Tealstone Acquisition

General

April 3, 2017,

the Company consummated the acquisition (the “Tealstone Acquisition”) of

100%

of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “

Tealstone

”) from the stockholders thereof (the “Sellers”) for consideration consisting of

$55,000,000

in cash,

1,882,058

shares of the Company’s common stock (the “

Placement Shares

”), and

$5,000,000

of promissory notes issued to the Sellers. In addition, the Company will make

$2,500,000

and

$7,500,000

of deferred cash payments on the

second

and

third

anniversaries of the closing date, respectively, and up to an aggregate of

$15,000,000

in earn-out payments

may

be made on the first, second,

third

and

fourth

anniversaries of the closing date to continuing Tealstone management or their affiliates if specified financial performance levels are achieved. Tealstone focuses on concrete construction of residential foundations, parking structures, elevated slabs and other concrete work for leading homebuilders, multi-family developers and general contractors in both residential and commercial markets. This acquisition enables expansion into adjacent markets and diversification of revenue streams and customer base with higher margin work.

The preliminary acquisition-date fair value of the consideration transferred totaled

$83.7

million, which consisted of the following:

Fair value of consideration transferred (amounts in thousands):

Cash	$	55,000
Common stock (1,882,058 shares)		17,061
Promissory notes		4,436
Deferred payments		7,211
Total	$	83,708

The fair value of the

1,882,058

common shares issued was determined based on the average market price of the Company’s common shares on the acquisition date.

The promissory notes and deferred payments have been discounted using a preliminary

12%

fair value discount rate. The earn-out arrangement requires the Company to pay up to an aggregate of

$15,000,000

in earn-out payments on the first, second,

third

and

fourth

anniversaries of the closing date to continuing Tealstone management or their affiliates if specified financial performance levels are achieved. The Company’s preliminary analysis indicates that the compensation is tied to the continuing employment of certain key employees and executives of Tealstone and will be treated as additional compensation and

not

as additional contingent consideration.

Preliminary Purchase Price Allocation

The aggregate purchase price noted above was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values at the acquisition closing date, which were based, in part, upon outside preliminary appraisals for certain assets, including specifically-identified intangible assets. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired totaling

$36.2

million, was recorded as goodwill.

The following table summarizes our preliminary goodwill addition (in thousands):

Balance at January 1, 2016 and 2017	$	54,820
Additional goodwill related to acquisition		36,151
Balance at June 30, 2017	$	90,971

The following table summarizes our preliminary purchase price allocation at the acquisition closing date (in thousands):

Cash	$	--
Accounts receivable		13,618
Costs and estimated earnings in excess of billings on uncompleted contracts		2,944
Inventory		1,218
Other current assets		54
Property, plant and equipment		565
Other assets, net		1
Identifiable intangible assets and Goodwill		76,151
Accounts payable		(9,449	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(303	)
Accrued expenses		(823	)
State income tax payable		(268	)
Total Consideration	$	83,708

The purchase price allocation and related amortization periods are based upon preliminary information and are subject to change when additional information concerning final asset and liability valuations is obtained. We have

not

completed our final assessment of the fair value of purchased intangible assets, property and equipment, inventory, tax balances, contingent liabilities, long-term leases or acquired contracts. Our final purchase price allocation

may

result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill. We have preliminarily assigned an asset value of

$40.0

million for identified intangible assets and have amortized

$0.5

million which is included in general and administrative expenses on our statement of operations for the

three

months ended

June 30, 2017.

We believe that a majority of the intangible amount will be allocated to customer relationships. A

10%

change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill and annual amortization expense of approximately

$4.0

million and

$0.2

million respectively.

Supplemental Pro Forma Information (Unaudited)

The following unaudited pro forma condensed combined financial information (“the pro forma financial information”) gives effect to the acquisition of Tealstone by Sterling, accounted for as a business combination using the purchase method of accounting. To give effect to the Tealstone Acquisition for pro forma financial information purposes, Tealstone’s commercial historical results were brought to within

one

month of Sterling’s interim results for the

three

and

six

month period ended

June 30, 2017,

and included the

three

and

six

months ended

May 31, 2017,

respectively. The pro forma financial information reflects the Tealstone Acquisition and related events as if they occurred at the beginning of the period, and gives effect to pro forma events that are: directly attributable to the acquisition, factually supportable, and expected to have a continuing impact on the combined results of Sterling and Tealstone following the acquisition. The pro forma financial information includes adjustments to: (

) exclude transaction costs that were included in Sterling’s and Tealstone’s historical results and are expected to be non-recurring; (

) include additional intangibles amortization and net interest expense associated with the Tealstone Acquisition; and (

) include the pro forma results of Tealstone for the

three

and

six

month periods ended

June 30, 2017.

This pro forma financial information has been presented for illustrative purposes only and is

not

necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does

not

purport to project the future operating results of the combined company following the Tealstone Acquisition. The Pro Forma consists of the following (amounts in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Pro forma Revenue	$	250,032	$	236,712	$	444,957	$	402,771
Pro forma net income attributable to Sterling	$	3,190	$	6,536	$	1,716	$	3,046