | %
Gross profit margin | 29.8 | % |  | 29.3 | % |  |  |  |
Adjusted EBITDA(1) | $ | 45,191 |  |  | $ | 43,206 |  |  | $ | 1,985 |  |  | 4.6 | %

(1)Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income to Adjusted EBITDA.
Revenue and Gross Profit
Revenue increased $20.4 million, or 5.3%, to $405.7 million in 2023 compared to $385.3 million in the same period of 2022. The increase was primarily driven by strengthening sales within Gexpro Services' Aerospace & Defense, Industrial Power, and Transportation end markets of $7.3 million, $17.7 million and $4.9 million, respectively, partially offset by continued softness in the Technology/Semiconductor end markets of $24.5 million. The increase also came from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.
Gross profit increased $8.2 million to $121.1 million in 2023 compared to $112.9 million in the same period of 2022 primarily as a result of increased sales volume and price increases and lower net freight expense of $6.1 million partially offset by an increase in expense for write-offs for obsolete and excess inventory of $3.6 million and higher freight capitalization of $0.5 million. Gexpro Services gross profit as a percent of revenue was 29.8% in 2023 compared to 29.3% in the prior year period. The gross profit margin percentage improvement for 2023 was primarily the result of price increases and lower net freight costs partially offset by higher expense for write-offs of obsolete and excess inventory.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate Gexpro Services' business and service customers.
Selling, general, and administrative expenses increased $2.5 million to $94.1 million in 2023 compared to $91.6 million in the same period of 2022. The increase was primarily driven by $1.7 million of additional expenses from the Frontier acquisition completed at the end of the first quarter of 2022 and additional compensation and product fulfillment costs to support the organic sales growth.
Adjusted EBITDA
During 2023, Gexpro Services generated Adjusted EBITDA of $45.2 million, an increase of $2.0 million, or 4.6% from the same period a year ago primarily driven by increased revenue and gross profit margin, partially offset by an increase in Selling, general, and administrative expenses.
Consolidated Non-operating Income and Expense

| Year Ended December 31, |  | Change
(Dollars in thousands) | 2023 |  | 2022 |  | Amount |  | %
Interest expense | $ | (42,774) |  |  | $ | (24,301) |  |  | $ | (18,473) |  |  | 76.0 | %
Loss on extinguishment of debt | $ | — |  |  | $ | (3,395) |  |  | $ | 3,395 |  |  | N/M
Change in fair value of earnout liabilities | $ | 758 |  |  | $ | (483) |  |  | $ | 1,241 |  |  | N/M
Other income (expense), net | $ | (2,982) |  |  | $ | (670) |  |  | $ | (2,312) |  |  | N/M
Income tax expense (benefit) | $ | 6,960 |  |  | $ | 5,531 |  |  | $ | 1,429 |  |  | 25.8 | %

N/M Not meaningful
Interest Expense
Interest expense increased $18.5 million in 2023 compared to the same period of 2022 primarily due to an increase in interest rates and higher borrowings related to the Hisco and other 2023 and 2022 acquisitions.
Loss on Extinguishment of Debt
The $3.4 million loss on extinguishment of debt in 2022 was primarily due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers.
Change in Fair Value of Earnout Liabilities
The $0.8 million benefit in 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $0.5 million expense in 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements and the Frontier earnout. Refer to Note 8 – Earnout Liabilities and Note 3 – Business Acquisitions within Item 8. Financial Statements and Supplementary Data for information about the earnout liabilities.
Other Income (Expense), Net
Other income (expense), net consists of effects of changes in foreign currency exchange rates, interest income, net and other non-operating income and expenditures. The $2.3 million change in 2023 compared to the same period of 2022 was partly due to unfavorable changes in foreign currency exchange rates and other insignificant changes in other non-operating income and expenditures.
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Income Tax Expense (Benefit)
Income tax expense was $7.0 million, a (346.8)% effective tax rate for the year ended December 31, 2023 compared to income tax expense of $5.5 million and a 42.8% effective tax rate for the prior year. The change in the year-over-year effective tax rate was primarily due to an increase in the partial valuation allowance against our excess interest expense carryforward balance, state taxes, foreign income and a pre-tax loss in the current year. The 2022 income tax was also impacted by the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $83.9 million on December 31, 2023 compared to $24.6 million on December 31, 2022.
The Company believes its current balances of cash and cash equivalents, availability under its 2023 Amended Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of December 31, 2023, the Company had $83.9 million of cash and cash equivalents and $198.3 million of bo rrowing availability remaining, net of outstanding letters of credit, under the 2023 Amended Credit Agreement.
On June 2, 2023, the Company raised net proceeds of approximately $98.5 million from the Rights Offering, in which 4,444,444 shares of DSG common stock were sold at a purchase price of $22.50 per share. On June 8, 2023, the Company borrowed $305 million under the incremental term loan of the 2023 Amended Credit Agreement. The Company used these combined proceeds primarily to fund the Hisco Transaction and to pay down its revolving credit facility.
Our primary short-term and long-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, potential business acquisitions, strategic initiatives and general corporate purposes. Our current debt obligations under the 2023 Amended Credit Agreement mature in April 2027. Required principal payments on the 2023 Amended Credit Agreement for the next twelve months are $30.3 million. Refer to Note 9 – Debt within Item 8. Financial Statements and Supplementary Data for additional information related to our debt obligations. Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future, however, we cannot provide assurance that unforeseen events or events beyond our control (such as a potential tightening of debt capital markets) will not have a material adverse impact on our liquidity.
Sources and Uses of Cash
The following table presents a summary of our cash flows:

(in thousands) | December 31, 2023 |  | December 31, 2022 |  | Change
Net cash provided by (used in) operating activities | $ | 102,286 |  |  | $ | (11,029) |  |  | $ | 113,315 |
Net cash provided by (used in) investing activities | $ | (278,523) |  |  | $ | (126,688) |  |  | $ | (151,835) |
Net cash provided by (used in) financing activities | $ | 250,406 |  |  | $ | 148,461 |  |  | $ | 101,945 |

Cash Provided by (Used in) Operating Activities
Net cash provided by operations for the year ended December 31, 2023 was $102.3 million primarily due to non-cash items, partially offset by a net loss and improvements in working capital.
Net cash used in operations for the year ended December 31, 2022 was $11.0 million, excluding non-cash items, primarily due to increased accounts receivables driven by higher sales and increased inventories due to increased supplier costs driven by inflation and global supply chain disruptions.
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 was $278.5 million, primarily due to the Hisco Transaction, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.
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Net cash used in investing activities for the year ended December 31, 2022 was $126.7 million, primarily due to acquisitions completed by TestEquity and Gexpro Services, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $250.4 million due to proceeds from the 2023 Amended Credit Agreement and the Rights Offering partially offset by repayment of previous indebtedness and principal payments on the term loans. In conjunction with the Hisco Transaction, the Company borrowed $305.0 million under the incremental term loan facility on June 8, 2023 and raised approximately $98.5 million, net of offering costs, through the Rights Offering which closed during the second quarter of 2023. During 2023, deferred financing costs of $3.4 million were incurred related to the 2023 Amended Credit Agreement.
Net cash provided by financing activities for the year ended December 31, 2022 was $148.5 million, primarily due to proceeds from term loans and revolving credit facilities to finance the Mergers and other acquisitions, partly offset by repayment of previous indebtedness. Deferred financing costs of $12.0 million were incurred during 2022 related to these financing activities.
Financing and Capital Requirements
Credit Facility
On June 8, 2023, in connection with the Hisco Transaction, DSG entered into the First Amendment, which amended and replaced the Amended and Restated Credit Agreement dated April 1, 2022 with the 2023 Amended Credit Agreement, and provided for a $305 million incremental term loan facility. The 2023 Amended Credit Agreement also provides for the Company to increase the commitments from time to time by up to $200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants.
The 2023 Amended Credit Agreement includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility, a $305 million incremental term loan and a $50 million senior secured delayed draw term loan facility. Refer to Note 9 – Debt within Item 8. Financial Statements and Supplementary Data for a description of the 2023 Amended Credit Agreement.
On December 31, 2023, we had $574.7 million in outstanding borrowings under the 2023 Amended Credit Agreement and $198.3 million of bo rrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component.
As of December 31, 2023, we were in compliance with all financial covenants under our 2023 Amended Credit Agreement. While we were in compliance with our financial covenants as of December 31, 2023, failure to meet the covenant requirements of the 2023 Amended Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness and could have a material adverse effect on our business, financial condition and results of operations.
Purchase Commitments
As of December 31, 2023, we had contractual commitments to purchase approximately $146 million of products from our suppliers and contractors over the next twelve months.
Capital Expenditures
During the year ended December 31, 2023, t otal capital expenditures for property, plant and equipment and rental equipment were $24.7 million excluding proceeds from the sale of rental equipment. The Company expects to spend appro ximately $16 million to $20 million for capital expenditures during 2024 to support ongoing operations.
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Stock Repurchase Program
The Company's Board of Directors previously authorized a stock repurchase program that permits the Company to repurchase its common stock. The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors and depend on various factors including an evaluation of our stock price, corporate and regulatory requirements, capital availability and other market conditions. In December 2023, the Board of Directors increased the existing repurchase program by $25.0 million bringing the total authorized to $37.5 million.
During 2023, the Company repurchased 138,725 shares of DSG common stock at an average cost of $26.09 per share for a total cost of $3.6 million. During 2022, the Company repurchased 108,178 shares of DSG common stock 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 $29.0 million at December 31, 2023. See Note 11 – Stockholders' Equity within Item 8. Financial Statements and Supplementary Data for further information.
Retention Bonuses
As part of the Purchase Agreement, 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. Pursuant to the Purchase Agreement, the Company paid $1.8 million of the retention bonuses during 2023 and will pay $34.6 million during 2024, with the remaining balance of $1.1 million to be paid in 2025.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
We have disclosed our significant accounting policies in Note 2 – Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data. The following provides information on the accounts requiring more significant estimates.
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. 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.
Goodwill Impairment - 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 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.
Business Combinations - We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:
•intangible assets, including the valuation methodology (the relief of royalty method for trade names and multi-period excess earnings method for customer relationships), estimations of future cash flows, discount rates, royalty rates, recurring revenue attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;
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•deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances;
•inventory;
•property, plant and equipment;
•pre-existing liabilities or legal claims;
•contingent consideration, including estimating the likelihood and timing of achieving the relevant thresholds; and
•goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this item:

| Page #
Report of Independent Registered Public Accounting Firm (Grant Thornton, LLP; Los Angeles, California; PCAOB ID#248) | 44
Report of Independent Registered Public Accounting Firm (BDO USA, P.C.; Chicago, Illinois; PCAOB ID#243) | 46
Consolidated Balance Sheets as of December 31, 2 0 2 3 and 2022 | 47
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2 02 3 and 2022 | 48
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 20 2 3 and 2022 | 49
Consolidated Statements of Cash Flows for the Years ended December 31, 2023 and 2022 | 50
Notes to Consolidated Financial Statements | 52

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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Distribution Solutions Group, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Distribution Solutions Group, Inc., (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 7, 2024 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Business Acquisition – HIS Company, Inc. – Valuation of acquired Intangible Assets
As described further in Note 3 to the financial statements, the Company acquired HIS Company, Inc. on June 8, 2023, for a total purchase price of approximately $267.3 million, net of cash acquired. The Company allocated the purchase price, on a preliminary basis, to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $65.3 million.
The principal considerations for our determination that the valuation of acquired customer relationships and trade names is a critical audit matter are (i) the significant judgment by management when determining assumptions used in the fair value measurement of acquired intangible assets and (ii) the high degree of auditor judgment and subjectivity in performing procedures and evaluating management’s significant assumptions relating to the projected forecasted information including revenue growth rate, weighted average cost of capital (WACC), royalty rate, and customer attrition rate.
Our audit procedures related to the valuation of the acquired intangible assets included the following, among others:
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(i) we tested the design and operating effectiveness of the controls over the Company’s acquisition and valuation process, including review of the valuation model, significant assumptions used, and the completeness and accuracy of the underlying data used
(ii) we reviewed the projected forecasted information including forecasted revenue growth rate by assessing the reasonableness of management’s forecasts compared to historical results and forecasted industry trends
(iii) with the assistance of our valuation specialists, we assessed the assumptions and methodologies used in developing the WACC, royalty rates, and customer attrition rates by developing a range of independent estimates and comparing those to the rates selected by management. We also involved our valuation specialists to validate the assumptions and methodologies used in valuing the intangible assets.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2023.
Los Angeles, California
March 7, 2024
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Distribution Solutions Group, Inc.
Chicago, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Distribution Solutions Group, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, P.C.
We served as the Company's auditor from 2022 to 2023.
Chicago, Illinois
March 14, 2023, except for effects of the Stock Split described in Notes 1 and 11, as to which the date is March 7, 2024
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Distribution Solutions Group, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share data)

| December 31,
| 2023 |  | 2022
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 83,931 |  |  | $ | 24,554 |
Restricted cash | 15,695 |  |  | 186 |
Accounts receivable, less allowances of $2,120 and $1,513, respectively | 213,448 |  |  | 166,301 |
Inventories | 315,984 |  |  | 264,374 |
Prepaid expenses and other current assets | 28,272 |  |  | 22,773 |
Total current assets | 657,330 |  |  | 478,188 |
Property, plant and equipment, net | 113,811 |  |  | 64,395 |
Rental equipment, net | 24,575 |  |  | 27,139 |
Goodwill | 399,925 |  |  | 348,048 |
Deferred tax asset, net | 95 |  |  | 189 |
Intangible assets, net | 253,834 |  |  | 227,994 |
Cash value of life insurance | 18,493 |  |  | 17,166 |
Right of use operating lease assets | 76,340 |  |  | 46,755 |
Other assets | 5,928 |  |  | 5,736 |
Total assets | $ | 1,550,331 |  |  | $ | 1,215,610 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 98,674 |  |  | $ | 80,486 |
Current portion of long-term debt | 32,551 |  |  | 16,352 |
Current portion of lease liabilities | 13,549 |  |  | 9,964 |
Accrued expenses and other current liabilities | 97,241 |  |  | 62,677 |
Total current liabilities | 242,015 |  |  | 169,479 |
Long-term debt, less current portion, net | 535,881 |  |  | 395,825 |
Lease liabilities | 67,065 |  |  | 39,828 |
Deferred tax liability, net | 18,326 |  |  | 23,834 |
Other liabilities | 25,443 |  |  | 23,649 |
Total liabilities | 888,730 |  |  | 652,615 |
Commitments and contingencies (Note 15) |  |  |
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 - 47,535,618 and 39,460,724 shares, respectively Outstanding - 46,758,359 and 38,833,568 shares, respectively | 46,758 |  |  | 38,834 |
Capital in excess of par value | 671,154 |  |  | 572,379 |
Retained deficit | (34,707) |  |  | (25,736) |
Treasury stock - 777,259 and 627,156 shares, respectively | (16,434) |  |  | (12,526) |
Accumulated other comprehensive income (loss) | (5,170) |  |  | (9,956) |
Total stockholders’ equity | 661,601 |  |  | 562,995 |
Total liabilities and stockholders’ equity | $ | 1,550,331 |  |  | $ | 1,215,610 |

(1) The accompanying 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 Consolidated Financial Statements
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Distribution Solutions Group, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars in thousands, except per share data)

| Year Ended December 31,
| 2023 |  | 2022
Revenue | $ | 1,570,402 |  |  | $ | 1,151,422 |
Cost of goods sold | 1,018,527 |  |  | 760,524 |
Gross profit | 551,875 |  |  | 390,898 |
Selling, general and administrative expenses | 508,884 |  |  | 349,112 |
Operating income (loss) | 42,991 |  |  | 41,786 |
Interest expense | (42,774) |  |  | (24,301) |
Loss on extinguishment of debt | — |  |  | (3,395) |
Change in fair value of earnout liabilities | 758 |  |  | (483) |
Other income (expense), net | (2,982) |  |  | (670) |
Income (loss) before income taxes | (2,007) |  |  | 12,937 |
Income tax expense (benefit) | 6,960 |  |  | 5,531 |
Net income (loss) | $ | (8,967) |  |  | $ | 7,406 |
Basic income (loss) per share of common stock(1) | $ | (0.20) |  |  | $ | 0.22 |
Diluted income (loss) per share of common stock(1) | $ | (0.20) |  |  | $ | 0.21 |
Comprehensive income (loss) |  |  |
Net income (loss) | $ | (8,967) |  |  | $ | 7,406 |
Other comprehensive income (loss), net of tax: |  |  |
Foreign currency translation adjustment | 4,906 |  |  | (11,525) |
Other | (120) |  |  | — |
Comprehensive income (loss) | $ | (4,181) |  |  | $ | (4,119) |

(1) The accompanying 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 Consolidated Financial Statements
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Distribution Solutions Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share data)

| 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) | — |  |  | — |  |  | — |  |  | 7,406 |  |  | — |  |  | — |  |  | 7,406 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (11,525) |  |  | (11,525) |
Stock-based compensation | — |  |  | — |  |  | 1,505 |  |  | — |  |  | — |  |  | — |  |  | 1,505 |
Shares issued | 135,927 |  |  | 135 |  |  | (135) |  |  | — |  |  | — |  |  | — |  |  | — |
Deemed consideration for reverse acquisition | 18,240,334 |  |  | 18,240 |  |  | 333,251 |  |  | — |  |  | — |  |  | — |  |  | 351,491 |
Reclassification of issuable shares from earnout derivative liability | — |  |  | — |  |  | 43,624 |  |  | — |  |  | — |  |  | — |  |  | 43,624 |
Fair value adjustment of stock-based compensation awards | — |  |  | — |  |  | 1,910 |  |  | — |  |  | — |  |  | — |  |  | 1,910 |
Repurchases of common stock | (108,178) |  |  | (108) |  |  | 108 |  |  | — |  |  | (1,940) |  |  | — |  |  | (1,940) |
Tax withholdings related to net share settlements of stock-based compensation awards | (24,163) |  |  | (24) |  |  | 57 |  |  | — |  |  | (553) |  |  | — |  |  | (520) |
Settlement of related party liability | — |  |  | — |  |  | 5,276 |  |  | — |  |  | — |  |  | — |  |  | 5,276 |
Other | — |  |  | (45) |  |  | 44 |  |  | — |  |  | — |  |  | — |  |  | (1) |
Balance at December 31, 2022 | 38,833,568 |  |  | $ | 38,834 |  |  | $ | 572,379 |  |  | $ | (25,736) |  |  | $ | (12,526) |  |  | $ | (9,956) |  |  | $ | 562,995 |
Net income (loss) | — |  |  | — |  |  | — |  |  | (8,967) |  |  | — |  |  | — |  |  | (8,967) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,906 |  |  | 4,906 |
Stock-based compensation | — |  |  | — |  |  | 3,732 |  |  | — |  |  | — |  |  | — |  |  | 3,732 |
Stock-based compensation liability paid in shares | — |  |  | — |  |  | 227 |  |  | — |  |  | — |  |  | — |  |  | 227 |
Shares issued | 85,842 |  |  | 86 |  |  | (86) |  |  | — |  |  | — |  |  | — |  |  | — |
Shares issued - earnout | 3,400,000 |  |  | 3,400 |  |  | (3,400) |  |  | — |  |  | — |  |  | — |  |  | — |
Issuance of common stock in rights offering | 4,444,444 |  |  | 4,444 |  |  | 94,025 |  |  | — |  |  | — |  |  | — |  |  | 98,469 |
Shares issued through employee share purchase plan | 144,608 |  |  | 144 |  |  | 3,109 |  |  | — |  |  | — |  |  | — |  |  | 3,253 |
Compensation expense related to employee share purchase plan | — |  |  | — |  |  | 427 |  |  | — |  |  | — |  |  | — |  |  | 427 |
Repurchases of common stock | (138,725) |  |  | (139) |  |  | 139 |  |  | — |  |  | (3,619) |  |  | — |  |  | (3,619) |
Tax withholdings related to net share settlements of stock-based compensation awards | (11,378) |  |  | (11) |  |  | 11 |  |  | — |  |  | (287) |  |  | — |  |  | (287) |
Other | — |  |  | — |  |  | 591 |  |  | (4) |  |  | (2) |  |  | (120) |  |  | 465 |
Balance at December 31, 2023 | 46,758,359 |  |  | $ | 46,758 |  |  | $ | 671,154 |  |  | $ | (34,707) |  |  | $ | (16,434) |  |  | $ | (5,170) |  |  | $ | 661,601 |

(1) The accompanying 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 Consolidated Financial Statements
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Distribution Solutions Group, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)

| Year Ended December 31,
| 2023 |  | 2022
Operating activities |  |  |
Net income (loss) | $ | (8,967) |  |  | $ | 7,406 |
Adjustments to reconcile to net cash used in operating activities: |  |  |
Depreciation and amortization | 63,588 |  |  | 45,186 |
Amortization of debt issuance costs | 2,420 |  |  | 1,888 |
Extinguishment of debt | — |  |  | 3,395 |
Stock-based compensation | 7,940 |  |  | 2,448 |
Compensation expense related to employee share purchases | 427 |  |  | — |
Deferred income taxes | (8,028) |  |  | (2,406) |
Change in fair value of earnout liabilities | (758) |  |  | 483 |
Gain on sale of rental equipment | (2,675) |  |  | (3,632) |
Loss on sale of property, plant and equipment | 294 |  |  | — |
Charge for step-up of acquired inventory | 3,582 |  |  | 2,866 |
Net realizable value adjustment and write-offs for obsolete and excess inventory | 8,990 |  |  | 4,608 |
Bad debt expense | 784 |  |  | 795 |
Changes in operating assets and liabilities, net of acquisitions: |  |  |
Accounts receivable | 18,020 |  |  | (21,771) |
Inventories | (1,236) |  |  | (42,404) |
Prepaid expenses and other current assets | 931 |  |  | (1,874) |
Accounts payable | 3,048 |  |  | (8,839) |
Accrued expenses and other current liabilities | 13,667 |  |  | 4,492 |
Other changes in operating assets and liabilities | 259 |  |  | (3,670) |
Net cash provided by (used in) operating activities | 102,286 |  |  | (11,029) |
Investing activities |  |  |
Purchases of property, plant and equipment | (15,337) |  |  | (8,307) |
Business acquisitions, net of cash acquired | (259,835) |  |  | (115,343) |
Purchases of rental equipment | (9,341) |  |  | (11,794) |
Proceeds from sale of rental equipment | 5,990 |  |  | 8,756 |
Net cash provided by (used in) investing activities | (278,523) |  |  | (126,688) |
Financing activities |  |  |
Proceeds from revolving lines of credit | 180,982 |  |  | 383,489 |
Payments on revolving lines of credit | (302,083) |  |  | (320,751) |
Proceeds from term loans | 305,000 |  |  | 445,630 |
Payments on term loans | (26,375) |  |  | (335,305) |
Deferred financing costs | (3,419) |  |  | (11,956) |
Proceeds from rights offering, net of offering costs of $1,531 | 98,469 |  |  | — |
Repurchase of common stock | (3,619) |  |  | (1,940) |
Shares repurchased held in treasury | (287) |  |  | (520) |
Proceeds from employees for share purchases | 3,253 |  |  | — |
Payment of financing lease principal | (515) |  |  | (429) |
Payment of earnout | (1,000) |  |  | — |
Payment on seller's note | — |  |  | (9,757) |
Net cash provided by (used in) financing activities | 250,406 |  |  | 148,461 |
Effect of exchange rate changes on cash and cash equivalents | 717 |  |  | (675) |
Increase (decrease) in cash, cash equivalents and restricted cash | 74,886 |  |  | 10,069 |
Cash, cash equivalents and restricted cash at beginning of period | 24,740 |  |  | 14,671 |
Cash, cash equivalents and restricted cash at end of period | $ | 99,626 |  |  | $ | 24,740 |
Cash and cash equivalents | $ | 83,931 |  |  | $ | 24,554 |
Restricted cash | 15,695 |  |  | 186 |
Total cash, cash equivalents and restricted cash | $ | 99,626 |  |  | $ | 24,740 |

See notes to Consolidated Financial Statements
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Distribution Solutions Group, Inc.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)

| Year Ended December 31,
| 2023 |  | 2022
Supplemental disclosure of cash flow information |  |  |
Net cash paid for income taxes | $ | 12,422 |  |  | $ | 13,813 |
Net cash paid for interest | $ | 38,048 |  |  | $ | 22,153 |
Net cash paid for interest on supply chain financing | $ | 2,581 |  |  | $ | 1,291 |
Non-cash activities: |  |  |
Fair value of common stock exchanged for reverse acquisition | $ | — |  |  | $ | 351,491 |
Settlement of related party obligations | $ | — |  |  | $ | 5,276 |
Right of use assets obtained in exchange for finance lease liabilities | $ | 616 |  |  | $ | 886 |
Right of use assets obtained in exchange for operating lease liabilities | $ | 19,424 |  |  | $ | 14,634 |
Seller's note issued as purchase consideration | $ | — |  |  | $ | 1,169 |

See notes to Consolidated Financial Statements
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Distribution Solutions Group, Inc.
Notes to Consolidated Financial Statements
Note 1 – Nature of Operations and Basis of Presentation
Organization
Distribution Solutions Group, Inc. ("DSG"), a Delaware corporation, is a global specialty distribution company providing value added distribution solutions to the maintenance, repair and operations ("MRO"), original equipment manufacturer ("OEM") and industrial technology markets. 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 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 Annual Report on Form 10-K to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc., and all entities consolidated in the accompanying consolidated financial statements.
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
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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.
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.
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 14 – 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, and converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the aerospace and defense, wireless and communication, semiconductors, industrial electronics and automotive, and electronics manufacturing industries.
Gexpro Services is a global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs.
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Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
2023 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. Refer to Note 11 – Stockholders' Equity for additional information about the Stock Split.
2022 Mergers
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 voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the consolidated financial statements for the year ended December 31, 2022 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 combined operations of all three entities are included in the consolidated financial statements for the year ended December 31, 2023. The financial statements as of December 31, 2023 and 2022 reflect the financial position of TestEquity, Gexpro Services and DSG's legacy Lawson business on a consolidated basis.
Note 2 – Summary of Significant Accounting Policies
Revenue Recognition —
Revenue from Contracts with Customers: Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring a product or providing a service. A majority of the Company’s revenue is short cycle in nature with shipments within one year of the order. A small portion of the Company’s revenue derives from contracts extending over one year and in some cases may have optional renewal terms if both parties agree to renew. The Company’s payment terms generally range between 10 to 120 days and vary by contract, the types of products sold and the volume of products sold, among other factors. Revenue includes product sales, services and billings for shipping charges, net of discounts, expected returns, rebates and sales tax. Estimates for rebates and expected returns is based on historical experience. The Company includes shipping costs billed to customers in Revenue and the related shipping costs in Cost of goods sold in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Performance Obligations: A m ajority of the Company’s contracts have a performance obligation which represents, in most cases, the product being sold to the customer. Some contracts include a second performance obligation to provide additional Vendor Managed Inventory ("VMI") services primarily related to monitoring and stocking. Although the Company has identified that it offers some customers both a product and a service obligation, the customer only receives one invoice per transaction with no price allocation between these obligations. The Company does not price its offerings based on any allocation between these obligations.
A portion of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to the customer. Assurance-type warranties provide a customer with assurance that the related product will function as parties intended because it complies with the agreed-upon specifications. Such warranties are not significant and do not represent a separate performance obligation.
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Select contracts with customers include variable consideration primarily related to volume rebates if predetermined thresholds are met. The Company estimates variable consideration using the expected-value method considering all reasonably available information, including experience, current, historical, and forecasted. Estimated amounts are included in the transaction price 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 resolved.
Over 95% of the Company’s performance obligations are recognized at a point in time, rather than over time, as the Company completes its performance obligations. Specifically, revenue is recognized when control transfers to the customer, typically upon shipment or receipt by the customer. Less than 5% of the Company's revenue is recognized over time and relates to services, in which the Company transfers control of a good or service over time and the customer simultaneously receives and consumes the benefits. That portion of expected consideration is deferred until the time that those services have been provided and the related performance obligations have been satisfied. At December 31, 2023 and 2022, the deferred consideration for the service performance obligations that have not been satisfied was insignificant and will be recognized within twelve months of the respective balance sheet date.
For revenue recognized over time, the input method is utilized and is based on costs incurred relative to estimated total costs.
Contract Costs: 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.
Rental Revenue: The Company determines if a contract contains a lease at inception. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Lawson and TestEquity segments operate as a lessor and rent certain equipment to customers through leases classified as operating leases under ASC 842, Leases ("ASC 842"). Lease revenue is recognized on a straight-line basis over the life of each lease. As there are trivial non-lease components, 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 are met.
Cash, Cash Equivalents, and Restricted Cash — 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 December 31, 2023 and December 31, 2022 approximates fair value. Cash balances at individual banks may exceed the federally insured limit by the Federal Deposit Insurance Corporation (the “FDIC”). The Company has not experienced any material losses in such accounts.
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 current and forecasted probability of collection, economic conditions, historical experience of bad debt write-offs as a percent of accounts receivable outstanding, and other significant events that may impact the collectibility of accounts receivable. Uncollected trade receivables are written off when identified to be unrecoverable.
Inventories — Inventories principally consist of purchased finished products and manufactured electronic equipment offered for resale stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and primarily the weighted average method for the TestEquity and Gexpro Services segments. Most of our products are not exposed to the risk of obsolescence due to technology changes. However, some of our products do have a limited shelf life, and from time to time we add and remove items from our catalogs, brochures or website for marketing and other purposes.
To reduce the cost basis of inventory to a lower of cost or net realizable value, a write-down is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these write-downs 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. In general,
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depending on the product category, we write-down inventory with low turnover at higher rates than inventory with higher turnover.
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 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 Consolidated Balance Sheets, and gains or losses are reflected in operating income (loss) within the Consolidated Statements of Operations and Comprehensive Income (Loss). The costs of repairs, maintenance and minor renewals are charged to expense as incurred.
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 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 Other income (expense) in the 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 Other income (expense) in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Stock-Based Compensation — Compensation based on the share value of DSG 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 $399.9 million of goodwill at December 31, 2023 and $348.0 million of goodwill at December 31, 2022. 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 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.
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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, right of use assets 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 2023 or 2022.
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, the Company considers 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 Consolidated Statements of Operations and Comprehensive Income (Loss).
Leases — The Company determines if a contract contains a lease at inception. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the commencement date of a lease, the Company recognizes a liability to make lease payments and a Right Of Use ("ROU") asset representing the right to use the underlying asset during the lease term. The Company includes options to extend or terminate a lease within the lease term when it is reasonably certain the option will be exercised. Leases are categorized as either operating or financing leases at commencement of the lease. Operating leases consist of office space, distribution and service centers, and Bolt branches. Financing leases primarily consist of equipment such as forklifts and copiers. The lease liability is measured at the present value of fixed lease payments over the lease term. The lease liability includes payments allocated to lease components, while payments allocated to non-lease components are expensed as incurred for all asset classes. 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. The initial measurement of the ROU asset includes the initial measurement of the lease liability, fixed lease payments made in advance of the lease commencement date and initial direct costs incurred by the Company and excludes lease incentives. Variable lease payments, such as payments based on an index rate or usage, are expensed as incurred and excluded from lease liabilities and ROU assets. 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. The Company has elected the practical expedient to exclude any short-term lease, defined as a lease with an initial term of 12 months or less, from the provisions of ASC 842. The short-term leases are not recorded in the consolidated balance sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term.
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The Lawson and TestEquity segments operate as a lessor and rent certain equipment to customers through leases classified as operating leases. The leased equipment is recognized in Rental equipment, net in the Consolidated Balance Sheets and the leasing revenue is recognized on a straight-line basis.
Earnings per Share — Basic earnings per share ("EPS") 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 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.
In accordance with ASC 260, Earnings per Share ("ASC 260"), the historical EPS was retrospectively adjusted to reflect the impact of the two-for-one stock split that occurred during 2023.
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 am ounts 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 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 Consolidated Balance Sheets. Foreign currency transaction losses of $1.5 million and $0.9 million were recorded for 2023 and 2022, respectively, as a component of Other income (expense) in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Treasury Stock — The Company repurchased 138,725 shares of its common stock during 2023 and 108,178 shares of its common stock during 2022 through its previously announced stock repurchase plan. The Company repurc hased 11,378 shares of its common stock i n 2023 and 24,163 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 during 2023 and held in treasury wa s $3.9 million.
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.
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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 the segments for the purpose of allocating resources and evaluating financial performance.
The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements. See Note 14 – 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.
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 DSG 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 DSG common stock. The contingently issuable shares were initially measured at the Merger Date and were subsequently measured at each reporting date until settled, or when they met 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 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
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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 12 – 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 write-offs, goodwill and intangible assets valuation, stock-based compensation and income taxes in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Supplier Concentrations — During 2023 and 2022, TestEquity purchases of inventory from one unrelated supplier accounted for 5.4% and 10.3% of the Company's total inventory purchases, respectively.
Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation, primarily relating to the presentation of accrued expenses and other liabilities. These reclassifications did not result in any changes to previously reported total assets, stockholder’s equity, and net income.
Recent 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 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.
Recent Accounting Pronoun cements - Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The pronouncement is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The adoption of ASU 2023-07 should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact that the adoption will have on its financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures to require greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid. The pronouncement is effective on a prospective basis for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of the adoption on its financial statement disclosures.
Note 3 – Business Acquisitions
Combination with TestEquity and Gexpro Services
On April 1, 2022, the Mergers 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 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.
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The business combination of Lawson, TestEquity and Gexpro Services combines three value added complementary distribution businesses. Lawson is a distributor of specialty 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 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 not 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 |  |  |

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The 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 |  |  |

Other Acquisitions
DSG and its operating companies acquired other businesses during the years ended December 31, 2023 and 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 HIS Company, Inc., a Texas corporation ("Hisco" and the "Hisco Transaction"), a distributor of specialty products serving industrial technology applications, pursuant to a Stock Purchase Agreement dated March 30, 2023 (the "Purchase Agreement"). 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 Radio Frequency Identification ("RFID") programs with specialized warehousing for chemical management, logistics services and cold storage.
The total purchase consideration exchanged for the Hisco Transaction was $267.3 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 year ended December 31, 2023, $22.8 million was recorded as compensation expense over the service period for the retention bonuses as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
DSG funded the Hisco Transaction with borrowings under its 2023 Amended Credit Agreement (as defined below) and proceeds raised from the Rights Offering (as defined below). Refer to Note 9 – Debt for information about the 2023 Amended 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 2023, the Company issued 144,608 shares of DSG common stock to the eligible Hisco employees and received approximately $3.3 million. During 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 Consolidated Statements of Operations and Comprehensive Income (Loss).
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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
Accounts Receivable(1) |  | $ | 66,792 |  |  | $ | (2,269) |  |  | $ | 64,523 |
Inventory |  | 61,300 |  |  | (645) |  |  | 60,655 |
Other current assets |  | 3,858 |  |  | 350 |  |  | 4,208 |
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 |  |  | (1,800) |  |  | 40,000 |
Trade names |  | 25,600 |  |  | (300) |  |  | 25,300 |
Deferred tax liability, net of deferred tax asset |  | (2,544) |  |  | 81 |  |  | (2,463) |
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) |  |  | (289) |  |  | (9,250) |
Goodwill |  | 49,718 |  |  | 232 |  |  | 49,950 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 270,425 |  |  | $ | (3,159) |  |  | $ | 267,266 |
Cash consideration |  | $ | 252,007 |  |  | $ | — |  |  | $ | 252,007 |
Deferred consideration(2) |  | 12,418 |  |  | 2,741 |  |  | 15,159 |
Contingent consideration |  | 6,000 |  |  | (5,900) |  |  | 100 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 270,425 |  |  | $ | (3,159) |  |  | $ | 267,266 |

(1) Accounts receivable had an estimated fair value of $64.5 million and a gross contractual value of $66.8 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected.
(2) The Company paid $7.8 million of the Hisco deferred consideration during 2023.
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 sheets 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 $0.2 million increase to goodwill and a $3.2 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 $41.4 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 each acquisition was completed within the one-year measurement periods following the respective acquisition dates and any adjustments were recorded in the
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period in which the adjustments were 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:

(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.
During 2023, the Company completed the purchase price allocation for Instrumex with adjustments to accrued expenses and other liabilities and long-term debt based on the final fair value measurements. 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.
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.

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
Revenue | $ | 1,752,465 |  |  | $ | 1,753,939 |
Net income | (37,114) |  |  | (6,264) |

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Actual Results of Business Acquisitions
The following table presents actual results attributable to our business combinations that were included in the consolidated financial statements for the years ended December 31, 2023 and 2022. The 2023 and 2022 results only reflect the results attributable to the acquisitions completed in those respective years. 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.

| Year Ended December 31, 2023 |  | Year Ended December 31, 2022
(in thousands) | Lawson |  | Other Acquisitions |  | Total |  | Lawson |  | Other Acquisitions |  | Total
Revenue | $ | — |  |  | $ | 229,358 |  |  | $ | 229,358 |  |  | $ | 373,738 |  |  | $ | 151,217 |  |  | $ | 524,955 |
Net Income | $ | — |  |  | $ | (14,478) |  |  | $ | (14,478) |  |  | $ | 15,283 |  |  | $ | 8,670 |  |  | $ | 23,953 |

The Company incurred transaction and integration costs related to the Mergers and other completed and contemplated acquisitions of $11.6 million for the year ended December 31, 2023 and $15.4 million for the year ended December 31, 2022, which are included in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Note 4 – Revenue Recognition
Disaggregation of Revenue
The Company’s revenue is primarily comprised of product sales to customers. The Company has disaggregated revenue by geographic area and by segment as it most reasonably depicts the amount, timing and uncertainty of revenue and cash flows generated from our contracts with customers. Disaggregated consolidated revenue by geographic area (based on the location to which the product is shipped to):

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
United States | $ | 1,253,401 |  |  | $ | 932,418 |
Canada | 141,125 |  |  | 118,722 |
Europe | 79,643 |  |  | 51,631 |
Pacific Rim | 13,515 |  |  | 10,768 |
Latin America | 74,577 |  |  | 34,202 |
Other | 9,841 |  |  | 3,681 |
Intersegment revenue elimination | (1,700) |  |  | — |
Total revenue | $ | 1,570,402 |  |  | $ | 1,151,422 |

See Note 14 – Segment Information for disaggregation of revenue by segment.
Rental Revenue
TestEquity rents new and used electronic test and measurement equipment to customers in multiple industries. Lawso n leases parts washer machines to customers. This leased equipment is included in Rental equipment, net in the Consolidated Balance Sheets, and rental revenue is included in Revenue in the Consolidated Statements of Operations and Comprehensive Income (Loss). The unearned rental revenue related to customer prepayments on equipment leases was nominal at December 31, 2023 and December 31, 2022.
Rental revenue from operating leases:

|  |  | Year Ended December 31,
(in thousands) |  |  |  |  | 2023 |  | 2022
Revenue from operating leases |  |  |  |  | $ | 17,186 |  |  | $ | 17,675 |

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Note 5 – Supplemental Financial Statement Information
Restricted Cash
The Company has agreed to maintain restricted cash of $15.7 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 with a balance of $7.3 million at December 31, 2023. The Company is restricted from withdrawing this balance without the prior consent of the sellers. The remaining restricted cash balance of $8.4 million represents collateral for certain borrowings under the 2023 Amended Credit Agreement, and the Company is restricted from withdrawing this balance without the prior consent of the respective lenders.
Property, Plant and Equipment, net
Components of property, plant and equipment, net were as follows:

| December 31,
(in thousands) | 2023 |  | 2022
Land | $ | 16,916 |  |  | $ | 9,578 |
Buildings and improvements | 50,376 |  |  | 27,199 |
Machinery and equipment | 48,844 |  |  | 26,948 |
Capitalized software | 9,148 |  |  | 7,889 |
Furniture and fixtures | 11,022 |  |  | 6,346 |
Vehicles | 1,738 |  |  | 1,713 |
Construction in progress(1) | 6,025 |  |  | 3,140 |
Total | 144,069 |  |  | 82,813 |
Accumulated depreciation and amortization | (30,258) |  |  | (18,418) |
Property, plant and equipment, net | $ | 113,811 |  |  | $ | 64,395 |

(1) Construction in progress primarily relates 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 $13.1 million in 2023 and $6.5 million in 2022. Amortization expense for capitalized software was $2.6 million in 2023 and $1.6 million in 2022.
Rental Equipment, net
Rental equipment, net consisted of the following:

| December 31,
(in thousands) | 2023 |  | 2022
Rental equipment | $ | 52,387 |  |  | $ | 63,184 |
Accumulated depreciation | (27,812) |  |  | (36,045) |
Rental equipment, net | $ | 24,575 |  |  | $ | 27,139 |

Depreciation expense included in cost of sales for rental equipment was $7.6 million and $8.0 million for 2023 and 2022, respectively. Refer to Note 4 – Revenue Recognition for a discussion on the Company's activities as lessor.
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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:

| December 31,
(in thousands) | 2023 |  | 2022
Accrued compensation | $ | 25,371 |  |  | $ | 24,094 |
Accrued severance and acquisition related retention bonus | 21,128 |  |  | 927 |
Accrued and withheld taxes, other than income taxes | 8,661 |  |  | 4,885 |
Deferred acquisition payments and accrued earnout liabilities | 7,513 |  |  | 1,383 |
Accrued stock-based compensation | 5,573 |  |  | 3,340 |
Accrued customer rebates | 5,473 |  |  | 5,053 |
Accrued interest | 3,301 |  |  | 1,775 |
Accrued income taxes | 1,994 |  |  | 731 |
Accrued health benefits | 1,728 |  |  | 1,306 |
Deferred revenue | 810 |  |  | 2,313 |
Other | 15,689 |  |  | 16,870 |
Total accrued expenses and other current liabilities | $ | 97,241 |  |  | $ | 62,677 |

Other Liabilities
Other liabilities consisted of the following:

| December 31,
(in thousands) | 2023 |  | 2022
Security bonus plan | $ | 8,666 |  |  | $ | 9,651 |
Deferred compensation | 11,041 |  |  | 9,962 |
Other | 5,736 |  |  | 4,036 |
Total other liabilities | $ | 25,443 |  |  | $ | 23,649 |

Security Bonus Plan
The Company has a security bonus plan which was previously created for the benefit of its Lawson independent sales representatives, under the terms of which participants are credited with a percentage of their annual net commissions. The aggregate amounts credited to participants’ accounts vest 25% after five years, and an additional 5% vests each year thereafter upon qualification for the plan. On January 1, 2013, the Company converted all of its Lawson U.S. independent sales representatives to employees. The security bonuses for those converted employees continue to vest, but their accounts are no longer credited with a percentage of net commissions. For financial reporting purposes, amounts are charged to operations over the vesting period. Expenses incurred for the security bonus plan were $0.2 million for the year ended December 31, 2023. The security bonus plan is partially funded by an $8.2 million investment in the cash surrender value in life insurance of certain employees which is included as a component of Cash value of life insurance in the Consolidated Balance Sheets. As of December 31, 2023, t he $8.9 million liability is primarily included in the Security bonus plan in the Consolidated Balance Sheets with the remaining portion included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
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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, 2021 |  | $ | — |  |  | $ | 70,112 |  |  | $ | 34,099 |  |  | $ | — |  |  | $ | 104,211 |
Acquisitions |  | 156,133 |  |  | 43,992 |  |  | 21,849 |  |  | 24,887 |  |  | 246,861 |
Impact of foreign exchange rates |  | (360) |  |  | — |  |  | (527) |  |  | (2,137) |  |  | (3,024) |
Balance at December 31, 2022 |  | 155,773 |  |  | 114,104 |  |  | 55,421 |  |  | 22,750 |  |  | 348,048 |
Acquisitions(1) |  | — |  |  | 50,886 |  |  | — |  |  | — |  |  | 50,886 |
Impact of foreign exchange rates |  | 142 |  |  | — |  |  | 322 |  |  | 527 |  |  | 991 |
Balance at December 31, 2023 |  | $ | 155,915 |  |  | $ | 164,990 |  |  | $ | 55,743 |  |  | $ | 23,277 |  |  | $ | 399,925 |

(1) Refer to Note 3 – Business Acquisitions for information related to measurement period adjustments.
Intangible Assets
The gross carrying and accumulated amortization for definite-lived intangible assets were as follows:

| December 31, 2023 |  | December 31, 2022
(in thousands) | Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Value |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Value
Trade names | $ | 117,881 |  |  | $ | (30,093) |  |  | $ | 87,788 |  |  | $ | 92,286 |  |  | $ | (17,401) |  |  | $ | 74,885 |
Customer relationships | 233,513 |  |  | (71,215) |  |  | 162,298 |  |  | 192,934 |  |  | (44,481) |  |  | 148,453 |
Other (1) | 8,011 |  |  | (4,263) |  |  | 3,748 |  |  | 7,961 |  |  | (3,305) |  |  | 4,656 |
Total | $ | 359,405 |  |  | $ | (105,571) |  |  | $ | 253,834 |  |  | $ | 293,181 |  |  | $ | (65,187) |  |  | $ | 227,994 |

(1) Other primarily consists of non-compete agreements.
Amortization expense for definite-lived intangible assets was $40.3 million in 2023 and $29.1 million in 2022. Amortization expense related to intangible assets was recorded in Selling, general and administrative expenses. The remaining weighted-average useful lives of intangible assets as of December 31, 2023 was 3.9 years for trade names and 4.8 years for customer relationships.
The estimated aggregate amortization expense for each of the next five years and thereafter are as follows:

(in thousands) |  | Amortization
2024 |  | $ | 42,875 |
2025 |  | 39,180 |
2026 |  | 36,167 |
2027 |  | 31,305 |
2028 |  | 27,192 |
Thereafter |  | 77,115 |
Total |  | $ | 253,834 |

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Note 7 – Leases
The Company leases property used for warehousing, distribution centers, office space, branch locations, equipment and vehicles. The expenses related to our leasing activity for the years ended December 31, 2023 and 2022 was as follows (in thousands):

|  |  |  | Year Ended December 31,
Lease Type |  | Classification |  | 2023 |  | 2022
Operating Lease Expense (1) |  | Operating expenses |  | $ | 21,131 |  |  | $ | 15,151 |
Financing Lease Amortization |  | Operating expenses |  | 546 |  |  | 466 |
Financing Lease Interest |  | Interest expense |  | 93 |  |  | 41 |
Financing Lease Expense |  |  |  | 639 |  |  | 507 |
Net Lease Cost |  |  |  | $ | 21,770 |  |  | $ | 15,658 |

(1) Includes short term lease expense, which is immaterial.
The value of net assets and liabilities related to our operating and finance leases as of December 31, 2023 and December 31, 2022 was as follows (in thousands):

|  | December 31,
Lease Type |  | 2023 |  | 2022
Total ROU operating lease assets |  | $ | 76,340 |  |  | $ | 46,755 |
Total ROU financing lease assets |  | 1,560 |  |  | 1,519 |
Total lease assets |  | $ | 77,900 |  |  | $ | 48,274 |
Total current operating lease obligation |  | $ | 13,010 |  |  | $ | 9,480 |
Total current financing lease obligation |  | 539 |  |  | 484 |
Total current lease obligations |  | $ | 13,549 |  |  | $ | 9,964 |
Total long term operating lease obligation |  | $ | 66,234 |  |  | $ | 38,898 |
Total long term financing lease obligation |  | 831 |  |  | 930 |
Total long term lease obligation |  | $ | 67,065 |  |  | $ | 39,828 |

The value of lease liabilities related to our operating and finance leases as of December 31, 2023 was as follows (in thousands):

Maturity Date of Lease Liabilities |  | Operating Leases |  | Financing Leases |  | Total
2024 |  | $ | 18,555 |  |  | $ | 615 |  |  | $ | 19,170 |
2025 |  | 18,299 |  |  | 435 |  |  | 18,734 |
2026 |  | 14,488 |  |  | 344 |  |  | 14,832 |
2027 |  | 12,371 |  |  | 117 |  |  | 12,488 |
2028 |  | 10,440 |  |  | 4 |  |  | 10,444 |
Thereafter |  | 29,841 |  |  | 1 |  |  | 29,842 |
Total lease payments |  | 103,994 |  |  | 1,516 |  |  | 105,510 |
Less: Interest |  | (24,750) |  |  | (146) |  |  | (24,896) |
Present value of lease liabilities |  | $ | 79,244 |  |  | $ | 1,370 |  |  | $ | 80,614 |

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The weighted average lease terms and interest rates of leases held as of December 31, 2023 and 2022 were as follows:

|  | Year Ended December 31,
|  | 2023 |  | 2022
|  | Operating Leases |  | Finance Leases |  | Operating Leases |  | Finance Leases
Weighted average remaining lease term |  | 6.6 years |  | 2.8 years |  | 5.6 years |  | 3.1 years
Weighted average interest rate |  | 7.8% |  | 7.1% |  | 7.1% |  | 6.6%

The cash outflows of leasing activity for the years ended December 31, 2023 and 2022 were as follows (in thousands):

|  |  |  | Year Ended December 31,
Cash Flow Source |  | Classification |  | 2023 |  | 2022
Operating cash flows from operating leases |  | Operating activities |  | $ | (15,516) |  |  | $ | (12,149) |
Operating cash flows from financing leases |  | Operating activities |  | $ | (242) |  |  | $ | (184) |
Financing cash flows from financing leases |  | Financing activities |  | $ | (515) |  |  | $ | (429) |

Refer to Note 4 – Revenue Recognition for a discussion on the Company's activities as lessor.
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 Consolidated Statements of Operations and Comprehensive Income (Loss) due to changes in the fair value of the earnout derivative liability. As the remaining additional shares had been reclassified to equity as of December 31, 2022, there was no change in fair value for the year ended December 31, 2023. See Fair Value Measurements in Note 2 – Summary of Significant Accounting Policies for further information.
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.
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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 December 31, 2023, the fair value of the earn-out was $0.1 million and $0.0 million, respectively, with amounts recorded in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
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 December 31, 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 Consolidated Balance Sheets. The Company recorded income of $0.7 million for changes in the fair value of the earn-out liability for the year ended December 31, 2023 as a component of Change in fair value of earnout liabilities in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Note 9 – Debt
The Company's outstanding long-term debt was comprised of the following:

| December 31, |
(in thousands) | 2023 |  | 2022 |
Senior secured revolving credit facility | $ | — |  |  | $ | 122,000 |  |
Senior secured term loan | 228,125 |  |  | 243,750 |  |
Senior secured delayed draw term loan | 46,875 |  |  | 50,000 |  |
Incremental term loan | 297,375 |  |  | — |  |
Other revolving line of credit | 2,301 |  |  | 1,352 |  |
Total debt | 574,676 |  |  | 417,102 |  |
Less: current portion of long-term debt | (32,551) |  |  | (16,352) |  |
Less: deferred financing costs | (6,244) |  |  | (4,925) |  |
Total long-term debt | $ | 535,881 |  |  | $ | 395,825 |  |

2023 Amended Credit Agreement
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” and as amended, the "2023 Amended Credit Agreement"), which amended and replaced the previous credit agreement, dated as of April 1, 2022.
The 2023 Amended 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 Amended Credit Agreement.
On June 8, 2023, in connection with the Hisco Transaction, the Company borrowed the $305 million under the
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incremental term loan. These borrowings were used, among other things, to partially fund the Hisco Transaction, to repay certain existing indebtedness of Hisco 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.
Net of outstanding letters of credit, there w as $198.3 million of borrowi ng availability under the revolving credit facility as of December 31, 2023.
The 2023 Amended Credit Agreement requires that the proceeds of any revolving credit facility loans be used for working capital and general corporate purposes (including, without limitation, permitted acquisitions), and requires that the proceeds of any delayed draw term loan facility be used solely to finance the payment of consideration for acquisitions permitted under the 2023 Amended Credit Agreement, and for any fees, costs and expenses incurred in connection therewith.
The loans under the 2023 Amended 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 Amended 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 Amended Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the 2023 Amended 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 Amended Credit Agreement.
The 2023 Amended Credit Agreement requires the Company to pay certain closing fees, arrangement fees, administration fees, commitment fees, ticking fees and letter of credit fees. These fees are reported as a component of Interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) and vary depending on the total net leverage ratio as defined in the 2023 Amended Credit Agreement. Fees were nominal in both 2023 and 2022.
On June 8, 2023, deferred financing costs of $3.4 million were incurred in connection with the 2023 Amended Credit Agreement, and deferred financing costs of $4.0 million were incurred during 2022 in connection with the previous credit agreement. Deferred financing costs are amortized over the life of the debt instrument and reported as a component of Interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). Amortization of deferred financing costs was $2.4 million and $1.9 million for 2023 and 2022, respectively. As of December 31, 2023, deferred financing costs net of accumulated amortization were $8.6 million of which $6.2 million are included in Long-term debt, less current portion, net (related to the senior secured term loan, senior secured delayed draw term loan and incremental term loan) and $2.3 million are included in Other assets (related to the senior secured revolving credit facility) in the Consolidated Balance Sheets.
Each of the loans under the 2023 Amended Credit Agreement matures on April 1, 2027, at which time all outstanding loans, together with all accrued and unpaid interest, must be repaid and the revolving credit facility commitments will terminate. Future maturities of long-term debt are $30.3 million per year payable in equal quarterly installments in 2024, 2025 and 2026, with the remaining balance of $481.6 million due in 2027 upon maturity. The Company is also required to prepay the term loans with the net cash proceeds from any disposition of certain assets (subject to reinvestment rights) or from the incurrence of any unpermitted debt. The Company may borrow, repay and reborrow the revolving loans until April 1, 2027, prepay any of the term loans, and terminate any of the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions and the reimbursement of certain lender costs in the case of prepayments of certain types of loans.
Subject to certain exceptions as set forth in the 2023 Amended Credit Agreement, the obligations of the Company and its U.S. subsidiaries under the 2023 Amended Credit Agreement are guaranteed by the Company and certain of the Company’s U.S. subsidiaries and the obligations of each of the Company’s Canadian subsidiaries under the 2023 Amended Credit Agreement are guaranteed by the Company and certain of its U.S. and Canadian subsidiaries.
Subject to certain exceptions as set forth in the 2023 Amended Credit Agreement, the obligations under the 2023 Amended Credit Agreement are secured by a first priority security interest in and lien on substantially all assets of the Company, each other borrower and each guarantor.
The 2023 Amended 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 Amended Credit Agreement. The 2023 Amended Credit
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Agreement contains various events of default (subject to exceptions, thresholds and grace periods as set forth in the 2023 Amended Credit Agreement). Under certain circumstances, a default interest rate will apply on all obligations at a rate equal to 2.0% per annum above the applicable interest rate. The Company was in compliance with all financial covenants as of December 31, 2023.
Previous Credit Agreements
2022 Amended and Restated Credit Agreement
On April 1, 2022, DSG and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “2022 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. The 2022 Credit Agreement provided for (i) a $200 million senior secured revolving credit facility, with a $25 million letter of credit sub-facility and a $10 million swingline loan sub-facility, (ii) a $250 million senior secured initial term loan facility and (iii) a $50 million senior secured delayed draw term loan facility. In addition, the 2022 Credit Agreement permitted the Company to increase the commitments from time to time by up to $200 million in the aggregate, subject to, among other things, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the Amended and Restated Credit Agreement.
On April 1, 2022, in connection with the Mergers, the Company borrowed the $250.0 million under the initial term loan facility and approximately $86.0 million of the revolving credit facility loans. These borrowings were used to 1) repay all obligations and refinance the Company’s previous credit agreement, 2) repay certain existing indebtedness of TestEquity and Gexpro Services and their respective subsidiaries, 3) pay fees and expenses in connection with the Mergers, and 4) finance the working capital needs and general corporate purposes of the Company. On April 29, 2022, the Company borrowed the $50.0 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC.
A $2.8 million loss on the extinguishment of debt for unamortized deferred financing costs was recorded in 2022 in connection with the payoff of previous indebtedness. The extinguishment is recorded in Loss on extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Income (Loss).
On June 8, 2023, the 2022 Credit Agreement was replaced entirely with the 2023 Amended Credit Agreement discussed above.
Gexpro Services - January 3, 2022 Gexpro Services Credit Agreement
On January 3, 2022, Gexpro Services entered into a credit agreement ("2022 Gexpro Services Credit Agreement") with a financial institution under which Gexpro Services obtained an initial $137 million term loan ("2022 Gexpro Services Term Loan"), a $25 million revolving line of credit ("2022 Gexpro Services Revolver") and a delayed $83 million term loan ("2022 Gexpro Services Delayed Term Loan"). The proceeds of the 2022 Gexpro Services Term Loan and 2022 Gexpro Services Delayed Term Loan were used to fund the Resolux acquisition, repay all borrowings under the 2020 Gexpro Services Credit Agreements (as defined below) and seller’s promissory note from SIS acquisition (refer to Note 3 – Business Acquisitions for further details of these acquisitions). In connection with the 2022 Gexpro Services Credit Agreement, deferred financing costs of $7.4 million were incurred.
Gexpro Services - 2020 Gexpro Services Credit Agreements
On February 24, 2020, Gexpro Services entered into credit agreements under which Gexpro Services obtained a $60 million term loan a $15 million revolving line of credit. A loss on debt extinguishment of $0.6 million was recorded on January 3, 2022 in connection with the January 3, 2022 Gexpro Services Credit Agreement.
TestEquity - 2017 TestEquity Credit Agreement
On April 28, 2017, TestEquity entered into a credit agreement with a financial institution under which TestEquity obtained a $101 million term loan and a $15.0 million revolving line of credit. A loss on debt extinguishment of $0.2 million was recorded on April 1, 2022 in connection with the 2022 Credit Agreement executed in connection with the consummation of the Mergers.
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Note 10 – Stock-Based Compensation
The Company recorded stock-based compensation expense of $7.9 million for the year ended December 31, 2023 and $2.4 million for the year ended December 31, 2022 in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) and recognized a net tax benefit relating to stock-based compensation of $0.9 million and $2.1 million, 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 $5.6 million a s of December 31, 2023 and $3.3 million as of December 31, 2022 was included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
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.
Equity Compensation Plans
On October 17, 2022, the Board of Directors approved and adopted the Distribution Solutions Group, Inc. Equity Compensation Plan, as amended and restated, effective October 17, 2022, and as amended November 10, 2022 (the “Amended and Restated Equity Plan”). The Amended and Restated Equity Plan provides for the grant of nonqualified and incentive stock options, stock awards and stock units to officers and employees of the Company. The Amended and Restated Equity Plan also provides for the grant of option rights and restricted stock to non-employee directors. Non-employee directors are limited to grants of no more than 60,000 shares of common stock in any calendar year and other than non-employee directors are limited to grants of no more than 500,000 shares of common stock in any calendar year. The Amended and Restated Equity Plan is administered by the Compensation Committee of the Board of Directors, or its designee, which as administrator of the plan, has the authority to select plan participants, grant awards, and determine the terms and conditions of the awards. As of December 31, 2023, the Company had approximately 1,161,687 shares of common stock still available under the Amended and Restated Equity Plan.
The Company also has a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of Stock Performance Rights (“SPRs”) that allow non-employee directors, officers and key employees to receive cash awards, subject to certain restrictions, equal to the appreciation of DSG common stock. The SPR Plan is administered by the Compensation Committee of the Board of Directors.
Stock Performance Rights
SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of DSG common stock over the SPR exercise price when the SPRs are surrendered. Expense, equal to the fair market value of the SPR at the date of grant and remeasured each reporting period, is recorded ratably over the vesting period. Compensation expense is included in Selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). The outstanding SPRs were granted with approximately a seven year life and vest over one to three years beginning on the first anniversary of the date of the grant. The SPRs are liability classified and included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
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On December 31, 2023 and 2022, the SPRs outstanding were re-measured at fair value using the Black-Scholes valuation model. This model requires the input of subjective assumptions that may have a significant impact on the fair value estimate. The weighted-average fair value of SPRs outstanding as of December 31, 2023 and December 31, 2022 was $18.37 and $7.65 per SPR, respectively, using the following assumptions:

| December 31,
| 2023 |  | 2022
Expected volatility | 41.1% to 45.9% |  | 43.4% to 52.2%
Risk-free rate of return | 4.5% to 5.3% |  | 4.4% to 4.7%
Expected term (in years) | 0.3 to 1.5 |  | 0.5 to 2.0
Expected annual dividend | $0 |  | $0

The expected volatility was based on the historic volatility of the Company's stock price commensurate with the expected life of the SPR. The risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the SPR. 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.
A liability of $4.9 million reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Activity related to the Company’s SPRs during the year ended December 31, 2023 was as follows:

| Number of SPRs |  | Weighted Average Exercise Price |  | Weighted Average Remaining Contractual Term (in years) |  | Aggregate Intrinsic Value (in millions)
Outstanding on December 31, 2022 | 352,368 |  |  | $ | 7.65 |  |  |  |  |
Granted | — |  |  | — |  |  |  |  |
Exercised | (93,350) |  |  | 28.16 |  |  |  |  |
Cancelled | — |  |  | — |  |  |  |  |
Outstanding on December 31, 2023 | 259,018 |  |  | 18.37 |  |  | 1.5 |  | $ | 4.6 |
Exercisable on December 31, 2023 | 259,018 |  |  | $ | 18.37 |  |  | 1.5 |  | $ | 4.6 |

The intrinsic value of SPRs exercised was $1.7 million for 2023 and $5.2 million for 2022. All SPRs for plan participants were fully vested prior to the Mergers, as such, there is no unrecognized compensation associated with any SPRs.
Restricted Stock Awards
Restricted stock awards ("RSAs") generally vest over a one to three year period beginning on the first anniversary of the date of the grant. 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 DSG common stock on the date of grant and the expense is recorded ratably over the vesting period.
Activity related to the Company’s RSAs during the year ended December 31, 2023 was as follows:

| Restricted Stock Awards |  | Weighted Average Grant Date Fair Value
Outstanding on December 31, 2022 | 113,174 |  |  | $ | 24.35 |
Granted | 53,054 |  |  | 21.86 |
Cancelled | (13,810) |  |  | 25.89 |
Exchanged for common shares | (54,202) |  |  | 22.86 |
Outstanding on December 31, 2023 | 98,216 |  |  | $ | 23.57 |

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As of December 31, 2023, there was $0.7 million of total unrecognized compensation cost related to RSAs that will be recognized over a weighted average period of 1.6 years. The weighted average grant date fair value per share of awards granted during the year was $21.86 in 2023 and $18.75 in 2022. The fair value of RSAs exchanged for shares of DSG common stock during 2023 was $1.5 million and $0.5 million during 2022.
Market Stock Units
Market Stock Units ("MSUs") are exchangeable for between 0% to 150% of the DSG common shares at the end of the vesting period based on the trailing 60-day average closing price of DSG common stock. The value of the MSUs was determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the DSG common stock over the measurement period. As of December 31, 2023 all MSUs are fully vested. The fair value of MSUs exchanged for shares of DSG common stock during 2023 was $0.6 million and $0.9 million during 2022.
Activity related to the Company’s MSUs during 2023 was as follows:

| Number of Market Stock Units |  | Maximum Shares Potentially Issuable |  | Weighted Average Grant Date Fair Value
Outstanding on December 31, 2022 | 162,936 |  |  | 234,586 |  |  | $ | 19.90 |
Granted | 518 |  |  | 777 |  |  | 30.54 |
Cancelled | (32,732) |  |  | (49,098) |  |  | 30.54 |
Exchanged for common shares | (14,615) |  |  | (22,710) |  |  | 17.49 |
Outstanding on December 31, 2023 | 116,107 |  |  | 163,555 |  |  | $ | 17.25 |

Stock Options
Stock options vest through the fifth anniversary from the grant date. 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. Activity related to the Company’s stock options during the year ended December 31, 2023 was as follows:

| Number of Stock Options |  | Weighted Average Exercise Price |  | Weighted Average Remaining Contractual Term (in years) |  | Aggregate Intrinsic Value (in millions)
Outstanding on December 31, 2022 | 576,000 |  |  | $ | 38.80 |  |  |  |  |
Granted | 1,402,605 |  |  | 37.03 |  |  |  |  |
Exercised | — |  |  | — |  |  |  |  |
Cancelled | (98,538) |  |  | 33.89 |  |  |  |  |
Outstanding on December 31, 2023 | 1,880,067 |  |  | 37.53 |  |  | 9.0 |  | $ | 3.1 |
Exercisable on December 31, 2023 | 180,800 |  |  | $ | 29.74 |  |  | 4.9 |  | $ | 1.7 |

The weighted average exercise price per stock option granted was $37.03 for 2023 and $42.88 for 2022. Unrecognized compensation cost related to stock options as of December 31, 2023 was $9.3 million, which is expected to be recognized over a weighted-average p eriod of 2.3 years. T here were 1,699,267 unvested and 180,800 fully vested stock options outstanding on December 31, 2023 with a weighted average exercise price of $29.74. The intrinsic value of stock options exercised was $0.0 million during 2023 and $0.6 million during 2022.
The grant date fair value of the stock options issued for the year ended December 31, 2023 and 2022 was estimated using a Black-Scholes valuation model. The weighted average fair value assumptions used in the model were as follows:
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| December 31,
| 2023 |  | 2022
Expected volatility | 45.2% to 45.6% |  | 43.7% to 44.6%
Risk-free rate of return | 3.6% to 4.5% |  | 2.7% to 3.1%
Expected term (in years) | 6.2 years |  | 6.5 years
Expected annual dividend | $0 |  | $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.
Performance Awards
Performance Awards ("PAs") are exchangeable for between 0% to 150% of DSG common shares, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics at the end of the vesting period. The PAs are liability classified and included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. The intrinsic value of PAs exercised was $0.2 million during 2023 and $0.1 million during 2022. There was no unrecognized compensation cost related to PAs as of December 31, 2023.
Activity related to the Company’s PAs during the year ended December 31, 2023 was as follows:

| Number of Performance Awards |  | Maximum Shares Potentially Issuable |  | Weighted Average Grant Date Fair Value
Outstanding on December 31, 2022 | 43,826 |  |  | 65,739 |  |  | $ | 24.08 |
Granted | 326 |  |  | 489 |  |  | 25.55 |
Exercised | (11,404) |  |  | (17,106) |  |  | 21.54 |
Cancelled | (6,668) |  |  | (10,002) |  |  | 20.85 |
Outstanding on December 31, 2023 | 26,080 |  |  | 39,120 |  |  | $ | 25.70 |

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 in the Consolidated Balance Sheets.
In order to implement the Stock Split, on August 31, 2023, DSG filed a Third Amended and Restated Certificate of Incorporation of DSG 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. The Stock Split did not change the $1.00 par value of DSG common stock.
Rights Offering
On May 9, 2023, the Company commenced a subscription rights offering to raise gross proceeds of up to approximately $100 million (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
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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 net proceeds of approximately $98.5 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 Consolidated Balance Sheets.
DSG used the proceeds from the Rights Offering, in combination with borrowings under the 2023 Amended Credit Agreement, to fund the Hisco Transaction.
Stock Repurchase Program
In 2019, the Board of Directors authorized a program pursuant to which the Company was authorized to repurchase up to $7.5 million of DSG common stock from time to time in open market transactio ns, privately negotiated transactions or by other methods. T he Board of Directors increased the repurchase program by $5.0 million in November 2022, and $25.0 million in December 2023, bringing the total authorized to $37.5 million.
During 2023, the Company repurchased 138,725 shares of DSG common stock at an average cost of 26.09 per share for a total cost of $3.6 million. During 2022, the Company repurchased 108,178 shares of DSG common stock 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 $29.0 million at December 31, 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 and number of shares and numbers of equity awards were retroactively adjusted. The following table provides the computation of basic and diluted earnings per share:

| December 31,
(in thousands, except share and per share data) | 2023 |  | 2022
Basic income per share: |  |  |
Net income (loss) | $ | (8,967) |  |  | $ | 7,406 |
Basic weighted average shares outstanding | 44,868,862 |  |  | 34,291,870 |
Basic income (loss) per share of common stock | $ | (0.20) |  |  | $ | 0.22 |
Diluted income per share: |  |  |
Net income (loss) | $ | (8,967) |  |  | $ | 7,406 |
Basic weighted average shares outstanding | 44,868,862 |  |  | 34,291,870 |
Effect of dilutive securities | — |  |  | 794,722 |
Diluted weighted average shares outstanding | 44,868,862 |  |  | 35,086,592 |
Diluted income (loss) per share of common stock | $ | (0.20) |  |  | $ | 0.21 |
Anti-dilutive securities excluded from the calculation of diluted income per share | 424,934 |  |  | 496,000 |

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Note 13 – Income Taxes
Income from operations before income taxes consisted of the following:

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
United States | $ | (24,949) |  |  | $ | 910 |
Foreign | 22,942 |  |  | 12,027 |
Total | $ | (2,007) |  |  | $ | 12,937 |

Provision (benefit) for income taxes from operations consisted of the following:

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
Current income tax expense: |  |  |
U.S. federal | $ | 4,961 |  |  | $ | 4,011 |
U.S. state | 2,388 |  |  | 869 |
Foreign | 7,639 |  |  | 3,057 |
Total | $ | 14,988 |  |  | $ | 7,937 |
Deferred income tax expense (benefit): |  |  |
U.S. federal | $ | (8,101) |  |  | $ | (947) |
U.S. state | 1,232 |  |  | (73) |
Foreign | (1,159) |  |  | (1,386) |
Total | $ | (8,028) |  |  | $ | (2,406) |
Total income tax expense (benefit): |  |  |
U.S. federal | $ | (3,141) |  |  | $ | 3,063 |
U.S. state | 3,620 |  |  | 796 |
Foreign | 6,481 |  |  | 1,672 |
Total | $ | 6,960 |  |  | $ | 5,531 |

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The reconciliation between the effective income tax rates and the statutory federal rates for operations are as follows:

| Year Ended December 31,
| 2023 |  | 2022
Statutory Federal rate | 21.0 | % |  | 21.0 | %
Increase (decrease) resulting from: |  |  |
Change in valuation allowance - current period activity | (380.7) |  |  | 1.3 |
Foreign rate differential | 6.2 |  |  | 4.0 |
Stock compensation | (5.0) |  |  | (0.5) |
Compensation deduction limitation | (7.0) |  |  | — |
State and local taxes, net | 67.1 |  |  | 4.5 |
Life insurance | (3.4) |  |  | — |
Meals & entertainment | (17.3) |  |  | 1.4 |
Change in uncertain tax positions | 18.1 |  |  | (2.9) |
Provision to return differences | (45.3) |  |  | — |
GILTI, Section 78, FDII, and Section 250 | — |  |  | 3.2 |
Transaction costs | — |  |  | 8.3 |
Branch income | (81.6) |  |  | — |
Earn Out Revaluation | — |  |  | 0.8 |
Change in deferred balances | 79.4 |  |  | — |
Other items, net | 1.7 |  |  | 1.7 |
Provision for income taxes | (346.8) | % |  | 42.8 | %

The effective tax rate for the year ended December 31, 2023 was (346.8)% compared to a 42.8% effective tax rate for the year ended December 31, 2022. The change in the year-over-year effective tax rate was primarily due to an increase in the partial valuation allowance against the Company's excess interest expense carryforward balance, state taxes, foreign income and a pre-tax loss in the current year. Relative to the U.S. statutory rate, the effective tax rate for the year ended December 31, 2023 was impacted by the items listed above.
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Deferred income tax assets and liabilities contain the following temporary differences:

| December 31,
(in thousands) | 2023 |  | 2022
Deferred tax assets: |  |  |
Federal & state NOL carryforward | $ | 10,158 |  |  | $ | 8,218 |
Inventory reserve | 8,815 |  |  | 6,990 |
Transaction costs | 673 |  |  | 1,620 |
Stock based compensation | 3,602 |  |  | 2,531 |
Accrued benefits & bonuses | 11,998 |  |  | 7,074 |
Bad debt reserve | 977 |  |  | 496 |
Section 163(j) limitation carryforward | 15,891 |  |  | 7,692 |
ROU liabilities | 18,936 |  |  | 11,947 |
Deferred state income tax | — |  |  | 745 |
Deferred revenue | 77 |  |  | 86 |
Investment in Foreign Subsidiaries | — |  |  | — |
Other | 4,005 |  |  | 2,822 |
Total deferred tax assets | 75,132 |  |  | 50,221 |
Deferred tax liabilities: |  |  |
Intangible assets and goodwill | 44,057 |  |  | 45,951 |
ROU asset | 18,264 |  |  | 11,295 |
Fixed assets | 20,977 |  |  | 15,617 |
Deferred state income tax | 17 |  |  | — |
Other | 1,591 |  |  | 188 |
Total deferred liabilities | 84,906 |  |  | 73,051 |
Net deferred tax liabilities before valuation allowance | (9,774) |  |  | (22,830) |
Valuation allowance | (8,457) |  |  | (815) |
Net deferred tax liabilities | $ | (18,231) |  |  | $ | (23,645) |

At December 31, 2023, the Company had $21.4 million of U.S. federal net operating loss carryforwards ("NOLs") which are subject to expiration beginning in 2027 and $53.5 million of various state net operating loss carryforwards which expire at varying dates between 2024 and 2035. At December 31, 2023 the Company had a total valuation allowance of $8.5 million. The change in the valuation allowance during 2023 was primarily related to a valuation allowance established against its Section 163(j) interest expense limitation deferred tax asset as the Company does not expect that its future taxable income will be sufficient to realize existing deferred tax assets. At December 31, 2022, a valuation allowance of $0.8 million was established against state NOLs.
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. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due the Company's legal entity structure and the complexity of U.S. tax laws.
Global Intangible Low Taxed Income (GILTI) is a deemed amount of income derived from controlled foreign corporations (CFCs) in which a U.S. person is a 10% direct or indirect shareholder. The Company owns numerous CFCs, which are subject to GILTI inclusion. However, because several of the CFCs operate in countries with a high tax rate, notably Canada, Denmark and Mexico, it was determined that a Section 954 High Tax Exception to GILTI inclusions is appropriate.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

| December 31,
(in thousands) | 2023 |  | 2022
Balance at beginning of year | $ | 3,027 |  |  | $ | — |
Additions for tax positions of current year | — |  |  | 191 |
Additions for tax positions of prior years | 503 |  |  | 3,741 |
Reductions for tax positions of prior year | — |  |  | (238) |
Lapse of statute of limitations | (796) |  |  | (667) |
Balance at end of year | $ | 2,734 |  |  | $ | 3,027 |

The recognition of the unrecognized tax benefits would have a favorable effect on the effective tax rate. The unrecognized tax benefits as of December 31, 2023 included $1.1 million of tax benefits that, if recognized, would impact the effective tax rate in future periods. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The unrecognized tax benefits are recorded as a component of Other Liabilities in the Consolidated Balance Sheets. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $0.8 million and $0.9 million as of December 31, 2023 and December 31, 2022, respectively. It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months; however, the Company does not expect the change to have a material impact on the Consolidated Statements of Operations and Comprehensive Income (Loss) or the Consolidated Balance Sheets. Interest and penalties are recognized over uncertain tax positions that arose from income tax matters in Canada. The Company has substantially concluded all Canadian income tax matters through the year ended December 31, 2015. Years 2016 through present are open and subject to examination.
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 December 31, 2023, the Company was subject to U.S. federal income tax examinations for the years 2020 through 2022 and income tax examinations from various other jurisdictions for the years 2016 through 2022.
Note 14 – 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, and converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the aerospace and defense, wireless and communication, semiconductors, industrial electronics and automotive, and electronics manufacturing industries.
Gexpro Services is a global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs.
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.
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Financial information for the Company's segments and reconciliations of that information to the consolidated financial statements is presented below.

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
Revenue |  |  |
Lawson(1) | $ | 468,711 |  |  | $ | 324,783 |
TestEquity | 641,768 |  |  | 392,358 |
Gexpro Services | 405,733 |  |  | 385,326 |
All Other(2) | 55,890 |  |  | 48,955 |
Intersegment revenue elimination | (1,700) |  |  | — |
Total revenue | $ | 1,570,402 |  |  | $ | 1,151,422 |
Operating income (loss) |  |  |
Lawson(1) | $ | 32,498 |  |  | $ | 6,536 |
TestEquity | (16,465) |  |  | 11,375 |
Gexpro Services | 27,000 |  |  | 21,291 |
All Other(2) | (42) |  |  | 2,584 |
Total operating income (loss) | $ | 42,991 |  |  | $ | 41,786 |

(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.
Segment revenue includes revenue from sales to external customers and intersegment revenue from sales transactions between segments. The Company accounts for intersegment sales similar to third party transactions that are conducted on an arm's-length basis and reflect current market prices. Intersegment revenue is eliminated in consolidation and is not included in consolidated revenue on the financial statements. Segment revenue and the elimination of intersegment revenue was as follows:

(in thousands) |  | Lawson |  | TestEquity |  | Gexpro Services |  | All Other |  | Elimination |  | Total
Year Ended December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Revenue from external customers |  | $ | 468,379 |  |  | $ | 641,643 |  |  | $ | 404,490 |  |  | $ | 55,890 |  |  | $ | — |  |  | $ | 1,570,402 |
Intersegment revenue |  | 332 |  |  | 125 |  |  | 1,243 |  |  | — |  |  | (1,700) |  |  | — |
Revenue |  | $ | 468,711 |  |  | $ | 641,768 |  |  | $ | 405,733 |  |  | $ | 55,890 |  |  | $ | (1,700) |  |  | $ | 1,570,402 |
Year Ended December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Revenue from external customers |  | $ | 324,783 |  |  | $ | 392,358 |  |  | $ | 385,326 |  |  | $ | 48,955 |  |  | $ | — |  |  | $ | 1,151,422 |
Intersegment revenue |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Revenue |  | $ | 324,783 |  |  | $ | 392,358 |  |  | $ | 385,326 |  |  | $ | 48,955 |  |  | $ | — |  |  | $ | 1,151,422 |

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Long-lived assets, which includes property, plant and equipment, rental equipment, goodwill, intangibles, right of use operating lease assets, and other assets, were as follows:

| December 31,
(in thousands) | 2023 |  | 2022
Long-lived assets by segment |  |  |
Lawson | $ | 312,136 |  |  | $ | 324,732 |
TestEquity | 378,348 |  |  | 201,919 |
Gexpro Services | 141,797 |  |  | 152,720 |
All Other | 42,132 |  |  | 40,696 |
Total | $ | 874,413 |  |  | $ | 720,067 |
Long-lived assets by geographic area |  |  |
United States | $ | 765,160 |  |  | $ | 580,870 |
Canada | 72,054 |  |  | 70,561 |
Europe | 32,997 |  |  | 67,957 |
Pacific Rim | 417 |  |  | — |
Latin America | 3,785 |  |  | 679 |
Total | $ | 874,413 |  |  | $ | 720,067 |

Refer to Note 4 – Revenue Recognition for disaggregated revenue by geographic area.
Capital expenditures and depreciation and amortization by segment were as follows:

| Year Ended December 31,
(in thousands) | 2023 |  | 2022
Capital expenditures |  |  |
Lawson(1) | $ | 6,626 |  |  | $ | 3,737 |
TestEquity | 2,955 |  |  | 250 |
Gexpro Services | 5,053 |  |  | 3,809 |
All Other(2) | 703 |  |  | 511 |
Total | $ | 15,337 |  |  | $ | 8,307 |
Depreciation and amortization |  |  |
Lawson(1) | $ | 19,532 |  |  | $ | 10,594 |
TestEquity | 26,002 |  |  | 17,480 |
Gexpro Services | 15,986 |  |  | 15,175 |
All Other(2) | 2,068 |  |  | 1,937 |
Total | $ | 63,588 |  |  | $ | 45,186 |

(1) Includes Lawson's activities only subsequent to the Merger Date of April 1, 2022 and not prior to the Mergers.
(2) Includes the activities of All Other only subsequent to the Merger Date of April 1, 2022 and not prior to the Mergers.
Note 15 – 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
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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. On October 25, 2023, Plaintiff Garfield voluntarily dismissed his appeal. The voluntary dismissal did not impact the appeal by Plaintiff Edelman, who continued to advance his appeal. Plaintiff’s opening brief on appeal was filed on November 30, 2023. Defendants’ joint answering brief was filed on January 5, 2024. Plaintiff’s optional reply brief was filed on January 25, 2024. The Delaware Supreme Court has scheduled oral argument in the appeal to occur on May 22, 2024.
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 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, 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 losses, 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
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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 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 December 31, 2023 the Company had approximately $0.1 million accrued for potential monitoring costs included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. 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.
Defined Contribution Plan
The Company provides a 401(k) defined contribution plan to allow employees a pre-tax investment vehicle to save for retirement. The Company made contributions to the 401(k) plan of $7.2 million and $5.5 million for the years ended December 31, 2023 and 2022, respectively.
Note 16 – 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 Consolidated Statements of Operations 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.
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 for interim executive management in addition to assisting in identifying cost savings, revenue enhancements and operational synergies of the combined companies. For the year ended 2023 and 2022, expense of $0.6 million and $0.2 million, respectively, was recorded in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss), reflecting expenses accrued for these consulting services.
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Principal Executive Office Lease
In connection with the Company’s headquarters move to Fort Worth, Texas in 2023, the Company has been utilizing office space in a building that is leased by LKCM. The Company is not charged any rent or other amounts for the use of the office space.
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 77.8% of the outstanding shares of DSG common stock as of December 31, 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 17 – Subsequent Event
On January 22, 2024, DSG completed the acquisition of Safety Supply Illinois LLC, conducting business as Emergent Safety Supply ("ESS"), with a preliminary purchase price of $9.9 million. ESS is a national distributor of safety products based near Chicago in Batavia, Illinois that generates annual sales of approximately $13 million. ESS was acquired to expand Lawson's safety product category. The acquisition was funded through DSG's cash on hand.
Due to the recent acquisition date, the purchase accounting for ESS was not final at the time of this filing, and a preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed was not complete. The final valuation will be completed within the one-year measurement period following the acquisition date.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report (“the Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective as of December 31, 2023.
Management’s Report on Internal Control over Financial Reporting
Company management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Exchange Act. This system, which management has chosen to base on the framework set forth in the 2013 Internal Control-Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is under the supervision of our Chief Executive Officer and Chief Financial Officer, is effected by the Company’s Board of Directors, management and other personnel, and is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
The Company has excluded HIS Company, Inc., a wholly-owned subsidiary, from the scope of management’s report on internal control over financial reporting, representing approximately 14% of total assets (excluding goodwill and intangible assets, which were integrated into the Company's control environment) as of December 31, 2023 and 15% of revenue for the year then ended.
Changes in Internal Control over Financial Reporting
As previously disclosed under “Item 9A – Controls and Procedures” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management concluded that its internal control over financial reporting was not effective based on the material weakness identified.
Specifically, in our TestEquity operating segment, we did not have sufficient technical accounting resources and personnel (i) to help ensure proper application of GAAP in the accounting for certain areas primarily related to accounting for business acquisitions and the disposal of rental equipment, or (ii) to effectively design and execute our process level controls around (a) revenue recognition, (b) account reconciliations, (c) accounting policies, and (d) proper segregation of duties. Although these control deficiencies did not result in any material misstatement of our consolidated financial statements, it could lead to a material misstatement of account balances or disclosures.
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As of December 31, 2023, the Company has completed remediation of the following previously reported material weakness and based on the results of its internal control evaluation, management concluded that our internal control over financial reporting is effective as of December 31, 2023.
The Company’s remediation efforts are described below. Except as otherwise described herein, there was no change in our internal control over financial reporting that occurred during the fourth quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weakness in Internal Control over Financial Reporting
Management has performed and implemented the necessary actions and controls to remediate the material weakness:
Accounting Expertise and Personnel
•Hired experienced professionals to enhance the depth and competence of our accounting and finance team.
•Reassigned responsibilities between operating segments to increase the number of critical accounting oversight roles, which strengthened the oversight and review procedures over segregation of duties, financial reporting, and internal controls.
•Centralized technical accounting expertise at the corporate level to oversee complex accounting transactions and review operating segment financial statements.
•Expanded training to include internal control workshops designed to improve control awareness and educate all applicable personnel, in addition to one-on-one training sessions on account reconciliations and other critical review procedures, including the completeness and accuracy over information produced by the Company.
Accounting Policies and Controls
•Established and communicated the financial reporting “Vision, Mission and Values”, which defines expectations related to strong internal controls governance, and reliable and accurate financial reporting.
•Strengthened and drafted critical accounting policies, specifically within complex, non-routine transactions, revenue recognition and accounting for business acquisitions, and developed processes and controls to verify accounting procedures.
•Implemented delegation of authority procedures to assign appropriate authorized reviewers.
•Designed and implemented entity-level monitoring controls to improve corporate oversight over the review and preparation of complete and accurate financial information.
•Designed and implemented review controls over the completeness and accuracy of key inputs provided to and outputs provided by third-party specialists who provide expertise on business combinations
•Performed thorough accounts reconciliations, including thorough review of noted differences.
Segregation of Duties
•Evaluated logical access and eliminated known high-risk segregation of duties conflicts.
•Established a standard framework governing the segregation of incompatible duties across the Company.
•Designed various processes and controls to adequately segregate job responsibilities and system access and implemented applicable mitigating internal controls.
•Designed and implemented periodic access review controls to monitor user access and identify segregation of duties conflict issues.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all control issues or misstatements, accordingly, our controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our control system are met. Projections of any evaluation of
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effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Distribution Solutions Group, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Distribution Solutions Group, Inc., (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated March 7, 2024 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of HIS Company, Inc., a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 14 and 15 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023. As indicated in Management’s Report, HIS Company, Inc., was acquired during 2023. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of HIS Company, Inc.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Los Angeles, California
March 7, 2024
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ITEM 9B. OTHER INFORMATION.
During the quarter ended December 31, 2023, none of our directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” (as such terms are defined under Item 408 of Regulation S-K).
ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
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Distribution Solutions Group, Inc.
Notes to Consolidated Financial Statements
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
a. Directors
The information required by this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024, under the caption “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.
b. Executive Officers
The information required by this Item is set forth under the caption Item 1 — Business under “Information About Our Executive Officers.”
c. Audit Committee
Information on the Company’s Audit Committee is contained under the caption “Board of Directors Meetings and Committees” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024, which is incorporated herein by reference.
The Board of Directors has determined that Lee Hillman, member of the Audit Committee of the Board of Directors, qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, and that Mr. Hillman is “independent” as the term is defined in the listing standards of the Nasdaq Global Select Market.
d. Code of Business Conduct
The Company has adopted a Code of Business Conduct applicable to all employees and sales representatives. The Company’s Code of Business Conduct is applicable to senior financial executives including the principal executive officer, principal financial officer and principal accounting officer of the Company. The Company’s Code of Business Conduct is available on the Corporate Governance page in the Investor Relations section of the Company’s website at http://www.distributionsolutionsgroup.com. The Company intends to post on its website any amendments to, or waivers from its Code of Business Conduct applicable to senior financial executives. The Company will provide any persons with a copy of its Code of Business Conduct without charge upon written request directed to the Company’s Secretary at the Company’s address.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024, under the caption “Remuneration of Executive Officers,” which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Additional information required by this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024 under the caption “Securities Beneficially Owned by Principal Stockholders and Management” which information is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 regarding the number of shares of DSG common stock that were available for issuance under the Company’s equity compensation plans which are described in greater detail in Note 10 – Stock-Based Compensation in Item 8. Financial Statements and Supplementary Data.
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Plan category |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by stockholders |  |  |  |  |  |
Stock options |  | 1,880,067 |  | $ | 37.53 |  |  |
Other stock units (1) |  | 300,891 |  | N/A |  |
Equity compensation plans not approved by stockholders |  | — |  | — |  |  | —
Total |  | 2,180,958 |  | $ | 37.53 |  |  | 1,161,687

(1)Includes potential DSG common stock issuance of 98,216 from restricted stock awards, 163,555 from market stock units and 39,120 from performance awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024 under the caption “Election of Directors” and “Certain Relationships and Related Transactions” which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required under this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2024 under the caption “Fees Paid to Independent Auditors” which information is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) See Index to Financial Statements and Supplementary Data in Item 8 on page 43.
(2) All other financial statement schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto.
(3) Exhibits:

Exhibit Number | Description of Exhibit
2.1† | Agreement and Plan of Merger, dated as of December 29, 2021, by and among LKCM TE Investors, LLC, TestEquity Acquisition, LLC, Lawson Products, Inc. and Tide Sub, LLC, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
2.2† | Agreement and Plan of Merger, dated as of December 29, 2021, by and among 301 HW Opus Investors, LLC, 301 HW Opus Holdings, Inc., Lawson Products, Inc. and Gulf Sub, Inc., incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
2.3† | Stock Purchase Agreement, dated as of March 30, 2023, by and among HIS Company, Inc., Distribution Solutions Group, Inc., HIS Company, Inc. Employee Stock Ownership Trust, which is maintained pursuant to and in connection with the HIS Company, Inc. Employee Stock Ownership Plan, acting through GreatBanc Trust Company, not in its corporate capacity, but solely in its capacity as trustee of HIS Company, Inc. Employee Stock Ownership Trust, and Ellis Moseley, solely in his capacity as the representative of HIS Company, Inc. Employee Stock Ownership Trust, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed March 31, 2023.
3.1 | Third A mended and Restated Certificate of Incorporation of the Company, effective as of August 31, 2023, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed on September 1, 2023.
3.2 | Amended and Restated By-Laws of the Company effective as of May 5, 2022, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed May 5, 2022.
4.1** | Description of common stock
1 0.1* | Lawson Products, Inc. Executive Deferral Plan (as Amended and Restated Effective November 1, 2015), incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
1 0.2* | Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017), incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
1 0.3* | Amendment of the Lawson Products, Inc. Amended Stock Performance Plan (as Amended and Restated Effective January 24, 2017), dated December 23, 2020, incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2020.
1 0.4* | Form Letter regarding Stock Performance Rights, incorporated by reference to Exhibit 10(c)(16) to the Company’s Annual Report on Form 10-K (File No. 000-10546) for the fiscal year ended December 31, 2004.
1 0.5* | Distribution Solutions Group, Inc. Equity Compensation Plan (amended and restated effective October 17, 2022, as amended November 10, 2022), incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed November 18, 2022.
1 0.6* | Form of Award Agreement under the 2009 Equity Compensation Plan (now known as the Distribution Solutions Group, Inc. Equity Compensation Plan) (Target Units, SPRs and Restricted Units), incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
1 0.7* | Form of Award Agreement under the 2009 Equity Compensation Plan (now known as the Distribution Solutions Group, Inc. Equity Compensation Plan) (MSU Target Units, ROIC Target Units and Restricted Units), incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
1 0.8* | Form of Award Agreement under the 2009 Equity Compensation Plan (now known as the Distribution Solutions Group, Inc. Equity Compensation Plan) (MSU Target Units, ROIC Target Units and Restricted Units), incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.9*,** | Form of Option Award Agreement dated as of Au gust 22, 2023 under the Distribution Solutions G r oup, Inc. Equity Compensation Plan, as amended on November 10, 2022.

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10.10*,** | Form of Option Award Agreement dated as of January 2 7, 2023 under the Distribution Solutions Group, Inc. Equity Compensation Plan, as amended on November 10, 2022.
1 0.11* | Lawson Products, Inc. 2021 Annual Incentive Plan Summary, incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1 2* | Form of Indemnification Agreement for Directors and Officers, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed September 19, 2008.
10.1 3* | Form of Change in Control Agreement for Officers, incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended September 30, 2021.
10.1 4* | Retirement and Consulting Agreement, dated as of March 2, 2021, by and between Lawson Products, Inc., an Illinois corporation, and Neil Jenkins, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed March 5, 2021.
10.1 5 | Voting Agreement, dated as of December 29, 2021, by and among Lawson Products, Inc. and Luther King Capital Management Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed January 4, 2022.
10.1 6† | Amended and Restated Credit Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., the subsidiaries of Lawson Products, Inc. party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 4, 2022.
10.1 7 | Registration Rights Agreement, dated as of April 1, 2022, by and among Lawson Products, Inc., 301 HW Opus Investors, LLC and LKCM TE Investors, LLC, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 4, 2022.
10.18* | Retirement and Consulting Agreement, dated as of April 4, 2022, by and between Lawson Products, Inc., an Illinois corporation, and Michael G. DeCata, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed April 8, 2022.
10.19* | Employment Agreement, dated as of April 4, 2022, by and between Lawson Products, Inc., an Illinois corporation, and Cesar A. Lanuza, incorporated by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q (File No. 000-10546) for the quarter ended June 30, 2022.
10.2 0* | Employment Agreement, dated as of January 27, 2023, by and between Lawson Products, Inc., an Illinois corporation, and Ronald J. Knutson, incorporate by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed January 31, 2023.
10.2 1 | Subscription Agent Agreement, dated as of May 8, 2023, by and among Distribution Solutions Group, Inc., Computershare Inc. and Computershare Trust Company, N.A., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-10546) filed May 9, 2023.
10.2 2† | Amended and Restated Credit Agreement, dated as of June 8, 2023, by and among Distribution Solutions Group, Inc., the subsidiaries of Distribution Solutions Group, Inc. party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to the Company’s Current Report on Form 8-K (File No. 000-10546) filed June 9, 2023.
21** | Subsidiaries of the Company.
23.1** | Consent of Grant Thornton, LLP.
23.2** | Consent of BDO USA, P.C.
31.1** | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2** | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97** | Distribution Solutions Group, Inc. Incentive Based Compensation Recoupment Policy, dated as of November 28, 2023.
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH** | Inline XBRL Taxonomy Extension Schema Document
101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 | Cover Page Interactive File (embedded within the Inline XBRL document and contained in Exhibit 101)

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† Certain schedules and/or similar attachments omitted pursuant to Item 601(a)(5) of Regulation S-K promulgated by the U.S. Securities and Exchange Commission. The Company agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the SEC upon request.
* Indicates management employment contracts or compensatory plans or arrangements.
** Filed herewith.
*** Furnished herewith.
ITEM 16. FORM 10-K SUMMARY.
None.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  |  | DISTRIBUTION SOLUTIONS GROUP, INC.
|  |  | (Registrant)
Dated: | March 7, 2024 |  | /s/ J. Bryan King
|  |  | J. Bryan King Chairman, President and Chief Executive Officer (principal executive officer)
Dated: | March 7, 2024 |  | /s/ Ronald J. Knutson
|  |  | Ronald J. Knutson Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer)
Dated: | March 7, 2024 |  | /s/ David S. Lambert
|  |  | David S. Lambert Vice President, Controller and Chief Accounting Officer (principal accounting officer)

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Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature |  | Title |  | Date
/s/ J. Bryan King |  | Chairman, President and Chief Executive Officer (principal executive officer) |  | March 7, 2024
J. Bryan King |  |  |  |
/s/ Ronald J. Knutson |  | Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) |  | March 7, 2024
Ronald J. Knutson |  |  |  |
/s/ David S. Lambert |  | Vice President, Controller and Chief Accounting Officer (principal accounting officer) |  | March 7, 2024
David S. Lambert |  |  |  |
/s/ Andrew B. Albert |  | Director |  | March 7, 2024
Andrew B. Albert |  |  |  |
/s/ I. Steven Edelson |  | Director |  | March 7, 2024
I. Steven Edelson |  |  |  |
/s/ Lee S. Hillman |  | Director |  | March 7, 2024
Lee S. Hillman |  |  |  |
/s/ Mark F. Moon |  | Director |  | March 7, 2024
Mark F. Moon |  |  |  |
/s/ Bianca A. Rhodes |  | Director |  | March 7, 2024
Bianca A. Rhodes |  |  |  |
/s/ Bradley Wallace |  | Director |  | March 7, 2024
Bradley Wallace |  |  |  |
/s/ Robert S. Zamarripa |  | Director |  | March 7, 2024
Robert S. Zamarripa |  |  |  |

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