Select Interior Concepts, Inc.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONPERIOD FROM TO Commission File Number: 001-38632 SELECT INTERIOR CONCEPTS, INC.(Exact name of Registrant as specified in its Charter) Delaware47-4640296(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 400 Galleria Parkway, Suite 1760Atlanta, Georgia30339(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (714) 701-4200 Securities registered pursuant to Section 12(b) of the Act:Title of each ClassName of each Exchange on which registeredClass A Common Stock, par value $0.01 per shareThe Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding12 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 ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ 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 “largeaccelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer☐Non-accelerated filer ☒ Smaller reporting company☐Emerging growth company ☒ If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards providedpursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $12.65 per share of the Registrant’s Class A Common Stock on theNasdaq Capital Market on August 16, 2018, was $187.9 million. The Registrant has elected to use August 16, 2018, which was the initial trading date of the Registrant’s Class A Common Stock on theNasdaq Capital Market, because on the last day of the Registrant’s most recently completed second fiscal quarter, the Registrant was a private company that was not publicly traded.As of March 11, 2019, the Registrant had 25,839,670 shares of Class A Common Stock outstanding.Documents Incorporated by ReferenceCertain portions of the Registrant’s Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders (to be filed with the U.S. Securities and Exchange Commission not later than 120 days afterthe end of the fiscal year covered by this Annual Report) are incorporated by reference into Part III of this Annual Report on Form 10-K, as indicated herein. Table of Contents PagePART I Item 1.Business3Item 1A.Risk Factors6Item 1B.Unresolved Staff Comments32Item 2.Properties32Item 3.Legal Proceedings32Item 4.Mine Safety Disclosures32 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33Item 6.Selected Financial Data35Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations36Item 7A.Quantitative and Qualitative Disclosures About Market Risk51Item 8.Financial Statements and Supplementary Data52Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure52Item 9A.Controls and Procedures52Item 9B.Other Information53 PART III Item 10.Directors, Executive Officers and Corporate Governance54Item 11.Executive Compensation54Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters54Item 13.Certain Relationships and Related Transactions, and Director Independence54Item 14.Principal Accounting Fees and Services54 PART IV Item 15.Exhibits, Financial Statement Schedules55Item 16Form 10-K Summary57 i Special Note Regarding Forward-Looking Statements and InformationThis Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (which we refer to as this “Annual Report”) contains forward-lookingstatements and cautionary statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs,projections, forecasts, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Someof the forward-looking statements can be identified by the use of terms such as “may,” “intend,” “might,” “plan,” “can,” “will,” “should,” “could,” “would,”“expect,” “believe,” “estimate,” “anticipate,” “continue,” “goal,” “predict,” “project,” “potential,” or the negative of these terms, and similar expressions.These forward-looking statements are subject to risks, contingencies, and uncertainties that are beyond our control. Further, new factors emerge from time totime that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that may cause actual results to differmaterially from those expressed or implied by the forward-looking statements include, but are not limited to, the following: •the cyclical nature of our businesses and the seasonality of the building products supply and services industry; •our dependency upon the homebuilding industry, repair and remodel activity, the economy, the credit markets, and other important factors; •general economic and financial conditions; •competition in our highly fragmented industry and the markets in which we operate; •exposure to warranty, casualty, construction defect and various other claims and litigation; •product shortages, loss of key suppliers, our dependence on third-party suppliers and manufacturers, and the development of alternatives todistributors in the supply chain; •changes in the costs of the products we install; •ability to implement our business strategies and achieve our growth objectives; •acquisition and integration risks; •increased operating costs; •the impact of inflation and deflation; •our inability to attract and retain highly skilled employees; •adverse credit and financial markets events and conditions; •credit sale risks; •retention of key personnel; •performance of individual locations; •environmental, health and safety laws and regulations; •the impact of federal, state and local regulations; •computer data processing systems; •our inability to cancel before the end of the term or renew many of the leases for our facilities; •the loss of our significant customers or a reduction in the quantity of products they purchase; •requirements of being a public company; •risks related to our internal controls; •the possibility of securities litigation;1 •restrictions relating to our operations in our current and future financing arrangements; •our inability to obtain additional capital on acceptable terms, if at all; •increases in interest rates; and •risks related to other factors discussed under “Risk Factors” and elsewhere in this Annual Report.You should read this Annual Report completely and with the understanding that actual future results may be materially different from expectationsexpressed in any forward-looking statements. All forward-looking statements made in this Annual Report are qualified by these cautionary statements. Theseforward-looking statements are made only as of the date of this Annual Report, and we do not undertake any obligation, other than as may be required by law,to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes infuture operating results over time or otherwise.Comparisons of results for current and any prior periods are not intended to express any future trends, or provide indications of future performance,and should only be viewed as historical data.2 PART IItem 1. Business.Company OverviewSelect Interior Concepts, Inc. (collectively with all of its subsidiaries, “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwidedistributor of interior building products with market positions in residential interior design services. Through our Residential Design Services (which we refer to as “RDS”) operating segment, we serve national and regional homebuilders by providingan integrated, outsourced solution for the design, consultation, sourcing, distribution and installation needs of their homebuyer customers. Through our 21design centers, our consultants work closely with homebuyers in the selection of a broad array of interior products and finishes, including flooring, cabinets,countertops, wall tile, finish carpentry, shower enclosures and mirrors, and related interior items, primarily for newly constructed homes. We then coordinatethe ordering, fulfillment and installation of many of these interior products to provide a streamlined experience for the homebuyer. With our design centersand our product sourcing and installation capabilities, we enable our homebuilder customers to outsource critical aspects of their business to us, therebyincreasing their sales, profitability, and return on capital. We also have leading market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertopsand specialty tiles through our Architectural Surfaces Group (which we refer to as “ASG”) operating segment. ASG sources natural and engineered stone froma global supply base, and markets these materials through a national network of distribution centers and showrooms at 23 different locations. In addition toserving the new residential and commercial construction markets with these materials, we also distribute them to the repair and remodel (which we refer to as“R&R”) market.Our HistoryThe SIC platform originated in September 2014, when affiliates of Trive Capital Management LLC (which we refer to as “Trive Capital”) acquiredRDS, which in turn acquired the assets of PT Tile Holdings, LP (which we refer to as “Pinnacle”) in February 2015, and 100% of the equity interests inGreencraft Holdings, LLC (which we refer to as “Greencraft”) in December 2017. In 2018, RDS then acquired the assets of Summit Stoneworks, LLC (whichwe refer to as “Summit”) in August 2018, and 100% of the equity interests in T.A.C. Ceramic Tile Co. (which we refer to as “TAC”) in December 2018.Affiliates of Trive Capital also formed a consolidation platform in the stone countertop market by acquiring 100% of the equity interests inArchitectural Granite & Marble, LLC in June 2015, which in turn acquired the assets of Bermuda Import-Export, Inc. (which we refer to as “Modul”) in July2016, 100% of the equity interests in Pental Granite and Marble, LLC (which we refer to as “Pental”) in February 2017, and the assets of Cosmic Stone & TileDistributors, Inc. (which we refer to as “Cosmic”) in October 2017, and these acquired businesses were combined to form ASG. ASG then acquired the assetsof Elegant Home Design, LLC (which we refer to as “Bedrock”) in January 2018, the assets of NSI, LLC (which we refer to as “NSI”) in March 2018, and theassets of The Tuscany Collection, LLC (which we refer to as “Tuscany”) in August 2018. November 2017 Restructuring TransactionsIn November 2017, Select Interior Concepts, Inc. and the former equity holders of RDS and ASG completed a series of restructuring transactions(collectively, the “November 2017 restructuring transactions”) pursuant to which Select Interior Concepts, Inc. acquired all of the outstanding equityinterests in each of RDS and ASG, including all of their respective wholly-owned subsidiaries. Following the November 2017 restructuring transactions,Select Interior Concepts, Inc. became a holding company that wholly owns RDS and ASG.3 Listing of our Class A Common Stock on the Nasdaq Capital MarketOn August 13, 2018, our shelf registration statement was declared effective by the U.S. Securities and Exchange Commission (which we refer to as the“SEC”), and on August 16, 2018 our Class A Common Stock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.”Residential Design ServicesRDS enters into exclusive service agreements with homebuilders at the beginning of certain new community development projects to provide themwith a single-source solution for the design center operations, consultation, sourcing, fulfillment, and installation phases of the homebuilding process. At ourdesign centers, our design staff work directly with homebuyers to help them achieve their design, styling, and product needs, leveraging our web-basedpreference analysis and proprietary software system to enable real-time pricing of interior options. During the initial design phase of a new residential development, RDS often assists builders with upfront planning of design elements and interioroptions. These alternatives then become the standard packages and design options which are the basis from which the new homebuyer makes upgradeselections. During the initial construction phase, RDS offers a full suite of interior customization options to homebuyers in its design centers, providing theopportunity to upgrade to higher priced options that are not part of the homebuilder’s standard package. These upgrades result in higher revenue andprofitability for both RDS and the homebuilder, who shares in the incremental revenue from any upgrades. RDS also provides installation services, ensuringthat the finished product meets the homebuyer’s specifications.RDS’ collection of design options enables homebuyers to customize their homes with high quality interior finishes and provides homebuilders with asingle partner to handle the majority of the interior design elements in a new home. RDS offers numerous interior surface categories which includes flooring,cabinets, countertops and wall tile, finish carpentry and shower enclosures and mirrors.Architectural Surfaces GroupOur ASG segment imports and distributes natural and engineered stone slabs, as well as tile, through 23 strategically positioned warehouse locationsacross the United States. Our stone slabs include marble, granite, and quartz, for use as kitchen and bathroom countertops, and our tiles consist of ceramic andporcelain for flooring, backsplash, and wall tile applications. We maintain a broad domestic footprint of showrooms and distribution centers, serving marketsin the Northeast, Southeast, Southwest, Mountain West, and West Coast regions of the United States and offer a targeted merchandising strategy, includingdisplaying our products in customer-oriented showrooms that cater to professional interior designers and architects as well as homeowners. We carry productlines of natural and engineered stone slabs and tile products that are tailored to the specific geographic regions that we serve.We have relationships with a wide array of stone slab quarries, manufacturers and distributors around the world and offer our customers a broad andconsistent selection of high-quality stone slabs from a global supply chain. We have successfully secured exclusive rights to leading materials that aremarketed under ASG’s MetroQuartz ® and PentalQuartz ® brands.CompetitionOur markets are highly fragmented and competitive. We face competition from large home improvement stores, national and regional interior surfaceretailers and distributors, and independent design centers. Some of our competitors are organizations that are larger, are better capitalized, have operatedlonger, have product offerings that extend beyond our product suite, and have a more established market presence with substantially greater financial,marketing, personnel, and other resources than we have. In addition, while we believe that there is a relatively low threat of new internet-only entrants due tothe nature of our products, the growth opportunities presented by e-commerce could outweigh these challenges and result in increased competition.4 EmployeesAs of December 31, 2018, we employed a total of approximately 1,360 employees. None of these employees is a party to a collective bargainingagreement.Government RegulationWe are subject to various federal, state and local laws and regulations applicable to our businesses generally in the jurisdictions in which we operate,including those relating to employment, import and export, public health and safety, work place safety, product safety, transportation, zoning, and theenvironment. We operate our businesses in accordance with standards and procedures designed to comply with applicable laws and regulations, and webelieve that we are in compliance in all material respects with such laws and regulations.Insurance and Risk ManagementWe use a combination of insurance policies specific to particular purposes to provide us with protection against potential liability for workers’compensation, general liability, product liability, director and officers’ liability, employer’s liability, property damage, auto liability, and other casualty andproperty risks. Changes in legal trends and interpretations, variability in inflation rates, changes in workers’ compensation and general liability premiumsand deductibles, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurancecarriers, and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to ensurewe maintain adequate levels of coverage.Legal ProceedingsFrom time to time, we are involved in various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While theoutcomes of these matters are generally not presently determinable, we do not believe that any of these proceedings, individually or in the aggregate, wouldbe expected to have a material adverse effect on our financial position, results of operations or cash flows.Intellectual PropertyWe possess proprietary knowledge and software programs, as well as registered trademarks that are important to our businesses. We make, and willcontinue to make, efforts to protect our intellectual property rights; however, the actions taken by us may be inadequate to prevent others from using similarintellectual property. In addition, third parties may assert claims against our use of intellectual property and we may be unable to successfully resolve suchclaims.Available informationOur internet website address is www.selectinteriorconcepts.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through ourwebsite as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our Code of Business Conduct and Ethics and thecharters of the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board of Directors are also posted on our website. Eachof these documents is also available in print to any stockholder who requests it. 5 Item 1A. Risk Factors.Risks Related to Our Business and IndustryThe industry in which we operate is dependent upon the U.S. residential homebuilding industry, repair and remodel activity, the economy, the creditmarkets, and other important factors, many of which are beyond our control.The building products supply and services industry in the United States is highly dependent on new home construction and the repair & remodel(which we refer to as “R&R”) market, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates,wage rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, local zoning and permitting processes, the availability ofconstruction financing and the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence,health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which weoperate and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes and adversely affect ourbusinesses.The U.S. homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The downturn in thehomebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on ourbusinesses during that time. There is significant uncertainty regarding the timing and extent of recovery in home construction and R&R activity andresulting product demand levels, and any decline may materially adversely affect our businesses, financial condition, operating results, and cash flows. Forexample, some analysts project that the demand for residential construction may be negatively impacted as the number of renting households has increasedin recent years and a shortage in the supply of affordable housing is expected to result in lower home ownership rates. Further, even if homebuilding activityfully recovers, the impact of such recovery on our businesses may be dampened if the average selling price or average size of new single-family homesdecreases, which could cause homebuilders to decrease spending on our products and services.We also rely on home R&R activity. High unemployment levels, high mortgage delinquency and foreclosure rates, lower home prices, limitedavailability of mortgage and home improvement financing, and significantly lower housing turnover may restrict consumer spending, particularly ondiscretionary items such as home improvement projects, and affect consumer confidence levels leading to reduced spending in the R&R end market.Furthermore, with even a slight decline in the economy, nationally or in any of the markets in which we operate, consumer preferences and purchasingpractices and the strategies of our customers may adjust in a manner that could result in changes to the nature and prices of products demanded by the endconsumer and our customers and could adversely affect our businesses and results of operations.In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of creditquality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to atighter credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders, as well as for thedevelopment of new residential lots, continue to be constrained compared to pre-2007 levels. As the housing industry is dependent upon the economy aswell as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, the housing industry may not fully recover topre-2007 levels. Prolonged weakness or another downturn in the homebuilding industry would have a significant adverse effect on our businesses, financialcondition, and results of operations.6 A significant portion of our, and in particular RDS’, business is in the state of California. A slowdown in the economy or a decline in homebuilding activityin California, or the occurrence of a natural disaster, could have a disproportionately negative effect on our business, financial condition, operatingresults, and cash flows.A significant portion of RDS’ business is in the state of California. In 2018 and 2017, we derived approximately 51% and 63%, respectively, of ourconsolidated net revenue, and RDS derived approximately 78% and 98%, respectively, of its net revenue, from customers in California. We expect that asignificant portion of our and RDS’ revenue will continue to depend on sales within the State of California for the foreseeable future. As such, we are moresusceptible to adverse developments in California than competitors with more diversified operations or if RDS had a more geographically diverse business. Aslowdown in the economy, or a decline in homebuilding activity, in California could have a disproportionately negative effect on our business, financialcondition, operating results and cash flows. In addition, California has historically been at greater risk of certain natural disasters and other risks, such asearthquakes, wildfires, droughts, mudslides, and civil disturbances. At times, these events have disrupted parts or all of the California economy.A significant decline in the general economy or the new home construction or R&R markets, and/or a deterioration in expectations regarding thehomebuilding market, could cause us to record significant non-cash impairment charges, which could negatively affect our earnings and reducestockholders’ equity.A significant decline in the general economy or the new home construction or R&R markets, and/or a deterioration in expectations regarding thehomebuilding market, could cause us to record significant non-cash, pre-tax impairment charges for goodwill or other long-lived assets, which are notdeterminable at this time and which could negatively affect our earnings and reduce stockholders’ equity. In addition, as a result of our acquisition strategy,we have recorded goodwill and may incur impairment charges in connection with prior and future acquisitions. If the value of goodwill or other intangibleassets is impaired, our earnings and stockholders’ equity would be adversely affected.Our businesses are cyclical and significantly affected by changes in general and local economic conditions.The building products supply and services industry is subject to cyclical market pressures. Demand for our products and services is highly sensitiveto general and local economic conditions over which we have no control, including changes in: •the number of new home and commercial building construction starts; •the production schedules of our homebuilder customers; •short- and long-term interest rates; •inflation; •employment levels and job and personal income growth; •housing demand from population growth, household formation and other demographic changes; •availability and pricing of mortgage financing for homebuyers and commercial financing for developers of multi-family homes and sub-contractors; •consumer confidence generally and the confidence of potential homebuyers in particular; •U.S. and global financial and political system and credit market stability; •private party and government mortgage loan programs and federal and state regulation, oversight and legal action regarding lending,appraisal, foreclosure and short sale practices; •federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, realestate taxes and other expenses; •federal, state and local energy efficiency programs, regulations, codes and standards; and •general economic conditions in the markets in which we compete.7 Unfavorable changes in these conditions could adversely affect consumer spending, result in decreased demand for homes, and adversely affect ourbusinesses generally. Any deterioration in economic conditions or increased uncertainty regarding economic conditions could have a material adverse effecton our businesses, financial condition, results of operations, and prospects.The building products supply and services industry is seasonal and affected by weather-related conditions.Our industry is seasonal. Seasonal changes and other weather-related conditions can adversely affect our businesses and operations through a declinein both the use of our products and demand for our services. Although weather patterns affect our operating results throughout the year, our first and fourthquarters have historically been, and are generally expected to continue to be, the most adversely affected by weather patterns in some of our markets, causingreduced construction activity. To the extent that severe weather conditions, such as unusually prolonged cold conditions, hurricanes, severe storms,earthquakes, floods, fires, droughts, other natural disasters or similar events occur in the markets in which we operate, construction or installation activitycould be reduced, delayed or halted and our businesses may be adversely affected.In addition, the levels of fabrication, distribution, and installation of our products generally follow activity in the construction industry, whichtypically occurs in the spring, summer and fall. Warmer and drier weather during the second and third quarters typically result in higher activity and revenuelevels during those quarters. Markets in which we operate that are impacted by winter weather, such as snow storms and extended periods of rain, experience aslowdown in construction activity during the beginning and the end of each calendar year, and this winter slowdown contributes to traditionally lower salesin our first and fourth quarters.Our industry and the markets in which we operate are highly fragmented and competitive, and increased competitive pressure may adversely affect ourbusinesses, financial condition, results of operations, and cash flows.The building products supply and services industry is highly fragmented and competitive. We face significant competition from local, regional andnational building materials chains, design centers, fabricators, and sub-contractors, as well as from privately-owned single-site enterprises. Competition variesdepending on product line, type of customer and geographic area. Any of these competitors may (i) foresee the course of market development more accuratelythan we do, (ii) offer products and services that are deemed superior to ours, (iii) have the ability to produce or supply similar products and services at a lowercost, (iv) install building products at a lower cost, (v) develop stronger relationships with suppliers, fabricators, homebuilders, and other customers in ourmarkets, (vi) develop a superior network of distribution centers in our markets, (vii) adapt more quickly to new technologies, new installation techniques, orevolving customer requirements, or (viii) have access to financing on more favorable terms than we can obtain. As a result, we may not be able to competesuccessfully with our competitors. In addition, home center retailers, which have historically concentrated their sales efforts on retail consumers and smallcontractors, may in the future intensify their marketing efforts to professional homebuilders. Furthermore, certain product manufacturers sell and distributetheir products directly to production homebuilders. The volume of such direct sales could increase in the future. Additionally, manufacturers and specialtydistributors who sell products to us may elect to sell and distribute directly to homebuilders in the future or enter into exclusive supplier arrangements withother distributors. Consolidation of production homebuilders may result in increased competition for their business. Finally, we may not be able to maintainour operating costs or product prices at a level sufficiently low for us to compete effectively. If we are unable to compete effectively, our financial condition,results of operations, and cash flows may be adversely affected.Our customers consider the performance and quality of the products we distribute, our customer service and price when deciding whether to use ourservices or purchase the products we distribute. Excess industry capacity for certain products in several geographic markets could lead to increased pricecompetition. We may be unable to maintain our operating costs or product prices at a level that is sufficiently low for us to compete effectively. If we areunable to compete effectively with our existing competitors or new competitors enter the markets in which we operate, our financial condition, results ofoperations, and cash flows may be adversely affected.8 Furthermore, in the event that increased demand leads to higher costs for the products we install, we may have limited, if any, ability to pass on costincreases in a timely manner or at all due to the fragmented and competitive nature of our industry, which may lead to an adverse effect on our financialcondition, results of operations, and cash flows.We are exposed to warranty, casualty, construction defect, contract, tort, employment and other claims, and legal proceedings related to our businesses,the products we distribute, the services we provide, and services provided for us by third parties.In the ordinary course of business, we are subject to various claims and litigation. Any such claims, whether with or without merit, could be timeconsuming and expensive to defend and could divert management’s attention and resources. As a sub-contractor, we are regularly subject to constructiondefects claims on various housing tracts. We may not always be able to successfully defend or be excused from the lawsuits related to these claims and couldbe subject to substantial losses.We are also from time to time subject to casualty, contract, tort and other claims relating to our businesses, the products we have distributed in thepast or may in the future distribute, and the services we have provided in the past or may in the future provide, either directly or through third parties. If anysuch claim were adversely determined, our financial condition, results of operations, and cash flows could be adversely affected if we were unable to seekindemnification for such claims or were not adequately insured for such claims. We rely on manufacturers and other suppliers to provide us with the productswe sell or distribute. Since we do not have direct control over the quality of products that are manufactured or supplied to us by third-parties, we areparticularly vulnerable to risks relating to the quality of such products.In addition, we are exposed to potential claims arising from the conduct of our employees, builders and their sub-contractors, and third-partyinstallers for which we may be liable. We and they are subject to regulatory requirements and risks applicable to general contractors, which includemanagement of licensing, permitting and quality of third-party installers. As they apply to our businesses, if we fail to manage these processes effectively orprovide proper oversight of these services, we could suffer lost sales, fines and lawsuits, as well as damage to our reputation, which could adversely affect ourbusinesses and results of operations.Furthermore, claims and investigations may arise related to distributor relationships, commercial contracts, antitrust or competition law requirements,employment matters, employee benefits issues and other compliance and regulatory matters, including anti-corruption and anti-bribery matters. While wehave processes and policies designed to mitigate these risks and to investigate and address such claims as they arise, we cannot predict or, in some cases,control the costs to defend or resolve such claims.Although we believe we currently maintain suitable and adequate insurance, there can be no assurance that we will be able to maintain suchinsurance on acceptable terms or that such insurance will provide adequate protection against potential liabilities, and the cost of any warranty, casualty,construction defect, contract, tort, employment or other litigation or other proceeding, even if resolved in our favor, could be substantial. Additionally, we donot carry insurance for all categories of risk that our businesses may encounter. Any significant uninsured liability may require us to pay substantial amounts.Warranty, casualty, construction defect, contract, tort, employment and other claims can be expensive to defend and can divert the attention of managementand other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customerconfidence in our products and us. There can be no assurance that any current or future claims will not adversely affect our financial position, cash flows, orresults of operations.9 Product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, our dependence on third-party suppliers andmanufacturers, or the development of alternatives to distributors in the supply chain, could adversely affect our businesses, financial condition, results ofoperations, and cash flows.Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturersand other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities to meet our operating needs. However, the loss of,or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our businesses,financial condition, results of operations, and cash flows. In prior downturns in the housing industry, manufacturers have reduced capacity by closing plantsand production lines within plants. Even if such capacity reductions are not permanent, there may be a delay in manufacturers’ ability to increase capacity intimes of rising demand. If the demand for products from manufacturers and other suppliers exceeds the available supply, we may be unable to sourceadditional products in sufficient quantity or quality in a timely manner and the prices for the products that we install could rise. These developments couldaffect our ability to take advantage of market opportunities and limit our growth prospects.Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and our need toaccess products in a timely and efficient manner is a significant challenge. Our ability to access products also can be adversely affected by the financialinstability of suppliers, suppliers’ non-compliance with applicable laws, tariffs and import duties, supply disruptions, shipping interruptions or costs, andother factors beyond our control. The loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplierarrangements could adversely impact our financial condition, results of operations, and cash flows.Although in some instances we have agreements with our suppliers, these agreements are generally terminable by either party without notice or onlimited notice. Many of our suppliers also offer us favorable terms based on the volume of our purchases. If market conditions change, suppliers may stopoffering us favorable terms. Failure by our suppliers to continue to supply us with products on favorable terms, commercially reasonable terms, or at all, couldput pressure on our operating margins or have a material adverse effect on our financial condition, results of operations, and cash flows.In addition, our larger customers, such as homebuilders, fabricators, and dealers, could begin purchasing more of their product needs directly frommanufacturers, which would result in decreases in our net sales and earnings. Our suppliers could invest in infrastructure to expand their own sales forces andsell more products directly to our customers, which also would negatively impact our businesses. These changes in the supply chain could adversely affectour financial condition, results of operations, and cash flows.A material disruption at one of our suppliers’ facilities or loss of a supplier relationship could prevent us from meeting customer demand, reduce our salesand negatively affect our overall financial results.Any of the following events could cease or limit operations unexpectedly: fires, floods, earthquakes, hurricanes, on-site or off-site environmentalincidents or other catastrophes; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; or war, acts of terrorism orother unexpected events. Any downtime or facility damage at our suppliers could prevent us from meeting customer demand for our products or require us tomake more expensive purchases from a competing supplier. If our suppliers were to incur significant downtime, our ability to satisfy customer requirementscould be impaired, resulting in customers seeking products from other distributors as well as decreased customer satisfaction and lower sales and operatingincome. In addition, a loss of a supplier relationship could harm our operations. Because we purchase from a limited number of suppliers, the effects of anyparticular shutdown or facility damage or loss of a supplier relationship could be significant to our operations.In addition, our suppliers’ inability to produce or procure the necessary raw materials to supply finished goods to us may adversely impact our resultsof operations, cash flows, and financial position.10 If we fail to qualify for supplier rebates or are unable to maintain or adequately renegotiate our rebate arrangements, our gross margins and income couldbe adversely affected.Many of our products, such as flooring, tile and finish carpentry, are purchased pursuant to rebate arrangements that entitle us to receive a rebatebased on the volume of our purchases. Such arrangements generally require us to purchase minimum quantities in certain geographies or product categoriesand result in higher rebates with increased quantities of purchases. These rebates effectively reduce the costs of our products and we manage our businesses totake advantage of these programs. When assessing the desirability of acquisitions, we consider the effects of such acquisitions on our ability to qualify forrebates. Rebate arrangements are subject to renegotiation with our suppliers from time to time. In addition, consolidation of suppliers may result in thereduction or elimination of rebate programs in which we participate. If we are unable to qualify for these rebates, are unable to renew rebate programs ondesirable terms or are unable to obtain the expected rebate benefits of our acquisitions, or a supplier materially reduces or stops offering rebates, our costscould increase and our gross margins and income could be adversely affected.Changes in product mix or the costs of the products we install can decrease our profit margins.The principal building products that we distribute and install have been subject to price changes in the past, some of which have been significant.Our operating results for individual quarterly periods can be, and have been, adversely affected by a delay between when building product cost increases areimplemented and when we are able to increase prices for our products and services, if at all. Our supplier purchase prices often depend on volumerequirements. If we do not meet these volume requirements, our costs could increase and our margins may be adversely affected. In addition, while we havebeen able to achieve cost savings through volume purchasing and our relationships with suppliers, we may not be able to continue to receive advantageouspricing for the products that we supply, which could have a material adverse effect on our financial condition, results of operations, and cash flows.Our profitability is also impacted by the mix of products that we install. There can be no assurance that the current product mix will continue, andany shift to options with lower profit margin could adversely impact our businesses, financial condition, results of operations, and cash flows.Political and economic uncertainty and unrest in foreign countries where our suppliers are located could adversely affect our operating results.In 2018, approximately 34% and 14% of ASG’s revenue came from products that were obtained directly from suppliers located in Vietnam andChina, respectively. We are subject to risks and uncertainties associated with changing economic and political conditions in these or other foreign countriesin which we source, or in the future may source, any of our products, such as: •increased import duties, tariffs, trade restrictions, and quotas; •work stoppages; •economic uncertainties (including inflation); •adverse foreign government regulations, government control, or sudden changes in laws and regulations; •wars, fears of war, and terrorist attacks; and •organizing activities and political unrest.We cannot predict if, when, or the extent to which, the countries in which we source our products will experience any of the above events. Any eventcausing a disruption, delay or cessation of imports from foreign locations would likely increase the cost or reduce the supply of products available to us, andcause us to seek alternative sources for our products, which may only be available on less advantageous terms, and would adversely affect our operatingresults.11 The importation of building materials into the United States could expose us to additional risk.A significant portion of the building materials that we distribute and/or install come from foreign jurisdictions outside North America. Such materialsmay be imported because they may not be available for domestic purchase in the United States or because there may be a shortfall of inventory availablelocally. Despite our efforts to ensure the merchantability of these products, such products may not adhere to U.S. standards or laws. In addition, pricing ofthese products can be impacted by changes to the relative value of the U.S. dollar over the applicable foreign currency in the long-term, which couldnegatively impact our margins. Importation of such building materials could subject us to greater risk, including currency risk, and lawsuits by customers orgovernmental entities.We may be unable to effectively manage our inventory and working capital as our sales volume increases or the prices of the products we distributefluctuate, which could have a material adverse effect on our businesses, financial condition, and results of operations.We purchase certain materials, including wood and laminate flooring, natural and engineered stone, tile for wall and flooring applications, glass forshower enclosures and mirrors, millwork, and interior doors, from manufacturers or quarries, which are then sold to customers as an installed product or as aprefabricated and installed product. We must maintain and have adequate working capital to purchase sufficient inventory to meet customer demand. Due tothe lead times required by our suppliers, we order products in advance of expected sales. As a result, we are required to forecast our sales and purchaseaccordingly. In periods characterized by significant changes in economic growth and activity in the commercial and residential construction and home R&Rend markets, it can be especially difficult to forecast our sales accurately. We must also manage our working capital to fund our inventory purchases.Excessive increases in the market prices of certain products can put negative pressure on our operating cash flows by requiring us to invest more in inventory.In the future, if we are unable to effectively manage our inventory and working capital as we attempt to expand our businesses, or if we make changes to howwe manage our payments to suppliers, our cash flows may be negatively affected, which could have a material adverse effect on our businesses, financialcondition, and results of operations.We are subject to significant pricing pressures from homebuilders, contractors, fabricators, dealers and other customers.Large homebuilders, contractors, fabricators, and dealers have historically been able to exert significant pressure on their outside suppliers anddistributors to keep prices low in the highly fragmented building products supply and services industry. In addition, continued consolidation in theresidential homebuilding industry and changes in builders’ purchasing policies and payment practices could result in even further pricing pressure. Forexample, there has been a recent trend of large publicly-traded homebuilders acquiring other large homebuilders, which increases their market share andbuying power. Our homebuilder customers may be acquired by other homebuilders that we do not currently have relationships with, which may make itdifficult for us to maintain our current market share and margins. A decline in the prices of the products we distribute and the services we provide couldadversely impact our operating results. When the prices of our products and services decline, customer demand for lower prices could result in lower salesprices and, to the extent that our inventory at the time was purchased at higher costs, lower margins. Alternatively, due to the rising market priceenvironment, our suppliers may increase prices or reduce discounts on the products we distribute and we may be unable to pass on any cost increase to ourcustomers, thereby resulting in reduced margins and profits. Overall, these pricing pressures may adversely affect our results of operations, and cash flows.The loss of any of our significant customers or a reduction in the quantity of products they purchase could affect our financial health.Our ten largest customers generated approximately 36% of our consolidated revenue for the year ended December 31, 2018. In addition, in 2018, onecustomer accounted for approximately 11% of our total revenue. We cannot guarantee that we will maintain or improve our relationships with thesecustomers or that we will continue to supply these customers at historical levels. Due to the weak housing market over the past several years relative to long-term averages, many of our homebuilder and fabricator customers substantially reduced their construction activity. Some homebuilder customers exited orseverely curtailed building activity in certain of our markets. In the future, additional homebuilder customers may exit or decrease their building activity inone or more of our markets. Our historically high rate of customer retention is not necessarily indicative of our future customer retention.12 In addition, homebuilders and other customers may: (i) purchase some of the products that we currently sell and distribute directly frommanufacturers; (ii) elect to establish their own building products manufacturing, fabrication, distribution, and/or installation facilities; or (iii) giveadvantages to manufacturing, fabrication, distribution, and/or installation intermediaries in which they have an economic stake. Continued consolidationamong homebuilders could also result in a loss of some of our present customers to our competitors. The loss of one or more of our significant customers ordeterioration in our existing relationships with any of our customers could adversely affect our financial condition, results of operations, and cash flows.Furthermore, our customers are not required to purchase any minimum amount of product from us. Should our customers purchase the products wedistribute or install in significantly lower quantities than they have in the past, or should the customers of any business that we acquire purchase productsfrom us in significantly lower quantities than they had prior to our acquisition of such business, such decreased purchases could have a material adverseeffect on our financial condition, results of operations, and cash flows.In an attempt to diversify and expand its customer base, RDS may target smaller homebuilders. This exposes RDS to additional risks, such asincreased non-payment risk of those customers, especially during times of economic uncertainty and tight credit markets.RDS’ customers may be affected by shortages in labor supply, increased labor costs or labor disruptions, which could have a material adverse effect on ourfinancial condition, results of operations, and cash flows.Our customers require a qualified labor force to build homes and communities, and we require a qualified labor force to install our products in thosehomes. Access to qualified labor and sub-contractors by our customers and us may be affected by circumstances beyond their or our control, including: •shortages of qualified trades people, such as flooring, tile and cabinet installers, carpenters, roofers, electricians and plumbers, especially inkey markets; •changes in immigration laws and trends in labor force migration; and •increases in sub-contractor and professional services costs.Labor shortages can be further exacerbated if demand for housing increases. Any of these circumstances could also give rise to delays in the start orcompletion of, or could increase the cost of, building homes. Such delays and cost increases would also have an effect on our ability to generate sales fromhomebuyers and could have a material adverse effect on our businesses, financial condition, results of operations, and cash flows.Our backlog estimates for our RDS segment may not be accurate and may not generate expected levels of future revenues or translate into profits.Estimates of future financial results are inherently unreliable. Our backlog estimates of potential future revenue for our RDS segment requiresubstantial judgment and are based on a number of assumptions, including management’s current assessment of customer contracts that exist as of the datethe estimates are made and the expected revenue to be derived from sales related to remaining housing lots to be fulfilled under existing service agreementsfor active residential developments. A number of factors could result in actual revenue being less than the amounts reflected in our estimates, such as upgraderates or upgrade amounts being lower than expected, or modification or cancellation of contracts by homebuilders. Actual rates and amounts may differ fromhistorical experiences used to estimate potential future revenue. Accordingly, there can be no assurance that we will actually generate the specified revenueor that the actual revenue will be generated within the estimated period. If such revenue fails to materialize, we could experience a reduction in revenue and adecline in profitability, which could result in a deterioration of our financial position and liquidity.13 We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers,the demand for our products and services and our market share.It is difficult to predict successfully the products and services our customers will demand. The success of our businesses depends in part on our abilityto identify and respond promptly to changes in demographics, consumer preferences, expectations, needs and weather conditions, while also managinginventory levels. For example, a significant portion of the product that we distribute is natural stone. If a natural stone product becomes unavailable for anyreason or the color and quality changes within the quarry we purchase from, we may not be able to replace that particular color or quality with an acceptablealternative. In general, the products we sell are affected by style trends, customer preferences and changes thereto. Failure to identify timely or effectivelyrespond to changing consumer preferences, expectations, and building product needs could possibly result in obsolete or devalued inventory, and adverselyaffect our relationship with customers, the demand for our products and services, and our market share.The success of our businesses depends, in part, on our ability to execute on our growth strategy, which includes opening new branches and pursuingstrategic acquisitions.Our long-term business strategy depends in part on increasing our sales and growing our market share through opening new branches, includingthrough our greenfield initiatives, and strategic acquisitions. A significant portion of our historical growth has occurred through acquisitions, and ourbusiness plan provides for continued growth through acquisitions in the future. We are presently evaluating, and we expect to continue to evaluate on anongoing basis, a variety of possible acquisition transactions, including both smaller acquisitions and larger acquisitions that would be material. We regularlymake, and we expect to continue to make, acquisition proposals, and we may enter into letters of intent for acquisitions. We cannot predict the timing of anycontemplated transactions, and there can be no assurances that we will identify suitable acquisition opportunities or, if we do identify such opportunities,that any transaction can be consummated on acceptable terms. We may be unable to continue to grow our businesses through acquisitions. In addition, thepast performance or size of our greenfield investments is not necessarily indicative of future performance or investment size. Furthermore, significant changesin our businesses or the economy, an unexpected decrease in our cash flows, or any restrictions imposed by our debt may limit our ability to obtain thenecessary capital for acquisitions or otherwise impede our ability to complete an acquisition. Our recent growth and our acquisition strategy have placed, andwill continue to place, significant demands on our management’s time, which may divert their attention from our businesses, and may lead to significant duediligence and other expenses regardless of whether we pursue or consummate any acquisition. Failure to identify suitable transaction partners and toconsummate transactions on acceptable terms, as well as the commitment of time and resources in connection with such transactions, could have a materialadverse effect on our businesses, financial condition, and results of operations.To a large extent, our growth strategy depends on RDS and ASG forming a strong, scalable platform. Our platform was formed in November 2017 andcontinues to be developed. There can be no assurance that we will be able to implement this platform across all, if any, markets, products and services wherewe currently plan to grow.Our acquisition strategy exposes us to significant risks and additional costs.In the last two years, we have completed eight acquisitions, and we continue to evaluate further possible acquisitions on an ongoing basis.Acquisitions also involve risks that the business acquired will not perform as expected and that business judgments concerning the value, strengths andweaknesses of the acquired business will prove incorrect. We may not accurately assess the value, strengths, weaknesses or potential profitability of anacquisition target. We may become liable for certain pre-acquisition liabilities of an acquired business, including, among others, tax liabilities, productliabilities, asbestos liabilities, environmental liabilities, pension liabilities and liabilities for employment practices, and these liabilities could be significant.In addition, an acquisition could result in the impairment of customer relationships or certain acquired assets such as inventory and goodwill. We may alsoincur costs and inefficiencies to the extent an acquisition expands the industries, products, markets or geographies in which we operate due to our limitedexposure to and experience in a given industry, market or region. Acquisitions can also involve post-transaction disputes with the counterparty regarding anumber of matters, including a purchase price, inventory or other working capital adjustment, environmental liabilities, or pension obligations. If any ofthese risks were to occur, our financial position, results of operations, and cash flows may be adversely affected.14 In addition, if we finance acquisitions by issuing our equity securities or securities convertible into our equity securities, our existing stockholderswould be diluted, which, in turn, could adversely affect the market price of our Class A Common Stock. We could also finance an acquisition with debt,resulting in higher leverage and interest costs relating to the acquisition. As a result, if we fail to evaluate and execute acquisitions efficiently, we may notultimately experience the anticipated benefits of the acquisitions, and we may incur costs that exceed our expectations.Any inability to successfully integrate our recent or future acquisitions could have a material adverse effect on us.Acquisitions typically require integration of the acquired companies’ sales and marketing, distribution, purchasing, finance and administrativefunctions, as well as exposure to different legal and regulatory regimes in jurisdictions in which we have not previously operated. We may not be able tointegrate successfully any business we acquire into our existing business or may not be able to do so in a timely, efficient and cost-effective manner. Ourinability to complete the integration of new businesses in a timely and orderly manner could increase costs and lower profits. Factors affecting the successfulintegration of acquired businesses include, but are not limited to, the following: •our inability to manage acquired businesses or control integration costs and other costs relating to acquisitions; •diverting the attention of our management and that of the acquired business; •merging or linking different accounting and financial reporting systems and systems of internal controls; •merging computer, technology and other information networks and systems; •assimilating personnel, human resources and other administrative departments and potentially contrasting corporate cultures; •failure to retain existing key personnel of the acquired businesses and recruit qualified new employees at new locations; •disrupting our relationship with, or loss of, key customers or suppliers; •incurring or guaranteeing additional indebtedness; •interfering with, or loss of momentum in, our ongoing business or that of the acquired company; and •delays or cost-overruns in the integration process.Any of these acquisition or other integration-related issues could divert management’s attention and resources from our day-to-day operations, causesignificant disruption to our businesses, and lead to substantial additional costs. Our inability to realize the anticipated benefits of an acquisition or tosuccessfully integrate acquired companies as well as other transaction-related issues could have a material adverse effect on our businesses, financialcondition, and results of operations.In addition, possible future acquisitions or dispositions may trigger a review by the U.S. Department of Justice, the U.S. Federal Trade Commission,and/or the State Attorneys General under their respective regulatory authority, focusing on the effects on competition, including the size or structure of therelevant markets and the pro-competitive benefits of the transaction. Any delay, prohibition or modification required by regulatory authorities couldadversely affect the terms of a proposed acquisition or could require us to modify or abandon an otherwise attractive acquisition opportunity.15 We may be subject to claims or liabilities arising from the operations of our various businesses for periods prior to the dates we acquired them, includingenvironmental, employee-related and other claims and liabilities not covered by insurance. These claims or liabilities could be significant.We may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for the periods prior to our acquisition ofthem, including environmental, employee-related and other liabilities and claims not covered by insurance. These claims or liabilities could be significant.Our ability to seek indemnification from the former owners of our acquired businesses for these claims or liabilities may be limited by various factors,including the specific time, monetary or other limitations contained in the respective acquisition agreements and the financial ability of the former owners tosatisfy our indemnification claims. In addition, insurance companies may be unwilling to cover claims that have arisen from acquired businesses or locations,or claims may exceed the coverage limits that our acquired businesses had in effect prior to the date of acquisition. If we are unable to successfully obtaininsurance coverage of third-party claims or enforce our indemnification rights against the former owners, or if the former owners are unable to satisfy theirobligations for any reason, including because of their current financial position, we could be held liable for the costs or obligations associated with suchclaims or liabilities, which could adversely affect our financial condition and results of operations.We cannot assure you that we will achieve synergies and cost savings in connection with prior or future acquisitions.We may not achieve anticipated cost savings in connection with prior or future acquisitions within the anticipated time frames or at all. In addition,our operating results from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or otherlong-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially adversely affect our results of operations,financial condition, stockholders’ equity, and cash flows.We may not be able to expand into new geographic markets, which may impact our ability to grow our businesses.We intend to continue to pursue our growth strategy to expand into new geographic markets for the foreseeable future. Our expansion into newgeographic markets may present competitive, distribution and other challenges that differ from the challenges we currently face. In addition, we may be lessfamiliar with the customers in these markets and may ultimately face different or additional risks, as well as increased or unexpected costs, compared to thosewe experience in our existing markets. We may also be unfamiliar with the labor force in these markets and may have difficulty finding and retainingnecessary skilled or qualified workers on acceptable terms, or at all. Expansion into new geographic markets may also expose us to direct competition withcompanies with whom we have limited or no past experience as competitors. Furthermore, some of our customer and supplier agreements may restrict themarkets where we are able to distribute certain products, and these limitations could negatively impact our ability to achieve success in new markets. To theextent we rely upon expanding into new geographic markets and do not meet, or are unprepared for, any new challenges posed by such expansion, our futuresales growth could be negatively impacted, our operating costs could increase, and our businesses, operations, and financial results could be negativelyaffected.We occupy many of our facilities under long-term non-cancellable leases, and we may be unable to renew our leases at the end of their terms.Many of our facilities and distribution centers are located on leased premises. Many of our current leases are non-cancellable and typically haveinitial terms ranging from one to 12 years, and most provide options to renew for specified periods of time. We believe that leases we enter into in the futurewill likely be long-term and non-cancellable and have similar renewal options. If we close or idle a facility, we would most likely remain committed toperform our obligations under the applicable lease, which would include, among other things, payment of the base rent, insurance, taxes and other expenseson the leased property for the balance of the lease term. The inability to terminate leases when idling a facility or exiting a geographic market can have asignificant adverse impact on our financial condition, results of operations, and cash flows.16 In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost,if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks,which in turn could have a material adverse effect on our businesses and results of operations. In addition, we may not be able to secure a replacement facilityin a location that is as commercially viable, including easy access to transportation and shipping, as the lease we are unable to renew. For example, closing afacility, even during the time of relocation, will reduce the sales that the facility would have contributed to our net revenue. Additionally, the net revenueand profit, if any, generated at a relocated facility may not equal the net revenue and profit generated at the existing one.Natural or man-made disruptions to our facilities may adversely affect our businesses and operations.We currently maintain a broad network of distribution facilities throughout the United States. Any widespread disruption to our facilities or those ofour suppliers resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could damage a significant portion of our facilitiesand inventory and could materially impair our ability to distribute our products to customers. We could incur significantly higher costs and longer lead timesassociated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition, anyshortages of fuel or significant fuel cost increases could disrupt our ability to distribute products to our customers. Disruptions to the national or localtransportation infrastructure systems, including those related to a domestic terrorist attack, may also affect our ability to keep our operations and servicesfunctioning properly. If any of these events were to occur, our financial condition, results of operations, and cash flows could be materially adverselyaffected.Anti-terrorism measures and other disruptions to the transportation network could impact our distribution system and our operations.Our ability to efficiently distribute products to our customers is an integral component of our overall business strategy. In the aftermath of terroristattacks in the United States, federal, state and local authorities have implemented and continue to implement various security measures that affect many partsof the transportation network in the United States. Our customers typically need quick delivery and rely on our on-time delivery capabilities. If securitymeasures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers or may incur increased expenses to do so.The implementation of new initiatives related to our operating software systems and related technology could disrupt our operations, and these initiativesmight not provide the anticipated benefits or might fail.We have made, and we plan to continue to make, significant investments in our operating software systems and related technology. These initiativesare designed to streamline our operations to allow our employees to continue to provide high quality service to our customers, while simplifying customerinteraction and providing our customers with a more interconnected purchasing experience. The cost and potential problems and interruptions associatedwith the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-based tools andservices, could disrupt or reduce the efficiency of our operations. In the event that we grow very rapidly, there can be no assurance that we will be able tokeep up, expand or adapt our IT infrastructure to meet evolving demand on a timely basis and at a commercially reasonable cost, or at all. In addition, ournew and upgraded technology might cost more than anticipated or might not provide the anticipated benefits, or it might take longer than expected to realizethe anticipated benefits or the initiatives might fail altogether. Because the success of our growth strategy depends in part on our IT infrastructure, problemswith any related initiatives may adversely affect our businesses, operations, and results of operations.17 We are subject to cybersecurity risks, and a disruption or breach of our IT systems could adversely impact our businesses and operations.We rely on the accuracy, capacity and security of our IT systems, some of which are managed or hosted by third parties, and our ability to continuallyupdate these systems in response to the changing needs of our businesses. We have incurred costs and may incur significant additional costs in order toimplement security measures that we feel are appropriate to protect our IT systems. Our security measures are focused on the prevention, detection andremediation of damage from computer viruses, natural or man-made disasters, unauthorized access, cyberattacks and other similar disruptions. Despite oursecurity measures, our IT systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or otherdisruptions. Any attacks on our IT systems could result in our systems or data being breached or damaged by computer viruses or unauthorized physical orelectronic access, which could lead to delays in receiving inventory and supplies or filling customer orders, and adversely affect our customer service andrelationships. Such a breach could result in not only business disruption, but also theft of our intellectual property or other competitive information orunauthorized access to controlled data and any personal information stored in our IT systems. To the extent that any data is lost or destroyed, or anyconfidential information is inappropriately disclosed or used, it could adversely affect our competitive position or customer relationships. In addition, anysuch access, disclosure or other loss of information could result in legal claims or proceedings, damage our reputation, and cause a loss of confidence in ourbusinesses, products and services, which could adversely affect our businesses, financial condition, profitability, and cash flows.To date, we have not experienced a material breach of our IT systems. As cyber-attacks become more sophisticated generally, we may be required toincur significant costs to strengthen our systems from outside intrusions and/or maintain insurance coverage related to the threat of such attacks. While wehave implemented administrative and technical controls and taken other preventive actions to reduce the risk of cyber incidents and protect our IT, they maybe insufficient to prevent physical and electronic break-ins, cyber-attacks, or other security breaches to our computer systems.We depend on key personnel.Our success depends to a significant degree upon the contributions of certain key personnel and other members of our management team, each ofwhom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Further, the process ofattracting and retaining suitable replacements for key personnel whose services we may lose would result in transition costs and would divert the attention ofother members of our senior management from our existing operations. The loss of services from key personnel or a limitation in their availability couldmaterially and adversely impact our businesses, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negativelyperceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance that would provide us with proceeds in the eventof death or disability of any of our key personnel.An inability to attract and retain highly skilled employees could adversely affect our businesses.To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense. We have, from time totime, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications, such as buildtradesmen for finish carpentry and for installation of tile, flooring and cabinets. Many of the companies with which we compete for experienced personnelhave greater resources than us. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employeesor we have breached their legal obligations, resulting in a diversion of our time and resources. If we fail to attract new personnel or fail to retain and motivateour current personnel, our businesses and future growth prospects could be adversely affected.18 RDS’ business and results of operations are significantly dependent on the availability and skill of sub-contractors.We engage sub-contractors to perform the installation of the products that we sell to our customers. Accordingly, the timing and quality of ourinstallations depends on the availability and skill of our sub-contractors. While we believe that our relationships with sub-contractors are good, we generallydo not have long-term contractual commitments with any sub-contractors, and we can provide no assurance that skilled sub-contractors will continue to beavailable at reasonable rates and in our markets. Competition for skilled contractors can be significant in our markets. The inability to contract with skilledsub-contractors at reasonable rates and on a timely basis could have a material adverse effect on our business, results of operations, and financial condition.Despite our quality control efforts, we may discover that our sub-contractors have engaged in improper construction practices or have installeddefective materials in the homes of our customers. The adverse costs of satisfying our warranty and other legal obligations in these instances may besignificant and we may be unable to recover the costs of warranty-related repairs from sub-contractors, suppliers and insurers, which could have a materialimpact on our business, results of operations, and financial condition.If any of RDS’ sub-contractors are characterized as employees, we would be subject to employment and withholding liabilities.We structure our relationships with our sub-contractors in a manner that we believe results in an independent contractor relationship, not anemployee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence inproviding services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control isgenerally indicative of an employment relationship. Although we believe that our sub-contractors are properly characterized as independent contractors, taxor other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or state, federal or foreigncourts were to determine that our sub-contractors are employees, and not independent contractors, we would be required to withhold income taxes, towithhold and pay social security, Medicare and similar taxes, and to pay unemployment and other related payroll taxes. We would also be liable for unpaidpast taxes and subject to penalties. As a result, any determination that our sub-contractors are our employees could have a material adverse effect on ourbusiness, financial condition, and results of operations.Changes in employment laws may adversely affect our businesses.Various federal and state labor laws govern the relationship with our employees and impact operating costs. These laws include: •employee classification as exempt or non-exempt for overtime and other purposes; •minimum wage requirements; •unemployment tax rates; •workers’ compensation rates; •immigration status; •mandatory health benefits; •paid leaves of absence, including paid sick leave; •tax reporting; and •other wage and benefit requirements.Significant additional government-imposed increases in the preceding areas could have a material adverse effect on our businesses, financialcondition, and results of operations.19 In addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and, fromtime to time, the U.S. Congress and Department of Homeland Security consider and implement changes to federal immigration laws, regulations orenforcement programs. These changes may increase our compliance and oversight obligations, which could subject us to additional costs and make ourhiring process more cumbersome or reduce the availability of potential employees. Although we take steps to verify the employment eligibility status of allour employees, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and maysubject us to fines or penalties and, if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts ourbrand and may make it more difficult to hire and retain qualified employees. Termination of a significant number of employees who were unauthorizedemployees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. Wecould also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal andstate immigration laws. These factors could have a material adverse effect on our businesses, financial condition, and results of operations.Federal, state, local and other regulations could impose substantial costs and/or restrictions on our operations that would reduce our net income.We are subject to various federal, state, local and other laws and regulations, including, among other things, transportation regulations promulgatedby the U.S. Department of Transportation (which we refer to as the “DOT”), work safety regulations promulgated by the Occupational Safety and HealthAdministration (which we refer to as “OSHA”), employment regulations promulgated by the U.S. Equal Employment Opportunity Commission, regulations ofthe U.S. Department of Labor, accounting standards issued by the Financial Accounting Standards Board or similar entities, and state and local zoningrestrictions, building codes and contractors’ licensing regulations. More burdensome regulatory requirements in these or other areas may increase our generaland administrative costs and adversely affect our financial condition, results of operations, and cash flows. Moreover, failure to comply with the regulatoryrequirements applicable to our businesses could expose us to litigation and substantial fines and penalties that could adversely affect our financial condition,results of operations, and cash flows.Our transportation operations, upon which we depend to distribute products from our distribution centers, are subject to the regulatory jurisdiction ofthe DOT, which has broad administrative powers with respect to our transportation operations. Vehicle dimensions and driver hours of service also are subjectto both federal and state regulation. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service wouldincrease our costs, which, if we are unable to pass these cost increases on to our customers, may increase our selling, general and administrative expenses andadversely affect our financial condition, results of operations, and cash flows. If we fail to comply adequately with the DOT regulations or regulations becomemore stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down ouroperations or we could be subject to increased audit and compliance costs. If any of these events were to occur, our financial condition, results of operations,and cash flows would be adversely affected.In addition, the homebuilding industry is subject to various local, state and federal statutes, ordinances, codes, rules and regulations concerningzoning, building design and safety, construction, energy conservation, environmental protection and similar matters. Regulatory restrictions may increaseour operating expenses and limit the availability of suitable building lots for our customers, which could negatively affect our sales and earnings.Failure to comply with applicable environmental, health and safety laws and regulations could have an adverse effect on our financial condition, resultsof operations, and cash flows.We are subject to a variety of federal, state and local laws and regulations relating to, among other things: the release or discharge of materials intothe environment; the management, use, generation, treatment, processing, handling, storage, transport or disposal of solid and hazardous wastes andmaterials; and the protection of public and employee health and safety and the environment. These laws and regulations impose strict liability in some caseswithout regard to negligence or fault and expose us to liability for the environmental condition of our currently or formerly owned, leased or operatedfacilities, and may expose us to liability for the conduct of others or for our20 actions, even if such actions complied with all applicable laws at the time these actions were taken. These laws and regulations may also expose us toliability for claims of personal injury or property or natural resource damage related to alleged exposure to, or releases of, regulated or hazardous materials.The existence of contamination at properties we own, lease or operate could also result in increased operational costs or restrictions on our ability to usethose properties as intended, including for purposes of construction materials distribution. In addition, because our properties are generally situated adjacentto or near industrial companies, our properties may be at an increased risk of having environmental contaminants from other properties spill or migrate ontoor otherwise affect our properties.Although we believe that we operate our businesses, including each of our locations, in compliance with applicable local environmental laws andregulations, and maintain all material permits required under such laws and regulations to operate our businesses, we may be held liable or incur fines orpenalties in connection with such requirements. While our employees who handle potentially hazardous substances receive specialized training and wearprotective equipment when necessary, there is still a risk that they, or others, may be exposed to these substances. Exposure to these substances could resultin significant injury to our employees and others, including site occupants, and damage to our property or the property of others, including natural resourcedamage. Our personnel and others at our work sites are also at risk for other workplace-related injuries, including slips and falls. In addition, as owners andlessees of real property, we may be held liable for, among other things, hazardous substances on, at, under or emanating from currently or formerly owned oroperated properties, or any off-site disposal locations, or for any known or newly discovered environmental conditions at or relating to any of our properties,including those arising from activities conducted by previous occupants or at adjoining properties, without regard to whether we knew of or were responsiblefor such release. We may be required to investigate, remove, remediate or monitor the presence or release of such hazardous substances. We may also be heldliable for fines, penalties or damages, including for bodily injury, property damage and natural resource damage in connection with the presence or release ofhazardous substances. In addition, expenditures may be required in the future as a result of releases of, or exposure to, hazardous substances, the discovery ofcurrently unknown environmental conditions, or changes in environmental laws and regulations or their interpretation or enforcement, and, in certaininstances, such expenditures may be material.Despite our compliance efforts, there is an inherent risk of liability in the operation of our businesses, especially from an environmental standpoint,and, from time to time, we may be in non-compliance with environmental, health and safety laws and regulations. These potential liabilities or non-compliances could have an adverse effect on our operations and profitability. Our failure to comply with applicable governmental requirements could resultin sanctions, including substantial fines or possible revocation of our authority to conduct some or all of our operations. Future changes in law, resulting instricter laws and regulations, more stringent interpretations of existing laws or regulations or the future discovery of environmental conditions may imposenew liabilities on us, reduce operating hours, require additional investment by us, or impede our ability to open new or expand existing plants or facilities.We have incurred, and may in the future incur, significant capital and operating expenditures to comply with such laws and regulations. The cost ofcomplying with such laws could have a material adverse effect on our financial condition, results of operations, and cash flows.Changes in legislation and government policy may have a material adverse effect on our businesses in the future.The 2016 presidential and congressional elections in the United States have resulted in significant changes in legislation and government policy. Inaddition to the recent reform of the federal tax code, specific legislative and regulatory proposals discussed during and after the election that could have amaterial impact on us include, but are not limited to, modifications to international trade policy and increased regulation. Furthermore, proposals have beendiscussed regarding the imposition of new or additional taxes or tariffs on goods imported from abroad that are used in our businesses or the elimination ofincome tax deductibility of such imported goods. For the year ended December 31, 2018, we purchased an estimated $117.6 million of material sourced fromoutside the United States.21 For example, in September 2018 and November 2018, in response to a petition filed by Cambria Company LLC, a U.S. producer of quartz surfaceproducts, with the U.S. Department of Commerce (which we refer to as the “DOC”) and the U.S. International Trade Commission (which we refer to as the“ITC”), the DOC announced preliminary determinations provisionally subjecting U.S. importers to countervailing and antidumping duties on subject quartzproducts pending a final decision by the ITC. Imports of the subject products made during June 23, 2018 to November 19, 2018 are potentially subject toretroactive antidumping and/or countervailing duties. One of the Company’s subsidiaries, Architectural Granite & Marble, LLC, imported quartz surfaceproducts during the retroactive duty application time period and has potential liability for antidumping and/or countervailing duties. The ITC is expected tomake a final decision on this matter in June 2019.We are currently unable to predict the extent of the changes to existing legislative and regulatory environments relevant to our businesses, or howthose and potential future changes would impact our businesses. To the extent that such changes have a negative impact on us or the industries we serve,including the imposition of additional duties discussed above or otherwise, these changes may materially and adversely impact our businesses, financialcondition, result of operations, and cash flows. Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations andfinancial condition.We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value added, net worth, property, withholding andfranchise taxes. We are also subject to regular reviews, examinations and audits by the U.S. Internal Revenue Service (which we refer to as the “IRS”) andother taxing authorities with respect to such income and non-income based taxes. If the IRS or another taxing authority disagrees with our tax positions, wecould face additional tax liabilities, including interest and penalties. Payment of such additional amounts upon final settlement or adjudication of anydisputes could have a material impact on our results of operations and financial position.In addition, we are directly and indirectly affected by new tax legislation and regulation, and the interpretation of tax laws and regulations. Changesin legislation, regulation or interpretation of existing laws and regulations, including the changes to the federal tax code pursuant to the Tax Cuts and JobsAct, could increase our taxes and have an adverse effect on our operating results and financial condition.As a result of the Tax Cuts and Jobs Act, we will benefit from a reduction of our corporate income tax rate. However, the impact of the variouslimitations, reductions and the repeal of certain expenses, deductions and tax credits are presently unknown and the tax liability of our businesses may beincreased, which could have an adverse effect on our operating results and financial condition.Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect ourresults of operations and financial condition.We are subject to taxes by the U.S. federal, state, and local tax authorities, and our tax liabilities will be affected by the allocation of expenses todiffering jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including: •changes in the valuation of our deferred tax assets and liabilities; •expected timing and amount of the release of any tax valuation allowances; •tax effects of stock-based compensation; •changes in tax laws, regulations or interpretations thereof; or •future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings incountries where we have higher statutory tax rates.In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, and local taxing authorities. Theimpact of the Tax Cuts and Jobs Act as well as outcomes from these audits could have an adverse effect on our operating results and financial condition.22 Risks Related to Our IndebtednessWe may use additional leverage in executing our business strategy, which may adversely affect our businesses.As of December 31, 2018, the principal amount of our total indebtedness was approximately $185.6 million, consisting of (i) $37.2 million under theSIC revolving credit facility, (ii) $144.2 million under the ASG term loan, and (iii) $4.2 million of vehicle and equipment loans, capital leases, and other termdebt. Additionally, as of December 31, 2018, there was also $0.3 million of outstanding letters of credit. We had the ability to access approximately$52.5 million of unused borrowings available under the SIC revolving credit facility as of December 31, 2018, and, as part of our growth strategy, we mayincur a significant amount of additional debt in the future. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewisebe recourse. If new debt is added to our current debt levels, the related risk that we now face could intensify.Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding theincurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and theability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-termfinancial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservativelycapitalized; however, our charter does not contain a limitation on the amount of debt we may incur and our board of directors may change our target debtlevels at any time without the approval of our stockholders.Incurring a substantial amount of debt could have important consequences for our businesses, including: •making it more difficult for us to satisfy our obligations with respect to our debt or to our trade or other creditors; •increasing our vulnerability to adverse economic or industry conditions; •limiting our ability to obtain additional financing on acceptable terms, or at all, to fund capital expenditures and acquisitions, particularlywhen the availability of financing in the capital markets is limited; •requiring a substantial portion of our cash flows from operations for the payment of interest on our debt and reducing our ability to use ourcash flows to fund working capital, capital expenditures, acquisitions, and general corporate requirements; •limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and •placing us at a competitive disadvantage to less leveraged competitors.We cannot assure you that our businesses will generate sufficient cash flow from operations or that future borrowings will be available to us throughcapital markets financings or under our credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness, or to fund our otherliquidity needs. We cannot assure you that we will be able to refinance any of the indebtedness that we will incur on commercially reasonable terms, or at all.In addition, we may incur additional indebtedness in order to finance our operations or to repay our indebtedness. If we cannot service our indebtedness, wemay have to take actions such as selling assets, seeking additional debt or equity or reducing or delaying capital expenditures, strategic acquisitions,investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms, or at all, or on termsthat would be advantageous to our stockholders or on terms that would not require us to breach the terms and conditions of our existing or future financingarrangements.23 Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants relating to our operations.Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, covenants (financial andotherwise) affecting our ability to incur additional debt, incur liens, make certain investments, sell our shares, reduce liquidity below certain levels, makedistributions to our stockholders and otherwise affect our operating policies. The restrictions contained in our financing arrangements could also limit ourability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans. If we fail to meetor satisfy any of these covenants in our financing arrangements, we would be in default under these arrangements, and our lenders could elect to declareoutstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests againstexisting collateral. In addition, our financing arrangements may contain cross-default provisions. As a result, if we default in our payment or performanceobligations under one of our financing arrangements and, in some cases, if the amount due thereunder is accelerated, other financing arrangements, if any,may be declared in default and accelerated even though we are meeting payment and performance obligations on those other arrangements. If this occurs, wemay not have sufficient available cash to pay all amounts that are then due and payable under our financing arrangements, and we may have to seekadditional debt or equity financing, which may not be available on acceptable terms. If alternative financing is not available, we may have to curtail ourinvestment activities and/or sell assets in order to obtain the funds required to make the accelerated payments or seek ways to restructure the loan obligations.If we default on several of our financing arrangements or any single significant financing arrangement, it could have a material adverse effect on ourbusinesses, prospects, liquidity, financial condition, and results of operations.Interest expense on debt we will incur may limit our cash available to fund our growth strategies.Our current financing arrangements have, and any additional debt we subsequently incur may have, a floating rate of interest. Higher interest ratescould increase debt service requirements on our current floating rate debt and on any floating rate debt we subsequently incur, and could reduce fundsavailable for operations, future business opportunities or other purposes. If we need to repay debt during periods of rising interest rates, we could be requiredto refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization ofthe maximum return on such assets and could result in a loss. The occurrence of either or both of such events could materially and adversely affect our cashflows and results of operations.We may require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.The expansion and development of our businesses may require significant capital, which we may be unable to obtain, to fund our capitalexpenditures, operating expenses, working capital needs, and potential strategic acquisitions. In accordance with our growth strategy, we mayopportunistically raise additional debt capital to help fund the growth of our businesses, subject to market and other conditions, but such debt capital maynot be available to us on a timely basis to meet our cash requirements. Further, our capital requirements may vary materially from those currently planned if,for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain ourcompetitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of ourdevelopment and expansion plans or otherwise forego market opportunities.To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and otherfactors that are beyond our control. We cannot assure you that our businesses will generate cash flow from operations in an amount sufficient to enable us tofund our liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before its maturity or obtain additional equity or debtfinancing. We cannot assure you that we will be able to do so on favorable terms, if at all. Any inability to generate sufficient cash flow, refinance our debt orincur additional debt on favorable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay orprevent the expansion of our businesses.24 Risks Related to Our Organization and StructureCertain anti-takeover defenses and applicable law may limit the ability of a third party to acquire control of us.Our amended and restated certificate of incorporation (which we refer to as our “charter”), our amended and restated bylaws (which we refer to as our“bylaws”), and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our Company that might involve a premiumpaid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our commonstock. Certain of these provisions are described below.Selected provisions of our charter and bylaws. Our charter and/or bylaws contain anti-takeover provisions that: •authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in one or moreseries, and with respect to each such series, to fix the number of shares constituting that series, the powers, rights and preferences of the sharesof that series, and the qualifications, limitations and restrictions of that series; •require that, subject to the express rights, if any, of the holders of any series of preferred stock, actions to be taken by our stockholders may betaken only at an annual or special meeting of our stockholders and not by written consent; •specify that special meetings of our stockholders can be called only by the chairman of our board of directors, our chief executive officer, ourpresident, or the majority of our board of directors; •provide that our bylaws may be amended by our board of directors without stockholder approval; •provide that, subject to the express rights, if any, of the holders of any series of preferred stock, directors may be removed from office only bythe affirmative vote of the holders of at least a majority of the voting power of our capital stock entitled to vote generally in the election ofdirectors; •provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors maybe filled only by a vote of a majority of directors then in office, although less than a quorum; •provide that, subject to the express rights, if any, of the holders of any series of preferred stock, any amendment, alteration or repeal of ourcharter provisions, or the adoption of any new or additional provision, inconsistent with our charter provisions relating to the management ofour Company by our board of directors, the calling of special meetings of our stockholders, the prohibition against stockholder action bywritten consent, and amendment of our charter, requires the affirmative vote of the holders of at least 66 2⁄3% of the voting power of ourcapital stock entitled to vote generally in the election of directors; •provide that the stockholders may amend, alter or repeal our bylaws, or adopt new or additional provisions of our bylaws, only with theaffirmative vote of at least 66 2⁄3% of the voting power of our capital stock entitled to vote generally; and •establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and otherproposals to be brought before a stockholders meeting.25 Selected provisions of Delaware law. We are a Delaware corporation, and we have elected to be subject to Section 203 of the General CorporationLaw of the State of Delaware (which we refer to as the “DGCL”) by provision of our charter. In general, Section 203 of the DGCL prevents an “interestedstockholder” (as defined in the DGCL) from engaging in a “business combination” (as defined in the DGCL) with us for three years following the date thatperson becomes an interested stockholder unless one or more of the following occurs: •before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholderbecame an interested stockholder or approved the business combination; •upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interestedstockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes ofdetermining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) stock held by directorswho are also officers of our Company and by employee stock plans that do not provide employees with the right to determine confidentiallywhether shares held under the plan will be tendered in a tender or exchange offer; or •following the transaction in which that person became an interested stockholder, the business combination is approved by our board ofdirectors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2 / 3% of our outstanding votingstock not owned by the interested stockholder.The DGCL generally defines “interested stockholder” as any person who, together with affiliates and associates, is the owner of 15% or more of ouroutstanding voting stock or is our affiliate or associate and was the owner of 15% or more of our outstanding voting stock at any time within the three-yearperiod immediately before the date of determination.Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of the Company.The employment agreements we have entered into with Tyrone Johnson, Nadeem Moiz, Kendall Hoyd and Sunil Palakodati, our Chief ExecutiveOfficer, Chief Financial Officer, President—RDS, and President—ASG, respectively, each provide that if their employment with us terminates under certaincircumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate theiremployment. Furthermore, these provisions could delay or prevent a transaction or a change in control of the Company that might involve a premium paidfor shares of our Class A Common Stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our Class ACommon Stock.Our bylaws provide that the state and federal courts located within the State of Delaware will be the exclusive forum for substantially all disputes betweenus and our stockholders, and further provide that the federal district courts of the United States of America will be the exclusive forum for resolving anycomplaint asserting a cause of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum fordisputes with us or our directors, officers, or employees.Our bylaws provide that the state or federal courts located within the State of Delaware will be the exclusive forum for: •any derivative action or proceeding brought on our behalf; •any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; •any action asserting a claim arising pursuant to any provision of the DGCL; •any civil action to interpret, apply, enforce or determine the validity of the provisions of our charter or our bylaws; and •any action asserting a claim governed by the internal affairs doctrine.26 Our bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaintasserting a cause of action arising under the Securities Act. Furthermore, our bylaws provide that any person or entity purchasing or otherwise acquiring anyinterest in any of our securities will be deemed to have notice of and consented to the choice of forum provisions of our bylaws described above.These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable fordisputes with us or any of our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees.The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that, inconnection with one or more actions or proceedings described above, a court could find the choice of forum provisions contained in our bylaws to beinapplicable or unenforceable. If a court were to find either choice of forum provision in our bylaws to be inapplicable or unenforceable in an action, we mayincur additional costs associated with resolving such dispute in other jurisdictions, which could seriously harm our business and financial condition.We may change our operational policies, investment guidelines and business and growth strategies without stockholder consent, which may subject us todifferent and more significant risks in the future.Our board of directors determines our operational policies, investment guidelines and business and growth strategies. Our board of directors maymake changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. Underany of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on ourbusinesses, prospects, liquidity, financial condition, and results of operations.We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies,our Class A Common Stock may be less attractive to investors.We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to as the “JOBS Act”), and weare eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growthcompanies, including, but not limited to, a requirement to present only two years of audited financial statements in the registration statement for theemerging growth company’s initial public offering of common equity securities, an exemption from the auditor attestation requirement of Section 404 of theSarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”), reduced disclosure about executive compensation arrangements pursuant to therules applicable to smaller reporting companies, no requirement to seek non-binding advisory votes on executive compensation or golden parachutearrangements and not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding asupplement to the auditor’s report providing additional information about the audit and the financial statements. We have elected to adopt these reduceddisclosure requirements.Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accountingstandards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securitiesregistered under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) are required to comply with the new or revisedfinancial accounting standards. In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extendedtransition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An emerging growthcompany can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We haveelected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This electionallows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until thosestandards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effectivedates.27 We would cease to be an “emerging growth company” upon the earliest of (i) December 31, 2023, which is the last day of the fiscal year followingthe fifth anniversary of the first sale of our Class A Common Stock pursuant to our effective registration statement under the Securities Act, (ii) the last day ofthe fiscal year during which our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issuedmore than $1.0 billion in non-convertible debt securities, or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year (and we have been a public company for at least 12 months and havefiled at least one annual report on Form 10-K).We cannot predict if investors will find our Class A Common Stock less attractive as a result of our taking advantage of these exemptions. If someinvestors find our Class A Common Stock less attractive as a result of our choices, there may be a less active trading market for our Class A Common Stockand our stock price may be more volatile.We are subject to financial reporting and other requirements as a newly public company for which our accounting and other management systems andresources may not be adequately prepared.As a public company with listed equity securities, we are required to comply with certain laws, regulations and requirements, including therequirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of theNasdaq Capital Market, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly andcurrent reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintaineffective internal controls and procedures for financial reporting.These reporting and other obligations will place significant demands on our management, administrative, operational, and accounting resources andwill cause us to incur significant expenses. We may in the future need to upgrade our information systems or create new systems, implement additionalfinancial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting andfinance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirementsand other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have amaterial adverse effect on our businesses, prospects, liquidity, financial condition and results of operations.If we are unable to design, implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy andcompleteness of our financial reports, which could adversely affect the market price of our Class A Common Stock.We are currently not required to comply with Section 404 of the Sarbanes-Oxley Act, and therefore are not yet required to make an assessment of theeffectiveness of our internal control over financial reporting for that purpose. However, as a public company, we will be required to maintain internal controlover financial reporting and to report any material weaknesses in such internal control. In addition, we will be required to furnish a report by our managementon the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, at the time we file our second annualreport on Form 10-K with the SEC, which will be for our year ending December 31, 2019. However, if we continue to take advantage of the exemptionscontained in the JOBS Act, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control overfinancial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed withthe SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act and we are an accelerated filer or large accelerated filerwithin the meaning of Section 12b-2 of the Exchange Act. At such time, our independent registered public accounting firm may issue a report that is adversein the event it is not satisfied with the level at which our controls are documented, designed or operating.28 We are in the process of designing, implementing and testing our internal control over financial reporting, which process is time consuming, costlyand complex.If we are unable to design, implement and test our internal control over financial reporting in a timely manner or if, in the future, we identify othercontrol deficiencies or material weaknesses in our accounting and financial reporting processes, we are unable to comply with the requirements of Section404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal control over financial reporting is effective, or our independent registered publicaccounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in theaccuracy and completeness of our financial reports and the market price of our Class A Common Stock could be negatively affected, and we could becomesubject to investigations by the SEC, the Nasdaq Stock Market or other regulatory authorities, which could require additional financial and managementresources.Operation on multiple Enterprise Resource Planning (which we refer to as “ERP”) information systems may negatively impact our operations.We are highly dependent on our information systems infrastructure to process orders, purchase materials, track inventory, ship products in a timelymanner, prepare invoices to our customers, maintain internal controls, produce financial data, and otherwise carry on our businesses in the ordinary course.Our RDS segment intends to implement a system that will enhance its ability to scale rapidly, and our ASG segment currently has significant operations ontwo different ERP platforms. Consequently, both segments have undertaken significant ERP implementation or conversion projects that are intended to becompleted in 2019. While we believe we have the experience, skill and management abilities, as well as access to the necessary experts and consultants, toplan and execute these projects without significant disruption to our businesses, ERP implementations and conversions are very complex and inherentlysubject to risks and uncertainty. There is no assurance that the projects will succeed or that failure in the design, programming, software or implementationwill not cause significant disruption to our businesses. Such a disruption could cause project cost overruns, which may be significant, losses in revenue,increases in operating costs, and reduced customer satisfaction, all of which would lead to a decline in profitability over the short term and possibly the longterm.We are also in process of implementing appropriate consolidation, analysis and reporting tools to facilitate effective monitoring of business resultsand variances, enable prompt and accurate financial period closes, and produce the necessary data and reports for board reports, financial statement auditsand public company filings. This project is also complex and subject to delays, reporting errors, and the potential inability to effectively close our books andreport our results on a timely basis, if at all, which may cause the market to lose confidence in our ability to effectively manage and control our businesses.This may in turn adversely affect our financial condition and the market value of our Class A Common Stock.Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment.These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules andinterpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In somecases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of thesecircumstances could have a material adverse effect on our businesses, prospects, liquidity, financial condition and results of operations.We are a holding company and conduct all of our operations through our subsidiaries.We are a holding company and substantially all of our businesses are conducted through our direct and indirect subsidiaries. We derive all of ouroperating income from RDS, ASG, and their respective subsidiaries. Other than any cash we may retain, substantially all of our assets will be held by ourdirect and indirect subsidiaries. We will rely on the earnings and cash flows of RDS, ASG, and their respective subsidiaries.29 We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries in the form of dividends and other payments ordistributions, to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or distributions to uswill depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limitthe amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and other agreementsof our subsidiaries and the covenants of any future outstanding indebtedness that our subsidiaries incur.Failure by our directors, officers or employees to comply with applicable codes of conduct could materially and adversely affect us. We have adopted a Code of Business Conduct and Ethics for our directors, officers and employees. Our adoption of this code and other standards ofconduct is not a representation or warranty that all persons subject to this code or standards are or will be in complete compliance. The failure of a director,officer or employee to comply with the applicable code or standards of conduct may result in termination of the relationship and/or adverse publicity, whichcould materially and adversely affect us. Risks Related to the Ownership of our Class A Common StockA trading market for our Class A Common Stock may not be sustained and our Class A Common Stock prices could decline.Although our Class A Common Stock is currently listed for trading on the Nasdaq Capital Market under the symbol “SIC,” an active trading marketfor the shares of our Class A Common Stock may not be sustained. Accordingly, no assurance can be given as to the following: •the likelihood that an active trading market for shares of our Class A Common Stock will be sustained; •the liquidity of any such market; •the ability of our stockholders to sell their shares of Class A Common Stock; or •the price that our stockholders may obtain for their Class A Common Stock.In addition, the securities markets in general and our Class A Common Stock have experienced price and volume volatility over the past year. Themarket price and volume of our Class A Common Stock may continue to experience fluctuations not only due to general stock market conditions but alsodue to government regulatory action, tax laws, interest rates and a change in sentiment in the market regarding our industry, operations or businessprospects. In addition to the other risk factors discussed in this section, the price and volume volatility of our Class A Common Stock may be affected by: •actual or anticipated variations in our quarterly operating results; •changes in market valuations of similar companies; •adverse market reaction to the level of our indebtedness; •additions or departures of key personnel; •actions by stockholders; •speculation in the press or investment community; •negative publicity regarding us specifically or our businesses generally; •general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets; 30 •our operating performance and the performance of other similar companies; •changes in accounting principles; and •passage of legislation or other regulatory developments that adversely affect us or the building products supply and services industry.If an active market is not maintained, or if our Class A Common Stock continues to experience price and volume volatility, the market price of ourClass A Common Stock may decline.If securities analysts do not publish research or reports about our Company, or if they downgrade our Class A Common Stock, the price of our Class ACommon Stock could decline.The trading market for our Class A Common Stock could be influenced by any research and reports that securities or industry analysts publish aboutus or our Company. We currently have limited research coverage by securities and industry analysts, with only one analyst covering us. If no other securitiesor industry analysts commence coverage of our Company, the trading price for our Class A Common Stock could be negatively impacted. In the event one ormore securities or industry analysts covering our Company downgrade our Class A Common Stock or publish inaccurate or unfavorable research about ourCompany, our Class A Common Stock price would likely decline. If any of these analysts ceases coverage of our Company or fails to publish reports on usregularly, demand for our Class A Common Stock could decrease, which could cause our Class A Common Stock price and trading volume to decline.We do not intend to pay dividends on our common stock for the foreseeable future.We currently intend to retain our future earnings, if any, to finance the development and expansion of our businesses and, therefore, do not intend topay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board ofdirectors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and suchother factors as our board of directors deems relevant in its discretion. Accordingly, you may need to sell your shares of our Class A Common Stock to realizea return on your investment, and you may not be able to sell your shares at or above the price you paid for them, or at all for an indefinite period of time,except as permitted under the Securities Act and the applicable securities laws of any other jurisdiction.Future sales of our Class A Common Stock, other securities convertible into our Class A Common Stock, or our preferred stock, or the perception in thepublic markets that these sales may occur, could cause the market value of our Class A Common Stock to decline.Our board of directors is authorized, without your approval, to cause us to issue additional shares of our Class A Common Stock or to raise capitalthrough the creation and issuance of preferred stock, other debt securities convertible into our Class A Common Stock, options, warrants and other rights, onterms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our Class A Common Stock or ofpreferred stock could cause the market price of our Class A Common Stock to decrease significantly. We cannot predict the effect, if any, of future sales of ourClass A Common Stock or the perception that these sales may occur, or the availability of our Class A Common Stock for future sales, on the value of ourClass A Common Stock. Sales of substantial amounts of our Class A Common Stock by any large stockholder, or the perception that such sales could occur,may adversely affect the market price of our Class A Common Stock.Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy liquidation, and future offerings of equitysecurities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of ourcommon stock.In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Uponbankruptcy or liquidation, holders of our debt securities and lenders with respect to other borrowings will receive a distribution of our available assets priorto the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market31 price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend paymentsor both that could limit our ability to pay dividends or make liquidating distributions to the holders of our common stock. Our decision to issue securities inany future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing ornature of our future offerings, and purchasers of our Class A Common Stock bear the risk of our future offerings reducing the market price of our Class ACommon Stock and diluting their ownership interest in our Company.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.We have 61 locations, each of which is leased. Our corporate headquarters are located at 400 Galleria Parkway, Suite 1760, Atlanta, Georgia 30339.The locations and uses of our top 20 locations, which comprise approximately 83% of our revenue, are as follows: Location Segment PurposeAnaheim, CA (East Hunter Avenue) RDS Design Center / Office / WarehouseAnaheim, CA (Blue Gum Street) RDS Distribution / Office / WarehouseAustin, TX ASG Design Center /Distribution /Office/WarehouseDenver, CO ASG Distribution / Office / WarehouseEscondido, CA RDS Design Center / Distribution / Office / WarehouseFife, WA ASG Distribution / Office / WarehouseFairfield, CA RDS Office / WarehouseGilroy, CA RDS Countertop Fabrication / Office / WarehouseLa Mirada, CA RDS Design Center / Distribution / Office / WarehouseLenexa, KS ASG Design Center / Distribution / Office / WarehouseLivermore, CA RDS Design Center / Distribution / Office / WarehouseNashville, TN ASG Design Center / Distribution / Office / WarehouseOklahoma City, OK ASG Design Center / WarehousePhoenix, AZ RDS Design Center / Office / WarehousePortland, OR ASG Distribution / Office / WarehouseSacramento, CA RDS Design Center / OfficeSeattle, WA ASG Distribution / Office / WarehouseSimi Valley, CA (Agate Court) RDS Office / WarehouseSun Valley, CA ASG Design Center / Distribution / Office / WarehouseVan Nuys, CA ASG Design Center / Office / Warehouse Item 3. Legal Proceedings.From time to time, we are involved in various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While theoutcomes of these matters are generally not presently determinable, we do not believe that any of these proceedings, individually or in the aggregate, wouldbe expected to have a material adverse effect on our financial position, results of operations or cash flows.Item 4. Mine Safety Disclosures.Not applicable.32 PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur Class A Common Stock is traded on the Nasdaq Capital Market under the ticker symbol “SIC.” The range of high and low sale prices of ourcommon stock as reported by the Nasdaq is set forth in the table below: 3rd Qtr 4th Qtr Fiscal Year 2018 High $13.00 $10.92 Low $9.65 $5.94 HoldersOn March 11, 2019, there were 293 stockholders of record of our Class A Common Stock. DividendsWe have never paid any cash dividends on our capital stock and have no current plans to pay any cash dividends. Our current policy is to retain anyfuture earnings for use in our business. Performance GraphThe graph below compares the cumulative total returns of our Class A Common Stock with that of the Nasdaq Composite Index, Russell 2000 Indexand the S&P Small Cap 600 Index, for the period commencing on August 16, 2018 (the date our Class A Common Stock commenced trading on the NasdaqCapital Market) and ending on December 31, 2018. All values assume an initial investment of $100 on August 16, 2018 and reinvestment of dividends. Thepoints on the graph represent month-end values based on the last trading day of each month. The comparisons are based on historical data and are notindicative of, nor intended to forecast, the future performance of our Class A Common Stock. 33 Comparison of Cumulative Total Returnamong Select Interior Concepts, Inc., Nasdaq Composite Index, Russell 2000 Index, and S&P Small Cap 600 Index 34 Item 6. Selected Financial Data.The following table summarizes certain financial data for the periods presented: Year Ended December 31, (in thousands, except share data) 2018 2017 2016 Statements of Operations Data: Total revenue $489,757 $352,952 $233,868 Gross profit 133,454 103,889 66,829 Gross margin 27.2% 29.4% 28.6%Income from operations $12,097 $6,162 $14,425 Total other expense, net 13,583 14,189 4,736 (Loss) income before provision for income taxes $(1,486) $(8,026) $9,689 Provision for income taxes 989 3,320 2,634 Net (loss) income $(2,475) $(11,346) $7,055 Balance Sheet Data (end of year): Cash, cash equivalents and restricted cash $6,362 $5,547 $4,727 Accounts receivable, net 63,601 45,284 27,904 Inventory 108,270 87,629 31,654 Total assets 416,014 320,246 136,507 Accounts payable 37,265 38,491 20,988 Accrued expenses and other current liabilities 27,620 19,840 6,417 Line of credit 36,706 19,269 11,027 Long-term debt, net of current portion and financing fees 142,442 86,897 43,573 Total liabilities 267,320 172,159 96,766 Stockholders' equity 148,694 148,088 39,741 Supplemental Financial Data: Cash provided by (used in): Operating activities $12,212 $(8,367) $15,540 Investing activities (80,624) (118,836) (14,787)Financing activities 72,227 128,024 1,653 Net income (loss) per common share: Basic and diluted $0.10 $(0.22) $— Weighted average number of common shares outstanding: Basic and diluted 25,634,342 25,614,626 — Basic and Diluted EPS and weighted average shares outstanding includes both Class A Common Stock and Class B Common Stock for the yearended December 31, 2017. In August 2018, each then remaining share of Class B Common Stock was automatically converted into one share of Class ACommon Stock, resulting in no shares of Class B Common Stock left outstanding. 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with Item 6. “Selected Financial Data” above and the accompanying consolidatedfinancial statements and related notes included in this Annual Report.The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differmaterially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factorsdiscussed below and elsewhere in this Annual Report, particularly in the sections entitled “Special Note Regarding Forward-Looking Statements andInformation” and “Risk Factors” included elsewhere in this Annual Report.OverviewSelect Interior Concepts, Inc. (collectively with all of its subsidiaries, “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwidedistributor of interior building products with market positions in residential interior design services. Through our Residential Design Services (which we referto as “RDS”) operating segment, we serve national and regional homebuilders by providing an integrated, outsourced solution for the design, consultation,sourcing, distribution and installation needs of their homebuyer customers. Through our 21 design centers, our consultants work closely with homebuyers inthe selection of a broad array of interior products and finishes, including flooring, cabinets, countertops, wall tile, finish carpentry, shower enclosures andmirrors, and related interior items, primarily for newly constructed homes. We then coordinate the ordering, fulfillment and installation of many of theseinterior product categories to provide for the homebuyer. With our design centers and our product sourcing and installation capabilities, we enable ourhomebuilder customers to outsource critical aspects of their business to us, thereby increasing their sales, profitability, and return on capital. We also haveleading market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops and specialty tilesthrough our other operating segment, Architectural Surfaces Group (which we refer to as “ASG”). ASG sources natural and engineered stone from a globalsupply base and markets these materials through a national network of distribution centers and showrooms. In addition to serving the new residential andcommercial construction markets with these materials, we also distribute them to the repair and remodel (which we refer to as “R&R”) market.Our platform originated in September 2014, when affiliates of Trive Capital Management LLC (which we refer to as “Trive Capital”) acquired RDS,which in turn acquired the assets of PT Tile Holdings, LP (which we refer to as “Pinnacle”) in February 2015, and 100% of the equity interests in GreencraftHoldings, LLC (which we refer to as “Greencraft”) in December 2017. In 2018, RDS then acquired the assets of Summit Stoneworks, LLC (which we refer to as“Summit”) in August 2018 and 100% of the equity interests in T.A.C. Ceramic Tile Co. (which we refer to as “TAC”) in December 2018. Affiliates of Trive Capital also formed a consolidation platform in the stone countertop market by acquiring 100% of the equity interests inArchitectural Granite & Marble, LLC in June 2015, which in turn acquired the assets of Bermuda Import-Export, Inc. (which we refer to as “Modul”) in July2016, 100% of the equity interests in Pental Granite and Marble, LLC (which we refer to as “Pental”) in February 2017, and the assets of Cosmic Stone & TileDistributors, Inc. (which we refer to as “Cosmic”) in October 2017, and these acquired businesses were combined to form ASG. ASG then acquired the assetsof Elegant Home Design, LLC (which we refer to as “Bedrock”) in January 2018, the assets of NSI, LLC (which we refer to as “NSI”) in March 2018, and theassets of The Tuscany Collection, LLC (which we refer to as “Tuscany”) in August 2018. November 2017 Restructuring TransactionsIn November 2017, Select Interior Concepts, Inc. entered into a series of restructuring transactions (which we refer to as the “November 2017restructuring transactions”) pursuant to which it acquired all of the outstanding equity interests in each of RDS and ASG, including all of their respectivewholly-owned subsidiaries. Following the November 2017 restructuring transactions, Select Interior Concepts, Inc. became a holding company that whollyowns RDS and ASG.36 November 2017 Private Offering and Private PlacementIn November 2017, we completed a private offering and private placement pursuant to which we issued an aggregate of 21,750,000 shares of ourClass A Common Stock, which included shares issued pursuant to the exercise of the option granted by us to the initial purchaser and placement agentthereunder, in reliance upon the exemptions from the registration requirements of the Securities Act of 1933, as amended (which we refer to as the “SecuritiesAct”), provided by Rule l44A, Regulation S, and Rule 506 of Regulation D under the Securities Act (which we refer to as the “November 2017 privateoffering and private placement”). We received net proceeds of $240.5 million from the November 2017 private offering and private placement, and we used$122.8 million in connection with the November 2017 restructuring transactions, which included our acquisition of all of the outstanding equity interests ineach of RDS and ASG and the repurchase by us of shares of our Class B Common Stock from existing stockholders, and $112.8 million to repay ouroutstanding indebtedness, with the remaining $4.9 million of the net proceeds being used for working capital and general corporate purposes.Listing of Class A Common Stock on the Nasdaq Capital MarketOn August 13, 2018, our shelf registration statement was declared effective by the SEC, and on August 16, 2018, our Class A Common Stockcommenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.” At such time, each then remaining share of our Class B Common Stock wasautomatically converted into one share of Class A Common Stock, resulting in no shares of Class B Common Stock left outstanding.Operating SegmentsWe have defined each of our operating segments based on the nature of its operations and its management structure and product offerings. Ourmanagement decisions are made by our Chief Executive Officer, whom we have determined to be our Chief Operating Decision Maker. Our managementevaluates segment performance based on operating income. Our two reportable segments are described below.Residential Design ServicesRDS, our interior design and installation segment, is a service business that provides design center operation, interior design, product sourcing, andinstallation services to homebuilders, homeowners, general contractors and property managers. Products sold and installed by RDS include flooring,countertops, cabinets, wall tile, interior trim (doors, moldings, door and window casing), shower enclosures and doors, mirrors, and window treatments. Newsingle-family and multi-family construction are the primary end markets, although we intend to explore growth opportunities in other markets, such as theR&R market.Architectural Surfaces GroupASG, our natural and engineered stone countertop distribution segment, distributes granite, marble, and quartz slabs for countertop and other uses,and ceramic and porcelain tile for flooring and backsplash and wall tile applications. Primary end markets are new residential and commercial constructionand the R&R market.Key Factors Affecting Operating ResultsOur operating results are impacted by changes in the levels of new residential construction and of the demand for products and services in the R&Rmarket. These are in turn affected by a broad range of macroeconomic factors including the rate of economic growth, unemployment, job and wage growth,interest rates, multi-family project financing, and residential mortgage lending conditions. Other important underlying factors include demographic variablessuch as household formation, immigration and aging trends, housing stock and vacant inventory levels, changes in the labor force, raw materials prices, thelegal environment, and local and regional development and construction regulation.Demand for our products and services is dependent on the overall levels of new residential construction and investment in residential remodeling.These variables are in turn affected by macroeconomic variables such as employment levels, income growth, consumer confidence, interest rates generally,and mortgage rates specifically.37 During the Great Recession from 2007 to 2009, our revenue and profits declined significantly as demand for our products collapsed with the dramaticdecline in residential construction. Since the trough of that recession in 2009, residential investment and demand for our products have entered into asustained period of growth. We believe we are well positioned to take advantage of long-term growth trends in the single-family and R&R markets. We alsobelieve that there is significant opportunity for additional penetration of the multi-family segment of the housing market.Material CostsThe materials that we distribute and install are sourced through a wide array of quarries, manufacturers, and distributors located in the United States,Mexico, South America, Europe, Africa and Asia. As demand for these products continues to grow with housing demand, we expect that we may be subject tocost increases from time to time. There is no guarantee that our relationships with our customers will be such that we can pass these increases on to ourcustomers. Affordability issues in new residential construction could temper our homebuilder customers’ ability to raise their prices, which could in turn limitour ability to increase prices to compensate for increases in our costs of materials. We believe, however, that over the long term, these same forces affectinghousing prices would also limit our suppliers’ ability to increase prices, which would help us maintain our margins.Labor CostsInstallation labor is a significant component of our aggregate labor force of approximately 1,360 employees. With the unemployment rate at 3.9% inDecember 2018 according to the U.S. Bureau of Labor Statistics, there is no guarantee that we will be able to attract the type and quality of skilled labor thatwe need in sufficient quantities to accomplish our growth plans. Correspondingly, we expect that tight labor markets will continue to lead to upward pressureon wages and could impact our gross profit margin and overall profitability negatively.We believe, however, that our scale will continue to give us the ability to provide steady work, an attractive benefits package, and a beneficial workenvironment, particularly as compared to our smaller competitors. Over time, we expect that the combination of these factors will gradually increase ourrelative advantage over smaller and less sophisticated competitors.Operating and Administrative CostsWe incur costs related to the operation and administration of our businesses that are reported as period expenses separately from Cost of Goods Sold.These expenses include, but are not limited to, purchasing of materials, sales and distribution and shipping of our products, project management, customerservice, human resources, accounting, information technology, general management, public company costs, and others. These costs will likely continue togrow as our businesses grow, but we believe that, overall, they will grow more slowly than the rate at which our gross profit grows due to improved utilizationrates of these resources and the fact that we have implemented and intend to continue to implement scalable technology and process improvements thatincrease the efficiency of our operations.Cyclicality and SeasonalityOur businesses are both cyclical and seasonal based on the homebuilding industry in the markets we serve. Because of the timing of installation ofour major product lines, which are mainly installed near the end of the construction process, as well as overall housing seasonality, our sales activity isnormally weighted toward the second half of the calendar year.Homebuilding-based businesses are also generally cyclical. Our financial performance will be impacted by economic changes nationally and locallyin the markets we serve. The building products supply industry is dependent on new home construction and subject to cyclical market pressures. Ouroperations are subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition,government regulation, trade policies, and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-familyhousing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors and homeowners.38 After the dramatic recession that ran from 2007 to 2009, there have been nine straight years of relatively steady growth. While we believe that theunderlying fundamentals of demand for new housing units and residential investment are indicative of continued growth into the future, there can be noassurance that macroeconomic or other factors will not change unexpectedly and cause a downturn in housing construction.Non-GAAP MeasuresIn addition to the results reported in accordance with United States generally accepted accounting principles (which we refer to as “GAAP”), we haveprovided information in this Annual Report relating to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin.EBITDA is defined as consolidated net income before interest, taxes and depreciation and amortization. Adjusted EBITDA is defined as consolidatednet income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization expense, (iv) stock compensation expense, and (v)adjustments for costs that are deemed to be transitional in nature or not related to our core operations, such as severance, facility closure costs, andprofessional, financing and legal fees related to business acquisitions, or similar transitional costs and expenses related to business investments, greenfieldinvestments, and integrating acquired businesses into our Company. Adjusted EBITDA margin is calculated as a percentage of our net revenue. EBITDA,Adjusted EBITDA, and Adjusted EBITDA margin are non-GAAP financial measures used by us as supplemental measures in evaluating our operatingperformance.Key Components of Results of OperationsNet Revenue. Net revenue consists of revenue net of our homebuilder customers’ participation, which is their share of revenue from our sales ofupgrades. In single-family construction, revenue is recognized when the work is complete or complete in all material respects. In multi-family construction,revenue is recognized on a percentage of completion basis as these projects often take place over several months. In our ASG segment, net revenue is derivedfrom the sale of stone products and is recognized when such products have been accepted at the customer’s designated location.Cost of Revenue. Cost of revenue consists of the direct costs associated with revenue earned by the sale and installation of our interior products inthe case of our RDS segment, or by delivering product in the case of our ASG segment. In our RDS segment, cost of revenue includes direct material costsassociated with each project, the direct labor costs associated with installation (including taxes, benefits and insurance), rent, utilities and other period costsassociated with warehouses and fabrication shops, depreciation associated with warehouses, material handling, fabrication and delivery costs, and other costsdirectly associated with delivering and installing product in our customers’ projects, offset by vendor rebates. In our ASG segment, cost of revenue includesdirect material costs, inbound and outbound freight costs, overhead (such as rent, utilities and other period costs associated with product warehouses),depreciation associated with fixed assets used in warehousing, material handling and warehousing activities, warehouse labor, taxes, benefits and other costsdirectly associated with receiving, storing, handling and delivering product to customers in revenue earning transactions.Gross Profit and Gross Margin. Gross profit is revenue less the associated cost of revenue. Gross margin is gross profit divided by revenue.Operating Expenses. Operating expenses include overhead costs such as general management, project management, purchasing, sales, customerservice, accounting, human resources, depreciation and amortization, information technology, public company costs and all other forms of wage and salarycost associated with operating our businesses, and the taxes and benefits associated with those costs. We also include other general-purpose expenses,including, but not limited to, office supplies, office rents, legal, consulting, insurance, and non-cash stock compensation costs. Professional servicesexpenses, including audit and legal, and transaction costs are also included in operating expenses and were a significant component of our total costs in 2018due to our transition to being a public company.39 Depreciation and Amortization. Depreciation and amortization expenses represent the estimated decline over time of the value of tangible assetssuch as vehicles, equipment and tenant improvements, and intangible assets such as customer lists and trade names. We recognize the expenses on a straight-line basis over the estimated economic life of the asset in question.Interest Expense. Interest expense represents amounts paid to or which have become due during the period to lenders and lessors under creditagreements and capital leases, as well as the amortization of debt issuance costs.Income Taxes. Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method,deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to temporary differences between the financial statementcarrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those differences are expected to be recovered or settled.Results of OperationsYear Ended December 31, 2018 Compared to Year Ended December 31, 2017Net Revenue. For the year ended December 31, 2018, net revenue increased by $136.8 million, or 38.8%, to $489.8 million, from $353.0 million forthe year ended December 31, 2017. This increase in net revenue was driven by the impact of organic growth and acquisitions in both our RDS and ASGoperating segments.In our RDS segment, net revenue increased by $75.2 million, or 38.9%, to $268.4 million for the year ended December 31, 2018, from $193.2 millionfor the year ended December 31, 2017. This increase was largely due to the acquisitions of Greencraft and Summit Stoneworks, which accounted for $55.6million of the RDS growth. Additionally, organic revenue increased $19.6 million through continued expansion of share in new geographies, increasedproduct offerings, and price/mix. In our ASG segment, net revenue increased by $62.9 million, or 39.0%, to $224.0 million for the year ended December 31, 2018, from $161.1 millionfor the year ended December 31, 2017. This increase was largely due to the acquisitions of Cosmic, Bedrock, NSI, Pental and Tuscany which accounted for$52.5 million of the growth. Additionally, organic revenue increased $10.4 million due to volume increases, greenfield expansion, and price/mix.Cost of Revenue. For the year ended December 31, 2018, cost of revenue increased by $107.2 million, or 43.0%, to $356.3 million, from $249.1million for the year ended December 31, 2017.In our RDS segment, cost of revenue increased by $54.3 million, or 38.7%, to $194.5 million for the year ended December 31, 2018, from $140.2million for the year ended December 31, 2017. The acquisitions of Greencraft and Summit drove $37.8 million of the year over year increase. The remaining$16.5 million increase in cost of revenues was substantially driven by an increase in sales in the legacy RDS business.In our ASG segment, cost of revenue increased by $54.2 million, or 49.2%, to $164.3 million for the year ended December 31, 2018, from $110.1million for the year ended December 31, 2017. This increase was primarily due to the acquisitions of Cosmic, Bedrock, NSI, Pental and Tuscany contributing$41.1 million, as well as a $13.1 million increase in cost of revenue in the legacy ASG business.Gross Profit and Margin. For the year ended December 31, 2018, gross profit increased by $29.6 million, or 28.5%, to $133.5 million, from $103.9million for the year ended December 31, 2017. For the year ended December 31, 2018, gross margin decreased by 2.2% to 27.2%, from 29.4% for the yearended December 31, 2017. In our RDS segment, gross margin increased by 0.1% to 27.5% for the year ended December 31, 2018, from 27.4% for the year ended December 31,2017. This increase was the result of improved margins from acquisitions and a slight shift in product and customer mix, partially offset by higherdepreciation in cost of revenue.40 In our ASG segment, gross margin decreased by 5.0% to 26.6% for the year ended December 31, 2018, from 31.6% for the year ended December 31,2017. This decrease in margin was driven by the ramp up of our greenfield sites that delivered lower contribution margin than the base business asanticipated, lower margin from the opportunistic acquisitions of Cosmic, NSI and Bedrock, one-time non-cash charges, and higher depreciation in cost ofrevenue.Operating Expense. For the year ended December 31, 2018, operating expenses increased by $23.7 million, or 24.3%, to $121.4 million, from $97.7million for the year ended December 31, 2017. This increase in operating expenses was primarily due to selling, general, and administrative expenses fromacquired businesses, non-cash long-term incentive plan expenses, one-time nonrecurring costs for completed acquisitions, the opening of greenfieldlocations, investments in SIC infrastructure as a new public company, the addition of M&A resources, and higher depreciation and amortization.In our RDS segment, operating expenses increased by $6.5 million to $59.6 million for the year ended December 31, 2018, from $53.1 million for theyear ended December 31, 2017. This increase was related to the Greencraft and Summit acquisitions, sales and marketing expenses to support increasedrevenues, and other expenses related to the growth of the business.In our ASG segment, operating expenses increased by $4.7 million to $47.7 million for the year ended December 31, 2018, from $43.0 million for theyear ended December 31, 2017. This increase was related to the Cosmic, Bedrock, NSI, Pental and Tuscany acquisitions, and expenses related to the openingof greenfield locations.The remaining $14.0 million of the increase in operating expenses was related to costs for developing public company infrastructure, mergers andacquisitions resources, and stock-based compensation accrual expense incurred by the SIC parent company.Depreciation and Amortization. For the year ended December 31, 2018, depreciation and amortization expenses increased by $5.7 million, or 38.5%,to $20.5 million, from $14.8 million for the year ended December 31, 2017.In our RDS segment, depreciation and amortization expenses increased by $2.7 million, or 39.1%, to $9.6 million for the year ended December 31,2018, from $6.9 million for the year ended December 31, 2017. This was primarily due to the depreciation associated with the acquired Greencraft andSummit assets and amortization related to intangible assets recognized in the purchase accounting for the Greencraft and Summit acquisitions.In our ASG segment, depreciation and amortization expenses increased by $2.8 million, or 35.0%, to $10.8 million for the year ended December 31,2018 from $8.0 million for the year ended December 31, 2017. Amortization of intangible assets acquired in the Bedrock and Tuscany acquisitionsaccounted for the majority of this increase with the remaining increase due to the depreciation of additional assets from new locations.Interest Expense. For the year ended December 31, 2018, interest expense decreased by $2.3 million, or 16.8%, to $11.4 million, from $13.7 millionfor the year ended December 31, 2017. Our interest expense was reduced because we decreased our borrowing significantly by paying off our RDS term loanand repaying a significant amount of our ASG term debt with proceeds from the November 2017 private offering and private placement. We offset thisdecrease by increasing our long-term debt to finance the Greencraft, Bedrock, Tuscany, Summit and TAC acquisitions.Income Taxes. For the year ended December 31, 2018, we recognized income tax expense of $1.0 million, a decrease of $2.3 million from income taxexpense of $3.3 million for the year ended December 31, 2017. Our deferred tax assets were revalued as a result of the Tax Cuts and Jobs Act in December2017, which resulted in a $5.3 million increase to income tax expense in 2017.Net (Loss) Income. For the year ended December 31, 2018, net loss decreased by $8.8 million to $2.5 million, from $11.3 million for the year endedDecember 31, 2017.41 Adjusted EBITDA. For the year ended December 31, 2018, Adjusted EBITDA increased to $54.4 million, from $47.0 million for the year endedDecember 31, 2017, as a result of $7.7 million in organic growth and $13.7 million of incremental operating profit from acquisitions, partially offset by $14.0million of additional cost and investments in SIC infrastructure as a new public company, establishing M&A resources, and increased cost of revenue andoperating expenses in both operating segments.Nonrecurring costs in 2018 include restructuring and severance related activity, acquisition and integrations costs, costs related to the filing of ourRegistration Statement on Form S-1, and greenfield costs. For the Year December 31, (in thousands) 2018 2017 Consolidated net loss $(2,475) $(11,346)Income tax expense 989 3,320 Interest expense 11,468 13,749 Depreciation and amortization 20,487 14,816 EBITDA 30,469 20,539 Consulting Fees to Trive Capital — 1,008 Share Based and Transaction Incentive Compensation 2,626 16,794 Nonrecurring Costs 21,326 8,656 Adjusted EBITDA $54,421 $46,997 Adjusted EBITDA Margin. For the year ended December 31, 2018, Adjusted EBITDA margin decreased to 11.1%, from 13.3% for the year endedDecember 31, 2017. The decrease in the Adjusted EBITDA margin was primarily due to investments in SIC for public company infrastructure, establishing abusiness development function, certain acquisitions by ASG that have slightly lower margins than ASG’s legacy business, and increased costs of revenue andoperating expenses in both operating segments. Year Ended December 31, 2017 Compared to Year Ended December 31, 2016Net Revenue. For the year ended December 31, 2017, net revenue increased by $119.1 million, or 50.9%, to $353.0 million, from $233.9 million forthe year ended December 31, 2016. Net revenue includes the elimination of intercompany sales.In our RDS segment, revenue increased by $17.4 million, or 9.9%, to $193.2 million for the year ended December 31, 2017, from $175.8 million forthe year ended December 31, 2016. This increase was largely due to the volume increases, measured in square feet of installed product, in our core business offlooring, countertops, and wall tile, as a result of a higher average size of the homes we serviced.In our ASG segment, revenue increased by $102.3 million, or 173.9%, to $161.1 million for the year ended December 31, 2017, from $58.8 millionfor the year ended December 31, 2016. This increase was largely due to the Pental acquisition, which accounted for $84.7 million, or 82.8 %, of the totalgrowth for the year ended December 31, 2017. The remainder of the growth of $17.6 million in our ASG segment for the year ended December 31, 2017 wasdue to increased revenue from new locations and a full year of revenue attributable to the Modul acquisition, which closed in July 2016.Cost of Revenue. For the year ended December 31, 2017, cost of revenue increased by $82.1 million, or 49.1%, to $249.1 million, from $167.0million for the year ended December 31, 2016.In our RDS segment, cost of revenue increased by $12.2 million, or 9.5%, to $140.2 million for the year ended December 31, 2017, from$128.0 million for the year ended December 31, 2016. This increase in cost of revenue was primarily due to an increase in sales.42 In our ASG segment, cost of revenue increased by $70.3 million, or 176.8%, to $110.1 million for the year ended December 31, 2017, from $39.8million for the year ended December 31, 2016. This increase was due to the Pental acquisition and the resulting increase in revenue.Gross Profit and Margin. For the year ended December 31, 2017, gross profit increased by $37.1 million, or 55.5%, to $103.9 million, from $66.8million for the year ended December 31, 2016. Gross margin also increased by 0.9% to 29.4% in 2017, from 28.6% in 2016. This increase was primarily dueto higher margin ASG business comprising a greater portion of our revenue mix in 2017 versus 2016 due to the acquisition of Pental.In our RDS segment, gross margin increased by 0.2% to 27.4% for the year ended December 31, 2017, from 27.2% for the year ended December 31,2016. This increase was the result of a slightly favorable shift toward houses where we generally installed higher amounts of upgrades in 2017.In our ASG segment, gross margin decreased by 0.8% to 31.6% for the year ended December 31, 2017, from 32.4% for the year ended December 31,2016. This decrease was due to a slightly unfavorable shift in product mix.Operating Expenses. For the year ended December 31, 2017, operating expenses increased by $45.3 million, or 86.5%, to $97.7 million, from$52.4 million for the year ended December 31, 2016.In our RDS segment, operating expenses increased by $13.8 million to $53.1 million for the year ended December 31, 2017, from $39.3 million forthe year ended December 31, 2016. $10.9 million of this increase was due to transaction costs and equity bonuses related to a February refinancingtransaction and the November 2017 private offering and private placement. The remaining $2.9 million of the increase was a result of growth in volumeduring the year.In our ASG segment, operating expenses increased by $29.9 million to $43.0 million for the year ended December 31, 2017, from $13.1 million forthe year ended December 31, 2016. $13.1 million of this increase was due to the addition of ten months of Pental operating expenses, $10.5 million wasrelated to the financing for the Pental acquisition and bonus payments made as a result of the November 2017 private offering and private placement, and therest was related to general company growth and costs associated with the opening of new locations.The remaining $1.6 million of the increase in operating expenses was related to overhead costs incurred by us at the SIC parent company level.Depreciation and Amortization. For the year ended December 31, 2017, depreciation and amortization expenses increased by $5.6 million,or 61.3%, to $14.8 million, from $9.2 million for the year ended December 31, 2016.In our RDS segment, depreciation and amortization expenses increased by $0.6 million, or 9.6%, to $6.9 million for the year ended December 31,2017, from $6.3 million for the year ended December 31, 2016. This increase was due to an increase in fixed assets acquired to support revenue growth.In our ASG segment, depreciation and amortization expenses increased by $5.0 million, or 171.4%, to $8.0 million for the year ended December 31,2017, from $3.0 million for the year ended December 31, 2016. This increase was due almost entirely to depreciation associated with the acquired Pentalassets and amortization related to intangible assets recognized in the purchase accounting for the Pental acquisition.Interest Expense. For the year ended December 31, 2017, interest expense increased by $9.0 million, or 191.5%, to $13.7 million, from $4.7 millionfor the year ended December 31, 2016. During the year ended December 31, 2017, our RDS segment increased its borrowing for the purpose of a dividenddistribution, and our ASG segment increased its borrowing to finance the Pental acquisition, prior to our repayment of a significant amount of debt with aportion of the proceeds from the November 2017 private offering and private placement.43 Income Taxes. For the year ended December 31, 2017, we recognized income tax expense of $3.3 million, an increase of $0.7 million from incometax expense of $2.6 million for the year ended December 31, 2016. Our deferred tax assets were revalued as a result of the Tax Cuts and Jobs Act in December2017, which resulted in a $5.3 million increase to income tax expense in 2017.Net (Loss) Income. For the year ended December 31, 2017, net income decreased by $18.4 million to a net (loss) of $(11.3) million, from net incomeof $7.1 million for the year ended December 31, 2016.Adjusted EBITDA. For the year ended December 31, 2017, Adjusted EBITDA increased to $47.0 million, from $27.4 million for the year endedDecember 31, 2016. Incremental operating profit from the Pental acquisition and an increase in operating profit in our RDS segment were partially offset byincreases in operating expenses related to opening new locations in our ASG segment. For the Year EndedDecember 31, (in thousands) 2017 2016 Consolidated net (loss) income $(11,346) $7,055 Income tax expense 3,320 2,634 Interest expense 13,749 4,736 Depreciation and amortization 14,816 9,187 EBITDA 20,539 23,612 Consulting Fees to Trive Capital 1,008 628 Share Based and Transaction Incentive Compensation 16,794 — Nonrecurring Costs 8,656 3,173 Adjusted EBITDA $46,997 $27,413 Adjusted EBITDA Margin. For the year ended December 31, 2017, Adjusted EBITDA margin increased to 13.3%, from 11.7% for the year endedDecember 31, 2016. The increase in the Adjusted EBITDA margin was primarily due to incremental operating profit from the Pental acquisition, whichproduced higher Adjusted EBITDA margin relative to our Company average prior to the Pental acquisition.Customer ConcentrationFor the years ended December 31, 2018, 2017 and 2016, the Company recognized revenue from one customer which accounted for 11.4%, 12.6%and 11.0% of total revenue, respectively. There were no customers which accounted for 10% or more of total accounts receivable, as of December 21, 2018and 2017.Liquidity and Capital ResourcesWorking capital is the largest element of our capital needs, as inventory and receivables are our most significant investments. We also requirefunding for acquisitions, to cover ongoing operating expenses, and to meet required obligations related to financing, such as lease payments and principaland interest payments.Our capital resources primarily consist of cash from operations and borrowings under our long-term revolving credit facilities, capital equipmentleases, and operating leases. As our revenue and profitability have improved during the recovery of the housing market, we have used increased borrowingcapacity under our revolving credit facilities to fund working capital needs. We have utilized capital leases and secured equipment loans to finance ourvehicles and equipment needed for both replacement and expansion purposes.As of December 31, 2018, we had $6.4 million of cash and cash equivalents and $52.5 million of available borrowing capacity under our revolvingcredit facilities. Based on our positive cash flow, our ability to effectively manage working capital needs, and available borrowing capacity, we believe thatwe have sufficient funding available or in place to finance our operations and immediate growth plans.44 Financing Sources; DebtSIC Credit FacilityIn June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as ofJune 28, 2018, which was amended on December 11, 2018 (which we refer to as the “SIC Credit Facility”), with a commercial bank, which amended andrestated each of the RDS credit agreement and the ASG credit agreements in their entirety. The SIC Credit Facility is used by the Company, including bothRDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility thatprovides for borrowings of up to an aggregate of $90 million, after it was increased by $10 million through an amendment in December 2018, and which maybe further increased to an aggregate amount not to exceed $130 million upon the satisfaction of certain conditions.Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate statedamount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a dollar-for-dollar basis by the aggregate statedamount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of theCompany and its subsidiaries.The revolving loans under the SIC Credit Facility bear interest at a floating rate equal to an index rate (which the Company can elect between anindex based on a LIBOR based rate or an index based on a Prime, Federal Funds or LIBOR based rate) plus an applicable margin. The applicable margin isdetermined quarterly based on the borrowers’ average daily availability (calculated by reference to their accounts receivable and inventory that comprisetheir borrowing base) during the immediately preceding fiscal quarter. Upon the occurrence of certain events of default under the SIC Credit Facility, theinterest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). All revolving loans under the SIC CreditFacility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions. Letter of credit obligations are due and payableon the date set forth in the respective loan documents or upon demand by the lender.Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, amongother things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens inconnection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions withaffiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. The SIC Credit Facility is subject to certain financial covenants. At December 31, 2018, the Company was in compliance with the financialcovenants.As of December 31, 2018, $37.2 million was outstanding under the SIC Credit Facility. The Company also had $0.3 million of outstanding letters ofcredit under the SIC Credit Facility at December 31, 2018.Term Loan FacilityOn February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with the lenders party thereto andCerberus Business Finance, LLC, as the agent for the lenders (which we refer to as the “Term Loan Facility”), which initially provided for a $105.0 millionterm loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, wasamended in August 2018 to adjust the borrowing capacity to $101.4 million and was amended in December 2018 to increase the borrowing capacity to$174.2 million.Borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus 5.25% for a base rate loan, or (ii) the LIBOR rateplus 7.25% for a LIBOR loan. The base rate is the greater of the publicly announced interest rate by the reference bank as its reference rate, the basecommercial lending rate or prime rate, and 3.5% per annum. During an insolvency proceeding or during any other event of default (if elected by the requiredlenders), the borrowings under the Term Loan Facility bear interest at the default rate, which is 2% per annum plus the interest rate otherwise applicable tosuch indebtedness. The borrowings under the Term Loan Facility are secured by substantially all of the assets of, and the performance and payment byborrowers thereunder are guaranteed by, the Company and certain of its subsidiaries.45 Following the delivery of audited annual financial statements for each fiscal year, the Term Loan Facility requires the Company to prepay amountsoutstanding under the Term Loan Facility with (i) 75% of the excess cash flow of the Company minus the aggregate principal amount of all optionalprepayments made in such preceding fiscal year, if the leverage ratio is greater than 3.25:1.00, or (ii) 50% of the excess cash flow of the Company minus theaggregate principal amount of all optional prepayments made in such preceding fiscal year, if the leverage ratio is less than or equal to 3.25:1.00.In addition, the Term Loan Facility also requires the Company to prepay amounts outstanding, subject to certain exceptions (and, with respect toclauses (i) and (ii) below, certain limited reinvestment rights), with: (i) 100% of the net proceeds of any asset disposition in excess of $0.75 million in anyfiscal year, (ii) 100% of any insurance or condemnation awards that are greater than $2.5 million, (iii) 100% of the net proceeds of any equity issuances, (iv)100% of the net proceeds of any issuance of indebtedness (other than certain permitted indebtedness), and (v) 100% of any net cash proceeds receivedoutside the ordinary course of business.All term loans under the Term Loan Facility are due and payable in full on February 28, 2023, subject to earlier acceleration upon certain conditions.Under the Term Loan Facility, the Company is required to comply with certain customary restrictive covenants that, among other things and withcertain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens, (ii) make certain capital expenditures, (iii) pay dividendsand make certain other distributions, (iv) sell or dispose of property or assets, (v) make loans, (vi) make payment of certain debt, (vii) make fundamentalchanges, (viii) enter into transactions with affiliates, and (ix) engage in any new businesses. The Term Loan Facility also contains certain customaryrepresentations and warranties, affirmative covenants, and reporting obligations.Substantially all of the Company’s assets are collateral for these loans except assets collateralized by the SIC Credit Facility which hold a seniorposition. These assets include all of accounts receivable and inventory, with the exception of newly acquired assets from the TAC acquisition amounting to$7.0 million for accounts receivable and $4.3 million for inventory. The Company is also restricted from paying dividends to its stockholders. Additionally,substantially all of the net assets of the Company’s subsidiaries are restricted by the term loan agreement from providing loans, advances and dividends to theSIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to these term loans. The Company was incompliance with all financial and nonfinancial covenants as of December 31, 2018 and 2017.As of December 31, 2018, approximately $144.2 million of indebtedness was outstanding under the Term Loan Facility.Vehicle and Equipment FinancingWe have used various secured loans and leases to finance our acquisition of vehicles. As of December 31, 2018, approximately $3.0 million ofindebtedness was outstanding under vehicle and equipment loans and capital leases.Historical Cash Flow InformationWorking CapitalInventory and accounts receivable represent over 85% of our tangible assets as of December 31, 2018, and accordingly, management of workingcapital is important to our businesses. Working capital (defined as current assets less current liabilities, excluding debt and cash) totaled $100.2 million atDecember 31, 2018, compared to $73.4 million at December 31, 2017. Working capital levels have increased primarily due to current year acquisitions.In our RDS segment, for the year ended December 31, 2018, working capital increased by $3.0 million to $16.9 million, compared to $13.9 millionfor the year ended December 31, 2017. Increases in accounts receivable and inventory associated with higher sales volume were offset by a correspondingincrease in accounts payable.46 In our ASG segment, for the year months ended December 31, 2018, working capital increased by $24.2 million to $84.9 million, compared to $60.7million for the year ended December 31, 2017. This increase was largely due to inventory and accounts receivable increases related to the Cosmic, Bedrock,NSI, and Tuscany acquisitions. Higher levels of inventory outside of the acquisitions that contributed to the working capital increase were attributable to newbranch locations and an increase of imported purchases in advance of expected tariffs on Chinese quartz and an expansion of the product line.Cash Flows Provided by / (Used in) Operating ActivitiesNet cash provided by / (used in) operating activities was $12.2 million and $(8.4) million for the years ended December 31, 2018 and 2017,respectively. Net loss was $2.5 million and $11.3 million for the years ended December 31, 2018 and 2017, respectively.Adjustments for noncash expenses included in the calculation of net cash provided by operating activities, including amortization and depreciation,changes in deferred income taxes and other noncash items, totaled $21.8, and $26.7 million for the years ended December 31, 2018 and 2017, respectively.Changes in operating assets and liabilities resulted in net cash used of $7.1 million and $23.7 million for the years ended December 31, 2018 and2017, respectively, due to investments in working capital.Cash Flows Used in Investing ActivitiesFor the year ended December 31, 2018, cash flow used in investing activities was $80.6 million, with $72.1 million resulting from our investments inacquisitions. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $8.5 million. For the year ended December 31, 2017,cash flow used in investing activities was $118.8 million, which consisted of $88.0 million for the acquisition of Pental and $26.8 million for the acquisitionof Greencraft. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $4.1 million.Cash Flows Provided by Financing ActivitiesNet cash provided by financing activities was $72.2 million and $128.0 million for the years ended December 31, 2018 and 2017, respectively. Cashflows provided by financing activities supported our acquisition strategies.For the year ended December 31, 2018, we borrowed an additional $57.2 million in term debt, with debt issuance costs of $0.5 million, and madeprincipal payments of $2.5 million. Aggregate net borrowings on the SIC Credit Facility were $17.9 million, with issuance costs of $0.5 million. Proceedsfrom employee stock purchases were $0.6 million. For the year ended December 31, 2017, we raised $240.5 million in net proceeds from the November 2017 private offering and private placement,used $122.8 million to repurchase and retire shares of our Class B Common Stock, and made distributions to equityholders of $35.4 million. We alsoborrowed an additional $130.0 million in term debt and made principal payments of $88.9 million, for a net increase in term debt of $41.1 million. Aggregatenet borrowings under the RDS credit facility and ASG credit facility were $8.2 million.47 Contractual ObligationsIn the table below, we set forth our enforceable and legally binding obligations as of December 31, 2018. Some of the amounts included in the tableare based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions bythird parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in thetable. Payments due by period (in thousands) Total Less than 1year 1 to 3 years 3 - 5 years More than 5years Long-Term Debt Obligation(1) $145,939 $1,879 $2,934 $141,126 — Capital Lease Obligations(2) 2,155 544 1,169 262 180 Operating Lease Obligations(3) 70,009 14,482 26,413 17,631 11,483 Purchase Obligations(4) 78,760 38,580 40,180 — — Total $296,863 $55,485 $70,696 $159,019 $11,663 (1)Long-term debt obligations include principal payments on our term loans as well as our notes payable. Long-term debt obligations do not includeinterest or fees on the unused portion of our revolving letters of credit or financing fees associated with the issuance of debt.(2)Capital lease obligations include payments on capital leases for vehicles and equipment purchased.(3)We lease certain locations, including, but not limited to, corporate offices, warehouses, fabrication shops, and design centers. For additionalinformation, see Note 10—Commitments and Contingencies to our consolidated financial statements included in this Annual Report.(4)These amounts take into account a contract with a supplier of engineered stone on an exclusive basis in certain states within the United States. Aspart of the terms of the exclusive right to distribute the products provided under the contract, we are obligated to take delivery of a certain minimumamount of product from this supplier. If we fall short of these minimum purchase requirements in any given calendar year, we have agreed tonegotiate with the supplier to arrive at a mutually acceptable resolution. There are no financial penalties to us if such commitments are not met;however, in such a case, the supplier has reserved the right, under the contract, to withdraw the exclusive distribution rights granted to us. Theamount of the payment is estimated by multiplying the minimum quantity required under the contract by the average price paid in 2018. Thisamounts to approximately $36.2 million in 2019 and 2020.In addition to the contractual obligations set forth above, as of December 31, 2018, we had an aggregate of approximately $37.2 million ofindebtedness outstanding under the SIC Credit Facility.Off-Balance Sheet ArrangementsAs of December 31, 2018, with the exception of operating leases that we typically use in the ordinary course of business, we were not party to anymaterial off-balance sheet financial arrangements that are reasonably likely to have a current or future effect on our financial condition or operating results.We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or forother contractually narrow or limited purposes.48 Critical Accounting Policies and EstimatesManagement’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain accountingpolicies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have beenreported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates onhistorical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from theseestimates and assumptions used in preparation of our consolidated financial statements.Revenue RecognitionOur revenue derived from the sale of imported granite, marble, and related items is recognized when persuasive evidence of an agreement existsthrough a purchase order or signed contract detailing the quantity and price, delivery per the agreement has been made, and collectability is reasonablyassured.Our contracts with our homebuilder customers are generally treated as short-term contracts for accounting purposes. These contracts will generallyrange in length from several days to several weeks. We account for these contracts under the completed contract method of accounting and will recognizerevenue and cost of revenues when the contract is complete and performance has been delivered.Our contracts related to multifamily projects are treated as long-term contacts for accounting purposes. Accordingly, the Company recognizesrevenue using the percentage-of-completion method of accounting. For the years ended December 31, 2018 and 2017, multifamily projects accounted forapproximately 2% and 5% of our combined revenues, respectively. At December 31, 2018 and 2017, the under billings (revenues in excess of billings) onmultifamily projects in progress were not significant.We estimate provisions for returns which are accrued at the time a sale is recognized. The Company also realized rebates to customers as a reductionto revenue in the period the rebate is earned.Cost of RevenueRDS’s cost of revenue is comprised of the costs of materials and labor to purchase and install products for our customers.ASG’s cost of revenue primarily consists of purchased materials, sourcing fees for inventory procurement, and freight costs.RDS and ASG also include payroll taxes and benefits, workers’ compensation insurance, vehicle-related expenses and overhead costs, including rent,depreciation, utilities, property taxes, repairs and maintenance costs in the cost of revenue.Our cost of revenue is reduced by rebates provided by suppliers in the period the rebate is earned.Accounts ReceivableAccounts receivable are recorded at net realizable value. We continually assess the collectability of outstanding customer invoices; and if deemednecessary, maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we considerfactors such as: historical collection experience, a customer’s current creditworthiness, customer concentrations, age of the receivable balance bothindividually and in the aggregate and general economic conditions that may affect a customer’s ability to pay. We have the ability to place liens against thesignificant amount of RDS customers in order to secure receivables. Actual customer collections could differ from the our estimates. At December 31, 2018and 2017, the allowance for doubtful accounts was $0.5 million and $0.2 million, respectively.49 InventoriesInventories consist of stone slabs, tile and sinks, and include the costs to acquire the inventories and bring them to their existing location andcondition. Inventory also includes flooring, cabinets, doors and trim, glass, and countertops, which have not yet been installed, as well as labor and relatedcosts for installations in process. Inventory is valued at the lower of cost (using the specific identification and first-in, first-out methods) or net realizablevalue.Intangible AssetsIntangible assets consist of customer relationships, trade names and non-compete agreements. We consider all our intangible assets to have definitelives and are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis based on theexpected cash flows generated by the existing customers as follows: Range of estimateduseful lives Weighted averageuseful lifeCustomer relationships 5 years – 15 years 10 yearsTrade names 3 years – 11 years 8 yearsNon-compete agreements Life of agreement 4 years Business CombinationsWe record business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assetsacquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded asgoodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed oneyear from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are reflected in theperiod in which they occur.GoodwillGoodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account for goodwill in accordancewith FASB ASC topic 350, Intangibles-Goodwill and Other Intangible Assets, which among other things, addresses financial accounting and reportingrequirements for acquired goodwill and other intangible assets having indefinite useful lives. ASC topic 350 requires goodwill to be carried at cost, prohibitsthe amortization of goodwill and requires us to test goodwill for impairment at least annually. We test for impairment of goodwill annually during the fourthquarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. Events or changes in circumstances which couldtrigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator,unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business,significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. Weidentified RDS and ASG as reporting units and determined each reporting unit’s fair value substantially exceeded such reporting unit’s carrying value. Therewere no impairment charges related to goodwill for the years ended December 31, 2018 and 2017.Equity based compensationWe account for equity based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using eitherstraight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service or performance period, which isusually equivalent to the vesting period.50 Income TaxesThe provision for income taxes is accounted for under the asset and liability method prescribed by ASC 740 (Topic 740, Income Taxes). Deferred taxassets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using theenacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rate changes are enacted.We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by thetaxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are thenmeasured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.On December 22, 2017, the Tax Cuts and Jobs Act (which we refer to as the “Tax Act”) was adopted into law. The Tax Act makes broad and complexchanges to the Internal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) eliminatingthe corporate alternative minimum tax (“AMT”) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interestexpense; and (iv) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. As of December 31, 2018 and 2017, our deferred tax assets and liabilities were valued at the 21.0% rate expected for 2018 and beyond.Our policy is to recognize interest and/or penalties related to all tax positions as income tax expense. To the extent that accrued interest and penaltiesdo not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that suchdetermination is made. We have recognized $0.5 million in interest and penalties related to uncertain tax positions as of December 31, 2018. No interest orpenalties were accrued as of December 31, 2017.Recent Accounting PronouncementsSee Note 1 – Organization and Business Description to our audited consolidated financial statements included in this Annual Report for adescription of recent accounting pronouncements issued. Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Interest Rate RiskWe borrow from lenders using financial instruments such as revolving lines of credit, term loans, and notes payable. In many cases, the interest costswe incur under these agreements is calculated using a variable rate that will fluctuate with changes in a published short-term market interest rate index, suchas LIBOR. Accordingly, there is no guarantee as to what our interest payments and expense will be in the future. In an economic environment where shortterm rates (under one year) may increase or continue to increase at any time, there can be no assurance that interest rates will not be higher in the future andhave an adverse effect on our financial soundness. At December 31, 2018, we had outstanding variable rate borrowings of approximately $181.3 million.Assuming the current level of borrowing under the variable rate debt facilities, a hypothetical one-percentage point increase (decrease) in interest rates on ourvariable rate debt would increase (decrease) our annual interest expense by approximately $1.8 million.For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows,assuming other factors are held constant. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivativefinancial instruments during the years ended December 31, 2018, 2017, and 2016. We have not entered into and currently do not hold derivatives for tradingor speculative purposes.51 Foreign Currency Exchange Rate RiskWe purchase materials from both domestic and foreign suppliers. While all of the suppliers receive payments in U.S. dollars and, as such, we are notcurrently exposed to any foreign currency exchange rate risk, there can be no assurance that the payments to suppliers in the future will not be affected byexchange fluctuations between the U.S. dollar and the local currencies of these foreign suppliers.Item 8. Financial Statements and Supplementary Data.The information required by this Item is incorporated herein by reference to the financial statements set forth in Item 15 (Exhibits, FinancialStatement Schedules) of Part IV of this Annual Report.Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed inCompany reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer andChief Financial Officer, to allow timely decisions regarding required disclosure.Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (whichwe refer to as, together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls andprocedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that ourdisclosure controls and procedures were effective as of the end of the period covered by this Annual Report. Remediation and Changes in Internal ControlsIn response to the previously disclosed material weakness existing as of December 31, 2017 and 2016, management has taken numerous steps toremediate this material weakness. The material weakness identified by our management and our independent registered public accounting firm related to thefact that we do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review information relatedto financial reporting in a timely manner. This material weakness is a result of issues that arose in the preparation and presentation of financial statements,maintaining of supporting documentation and agreements, accounting for acquired businesses, accounting for intercompany transactions, correct balancesheet and income statements classifications, correct application of inventory valuation, accounting treatment of our returns policies, and effective monitoringand recording of accounting period cutoffs of revenues, receivables, inventory and liabilities.Actions taken in 2018 to remediate included, but were not limited to, the following: (i) hiring additional resources with significant experience inpublic company accounting and reporting to strengthen our accounting team, (ii) conducting a company-wide assessment of our control environment, (iii)augmenting, documenting and formalizing our internal controls and financial reporting policies and procedures, and (iv) instituting appropriate review andoversight responsibilities within the accounting and financial management function. The material weakness was remediated as of December 31, 2018.52 Changes in Internal Control over Financial ReportingExcept as discussed above, there were no changes during the fourth quarter of 2018 in our internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.Management’s Report on Internal Controls Over Financial ReportingThis Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation reportof the Company’s registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.Item 9B. Other InformationNone. 53 PART IIIItem 10. Directors, Executive Officers of the Registrant and Corporate GovernanceThe information required by this Item will be set forth in our definitive proxy statement (which we refer to as our “2019 Proxy Statement”) to be filedin connection with our 2019 Annual Meeting of Stockholders (which Proxy Statement will be filed with the SEC within 120 days of December 31,2018). The information required by this Item to be contained in our 2019 Proxy Statement under the headings “Election of Directors,” “ExecutiveCompensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.Our Code of Business Conduct and Ethics is available in the “Investors—Corporate Governance—Governance Highlights—Governance Documents”section of our website located at www.selectinteriorconcepts.com. To the extent required by applicable rules of the SEC and the Nasdaq Stock Market, weintend to disclose on our website any amendments to, or waivers from, any provision of our Code of Business Conduct and Ethics that apply to ourCompany's directors and executive officers, including our principal executive officer, principal financial officer or controller, or persons performing similarfunctions.Item 11. Executive CompensationThe information required by this Item will be set forth in our 2019 Proxy Statement under the heading “Executive Compensation,” whichinformation is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item will be set forth in our 2019 Proxy Statement under the heading “Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters,” which information is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item will be set forth in our 2019 Proxy Statement under the heading “Related Transactions and DirectorIndependence” which information is incorporated herein by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this Item will be set forth in our 2019 Proxy Statement under the heading “Fees Paid to Our Independent RegisteredAccounting Firm,” which information is incorporated herein by reference. 54 PART IVItem 15. Exhibits, Financial Statement Schedules.(a) The following documents are filed as part of this Annual Report on Form 10-K: Exhibits.1. Financial Statements. The following financial statements of the Company are included in a separate section of this Annual Report on Form10-K commencing on the page numbers specified below: Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets F-3Consolidated Statements of Operations F-4Consolidated Statements of Changes in Equity F-5Consolidated Statements of Cash Flows F-6Notes to Consolidated Financial Statements F-72. Financial Statements Schedules. See “Schedule I – SIC’s Condensed Parent Company Only Financial Statements” beginning on page F-49.3. Exhibits. The following exhibits are either filed herewith or incorporated herein by reference: ExhibitNumber Description 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the initial filing of theCompany’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s RegistrationStatement on Form S-1 (File No. 333-226101), filed with the SEC on July 25, 2018). 10.1† 2017 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the initial filing of the Company’s Registration Statement onForm S-1 (File No. 333-226101), filed with the SEC on July 9, 2018). 10.2† Form of Restricted Stock Agreement for use with the 2017 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to theinitial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018). 10.3† Form of Phantom Stock Agreement for use with the 2017 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to the initialfiling of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018). 10.4† Employment Agreement, dated as of November 22, 2017, as amended by the Amendment to Employment Agreement, dated as of May 1, 2018,each by and between the Company and Tyrone Johnson (incorporated by reference to Exhibit 10.4 to the initial filing of the Company’sRegistration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9, 2018). 10.5† Employment Agreement, dated as of August 17, 2018, by and between the Company and Nadeem Moiz (incorporated by reference to Exhibit10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on August 17, 2018). 10.6† Employment Agreement, dated as of November 22, 2017, by and between the Company and Kendall R. Hoyd (incorporated by reference toExhibit 10.5 to the initial filing of the Registration Statement on Form S-1 of the Company (File No. 333-226101), filed with the SEC onJuly 9, 2018). 10.7† Amendment to Employment Agreement, dated as of August 17, 2018, by and between the Company and Kendall R. Hoyd (incorporated byreference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on August 17, 2018). 55 10.8† Employment Agreement, dated as of November 22, 2017, by and between the Company and Sunil Palakodati (incorporated by reference toExhibit 10.6 to the initial filing of the Registration Statement on Form S-1 of the Company (File No. 333-226101) filed with the SEC on July 9,2018). 10.9† Amendment to Employment Agreement, dated as of August 17, 2018, by and between the Company and Sunil Palakodati (incorporated byreference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed with the SEC on August 17, 2018). 10.10† Form of Indemnification Agreement between the Company and each of its directors and executive officers (incorporated by reference toExhibit 10.7 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SEC on July 9,2018). 10.11 Board Designee Agreement, dated December 15, 2017, by and between the Company and Gateway Securities Holdings, LLC. (incorporated byreference to Exhibit 10.22 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SECon July 9, 2018). 10.12 Amended and Restated Loan, Security and Guaranty Agreement, dated as of June 28, 2018, by and among the Company and the Company’ssubsidiaries party thereto, as borrowers and obligors, as applicable, and Bank of America, N.A., as lender (incorporated by reference to Exhibit10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, filed with the SEC on September 6, 2018). 10.13 Financing Agreement, dated as of February 28, 2017, among Architectural Granite & Marble, LLC and Pental Granite and Marble, LLC, asborrowers, the financial institutions party thereto as lenders, and Cerberus Business Finance, LLC, as agent for the lenders (incorporated byreference to Exhibit 10.14 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-226101), filed with the SECon July 9, 2018). 10.14 First Amendment to Financing Agreement, dated as of November 22, 2017, among Architectural Granite & Marble, LLC and Pental Granite andMarble, LLC, as borrowers, the financial institutions party thereto as lenders, and Cerberus Business Finance, LLC, as agent for the lenders(incorporated by reference to Exhibit 10.15 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-26101),filed with the SEC on July 9, 2018). 10.15 Second Amendment to Financing Agreement, dated as of December 29, 2017, by and among Architectural Granite & Marble, LLC and PentalGranite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for thelenders (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,2018, filed with the SEC on September 6, 2018). 10.16 Third Amendment to Financing Agreement, dated as of June 28, 2018, by and among Architectural Granite & Marble, LLC and Pental Graniteand Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for the lenders(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, filedwith the SEC on September 6, 2018). 10.17 Fourth Amendment to Financing Agreement, dated as of August 31, 2018, by and among Architectural Granite & Marble, LLC and PentalGranite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for thelenders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on September 7, 2018). 10.18 Fifth Amendment to Financing Agreement, dated as of December 31, 2018, by and among Architectural Granite & Marble, LLC and PentalGranite and Marble, LLC, as borrowers, the financial institutions party thereto, as lenders, and Cerberus Business Finance, LLC, as agent for thelenders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on January 4, 2019). 56 10.19 Lease, dated September 4, 2015, by and between Scholten Family Trust, dated April 14, 1992, as lessor, and L.A.R.K. Industries, Inc., as lessee(incorporated by reference to Exhibit 10.16 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-26101),filed with the SEC on July 9, 2018). 10.20 Sharpen Business Analytics Consulting Agreement, dated as of March 1, 2015, by and between Residential Design Services and SharpenBusiness Analytics (incorporated by reference to Exhibit 10.17 to the initial filing of the Company’s Registration Statement on Form S-1 (FileNo. 333-26101), filed with the SEC on July 9, 2018). 10.21 Registration Rights Agreement, dated as of November 22, 2017, among the Company, Trive Capital Fund I LP, Trive Capital Fund I (Offshore)LP, Trive Affiliated Coinvestors I LP, Tyrone Johnson, Kendall Hoyd, Sunil Palakodati, Tim Reed, and B. Riley FBR, Inc (incorporated byreference to Exhibit 10.8 to the initial filing of the Company’s Registration Statement on Form S-1 (File No. 333-26101), filed with the SEC onJuly 9, 2018). 10.22 Asset Purchase Agreement, dated as of August 31, 2018, by and among L.A.R.K. Industries, Inc., Summit Stoneworks, LLC and certainequityholders of Summit Stoneworks, LLC party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K, filed with the SEC on September 7, 2018). 10.23 Repurchase Agreement, dated as of November 9, 2018, by and among Trive Capital Fund I LP, Trive Capital Fund I (Offshore) LP and TriveAffiliated Coinvestors I LP, and the Company (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q forthe quarterly period ended September 30, 2018, filed with the SEC on November 13, 2018). 21.1* Subsidiaries of Select Interior Concepts, Inc. 23.1* Consent of Independent Registered Public Accounting Firm 31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 32.2* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. *Filed herewith.†Management contract or compensatory plan or arrangement. Item 16. Form 10-K SummaryNone. 57 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized. Select Interior Concepts, Inc. Date: March 15, 2019 By:/s/ Tyrone Johnson Tyrone Johnson Chief Executive Officer and Director(Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons onbehalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Tyrone Johnson Chief Executive Officer and Director March 15, 2019Tyrone Johnson (Principal Executive Officer) /s/ Nadeem Moiz Chief Financial Officer March 15, 2019Nadeem Moiz (Principal Financial and Accounting Officer) /s/ J. David Smith Chairman of the Board of Directors March 15, 2019J. David Smith /s/ Donald F. McAleenan Director March 15, 2019Donald F. McAleenan /s/ Robert Scott Vansant Director March 15, 2019Robert Scott Vansant /s/ S. Tracy Coster Director March 15, 2019S. Tracy Coster /s/ Brett G. Wyard Director March 15, 2019Brett G. Wyard 58 Index to Consolidated Financial Statements Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets F-3Consolidated Statements of Operations F-4Consolidated Statements of Changes in Equity F-5Consolidated Statements of Cash Flows F-6Notes to Consolidated Financial Statements F-7Schedule I – SIC’s Condensed Financial Statements F-49F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersSelect Interior Concepts, Inc. Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of Select Interior Concepts, Inc. (a Delaware corporation) and subsidiaries (the “Company”)as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in theperiod ended December 31, 2018, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financialstatements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity withaccounting principles generally accepted in the United States of America.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. 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 ofthe 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 reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2017.Los Angeles, CaliforniaMarch 15, 2019F-2 Select Interior Concepts Consolidated Financial StatementsSelect Interior Concepts, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 31, 2018 and 2017 As of December 31, (in thousands, except share data) 2018 2017 Assets Current assets Cash $6,362 $2,547 Restricted cash 3,000 3,000 Accounts receivable, net of allowance for doubtful accounts of $500 and $217 at December 31, 2018 and 2017, respectively 63,601 45,284 Inventories 108,270 87,629 Prepaid expenses and other current assets 2,809 2,625 Income taxes receivable 1,263 1,520 Total current assets 185,305 142,605 Property and equipment, net of accumulated depreciation of $13,038 and $6,669 at December 31, 2018 and 2017, respectively 19,798 13,226 Deferred tax assets, net 9,355 11,569 Goodwill 94,593 66,326 Customer relationships, net of accumulated amortization of $35,877 and $23,835 at December 31, 2018 and 2017, respectively 79,843 68,125 Intangible assets, net 20,872 14,138 Other assets 6,248 4,257 Total assets $416,014 $320,246 Liabilities and Stockholders’ Equity Current liabilities Current portion of long-term debt, net of financing fees of $511 and $522 at December 31, 2018 and 2017, respectively $1,368 $1,449 Current portion of capital lease obligations 500 229 Accounts payable 37,265 38,491 Income taxes payable 984 — Accrued expenses and other current liabilities 27,620 19,840 Customer deposits 9,908 5,320 Total current liabilities 77,645 65,329 Line of credit 36,706 19,269 Long-term debt, net of current portion and financing fees of $1,618 and $1,673 at December 31, 2018 and 2017, respectively 142,442 86,897 Long-term capital lease obligations 1,544 664 Other long-term liabilities 8,983 — Total liabilities 267,320 172,159 Commitments and contingencies (Note 10) — — Stockholders' Equity Class A common stock, par value $0.01 per share; 100,000,000 shares authorized; 25,682,669 and 21,750,000 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively 257 217 Class B common stock, par value $0.01 per share; 15,000,000 shares authorized; no shares issued and outstanding at December 31, 2018, and 3,864,626 shares issued and outstanding at December 31, 2017 — 39 Additional paid-in capital 156,601 153,520 Accumulated deficit (8,164) (5,689)Total stockholders’ equity 148,694 148,087 Total liabilities and equity $416,014 $320,246 See accompanying notes to consolidated financial statements. F-3 Select Interior Concepts, Inc. and SubsidiariesConsolidated Statements of OperationsFor the Years Ended December 31, 2018, 2017 and 2016 Year Ended December 31, (in thousands, except share data) 2018 2017 2016 Revenue, net 489,757 $352,952 $233,868 Cost of revenue 356,303 249,063 167,038 Gross profit 133,454 103,889 66,830 Selling, general and administrative expenses 121,357 97,727 52,405 Income from operations 12,097 6,162 14,425 Other expense: Interest expense 11,426 12,761 4,735 Loss on extinguishments of debt 42 988 — Other expense, net 2,115 439 1 Total other expense, net 13,583 14,188 4,736 (Loss) income before provision for income taxes (1,486) (8,026) 9,689 Provision for income taxes 989 3,320 2,634 Net (loss) income $(2,475) $(11,346) $7,055 Less: net (loss) income attributable to Predecessor $— $(5,657) $7,055 Net (loss) attributable to Select Interior Concepts, Inc. $(2,475) $(5,689) $— (Loss) per basic and diluted share of common stock Basic Class A Common Stock $(0.10) $(0.22) $— Basic Class B Common Stock $(0.22) $— Diluted Class A Common Stock $(0.10) $(0.22) $— Diluted Class B Common Stock $(0.22) $— Weighted average shares outstanding Basic Class A Common Stock 25,634,342 19,650,000 — Basic Class B Common Stock 5,964,626 — Diluted Class A Common Stock 25,634,342 19,650,000 — Diluted Class B Common Stock 5,964,626 — F-4 Select Interior Concepts, Inc. and SubsidiariesConsolidated Statements of Changes in EquityFor the Years Ended December 31, 2018, 2017, and 2016 Predecessor Class A Stockholders Class B Stockholders (in thousands, except share data) MemberUnits Members’Capital Class ACommonStockSharesOutstanding Class ACommonStock Class BCommonStockSharesOutstanding Class BCommonStock TotalAdditionalPaid-inCapital TotalAccumulatedDeficit Total Balance as of January 1, 2016 34,792,621 $20,411 — $— — $— $— $— $20,411 Net income — 7,055 — — — — — — 7,055 Dividends issued — (263) — — — — — — (263)Equity issued related to the acquisition of Modul 21,128,318 12,538 — — — — — — 12,538 Balance as of December 31, 2016 55,920,939 39,741 — — — — — — 39,741 Issuance of Class E-1 Units to existing members 21,736,168 — — — — — — — — Issuance of Class E-2 Units to Aquarius Seller, Inc. andan existing member 7,156,106 10,030 — — — — — — 10,030 Dividends issued — (35,421) — — — — — — (35,421)Equity based compensation (See Note 12) 4,175,844 7,345 — — — — — — 7,345 Net loss prior to November 2017 Restructuring Transactions and November 2017 Private Offering and Private Placement — (5,657) — — — — — — (5,657)Balance prior to November 2017 Restructuring Transactions and November 2017 Private Offering and Private Placement 88,989,057 16,038 — — — — — — 16,038 Contribution of member units for Class B CommonStock (57,361,484) (10,264) — — 9,244,112 92 10,172 — - Repurchase of member units (31,627,573) (5,774) — — — — (56,952) — (62,726)Repurchase and retirement of Class B Common Stock — — — — (5,379,486) (53) (59,981) — (60,034)Sale of Class A Common Stock in November 2017Private Offering and Private Placement, including follow-on offering of 3,000,000 shares of Class A CommonStock — — 21,750,000 217 — — 240,284 — 240,501 Deferred tax asset adjustment — — — — — — 19,845 — 19,845 Balance subsequent to November 2017 Restructuring Transactions and November 2017 Private Offering and Private Placement — — 21,750,000 3,864,626 39 153,368 — 153,368 Equity based compensation — — — — — 152 — 152 Net loss subsequent to November 2017 Restructuring Transactions and November 2017 Private Offering and Private Placement — — — — — — — (5,689) (5,689)Balance as of December 31, 2017 — — 21,750,000 217 3,864,626 39 153,520 (5,689) 148,087 Equity based compensation — — 27,646 — — 2,528 — 2,528 Issuances of Class A and Class B Stock — — 752 1 39,645 553 — 554 Special stock dividend and Class B cancellation — — 226,511 2 (226,511) (2) — — — Conversion of Class B Stock to Class A Stock — — 3,677,760 37 (3,677,760) (37) — — — Net loss — — — — — — — (2,475) (2,475)Balance as of December 31, 2018 — $— 25,682,669 $257 — $— $156,601 $(8,164) $148,694 See accompanying notes to consolidated financial statements. F-5 Select Interior Concepts, Inc. and SubsidiariesConsolidated Statements of Cash FlowsFor the Years Ended December 31, 2018, 2017 and 2016 Year Ended December 31, (in thousands) 2018 2017 2016 Cash flows from operating activities Net (loss) income $(2,475) $(11,346) $7,055 Adjustments to reconcile net (loss) income to net provided by cash (used in) operating activities: Depreciation and amortization 20,487 14,816 9,187 Change in fair value of Greencraft Holdings, LLC earn-out liability 2,109 — — Equity based compensation 2,528 7,497 — Deferred (benefit from) provision for income taxes (4,186) 2,929 (1,896)Amortized interest on deferred debt issuance costs 663 558 273 Loss on extinguishment of debt 42 988 — Increase (decrease) in allowance for doubtful accounts 283 (127) (101)(Gain) loss on disposal of property and equipment, net (139) 57 1 Changes in operating assets and liabilities: Accounts receivable (4,370) (8,784) 3,348 Inventories 1,209 (24,024) (4,345)Prepaid expenses and other current assets 151 (1,616) 592 Related party receivable — — 44 Other assets (174) (110) (248)Accounts payable (11,891) 9,166 (410)Accrued expenses and other current liabilities 3,847 2,965 1,275 Income taxes payable (receivable) 1,240 (2,405) 504 Customer deposit 2,888 1,069 261 Net cash provided by (used in) operating activities 12,212 (8,367) 15,540 Cash flows used in investing activities Purchase of property and equipment (8,507) (4,218) (3,477)Proceeds from disposal of property and equipment 6 144 30 Acquisition of T.A.C. Ceramic Tile Co., net of cash acquired (40,189) — — Acquisition of Summit Stoneworks, LLC (16,000) — — Acquisition of The Tuscany Collection, LLC (4,152) — — Acquisition of NSI, LLC (290) — — Acquisition of Elegant Home Design, LLC (11,492) — — Acquisition of Pental Granite and Marble, LLC, net of cash acquired — (88,001) — Acquisition of Greencraft Holdings, LLC, net of cash acquired — (26,762) — Acquisition of Bermuda Import-Export, Inc., net of cash acquired — — (11,340)Net cash used in investing activities (80,624) (118,837) (14,787)Cash flows provided by financing activities Dividends issued — (35,421) $(263)Repurchase of member units — (62,725) — Repurchase and retirement of Class B Common Stock — (60,035) — Proceeds from November 2017 Private Offering and Private Placement, net of issuance costs of $18.0 million — 240,501 — Proceeds from issuance of equity 553 30 12,538 Proceeds (payment) on line of credit, net 17,886 8,242 (7,902)Proceeds from term loan 57,250 130,000 — Term loan deferred issuance costs (958) (2,952) — Payments on notes payable (1,454) (667) (717)Principal payments on long-term debt (1,050) (88,949) (2,002)Net cash provided by financing activities 72,227 128,024 1,654 Net increase in cash and restricted cash 3,815 820 2,407 Cash and restricted cash, beginning of period 5,547 $4,727 $2,320 Cash and restricted cash, end of period $9,362 $5,547 $4,727 Supplemental disclosures of cash flow information Cash paid for interest $10,445 $12,146 $4,493 Cash paid for income taxes $3,845 $2,762 $4,403 Supplemental disclosures of non-cash investing and financing activities Deferred tax asset adjustment related to November 2017 Restructuring Transactions $— $19,845 $— Acquisition of Bermuda Import-Export, Inc. credit deposits $— $— $330 Acquisition of Pental Granite and Marble, LLC, Rollover Equity $— $10,000 $— Acquisitions measurement period adjustments, PT Tile $— $— $140 Contribution of 57,361,484 member units for 9,244,112 shares of Class B Common Stock $— $10,264 $— Measurement period adjustment related to acquisition of Greencraft Holdings, LLC $317 $— $— Earn-out purchase price adjustment for Summit Stoneworks, LLC $1,851 Earn-out purchase price adjustment for T.A.C. Ceramic Tile Co. $2,265 Acquisition of Elegant Home Design, LLC, indemnity holdback $1,000 $— $— Acquisition of equipment and vehicles with long-term debt and capital leases $1,804 $1,270 $511 See accompanying notes to consolidated financial statements. F-6 Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements1. Organization and Business DescriptionOrganization and Nature of OperationsThese financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC” or the “Company”).SIC is a Delaware corporation that was restructured in November 2017 to be a holding company on which to consolidate diversified buildingproducts and services companies with a primary focus on providing products and services related to the interior of all types of buildings. Through its twoprimary operating subsidiaries and segments, Residential Design Services, LLC (f/k/a TCFI LARK LLC) (“RDS”) and Architectural Surfaces Group, LLC(f/k/a TCFI G&M LLC) (“ASG”), SIC imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops, operates designcenters that merchandise interior products, and provides installation services. SIC’s interior product offerings include flooring, cabinets, countertops, walltile, finish carpentry, and shower enclosures and mirrors. RDS operates throughout California, Reno, Nevada, Phoenix, Arizona, Austin, Texas, Manassas,Virginia, Elkridge, Maryland, Atlanta, Georgia, and Charlotte, North Carolina. ASG has operations in the Northeast, Southeast, Southwest, Midwest,Mountain West, and West Coast regions of the United States.The SIC platform originated in September 2014, when affiliates of Trive Capital Management LLC (“Trive Capital”) acquired RDS, which in turnacquired the assets of PT Tile Holdings, LP (“Pinnacle”) in February 2015, and 100% of the equity interests in Greencraft Holdings, LLC (“Greencraft”) inDecember 2017. RDS then acquired the assets of Summit Stoneworks, LLC (“Summit”) in August 2018, and 100% of the equity interests in T.A.C. CeramicTile Co. (“TAC”) in December 2018. Affiliates of Trive Capital also formed a consolidation platform in the stone countertop market by establishing TCFI G&M LLC, a Delaware limitedliability company formed on May 26, 2015. TCFI G&M LLC acquired 100% of the equity interests in Architectural Granite & Marble, LLC in June 2015,which in turn acquired the assets of Bermuda Import-Export, Inc. (“Modul”) in July 2016, 100% of the equity interests in Pental Granite and Marble, LLC(“Pental”) in February 2017, and the assets of Cosmic Stone & Tile Distributors, Inc. (“Cosmic”) in October 2017. On January 17, 2018, TCFI G&M LLCchanged its name to Architectural Surfaces Group, LLC (a/k/a ASG). ASG then acquired the assets of Elegant Home Design, LLC (Bedrock”) in January2018, the assets of NSI, LLC (“NSI”) in March 2018, and the assets of The Tuscany Collection, LLC (“Tuscany”) in August 2018.ReorganizationOn November 22, 2017, SIC and the former equity holders of RDS and ASG completed a series of restructuring transactions (collectively, the“November 2017 Restructuring Transactions”) whereby (i) certain former equity holders of RDS and ASG (collectively referred to as the “RolloverStockholders”) contributed a certain amount of equity interests in RDS and ASG to SIC in exchange for shares of Class B common stock, par value $0.01 pershare, of SIC (“Class B Common Stock”) (such transaction referred to as the “Contribution and Exchange”), (ii) SIC used a certain amount of proceeds fromthe November 2017 Private Offering and Private Placement (described below) to purchase from certain former equity holders of RDS and ASG the remainingequity interests in each of RDS and ASG (that were not initially contributed to SIC as part of the Contribution and Exchange), and (iii) after the precedingtransactions, RDS and ASG became wholly-owned subsidiaries of SIC. SIC was wholly owned by Trive Capital and was inactive until the November 2017Restructuring Transactions. Prior to the November 2017 Restructuring Transactions, SIC, RDS, and ASG were all under the common control of Trive Capital.F 7Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 1. Organization and Business Description (Continued) Concurrent with the November 2017 Restructuring Transactions, SIC completed a private offering and private placement of 18,750,000 shares of itsClass A common stock, par value $0.01 per share (“Class A Common Stock”), to new investors, at a public offering price of $12.00 per share for grossproceeds of approximately $225 million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses) (the“November 2017 Private Offering and Private Placement”). The net proceeds from the November 2017 Private Offering and Private Placement were primarilyused by SIC to (i) repurchase 2,379,486 shares of Class B Common Stock from Trive Capital for approximately $26.6 million, (ii) purchase, from certainRollover Stockholders, the remaining outstanding equity interests in each of RDS and ASG (that were not initially contributed to SIC as part of theContribution and Exchange) for approximately $62.7 million, and (iii) repay outstanding indebtedness totaling $112.8 million to third-party lenders and pay$0.3 million of lending related fees. The remainder of the net proceeds was used by SIC for transaction expenses related to the November 2017 PrivateOffering and Private Placement, working capital and general corporate purposes.In accordance with the terms of the November 2017 Private Offering and Private Placement, in December 2017, SIC completed an additional sale of3,000,000 shares of Class A Common Stock to new investors at an offering price of $12.00 per share for total gross proceeds of approximately $36.0 million(prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses). These net proceeds were used by SIC torepurchase an additional 3,000,000 shares of Class B Common Stock from certain Rollover Stockholders. Holders of Class A Common Stock and Class BCommon stock vote together as a single class on all matters, subject to certain exceptions in the Company’s amended and restated certificate ofincorporation. Holders of Class B Common Stock, other than items related to the Special Stock Dividends (see Registration Rights under Note 11), havesubstantially the same rights in SIC as holders of Class A Common Stock.The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their carryingamounts in a manner similar to a pooling of interests. Accordingly, the 2017 and 2016 consolidated historical results of SIC includes the results under the “asif pooling” method.Transition to Public CompanyOn August 13, 2018, the SEC declared effective the Company’s Registration Statement on Form S-1, which contained a prospectus pursuant to whichcertain selling stockholders of the Company may offer and sell shares of Class A Common Stock. On August 16, 2018, the Company’s Class A CommonStock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.”2. Summary of Significant Accounting PoliciesBasis of Presentation and ConsolidationThe accompanying consolidated financial statements include the accounts of SIC, its wholly owned subsidiaries RDS and ASG, and their whollyowned subsidiaries, and are presented using the accrual basis of accounting in accordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in combination. References to the “ASC” hereafterrefer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative U.S. GAAP.The November 2017 Restructuring Transactions resulting in the transfer of RDS and ASG to subsidiaries of SIC was determined to be a combinationof interests between commonly controlled entities and, as such, the Company accounted for the transactions using “as if pooling” accounting. Accordingly,the consolidated and results of SIC includes the results of both RDS and ASG for all of 2017 and recast 2016 under the “as if pooling” method. The assets andliabilities of RDS and ASG will also be reflected at their historical cost, as determined in accordance with the requirements of ASC 805 when consolidatedinto the accounts of SIC in a manner similar to a pooling of interests.F-8Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) The consolidated financial statements and related disclosures for the period ended December 31, 2016 have previously been issued for RDS and ASGon a combined consolidated basis. For purposes of comparability with the consolidated financial statements and disclosures for the period endedDecember 31, 2017, the Company reclassified the combined consolidated financial statements and disclosures for the period ended December 31, 2016 toconform to the Company’s consolidated financial statements and disclosures. Earnings (Loss) per Common ShareFor the year ended December 31, 2018, basic earnings per share for common stock is computed by dividing net income (loss) by the weightedaverage number of shares of common stock outstanding. Common stock at December 31, 2018 consists of only Class A Common Stock, since in August2018, each then remaining share of Class B Common Stock was automatically converted into one share of Class A Common Stock, resulting in no shares ofClass B Common Stock left outstanding. Diluted earnings per share for common stock is computed by dividing net income (loss) plus the dilutive effect ofrestricted stock-based awards using the treasury stock method.For the period between the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement andDecember 31, 2017, the Basic earnings per share for both Class A and Class B Common Stock is computed by dividing net income (loss) for the periodsubsequent to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement by the weighted averagenumber of shares of common stock outstanding during the period subsequent to the November 2017 Restructuring Transactions and the November 2017Private Offering and Private Placement. Diluted earnings per share for both Class A and Class B Common Stock is computed by dividing net income for theperiod subsequent to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement by the weightedaverage number of shares of common stock outstanding during the period subsequent to the November 2017 Restructuring Transactions and the November2017 Private Offering and Private Placement, plus the dilutive effect of restricted stock-based awards using the treasury stock method. Income (loss) earnedprior to the November 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement is attributable to the LLC membersand, as such, is not reflected in earnings per share. The following table sets forth the computation of basic and diluted loss per share for the year ended December 31, 2018 and the period between theNovember 2017 Restructuring Transactions and the November 2017 Private Offering and Private Placement and December 31, 2017: (in thousands, except share and per share data) Year EndedDecember 31,2018 Period EndedDecember 31,2017 Net loss $(2,475) $(5,689)Weighted average basic and dilutive Class A Common Stock outstanding 25,634,342 19,650,000 Weighted average basic and dilutive Class B Common Stock outstanding — 5,964,626 Total weighted average basic and diluted shares of common stock outstanding 25,634,342 25,614,626 Loss per share of common stock: Basic and diluted $(0.10) $(0.22) All restricted stock awards outstanding totaling 825,976 at December 31, 2018, and 356,368 at December 31, 2017, were excluded from thecomputation of diluted earnings per share in 2018 and 2017 because the Company reported a net loss and the effect of inclusion would have beenantidilutive.F-9Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Use of EstimatesThe preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and contingencies at the date of the consolidated financial statements and the reported revenues andexpenses. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination ofallowances for doubtful accounts, inventory reserves, the lives and methods for recording depreciation and amortization on property and equipment, the fairvalue of reporting units and indefinite life intangible assets, deferred income taxes, revenue recognition, warranties, returns and the purchase price allocationsused in the Company’s acquisitions. Restricted CashAt December 31, 2018 and 2017, the Company had restricted cash of $3.0 million. The restricted cash are funds held in escrow related to theGreencraft acquisition. Fair Value MeasurementASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on thebalance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which theinstrument could be exchanged in a current transaction between willing parties.The three levels of the fair value hierarchy are as follows:Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.Level 2—Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that areobservable or can be corroborated by observable data for substantially the full term of the assets or liabilities.Level 3—Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of theassets or liabilities.The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fairvalue measurement.The earn-out associated with the acquisition of Summit Stoneworks, LLC (“Summit”) in August 2018 with a fair value of $1.9 million is classified asLevel 3 as of December 31, 2018 and is valued using the internal rate of return model. The assumptions used in preparing the internal rate of return modelinclude estimates for future revenues from Summit products and services and a discount factor of 3.8% at December 31, 2018. The assumptions used inpreparing the internal rate of return model include estimates for outcome of milestone goals are achieved, the probability of achieving each outcome anddiscount rates.The earn-out associated with the acquisition of T.A.C. Ceramic Tile Co, LLC (“TAC”) in December 2018 with a fair value of $2.3 million is classifiedas Level 3 as of December 31, 2018 and is valued using the internal rate of return model. The assumptions used in preparing the internal rate of return modelinclude estimates for future revenues from TAC products and services and a discount factor of 3.8% at December 31, 2018. The assumptions used in preparingthe internal rate of return model include estimates for outcome of milestone goals are achieved, the probability of achieving each outcome and discountrates. The earn-out associated with the acquisition of Greencraft Holdings, LLC (“Greencraft”) in December 2017 with a fair value of $7.9 million and $5.8million as of December 31, 2018 and December 31, 2017, respectively, was classified as Level 3 at December 31, 2017. As of December 31, 2018, thisliability is no longer classified as a Level 3 investment as the earn-out targets the liability is based on are 2018 actual financial metrics met as of December31, 2018. This earnout will be paid out in 2019. The change in the fair value of the earn-out of $2.1 million was recorded as other expense for the year endedDecember 31, 2018.F-10Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) At December 31, 2018 and 2017, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term obligationsapproximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term loans, and notespayable approximate their fair values, as interest rates approximate market rates. The Company recognizes transfers between levels at the end of the reportingperiod as if the transfers occurred on the last day of the reporting period. There were no transfers during 2018 or 2017 other than the Greencraft earn-out out ofLevel 3 in 2018 due to the availability of observable and known inputs to calculate the fair value of the liability at December 31, 2018.Accounts ReceivableAccounts receivable are recorded at net realizable value. The Company continually assesses the collectability of outstanding customer invoices; andif deemed necessary, maintains an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, theCompany considers factors such as: historical collection experience, a customer’s current creditworthiness, customer concentrations, age of the receivablebalance both individually and in the aggregate and general economic conditions that may affect a customer’s ability to pay. The Company also has theability to place liens against the significant amount of RDS customers in order to secure receivables. Actual customer collections could differ from theCompany’s estimates. At December 31, 2018 and 2017, the Company’s allowance for doubtful accounts was $0.5 million and $0.2 million, respectively.InventoriesInventories consist of stone slabs, tile and sinks, and include the costs to acquire the inventories and bring them to their existing location andcondition. Inventory also includes flooring, cabinets, doors and trim, glass, and countertops, which have not yet been installed, as well as labor and relatedcosts for installations in process. Inventory is valued at the lower of cost (using the specific identification and first-in, first-out methods) or net realizablevalue.Property and EquipmentProperty and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided for on astraight-line basis over the estimated useful lives of the related assets as follows: Machinery and equipment 7 yearsVehicles 3-5 yearsFurniture and fixtures 3-7 yearsComputer and office equipment 3-5 yearsLeasehold improvements Shorter of 15 years or the remaining lease term Intangible AssetsIntangible assets consist of customer relationships, trade names and non-compete agreements. The Company considers all its intangible assets tohave definite lives and are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basisbased on the expected cash flows generated by the existing customers as follows: Range of estimateduseful lives Weighted averageuseful lifeCustomer relationships 5 years – 15 years 10 yearsTrade names 3 years – 11 years 8 yearsNon-compete agreements Life of agreement 4 years F-11Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Business CombinationsThe Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiableassets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value isrecorded as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not toexceed one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments arereflected in the period in which they occur.Impairment of Long-Lived AssetsThe Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changesin circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possibleimpairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted cash flows ofthe related operations. If the aggregate of these cash flows is less than the carrying value of such assets, an impairment loss is recognized for the differencebetween the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair valueof long-lived assets. There were no impairment losses on long-lived assets for the years ended December 31, 2018 and 2017.GoodwillGoodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. During the year ended December 31,2018, ASG recorded goodwill totaling $0.4 million related to the acquisition of the assets of Elegant Home Design, LLC (“Bedrock”), $0.4 million related tothe acquisition of the assets of NSI, LLC (“NSI”), and $1.2 million related to the acquisition of the assets of The Tuscany Collection, LLC (“Tuscany”).During the year ended December 31, 2018, RDS recorded goodwill totaling $8.3 million related to the acquisition of the assets of Summit and $17.8million related to the purchase of 100% of the issued and outstanding equity interests of TAC. Additionally, RDS recorded a measurement period adjustmentto goodwill for the acquisition of Greencraft of $0.3 million during 2018 (See Note 4). During the year ended December 31, 2017, RDS recorded goodwill totaling $10.4 million related to the acquisition of Greencraft and ASG recordedgoodwill totaling $25.4 million related to the acquisition of Pental. ASG also acquired Cosmic Stone & Tile Distributors, Inc. (“Cosmic”) in 2017 with nosignificant impact on Goodwill.The Company accounts for goodwill in accordance with FASB ASC topic 350, Intangibles-Goodwill and Other Intangible Assets, which amongother things, addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets having indefinite useful lives. ASCtopic 350 requires goodwill to be carried at cost, prohibits the amortization of goodwill and requires the Company to test goodwill for impairment at leastannually. The Company tests for impairment of goodwill annually during the fourth quarter or more frequently if events or changes in circumstances indicatethat the goodwill may be impaired. Events or changes in circumstances which could trigger an impairment review include a significant adverse change inlegal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changesin the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economictrends, or significant underperformance relative to expected historical or projected future results of operations. The Company identified RDS and ASG asreporting units and determined each reporting unit’s fair value substantially exceeded such reporting unit’s carrying value. There were no impairment chargesrelated to goodwill for the years ended December 31, 2018 and 2017.F-12Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Debt Issuance CostsDebt issuance costs related to a recognized debt liability are deferred and amortized over the related term of the debt as non-cash interest expense andare presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. Debt issuance costs areamortized using the effective interest method or on a straight-line basis when it approximates the effective interest method.Sales TaxThe Company’s policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. The Company records theamounts collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses.Warranty ObligationsThe Company offers supplier-specific product warranties to its customers. In estimating future warranty obligations, the Company considers variousrelevant factors, including its warranty policies and practices and those of its suppliers, the historical frequency of claims, the cost to replace products underwarranty, and the amounts expected to be reimbursed by suppliers. On certain products, customer warranty claims are covered directly by the manufacturer ofthe product. Management estimates its warranty obligation at December 31, 2018 and 2017, to be minimal, and therefore, the Company has not recorded aprovision for accrued warranty costs.Operating LeasesThe Company accounts for rent expense for its operating leases on a straight-line basis in accordance with authoritative guidance on accounting forleases. The Company leases its corporate, administrative, retail and manufacturing facilities over terms expiring between 2019 and 2029. The Company alsoleases certain office and warehouse equipment over terms expiring between 2019 and 2026. The term of the lease is considered its initial obligation period,which does not include option periods. The leases may have renewal clauses exercisable at the option of the Company and contain rent holidays and/or rentescalation clauses. The Company includes scheduled rent holidays and rent escalation clauses for the purposes of recognizing straight-line rent over the leaseterm.Capital LeasesThe Company finances the acquisition of certain vehicles with capital leases. The acquisition costs are recognized as property, plant and equipment(“PP&E”) on the consolidated balance sheets at fair value at the inception of the lease, or, if lower, at the present value of the minimum lease payments asdetermined at the inception of the lease. The acquisition costs are amortized over the useful life on the same basis as owned vehicles or, where shorter, theterm of the capital lease. Amortization expense is recorded as accumulated amortization on the consolidated balance sheets. The capital lease liability owedto the lessor is included in the consolidated balance sheets as a capital lease obligation. Lease payments are apportioned between interest expense and areduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.Revenue RecognitionThe Company’s revenue derived from the sale of imported granite, marble, and related items is recognized when persuasive evidence of an agreementexists through a purchase order or signed contract detailing the quantity and price, delivery per the agreement has been made, and collectability is reasonablyassured.The Company’s contracts with its home builder customers are generally treated as short-term contracts for accounting purposes. These contracts willgenerally range in length from several days to several weeks. The Company accounts for these contracts under the completed contract method of accountingand will recognize revenue and cost of revenues when the contract is complete and performance has been delivered.F-13Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued)The Company’s contracts related to multifamily projects are treated as long-term contacts for accounting purposes. Accordingly, the Companyrecognizes revenue using the percentage-of-completion method of accounting. Progress to completion varies by project and can include measurement bysquare footage or units completed. For the years ended December 31, 2018 and 2017, multifamily projects accounted for approximately 2% and 5% of theCompany’s combined revenues, respectively. At December 31, 2018 and 2017, the under billings (revenues in excess of billings) on multifamily projects inprogress were not significant.The Company estimates provisions for returns which are accrued at the time a sale is recognized. The Company also realized rebates to customers as areduction to revenue in the period the rebate is earned.Cost of RevenueRDS’ cost of revenue is comprised of the costs of materials and labor to purchase and install products for the Company’s customers.ASG’s cost of revenue primarily consists of purchased materials, sourcing fees for inventory procurement, and freight costs.RDS and ASG also include payroll taxes and benefits, workers’ compensation insurance, vehicle-related expenses and overhead costs, including rent,depreciation, utilities, property taxes, repairs and maintenance costs in the cost of revenue.The Company’s cost of revenue is reduced by rebates provided by suppliers in the period the rebate is earned.Shipping and Handling ChargesFees charged to customers for shipping and handling of product are included in revenues. The costs for shipping and handling of product arerecorded as a component of cost of revenue.AdvertisingThe Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2018, 2017, and 2016 totaled $2.5million, $1.4 million and $0.4 million, respectively.Equity based compensationThe Company accounts for equity based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expenseusing either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service or performance period,which is usually equivalent to the vesting period. (See Note 12)Income TaxesThe provision for income taxes is accounted for under the asset and liability method prescribed by ASC 740 (Topic 740, Income Taxes ). Deferred taxassets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using theenacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rate changes are enacted.The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained onexamination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from suchpositions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.F-14Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued)On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was adopted into law. The Tax Act makes broad and complex changes to theInternal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) eliminating the corporatealternative minimum tax (“AMT”) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interest expense; and(iv) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. As ofDecember 31, 2018 and 2017, the Company’s deferred tax assets and liabilities were valued at the 21.0% rate expected for 2018 and beyond.The Company’s policy is to recognize interest and/or penalties related to all tax positions as income tax expense. To the extent that accrued interestand penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in theperiod that such determination is made. The Company has recognized $0.5 million in interest and penalties related to uncertain tax positions as of December31, 2018. No interest or penalties were accrued as of December 31, 2017.Segment ReportingIn accordance with ASC 280-10-50-1, an operating segment is a component of an entity that has all the following characteristics: a.It engages in business activities from which it may earn revenues and incur expenses. b.Its discrete financial information is available. c.Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to beallocated to the segment and assess its performance.The Company has identified two operating segments that meet all three of the criteria, RDS and ASG. Each of these operating segments providesproducts and services that generate revenue and incur expenses as they engage in business activities and maintains discrete financial information.Additionally, the Company’s chief operating decision, the Chief Executive Officer, reviews financial performance, approves budgets and allocates resourcesat the RDS and ASG operating segment level.Recent Accounting PronouncementsThe Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business StartupsAct of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new orrevised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new orrevised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accountingstandards that have different effective dates for public and private companies until those standards apply to private companies.In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The ASUestablishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance, such as the real estate, construction, and software industries. The ASU core principal is to recognize revenue to depict the transfer of goodsor services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During2014-2016, the FASB issued various amendments to this topic and the amendments clarified certain positions and extended the implementation date untilannual periods beginning after December 15, 2018. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its consolidatedfinancial statements. The Company will adopt ASU 2014-09 in the fourth quarter of 2019 and intends to use the modified retrospective transition method.In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires inventory to be measured at the lower of cost and net realizablevalue. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, andtransportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning afterDecember 15, 2017. The Company adopted this guidance on January 1, 2017 on a prospective basis. The adoption did not have a significant effect on theCompany’s consolidated financial position or results of operations.F-15Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued)In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees forthose leases classified as operating leases under previous standards. For leases with a term of 12 months or less, a lessee is permitted to make an accountingpolicy election by class of asset not to recognize lease assets and lease liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15,2019, but early application is permitted. The Company is currently evaluating the impact of the provisions of ASU 2016-02 on the presentation of itsconsolidated financial statements and related disclosures.In August 2016, the FASB issued ASU 2016–15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(a consensus of the Emerging Issues Task Force), which provides specific guidance on eight cash flow classification and presentation issues arising fromcertain cash receipts and cash payments that currently result in diverse practices. The amendments provide guidance in the presentation and classification ofcertain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupondebt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from thesettlement of corporate-owned life insurance policies and distributions received from equity method investees. As an emerging growth company utilizing theextended transition period for new accounting pronouncements, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2018,and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied using a retrospective approach.The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which reduces thecomplexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other thaninventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party.ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements and related disclosures.In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. ASU 2016-18 is intended to reduce the diversity in practice around howrestricted cash is classified within the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017,including interim periods within that reporting period, with early adoption permitted. The Company has evaluated the impact of ASU 2016-18, and, adoptedthe new standard, and the Company will not present the release of restricted cash as an investing activity cash inflow. Instead, restricted cash balances havebeen and will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows.Also, in January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805)—Clarifying the Definition of a Business. This ASUprovides additional guidance in regards to evaluating whether a transaction should be treated as an asset acquisition (or disposal) or a businesscombination. Particularly, the amendments to this ASU provide that when substantially all of the fair value of the gross assets acquired (or disposed of) isconcentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This clarification reduces the number oftransactions that needs further evaluation for business combination. This became effective for the Company on January 1, 2019. The Company has adoptedthis standard and will apply it to future acquisitions.In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, whichclarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modificationaccounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change interms or conditions. ASU 2017-09 was adopted by the Company and is effective for fiscal years beginning after December 15, 2017, including interimperiods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements andrelated disclosures.F-16Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued)In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, whichpermits reclassification of the income tax effects of the Tax Act on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidancemay be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized,or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interimperiods within those annual periods, with early adoption permitted. The adoption of this standard is not expected to have a material impact on theCompany’s consolidated financial statements and related disclosures.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework (ASU 2018-13). The updatedguidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods withinthose fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currentlyassessing the impact of adopting the updated provisions.Also, in August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract.The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contractwith the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include aninternal use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs,while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective forpublic business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption of theamendments in ASU 2018-15 is permitted, including adoption in any interim period, for all entities. The amendments in ASU 2018-15 should be appliedeither retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the effect thisguidance may have on its consolidated financial statements.3. Concentrations, Risks and UncertaintiesThe Company maintains cash balances primarily at one commercial bank per legal entity. The accounts are insured by the Federal Deposit InsuranceCorporation up to $250,000. The amounts held in financial institutions periodically exceed the federally insured limit. Management believes that thefinancial institutions are financially sound and the risk of loss is minimal.Credit is extended for some customers and is based on financial condition, and generally, collateral is not required. Credit losses are provided in theconsolidated financial statements and consistently have been within management’s expectations.For the years ended December 31, 2018, 2017 and 2016, the Company recognized revenue from one customer which accounted for 11.4%, 12.6%and 11.0% of total revenue, respectively. There were no customers which accounted for 10% or more of total accounts receivable, as of December 31, 2018and 2017.F-17Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. AcquisitionsBedrock AcquisitionOn January 31, 2018, ASG acquired the assets of a slab and tile distributor, Elegant Home Design, LLC (“Bedrock”), for total consideration of $12.5million with cash consideration of $11.5 million and $1.0 million accrued liability recorded as security for and source of payment of sellers’ obligations thatoccur within one year subsequent to the acquisition. The outstanding balance remaining of $1.0 million was paid in cash to the sellers in 2019. In addition tothe consideration paid for Bedrock, the Company agreed to pay up to an additional $3.0 million to be allocated among three individuals, subject to Bedrockmeeting certain financial conditions defined in the purchase agreement and such individuals maintaining continuous employment with the Companythrough January 31, 2019. These financial conditions were not met and accordingly, no payout will be made to these individuals. As of December 31, 2018,the Company did not record any compensation expense associated with this provision.The Bedrock acquisition was financed with $6.25 million of borrowing from the Company’s term loan described in Note 9 and the remainder fromASG’s line of credit described in Note 8. The Bedrock acquisition was accounted for under the acquisition method of accounting, and the assets acquired andliabilities assumed, including identifiable intangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisitiondate. ASG acquired Bedrock to further expand its distribution presence in the Midwest, and to gain access to new geographies, supply chains, products,and distribution rights. The goodwill recorded reflects the strategic value of the acquisition beyond the net value of its assets acquired less liability assumed.The goodwill is deductible for tax purposes.The Company incurred approximately $0.1 million in direct acquisition costs, all of which were expensed as incurred, and are included in generaland administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumedliabilities of Bedrock. The following table summarizes the allocation of the purchase price as of the transaction’s closing date: (in thousands) Amount Accounts receivable $2,543 Inventory 13,425 Other current assets 163 Property and equipment 374 Goodwill 381 Other intangible assets 1,505 Other assets 60 Total assets acquired 18,451 Total liabilities 5,959 Total consideration $12,492 From the date of the Bedrock acquisition to December 31, 2018, Bedrock generated revenue of $27.7 million and net income of $1.9 million, whichare included in the Company’s consolidated statements of operations. F-18Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)Pro Forma ResultsThe following unaudited pro forma information for the years ended December 31, 2018 and 2017 has been prepared to give effect to the acquisitionof Bedrock as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the purchase price allocation. This pro formainformation does not purport to represent what the actual results of operations of the Company would have been had the Bedrock acquisition occurred onsuch date, nor does it purport to predict the results of operations for future periods. Year Ended December 31, 2018 2017 (in thousands) (unaudited) Pro Forma: Total revenue $491,984 $381,231 Net (loss) $(2,445) $(10,568) Pro forma assumptions are as follows: •Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017. •Selling, general and administrative expenses were based on actual results adjusted by $0.02 million and $0.3 million for the years endedDecember 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition. •Actual interest expense was adjusted by $0.05 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, forthe imputed interest on the acquired debt issued to fund the acquisition. •Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes.NSI AcquisitionOn March 19, 2018, ASG acquired the assets of NSI, LLC, a Maryland limited liability company (“NSI”), for approximately $0.3 million in cash. TheNSI acquisition and related transaction costs were financed by ASG’s line of credit described in Note 8. The NSI acquisition was accounted for under theacquisition method of accounting, and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on theirrespective preliminary estimated fair values as of the acquisition date.The Company has performed a valuation of the acquired assets and assumed liabilities of NSI. The goodwill is deductible for tax purposes. Thefollowing table summarizes the estimated allocation of the preliminary purchase price as of the transaction’s closing date: (in thousands) Amount Accounts receivable $251 Inventory 689 Goodwill 390 Total assets acquired 1,330 Total liabilities 1,040 Total consideration $290 From the date of the NSI acquisition to December 31, 2018, revenue and net income generated by NSI was not significant. Pro forma revenues and netincome for the years ended December 31, 2018 and 2017, respectively, were not significant. There were no significant direct acquisition costs associated withthe NSI acquisition.F-19Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)Tuscany AcquisitionOn August 22, 2018, ASG acquired the assets of The Tuscany Collection, LLC (“Tuscany”), a distributor of natural stone, quartz and tile in LasVegas, Nevada, for approximately $4.2 million in cash. The Tuscany acquisition and related transaction costs were financed by the Company’s line of creditdescribed in Note 8. The Tuscany acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed,including identifiable intangible assets, were recorded based on their respective estimated fair values as of the acquisition date.The Company incurred approximately $0.1 million in direct acquisition costs, all of which were expensed as incurred, and are included in generaland administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumedliabilities of Tuscany. The following table summarizes the estimated allocation of the purchase price as of the transaction’s closing date: (in thousands) Amount Accounts receivable $167 Inventory 2,258 Goodwill 1,081 Other intangible assets 2,685 Other current assets 161 Total assets acquired 6,352 Total liabilities 2,200 Total consideration $4,152 Total goodwill that is expected to be deductible for tax purposes is $1.1 million. From the date of the Tuscany acquisition to December 31, 2018,revenue and net income generated by Tuscany was not significant. Pro forma revenues and net income for the periods ended December 31, 2018 and 2017,respectively, were not significant.Summit AcquisitionOn August 31, 2018, RDS acquired the assets of Summit Stoneworks, LLC (“Summit”), which is located in Austin, Texas, and is engaged in builderdesign services and the fabrication and installation of stone products for commercial and residential applications, for $16 million in cash. The agreement alsoprovides for potential earn-out consideration of up to $3.5 million to the former shareholders of Summit for the achievement of certain 2018 and 2019financial milestones. The contingent earn-out consideration had an estimated fair value of $1.9 million at the date of acquisition and is included in otherlong-term liabilities. During the year ended December 31, 2018, no payments were made on the earn-out. The Summit acquisition was financed from theCompany’s term loan described in Note 9. The Summit acquisition was accounted for under the acquisition method of accounting and the assets acquired andliabilities assumed, including identifiable intangible assets, were recorded based on their respective estimated fair values as of the acquisition date.The total purchase price consisted of the following: (in thousands) Amount Cash consideration $16,000 Fair value of earn-out 1,851 $17,851 The Company incurred approximately $0.3 million in direct acquisition costs, all of which were expensed as incurred, and are included in generaland administrative expenses in the consolidated statements of operations. The Company has performed a valuation of the acquired assets and assumedliabilities of Summit.F-20Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)The acquisition will expand the scale of the RDS segment into Austin and San Antonio, Texas markets. The goodwill recorded reflects the strategicvalue of the acquisition beyond the net value of its assets acquired less liability assumed.The following table summarizes the allocation of the purchase price as of the transaction’s closing date: (in thousands) Amount Accounts receivable $1,249 Inventory 1,059 Property and equipment 1,042 Goodwill 8,304 Other intangible assets 8,280 Other assets 14 Total assets acquired 19,948 Total liabilities 2,097 Total consideration $17,851 Total goodwill that is expected to be deductible for tax purposes is $6.4 million. From the date of the Summit acquisition to December 31, 2018,Summit generated revenue of $5.8. million and net income of $0.4 million, which are included in the Company’s consolidated statements of operations.Pro Forma ResultsThe following unaudited pro forma information for the year ended December 31, 2018 and 2017 has been prepared to give effect to the acquisition ofSummit as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the purchase price allocation. This pro formainformation does not purport to represent what the actual results of operations of the Company would have been had the Summit acquisition occurred onsuch date, nor does it purport to predict the results of operations for future periods. Year Ended December 31, 2018 2017 (in thousands) (unaudited) Pro Forma: Total revenue $500,785 $370,645 Net (loss) $(3,954) $(12,205) Pro forma assumptions are as follows: •Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017. •Selling, general and administrative expenses were based on actual results adjusted by $0.8 million and $1.1 million for the years endedDecember 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition. •Actual interest expense was adjusted by $0.6 million and $0.9 million for the years ended December 31, 2018 and 2017, respectively, for theimputed interest on the acquired debt issued to fund the acquisition. •Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes. F-21Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)TAC AcquisitionOn December 31, 2018, RDS purchased 100% of the issued and outstanding equity interests of T.A.C. Ceramic Tile Co. (“TAC”), which is located inManassas, Virginia, and specializes in design center selections and installation of all types of interior flooring surfaces, including tile, hardwood and carpet,for cash consideration of $41.2 million.The agreement also provides for potential earn-out consideration to the former shareholders of TAC for the achievement of certain 2019 financialmilestones. The contingent earn-out consideration had an estimated fair value of $2.3 million at the date of acquisition and is included in other long-termliabilities. The TAC acquisition was financed from the Company’s term loan described in Note 9. The TAC acquisition was accounted for under theacquisition method of accounting and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on theirrespective estimated fair values as of the acquisition date.The total purchase price consisted of the following: (in thousands) Amount Cash consideration $41,210 Fair value of earn-out 2,265 $43,475 The Company incurred approximately $0.7 million in direct acquisition costs, all of which were expensed as incurred, and are included in generaland administrative expenses in the consolidated statements of operations. Additionally, $0.4 million of deferred issuance costs incurred were capitalized. TheCompany has performed a preliminary valuation of the acquired assets and assumed liabilities of TAC. Using the total consideration for the TAC acquisition,the Company has estimated the allocations to such assets and liabilities.Management believes the acquisition expands the scale of the RDS segment while advancing the Company’s objective to diversify acrossgeography, channel and product line, including the Mid-Atlantic region. The acquisition will also assist in introducing a range of additional products tocustomers, including countertops and cabinets. These factors are the basis for the excess purchase price paid over the value of the assets acquired andliabilities assumed, resulting in goodwill.The following table summarizes the estimated allocation of the preliminary purchase price as of the transaction’s closing date: (in thousands) Amount Cash $1,217 Accounts receivable 6,966 Inventory 4,343 Other current assets 87 Property and equipment 1,492 Goodwill 17,794 Other intangible assets 19,865 Other assets 4,873 Total assets acquired 56,637 Current liabilities 1,895 Deferred income taxes 6,400 Other long-term liabilities 4,867 Total liabilities 13,162 Total consideration $43,475 F-22Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)Included in other long-term liabilities is an estimated uncertain tax position of $4.4 million, as well as $0.5 million of interest and penalties, which isoffset by a corresponding indemnification receivable recorded in other assets, as all tax liabilities pre-acquisition are indemnified by the former owners. AsTAC was acquired on December 31, 2018, no revenue or net income generated by TAC was included in the Company’s consolidated statements ofoperations.Pro Forma ResultsThe following unaudited pro forma information for the years ended December 31, 2018 and 2017 has been prepared to give effect to the acquisitionof TAC as if the acquisition had occurred on January 1, 2017. The pro forma information takes into account the preliminary purchase price allocation. Thispro forma information does not purport to represent what the actual results of operations of the Company would have been had the TAC acquisition occurredon such date, nor does it purport to predict the results of operations for future periods. Year Ended December 31, 2018 2017 (in thousands) (unaudited) Pro Forma: Total revenue $562,219 $413,584 Net (loss) $(2,793) $(12,308) Pro forma assumptions are as follows: •Revenues and costs of sales were based on actual results for the years ended December 31, 2018 and 2017 •Selling, general and administrative expenses were based on actual results adjusted by $1.8 million and $1.8 million for the years endedDecember 31, 2018 and 2017, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition.Selling, general and administrative expenses were also adjusted by $4.4 million and $3.7 million for the years ended December 31, 2018 and2017, respectively, for the impact of significant nonrecurring charges. •Actual interest expense was adjusted by $0.6 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, for theimputed interest on the acquired debt issued to fund the acquisition. •Income taxes were adjusted to impute the Company’s corporate effective rate during the period on the pro forma income before taxes. Pental Acquisition On February 28, 2017, ASG executed an agreement to purchase 100% of the equity interests of Aquarius Seller, Inc., a company incorporated in thestate of Washington. Aquarius Seller, Inc. held 100% of the equity interests of Pental Granite and Marble, LLC (“Pental”), a Washington limited liabilitycompany engaged in the selling of granite, marble and related products. Total consideration for the purchase of Aquarius Seller, Inc. was $88.6 million incash, and 7,134,701.65 Class E2 Units of ASG with an estimated fair value of $10.0 million. Total capitalization changes due to the acquisition resulted inthe issuance of 21,736,168 Class E-1 Units, 7,156,104 Class E-2 Units and 568,435 Class C Units of G&M.Also on February 28, 2017, ASG entered into a financing agreement with a third-party lender to borrow amounts up to $105.0 million to be used forpurposes of refinancing ASG’s existing debt, funding a portion of the purchase price for the acquisition of Aquarius Seller, Inc. and funding other amountsdefined in the financing agreement. In conjunction with the acquisition of Aquarius Seller, Inc., availability under ASG’s line of credit was increased to $40.0million.F-23Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)The total purchase price consisted of the following: (in thousands) Amount Cash Consideration $88,638 Rollover Equity 10,000 $98,638 The acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed, including identifiableintangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisition date. The excess of purchase priceconsideration over the estimated net fair value of assets acquired has been allocated to goodwill. Any change in the estimated fair value of the assetsacquired, liabilities assumed and rollover equity subsequent to the closing date, including changes from events after the closing date, will be recognized inearnings in the period the estimated fair value changes.ASG incurred approximately $3.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general andadministrative expenses in the consolidated statements of operations.Management believes the acquisition creates a stronger combined entity primarily due to the increased geographic markets the combined entity willservice and the broadening of the company’s product offering. These two factors are the basis for the excess purchase price paid over the value of the assetsacquired and liabilities assumed, resulting in goodwill.The following is a summary of the purchase price allocation for the Company’s acquisition of Pental: (in thousands) Amount Cash $637 Accounts receivable 5,389 Inventory 30,694 Property and equipment 2,306 Intangible assets subject to amortization 43,800 Goodwill 25,388 Other assets 412 Total assets acquired $108,626 Total liabilities 9,988 Total consideration $98,638 From the date of the Pental acquisition to December 31, 2017, Pental generated net revenue of $84.7 million and a net income of $16.2 million,which are included in the consolidated statements of operations.Pro Forma ResultsThe following unaudited pro forma information for the period ended December 31, 2017 and 2016, has been prepared to give effect to the acquisitionof Pental as if the acquisition had occurred on January 1, 2016. This pro forma information does not purport to represent what the actual results of operationsof the Company would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for future periods. Year Ended December 31, 2017 2016 (in thousands) (unaudited) Pro Forma: Total revenue $367,013 $331,513 Net (loss) income $(11,263) $11,562F-24Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued) Pro forma assumptions are as follows: •Revenues and costs of sales were based on actual results adjusted for intercompany eliminations for the years ended December 31, 2017 and2016. •General and administrative expenses were based on actual results adjusted by $0.7 million and $4.3 million for the years ended December 31,2017 and 2016, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition. •Actual interest expense was adjusted by $1.2 million and $7.2 million for the year ended December 31, 2017 and 2016, respectively, for theimputed interest on the acquired debt issued to fund the acquisition. •Income taxes were adjusted to impute the Company’s corporate rate on the pro forma income before taxes.Cosmic AcquisitionOn October 2, 2017, ASG executed an asset purchase agreement with Cosmic Stone & Tile Distributors, Inc. (“Cosmic”), a New Jersey corporation.Cosmic was established in 1993 and is a slab and tile distributor serving the Tri-State area and most Mid-Atlantic States. The total purchase price was $2.0million in cash and a $0.2 accrued liability recorded as security for and source of payment of sellers obligations as defined in the purchase agreement thatoccur within one year subsequent to the acquisition. The outstanding balance remaining of $0.2 million was paid in cash to the sellers in October 2018. Thepurchase price was allocated as $2.0 million in inventory and $0.2 in property and equipment. From the date of the Cosmic acquisition to December 31,2017, net revenue and net income generated by Cosmic was not significant. Pro forma revenue and net income for the periods ended December 31, 2017 andDecember 31, 2016 were not significant.Management believes the Cosmic acquisition created a stronger combined entity through expansion into the Tri-State and Mid-Atlantic regions.Greencraft AcquisitionOn December 29, 2017, RDS executed an agreement to purchase 100% of the equity interests of Greencraft Holdings, LLC (“Greencraft”), an Arizonalimited liability company, which provides full-service as a general contractor, performing installations and renovation-based construction services withrevenues generated largely from cabinet and flooring installations. Greencraft wholly owns Casa Verde, Stone and Tile, and Greencraft Interiors. Totalconsideration for the acquisition was $33.0 million with cash consideration of $24.2 million, $3.0 million cash placed in escrow, and an earn-out with anacquisition date fair value of $5.8 million. The agreement provides for the amount in escrow as security for and source of payment of sellers obligations asdefined in the purchase agreement that occur within one year subsequent to the acquisition. An adjustment to the total consideration of $0.3 million wasrecorded during 2018. The balance remaining in escrow at December 31, 2018 was released to the sellers in January 2019. The Company has included the$3.0 million placed in escrow as restricted cash on the consolidated balance sheets and has included a liability in accrued expenses and other currentliabilities for $3.0 million, the fair value of the liability due to the sellers at the release date. The agreement also provided for potential earn-out considerationof up to $8.0 million to the former shareholders of Greencraft for the achievement of certain 2018 financial milestones. The earn-out estimated fair value is$7.9 million as of December 31, 2018 and is recorded in accrued expenses and other current liabilities. The fair value at December 31, 2018, was calculatedusing the actual results achieved on the 2018 financial milestones. The earn-out will be paid to the shareholders in 2019. The change in the fair value of theearn-out of $2.1 million was recorded as other expense for the year ended December 31, 2018. During the years ended December 31, 2018 and 2017, nopayments were made on the earn-out or out of escrow. The acquisition was financed with $13.5 million of long term debt and the remaining with funds fromthe line of credit.F-25Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)The total purchase price consisted of the following: (in thousands) Amount Cash Consideration $27,218 Fair Value of Earn Out 5,794 $33,012 The acquisition was accounted for under the acquisition method of accounting and the assets acquired and liabilities assumed, including identifiableintangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisition date. The excess of purchase priceconsideration over the estimated net fair value of assets acquired has been allocated to goodwill. Any change in the estimated fair value of the assets acquiredand liabilities assumed subsequent to the closing date, including changes from events after the closing date, will be recognized in earnings in the period theestimated fair value changes.RDS incurred approximately $0.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general andadministrative expenses in the consolidated statements of operations.Management believes the Greencraft acquisition created a stronger combined entity due to Greencraft’s presence and reputation in Arizona as well asits expertise with cabinets installation and renovation-based construction services. These two factors are the basis for the excess purchase price paid over thevalue of the assets acquired and liabilities assumed, resulting in goodwill.The following is a summary of the purchase price allocation for the Company’s acquisition of Greencraft: (in thousands) Amount Cash $191 Accounts receivable 2,606 Inventory 1,259 Property and equipment 676 Intangible assets subject to amortization 18,285 Goodwill 10,702 Other assets 433 Total assets acquired $34,152 Total liabilities 1,140 Total consideration $33,012 During the two days from the date of acquisition to December 31, 2017, Greencraft did not generate any net revenue or net income.Pro Forma ResultsThe following unaudited pro forma information for the period ended December 31, 2017 and 2016 has been prepared to give effect to the acquisitionof Greencraft as if the acquisition had occurred on January 1, 2016. This pro forma information does not purport to represent what the actual results ofoperations of the Company would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for futureperiods. Year Ended December 31, 2017 2016 (in thousands) (unaudited) Pro Forma: Total revenue $386,873 $255,510 Net (loss) income $(9,861) $5,885F-26Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued) Pro forma assumptions are as follows: •Revenues and costs of sales were based on actual results for the year ended December 31, 2017 and 2016, respectively. •General and administrative expenses were based on actual results adjusted by $1.9 million for both years ended December 31, 2017 and2016, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition. •Actual interest expense was adjusted by $1.4 million for both years ended December 31, 2017 and 2016, respectively, for the imputedinterest on the acquired debt issued to fund the acquisition. •Income taxes were adjusted to impute the Company’s corporate rate on the pro forma income before taxes. Modul AcquisitionOn July 21, 2016, ASG acquired the assets and liabilities from Bermuda Import-Export, Inc., d/b/a Modul Marble & Granite (“Modul”), a corporationformed in the state of California, for approximately $11.3 million in cash. The Modul acquisition and related transactions costs were funded through thecontribution of $12.5 million by existing members in exchange for 21,027,212 Class A member units and 101,106 Class D member units.ASG incurred approximately $0.5 million in direct acquisition costs, all of which were expensed as incurred, and are included in general andadministrative expenses in the consolidated statements of operations.ASG recorded the Modul acquisition using the acquisition method of accounting and accordingly, recognized the assets acquired and liabilitiesassumed at their fair values as of the date of the acquisition. The results of the acquired operations are included in the Company’s consolidated results ofoperations beginning with the date of acquisition.The goodwill of approximately $4.0 million arising from the Modul acquisition represents the excess of the purchase price over the aggregate fairvalue of the net identifiable assets acquired and liabilities assumed, including identifiable intangible assets. Management believes the acquisition of Modulstrengthens its presence in the southern California market due to geographic expansion and the reputation for unique, high quality product Modul is knownfor. These factors are the basis for the excess purchase price paid over the value of the assets acquired and liabilities assumed, resulting in goodwill.The total purchase price consisted of the following: (in thousands) Amount Cash consideration $11,340 Customer deposits 330 Total consideration $11,670 F-27Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 4. Acquisitions (Continued)The following is a summary of the purchase price allocation for the Company’s acquisition of Modul: (in thousands) Amount Accounts receivable $579 Inventory 4,007 Deposits 40 Goodwill 3,959 Other intangible assets 5,080 Total assets acquired 13,665 Accounts payable 1,201 Customer deposits 793 Total liabilities assumed 1,995 Total consideration $11,670 Pro Forma ResultsThe following unaudited pro forma information for the year ended December 31, 2016 has been prepared to give effect to the acquisition of Modul asif the acquisition had occurred on January 1, 2016. This pro forma information does not purport to represent what the actual results of operations of theCompany would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for future periods. (in thousands) Year EndedDecember 31,2016(unaudited) Pro Forma: Total revenue $242,081 Net income $8,229 The Company’s pro forma assumptions are as follows:Revenues and operating costs were based on actual results for the year ended December 31, 2016. 5. InventoriesInventories are valued at the lower of cost and net realizable value, with cost determined under the first in, first out method. The significantcomponents of inventory consisted of the following at December 31: (in thousands) 2018 2017 Raw materials $103,193 $80,726 Installations in process 5,077 6,903 $108,270 $87,629 F-28Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 6. Property and equipment, netProperty and equipment consisted of the following at December 31: (in thousands) 2018 2017 Vehicles $8,553 $5,378 Machinery and equipment 4,513 2,807 Leasehold improvements 7,992 5,287 Furniture and fixtures 7,058 3,363 Computer equipment 4,194 2,908 Other 526 152 $32,836 $19,895 Less: accumulated depreciation and amortization (13,038) (6,669)Property and equipment, net $19,798 $13,226 Depreciation and amortization expense of property and equipment totaled $6.6 million, $3.9 million and $2.0 million for the years endedDecember 31, 2018, 2017, and 2016, respectively. For the year ended December 31, 2018, $3.7 million and $2.9 million of depreciation expense wasincluded in cost of goods sold and general and administrative expense, respectively. For the year ended December 31, 2017, $2.1 million and $1.8 million ofdepreciation expense was included in cost of goods sold and general and administrative expense, respectively. For the year ended December 31, 2016, $1.3million and $0.7 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively.7. Goodwill and Intangible AssetsGoodwillThe change in carrying amount of goodwill by reporting unit was as follows: (in thousands) ASG RDS Total Goodwill December 31, 2016 $18,324 $12,228 $30,552 Pental Acquisition 25,388 — 25,388 Greencraft Acquisition — 10,386 10,386 December 31, 2017 $43,712 $22,614 $66,326 NSI Acquisition 390 — 390 Bedrock Acquisition 381 — 381 Tuscany Acquisition 1,081 — 1,081 Summit Acquisition — 8,304 8,304 TAC Acquisition — 17,794 17,794 Greencraft measurement period adjustment — 317 317 December 31, 2018 $45,564 $49,029 $94,593 F-29Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 7. Goodwill and Intangible Assets (Continued) Intangibles AssetsThe following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets by reportingunit as of December 31, 2018: (in thousands) Gross CarryingAmount ASG RDS Total GrossCarryingAmount Customer relationships $60,180 $55,540 $115,720 Tradenames 7,740 16,800 24,540 Non-Compete agreements 50 350 400 $67,970 $72,690 $140,660 (in thousands) AccumulatedAmortization ASG RDS TotalAccumulatedAmortization Customer relationships $(13,268) $(22,609) $(35,877)Tradenames (1,457) (2,543) (4,000)Non-Compete agreements (9) (59) (68) $(14,734) $(25,211) $(39,945) (in thousands) Net Book Value ASG RDS TotalNet BookValue Customer relationships $46,912 $32,931 $79,843 Tradenames 6,283 14,257 20,540 Non-Compete agreements 41 291 332 $53,236 $47,479 $100,715 The following table provides the gross carrying amount, accumulated amortization and net book value for each class of intangible assets by reportingunit as of December 31, 2017: (in thousands) Gross CarryingAmount ASG RDS Total GrossCarryingAmount Customer relationships $57,200 $34,760 $91,960 Tradenames 6,580 9,550 16,130 Non-Compete agreements — 235 235 $63,780 $44,545 $108,325 (in thousands) AccumulatedAmortization ASG RDS TotalAccumulatedAmortization Customer relationships $(7,308) $(16,527) $(23,835)Tradenames (727) (1,500) (2,227)Non-Compete agreements — — — $(8,035) $(18,027) $(26,062)F-30Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 7. Goodwill and Intangible Assets (Continued) (in thousands) Net BookValue ASG RDS TotalNet BookValue Customer relationships $49,892 $18,233 $68,125 Tradenames 5,853 8,050 13,903 Non-Compete agreements — 235 235 $55,745 $26,518 $82,263 Amortization expense on intangible assets totaled $13.9 million, $10.9 million, and $7.1 million during the years ended December 31, 2018, 2017,and 2016, respectively.The estimated annual amortization expense for the next five years and thereafter is as follows: Year Ending December 31: 2019 $15,122 2020 11,824 2021 11,818 2022 11,742 2023 11,378 Thereafter 38,831 $100,715 8. Lines of CreditSIC Credit FacilityIn June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as ofJune 28, 2018, which was amended on December 11, 2018 (“SIC Credit Facility”), with a commercial bank, which amended and restated each of the RDScredit agreement and the ASG credit agreement in their entirety. The SIC Credit Facility will be used by the Company, including both RDS and ASG, foroperational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowingsup to an aggregate of $90 million, after it was increased by $10 million through an amendment in December 2018, and which may be further increased to anaggregate amount not to exceed $130 million upon the satisfaction of certain conditions.Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate statedamount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a dollar-for-dollar basis by the aggregate statedamount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of theCompany and its subsidiaries.The revolving loans under the SIC Credit Facility bear interest at a floating rate equal to an index rate (which the Company can elect between anindex based on a LIBOR based rate or an index based on a Prime, Federal Funds or LIBOR based rate) plus an applicable margin. The applicable margin isdetermined quarterly based on the borrowers’ average daily availability (calculated by reference to their accounts receivable and inventory that comprisetheir borrowing base) during the immediately preceding fiscal quarter. Upon the occurrence of certain events of default under the SIC Credit Facility, theinterest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). All revolving loans under the SIC CreditFacility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions. Letter of credit obligations under the SIC CreditFacility are due and payable on the date set forth in the respective loan documents or upon demand by the lender.F-31Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 8. Lines of Credit (Continued)Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, amongother things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens inconnection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions withaffiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. As of December 31, 2018, $37.2 million was outstanding under the SIC Credit Facility. The Company also has $0.3 million in letters of creditoutstanding at December 31, 2018. The SIC Credit Facility is subject to certain financial covenants. At December 31, 2018, the Company was in compliancewith the financial covenants.The Company incurred debt issuance costs of $0.5 million in connection with the SIC Credit Facility. These costs will be amortized to non-cashinterest expense over the term of the agreement on a straight-line basis which approximates the effective interest method. Non-cash interest expense related tothese costs was $0.05 million for the year ended December 31, 2018. At December 31, 2018, SIC had $0.4 million of unamortized debt issuance costs relatedto the SIC Credit Facility. These costs are shown as a direct deduction of the line of credit liability in the accompanying Company’s consolidated balancesheets.RDS Line of CreditIn September 2014, RDS entered into a revolving line of credit agreement with a commercial bank with a limit of the lesser of $25,000,000 or the sumof (i) up to 85% of eligible builder accounts receivable, plus (ii) up to 85% of the value of eligible homeowner accounts receivable, not to exceed$3,000,000, plus (iii) up to 70% of the value of eligible unbilled accounts, not to exceed the greater of (x) $3,000,000 and (y) 25% of the Borrowing Base (asdefined), plus (iv) the lesser of (x) 65% of the value of eligible inventory; or (y) 85% of the result of the net orderly liquidation value percentage times thevalue of eligible inventory, minus (v) the availability reserve (as defined) determined by the lender. All borrowings were at the bank’s discretion and boreinterest at the London InterBank Offered Rate (“LIBOR”) plus an applicable margin (as defined), which varied based upon RDS’ leverage ratio. Interest wasdue and payable in arrears monthly. At December 31, 2017, the interest rate on the outstanding balance under the credit agreement was 5.5%. AtDecember 31, 2017, outstanding borrowings on the credit agreement totaled $14 million. The RDS credit agreement was terminated on June 29, 2018coinciding with SIC entering into a new line of credit.In connection with the RDS credit agreement, RDS incurred certain issuance costs. These costs were amortized to non-cash interest expense over theterms of the related notes on a straight-line basis until termination of the agreement. Upon termination the remaining $0.04 million was expensed as loss onextinguishment of debt. Non-cash interest expense related to these costs was $0.04 million and $0.02 million for the years ended December 31, 2018 and2017, respectively. At December 31, 2017, the unamortized debt issuance costs related to the RDS credit agreement totaled $0.08 million.ASG Line of CreditIn June 2015, ASG entered into a loan and security agreement with a financial institution for a line of credit with availability of $15 million. InFebruary 2017 the agreement was amended increasing the availability to $40 million. ASG could borrow, repay, and re-borrow all or any part of thecommitment at any time before the maturity date on February 27, 2022, so long as the combined total unpaid principal amount outstanding under the noteand the face amount of any outstanding letters of credit did not exceed the commitment at any time. The principal amount outstanding under the line ofcredit accrues interest at a floating per annum rate equal to the greater of (a) the Prime Rate for such day; (b) the Federal Funds Rate for such day, plus 0.50%;or (c) LIBOR for a 30-day interest period as determined on such day, plus 2.0% (as defined). The interest rate in effect was 5.0% per annum as of December 31,2017. The interest was payable monthly. The line of credit was collateralized by the assets of ASG. At December 31, 2017, $5.3 million was outstanding onthe line of credit. The ASG credit agreement was terminated on June 29, 2018 coinciding with SIC entering into a new line of credit.ASG incurred debt issuance costs in connection with the ASG credit agreement. These costs were amortized to non-cash interest expense over theterms of the related notes on a straight-line basis which approximates the effective interest method. Non-cash interest expense related to these costs was deminimis for the years ended December 31, 2018 and 2017. As of December 31, 2018 and 2017, ASG had no unamortized debt issuance costs related to theASG credit agreement.F-32Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 9. Long-Term DebtLong-term debt consisted of the following at December 31: (in thousands) 2018 2017 RDS equipment and vehicle notes $956 $1,397 ASG term loans 144,983 89,143 145,939 90,540 Unamortized debt issuance costs (2,129) (2,194)Total long-term debt 143,810 88,346 Current portion of long-term debt, net of financing fees $1,368 $1,449 Long-term debt, net of current portion and financing fees $142,442 $86,897 RDS Equipment and Vehicle NotesRDS has financed the acquisition of certain vehicles, property, and equipment with notes payable that mature at various times through May 2023. Asof December 31, 2018 and 2017, the outstanding balance on equipment and vehicle notes payable, totaled $1.0 million and $1.4 million, respectively. Thesenotes are secured by the vehicles and equipment that were financed and require monthly interest and principal payments. The aggregate of the monthlypayments was approximately $0.05 million at December 31, 2018 and 2017. The interest rates on the notes ranged from 0% to 8.85% per annum for 2018 andfrom 0% to 8.08% per annum for 2017, and the weighted-average interest rate on the outstanding balances at December 31, 2018 and 2017, was 4.85% and4.49% respectively.ASG Term LoansIn December 2015, ASG entered into a loan agreement with a financial institution offering a term loan in the aggregate amount of $1.7 million tofinance the purchase of equipment. Amounts due under the term loan bear interest at 3.75% per annum with interest payable monthly. Principal payments aredue in monthly installments beginning April 8, 2016 through maturity (March 8, 2021). At December 31, 2018 and 2017, ASG had $0.7 million and $1.0million outstanding on this loan, respectively.In May 2016, ASG entered into a loan agreement with an investor offering a term loan in the amount of $0.02 million to finance improvements toASG’s facilities in Anaheim, California. Amounts outstanding under the term loan bear interest at 8% per annum. Payments consisting of principal andinterest are due monthly through maturity (January 1, 2023). As of December 31, 2018 and 2017, ASG had $0.1 million outstanding on this loan.On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with the lenders party thereto andCerberus Business Finance, LLC, as the agent for the lenders (“Term Loan Facility”), which initially provided for a $105.0 million term loan facility. TheTerm Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, was amended in August 2018 toadjust the borrowing capacity to $101.4 million, and was amended in December 2018 to increase the borrowing capacity to $174.2 million.Amounts due under the term loan bear interest at the election of the Company, indexed either to the LIBOR rate or the “base rate,” with an“applicable margin” (each as defined in the financing agreement) (9.6% and 8.6% per annum as of December 31, 2018 and 2017, respectively). Interest ispayable monthly with principal payments due in quarterly installments beginning July 1, 2017 through maturity (February 28, 2023). The Companyborrowed an additional $6.25 million under the terms of this loan to fund a portion of the acquisition of Bedrock on January 31, 2018 and borrowed anadditional $8 million under the terms of this loan to fund a portion of the acquisition of Summit on August 31, 2018. The Company borrowed an additional$43 million under the terms of this loan to fund the acquisition of TAC on December 31, 2018. As of December 31, 2018 and December 31, 2017, theCompany had $144.2 million and $88.0 million outstanding under this term loan, respectively.F-33Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 9. Long-Term Debt (Continued)Substantially all of the Company’s assets are collateral for these loans except assets collateralized by the SIC Credit Facility which hold a seniorposition. These assets include all of accounts receivable and inventory, with the exception of newly acquired assets from the TAC acquisition amounting to$7.0 million for accounts receivable and $4.3 million for inventory. The Company is also restricted from paying dividends to its stockholders. Additionally,substantially all of the net assets of the Company’s subsidiaries are restricted by the term loan agreement from providing loans, advances and dividends to theSIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to these term loans. The Company was incompliance with all financial and nonfinancial covenants as of December 31, 2018 and 2017.ASG incurred debt issuance costs in connection with its term loans. These costs are being amortized to non-cash interest expense over the terms of therelated notes on a straight-line basis, which approximates the effective interest rate method. Non-cash interest expense related to these costs was $0.5 millionfor each of the years ended December 31, 2018 and 2017. Additionally, ASG expensed the remaining unamortized debt issuance costs for the refinanced debtof $0.6 million as extinguishment of debt in February, 2017. At December 31, 2018 and 2017, the unamortized debt issuance costs related to the term loanstotaled $2.1 million and $2.2 million, respectively, and are shown as a direct deduction from the liability on the accompanying consolidated balance sheets.Future MaturitiesAt December 31, 2018, the future maturities of the Company’s long-term debt for each of the next five years and thereafter are as follow: 2019 $1,879 2020 1,717 2021 1,217 2022 1,140 2023 139,986 $145,939 Unamortized balance remaining of financing fees (2,129)Total long-term debt net of financing fees 143,810 Current portion of long-term debt net of financing fees (1,368)Long term debt net of financing fees $142,442 10. Commitments and ContingenciesEquity Tracking Incentive PlanRDS granted exit payments under the Equity Tracking Incentive Program during 2015 to four executives. The executives were eligible to receive anexit payment if certain equity targets are met upon an Exit event. The amount of the Exit Payment would be based on the additional equity value achievedby the Company above the initial equity investment by TCFI LARK, LLC, net of all of the anticipated Exit Payments, on the first to occur of the followingevents: (i) RDS’ initial public offering, (ii) the sale of all or substantially all of the assets of RDS to an unrelated person or entity, or (iii) any other similartransaction in which Trive Capital sells or transfers all of its ownership to an unrelated third party. The Exit Payment shall vest according to the vestingscheduled denoted in the arrangement and will be settled in cash. If the executive ceases to be employed by RDS and its subsidiaries for any or no reason(other than termination for cause) prior to an Exit, the executive may become vested up to a maximum of 50% of the Exit Payment depending on the lengthof continued employment. The remaining 50% of the Exit Payment will vest only if the executive is employed through the date of the Exit. The Companydid not recognize a liability on the date of grant or at December 31, 2016 as the relevant event had not occurred. With the November 2017 Private Offeringand Private Placement (See Note 11), item (iii) above triggered the payment under the Equity Tracking Incentive Plan to the four executives. For the yearended December 31, 2017, RDS recognized $3.5 million of general and administrative expense on the consolidated statements of operations related to thesepayments.F-34Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 10. Commitments and Contingencies (Continued)LeasesThe Company leases certain vehicles under leases classified as capital leases. The leased vehicles are included as property, plant and equipment andamortized to accumulated amortization on a straight line basis over the life of the lease, typically four years. The total acquisition cost included in PP&Erelated to the leased vehicles is $2.7 million and $1.1 million at December 31, 2018 and 2017, respectively. Total accumulated amortization related to theleased vehicles is $0.5 million and $0.05 million at December 31, 2018 and 2017, respectively, with amortization expense totaling $0.5 million and $0.05million for the years ended December 31, 2018 and 2017, respectively. The Company did not have any capital leases for the year ended December 31, 2016.RDS leases its corporate, administrative, fabrication and warehousing facilities under long-term non-cancelable operating lease agreements expiringat various dates through December 2023. The monthly rents are subject to annual increases and generally require the payment of utilities, real estate taxes,insurance and repairs. Four of RDS’ facility leases are with a company owned by a stockholder of SIC and three of RDS’ facility leases are with employees orcontractors of RDS. Three additional related party leases were added with the acquisition of Intown Design in 2019 (See Note 18).RDS also has operating leases for certain office equipment and vehicles under long-term lease agreements expiring at various dates through 2024.ASG leases its facilities and equipment under long-term non-cancellable operating lease agreements expiring at various dates through October 2029.The facility leases contain predetermined fixed escalations of the minimum rentals. Four of ASG’s facility leases are with companies owned by stockholdersof SIC or other related parties.The Company recognizes rent expense on a straight-line basis and records the difference between the recognized rent expense and amounts payableunder the lease as deferred rent. Aggregate deferred rent at December 31, 2018 and 2017 was $1.9 million and $1.3 million, respectively. Aggregate rentexpense for the years ended December 31, 2018, 2017, and 2016 totaled $14.3 million, $7.5 million and $4.5 million, respectively.Aggregate future minimum payments under capital leases and noncancelable operating leases at December 31, 2018 are as follows: (in thousands) CapitalLeaseObligations RelatedPartyOperatingLeaseObligations ThirdPartyOperatingLeaseObligations Net LeaseCommitments 2019 $544 $3,119 $11,363 $15,026 2020 619 3,042 10,924 14,585 2021 550 2,543 9,904 12,997 2022 197 2,335 8,314 10,846 2023 65 1,282 5,700 7,047 Thereafter 180 — 11,483 11,663 Total minimum lease payments $2,155 $12,321 $57,688 $72,164 Less: amount representing interest 111 Present value of net minimum lease payments 2,044 Less: current maturities of capital lease obligations 500 Long-term capital lease obligations $1,544 F-35Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 10. Commitments and Contingencies (Continued)LitigationThe Company experiences routine litigation in the normal course of its business. Production residential builders in California are primarily sued foralleged construction defects. As a practice, residential builders name all subcontractors in the lawsuit whether or not the subcontractor has any connection,direct or indirect, with the alleged defect. The Company, as a subcontractor, is involved in these lawsuits as a result. The Company generally has no orminimal liability in the majority of these lawsuits. The Company’s insurance policies’ self-insured retention (“SIR”) or/deductible typically ranges from$0.01 million to $0.03 million. In the event that the Company has exposure beyond its SIR/deductible, the Company’s general liability policy is triggeredand the general liability insurance and the insurance carrier defends the Company in the lawsuit and is responsible for additional exposure up to policylimits. The Company has consistently maintained general liability insurance with $2.0 million aggregate and $1.0 million per occurrence limits.Management does not believe that any pending or threatened litigation will have a material adverse effect on the Company’s combined business, financialcondition, results of operations, and/or cash flows.IndemnificationIn the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties andprovide for general indemnifications, including to lessors of office and warehouse space for certain actions arising during the Company’s tenancy and to theCompany’s customers. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company inthe future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnificationobligations. However, the Company may record charges in the future as a result of these indemnification obligations.Exclusive Distributor RightsPental’s main supplier has agreed to allow Pental exclusive distribution rights in 23 states in the United States. To maintain these rights, Pental mustmeet certain minimum purchase requirements. Purchase volumes through December 31, 2020 must be a minimum purchase of 90 containers per month. Usingan estimated price per container based on the 2018 average price per container the future minimum purchases to maintain the exclusive rights as ofDecember 31, 2018 are as follows: (in thousands) Amount 2019 36,180 2020 36,180 $72,360 If Pental falls short of these minimum requirements in any given calendar year, Pental has agreed to negotiate with the supplier to arrive at a mutuallyacceptable resolution. There are no financial penalties to Pental if such commitments are not met; however, the supplier reserves the right to removeexclusive distribution rights privileges. Purchase CommitmentsThe Company also has contracted to minimum purchase commitments with certain suppliers. RDS has committed to purchase $2 million in productsannually for each of the calendar years 2019, 2020, 2021 with a certain supplier. Additionally, ASG has committed to purchase volumes estimated atapproximately $0.4 million in 2019 with a specific Italian distributor. F-36Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 11. EquityRDSPrior to the November 2017 Restructuring Transactions, RDS was governed by the terms and conditions of TCFI’s Amended and Restated LimitedLiability Company Agreement (the “Operating Agreement”), effective as of August 31, 2014. The Operating Agreement provided for two types member units:Class A and Class B. At December 31, 2016, RDS had 16,891,535 Class A Units and Class B Units issued and outstanding. Both units had voting rights. TheClass A Units were owned by Trive Capital. The Operating Agreement provided that the Class A unitholders receive 100% of distributions until Trive Capitalhad received 100% of its invested capital. Thereafter, distributions were made 100% to the Class B unitholders until they received 20% of the totaldistributions, and thereafter, distributions were made to both classes of unitholders on a pro rata basis.Prior to the November 2017 Restructuring Transactions, distributions totaling $20.8 million were paid to members during 2017 and no distributionswere made in 2016.ASGPrior to the November 2017 Restructuring Transactions, under ASG’s Second Amended and Restated Limited Liability Agreement dated July 21,2016, membership interests were divided into four classes of units referred to as Class A Units, Class B Units, Class C Units, and Class D Units. The Board ofManagers was authorized to issue (i) Additional Units (including new classes or series of Units thereof having rights which were preferential to or otherwisedifferent than the rights of any then-existing class or series of Units) and (ii) obligations, evidences of indebtedness or other securities or interests in each caseconvertible into or exchangeable for Units. The Board of Managers determined the terms and conditions governing the issuance of such Additional Units,including the number and designation of such Additional Units, the preference (with respect to distributions, in liquidation or otherwise) over any other Unitsand any required contributions in connection therewith, and were entitled to make such amendments to this Agreement as may be necessary to effectuate theforegoing without obtaining the consent of any Member.Members owning Class A, Class B or Class D Units were entitled to vote on any matter permitted or required to be voted upon by the Members. EachMember had one vote per Class A, Class B and Class D Unit owned by such Member. Class C Units represented the participation of ASG’s management oremployees in distributions to Members resulting from a dissolution, liquidation, or sale of substantially all of ASG’s assets. All Class C Units outstanding atDecember 31, 2016 were awarded on August 1, 2016.Under ASG’s Limited Liability Agreement, all distributions of Net Proceeds of a Capital Transaction, distributable cash or other property were madein the following order of priority. First, one hundred percent to the Class A Members Pro Rata, until such time as the Class A Members received an amount ofdistributions equal to one hundred percent of its Invested Capital (defined). Second, one hundred percent to the Class B Members, in proportion to their ClassB Capital Return Accounts, until such Class B Capital Return Accounts were reduced to zero. Third, one hundred percent to the Class D Members, inproportion to their Class D Capital Return Accounts, until such Class D Capital Return Accounts were reduced to zero.Thereafter, all distributions of Net Proceeds of a Capital Transaction, distributable cash or other property were to be made one hundred percent to theMembers Pro Rata; provided, however, no Class C Unit could participate in a distribution until the aggregate distributions to the Members since the date thatClass C Unit was issued equal the Hurdle Amount for that Class C Unit (defined). Notwithstanding the foregoing, in the event of a 3.25x Return Transaction(defined) distributions would occur such that, subject to any re-allocation as defined in the limited liability agreement, each Rollover Member’s (defined) ProRata share of that distribution was calculated as if the Rollover Members, collectively and proportionately, had an additional ten percent (10%) of theoutstanding Units at that time, and each other Member’s (defined) Pro Rata share of that distribution was diluted proportionately.At December 31, 2016, ASG had 39,029,404 Class A Units, Class B Units, and Class D Units issued and outstanding. At December 31, 2016, ASG had3,393,861 Class C Units, granted and unvested. Distributions totaling $262,825 were paid to Members during the year ended December 31, 2016.F-37Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 11. Equity (Continued)ASG’s Third Amended and Restated Limited Liability Agreement dated February 28, 2017 added Class E-1 Units and Class E-2 Units primarily tofacilitate the acquisition of Pental. In connection with the acquisition of Pental, ASG issued 7,134,702 Class E-2 Units valued at $10.0 million to AquariusSeller, Inc. for its Rollover Equity (See Note 4). An additional 21,404 Class E-2 Units were issued for $30,000 to an existing member. In addition, 21,736,168Class E-1 Units were issued to Class A unitholders and 568,435 Class C Units were granted to management and employees.Prior to the November 2017 Restructuring Transactions, distributions totaling $14.6 million were paid to Members during 2017.Class A and B Common StockIn connection with the November 2017 Private Offering and Private Placement, the Company sold and issued 18,750,000 shares of the Company’sClass A Common Stock to new investors, at an offering price of $12.00 per share, for gross proceeds of approximately $225 million (prior to payment ofdiscounts and fees to the initial purchaser and placement agent and offering expenses). In December 2017, in connection with the over-allotment optiongranted to the initial purchaser and placement agent in the November 2017 Private Offering and Private Placement, the Company sold and issued anadditional 3,000,000 shares of Class A Common Stock to new investors at an offering price of $12.00 per share, for gross proceeds of approximately $36million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses).As part of the November 2017 Restructuring Transactions, SIC used approximately $62.7 million of the proceeds from the November 2017 PrivateOffering and Private Placement to purchase a certain amount of equity interests in RDS and ASG from the Rollover Stockholders. The remaining equityinterests in RDS and ASG were rolled over into 9,244,112 shares of Class B Common Stock. Concurrently, SIC used approximately $26.6 million of theproceeds from the November 2017 Private Offering and Private Placement to repurchase and retire 2,379,486 shares of Class B Common Stock from affiliatesof Trive Capital Management LLC (“Trive Capital”). In accordance with the terms of the November 2017 Private Offering and Private Placement, inDecember 2017, the Company also repurchased and retired 3,000,000 shares of Class B Common Stock with the proceeds of the sales of Class A CommonStock to new investors. Immediately after the consummation of the November 2017 Private Offering and Private Placement and the November 2017Restructuring Transactions, the Company had 21,750,000 shares of Class A Common Stock outstanding and 3,864,626 shares of Class B Common Stockoutstanding.Registration RightsIn connection with the November 2017 Private Offering and Private Placement, a Registration Rights Agreement (“Registration Rights Agreement”)was entered into by the Company, certain members of Company management, affiliates of Trive Capital, and B. Riley FBR, Inc. as the initialpurchaser/private placement agent in the November 2017 Private Offering and Private Placement.Pursuant to the Registration Rights Agreement, the Company agreed to file with the SEC as soon as reasonably practicable, but in no event later thanJanuary 31, 2018, a shelf registration statement registering the resale of Class A Common Stock sold in the November 2017 Private Offering and PrivatePlacement (“Shelf Registration Statement”). Pursuant to the Registration Rights Agreement, the Company also agreed to use its commercially reasonableefforts to cause the Shelf Registration Statement to be declared effective by the SEC and have the Class A Common Stock listed on a national securitiesexchange no later than May 31, 2018. F-38Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 11. Equity (Continued)The Registration Rights Agreement provided that if the Shelf Registration Statement was not effective, and the Class A Common Stock was not listedand trading on a national securities exchange, by May 31, 2018, then holders of shares of Class A Common Stock would be entitled to receive dividends onshares of Class A Common Stock that would accrue and be payable only in additional shares of Class A Common Stock (“Special Stock Dividends”). TheRegistration Rights Agreement also provided that Special Stock Dividends would accrue at a daily rate equal to the quotient of (i) 0.05 multiplied by21,750,000 (the aggregate number of shares of Class A Common Stock sold and issued in the November 2017 Private Offering and Private Placement)divided by (ii) 365, up to a maximum aggregate number of shares of Class A Common Stock equal to 1,460,149 shares (“Maximum Accrual Amount”), andwould cease accruing upon the Shelf Registration Statement being declared effective, and the Class A Common Stock commencing trading on a nationalexchange. In the event that Special Stock Dividends are paid by the Company to the holders of Class A Common Stock, an equivalent amount of shares ofClass B Common Stock held by affiliates of Trive Capital and certain members of Company management would be repurchased by the Company at a price of$0.01 per share and immediately cancelled. The shares of Class B Common Stock to be repurchased, if any, would be from the 1,460,149 shares of Class BCommon Stock that were held in escrow (consisting of 1,000,000 shares held by affiliates of Trive Capital and 460,149 shares held by certain members ofmanagement).If the Shelf Registration Statement was declared effective by the SEC, and the Class A Common Stock listed on a national securities exchange priorto Special Stock Dividends accruing to the Maximum Accrual Amount, each remaining share of Class B Common Stock would automatically convert intoone share of Class A Common Stock. The Registration Rights Agreement also described procedures to be followed in the event the Company proposed toconduct an initial public offering of its Class A Common Stock; however, the Registration Rights Agreement does not explicitly require the Company to doso. On August 13, 2018, the Company’s Shelf Registration Statement was declared effective by the SEC and on August 16, 2018 the Class A CommonStock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.” As of August 15, 2018, the Special Stock Dividend stoppedaccruing, with a total amount accrued of 226,511 shares. After the Special Stock Dividend was paid and an equal number of shares of Class B Common Stockwere repurchased and cancelled by the Company, each then remaining share of Class B Common Stock was automatically converted into one share of ClassA Common Stock, resulting in no shares of Class B Common Stock left outstanding.Repurchase AgreementIn connection with the November 2017 Private Offering and Private Placement, the Company has entered into a Repurchase Agreement with certainaffiliates of Trive Capital pursuant to which the Company has the right to repurchase, at a price of $0.01 per share, an aggregate of 800,000 shares of Class ACommon Stock held by such affiliates of Trive Capital upon the determination of the non-occurrence of certain Company performance goals or stock tradingthresholds specified in the Repurchase Agreement. Such affiliates of Trive Capital have placed the 800,000 shares of Class A Common Stock in escrowpending such determination of the occurrence or non-occurrence of the specified performance goals and stock trading thresholds. The Company determinedthat the performance goals and stock trading thresholds were not met and intends to repurchase these shares from Trive Capital.Dividend RightsHolders of shares of Class A Common Stock are entitled to ratably receive dividends when and if declared by the Company’s board of directors out offunds legally available for that purpose, subject to any statutory or contractual restrictions on the payment of dividends and to any prior rights andpreferences that may be applicable to any outstanding preferred stock.F-39Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 11. Equity (Continued)Liquidation RightsUpon the Company’s liquidation, dissolution, distribution of assets or other winding up, holders of shares of Class A Common Stock are entitled toreceive ratably the assets available for distribution to the stockholders after payment of liabilities and any liquidation preference of any outstanding preferredstock.Other MattersThe shares of Class A Common Stock have no preemptive or conversion rights and are not subject to further calls or assessment by us. There are noredemption or sinking fund provisions applicable to the Class A Common Stock. All outstanding shares of the Class A Common Stock are fully paid andnon-assessable.12. Stock CompensationOn November 22, 2017, the Company adopted the Select Interior Concepts, Inc. 2017 Incentive Compensation Plan (“2017 Plan”). Upon theadoption of the 2017 Plan, the maximum aggregate number of shares issuable thereunder was 2,561,463 shares. At December 31, 2018 and, 2017, there wereapproximately 1,667,446 and 1,848,727 shares of common stock available for grant under the 2017 Plan, respectively.Stock OptionsThe 2017 Plan permits the grant of incentive stock options to employees and the grant of nonstatutory stock options, restricted stock, restricted stockunits, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants at the sole discretion of theCompany’s board of directors.The Company’s board of directors administers the 2017 Plan, selects the individuals to whom options will be granted, and determines the number ofoptions to be granted and the term and exercise price of each option. Incentive stock options granted pursuant to the terms of the 2017 Plan cannot begranted with an exercise price of less than 100% of the fair market value of the underlying stock on the date of grant (110% if the award is issued to a 10% ormore stockholder of the Company). The term of the options granted under the Plan cannot be greater than ten years; five years for incentive stock optionsgranted to optionees who have a greater than 10% ownership interest in the Company.If a 2017 Plan option expires, such as upon termination of employment, becomes unexercisable without having been exercised in full, is surrenderedpursuant to an option exchange program, or settled in a manner that does not result in the issuance of shares, the unpurchased shares will become availablefor future grant or sale under the 2017 Plan. If the employee does not exercise vested 2017 Plan options upon termination, these options will expire and revertback to the 2017 Plan’s option pool. The Company’s policy is to issue new shares of common stock upon the exercise of stock options.The Company’s has not had any stock option activity under the 2017 Plan for the years ended December 31, 2018 and 2017.Restricted StockRestricted stock awards and restricted stock unit awards are grants of shares of the Company’s common stock that are subject to various restrictions,including restrictions on transferability, vesting and forfeiture provisions. Recipients of restricted stock awards generally will have voting and dividendrights with respect to such shares upon grant without regard to vesting, unless the Company’s board of directors provides otherwise. Recipients of restrictedstock unit awards generally will not have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the Company’sboard of directors provides otherwise. Shares of restricted stock that do not vest for any reason will be forfeited by the recipient and will revert to theCompany.F-40Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 12. Stock Compensation (Continued)On November 22, 2017, concurrent with November 2017 Private Offering and Private Placement, 356,368 shares of restricted stock were granted tocertain members of the executive management team and members of the Company’s board of directors subject to certain vesting conditions, includingcontinuous service to the Company for a period of 3 years and meeting other Company performance conditions, including continuous service to theCompany, following the date of the restricted stock agreement. The shares vest ratably on an annual basis. For the year ended December 31, 2018, anadditional 779,016 shares of restricted stock were granted to certain executives and key employees, and such shares are subject to vesting over a period ofthree years and certain other conditions, including continuous service to the Company, following the date of the restricted stock agreement. The shares vestratably on an annual basis.The Company estimated the fair value of these shares on the date the shares were granted, and recognizes the resulting fair value, net of estimatedforfeitures, over the requisite service period as general and administrative expense and additional paid-in capital. The grant date fair value for the shares ofrestricted stock granted on November 22, 2017 through August 15, 2018 was estimated using the price per share sold in the November 2017 Private Offeringand Private Placement as a proxy due to the lack of any subsequent market indication of a change in value as the Company’s stock traded very infrequentlyand in very low volume during that period. Subsequent to the commencement of trading of the Class A Common Stock on the Nasdaq Capital Market onAugust 16, 2018, the grant date fair value was determined using the share closing price on the date of grant.A summary of the restricted stock activity for the years ended December 31, 2018 and 2017 is as follows: (in thousands) Number ofRestrictedOutstanding WeightedAverageGrantDate FairValue Nonvested shares at January 1, 2017 — — Granted 356,368 $12.00 Forfeited — — Vested — — Nonvested shares at December 31, 2017 356,368 $12.00 Granted 779,016 $11.83 Forfeited (281,762) 12.00 Vested (27,646) 12.00 Nonvested shares at December 31, 2018 825,976 $11.84 As of December 31, 2018, total remaining equity based compensation expense for unvested restricted stock is $7.6 million, which is expected to berecognized over a weighted average remaining period of 2.7 years. Equity -based compensation expense recognized for restricted stock for the years endedDecember 31, 2018, 2017 and 2016 was $2.5 million, $0.2 million and $0, respectively. The recognized tax benefit for stock compensation expense for theyear ended December 31, 2018 was $1.0 million. There was no significant tax benefit recorded for stock compensation expense in 2017 or 2016.Phantom StockPhantom stock awards are grants of shares of the Company’s common stock that are settled in cash and subject to various restrictions, includingrestrictions on transferability, vesting and forfeiture provisions. Recipients of phantom stock awards generally will not have voting and dividend rights withrespect to such shares upon grant without regard to vesting, unless the Company’s board of directors provides otherwise. Shares of phantom stock that do notvest for any reason will be forfeited by the recipient and will revert to the Company.F-41Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 12. Stock Compensation (Continued)On November 22, 2017, concurrent with November 2017 Private Offering and Private Placement, 356,368 shares of phantom stock were granted tocertain members of the executive management team and members of the Company’s board of directors subject to certain vesting conditions includingcontinuous service to the Company and meeting other Company performance conditions, following the date of the phantom stock agreement. As a result ofthe cash-settlement feature of these awards, the Company considers these awards to be liability awards, which are measured at fair value at each reporting dateand the pro-rata vested portion of the award is recognized as a liability to the extent that the performance condition is deemed probable. The fair value forthe shares of phantom stock granted on November 22, 2017 was estimated using the most current price paid for Class A Common Stock traded between abuyer and a seller.The Company recorded phantom stock based compensation expense of $0.01 million and $0.8 million related to these shares for the years endedDecember 31, 2018 and 2017, respectively.A summary of the phantom stock activity for the years ended December 31, 2018 and 2017 is as follows: Number ofPhantomRestrictedOutstanding Nonvested shares at January 1, 2017 — Granted 356,368 Forfeited — Vested (70,440)Nonvested shares at December 31, 2017 285,928 Granted — Forfeited (281,762)Vested (1,389)Nonvested shares at December 31, 2018 2,777 As of December 31, 2018, total remaining equity based compensation expense for unvested phantom stock is $0.02 million, which is expected to berecognized over a weighted average remaining period of 1.9 years.13. Provision for Income TaxesAt December 31, 2018, 2017 and 2016, the components of the provision for income taxes reflected on the consolidated statements of operations areas follows: (in thousands) 2018 2017 2016 Current: Federal $3,604 17 $3,458 State 1,571 374 1,072 Total current 5,175 391 4,530 Deferred: Federal (2,871) 3,712 (1,471)State (1,315) (783) (425)Total deferred (4,186) 2,929 (1,896)Provision for income taxes $989 $3,320 $2,634 F-42Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 13. Provision for Income Taxes (Continued)The following is a reconciliation of expected income tax expense (computed by applying the federal statutory income tax rate to income beforetaxes) to actual income tax expense. (in thousands) 2018 2017 2016 Income taxes at federal statutory rate $(280) $(2,756) $3,294 State income taxes, net of federal benefit 148 (248) 468 Domestic production activities deductions — (97) (206)Permanent items 294 1,729 8 Transaction costs 968 64 — State rate change (27) (140) — Tax Cuts and Jobs Act — 5,372 — 2015 IRS audit — 228 — Flow-through income — (956) (1,372)Other, net (114) 124 442 Provision for income taxes $989 $3,320 $2,634 At December 31, 2018, the Company's effective income tax rate is different from what would be expected if the federal statutory rate were applied tonet income before taxes primarily because permanent adjustments, capitalized transaction costs, prior period adjustments, and state income taxes. AtDecember 31, 2017, the Company’s effective income tax rate is different from the federal statutory rate primarily due to the impact of the Tax Act notedbelow. At December 31, 2016, the Company’s effective income tax rate is different from what would be expected if the federal statutory rate were applied tonet income before taxes primarily because there is no provision for deferred income taxes for the portion of pretax net income attributable to ASG, which is alimited liability company. The equity holders of ASG, prior to the November 2017 Restructuring Transactions, separately accounted for their share of ASG’sincome, deduction and losses on their income tax returns. In addition, the effective rate differed from the statutory rate for RDS as a result of permanentfavorable adjustments and state income taxes. The November 2017 Restructuring Transaction was treated as a combination of entities under common control,which resulted in a higher basis for tax vs. book. This resulted in the recognition of deferred tax assets totaling approximately $19.7 million (tax effected)which is recognized as contributed capital.The components of deferred tax assets and liabilities are as follows as of December 31, 2018 and 2017: (in thousands) 2018 2017 Deferred tax assets Accrued liabilities $682 $473 State income taxes 208 29 Intangible assets 5,396 11,225 Net operating loss — 541 Inventory 3,228 322 Stock based compensation 659 257 Other, net 558 359 Total deferred tax assets 10,731 13,206 Deferred tax liabilities Property and equipment (1,376) (1,637)Total deferred tax liabilities (1,376) (1,637)Net deferred tax assets (liabilities) $9,355 $11,569 F-43Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 13. Provision for Income Taxes (Continued)Deferred income taxes reflect the net effects of temporary differences between the amounts of assets and liabilities for financial reporting purposes.The Company has not provided for a valuation allowance against any of its deferred tax assets, as management has determined it is more likely than not thatthese deferred tax assets will be realized. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all orsome portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxableincome during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilitiesand projected future taxable income in making this assessment.On December 22, 2017, the President of the United States signed into law the Tax Act. The Tax Act amends the Internal Revenue Code to reduce taxrates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of35% to a flat 21% rate. The rate reduction was effective on January 1, 2018. Because of the rate reduction, the Company reduced the deferred tax assetbalance as of December 31, 2017 by $5.3 million. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidanceon accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Actenactment date for companies to complete the accounting relating to the Tax Act under Accounting Standards Codification Topic 740. Income Taxes (ASC740). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 iscomplete. To the extent that a company’s accounting for Tax Act-related income tax effects is incomplete, but the company is able to determine a reasonableestimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financialstatements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TaxAct. The Company has completed its evaluation of the Act of 2017 on its December 31, 2018 financial statements and adjusted its provision for the yearended December 31, 2018 accordingly.As of December 31, 2018, unrecognized tax benefits relate entirely to pre-acquisition TAC returns. Assessments related to TAC for tax years throughthe December 31, 2018 transaction date are the responsibility of former TAC management. The Company is fully indemnified for income taxes prior to theacquisition, as well as any related interest and penalties. The Company does not expect any significant increases or decreases to the Company’s unrecognizedtax benefits within the next 12 months. The Company is subject to examinations by federal taxing authorities for the tax years 2015 – 2018 and by statetaxing authorities for the tax years 2014—2018. The Company is not currently under any tax examinations. The Company analyzes filing positions in all ofthe federal and state jurisdictions where it is required to file income tax returns, and all open tax years in these jurisdictions to determine if there are anyuncertain tax positions on its tax returns.A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows: (in thousands) 2018 2017 Unrecognized tax positions, beginning of year $— $— Gross increase - current period tax positions — — Gross decrease - prior period tax positions — — Gross increase - prior period tax positions 4,364 — Expiration of statute of limitations — — Unrecognized tax positions, end of year $4,364 $— Of the Company’s total unrecognized tax benefits of $4.4 million, there would be no impact to the annual effective tax rate if recognized as theuncertain tax positions are fully indemnified. The Company’s policy is to recognize interest and/or penalties related to all tax positions as income taxexpense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction ofthe overall income tax provision in the period that such determination is made. The Company has recognized $0.2 million in interest and $0.3 million inpenalties related to uncertain tax positions as of December 31, 2018. If recognized, there would be no impact to the effective tax rate as the interest andpenalties are fully indemnified. No interest or penalties were accrued as of December 31, 2017.Pursuant of Internal Revenue Code Sections 382, annual use of the Company’s net operating loss carryforwards may be limited in the event acumulative change in ownership of more than 50% occurs within a three-year period. F-44Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 14. Employee Benefit PlanThe Company maintains a qualified 401(k) plan for the benefit of its employees. Substantially all employees are eligible to participate in the plan.Under the plan, eligible participants are permitted to make salary deferral contributions to the plan. In addition, the plan provides for employer matching.During the years ended December 31, 2018, 2017 and 2016, the Company contributed $0.9 million, $0.6 million, and $0.3 million to the plan, respectively.15. Related Party TransactionsConsulting AgreementDuring the periods ended December 31, 2017 and 2016, respectively, each of RDS and ASG had a consulting agreement with Trive Capital (affiliatesof which collectively hold more than 5% of the Company’s common stock and are affiliated with Christopher Zugaro, the former chairman of the Company’sboard of directors). Under each such respective agreement, RDS and ASG were each required to pay Trive Capital an annual nonrefundable consulting fee of$0.4 million, payable in four quarterly installments of $0.1 million each, plus the reimbursement of expenses. Each consulting agreement also allowed foradditional consulting work outside of the scope of the agreement to be provided by Trive Capital and billed separately to each company. The agreement wasterminated at the time of the November 2017 Restructuring Transaction. Consulting fees plus expenses that were expensed to Trive Capital during the yearsended December 31, 2017 and 2016 totaled $2.8 million and $1.2 million, respectively. There was no outstanding balance due to Trive Capital atDecember 31, 2018 or December 31, 2017. Facility RentRDS leases four of its facilities from a trust affiliated with a stockholder of the Company. Rent expense under these leases totaled $0.8 million duringthe years ended December 31, 2018 and 2017, $0.7 million during the year ended December 31, 2016. No amounts were unpaid at December 31, 2018 and2017. (See Note 10 ).In 2018, RDS entered into a lease of a facility with a current Summit employee. Rent expense under this lease totaled $0.07 million during the yearended December 31, 2018. No amounts were unpaid at December 31, 2018. In conjunction with the purchase of TAC on December 31, 2018, RDS enteredinto two facility leases with a current TAC contractor. No expense was incurred during 2018 and no amounts were unpaid at December 31, 2018. (See Note10 ). ASG leases office space from AASG Bee Creek Investments Ltd., a company owned by certain stockholders of the Company. The lease was renewedon February 29, 2016 and includes an additional option to renew the lease for five years. Rent expense under this lease was $0.5 million for each of the yearsended December 31, 2018, 2017, and 2016. No amounts were unpaid at December 31, 2018 and 2017. (See Note 10).ASG leases office space from AASG San Antonio Investments Ltd., a company owned by certain stockholders of the Company. The lease wasrenewed on February 29, 2016 and includes an additional option to renew the lease for two years. Rent expense under this lease was $0.2 million for each ofthe years ended December 31, 2018, 2017, and 2016. No amounts were unpaid at December 31, 2018 and 2017. (See Note 10).ASG leases office space from 502 Jersey Ave LLC, a company owned by an employee and former owner of Cosmic. Rent expense under this lease was$0.4 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively. There was no rent expense incurred with this company in 2016.No amounts were unpaid at December 31, 2018 and 2017. (See Note 10).ASG leases office space from 521 Digiulian Boulevard, LLC, a company owned by a current employee and former owner of NSI. Rent expense underthis lease was $0.1 million for the year ended December 31, 2018. There was no expense under this lease during the years ended December 31, 2017 and2016. No amounts were unpaid under this lease at December 31, 2018 and 2017. (See Note 10).F-45Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 15. Related Party Transactions (Continued)Subcontractors and SuppliersTwo of RDS employees have family members that have an ownership interest in flooring subcontracting companies that do business with RDS.During the years ended December 31, 2018, 2017, and 2016, these companies performed a total of $1.6 million, $3.2 million, and $2.7 million in subcontractwork for RDS, respectively. Amounts due and recorded as accounts payable at December 31, 2018 was $0.01 million. No amount was unpaid atDecember 31, 2017.Design services were also provided to RDS by designers affiliated with current Greencraft employees in 2018. During the year ended December 31,2018, expenses incurred with this design company were $0.08 million. No amount was unpaid at December 31, 2018.Other Consulting ServicesA consulting firm affiliated with an officer of the Company has performed various consulting services for the Company related to human resources,accounting, and project management. During the years ended December 31, 2018, 2017, and 2016, the Company incurred approximately $0.2 million, $0.3million, and $0.3 million of costs with this consulting firm, respectively. Amounts due and recorded as accounts payable at December 31, 2018 was $0.01million. No amount was unpaid at December 31, 2017.An ASG executive and a stockholder of the Company terminated employment with ASG as of June 30, 2017. The stockholder continued to providebusiness consulting services for ASG through June 30, 2018. During the years ended December 31, 2018 and 2017, ASG incurred $0.05 million and $0.06million, respectively, of consulting costs with this stockholder. There were no consulting costs associated with this stockholder during 2016. No amountswere unpaid at December 31, 2018 and 2017. 16. Segment InformationThe Company’s operations are classified into two operating segments: RDS and ASG. Under RDS, the Company offers interior design andinstallation services, and under ASG, the Company performs natural and engineered surfaces distribution. These operating segments represent strategicbusiness areas which, although they operate separately and provide their own distinctive services, enables the Company to more effectively offer thecomplete line of interior design and selection services, merchandising, and complex supply chain management. While individual acquisitions, for a time,may have discrete financial information before being fully integrated, RDS and ASG are the only operating and reporting segments for which both discretefinancial information is available and is reviewed by management for the purpose of making operating decisions and assessing financial performance.Inter-segment eliminations result primarily from the sale of ASG inventory to the RDS segment, including the related profit margin, as well as someintercompany borrowings recorded in the form of intercompany payables and receivables.In addition, certain corporate-level costs incurred at a corporate level or at the reporting unit level that benefit the segments is not allocated. Thesecosts include: corporate payroll costs, legal, professional service fees, interest expense, including amortization of deferred financing costs, and taxes andequity based compensation.F-46Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 16. Segment Information (Continued)The Company evaluates performance of the respective segments based upon revenue and operating income. Information for the years presented isprovided below: For the Years Ended December 31, (in thousands) 2018 2017 2016 Net revenue: RDS $268,362 $193,204 $175,824 ASG 223,971 161,114 58,613 Elimination of intercompany sales (2,576) (1,366) (569)Consolidated Total $489,757 $352,952 $233,868 Operating income (loss): RDS $14,252 $(161) $8,481 ASG 11,925 7,966 5,972 Elimination of intercompany operating income (46) (74) (28)Unallocated corporate operating loss (14,034) (1,569) — Consolidated Total $12,097 $6,162 $14,425 Capital expenditures: RDS $1,684 $1,289 $1,268 ASG 6,539 2,793 2,210 Unallocated corporate capital expenditures 284 Consolidated Total $8,507 $4,082 $3,478 Depreciation and amortization: RDS $9,634 $6,853 $6,252 ASG 10,833 7,963 2,935 Unallocated corporate depreciation and amortization 20 Consolidated Total $20,487 $14,816 $9,187 As of December 31, (in thousands) 2018 2017 Goodwill: RDS $49,029 $22,614 ASG 45,564 43,712 Consolidated Total $94,593 $66,326 Other intangible assets, net: RDS $47,479 $26,518 ASG 53,236 55,745 Consolidated Total $100,715 $82,263 Total assets: RDS $170,724 $103,172 ASG 230,505 203,637 Elimination of intercompany receivables and inventory (1,016) (276) Unallocated corporate assets 15,801 13,713 Consolidated Total $416,014 $320,246 F-47Select Interior Concepts, Inc. and SubsidiariesNotes to Consolidated Financial Statements 17. Selected Quarterly Financial Data (Unaudited)Selected summarized quarterly financial information is as follows for the periods presented: (In thousands, except per share data) Quarter Ended Fiscal 2018 December 31 September 30 June 30 March 31 Total revenue $132,957 $127,553 $124,861 $104,386 Gross profit 34,628 36,470 34,406 27,950 Income from operations 3,533 4,004 3,610 950 Net (loss) income (1,833) 753 (86) (1,309)Basic EPS $(0.07) $0.03 $— $(0.05)Diluted EPS $(0.07) $0.03 $— $(0.05)Fiscal 2017 Total revenue $100,261 $94,605 $90,361 $67,725 Gross profit 28,793 28,115 26,511 20,470 Income from operations (8,716) 7,129 7,056 693 Net (loss) income (14,969) 2,812 3,396 (2,585) Basic and Diluted EPS includes both Class A Common Stock and Class B Common Stock for the quarters ended June 30, 2018 and March 30,2018. In August 2018, each then remaining share of Class B Common Stock was automatically converted into one share of Class A Common Stock, resultingin no shares of Class B Common Stock left outstanding.18. Subsequent EventsEvents occurring after December 31, 2018, have been evaluated for possible adjustment to the consolidated financial statements or disclosure as ofMarch 15, 2019, which is the date the consolidated financial statements were available to be issued.On March 1, 2019, the Company acquired Intown Design (“Intown”) for approximately $11 million in cash at closing (subject to post-closingpurchase price true-up adjustments), and an earn-out amount based on the achievement of certain EBITDA thresholds. Intown fabricates and installs granite,marble and quartz countertops in Alabama, Georgia, North Carolina, South Carolina, and Tennessee, and installs cabinets in Georgia. Intown operatesfacilities in Atlanta, Georgia and Charlotte, North Carolina, serving both residential and commercial customers in new-construction and R&R end markets,with annualized sales of approximately $20 million. Management believe the acquisition will further diversify the Company’s geographic mix and channelstrength. In conjunction with the acquisition, the Company entered into three facility leases with the former owner who is now an employee of the Company.As a result of the timing of this acquisition, not all disclosures for the Intown acquisition as required under ASC 805 are presented, including certain proforma information, as the initial accounting for the business combination is incomplete at the time the financial statements were available to be issued. F-48 Schedule I – SIC’s Condensed Parent Company Only Financial Statements Select Interior Concepts, Inc.Parent Company OnlyCondensed Balance Sheets(In thousands, except share data) (in thousands) As of December 31,2018 As of December 31,2017 Assets Investment in wholly owned subsidiaries $161,145 $149,587 Other assets 468 — Total assets $161,613 $149,587 Liabilities and Stockholders' Equity Due to subsidiaries $11,183 $441 Accrueds and other liabilities 1,736 1,059 Total liabilities 12,919 1,500 Stockholders' Equity: Class A common stock, par value $0.01 per share; 100,000,000 shares authorized;25,682,669 and 21,750,000 shares issued and outstanding atDecember 31, 2018 and December 31, 2017, respectively 257 217 Class B common stock, par value $0.01 per share; 15,000,000 shares authorized; no shares issued andoutstanding at December 31, 2018, and 3,864,626shares issued and outstanding at December 31, 2017 — 39 Additional paid in capital 156,601 153,520 Accumulated deficit (8,164) (5,689)Total stockholders' equity 148,694 148,087 Total liabilities and stockholders' equity $161,613 $149,587 See Notes to Condensed Parent Company Only Financial Statements.F 49 Select Interior Concepts, Inc.Parent Company OnlyCondensed Statements of Operations(In thousands) (in thousands) Year Ended December31,2018 Period Ended December31,2017 Equity in net income (loss) of subsidiaries $11,559 $(4,120)Operating expenses (14,034) (1,569)Net loss $(2,475) $(5,689) See Notes to Condensed Parent Company Only Financial Statements.F-50 Select Interior Concepts, Inc.Parent Company OnlyCondensed Statements of Cash Flows(In thousands) (in thousands) Year EndedDecember 31,2018 Period EndedDecember 31,2017 Cash Flows Used in Operating Activities: Net loss $(2,475) $(5,689)Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries (11,559) 4,120 Depreciation and amortization 21 — Equity based compensation 2,528 152 Changes in assets and liabilities: Changes in operating assets (204) — Changes in accrued expenses 677 976 Net cash used in operating activities $(11,012) $(441)Cash Flows used in Investing Activities: Purchase of equipment (284) — Investment in subsidiaries — (117,741)Net cash provided by investing activities $(284) $(117,741)Cash Flows provided by Financing Activities: Repurchase and retirement of common B shares — (60,035)Repurchase of member units — (62,725)Contributions — 240,501 Borrowings from subsidiaries 10,743 441 Proceeds from issuance of equity 553 — Net cash provided by financing activities $11,296 $118,182 Net change in cash and cash equivalents — — Cash and cash equivalents: Beginning — — Ending $— $— See Notes to Condensed Parent Company Only Financial Statements. F-51 Notes to Condensed Parent Company Only Financial StatementsNote 1. Description of Select Interior Concepts Inc.These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC”). SIC is a Delaware corporation that wasrestructured in November 2017 to be a holding company on which to consolidate diversified building products and services companies with a primary focuson the interiors of all types of buildings. SIC owns 100% of its two primary operating subsidiaries and segments, Residential Design Services andArchitectural Surfaces Group. SIC has no significant operations or assets other than its ownership in Residential Design Services and Architectural SurfacesGroup. Accordingly, SIC is dependent upon its subsidiaries to fund its obligations.Note 2. Basis of PresentationThe accompanying Condensed Parent Only Financial Statements include the amounts of SIC and its investment in its subsidiaries under the equitymethod, and do not present the financial statements of SIC and its subsidiaries on a consolidated basis. Under the equity method, investments in subsidiariesare stated at cost plus contributions and equity in undistributed income (loss) of subsidiaries less distributions received since the date of acquisition. Therehave been no distributions in 2018 and 2017. Income tax considerations were evaluated under the separate return method, resulting in no net tax benefits forSIC as a separate entity. The period ended December 31, 2017 represents the period between the November 2017 Restructuring Transactions and theNovember 2017 Private Offering and Private Placement and December 31, 2017. These Condensed Parent Company Only Financial Statements should beread in conjunction with the consolidated financial statements of Select Interior Concepts, Inc. and subsidiaries and the accompanying Notes to theconsolidated financial statements. F-52Exhibit 21.1 SELECT INTERIOR CONCEPTS, INC.List of Subsidiaries Name of SubsidiaryState of Formation,Organization, orIncorporationAG Holdco (SPV) LLCDelawareArchitectural Granite & Marble, LLCDelawareArchitectural Surfaces Group, LLCDelawareCasa Verde Services, LLCDelawareGreencraft Holdings, LLCArizonaGreencraft Interiors, LLCArizonaGreencraft Stone and Tile, LLCArizonaL.A.R.K. Industries, Inc.CaliforniaPental Granite and Marble, LLCWashingtonResidential Design Services, LLCDelawareSIC Intermediate, Inc.DelawareT.A.C. Ceramic Tile Co.Virginia  Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 15, 2019 with respect to the consolidated financial statements and financial statement schedule included in theAnnual Report of Select Interior Concepts, Inc. on Form 10-K for the year ended December 31, 2018. We consent to the incorporation by reference of saidreport in the Registration Statement of Select Interior Concepts, Inc. on Form S-8 (File No. 333-227510). /s/ GRANT THORNTON LLP Los Angeles, CaliforniaMarch 15, 2019 Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Tyrone Johnson, certify that:1. I have reviewed this Annual Report on Form 10-K of Select Interior Concepts, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Dated: March 15, 2019/s/ Tyrone Johnson Tyrone Johnson Chief Executive Officer (Principal Executive Officer) Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Nadeem Moiz, certify that:1. I have reviewed this Annual Report on Form 10-K of Select Interior Concepts, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Dated: March 15, 2019/s/ Nadeem Moiz Nadeem Moiz Chief Financial Officer (Principal Financial Officer)  Exhibit 32.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Select Interior Concepts, Inc. (the “Company”) for the fiscal year ended December 31,2018, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Tyrone Johnson, Chief Executive Officer(Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that, to my knowledge: 1.the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2.the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations ofthe Company.Dated: March 15, 2019/s/ Tyrone Johnson Tyrone Johnson Chief Executive Officer (Principal Executive Officer)  Exhibit 32.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Select Interior Concepts, Inc. (the “Company”) for the fiscal year ended December 31,2018, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Nadeem Moiz, Chief Financial Officer(Principal Financial Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that, to my knowledge: 1.the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2.the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations ofthe Company.Dated: March 15, 2019/s/ Nadeem Moiz Nadeem Moiz Chief Financial Officer (Principal Financial Officer) 

Continue reading text version or see original annual report in PDF format above