Filed Pursuant to Rule 424(b)(3)
Registration No. 333-226101

Prospectus Supplement No. 14

(To Prospectus dated August 16, 2018)

Select Interior Concepts, Inc.

24,145,996 Shares

Class A Common Stock

This Prospectus Supplement No. 14 (this “Prospectus Supplement”) supplements and amends our prospectus dated August 16, 2018, as supplemented and amended by the Prospectus Supplement No. 1 dated August 17, 2018, the Prospectus Supplement No. 2 dated September 6, 2018, the Prospectus Supplement No. 3 dated September 7, 2018, the Prospectus Supplement No. 4 dated November 13, 2018, the Prospectus Supplement No. 5 dated January 7, 2019, the Prospectus Supplement No. 6 dated March 12, 2019, Prospectus Supplement No. 7 dated March 15, 2019, Prospectus Supplement No. 8 dated March 20, 2019, Prospectus Supplement No. 9 dated May 10, 2019, Prospectus Supplement No. 10 dated May 17, 2019, Prospectus Supplement No. 11 dated July 18, 2019, Prospectus Supplement No. 12 dated August 8, 2019, and Prospectus Supplement No. 13 dated August 21, 2019 (as supplemented and amended, the “Final Prospectus”), relating to the resale of up to an aggregate of 24,145,996 shares of our Class A common stock, par value $0.01 per share (which we refer to as our “Class A Common Stock”), by the selling stockholders identified in the Final Prospectus (which term as used in the Final Prospectus includes pledgees, donees, transferees or other successors-in-interest).

We will not receive any of the proceeds from the sale of these shares of our Class A Common Stock by the selling stockholders.

This Prospectus Supplement is being filed to update, supplement or amend the information contained in the Final Prospectus with the information contained and incorporated by reference in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 (the “Quarterly Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 5, 2019.  Accordingly, we have attached the Quarterly Report to this Prospectus Supplement.  

This Prospectus Supplement should be read in conjunction with the Final Prospectus, and this Prospectus Supplement is qualified by reference to the Final Prospectus, except to the extent that the information contained in this Prospectus Supplement supersedes the information contained in the Final Prospectus.  This Prospectus Supplement is not complete without, and may not be delivered or utilized except in connection with, the Final Prospectus, including the additional supplements or amendments thereto.

Our Class A Common Stock is listed for trading on the NASDAQ Capital Market under the symbol “SIC.”

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, under applicable federal securities laws and are eligible for reduced public company reporting requirements.  See “Summary—Emerging Growth Company Status” in the Final Prospectus for more information.

Investing in our Class A Common Stock involves a high degree of risk.  Before buying any shares, you should carefully read the discussion of material risks of investing in our Class A Common Stock in the section entitled “Risk Factors” beginning on page 16 of the Final Prospectus.

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus Supplement or the Final Prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

The date of this Prospectus Supplement is November 5, 2019.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended September 30, 2019

OR

For the transition period from ____________ to _____________

Commission File Number: 001-38632

SELECT INTERIOR CONCEPTS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (888) 701-4737

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

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

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

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

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

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

As of November 1, 2019, the registrant had 25,087,346 shares of Class A common stock, par value $0.01 per share, outstanding.

SELECT INTERIOR CONCEPTS, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2019

Table of Contents

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Select Interior Concepts, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Select Interior Concepts, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Select Interior Concepts, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Select Interior Concepts, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Organization and Business Description

These 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 through which to consolidate diversified building products and services companies.  Through its two primary operating subsidiaries and segments, Residential Design Services (“RDS”) and Architectural Surfaces Group (“ASG”), the Company imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops, operates design centers that merchandise interior products, and provides installation services. RDS interior product offerings include flooring, cabinets, countertops and wall tile, finish carpentry, cabinets, shower enclosures and mirrors.  RDS operates throughout the United States, including in California, Nevada, Arizona, Texas, Virginia, Maryland, North Carolina, and Georgia.  ASG has operations in the Northeast, Southeast, Southwest, Midwest, Mountain West, and West Coast regions of the United States.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  As such, the information included in these unaudited interim financial statements and condensed notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The condensed consolidated balance sheet as of December 31, 2018 included herein has been derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

The condensed consolidated financial statements include the accounts of SIC, its wholly owned subsidiaries, RDS and ASG, and their respective wholly-owned subsidiaries, and are presented in accordance with GAAP.  All significant intercompany accounts and transactions have been eliminated in combination.  References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2019 or any other period.

There have been no changes to our significant accounting policies described in our consolidated financial statements and related disclosures as of December 31, 2018 that have had a material impact on our condensed consolidated financial statements and related notes.

Reorganization

On 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 certain former equity holders of RDS and ASG 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 per share, of SIC (“Class B Common Stock”).

Concurrent with the November 2017 Restructuring Transactions, SIC completed a private offering and private placement of 18,750,000 shares of its Class A common stock, par value $0.01 per share (“Class 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 of discounts and fees to the initial purchaser and placement agent and offering expenses) (“November 2017 Private Offering and Private Placement”).

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In accordance with the terms of the November 2017 Private Offering and Private Placement, in December 2017, SIC completed an additional sale of 3,000,000 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).

Transition to Public Company

On August 13, 2018, the SEC declared effective the Company’s Registration Statement on Form S-1, which contained a prospectus pursuant to which certain selling stockholders of the Company may offer and sell shares of Class A Common Stock.  On August 16, 2018, the Company’s Class A Common Stock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.”

In connection with the listing of the Company’s Class A Common Stock on the Nasdaq Capital Market, following the repurchase and cancellation by the Company of a certain number of shares of Class B Common Stock, each then remaining share of Class B Common Stock was automatically converted into one share of Class A Common Stock, resulting in no shares of Class B Common Stock left outstanding.

Repurchase Agreement

In connection with the November 2017 Private Offering and Private Placement, the Company entered into a Repurchase Agreement with certain affiliates of Trive Capital Management LLC (“Trive Capital”) pursuant to which the Company had the right to repurchase, at a price of $0.01 per share, an aggregate of 800,000 shares of Class A Common Stock held by such shareholders upon the determination of the non-occurrence of certain Company performance goals or stock trading thresholds specified in the Repurchase Agreement. The Company determined that the performance goals and stock trading thresholds were not met, and repurchased these shares in April 2019 at par value and subsequently retired such shares.

Earnings (Loss) per Share of Common Stock

Basic earnings (loss) per share for the three and nine months ended September 30, 2019 and 2018 is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding.  Diluted earnings per share for common stock is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of restricted stock-based awards using the treasury stock method. The following table sets forth the computation of basic and diluted earnings/(loss) per share for the three and nine months ended September 30, 2019 and 2018:

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All restricted stock units or awards outstanding consisting of 1,055,384 shares of restricted stock at September 30, 2018 were excluded from the computation of diluted earnings per share in the nine months ended September 30, 2018 because the Company reported a net loss and the effect of inclusion would have been antidilutive.  

Equity

Total equity at September 30, 2019 and December 31, 2018 was $155.7 million and $148.7 million, respectively. The change in equity of $7.0 million during the period was a result of an increase in additional paid in capital of $3.5 million related to equity-based compensation and a decrease to the accumulated deficit of $3.7 million resulting from the net income for the nine months ended September 30, 2019.  Additionally, the Company purchased $0.2 million of its outstanding common stock during the nine months ended September 30, 2019, which shares are being held in treasury.  Total equity at September 30, 2019 and June 30, 2019 was $155.7 million and $152.0 million, respectively. The change in equity of $3.7 million during the period was a result of an increase in additional paid in capital of $1.5 million related to equity-based compensation and a decrease to the accumulated deficit of $2.5 million resulting from the net income for the three months ended September 30, 2019. Additionally, the Company purchased $0.2 million of its outstanding common stock during the quarter ended September 30, 2019, which shares are being held in treasury.  

Total equity at September 30, 2018 and December 31, 2017 was $150.6 million and $148.1 million, respectively. The change in equity of $2.5 million during the period was a result of an increase in additional paid in capital of $2.6 million related to equity-based compensation, an increase of $0.5 million related to employee stock purchases, and an increase to the accumulated deficit of $0.6 million resulting from the net loss for the nine months ended September 30, 2018. Total equity at September 30, 2018 and June 30, 2018 was $150.6 million and $148.3 million, respectively. The change in equity of $2.3 million during the period was a result of an increase in additional paid in capital of $0.9 million related to equity-based compensation and $0.5 million related to employee stock purchases and a decrease to the accumulated deficit of $0.8 million resulting from the net income for the three months ended September 30, 2018.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingencies, and reported revenues and expenses as of and for periods ended on the date of the consolidated financial statements. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination of allowances for doubtful accounts, inventory valuation, the lives and methods for recording depreciation and amortization on property and equipment, the fair value of reporting units and indefinite life intangible assets, deferred income taxes and the purchase price allocations used in the Company’s acquisitions.

Fair Value Measurement

ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance 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 the instrument 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 are observable 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 the assets 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 fair value measurement.

The Company records contingent consideration, or earn-outs, associated with certain acquisitions.  These earn-outs are adjusted to fair value at each reporting period and any change to fair value based on a change in certain factors, such as the risk adjusted rate or estimates for the outcome of specified milestone goals, will result in an adjustment to the fair value of the liability. These adjustments are recorded to income/expense as a measurement period adjustment.  

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There is no earn-out liability recorded as of September 30, 2019 associated with the acquisition of Summit Stoneworks, LLC (“Summit”) in August 2018.  The recorded fair value liability for the earn-out as of December 31, 2018 was $1.9 million. This liability was classified as a Level 3 fair value estimate at December 31, 2018 and is no longer a Level 3 fair value estimate as of September 30, 2019 as the underlying inputs are now known and the earn-out target criteria was not met. Adjustments reducing the fair value of the earn-out liability by $1.9 million were recorded within other (income) expense for the nine months ended September 30, 2019.  No adjustment was recorded during the three months ended September 30, 2019.

The earn-out liability associated with the acquisition of T.A.C. Ceramic Tile Co, LLC (“TAC”) in December 2018 is classified as Level 3 and is valued using an option pricing model. The assumptions used in preparing the option pricing model include certain estimates for future earnings from TAC products and services, a volatility factor of 25%, and a risk adjusted rate of 11.0% at September 30, 2019.   The fair value of this earn-out liability was recorded as $2.9 million and $2.3 million as of September 30, 2019 and December 31, 2018, respectively.  Adjustments decreasing the fair value of the earn-out liability by $0.6 million and increasing the earn-out liability by $0.6 million were recorded within other (income) expense for the three and nine months ended September 30, 2019, respectively.

The earn-out liability associated with the acquisition of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”) in March 2019 is classified as Level 3 and is valued using an option pricing model.  The fair value of this earn-out liability was recorded as $0.6 million as of September 30, 2019.  The assumptions used in preparing the option pricing model include estimates for future earnings from Intown products and services, a volatility factor of 25%, and a risk adjusted rate of 12% at September 30, 2019. An adjustment decreasing the fair value of the earn-out liability by $1.4 million was recorded within other (income) expense for the three and nine months ended September 30, 2019.

The earn-out liability associated with the acquisition of Greencraft Holdings, LLC (“Greencraft”) in December 2017 was paid to the former owners in May 2019 in the amount of $8.0 million.  As of December 31, 2018, the fair value of this earn-out was recorded as $7.9 million.

At September 30, 2019 and December 31, 2018, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term obligations approximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term loans, and notes payable approximate their fair values, as interest rates approximate market rates. The Company recognizes transfers between levels at the end of the reporting period as if the transfers occurred on the last day of the reporting period. There were no transfers during 2019 or 2018, other than the Summit earn-out liability from Level 3 during the three months ended September 30, 2019 and the Greencraft earn-out liability from Level 3 in 2018 due to the availability of observable and known inputs to calculate the fair value of the liabilities as of September 30, 2019 and December 31, 2018, respectively.  

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization.  The Company capitalizes internal-use software as property and equipment under ASC 350-40, Internal-Use Software.  Depreciation and amortization are provided for on a straight-line basis over the estimated useful lives of the related assets as follows:

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Intangible Assets

Intangible assets consist of customer relationships, trade names and non-compete agreements. The Company considers all its intangible assets to have definite lives, and such intangible assets are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis based on the expected cash flows generated by the existing customers as follows:

Business Combinations

The Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill.  The purchase price accounting reflected in the accompanying financial statements is provisional and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date).  The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities.  Measurement period adjustments are reflected in the period in which they occur.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possible impairment 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 of the 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 difference between the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. There were no impairment losses on long-lived assets for the periods ended September 30, 2019 or December 31, 2018.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets, including intangible assets. Goodwill is tested annually for impairment on December 31.  No impairment indicators were present during the nine months ended September 30, 2019.

Revenue Recognition

The Company’s revenue derived from the sale of imported granite, marble, and related items is recognized when persuasive evidence of an agreement exists through a purchase order or signed contract detailing the quantity and price, delivery per the agreement has been made, and collectability is reasonably assured.

The Company’s contracts with its homebuilder customers are generally treated as short-term contracts for accounting purposes. These contracts will generally range in length from several days to several weeks. The Company accounts for these contracts under the completed contract method of accounting and will recognize revenue and cost of revenues when obligations under the contract are complete.

The Company’s contracts related to multi-family projects are treated as long-term contacts for accounting purposes. Accordingly, the Company recognizes revenue using the percentage-of-completion method of accounting.

The Company estimates provisions for returns, which are accrued at the time a sale is recognized. The Company also realizes rebates to customers as a reduction to revenue in the period the rebate is earned.

During the quarter ending December 31, 2019, the Company will adopt Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will impact our revenue recognition policy.  See Recent Accounting Pronouncements section of Note 2.

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Equity-based Compensation

The Company accounts for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service period, which is usually equivalent to the vesting period. See Note 11 for further discussion.

Segment Reporting

In accordance with ASC 280-10-50-1, an operating segment is a component of an entity that has all of the following characteristics:

The Company has identified two operating segments that meet all three of the above criteria, RDS and ASG. Each of these operating segments provides products and services that generate revenue and incur expenses as it engages in business activities, and each maintains discrete financial information. Additionally, the Company’s chief operating decision maker, its Chief Executive Officer, reviews financial performance, approves budgets and allocates resources at each of the RDS and ASG operating segment level.

Recent Accounting Pronouncements

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards 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). This ASU establishes a comprehensive revenue recognition standard for virtually all industries in GAAP, including those that previously followed industry-specific guidance, such as the real estate, construction, and software industries. The core principal of this ASU is to recognize revenue to depict the transfer of goods or 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. During 2014-2016, the FASB issued various amendments to this topic and the amendments clarified certain positions and extended the implementation date until annual periods beginning after December 15, 2018.  During the quarter ending December 31, 2019, the Company will adopt this guidance on a modified retrospective basis. For contracts which were not completed as of January 1, 2019, revenue related to our short-term contracts with homebuilder customers, primarily in our RDS operating segment, will now be recognized over time based on the extent of progress towards completion of the individual performance obligations, instead of under the completed contract method, because of continuous transfer of control to the customer. We do not expect the impact on our revenue recognition to be material for our multi-family contracts that are currently recognized under the existing percentage-of-completion method of accounting, due to the comparable methodology of revenue recognition under the updated guidance. We do not estimate any material impact from adoption related to our sales of imported granite, marble, and related items of our ASG operating segment, as the Company has concluded that it will have substantially similar performance obligations and recognition timing under the amended guidance.  We will recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019. The estimated adjustment to our opening retained earnings on January 1, 2019, as a result of implementation of this ASU, is estimated to be approximately $1.2 million.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those 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 accounting policy 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 its consolidated financial statements and related disclosures.

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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 from certain cash receipts and cash payments that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. As an emerging growth company utilizing the extended 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 November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. ASU 2016-18 is intended to reduce the diversity in practice around how restricted cash is classified within the statement of cash flows. ASU 2016-18 was effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has evaluated the impact of ASU 2016-18, and adopted the new standard. The Company will not present the release of restricted cash as an investing activity cash inflow. Instead, restricted cash balances have been and will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805)—Clarifying the Definition of a Business. This ASU provides additional guidance in regards to evaluating whether a transaction should be treated as an asset acquisition (or disposal) or a business combination. Particularly, the amendments to this ASU provide that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This clarification reduces the number of transactions that needs further evaluation for business combination. This ASU became effective for the Company on January 1, 2019. The Company has adopted this standard and will apply it to future acquisitions.

Also, in January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the goodwill impairment test by eliminating the step 2 requirement to determine the fair value of its assets and liabilities at the impairment testing date. ASU 2017-04 is effective for annual periods beginning after December 15, 2021. Early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidance may 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 interim periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’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). This ASU improves the disclosure requirements for fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact of adopting the updated guidance.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 provides 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 contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal 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 for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption of the amendments in ASU 2018-15 is permitted, including adoption in any interim period, for all entities. The amendments in ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.

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Note 3. Concentrations, Risks and Uncertainties

Credit is extended for some customers and is based on their financial condition, and generally, collateral is not required. Credit losses are included in the consolidated financial statements and consistently have been within management’s expectations.

For the three and nine months ended September 30, 2019, the Company did not have any one customer which accounted for more than 10% of total revenues.  For the three and nine months ended September 30, 2018, the Company recognized revenues from one customer which accounted for 13.3% and 12.0% of total revenues, respectively.  There were no customers which accounted for 10% or more of total accounts receivable as of September 30, 2019 and December 31, 2018.

Note 4. Acquisitions

Intown Acquisition

On March 1, 2019, RDS acquired the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”), an installer of residential and light commercial countertops and cabinets, for total cash consideration of $10.7 million at closing and an additional $0.8 million of purchase price adjustments that were funded in June 2019.  The purchase agreement also provides for potential earn-out consideration to the former shareholders of Intown in connection with the achievement of certain 2019 and 2020 financial milestones. The final earn-out payment has no maximum limit, but if certain targets are not met, there may be no earn-out payment. The contingent earn-out consideration had a preliminary estimated purchase price fair value of $2.5 million as of March 31, 2019, that was subsequently adjusted to a determined fair value of $2.0 million at the date of acquisition.  

The upfront cash paid for the Intown acquisition was financed with additional borrowings from the Company’s third-party financing agreement described in Note 9. The Intown 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 fair values as of the acquisition date. The total purchase price consisted of the following:

RDS acquired Intown to further diversify RDS’ geographic mix and channel strength. The goodwill recorded reflects the strategic value of the acquisition beyond the net value of its assets acquired less liabilities assumed. The goodwill is deductible for tax purposes.

The Company incurred approximately $0.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general and administrative expenses in the consolidated statements of operations. The Company has performed a preliminary valuation of the acquired assets and assumed liabilities of Intown. Using the total consideration for the acquisition, the Company has estimated the allocations to such assets and liabilities. The following table summarizes the estimated allocation of the preliminary purchase price as of the transaction’s closing date.

From the date of acquisition to September 30, 2019, Intown generated revenue of $12.3 million and net income of $1.7 million, which are included in the Company’s Condensed consolidated statements of operations.

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Pro Forma Results

The following unaudited pro forma information for the nine months ended September 30, 2019 and 2018 has been prepared to give effect to the acquisition of Intown as if the acquisition had occurred on January 1, 2018. The pro forma information takes into account the preliminary purchase price allocation. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the Intown acquisition occurred on such date, nor does it purport to predict the results of operations for future periods.

Our pro forma assumptions are as follows:

Bedrock and NSI Acquisitions

The Company made two acquisitions in the first quarter of 2018. On January 31, 2018, ASG acquired the assets of a slab and tile distributor, Elegant Home Design, LLC (“Bedrock”), for total consideration of $12.5 million. On March 19, 2018, ASG acquired the assets of NSI, LLC, a Maryland limited liability company (“NSI”), for approximately $0.3 million in cash. Pro forma revenue and net income for the nine months ended September 30, 2018 were not significant for NSI.    

Pro Forma information for the nine months ended September 30, 2018 for Bedrock as follows has been prepared to give effect to the acquisition of Bedrock as if the acquisition had occurred on January 1, 2018. This pro forma information does not purport to represent what the actual results of operations of 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.

Our pro forma assumptions are as follows:

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From the date of acquisition to September 30, 2018, Bedrock generated net revenue of $20.3 million and a net income of $1.2 million and for the nine months ended September 30, 2019, Bedrock generated net revenue of $23.3 million and a net income of $2.4 million. These amounts are included in the respective consolidated statements of operations.

Tuscany Acquisition

On August 22, 2018, ASG acquired the assets of The Tuscany Collection, LLC (“Tuscany”), a distributor of natural stone, quartz and tile in Las Vegas, Nevada, for approximately $4.2 million in cash. 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. Pro forma revenue and net income for the nine months ended September 30, 2018 were not significant for Tuscany.

Summit Acquisition

On August 31, 2018, RDS acquired the assets of Summit Stoneworks, LLC (“Summit”), which is located in Austin, Texas, and is engaged in builder design services and the fabrication and installation of stone products for commercial and residential applications, for $16.3 million in cash. The agreement also provided for potential earn-out consideration of up to $3.5 million to the former shareholders of Summit for the achievement of certain 2018 and 2019 financial milestones. These milestones were not achieved and fair value of the earn-out was reduced to zero. The acquisition expanded the scale of the RDS segment into Austin and San Antonio, Texas markets. The Summit 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.  

Pro Forma Results

Pro Forma information for the nine months ended September 30, 2018 for Summit as follows has been prepared to give effect to the acquisition of Summit as if the acquisition had occurred on January 1, 2018. This pro forma information does not purport to represent what the actual results of operations of 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.

Pro forma assumptions are as follows:

From the date of the Summit acquisition to September 30, 2018, Summit generated revenue of $1.3 million and net income of $0.08 million and for the nine months ended September 30, 2019, Summit generated revenue of $12.2 million and net income of $2.1 million which are included in the Company’s consolidated statements of operations.

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Note 5. Inventories

Inventories are valued at the lower of cost (using specific identification and first-in first-out methods) or net realizable value. The significant components of inventory were as follows:

Note 6. Property and Equipment

Property and equipment consisted of the following:

Depreciation and amortization expense of property and equipment totaled $2.1 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively. For three months ended September 30, 2019, $1.0 million and $1.1 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. For the three months ended September 30, 2018, $1.0 million and $0.7 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively.

Depreciation and amortization expense of property and equipment totaled $6.1 million and $4.7 million for the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, $2.7 million and $3.4 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. For the nine months ended September 30, 2018, $2.7 million and $2.0 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively

Note 7. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by reportable segment were as follows:

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Intangibles Assets

The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of September 30, 2019:

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The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of December 31, 2018:

Amortization expense on intangible assets totaled $4.0 million and $12.6 million during the three and nine months ended September 30, 2019, respectively.  Amortization expense on intangible assets totaled $3.4 million and $10.1 million during the three and nine months ended September 30, 2018, respectively.

The estimated annual amortization expense for the next five years and thereafter is as follows:

Note 8. Lines of Credit

SIC Line of Credit

In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018 (the “SIC Credit Facility”), with a commercial bank. The SIC Credit Facility is used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provided for borrowings up to an aggregate of $90 million, which was increased to $100 million through amendment in August 2019.

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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 stated amount 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 stated amount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries.

The revolving loans under the SIC Credit Facility bear interest at a floating rate, which the Company can elect between a LIBOR based rate plus an applicable margin varying from one hundred twenty five basis points (1.25%) to one hundred seventy five basis points (1.75%) based on the borrowers’ average daily availability determined quarterly, or a base rate determined on the highest of three alternative rates based on the Prime rate, or the Federal Funds rate plus a fifty basis point (0.50%) margin, or a LIBOR based rate plus a two hundred basis point (2.00%) margin. Upon the occurrence of certain events of default under the SIC Credit Facility, the interest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). All revolving loans under the SIC Credit Facility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions. Letter of credit obligations under the SIC Credit Facility are due and payable on 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, among other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.  

As of September 30, 2019, $34.3 million was outstanding under the SIC Credit Facility. The Company also had $0.4 million of outstanding letters of credit under the SIC Credit Facility at September 30, 2019. The SIC Credit Facility is subject to certain financial covenants. At September 30, 2019, the Company was in compliance with the financial covenants contained in the SIC Credit Facility.

The Company incurred debt issuance costs of $0.5 million in connection with the SIC Credit Facility. These costs will be amortized to non-cash interest expense over the term of the agreement on a straight-line basis which approximates the effective interest method. Non-cash interest expense related to these costs was $0.02 million and $0.07 million for the three and nine months ended September 30, 2019. Non-cash interest expense related to these costs was $0.02 million for the three and nine months ended September 30, 2018. At September 30, 2019, SIC had $0.4 million of unamortized debt issuance costs related to the SIC Credit Facility. These costs are shown as a direct deduction of the line of credit liability in the accompanying condensed consolidated balance sheets.

Note 9. Long-Term Debt

Long-term debt consisted of the following:

RDS Equipment and Vehicle Notes

RDS has financed the acquisition of certain vehicles, property, and equipment with notes payable that mature at various times through May 2024. As of September 30, 2019 and December 31, 2018, the outstanding balance on equipment and vehicle notes payable totaled $1.4 million and $1.0 million, respectively. These notes are secured by the vehicles and equipment that were financed and require monthly interest and principal payments.

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ASG Term Loans

In December 2015, ASG entered into a loan agreement with a financial institution offering a term loan in the aggregate amount of $1.7 million to finance the purchase of equipment. Amounts due under the term loan bear interest at 3.75% per annum with interest payable monthly. Principal payments are due in monthly installments beginning April 8, 2016 through maturity (March 8, 2021). At September 30, 2019 and December 31, 2018, ASG had $0.4 million and $0.7 million outstanding under this term loan, respectively.

On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries.  The Term Loan Facility was subsequently amended in December 2018 to increase the borrowing capacity to $174.2 million and in July 2019 to amend certain covenants.  On August 19, 2019, the Term Loan Facility was further amended, resulting in an adjusted borrowing rate.  Additionally, the amendment imposes a prepayment premium with respect to an optional prepayment of the term loans under the Financing Agreement occurring within fifteen months of the date of the amendment (other than prepayments in connection with a change of control) in an amount equal to 1.50% of any such principal amount prepaid.

Subsequent to the August 2019 amendment, borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus 4.75% for a base rate loan, or (ii) the LIBOR rate plus 6.75% for a LIBOR loan in the event the Leverage Ratio is greater than 2.40 to 1:00.   In the event the leverage ratio is less than 2.40 to 1.00, the rates decrease to either (i) the base rate plus 4.25% for a base rate loan, or (ii) the LIBOR rate plus 6.25% 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 base commercial lending rate or prime rate, and 3.5% per annum. The interest rate assessed as of September 30, 2019 was 8.87%.  Interest is payable monthly with principal payments due in quarterly installments beginning July 1, 2017 through maturity (February 28, 2023). The Company borrowed an additional $11.5 million under the Term Loan Facility to fund the acquisition of Intown on March 1, 2019. As of September 30, 2019 and December 31, 2018, the Company had $154.1 million and $144.2 million outstanding, respectively, under the Term Loan Facility.

Substantially all of the Company’s assets, including accounts receivable and inventory, are collateral for the Term Loan Facility, except assets identified as collateral for the SIC Credit Facility which hold a senior position. The Company is also restricted from paying dividends to its stockholders. Additionally, substantially all of the Company’s subsidiaries are restricted by the Term Loan Facility from providing loans, advances and dividends to the SIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to these term loans. The Company was in compliance with all material financial and non-financial covenants under the Term Loan Facility as of September 30, 2019 and December 31, 2018.

The Company incurred debt issuance costs in connection with its term loans. These costs are being amortized to non-cash interest expense over the terms of the related notes on a straight-line basis, which approximates the effective interest rate method. Non-cash interest expense related to these costs was $0.1 million and $0.4 million for the three and nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, the unamortized debt issuance costs related to the term loans totaled $1.7 million and $2.1 million, respectively, and are shown as a direct deduction from the liability on the accompanying condensed consolidated balance sheets.

Note 10. Commitments and Contingencies

Leases

The Company leases certain vehicles and equipment under leases classified as capital leases. The leased vehicles and equipment are included as property and equipment (“PP&E”) and amortized to accumulated amortization on a straight-line basis over the life of the lease, which is typically three to four years. The total acquisition cost included in PP&E related to capital leases was $8.4 million and $2.7 million at September 30, 2019 and December 31, 2018, respectively. Total accumulated amortization related to the capital leases is $1.1 million and $0.5 million at September 30, 2019 and December 31, 2018, respectively, with amortization expense totaling $0.3 million and $0.6 million for the three and nine months ended September 30, 2019, respectively.  Total amortization expense totaled $0.1 million and $0.2 million for the three and nine months ended September 30, 2018, respectively.   Included in the capital lease balances is approximately $2.2 million of assets that were sold and subsequently leased back in the three months ended September 30, 2019, related to certain ERP software and equipment.  The transaction did not qualify for sale-leaseback accounting and no sale was recognized.  Proceeds from the transaction were reported as a financing activity in the statement of cash flows for the nine months ended September 30, 2019.

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RDS leases its corporate, administrative, fabrication and warehousing facilities under long-term non-cancelable operating lease agreements expiring at 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. Three of RDS’ facility leases are with a company owned by a Company stockholder and six other facilities are leased from current employees, contractors or former owners of acquired businesses.  

RDS also leases certain office equipment under long-term lease agreements expiring at various dates through September 2022.

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. ASG has a facility lease with a current Company employee.

SIC leases its corporate facilities under a long-term non-cancelable operating lease through October 2022.

The Company recognizes rent expense on a straight-line basis and records the difference between the recognized rent expense and amounts payable under the lease as deferred rent. Aggregate deferred rent at September 30, 2019 and December 31, 2018 was $2.2 million and $1.9 million, respectively. Aggregate rent expense for the three and nine months ended September 30, 2019 totaled $4.9 million and $14.3 million, respectively.  Aggregate rent expense for the three and nine months ended September 30, 2018 totaled $3.6 million and $9.6 million, respectively     

Exclusive Distributor Rights

A main supplier of ASG’s Pental business has agreed to allow Pental exclusive distribution rights in 23 states in the United States. To maintain these rights, Pental must meet certain minimum purchase requirements. Purchase volumes through December 31, 2020 must be a minimum purchase of 90 containers per month.  

Using an estimated price per container based on the average price per container in 2018, the future minimum purchases to maintain the exclusive rights as of September 30, 2019 are as follows:

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 mutually acceptable resolution. There are no financial penalties to Pental if such commitments are not met; however, the supplier reserves the right to remove exclusive distribution rights privileges.

Purchase Commitments

The Company also has contractually committed itself to certain minimum purchase commitments with certain suppliers. RDS has committed to purchase $2.0 million in products annually for each of the calendar years 2019, 2020, and 2021 with a certain supplier.   For the nine months ended September 30, 2019, more than the minimum of $2.0 million has been purchased from this supplier.  Financial penalties for not achieving the minimum purchase commitment amount are equal to 15% of the shortfall amount.

Note 11. Stock Compensation

On November 22, 2017, the Company adopted the Select Interior Concepts, Inc. 2017 Incentive Compensation Plan (the “2017 Plan”). Upon the adoption of the 2017 Plan, the maximum aggregate number of shares issuable thereunder was 2,561,463 shares.  As of September 30, 2019, there were approximately 1,813,058 shares of the Company’s common stock subject to outstanding awards and approximately 475,019 shares of the Company’s common stock were reserved and available for future awards under the 2017 Plan.  At December 31, 2018, there were approximately 1,667,446 shares of common stock available for grant under the 2017 Plan.

On March 26, 2019, the board of directors adopted the Select Interior Concepts, Inc. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”), which was approved at the 2019 Annual Meeting of Stockholders on May 15, 2019.  The 2019 Incentive Plan serves as the successor to the 2017 Plan; however, shares will continue to be available for award grants under the 2017 plan following the effectiveness of the 2019 plan.  The maximum aggregate number of shares issuable under the 2019 plan is 1,700,000.  No awards had been issued under the 2019 Incentive Plan as of September 30, 2019. 

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Stock Options

The Company has not had any stock option activity under the 2017 Plan or 2019 Incentive Plan.

Restricted Stock

Restricted stock awards and restricted stock unit awards are grants of shares of the Company’s common stock or rights to receive 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 dividend rights with respect to such shares prior to vesting, subject to such awards’ forfeiture provisions, unless the board of directors provides otherwise. Recipients of restricted stock unit awards generally will not have voting and dividend rights unless and until shares of common stock are issued with respect to such awards. Shares of restricted stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.

For the nine months ended September 30, 2019, 241,957 restricted stock units were granted to certain directors, executives, and key employees, and such awards are subject to vesting over a period ranging from one to three years, and certain other conditions, including continuous service to the Company, following the date of the restricted stock unit agreement. The shares vest ratably on an annual basis. Additionally, restricted stock units were granted to certain executives and include both a service and a performance condition. The performance condition is achievement of a 2021 earnings target and the level of achievement of the earnings target determines the number of shares that will be issued.  The number of shares to be issued at achievement of 100% of the earnings target is 573,824, and up to 1,147,648 shares will be issued upon achievement of 200% of the earnings target.  The 200% target share amount of 1,147,648 is included as granted in the table below of nonvested shares outstanding.

The Company estimated the fair value of these shares on the date the shares were granted and recognizes the resulting fair value over the requisite service period. The grant date fair value for the restricted stock units during the nine months ended September 30, 2019 was determined using the closing share price on the date of grant.

A summary of the Company’s restricted stock activity for the nine months ended September 30, 2019 is as follows:

As of September 30, 2019, total remaining stock-based compensation expense for nonvested restricted stock is $12.4 million, which is expected to be recognized over a weighted average remaining period of 2.3 years.

Total stock-based compensation expense recognized for restricted stock for the three and nine months ended September 30, 2019 was $1.5 million and $3.5 million, respectively. Total stock-based compensation expense recognized for restricted stock for the three and nine months ended September 30, 2018 was $0.9 million and $2.6 million, respectively.

In addition to the 1,813,058 nonvested shares outstanding, an agreement was entered into with certain executives to receive some or all of awarded 2019 annual compensation bonuses in equity shares instead of cash.  These bonuses are estimated to be settled in the first quarter of 2020 and will be settled at fixed amounts using the stock price on or around the date of settlement.  The estimated number of shares to be awarded to executives upon settlement in 2020 is approximately 107,197 shares, using the estimated annual compensation cost and closing stock price at September 30, 2019.  The compensation expense associated with these awards is $1.0 million for the nine months ended September 30, 2019.  The related liability associated with these bonuses is recorded in accrued expenses and other current liabilities as of September 30, 2019.

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Phantom Stock

Phantom stock awards are grants of phantom stock with respect to shares of the Company’s common stock that are settled in cash and subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company. Remaining shares of phantom stock outstanding at September 30, 2019 are for members of the board of directors and are subject to vesting over a period of three years. As a result of the cash-settlement feature of these awards, the Company considers these awards to be liability awards, which are measured at fair value at each reporting date and the pro-rata vested portion of the award is recognized as a liability. The fair value as of September 30, 2019 for the phantom stock awards was estimated using the closing price of the Class A Common Stock on September 30, 2019.

The Company recorded phantom stock based compensation expense of less than $0.01 million during the three and nine months ended September 30, 2019. The Company recorded phantom stock based compensation expense of $0.3 million and $2.3 million during the three and nine months ended September 30, 2018, respectively.  

A summary of the Company’s phantom stock activity for the period ended September 30, 2019 is as follows:

As of September 30, 2019, total remaining stock-based compensation expense for phantom stock is $0.01 million, which is expected to be recognized over a weighted average remaining period of 1.3 years.

Note 12. Provision for Income Taxes

The Company determines its periodic income tax benefit or expense based upon the current period income and the annual estimated tax rate for the Company adjusted for discrete items. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.

Total tax expense was $2.1 million for the nine months ended September 30, 2019 compared to a tax benefit of $0.6 million for the nine months ended September 30, 2018.  For the nine months ended September 30, 2019, the effective tax rate of 35.42% decreased compared to the effective tax rate of 47.46% for the nine months ended September 30, 2018, due to a reduction in permanent tax differences and the change in pre-tax earnings for the respective periods. 

Note 13. Related Party Transactions

Facility Rent

RDS leases three of its facilities from a trust affiliated with a Company stockholder. Additionally, as a result of recent acquisitions, RDS also leases six of its facilities from current employees, contractors or former owners of acquired businesses. Rent expense under all of these leases totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2019, respectively. Rent expense under related party RDS leases was $0.3 million and $0.7 million during the three and nine months ended September 30, 2018, respectively.  No amounts were unpaid under these leases at September 30, 2019 and December 31, 2018. 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 under this lease was $0.04 million and $0.1 million for the three and nine months ended September 30, 2019, respectively. Rent expense under this lease was $0.04 million and $0.08 million for the three and nine months ended September 30, 2018, respectively.  No amounts were unpaid under this lease at September 30, 2019 and December 31, 2018. See Note 10.

ASG leases office space in New Jersey that was owned by a former employee (who is no longer employed by the Company in 2019). Rent expense under this lease was $0.1 million and $0.3 million for the three and nine months ended September 30, 2018, respectively. No related party rent expense was incurred in 2019. No amounts were unpaid under this lease at September 30, 2019 and December 31, 2018. See Note 10.

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Subcontractors and Supplier

Two RDS employees have family members that have an ownership interest in flooring subcontracting companies that have business relationships with RDS. During the three and nine months ended September 30, 2019, these companies performed a total of $0.4 million and $0.8 million in subcontract work for RDS, respectively.  During the three and nine months ended September 30, 2018, these companies performed a total of $0.4 million and $1.3 million in subcontract work for RDS, respectively.  Amounts due and recorded as accounts payable at September 30, 2019 and December 31, 2018 were $0.02 million and $0.01 million, respectively.  

Design services were also provided to RDS by designers affiliated with current Greencraft employees. During the three and nine months ended September 30, 2019, expenses incurred with this design company were $0.03 million and $0.08 million, respectively. No amounts were unpaid at September 30, 2019 and December 31, 2018.

Other Related Party Transactions

A 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 three and nine months ended September 30, 2019, the Company incurred $0.1 million and $0.2 million of costs, respectively, with this consulting firm. During the three and nine months ended September 30, 2018, the Company incurred $0.04 million and $0.2 million of costs, respectively, with this consulting firm. Amounts due and recorded as accounts payable at September 30, 2019 and December 31, 2018 were $0.02 million and $0.01 million, respectively.

Note 14. Segment Information

The Company’s operations are classified into two operating segments: RDS and ASG. Under RDS, the Company offers interior design and installation services, and under ASG, the Company offers natural and engineered surfaces distribution services. These operating segments represent strategic business areas which, although they operate separately and provide their own distinctive services, enable the Company to more effectively offer the complete line of interior design and selection services, merchandising, and complex supply chain management. Neither of the two operating segments have any reporting units. 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 discrete financial information is available and is reviewed by the Company’s chief operating decision maker.

Inter-segment eliminations result, primarily, from the sale of ASG inventory to the RDS segment, including the related profit margin, as well as some intercompany borrowings recorded in the form of intercompany payables and receivables.  The unallocated corporate loss includes all equity related compensation expense.

The Company evaluates performance of the respective segments based upon revenues and operating income. Information for the periods presented is provided below:

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Note 15. Subsequent Events

Events occurring after September 30, 2019 have been evaluated for possible adjustment to the condensed consolidated financial statements or disclosure as of November 5, 2019, which is the date the condensed consolidated financial statements were available to be issued.  No significant matters were identified requiring adjustments to or disclosure in these financial statements.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (which we refer to as this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking statements may be identified by the use of words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue,” and other forms of these words or similar words or expressions or the negatives thereof. Forward-looking statements are based on historical information available at the time the statements are made and are based on management’s reasonable belief or expectations with respect to future events. Forward-looking statements are subject to risks, uncertainties, and other factors, including, but not limited to, those factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (our “Annual Report”), that may cause the Company’s actual results, level of activity, performance or achievement to be materially different from the results or plans expressed or implied by such forward-looking statements. All forward-looking statements in this Report are qualified by the factors, risks and uncertainties contained in our Annual Report. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved. Forward-looking statements speak only as of the date on which they are made and the Company undertakes no obligation to update any forward-looking statement to reflect future events, developments or otherwise, except as may be required by applicable law.

Overview

Select Interior Concepts, Inc. (which we refer to collectively, with all of its subsidiaries, as “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwide distributor of interior building products with market positions in residential interior design and installation services. 

Through our Residential Design Services (which we refer to as “RDS”) operating segment, we primarily serve national and regional homebuilders by providing an integrated, outsourced solution for the interior design consultation, sourcing, distribution and installation of interior products of their homebuyer customers. Through our 17 design 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 coordinate the ordering, fulfillment and installation of many of these interior products to provide a streamlined experience for the homebuilder. With our design centers and our product sourcing and installation capabilities, we enable our homebuilder customers to outsource critical aspects of their business to us, thereby increasing their sales, profitability, and return on capital.  

We also have market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops and specialty tiles through our Architectural Surfaces Group (which we refer to as “ASG”) operating segment. ASG sources natural and engineered stone from a global supply base and markets these materials through a national network of distribution centers and showrooms at 23 different locations. In addition to serving the repair and remodel (which we refer to as “R&R”) market with these materials, we also distribute them to new residential and commercial construction markets.

Operating Segments

We have defined each of our operating segments based on the nature of its operations, its management structure and its product offerings. Our management decisions are made by our Chief Executive Officer, whom we have determined to be our chief operating decision maker. Our management evaluates segment performance based on operating income. Our two reportable segments are described below.

Residential Design Services

RDS, our interior design and installation segment, is a service business that provides design center operation, interior design, product sourcing, and installation services to homebuilders, homeowners, general contractors and property managers. Products sold and installed include flooring, prefabricated countertops, cabinets, wall tile, interior trim (doors, moldings, door and window casing), shower enclosures and doors, mirrors, and window treatments. New single-family and multi-family construction are the primary end markets, although we are exploring growth opportunities in other markets, such as the R&R market.

Architectural Surfaces Group

ASG, our natural and engineered stone countertop distribution segment, distributes granite, marble and quartz slabs for countertop and other uses, ceramic and porcelain tile for flooring, backsplash and wall tile applications and other related products. Primary end markets are new residential and commercial construction and the R&R market.

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Key Factors Affecting Operating Results

Our operating results are primarily impacted by changes in the levels of new residential construction and the demand for products and services in the R&R market. 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 variables such as household formation, immigration and aging trends, housing stock and vacant inventory levels, changes in the labor force, raw materials prices, the legal environment, government tariffs, local and regional development, and construction regulation.

Key Components of Results of Operations

Net Revenue. In our RDS segment, net revenue consists of revenue net of our homebuilder customers’ participation, which is their share of revenue from our sales of upgrades. 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 derived from 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 in the 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 costs associated with each project, the direct labor costs associated with installation (including taxes, benefits and insurance), rent, utilities and other period costs associated with warehouses and fabrication shops, depreciation associated with warehouses, material handling, fabrication and delivery costs, and other costs directly associated with delivering and installing product in our customers’ projects, offset by vendor rebates. In our ASG segment, cost of revenue includes direct 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 costs directly associated with receiving, storing, handling and delivering product to customers in revenue earning transactions, offset by vendor rebates.

Gross Profit and Gross Margin. Gross profit is revenue less the associated cost of revenue. Gross margin is gross profit divided by net revenue.

Operating Expenses. Operating expenses include overhead costs such as general management, project management, purchasing, sales, customer service, accounting, human resources, depreciation and amortization, information technology, public company costs and all other forms of wage and salary cost 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, insurance, and non-cash stock compensation costs. Professional services expenses, including audit and legal and certain consulting, and transaction costs are also included in operating expenses.

Depreciation and Amortization. Depreciation and amortization expenses represent the estimated decline over time of the value of tangible assets such 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 credit agreements 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 statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Net Revenue. For the three months ended September 30, 2019, net revenue increased $31.8 million, or 25.0%, to $159.4 million, from $127.6 million for the three months ended September 30, 2018. Net revenue for the three months ended September 30, 2019 and 2018 is adjusted for the elimination of intercompany sales of $0.7 million and $0.6 million, respectively.

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In our RDS segment, net revenue increased by $28.8 million, or 42.2%, to $96.9 million for the three months ended September 30, 2019, from $68.2 million for the three months ended September 30, 2018. The increase was due primarily to the acquisitions of Summit, TAC, and Intown, which accounted for $28.5 million of the RDS growth. Revenue from organic sales was essentially flat period over period as we continue to face softening in the Southern California housing market, which is our largest market.

In our ASG segment, net revenue increased by $3.3 million, or 5.4%, to $63.2 million for the three months ended September 30, 2019, from $60.0 million for the three months ended September 30, 2018. For the three months ended September 30, 2019, the acquisition of Tuscany accounted for $0.7 million of the ASG growth, with the remainder of the increase of $2.6 million in our ASG segment attributable to increased revenue from organic growth.

Cost of Revenue. For the three months ended September 30, 2019, cost of revenue increased $26.0 million, or 28.8%, to $117.1 million, from $91.1 million for the three months ended September 30, 2018. Cost of revenue for the three months ended September 30, 2019 and 2018 is adjusted for the elimination of intercompany sales of $0.7 million and $0.5 million, respectively.

In our RDS segment, cost of revenue increased by $21.9 million, or 45.0%, to $71.1 million for the three months ended September 30, 2019, from $49.2 million for the three months ended September 30, 2018. The acquisitions of Summit, TAC and Intown were primarily responsible for this increase, contributing $20.5 million. In addition to acquisitions, $1.4 million in additional costs were incurred due to changes in product mix in the organic business that have higher costs.

In our ASG segment, cost of revenue increased by $4.3 million, or 10.1%, to $46.7 million for the three months ended September 30, 2019, from $42.4 million for the three months ended September 30, 2018. This was primarily due to the increase of costs associated with organic growth and higher freight and labor costs predominantly due to supply chain changes, and higher lease expense. The acquisition of Tuscany also contributed $0.6 million of the increase.

Gross Profit and Margin. For the three months ended September 30, 2019, gross profit increased $5.9 million, or 16.1%, to $42.3 million, from $36.5 million for the three months ended September 30, 2018. The increase in gross profit was primarily due to higher net sales from acquisitions. For the three months ended September 30, 2019, gross margin decreased 2.0% to 26.6% from 28.6% for the three months ended September 30, 2018. This decrease in gross margin was primarily due to an unfavorable shift in product mix and increased costs.  

In our RDS segment, gross margin decreased 1.1% to 26.7% for the three months ended September 30, 2019, from 27.8% for the three months ended September 30, 2018. This was primarily due to an unfavorable product mix resulting from entry- to mid-level homebuilding comprising a larger share of project activity in our markets.

In our ASG segment, gross margin decreased 3.1% to 26.1% for the three months ended September 30, 2019, from 29.2% for the three months ended September 30, 2018. This decrease was primarily a result of higher freight and labor costs predominantly due to changes to the supply chain, and increased lease expense.

Operating Expense. For the three months ended September 30, 2019, operating expenses increased by $3.7 million, or 11.3%, to $36.1 million, from $32.5 million for the three months ended September 30, 2018. The increase in operating expenses was primarily due to selling, general, and administrative expenses from acquired businesses.

In our RDS segment, operating expenses increased by $5.6 million to $20.5 million for the three months ended September 30, 2019, from $15.0 million for the three months ended September 30, 2018. This increase was primarily related to the Summit, TAC, and Intown acquisitions.

In our ASG segment, operating expenses decreased by $1.8 million to $10.8 million for the three months ended September 30, 2019, from $12.6 million for the three months ended September 30, 2018. The three months ended September 30, 2018 included non-recurring costs for new locations and acquisitions related to Tuscany.

SIC corporate costs decreased by $0.1 million to $4.8 million for the three months ended September 30, 2019, from $4.9 million for the three months ended September 30, 2018.

Depreciation and Amortization. For the three months ended September 30, 2019, depreciation and amortization expenses increased by $0.9 million, or 18.4%, to $6.0 million, from $5.1 million for the three months ended September 30, 2018.

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In our RDS segment, depreciation and amortization expenses increased by $0.8 million, or 34.4%, to $3.3 million for the three months ended September 30, 2019, which was primarily due to the depreciation and amortization associated with the assets acquired in the Summit, TAC, and Intown acquisitions.

In our ASG segment, depreciation and amortization expenses increased by $0.1 million, or 3.1%, to $2.8 million for the three months ended September 30, 2019, which was primarily due to amortization associated with the Tuscany acquisition.

Interest Expense. For the three months ended September 30, 2019, interest expense increased by $1.5 million, or 50.7%, to $4.3 million, from $2.9 million for the three months ended September 30, 2018. During the three months ended September 30, 2019, our interest expense increased primarily due to the borrowings associated with funding the TAC and Intown acquisitions since September 30, 2018.

Income Taxes. For the three months ended September 30, 2019, we recognized income tax expense of $1.4 million, an increase of $1.5 million from income tax benefit of $0.04 million for the three months ended September 30, 2018. This increase is related to our increased profitability during the three months ended September 30, 2019, as well as an increase in state taxes.

Net (Loss) Income. For the three months ended September 30, 2019, net income increased by $1.7 million to $2.5 million, from $0.8 million of income for the three months ended September 30, 2018.

Adjusted EBITDA. For the three months ended September 30, 2019, Adjusted EBITDA increased to $17.0 million, from $15.1 million for the three months ended September 30, 2018, primarily as a result of the factors discussed above.

Adjusted EBITDA Margin. Adjusted EBITDA margin decreased from 11.8% for the three months ended September 30, 2018 to 10.7% for the three months ended September 30, 2019.

Nine months ended September 30, 2019 Compared to Nine months ended September 30, 2018

Net Revenue. For the nine months ended September 30, 2019, net revenue increased $97.9 million, or 27.4%, to $454.7 million, from $356.8 million for the nine months ended September 30, 2018. Net revenue for the nine months ended September 30, 2019 and 2018 is adjusted for the elimination of intercompany sales of $2.2 million and $1.3 million, respectively.

In our RDS segment, net revenue increased by $76.2 million, or 39.3%, to $269.7 million for the nine months ended September 30, 2019, from $193.6 million for the nine months ended September 30, 2018. The increase was due to the acquisition of Summit, TAC, and Intown, which accounted for $80.3 million of the growth in RDS revenues. During the period, revenues from organic sales decreased $4.1 million as we continue to face softening in the Southern California housing market, which is our largest market.

In our ASG segment, net revenue increased by $22.5 million, or 13.7%, to $187.1 million for the nine months ended September 30, 2019, from $164.5 million for the nine months ended September 30, 2018. The increase was due to the acquisition of Bedrock, NSI, and Tuscany, which collectively accounted for $7.9 million of ASG growth, with the remainder of the growth of $14.6 million in our ASG segment attributable to increased revenue from organic volume and price/mix.

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Cost of Revenue. For the nine months ended September 30, 2019, cost of revenue increased $71.4 million, or 27.7%, to $329.4 million, from $258.0 million for the nine months ended September 30, 2018. Cost of revenue for the nine months ended September 30, 2019 and 2018 is adjusted for the elimination of intercompany sales of $2.2 million and $1.3 million, respectively.

In our RDS segment, cost of revenue increased by $55.0 million, or 39.2%, to $195.4 million for the nine months ended September 30, 2019, from $140.4 million for the nine months ended September 30, 2018. The acquisitions of Summit, TAC and Intown were primarily responsible for this increase, contributing $57.0 million. This increase was partially offset by a decrease in cost of revenues as a result of lower revenue in the Southern California market.

In our ASG segment, cost of revenue increased by $17.3 million, or 14.5%, to $136.2 million for the nine months ended September 30, 2019, from $118.9 million for the nine months ended September 30, 2018. This was partially due to the acquisition of Bedrock, NSI, and Tuscany, which contributed $5.8 million of the increase, with the remaining increase due to costs associated with organic growth.

Gross Profit and Margin. For the nine months ended September 30, 2019, gross profit increased $26.4 million, or 26.7%, to $125.2 million, from $98.8 million for the nine months ended September 30, 2018. The increase in gross profit was due to higher net sales. For the nine months ended September 30, 2019, gross margin decreased 0.2% to 27.5%, from 27.7% for the nine months ended September 30, 2018.

In our RDS segment, gross margin increased by 0.1% to 27.6% for the nine months ended September 30, 2019, from 27.5% for the nine months ended September 30, 2018. This was as a result of favorable contribution from acquisitions offset by an unfavorable product mix primarily due to entry- to mid-level homebuilding comprising a larger share of project activity in our markets.

In our ASG segment, gross margin decreased by 0.5% to 27.2% for the nine months ended September 30, 2019, from 27.7% for the nine months ended September 30, 2018. This decrease was primarily the result of higher freight and labor costs predominantly due to changes to the supply chain partially offset by an increase from our recently acquired businesses.

Operating Expense. For the nine months ended September 30, 2019, operating expenses increased by $18.8 million, or 20.8%, to $109.0 million from $90.3 million for the nine months ended September 30, 2018. The increase in operating expenses was primarily due to additional expenses incurred in our recently acquired businesses, including higher depreciation and amortization expenses, and additional SIC corporate costs.

In our RDS segment, operating expenses increased by $19.0 million to $61.5 million for the nine months ended September 30, 2019, from $42.5 million for the nine months ended September 30, 2018. This increase was primarily related to the acquisitions of Summit, TAC, and Intown acquisitions.

In our ASG segment, operating expenses decreased by $1.2 million to $33.4 million for the nine months ended September 30, 2019, from $34.6 million for the nine months ended September 30, 2018. This decrease was due to one-time non-recurring expenses related to the Bedrock and Tuscany acquisitions, and expenses related to the opening of new locations incurred during the nine months ended September 30, 2018.

The remaining $1.0 million of the increase in operating expenses was related to overhead costs incurred at the corporate level.

Depreciation and Amortization. For the nine months ended September 30, 2019, depreciation and amortization expenses increased by $4.0 million, or 26.7%, to $18.7 million, from $14.8 million for the nine months ended September 30, 2018.

In our RDS segment, depreciation and amortization expenses increased by $3.4 million, or 48.7%, to $10.3 million for the nine months ended September 30, 2019, which was primarily due to the depreciation and amortization associated with the acquisitions of Summit, TAC and Intown.

In our ASG segment, depreciation and amortization expenses increased by $0.5 million, or 6.5%, to $8.4 million for the nine months ended September 30, 2019, which was primarily due to amortization expenses associated with our Tuscany acquisition.

Interest Expense. For the nine months ended September 30, 2019, interest expense increased by $5.0 million, or 61.1%, to $13.2 million, from $8.2 million for the nine months ended September 30, 2018. Interest expense increased primarily due to the borrowings associated with funding the TAC and Intown acquisitions since September 30, 2018.

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Income Taxes. For the nine months ended September 30, 2019, we recognized income tax expense of $2.1 million, an increase of $2.6 million from income tax benefit of $0.6 million for the nine months ended September 30, 2018. This increase is related to our profitability during the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the effective tax rate of 35.42% decreased compared to the effective tax rate of 47.46% for the nine months ended September 30, 2018, due to a reduction in permanent tax differences and the change in pre-tax earnings for the respective periods.

Net (Loss) Income. For the nine months ended September 30, 2019, net income increased by $4.4 million to $3.7 million, from $0.6 million net loss for the nine months ended September 30, 2018.

Adjusted EBITDA. For the nine months ended September 30, 2019, Adjusted EBITDA increased to $46.1 million, from $39.6 million for the nine months ended September 30, 2018, primarily as a result of the factors discussed above.

Adjusted EBITDA Margin. For the nine months ended September 30, 2019, Adjusted EBITDA margin decreased slightly to 10.1% from 11.1% for the nine months ended September 30, 2018.

Non-GAAP Measures

In addition to the results reported in accordance with United States generally accepted accounting principles (which we refer to as “GAAP”), we have provided information in this Report relating to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. We have provided definitions below for these non-GAAP financial measures and have provided the tables above reconciling these non-GAAP financial measures to the comparable GAAP financial measures.

We believe that these non-GAAP financial measures provide valuable information regarding our earnings and business trends by excluding specific items that we believe are not indicative of the ongoing operating results of our businesses, providing a useful way for investors to make a comparison of our performance over time and against other companies in our industry.

We have provided these non-GAAP financial measures as supplemental information to our GAAP financial measures and believe these non-GAAP measures provide investors with additional meaningful financial information regarding our operating performance and cash flows. Our management and board of directors also use these non-GAAP measures as supplemental measures to evaluate our businesses and the performance of management, including the determination of performance-based compensation, to make operating and strategic decisions, and to allocate financial resources. We believe that these non-GAAP measures also provide meaningful information for investors and securities analysts to evaluate our historical and prospective financial performance. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Furthermore, the non-GAAP measures presented by us may not be comparable to similarly titled measures of other companies.

EBITDA is defined as consolidated net income before interest, taxes and depreciation and amortization. Adjusted EBITDA is defined as consolidated net 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 and employee related reorganization costs, purchase accounting fair value adjustments, facility closure costs, and professional, financing and legal fees related to business acquisitions, or similar transitional costs and expenses related to business investments, greenfield investments, 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 operating performance.

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Liquidity and Capital Resources

Working capital is the largest element of our capital needs, as inventory and receivables are our most significant investments. We also require funding for acquisitions, to cover ongoing operating expenses, and to meet required obligations related to financing, such as lease payments and principal and interest payments.

Our capital resources primarily consist of cash from operations and borrowings under our long-term revolving credit facility, capital leases, and operating leases. As our revenue and profitability have improved during the recovery of the housing market, we have used increased borrowing capacity under our revolving credit facility to fund working capital needs. We have utilized capital leases and secured equipment loans to finance our vehicles and equipment needed for both replacement and expansion purposes.

As of September 30, 2019, we had $8.6 million of cash and cash equivalents and $65.3 million of available borrowing capacity under our revolving credit facility. Based on our track record of profitability, positive cash flow, and ability to effectively manage working capital needs, we believe that we have sufficient funding in place to finance our operations and immediate growth plans.

Financing Sources; Debt

SIC Credit Facility

In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018 (which we refer to as the “SIC Credit Facility”), with Bank of America, N.A. The SIC Credit Facility is used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings of up to an aggregate of $100 million (after it was increased by $10 million through amendment in August 2019).

All revolving loans under the SIC Credit Facility are due and payable in full on June 28, 2023, subject to acceleration upon certain conditions.

The SIC Credit Facility is subject to certain financial covenants. At September 30, 2019 and December 31, 2018, the Company was in compliance with all material financial covenants.

As of September 30, 2019, $34.3 million of indebtedness was outstanding under the SIC Credit Facility. The Company also had $0.4 million of outstanding letters of credit under the SIC Credit Facility at September 30, 2019.  

Term Loan Facility

On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (which we refer to as the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries. The Term Loan Facility was subsequently amended in December 2018 to increase the borrowing capacity to $174.2 million and in July 2019 to amend certain covenants. On August 19, 2019, the Term Loan Facility was further amended, resulting in an adjusted borrowing rate.  Additionally, the amendment imposes a prepayment premium with respect to an optional prepayment of the term loans under the Financing Agreement occurring within fifteen months of the date of the amendment (other than prepayments in connection with a change of control) in an amount equal to 1.50% of any such principal amount prepaid.

All term loans under the Term Loan Facility are due and payable in full on February 28, 2023, subject to acceleration upon certain conditions.

The Company is required to meet certain financial and nonfinancial covenants pursuant to the Term Loan Facility. The Company was in compliance with all material financial and nonfinancial covenants as of September 30, 2019 and December 31, 2018.

As of September 30, 2019, approximately $154.1 million of indebtedness was outstanding under the Term Loan Facility.

Vehicle and Equipment Financing

We have used various secured loans and leases to finance our acquisition of vehicles. As of September 30, 2019, approximately $8.3 million of indebtedness was outstanding under vehicle and equipment loans and capital leases.

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Historical Cash Flow Information

Working Capital

Inventory and accounts receivable represent over 75% of our tangible assets, and accordingly, management of working capital is important to our businesses. Working capital (defined as current assets less current liabilities, excluding debt and cash) totaled $115.0 million at September 30, 2019, compared to $100.2 million at December 31, 2018, for a net increase of $14.8 million, due to shifts in receivables, inventory, accounts payable and accrued liabilities, due in part to timing and the acquisition of Intown.

Cash Flows Provided by Operating Activities

Net cash provided by operating activities was $20.3 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively. Net income was $3.7 million for the nine months ended September 30, 2019, and net loss was $0.6 million for the nine months ended September 30, 2018. 

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 $20.8 million for the nine months ended September 30, 2019, and $20.6 million for the nine months ended September 30, 2018.

Changes in operating assets and liabilities resulted in net cash used of $4.3 million for the nine months ended September 30, 2019. Changes in operating assets and liabilities resulted in net cash used of $17.2 million for the nine months ended September 30, 2018.

Cash Flows Used in Investing Activities

For the nine months ended September 30, 2019, cash flow used in investing activities was $22.8 million, with $1.0 million for the indemnity payment related to the Bedrock acquisition, $11.5 million for the acquisition of Intown, and $3.0 million for the escrow payment related to the Greencraft acquisition. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $7.3 million.

For the nine months ended September 30, 2018, cash flow used in investing activities was $39.3 million, with $0.3 million for the acquisition of NSI, $11.5 million for the acquisition of Bedrock, $4.2 million for the acquisition of Tuscany, and $16.3 million for the acquisition of Summit. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $7.1 million.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $1.8 million and $37.9 million for the nine months ended September 30, 2019 and 2018, respectively.

For the nine months ended September 30, 2019, we borrowed an additional $11.5 million in term debt and $2.1 million in an ERP financing transaction, and made principal payments of $1.6 million, for a net increase in term debt of $12.0 million. As of September 30, 2019, aggregate net payments on the SIC Credit Facility were $2.8 million and payments on notes payable were $1.4 million. We also classified $5.8 million of the total $8.0 million Greencraft earnout payment as a financing activity, as this was the fair value of the contingent liability accrued at purchase.

For the nine months ended September 30, 2018, we borrowed an additional $14.3 million in term debt with debt issuance costs of $0.5 million, and made principal payments of $0.8 million, for a net increase in term debt, net of issuance costs, of $13.0 million. Aggregate net borrowings on the SIC Credit Facility were $25.4 million and payments on notes payable were $1.0 million during the nine months ended September 30, 2018. Proceeds from employee stock purchases were $0.5 million during the nine months ended September 30, 2018.

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Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations as of September 30, 2019. Some of the amounts included in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table.