SMITH MIDLAND CORP - Annual Report: 2018 (Form 10-K)
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-K
☒
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the Fiscal Year
Ended December 31,
2018
or
☐
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number
1-13752
Smith-Midland
Corporation
(Exact Name of
Registrant as Specified in its Charter)
|
Delaware
|
54-1727060
|
|
(State or Other
Jurisdiction of Incorporation or
Organization)
|
(I.R.S. Employer
Identification
No.)
|
P.O. Box 300,
5119 Catlett Road
Midland,
Virginia 22728
(Address of Principal Executive Offices, Zip
Code)
(540)
439-3266
(Registrant's
Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of
the Act: None
Securities Registered Pursuant to Section
12(g) of the Act:
Common Stock, $.01
par value per share
(Title of
Class)
Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes ☐ No
☒
Indicate by check mark
if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.Yes ☐ No
☒
Indicate by check mark
whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
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
if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the
definitions of “large accelerated filer”,
“accelerated filer”, “smaller reporting
company”, and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
|
Large accelerated
filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
|
☐
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Smaller reporting
company
|
☒
|
|
|
Emerging growth
company
|
☐
|
|
|
|
|
If an emerging growth
company, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes ☐ No
☒
The aggregate market
value of the shares of the voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and
asked price of such common equity as of June 30, 2018 (the last
business day of the Company’s most recently completed second
fiscal quarter) was $22,936,322. For the sole purpose of making
this calculation, the term “non-affiliate” has been
interpreted to exclude directors, officers, and holders of 10% or
more of the Company’s common stock.
1
As of March 5,
2019, the Company had outstanding 5,134,492 shares of Common Stock,
$.01 par value per share, net of treasury shares.
Documents
Incorporated By Reference
None
2
FORWARD-LOOKING
STATEMENTS
This Annual Report and
related documents include “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. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause the
Company’s actual results, performance (financial or
operating) or achievements expressed or implied by such forward
looking statements not to occur or be realized. Such forward
looking statements generally are based upon the Company’s
best estimates of future results, performance or achievement, based
upon current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of
forward-looking terminology such as “may,”
“will,” “expect,” “believe,”
“estimate,” “anticipate,”
“continue,” or similar terms, variations of those terms
or the negative of those terms. Potential risks and uncertainties
include, among other things, such factors as:
•
While the Company reported net income for the
years ended December 31, 2018 and 2017, there are no assurances the
Company can remain profitable in future periods,
•
our debt level increased in 2018, and our ability
to satisfy the same cannot be assured,
•
the continued availability of financing in the
amounts, at the times, and on the terms required, to support our
future business and capital projects,
•
the extent to which we are successful in
developing, acquiring, licensing or securing patents for
proprietary products,
•
changes in economic conditions specific to any
one or more of our markets (including the availability of public
funds and grants for construction),
•
changes in general economic conditions in the
Company's primary service areas,
•
adverse weather which inhibits the demand for our
products,
•
our compliance with governmental
regulations,
•
the outcome of future litigation, if
any,
•
on material construction projects, our ability to
produce and install product that conforms to contract
specifications and in a time frame that meets the contract
requirements,
•
the cyclical nature of the construction
industry,
•
our exposure to increased interest expense
payments should interest rates change,
•
the Company’s Board of Directors, which is
composed of five members, has only two outside, independent
directors, and
•
the other factors and information disclosed and
discussed in other sections of this report.
Investors and
shareholders should carefully consider such risks, uncertainties
and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could
cause actual results to differ materially from those provided in
the forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether
as a result of new information, future events or
otherwise.
3
PART I
Item
1 Business
General
Smith-Midland
Corporation (the "Company") invents, develops, manufactures,
markets, leases, licenses, sells, and installs a broad array of
precast concrete products for use primarily in the construction,
highway, utilities and farming industries through its six
wholly-owned subsidiaries. The Company's precast, licensing and
barrier rental customers are primarily general contractors and
federal, state, and local transportation authorities located in the
Mid-Atlantic, Northeastern, Midwestern and Southeastern regions of
the United States. The Company's operating strategy has involved
producing innovative and proprietary products, including
SlenderWall®, a patent pending, lightweight, energy efficient
concrete and steel exterior wall panel for use in building
construction; J-J Hooks® Highway Safety Barrier, a patented,
positive-connected highway safety barrier; SoftSound™, a
proprietary sound absorptive finish used on the face of sound
barriers to absorb some of the traffic noise; Sierra Wall™, a
patented sound barrier primarily for roadside use; Easi-Set®
and Easi-Span® patented transportable concrete buildings; and
Beach Prisms™ erosion mitigating modules. In addition,
the Company's precast subsidiaries produce farm products such as
cattleguards and water and feed troughs as well as custom order
precast concrete products with various architectural surfaces, as
well as generic highway sound barriers, retaining walls and utility
vaults.
The Company was
incorporated in Delaware on August 2, 1994. Prior to a corporate
reorganization completed in October 1994, the Company conducted its
business primarily through Smith-Midland Virginia, which was
incorporated in 1960 as Smith Cattleguard Company, a Virginia
corporation, and which subsequently changed its name to
Smith-Midland Corporation in 1985. The Company’s principal
offices are located at 5119 Catlett Road, Midland, Virginia 22728
and its telephone number is 540-439-3266. As used in this report,
unless the context otherwise requires, the term the
“Company” refers to Smith-Midland Corporation and its
subsidiaries. The Company’s wholly owned subsidiaries consist
of Smith-Midland Corporation, a Virginia corporation;
Smith-Carolina Corporation, a North Carolina corporation;
Smith-Columbia Corporation, a South Carolina corporation, Easi-Set
Industries Worldwide, Inc., a Virginia corporation; Concrete Safety
Systems, Inc., a Virginia corporation; and Midland Advertising and
Design, Inc., a Virginia corporation doing business as Midland
Advertising + Design.
Market
The Company's precast
concrete products market and barrier rental market primarily
consists of general contractors performing public and private
construction contracts, including the construction of commercial
buildings, public and private roads and highways, and airports,
municipal utilities, and federal, state, and local transportation
authorities, primarily located in the Mid-Atlantic, Northeastern,
Midwestern and Southeastern states. Due to the lightweight
characteristics of the SlenderWall® exterior cladding system,
the Company has expanded its competitive services outside of the
Mid-Atlantic states. The Company's licensing subsidiary
licenses its proprietary products to precast concrete manufacturers
nationwide and internationally in Canada, Belgium, New Zealand,
Australia, Mexico, Trinidad, Spain, and Chile.
The precast concrete
products market is affected by the cyclical nature of the
construction industry. In addition, the demand for construction
varies depending upon weather conditions, the availability of
financing at reasonable interest rates, overall fluctuations in the
national and regional economies, past overbuilding, labor relations
in the construction industry, and the availability of material and
energy supplies. A substantial portion of the Company's business is
derived from local, state, and federal building projects, which are
further dependent upon budgets and, in some cases, voter-approved
bonds.
Products
The Company's precast
concrete products are cast in manufacturing facilities and
delivered to a site for installation, as contrasted to ready-mix
concrete, which is produced offsite in a “batch
plant,”and delivered with a concrete mixer truck where it is
mixed and delivered to a construction site to be poured and set at
the site. Precast concrete products are used primarily
as parts of buildings or highway structures, and may be used
architecturally, as in a decorative wall of a building. Structural
uses include building walls, frames, floors, or roofs. The
Company currently manufactures and sells a wide variety of products
for use in the construction, transportation and utility
industries.
4
Easi-Set
SlenderWall® Lightweight
Construction Panels
The SlenderWall®
system is a prefabricated, energy-efficient, lightweight exterior
cladding system that is offered as a cost-effective alternative to
the traditional cladding used for the exterior walls of buildings.
The Company's SlenderWall® system combines the essential
components of a wall system into a single panel ready for interior
dry wall mounting upon installation. The base components of each
SlenderWall® panel consists of a galvanized stud frame with an
exterior surface of approximately two-inch thick, steel reinforced,
high-density, precast concrete (with integral water repellant), a
thermal break, and various architectural surfaces. The exterior
architectural concrete facing is attached to the interior steel
frame by use of coated stainless steel fasteners that position the
exterior concrete away from the steel frame to provide improved
thermal performance.
SlenderWall® panels
are approximately one-third the weight of traditional precast
concrete walls of equivalent size, permanence and durability, and
are also significantly improved as to permanence and
durability. The lighter weight translates into reduced
construction costs resulting from less onerous structural and
foundation requirements as well as lower shipping costs. Additional
savings result from reduced installation time, ease of erection,
and the use of smaller cranes for installation. Closed-cell foam
insulation and windows can be plant-installed further reducing cost
and construction schedules.
The Company custom
designs, manufactures, installs and licenses the SlenderWall®
exterior cladding system. The exterior of the SlenderWall®
system can be produced in a variety of attractive architectural
finishes, such as concrete, exposed stone, granite or thin brick
and can be integrated with other cladding materials.
Easi-Set
Sierra Wall™
The Easi-Set Sierra
Wall™ ("Sierra Wall") combines the strength and durability of
precast concrete with a variety of finishes to provide an effective
and attractive sound and sight barrier for use alongside highways
around residential, industrial, and commercial properties. With
additional reinforcement, Sierra Wall can also be used as a
retaining wall to retain earth in both highway and residential
construction. Sierra Wall is typically constructed of four-inch
thick, steel-reinforced concrete panels with an integral column
creating a tongue and groove connection system. This tongue
and groove connection system and its foundation connection make
Sierra Wall easy to install and move if boundaries change or
highways are relocated after the completion of a project. The
patented Sierra Wall II one-piece extended post and panel design
reduces installation time and cost.
The Company custom
designs and manufactures Sierra Wall components to conform to the
specifications provided by the contractor. The width, height,
strength, and exterior finish of each wall varies depending upon
the terrain and application. The Company also produces generic
post and panel design sound barrier wall systems. These
systems are constructed of steel or precast concrete columns (the
Company manufactures the precast or prestressed columns) with
precast concrete panels which slide down into the groove in each
column.
Sierra Wall is used
primarily for highway projects as a noise barrier as well as for
residential purposes, such as privacy walls between homes, security
walls or windbreaks, and for industrial or commercial purposes,
such as to screen and protect shopping centers, industrial
operations, institutions or highways. The variety of available
finishes enables the Company to blend the Sierra Wall with local
architecture, creating an attractive, as well as functional,
barrier.
Easi-Set
J-J Hooks® Highway Safety Barrier
The Easi-Set J-J
Hooks® highway safety barriers (the "J-J Hooks Barriers") are
crash-tested (privately funded), positively connected, safety
barriers that the Company sells, rents, delivers, installs and
licenses for use on roadways to separate lanes of traffic (in
free-standing, bolted, or pinned installations) in construction
work zones or for traffic control. Barriers are deemed to be
positively connected when the connectors on each end of the barrier
sections are interlocked with one another. J-J Hooks Barriers
interlock without the need for a separate locking device. The
primary advantage of a positive connection is that a barrier with
such a connection can withstand vehicle crashes at higher speeds
without separating. The Federal Highway Administration
("FHWA") requires that states use only positively connected
barriers, which meet NCHRP-350 or MASH crash test requirements. J-J
Hooks Barriers that meet NCHRP-350 and MASH TL3 requirements are
deemed eligible by the FHWA for federal-aid reimbursement. The
Company has benn issued patents with respect to J-J Hooks in the
United States, Canada, and other countries.
5
The Company has received
“design protection” in the U.S for the “end
taper” on each end of the barrier sections. The United States
has issued a "trade dress" registration for the "end taper" design
feature. Accordingly, in the United States, these features cannot
be legally copied by others.
The proprietary feature
of J-J Hooks Barriers is the design of its positive connection.
Protruding from each end of a J-J Hooks Barrier section is a
fabricated bent steel connector; rolled in toward the end of the
barrier, resembling the letter "J" when viewed from directly
above. The connector protruding from each end of the barrier
is rolled identically so that when one end of a barrier faces the
end of another, the resulting "J-Hook" face each other. To
connect one section of a J-J Hooks Barrier to another, a contractor
merely positions the J-Hook of an elevated section of the barrier
above the J-Hook of a set section and lowers the elevated section
into place. The positive connection is automatically engaged
using the cast-in alignment slot.
The Company believes
that the J-J Hooks Barrier connection design is superior to other
highway safety barriers that were positively connected through the
"eye and pin" technique. Barriers incorporating this technique
have eyes or loops protruding from each end of the barrier, which
must be aligned during the setting process. Once set, a crew
inserts pins or long bolts through the eyes which connects and
bolts the barrier sections together. Compared to this technique,
the J-J Hooks Barriers are easier and faster to install and remove,
require a smaller crew, and eliminates the need for loose hardware
to make the connection.
In March 1999, the FHWA
approved the free-standing J-J Hooks Barrier (tested in accordance
with NCHRP-350 Test Level 3) following successful crash testing in
accordance with National Cooperative Highway Research Program
requirements. In December 2012 the FHWA approved the pinned and
bolted J-J Hooks and in March 2018 approved the free-standing J-J
Hooks. In September 2018 the FHWA approved a 20-foot deisgn
originally tested to NCHRP 350 TL3 requirements and approved by the
FHWA (tested in accordance with MASH Test Level 3) for use on
federally aided highway projects following the successful
completion of crash testing based on criteria from the AASHTO
Manual for Assessing Safety Hardware.
J-J Hooks NCHRP-350
free-standing barrier has been approved for use on state and
federally funded projects by 42 states, plus Washington, D.C. The
Company is in various stages of the application process in
additional states and believes that approval in some of the
states will be granted; however no assurance can be given that
approval will be received from any or all of the remaining states
or that such approval will result in the J-J Hooks Barrier being
used in such states. In addition, J-J Hooks Barrier has been
approved by the appropriate authorities for use in the countries of
Canada (Alberta, Nova Scotia, New Brunswick and Ontario),
Australia, New Zealand, Spain, Portugal, Belgium, Germany and
Chile.
J-J Hooks restrained
(pinned or bolted) barrier successfully passed the MASH TL3 tests
in August of 2012 and received FHWA Eligibility Letters in December
2012. Currently 32 states have approved the MASH restrained barrier
and 17 states have approved the MASH free-standing design as an
alternate to their state standard. In Canada, the provinces of
Alberta and Nova Scotia have approved the MASH tested barrier. The
new J-J Hooks free-standing barrier successfully passed the two
required MASH TL3 tests and in January 2018 and August 2018
received the FHWA federal-aid eligibility letters. The FHWA
Eligibility letters B300 and B307 have been issued as of February
2018 and September 2018, respectively.
Easi-Set
Precast Building and Easi-Span®
Expandable
Precast Building
Easi-Set Precast
Buildings are transportable, prefabricated, single-story, all
concrete buildings designed to be adaptable to a variety of uses
ranging from housing communications operations, traffic control
systems, mechanical and electrical stations, to inventory or supply
storage, restroom facilities or kiosks. Easi-Set Precast Buildings
and Restrooms are available in a variety of exterior finishes and
in 38 standard sizes, or can be custom sized. The roof and floor of
each Easi-Set Building is manufactured using the Company's second
generation post-tensioned system, which helps seal the buildings
against moisture. As freestanding units, the Easi-Set Buildings
require no poured foundations or footings and can be easily
installed within a few hours. After installation the buildings can
be moved, if desired, and reinstalled in a new location. The
Company has been issued patents in connection with this product in
the United States and Canada.
The Company also offers
Easi-Span® a line of expandable precast concrete
buildings. Easi-Span® incorporates the technology of the
Easi-Set Buildings, but are available in larger sizes and, through
its modular construction, can be combined in varied configurations
to permit expansion capabilities. Since these larger buildings
have less competition from other materials and methods, they
produce higher profit margins. Both the Easi-Span and Easi-Set
Buildings offer lines of fully-outfitted restrooms with over a
dozen standard models.
6
The Company has sold
its Easi-Set® and Easi-Span® Precast Buildings for the
following uses:
●
Communications
Operations — to house fiber optics regenerators,
switching stations and microwave transmission shelters, cellular
phone sites, and cable television repeater stations.
●
Government
Applications — to federal, state and local authorities
for uses such as weather and pollution monitoring stations;
military storage, housing and operations; park vending enclosures;
rest rooms; kiosks; traffic control systems; school maintenance and
athletic storage; airport lighting control and transmitter housing;
and law enforcement evidence and ammunition storage.
●
Utilities
Installations — for electrical switching stations and
transformer housing, gas control shelters and valve enclosures,
water and sewage pumping stations, and storage of contaminated
substances or flammable materials which require spill
containment.
●
Commercial and Industrial
Locations — for electrical and mechanical housing,
cemetery maintenance storage, golf course vending enclosures,
mechanical rooms, rest rooms, emergency generator shelters, gate
houses, automobile garages, hazardous materials storage, food or
bottle storage, animal shelters, and range houses.
Easi-Set
Utility Vault
The Company produces a
line of precast concrete underground utility vaults ranging in size
from 27 to 1,008 cubic feet. Each Easi-Set utility vault normally
comes with a manhole opening on the top for ingress and egress and
openings around the perimeter, in accordance with the customer's
specifications, to access water and gas pipes, electrical power
lines, telecommunications cables, or other such media of transfer.
The utility vaults may be used to house equipment such as cable,
telephone or traffic signal equipment, and for underground storage.
The Company also manufactures custom-built utility vaults for
special needs.
SoftSound™
Soundwall Panels
SoftSound™
soundwall panels utilize a “wood chip aggregate” sound
absorptive material applied to the face of soundwall panels, which
is used to absorb highway noise. SoftSound™ is a
proprietary product developed and tested by the Company and is
currently approved for use in Virginia, Maryland, seven additional
states, and the provinces of Ontario and Quebec, Canada. Approvals
are still pending in a number of additional states. The
Company introduced this product line into its licensing program and
is in the process of seeking to obtain approvals in all 50 states
and the Canadian Provinces.
Beach
Prisms™ Erosion Control Modules
In 2006, the Company
began production and launched full-scale advertising and
promotional efforts for its product, Beach Prisms™, a
shoreline erosion control product that uses the preferred natural
"soft" approach as opposed to the "hard" approach of seawalls and
jetties, to solve this worldwide problem. This product is
expected to provide a higher margin than many of the
Company’s other product lines. Beach Prisms™ work by
reducing the amount of energy in incoming waves before the waves
reach the shoreline. Waves pass through the specially designed
slots in the triangular 3-4 foot tall by 10 foot long Beach
Prisms™ modules. The success of a Beach Prisms ™
installation is dependent on the prevailing wind in relation to the
shoreline, the tides, the fetch and the availability of sand in the
surf. Beach Prisms™ are primarily for river- and bay-front
property owners who want an alternative to traditional armor stone,
or groins and jetties. The Company received “design
protection” in the United States for the Beach Prisms™
in 2010.
The Company currently
has orders and is also accepting new orders with deposits for the
Beach Prism product, and the Company is working with the states of
Virginia and Maryland to secure approval of each state’s
environmental agency. Each project must apply for approval by the
appropriate state to obtain a permit to install the Beach Prism.
Such approvals are meeting resistance from the environmental
agencies, however, the Company believes approval is forthcoming.
One permit was received from the State of Maryland, and the Company
is hopeful to begin production to fulfill a potential order. In the
event that approvals are not timely received, these orders may be
cancelled.
7
H2Out™
Secondary Drainage System
H2Out™ is the
first "in the caulk joint" secondary drainage and street level leak
detection product for panelized exterior cladding. A second line of
caulking and drainage strip located behind the exterior line of
caulking exits all water leakage to the exterior of the building
preventing moisture and mold, and hence deterring lawsuits from
tenants and owners of buildings. H2Out™ has been
added as a feature of the SlenderWall® system and is being
included in the product literature, website, and all sales
presentations.
Although the Company
is optimistic about the success of Beach Prisms™ and
H2Out™, there can be no assurance of the commercial
acceptance of these products.
Sources of
Supply
All of the raw materials
necessary for the manufacture of the Company's products are
available from multiple sources. To date, the Company has not
experienced significant delays in obtaining materials and believes
that it will continue to be able to obtain required materials from
a number of suppliers at commercially reasonable
prices.
Licensing
The Company presently
grants licenses through its wholly-owned subsidiary Easi-Set
Industries for the manufacturing and sale rights for certain
proprietary products, such as the J-J Hooks® Barrier,
Easi-Set®/Easi-Span® Precast Buildings,
SlenderWall®, SoftSound™ and Beach Prisms™ as well
as certain non-proprietary products, such as the Company's
cattleguards. Generally, licenses are granted for a point of
manufacture. The Company receives an initial one-time training
& administration license fee varying on the product
licensed. License royalties vary depending upon the product
licensed, but the range is typically 4% to 6% of the net sales of
the licensed product. In addition,
Easi-Set®/Easi-Span® Buildings and SlenderWall®
licensees pay the Company a monthly fee for co-op advertising &
promotional programs. The Company produces and distributes
advertising & promotional materials and promotes the licensed
products through its own advertising subsidiary, Midland
Advertising + Design.
The Company maintains 56
licensing agreements in the United States, 9 in Canada, and 1 each
in Australia, Belgium, Mexico, New Zealand and Trinidad, for a
total of 70 licensees worldwide.
The Company is
continually discussing new license arrangements with potential
precast companies and, although no assurance can be given, expects
to increase its licensing activities.
Marketing and
Sales
The Company uses an
in-house sales force and, to a lesser extent, independent sales
representatives to market its precast concrete products through
trade show attendance, sales presentations, advertisements in trade
publications, and direct mail to end users. Currently, our South
Carolina production facility is utilizing the sales force from the
Virginia production facility until they fully establish their
own.
The Company has also
established a cooperative advertising program in which the Company
and its Easi-Set®/Easi-Span® Buildings and
SlenderWall® licensees combine resources to promote certain
precast concrete products. Licensees pay a monthly fee and the
Company pays any additional amounts required to advertise the
products across the country. Although the Company advertises
nationally, the Company's precast subsidiaries marketing efforts
are concentrated on the region within a 250-mile radius from its
facilities, which includes most of Virginia, Delaware, the District
of Columbia, Maryland, North Carolina, South Carolina, Georgia, and
parts of Florida, Pennsylvania, New York, New Jersey and West
Virginia.
The Company's precast
product sales and barrier rental sales result primarily from the
submission of estimates or proposals to general contractors who
then include the estimates in their overall bids to various
government agencies and other end users that solicit construction
contracts through a competitive bidding process. In general,
these contractors solicit and obtain their construction contracts
by submitting the most attractive bid to the party desiring the
construction. The Company's role in the bidding process is to
provide estimates to the contractors desiring to include the
Company's products or services in the contractor's bid. If a
contractor who accepts the Company's bid is selected to perform the
construction, the Company provides the agreed upon products or
services. In many instances, the Company provides estimates to
more than one of the contractors bidding on a single
project. The Company also occasionally negotiates with and
sells directly to end-users.
8
Competition
The precast concrete
industry is highly competitive and consists of a few large
companies and many small to mid-size companies, several of which
have substantially greater financial and other resources than the
Company. Nationally, several large companies dominate the
precast concrete market. However, due to the weight and costs
of delivery of precast concrete products, competition in the
industry tends to be limited by geographical location and distance
from the construction site and is fragmented with numerous
manufacturers in a large local area.
The Company believes
that the principal competitive factors for its precast products are
price, durability, ease of use and installation, speed of
manufacture and delivery time, ability to customize, FHWA and state
approval, and customer service. The Company believes that its
plants in Midland, Virginia, Reidsville, North Carolina and
Columbia, South Carolina compete favorably with respect to each of
these factors in the Mid-Atlantic and Southeastern regions of the
United States. Finally, the Company believes it offers a broad
range of products that are very competitive in these
markets.
Patents and Proprietary
Information
The Company currently
owns U.S., Canadian, Australian and New Zealand patents for J-J
Hooks® highway barrier, U.S. and Canadian patents for
Easi-Set® Precast Building features and U.S. patents for
Sierra Wall. The original patents on the J-J Hooks barrier and
SlenderWall have expired. Since the original patents were obtained,
the Company has filed new patent applications, and obtained
patents, for the crash tested J-J Hooks barrier. A patent
application has also been filed for the newest version of
SlenderWall. Additionally, the Company has “trade
dress” applications for J-J Hooks features filed in the U.S.,
Australia, and New Zealand and “distinguishing guise”
applications for J-J Hooks features filed in Canada. A U.S.
“trade dress” application for Beach Prisms and the J-J
Hooks "end taper" have been issued in the U.S.
The Company owns U.S.
registered trademarks for Smith-Midland (logo), Smith Cattleguard
(words), Excellence in Precast Concrete (words), Easi-Set (logo
& words), Easi-Span (words), Easi-Set Industries (words), J-J
Hooks (logo), SlenderWall (logo), Thermaguard (words) and J-J Hooks
"V" taper (trade-dress). The J-J Hooks logo is registered in
Canada, European Community, Australia, and New
Zealand.
While the Company
intends to vigorously enforce its patent rights against
infringement by third parties, no assurance can be given that the
patents or the Company's patent rights will be enforceable or
provide the Company with meaningful protection from competitors or
that its patent applications will be allowed. Even if a
competitor's products were to infringe patents held by the Company,
enforcing the patent rights in an enforcement action would be very
costly, and assuming the Company has sufficient resources, would
divert funds and resources that otherwise could be used in the
Company's operations. No assurance can be given that the
Company would be successful in enforcing such rights, that the
Company's products or processes do not infringe the patent or
intellectual property rights of a third party, or that if the
Company is not successful in a suit involving patents or other
intellectual property rights of a third party, that a license for
such technology would be available on commercially reasonable
terms, if at all.
Government
Regulation
The Company frequently
supplies products and services pursuant to agreements with general
contractors who have entered into contracts with federal or state
governmental agencies. The successful completion of the
Company’s obligations under such contracts is often subject
to the satisfactory inspection or approval of such products and
services by a representative of the contracting
agency. Although the Company endeavors to satisfy the
requirements of each such contract to which it is a party, no
assurance can be given that the necessary approval of its products
and services will be granted on a timely basis or at all and that
the Company will receive any payments due to it. Any failure
to obtain such approval and payment may have a material adverse
effect on the Company's business.
The Company's operations
are subject to extensive and stringent governmental regulations
including regulations related to the Occupational Safety and Health
Act (OSHA) and environmental protection. The Company believes
that it is substantially in compliance with all applicable
regulations. The cost of maintaining such compliance is not
considered by the Company to be significant.
9
The Company's employees
in its manufacturing division operate complicated machinery that
may cause substantial injury or death upon malfunction or improper
operation. The Company's manufacturing facilities are subject
to the workplace safety rules and regulations of OSHA. The
Company believes that it is in compliance with the requirements of
OSHA.
During the normal course
of its operations, the Company uses and disposes of materials, such
as solvents and lubricants used in equipment maintenance, that are
classified as hazardous by government agencies that regulate
environmental quality. The Company attempts to minimize the
generation of such waste as much as possible, and to recycle such
waste where possible. Remaining wastes are disposed of in
permitted disposal sites in accordance with applicable
regulations.
In the event that the
Company is unable to comply with the OSHA or environmental
requirements, the Company could be subject to substantial
sanctions, including restrictions on its business operations,
monetary liability and criminal sanctions, any of which could have
a material adverse effect upon the Company's business.
Employees
As of March 5,
2019, the Company had a total of 220 employees, of which 191 are
full-time, 8 are part-time and 21 are temporary workers, with 159
located at the Company's Midland, Virginia facility, 32 are located
at the Company's facility in Reidsville, North Carolina and 29 are
located at the Company's facility in Hopkins, South
Carolina. None of the Company's employees are represented by
labor organizations and the Company is not aware of any activities
seeking such organization. The Company considers its
relationships with its employees to be satisfactory.
Item
1A. Risk
Factors
Not
applicable
Item
1B Unresolved
Staff Comments
Not
applicable
Item
2. Properties
Facilities
The Company operates
three manufacturing facilities. The largest manufacturing
operations facility is a 44,000 square foot manufacturing plant
located on approximately 28 acres of land in Midland, Virginia, of
which the Company owns approximately 25 acres and 3 acres are
leased from Rodney I. Smith, the Company's Chairman of the Board,
at an annual rental rate of $24,000. The manufacturing
facility houses two concrete mixers and one concrete
blender. The plant also includes two environmentally
controlled casting areas, two batch plants, a form fabrication
shop, a welding and metal fabrication facility, a carpentry shop, a
quality control center and a covered steel reinforcing fabrication
area of approximately 8,000 square feet. The Company's Midland
facility also includes a large storage yard for inventory and
stored materials.
The
Company's second manufacturing facility is located in Reidsville,
North Carolina on ten acres of owned land and includes an 8,000
square foot manufacturing plant and administrative offices. The
Company currently owns 46 acres on which it is in the process of
building a 15,000 square foot manufacturing plant with additional
space for future expansion. The expansion is estimated to cost $3.3
million and will increase production and storage capacity. The
project will be funded through bank financing. Management expects
completion of the new facility during the third quarter 2019 with
manufacturing expected to begin during that same time period. The
current North Carolina facility has remained operational during the
construction of the new plant, and future use is not determined at
this time. There can be no assurance as to the cost, financing,
timetable, completion, or success of this
project.
The Company's third
manufacturing facility is located in Hopkins (Columbia), South
Carolina. The facility is located on 39 acres of land and has
approximately 40,000 square feet of production space and
administrative offices. The South Carolina facility gives the
Company sufficient capacity to cover additional territory from the
Atlantic Coast region to the northern part of Florida.
The Company's present
facilities are adequate for its current needs.
10
Item
3. Legal Proceedings
The Company is not
presently involved in any litigation of a material
nature.
Item
4. Mine Safety
Disclosures
Not
applicable
11
PART II
Item 5.
Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The Company's Common
Stock trades on the OTCQX Markets under the symbol
"SMID".
As of March 5,
2019, there were approximately 100 record holders of the Company's
Common Stock. Management believes there are at least 700 beneficial
owners of the Company's Common Stock.
Dividends
Although the Company
paid a dividend for seven consecutive years, the Company cannot
guarantee the continued payment of dividends due to the internal
need for funds in the development and expansion of its
business. The declaration of dividends in the future will be
at the election of the Board of Directors and will depend upon
earnings, capital requirements and financial position of the
Company, general economic conditions and other pertinent
factors.
Item
6. Selected Financial
Data
Not
applicable.
Item
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion
should be read in conjunction with the Consolidated Financial
Statements of the Company (including the Notes thereto) included
elsewhere in this report. Dollar amounts are in thousands, except
for per share amounts.
The Company generates
revenues primarily from the sale, leasing, licensing, shipping and
installation of precast concrete products for the construction,
utility and farming industries. The Company's operating
strategy has involved producing innovative and proprietary
products, including Slenderwall™, a patent pending,
lightweight, energy efficient concrete and steel exterior wall
panel for use in building construction; J-J Hooks® Barrier, a
patented positive-connected highway safety barrier; Sierra
Wall™, a patented sound barrier primarily for roadside use;
transportable concrete buildings; and SoftSound™, a highway
sound attenuation system. In addition, the Company produces
utility vaults; farm products such as cattleguards; and custom
order precast concrete products with various architectural
surfaces.
12
As a part of the
construction industry, the Company's sales and net income may vary
greatly from quarter to quarter over a given year. Because of the
cyclical nature of the construction industry, many factors not
under our control, such as weather and project delays, affect the
Company's production schedule, possibly causing a momentary
slowdown in sales and net income. As a result of these factors, the
Company is not always able to earn a profit for each period,
therefore, please read Management's Discussion and Analysis of
Financial Condition and Results of Operations and the accompanying
financial statements with these factors in mind.
Overview
Overall, the
Company’s financial performance was slightly lower in 2018
when compared to 2017. The Company had net income in 2018 in the
amount of $1,687 compared to net income of $2,684 for
2017. The primary reason for the decrease in net profit was
due to the deferred guaranteed buy-back agreement with a customer,
which at December 31, 2018, had associated deferred revenues of
$6,592 and deferred costs of $5,304, which amounts will increase as
more product is delivered. Although
barrier product sales are not being recognized, the Company has
begun recognizing barrier rental revenue which will continue
through the life of the customer's project. Accordingly, once all
product is delivered to this customer, the Company will nonetheless
continue to recognize the net profits from this project until the
buy-back option is either exercised or expired. Delivery of product
commenced in the second quarter of 2018 and is expected to be
completed during the second quarter of 2019. The buy-back option
expires when the customer completes the project utilizing the
barrier, which is expected to be in 2022. Thus, whereas the Company
will likely have completed its obligations in 2019, it will
nonetheless continue to recognize net profits through 2022. It
should be noted that the amount of the buy-back obligation is not
amortized over this period, but as it is equal in the amount to
revenue and expense, and the full amount of the net profit is
recognized over this period. Sales
were particularly strong in the first quarter of 2017 due to one
large short-term barrier rental project, which produced profits
slightly higher than our normal rental projects because of the
large amount of preparation, installation and removal, and follow
through that was accomplished in a short period of time that
impacted the year-over-year comparison. Sales continue to look
stable for 2019, with the current backlog and bidding remaining
strong. Based on current market activity and the Company's backlog
of $31.1 million as of March 5, 2019, management believes that 2019
will be another strong financial year for the Company, although no
assurance can be given.
Results of
Operations
Year ended December 31, 2018
compared to the
year ended December 31,
2017
For the year ended
December 31, 2018, the Company had total revenue of $40,220
compared to total revenue of $41,717 for the year ended
December 31, 2017, a decrease of $1,497, or 3.6%. Sales
include revenues from product sales, barrier rental income, royalty
revenue, and shipping and installation income. Product sales
are further divided into Soundwall, architectural and
SlenderWall™ panels, miscellaneous wall panels, highway
barrier, Easi-Set®/Easi-Span® buildings, utility and farm
products, and miscellaneous precast products. The following
table summarizes the revenue by type and a comparison for the years
ended December 31, 2018 and 2017 (in thousands):
|
Revenue by Type (Disaggregated
Revenue)
|
|
|
|
|
|
|
2018
|
2017
|
Change
|
% of
Change
|
|
Product Sales:
|
|
|
|
|
|
Soundwall
Sales
|
$9,867
|
$7,571
|
$2,296
|
30.3%
|
|
Architectural
Sales
|
876
|
829
|
47
|
5.7%
|
|
SlenderWall
Sales
|
5,572
|
2,048
|
3,524
|
172.1%
|
|
Miscellaneous
Sales
|
1,760
|
2,793
|
(1,033)
|
(37.0)%
|
|
Barrier
Sales
|
7,264
|
11,276
|
(4,012)
|
(35.6)%
|
|
Easi-Set and Easi-Span
Building Sales
|
2,114
|
2,484
|
(370)
|
(14.9)%
|
|
Utility and Farm Product
Sales
|
1,232
|
1,492
|
(260)
|
(17.4)%
|
|
Miscellaneous Product
Sales
|
474
|
562
|
(88)
|
(15.7)%
|
|
Total Product
Sales
|
29,159
|
29,055
|
104
|
0.4%
|
|
Barrier
Rentals
|
1,729
|
4,267
|
(2,538)
|
(59.5)%
|
|
Royalty
Revenue
|
1,675
|
1,885
|
(210)
|
(11.1)%
|
|
Shipping and
Installation
|
7,657
|
6,510
|
1,147
|
17.6%
|
|
Total Service
Revenue
|
11,061
|
12,662
|
(1,601)
|
(12.6)%
|
|
Total
Revenue
|
$40,220
|
$41,717
|
$(1,497)
|
(3.6)%
|
13
Soundwall
Sales – Soundwall panel sales increased significantly
by 30.3% in 2018 compared to 2017 due primarily to the larger
number of projects in production during 2018 at all three
manufacturing facilities as compared to 2017. The Company continued
to have increasing soundwall sales out of Reidsville, North
Carolina and Columbia, South Carolina to expand the customer base
for highway soundwall panel production. Soundwall sales were higher
at each location, driving the increase for 2018. Soundwall bid
projects continue to remain strong in 2019 and management maintains
a positive outlook with addtional projects being released on the
east coast from Maryland to Georgia, although no assurance can be
given on awards.
Architectural
Sales – Architectural panel sales slightly increased
by 5.7% in 2018 compared to 2017 as the Company was awarded more
architectural wall panels to produce during 2018, which coincided
with SlenderWall production (see the SlenderWall section below).
The architectural product line is lagging far behind our other
product lines, as it becomes a more of a commodity product in the
market, but still continues to be a complimentary product to the
Company's proprietary Slenderwall panel system. Management does
believe, however, that 2019 architectural sales should increase
over the 2018 sales volume.
SlenderWall
Sales – SlenderWall panel sales increased
significantly by 172.1% in 2018 when compared to 2017. The Company
had a total of three SlenderWall projects in production in 2018,
including the largest SlenderWall project ever produced.
SlenderWall sales should stay strong in 2019 as the Company is
working diligently to close numerous SlenderWall projects.
Currently, the Company has received authorization to begin
engineering and production on a couple of the projects by the
owners. Management believes the SlenderWall projects have a high
probability of being awarded to the Company, which will continue to
increase awareness of the proprietary product in the marketplace,
although no assurance can be given.
Miscellaneous
Sales – Miscellaneous sales are highly customized
precast concrete products that don't fit other standard revenue
types. Miscellaneous sales decreased by 37.0% in 2018 when compared
to 2017, due mainly to one large order for a highly customized
barrier produced in 2017. Miscellaneous projects are difficult to
predict from year to year, however, based on the Company's current
backlog of orders and our bid outlook, management believes that
production and sales of miscellaneous products in 2019 will be
similar or less than 2018 levels.
Barrier
Sales – Barrier sales are dependent on the number of
highway projects active during the period and whether customers are
more prone to buy barrier than to rent. In 2018 barrier sales
decreased by 35.6% as compared to 2017. Although barrier production
increased in 2018 as compared to 2017, a large portion is not being
recognized as barrier sales due to the guaranteed buy-back
agreement with a customer; instead the Company will recognize the
income as barrier rental revenue (less associated expenses) over
the duration of the project, for which deliveries began in the
second quarter of 2018 and are expected to be completed during the
second quarter of 2019. Accordingly, during and after product
delivery to this customer, the Company will recognize revenue as
barrier rental revenue until the buy-back option is either
exercised or expired, which is expected to be in 2022. Thus,
whereas the Company is likely to have completed its production and
delivery of all product in 2019, it will recognize net profits
through 2022. See "Overview". Management expects barrier sales to
be lower for 2019 as compared to annual barrier sales for
2018.
Utility
and Farm Product Sales – Utility and farm products are
mainly underground utility vaults used in infrastructure
construction. Utility and farm product sales decreased by 17.4% in
2018 compared to 2017. The utility market is extremely competitive,
with many competitors who specialize in lower priced utility
products. The Company is much more competitive on larger quantity
projects, but did not receive significant orders during 2018. As
the recently funded highway projects also require utility vaults
for underground placement of utilities, management believes that
manhole sales should improve for 2019.
14
Miscellaneous
Product Sales – Miscellaneous products are products
that are produced or sold that do not meet the criteria defined for
other revenue categories. Examples would include precast
concrete slabs, waste blocks or small add-on items. For 2018,
miscellaneous product sales decreased by 15.7% when compared to
2017. The decrease in sales was due to less demand for these types
of products. Management expects miscellaneous product sales to
remain flat or decrease in 2019, as these products are typically
small in nature and the Company focuses it's priorities on larger,
more profitable jobs.
Barrier
Rentals – Barrier rentals decreased by 59.5% in 2018
when compared to 2017. The decrease resulted primarily from one
large rental contract awarded to the Company for a short-term
barrier rental project in January 2017. As described in "Overview"
and "Barrier Sales" above, the Company began recognizing revenue
under a deferred guaruanteed buy-back agreement with a customer for
barrier, which will continue until the buy-back option is either
exercised or expires when the customer completes the project
utilizing the barrier, which is expected to be in 2022. The
Company's standard highway barrier rentals remained strong in 2018
with an increase over the year 2017. Management believes standard
highway barrier rentals will continue to be strong in 2019 as the
outlays for infrastructure spending by federal and state
governments continues to increase. The Company increased its
barrier rental fleet again during 2018, while also adding
additional services and products to the rental division. The
Company continues to pursue its rental barrier expansion plans for
its local geographical sales areas and expects its core rental
business to increase.
Royalty
Revenue – Royalty revenues decreased by 11.1% in 2018
as compared to 2017. The decrease was a result of lower barrier
royalties, which was mainly impacted by weather throughout the
country. The Company signed addtional barrier and SlenderWall
licensees during 2018. SlenderWall royalties continued to increase
during 2018. The Company continues to explore opportunities around
the world to expand the reach of SlenderWall and J-J Hooks barrier
with the newest crash test being completed in Australia during
2018. Management believes that overall royalties will increase
during 2019 as the construction industry continues to expand,
especially in the infrastructure section of the
market.
Shipping
and Installation – Shipping revenue results from
shipping our products to the customers' final destination and is
recognized when the shipping services take place. Installation
activities include installation of our products at the
customers’ construction site. Installation revenue results
when attaching architectural wall panels to a building, installing
an Easi-Set® building at a customers' site, setting highway
barrier, or setting any of our other precast products at a site
specific to the requirements of the owner. Shipping and
installation revenues increased by 17.6% for 2018 when compared to
2017. The increase was mainly due to the increase of delivery and
installation of barrier associated with the deferred buy-back
agreement and an increase in SlenderWall installation as compared
to 2017. With large SlenderWall projects expected to be delivered
in 2019, management believes that shipping and installation
revenues for 2019 will be similar to 2018.
Cost
of Goods Sold – Total cost of goods sold for the year
ended December 31, 2018 was $29,730, a decrease of $523, or
1.7%, from $30,253 for the year ended December 31,
2017. Total cost of goods sold, as a percentage of total
revenue not including royalties, increased to 77% for the year
ended December 31, 2018 from 76% for the year ended
December 31, 2017. The increase in the cost of goods sold
as a percentage of total revenue was due, in part, to product mix
and an increase in barrier rental sales. Raw material costs
increased slightly in 2018 over 2017 with some inflationary
pressures for the Company. Prices for steel and cement, some of our
largest input costs, increased during 2018, and is expected to
remain relatively flat in 2019. In addition, the Company had one
large short-term barrier rental project in 2017 that sold at higher
margins than many of our normal precast product sales, which had a
favorable effect on margins for 2017. The Company continues to seek
new vendor partnerships to help develop a price advantage for its
raw materials as well as a continuous supply of these materials and
has changed several vendors due to better supply sources and better
pricing.
General
and Administrative Expenses – For the year ended
December 31, 2018, the Company's general and administrative
expenses increased by $422, or 8.0%, to $5,675 from $5,253 during
the same period in 2017. The increase in general and
administrative expenses resulted primarily from an increase in
salaries and insurance expenses. The stock compensation continued
in 2018 to reward and retain key associates for continuous
improvement and performance.
Selling
Expenses – Selling expenses for the year ended
December 31, 2018 increased by $103, or 4.1%, to $2,599 from
$2,496 for the year ended December 31, 2017. The increase
was due to an increase in salary and commission expense with some
of the largest sales contracts in Company history. The Company
recently hired additional sales persons at the Columbia, South
Carolina facility. With the current increase in sales and continued
anticipation of increases in future years, additional sales persons
remain a priority for the Company.
15
Operating
Income – The Company had operating income for the year
ended December 31, 2018 of $2,216 compared to operating income
of $3,715 for the year ended December 31, 2017, a decrease of
$1,499. The decrease in operating income was primarily the result
of the deferred revenue of $6,592 and deferred costs of $5,304
associated with the guaranteed buy-back agreement, and the higher
margin special project, which occurred in the first quarter of
2017.
Interest
Expense – Interest expense was $176 for the year ended
December 31, 2018 compared to $184 for the year ended
December 31, 2017. The decrease of $8, or 4.3%, was due
primarily to long-term balances nearing the end of the loan term.
The North Carolina expansion is being financed primarily through
borrowings, with expected completion in the third quarter of 2019,
and accordingly, interest expense is expected to increase in
2019.
Income
Tax Expense – The Company had income tax expense of
$572 for the year ended December 31, 2018 compared to income
tax expense of $1,057 for the year ended December 31, 2017.
The Company had an effective rate of 25.3% for the year ended
December 31, 2018 compared to an effective rate of 28.3% for
the same period in 2017.
Net Income
– The Company had net income of $1,687 for the year ended
December 31, 2018, compared to net income of $2,684 for the
same period in 2017. The basic and diluted income per share
was $0.33 for 2018, compared to basic and diluted income per share
of $0.53 for the year ended December 31, 2017. There were
5,080 basic and 5,096 diluted weighted average shares
outstanding in 2018 and 5,042 basic and 5,079 diluted weighted
average shares outstanding in the 2017.
Liquidity and Capital
Resources
The Company financed its
capital expenditures requirements for 2018 with cash flows from
operations, cash balances on hand and notes payable to a bank. The
Company had $4,503 of debt obligations at December 31, 2018,
of which $1,711 is scheduled to mature within twelve months. During
the twelve months ended December 31, 2018, the Company made
repayments of outstanding debt in the amount $660.
The Company has a note
payable to Summit Community Bank (the “Bank”) with a
balance of $711 as of December 31, 2018. The note has a
remaining term of approximately three years and a fixed interest
rate of 3.99% annually with monthly payments of $26 and is secured
by principally all of the assets of the Company. Under the
terms of the note, the Bank will permit chattel mortgages on
purchased equipment not to exceed $250 for any one individual loan
so long as the Company is not in default. The Company's maintains a
limit of $3,500 for annual capital expenditures, excluding
acquisitions and plant expansions. At December 31, 2018,
the Company was in compliance with all covenants pursuant to the
loan agreement.
On March 27, 2016, the
Company executed an agreement to purchase the land, building and
fixtures of a facility located in Hopkins, South Carolina
("Smith-Columbia") for a purchase price of $1,550. The facility is
located on 39 acres of land and has approximately 40,000 square
feet of production space. The agreement was completed in July 2016,
and was financed by a new 15 year term facility from the Bank. The
note has a remaining term of approximately eleven and one-half
years and a fixed interest rate of 5.29% annually with monthly
payments of $11 and is secured by all of the assets of
Smith-Columbia and a guarantee by the Company. The balance of the
note payable at December 31, 2018 was
$1,169.
In addition to the notes
payable discussed above, the Company also has a $4,000 line of
credit with the Bank that had a balance of $1,000 at
December 31, 2018 used to fund the construction of the North
Carolina expansion, which will be converted to long-term debt when
the financing closes in 2019. The line of credit is evidenced by a
commercial revolving promissory note which carries a variable
interest rate of prime and matures on September 18, 2019. The loan
is collateralized by a first lien position on the Company's
accounts receivable and inventory and a second lien position on all
other business assets. Key provisions of the line of credit require
the Company, (i) to obtain bank approval for capital expenditures
in excess of $3,500 during the term of the loan; and (ii) to obtain
bank approval prior to its funding any acquisition. On September
18, 2018 the Company received a Commitment Letter from the Bank to
provide a guidance line of credit specifically to purchase business
equipment in an amount up to $1,500. The commitment provides for
the purchase of equipment with minimum advances of $50 for which a
note payable will be executed with a term not to exceed five years
with an interest rate at the Wall Street Journal prime rate plus
.5% with a floor of 4.49% per annum. The loan is collateralized by
a first lien position on all equipment purchased under the line.
The commitment for the guidance line of credit matures on September
17, 2019. As of December 31, 2018, the Company had not purchased
any equipment pursuant to the $1,500 commitment.
16
At December 31,
2018, the Company had cash totaling $1,946 and $1,107 of investment
securities available for sale compared to cash totaling $3,390 and
$1,098 of investment securities available for sale at
December 31, 2017. During 2018, the Company’s
operating activities provided $8,472 of cash due mainly to the
treatment of the deferred buy-back guarantee, which the Company
received payment as the product was produced. In 2018,
investing activities used $10,642 in cash primarily for the barrier
associated with the guaranteed buy-back and for the purchase of
property and capital equipment. Financing activities provided
$726 in cash in 2018, resulting primarily from new loans for the
North Carolina expansion and the financing of capital
expenditures.
Capital spending,
including financed additions, increased from $2,741 in 2017 to
$5,234 in 2018. Capital expenditures in 2018 included spending for
rental barrier, yard expansions in Virginia, the North Carolina
expansion, and manufacturing equipment. In 2019, the Company
intends to continue to make capital improvements which include
additional yard expansions in Virginia and the North Carolina
expansion, along with manufacturing equipment. The Company
anticipates capital spending for 2019 to be $2,000 within the
$3,500 loan covenant from the bank, excluding acquisitions and
plant expansions which is expected to be an additional
$2,200.
The Company’s cash
flow from operations is affected by production schedules set by
contractors, which generally provide for payment 45 to 75 days
after the products are produced and with some architectural
contracts, retainage may be held until the entire project is
completed. This payment schedule could result in liquidity
problems for the Company because it must bear the cost of
production for its products before it receives payment. The
Company's days sales outstanding (DSO) in 2018 was 86 days compared to 75 days in
2017. The DSO increased due to the increase in retainage
outstanding on large SlenderWall projects. Although no assurance
can be given, the Company believes that anticipated cash flow from
operations with adequate project management on jobs will be
sufficient to finance the Company’s operations and necessary
capital expenditures for at least the next 12 months.
The Company’s
inventory at December 31, 2018 was $3,560 and at
December 31, 2017 was $3,515, an increase of $45. The
annual inventory turns for 2018 and 2017 were 11.9 and 7.1,
respectively. The inventory turns for 2018 have increased due to
the Company having limited inventory, and all major contracts were
recognized in revenue, or as deferred revenue, as produced.
Finished goods inventory remained flat for 2018 as compared to
2017.
Critical Accounting
Policies
The Company’s
significant accounting policies are more fully described in its
Summary of Accounting Policies to the Company’s consolidated
financial statements. The preparation of financial statements
in conformity with accounting principles generally accepted within
the United States of America requires management to make estimates
and assumptions in certain circumstances that affect amounts
reported in the accompanying financial statements and related
notes. In preparing these consolidated financial statements,
management has made its best estimates and judgments of certain
amounts included in the consolidated financial statements, giving
due consideration to materiality. The Company does not believe
there is a great likelihood that materially different amounts would
be reported related to the accounting policies described below,
however, application of these accounting policies involves the
exercise of judgment and the use of assumptions as to future
uncertainties and as a result, actual results could differ from
these estimates.
The Company evaluates
the adequacy of its allowance for doubtful accounts at the end of
each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts,
subsequent cash collections on these accounts and comparative
accounts receivable aging statistics. Based on this
information, along with other related factors, the Company develops
what it considers to be a reasonable estimate of the uncollectible
amounts included in accounts receivable. This estimate
involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the
Company’s estimate.
The Company recognizes
revenue on the sale of its standard precast concrete products at
shipment date, including revenue derived from any projects to be
completed under short-term contracts. Installation services
for precast concrete products, leasing and royalties are recognized
as revenue as they are earned. Certain sales of Soundwall,
Slenderwall, and other architectural concrete products are
recognized over time. Over time contracts are estimated based on
the number of units produced (output method) during the period
multiplied by the unit rate stated in the contract.
As
the output method is driven by units produced, the Company
recognizes revenues based on the value transferred to the customer
relative to the remaining value to be transferred. The Company also
matches the costs associated with the units produced. If a contract
is projected to result in a loss, the entire contract loss is
recognized in the period when the loss was first determined and the
amount of the loss updated in subsequent reporting periods. Revenue
recognition also includes an amount related to a contract asset or
contract liability. If the recognized revenue is greater than the
amount billed to the customer, a contract asset is recorded in
accounts receivable - unbilled. Conversely, if the amount billed to
the customer is greater than the recognized revenue, a contract
liability is recorded in customer deposits on uncompleted
contracts. Changes in the job performance, job conditions and final
contract settlements are factors that influence management’s
assessment of total contract value and therefore, profit and
revenue recognition.
17
Seasonality
The Company services the
construction industry primarily in areas of the United States where
construction activity may be inhibited by adverse weather during
the winter. As a result, the Company may experience reduced
revenues from December through February and realize the substantial
part of its revenues during the other months of the year. The
Company may experience lower profits, or losses, during the winter
months, and as such, must have sufficient working capital to fund
its operations at a reduced level until the spring construction
season. The failure to generate or obtain sufficient working
capital during the winter may have a material adverse effect on the
Company.
Inflation
Management believes that
the Company's operations were not significantly affected by
inflation in 2018 and 2017, particularly in the purchases of
certain raw materials such as cement and steel. The Company
believes that raw material pricing will likely remain flat or
slightly increase in 2019, although no assurance can be given
regarding future pricing.
Backlog
As of March 5, 2019
the Company's sales backlog was approximately $31.1 million as
compared to approximately $29.5 million at approximately the same
time in 2018. It is estimated that most of the projects in the
sales backlog will be produced within 12 months, but a few will be
produced through the year 2020. There has been an increase in the
backlog for 2019 when compared to the approximately the same time
in 2018, and the Company expects it to continue to grow as the
Company continues to bid on large infrastructure and SlenderWall
projects, although no assurance can be given.
The risk exists that
recessionary economic conditions may adversely affect the Company
more than it has experienced to date. To mitigate these
economic and other risks, the Company has a broader product
offering than most competitors and has historically been a leader
in innovation and new product development in the industry. The
Company is continuing this strategy through the development,
marketing and sales efforts for its new
products.
The Company continues to
evaluate its processes, both production and administrative
processes, and has streamlined many of these processes through lean
activities. During 2018 and 2017, the Company, through lean
activities, has begun to to see positive effects to the bottom
line. It is management's intention to continue in this effort on a
significant level to help reach our goals for 2019 which are to
substantially reduce quality issues, significantly reduce design
and drawing issues, while increasing production capacity and sales
volume. In order to meet these goals, substantial improvements
through lean tools and lean thinking must be implemented company
wide.
The Company is
continuing its marketing, advertising and promotional efforts for
both Beach Prisms™, a shoreline erosion control product that
uses the preferred natural "soft" approach as opposed to the "hard"
approach of seawalls and jetties, to solve this worldwide problem
and H2Out™, the world’s first “in the caulk
joint” secondary drainage and street level leak detection
product for panelized exterior cladding. While the Company has
received a permit to install Beach Prisms™ at a specific site
in Virginia and other states, and has received one permit in
Maryland, it is still in the process of seeking to secure
additional site permit approvals in Virginia and Maryland and the
support of the appropriate environmental agencies in neighboring
states for its Beach Prisms™. Although the Company is
optimistic about the success of Beach Prisms™ and
H2Out™, there can be no assurance of the commercial
acceptance of these products.
18
Item 7A. Quantitative and
Qualitative Disclosures about Market Risk
Not
applicable.
Item 8. Financial Statements
and Supplementary Data
The consolidated
financial statements table of contents, which appears on page F-2,
are filed as part of this report.
Item 9. Changes In and
Disagreements With Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item 9A. Controls and
Procedures
Management’s Report on
Internal Control over Financial Reporting
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as
amended. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of the financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. This process
includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our consolidated financial
statements.
Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of the internal control over financial reporting to
future periods are subject to risk that the internal control may
become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may
deteriorate.
The Chief Executive
Officer and Chief Financial Officer of the Company assessed the
effectiveness of our internal control over financial reporting
based on the framework in “Internal Control –
Integrated Framework (1992)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) as of December 31, 2018, and concluded
that its controls were effective as of such date.
This annual report does
not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting
firm pursuant to the Securities and Exchange Commission rules that
permit the Company to provide only management’s report in
this annual report.
Disclosure controls and
procedures
We carried out our
evaluation, under the supervision and with the participation of our
management, including our chief executive officer and our chief
financial officer, of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report,
pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended. Based on our evaluation, our
principal executive officer and chief financial officer concluded
that our disclosure controls and procedures as of the end of the
period covered by this report were effective.
19
Changes in Internal Control
over Financial Reporting
There has been no change
in the Company’s internal control over financial reporting
during the quarter ended December 31, 2018 that has materially
affected, or is reasonably likely to materially affect, its
internal control over financial reporting.
Item
9B. Other Information
None.
20
PART III
Item
10. Directors, Executive Officers and
Corporate Governance
Certain information with
respect to our Directors and executive officers is set forth
below.
|
Name
|
|
Age
|
|
Director or
Executive
Officer Since
|
|
Position
|
|
Rodney I.
Smith
|
|
80
|
|
1970
|
|
Chairman of the Board of
Directors
|
|
|
|
|
|
|
|
|
|
Ashley B.
Smith
|
|
56
|
|
1994
|
|
Chief Executive Officer,
President, and Director
|
|
|
|
|
|
|
|
|
|
Wesley A.
Taylor
|
|
71
|
|
1994
|
|
Director
|
|
|
|
|
|
|
|
|
|
James Russell
Bruner
|
|
63
|
|
2018
|
|
Director
|
|
|
|
|
|
|
|
|
|
Richard
Gerhardt
|
|
52
|
|
2016
|
|
Director
|
|
|
|
|
|
|
|
|
|
Adam J.
Krick
|
|
33
|
|
2018
|
|
Chief Financial
Officer
|
Background
The following is a brief
summary of the background of each Director and executive officer of
the Company:
Rodney I.
Smith. Chairman of the Board of
Directors. Rodney I. Smith co-founded the Company in
1960 and became its President and Chief Executive Officer in 1965.
He served as President until 2012 and Chief Executive Officer until
May 2018. Mr. Smith currently remains as a part-time employee of
the Company. He has served on the Board of Directors and has been
its Chairman since 1970. Mr. Smith is the principal developer
and inventor of the Company’s proprietary and patented
products. He is the past President of the National Precast
Concrete Association. Mr. Smith has served on the Board of
Trustees of Bridgewater College in Bridgewater, Virginia since
1986. The Company believes that Mr. Smith’s extensive
experience in the precast concrete products industry and his
knowledge of the marketplace gives him the qualifications and
skills necessary to serve in the capacity as the Chairman of the
Board of Directors.
Ashley B. Smith.
Chief Executive
Officer, President, and Director. Ashley B. Smith has
served as Chief Executive Officer of the Company since May 2018,
President of the Company since 2012, Vice President of the Company
from 1990 to 2011, and as a Director since 1994. He is the
immediate past Chairman of the National Precast Concrete
Association. Mr. Smith holds a Bachelor of Science degree in
Business Administration from Bridgewater College. Mr. Ashley
B. Smith is the son of Mr. Rodney I. Smith. The Company
believes that Mr. Smith’s education, experience in the
precast concrete industry and business experience give him the
qualifications and skills necessary to serve in the capacity as a
director.
Wesley A.
Taylor. Director. Wesley
A. Taylor served as Vice President of Administration of the Company
from 1989 until 2017 and has served as a Director since 1994. Mr.
Taylor holds a Bachelor of Arts degree from Northwestern State
University. The Company believes that Mr. Taylor’s
education, business experience and his extensive experience in the
precast concrete industry gives him the qualifications and skills
necessary to serve in the capacity as a director.
21
James Russell Bruner.
Director.
Mr. Bruner
has served as a member of the Board of Directors of the Company
since December 2018.
Mr. Bruner has served as Chairman of Maersk Line, Limited
(“Maersk Line”) since November 2016 and was President
and Chief Executive Officer of Maersk Line from January 2014 to
November 2017. Maersk Line owns and operates a fleet of container
and tanker ships that are under the flag of the United States.
These ships support military, government and humanitarian missions
through the transportation of United States government cargo on an
international basis. Through its subsidiaries, Maersk Line owns
and/or operates ships designed to carry wheeled cargo and a fleet
of tankers and maritime support vessels. Maersk Line operates as a
subsidiary of A.P. Moller-Maersk A/S, an integrated transport and
logistics company headquartered in Copenhagen, Denmark. Mr. Bruner
attended Bridgewater College in Virginia. He is a graduate of the
University of Michigan Executive Program and Harvard Business
School's Advanced Management Program. The Company believes
that Mr. Bruner's current and past business-related experience
provides him with the knowledge and skills necessary to serve in
the capacity as a director of the Company.
Richard Gerhardt.
Director.
Mr. Gerhardt has served as a member of the Board of Directors of
the Company since 2016. He currently is serving his first term as a
Fauquier County, Virginia Supervisor for the Cedar Run Magisterial
District. Mr. Gerhardt presently serves on the boards of Path
Foundation (formally Fauquier Health Foundation), Virginia Gold Cup
Association and Fauquier Free Clinic. From 2003 to 2014, Mr.
Gerhardt served in an escalating succession of positions for three
global shipping and logistic companies: DHL Global Mail, ESI Global
Logistic and MSI Worldwide. His eight years as President, Chief
Operating Officer, and a shareholder of MSI Worldwide culminated in
its acquisition by Belgian Post. Mr. Gerhardt holds a Bachelor of
Arts in Business Administration with a minor in Economics from
Washington College in Chestertown, Maryland. The Company believes
that Mr. Gerhardt's current and past business-related experience
provides him with the knowledge and skills necessary to serve in
the capacity as a director of the Company.
Adam J.
Krick. Chief Financial
Officer. Adam J. Krick has served as Chief Financial
Officer of the Company since January 2018. Prior to becoming
the Chief Financial Officer, Mr. Krick served as the Accounting
Manager for the Company since 2014. Prior to joining the Company,
Mr. Krick worked in public accounting focusing on tax and business
consulting. Mr. Krick is a Certified Public Accountant and holds a
Bachelor of Business Administration degree in Accounting from James
Madison University.
Section
16(a) Beneficial Ownership Reporting
Compliance
Section 16(a)
(“Section 16(a)”) of the Securities Exchange Act of
1934, as amended, requires executive officers and Directors and
persons who beneficially own more than ten percent (10%) of the
Company’s Common Stock to file initial reports of ownership
on Form 3 and reports of changes in ownership on Form 4 with the
Securities and Exchange Commission and any national securities
exchange on which the Corporation’s securities are
registered.
Based solely on a review
of the copies of such forms furnished to the Company, the Company
believes that all Section 16(a) filing requirements applicable to
its executive officers, Directors and greater than ten percent
(10%) beneficial owners were satisfied during 2018, except that
James Russell Bruner filed his Form 3 Initial Statement of
Beneficial Ownership of Securities one day after it was due during
2018.
Code of
Ethics
The Company adopted a
code of ethics that applies to the Chief Executive Officer, Chief
Financial Officer, Accounting Manager and persons performing
similar functions. The Board of Directors approved the code of
ethics at their meeting on December 17, 2003. A copy of the
code of ethics was filed as an exhibit to the Company’s Form
10-KSB for the year ended December 31, 2003, and a copy may be
obtained without charge by requesting one in writing from
Secretary, Smith-Midland Corporation, P.O. Box 300, 5119 Catlett
Road, Midland, VA 22728.
22
Audit
Committee
The Company created an
Audit Committee in August 2018. The Audit Committee consists of
James Russell Bruner and Richard Gerhardt, the two independent
board members. Mr. James Russell Bruner is an audit committee
financial expert.
The following table sets
forth the compensation paid by the Company for services rendered
for 2018 and 2017 to the principal executive officer and the
Company’s two most highly compensated executive officers
other than the principal executive officer (the “named
executive officers”) as of the end of 2018:
Summary Compensation
Table
|
Name and Principal
Position
|
Year
|
Salary
($)(1)
|
Bonus
($)(2)
|
Stock
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
Rodney I.
Smith
|
2018
|
123,247
|
60,350
|
—
|
102,000
|
285,597
|
|
Chief Executive Officer
and Chairman of the Board (3)(4)
|
2017
|
116,774
|
64,230
|
228,900
|
102,000
|
511,904
|
|
|
|
|
|
|
|
|
|
Ashley B.
Smith
|
2018
|
188,823
|
119,006
|
—
|
3,000
|
310,829
|
|
Chief Executive Officer
and President (4)(5)
|
2017
|
201,994
|
59,808
|
—
|
3,000
|
264,802
|
|
|
|
|
|
|
|
|
|
Adam J.
Krick
|
2018
|
134,437
|
20,350
|
17,225
|
3,000
|
175,012
|
|
Chief Financial
Officer (6)
|
|
|
|
|
|
|
(1) Represents salaries paid in 2018
and 2017 for services provided by each named executive officer
serving in the capacity listed.
(2) Represents amounts paid for annual
performance-based bonus related to operations for the prior
year.
(3) Mr.
Rodney I. Smith was paid $99,000 in each of 2018 and 2017, which is
included in the column titled “All Other Compensation”,
for royalty payments due under his employment contract with the
Company, which is more fully described in the following section
titled “Employment Contracts and Termination of Employment
and Change in Control Arrangements”. In addition, Mr.
Rodney Smith received director’s compensation in the amount
of $3,000 for the years 2018 and 2017. Includes, under Stock
Awards, 42,000 restricted shares granted to Mr. Smith in January
2017, vesting ratably, on an annual basis, over a three year
vesting period. The value of the common stock shares at the grant
date was $228,900.
(4) Mr.
Ashley B. Smith replaced Mr. Rodney I. Smith as Chief Executive
Officer in May 2018.
(5) Mr.
Ashley B. Smith received director’s compensation in the
amount of $3,000 for each of the years 2018 and
2017.
(6) Includes 2,500 restricted shares granted in
January 2018 pursuant to the Company's 2016 Equity Incentive Plan,
which shares vested in full immediately on the grant date. The
value of the common stock shares at the grant date was $17,225. Mr.
Krick received advisory director's compensation in the amount of
$3,000 for the year 2018, as shown in "All Other
Compensation".
23
Outstanding Equity Awards At
Fiscal Year-End
The following table
sets forth information for the named executive officers regarding
any common share purchase options, stock awards or equity incentive
plan awards that were outstanding as of December 31,
2018.
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price
($/Sh)
|
Option
Expiration Date
|
Number of Shares or
Units of Stock that have not Vested (#)(1)
|
Market Value of Shares
or Units of Stock that have not Vested ($)
|
Equity Incentive Plan
Awards: Number of Unearned Shares, Units or Other Rights that have
not Vested (#)
|
Equity Incentive Plan
Awards: Market or Payout Value of Unearned Shares, Units or Other
Rights that have not Vested ($)
|
|
Rodney I.
Smith
|
—
|
—
|
—
|
—
|
28,000
|
152,600
|
—
|
—
|
|
Ashley B.
Smith
|
—
|
—
|
—
|
—
|
10,667
|
52,800
|
—
|
—
|
|
Adam J.
Krick
|
—
|
—
|
—
|
—
|
167
|
825
|
—
|
—
|
|
TOTAL
|
—
|
—
|
|
|
38,834
|
206,225
|
—
|
—
|
Compensation of
Directors
All Directors receive
$1,000 per meeting as compensation for their services as Directors
and are reimbursed for expenses incurred in connection with the
performance of their duties.
Fiscal 2018 Director
Compensation
|
Name
|
Fees
Earned
or Paid in
Cash ($)
|
Stock
Awards
($)(2)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compen-
sation
|
Non-
Qualified
Deferred
Compen-
sation
Earnings
|
All Other
Compen-
sation
|
Total ($)
|
|
Rodney I.
Smith
|
3,000
|
—
|
—
|
—
|
—
|
—
|
3,000(1)
|
|
Ashley B.
Smith
|
3,000
|
—
|
—
|
—
|
—
|
—
|
3,000(1)
|
|
Wesley A.
Taylor
|
3,000
|
—
|
—
|
—
|
—
|
—
|
3,000
|
|
G. E. "Nick" Borst
(retired)
|
3,000
|
—
|
—
|
—
|
—
|
—
|
3,000
|
|
James Russell
Bruner
|
1,000
|
—
|
—
|
—
|
—
|
—
|
1,000
|
|
Richard
Gerhardt
|
2,000
|
—
|
—
|
—
|
—
|
—
|
2,000
|
(1)
Reflected in Summary Compensation Table
above.
24
Employment Contracts and
Termination of Employment and Change in Control
Arrangements.
The Company entered an
Employment Agreement with Rodney I. Smith, its former Chief
Executive Officer and current Chairman of the Board, effective as
of September 30, 2002. The agreement provides for an annual base
salary of $99,000 (“Base Salary”), which is reviewed at
least annually and adjusted from time to time at the determination
of the Board of Directors. It also provides for an annual
royalty fee of $99,000 payable as consideration for Mr.
Smith’s assignment to the Company of all of his rights, title
and interest in and to the Patents (as defined in the
agreement). Payment of the royalty continues for as long as
the Company is using the inventions underlying the
Patents. Mr. Smith is also entitled to a performance-based
bonus as determined by the Board each calendar year.
Mr. Smith’s
employment agreement provides further that if Mr. Smith (i)
voluntarily leaves the employ of the Company within six months of
his becoming aware of a Change of Control (as defined in the
agreement) of the Company, then he shall be entitled to receive a
lump sum amount equal to three times the five-year average of his
combined total annual compensation, which includes the Base Salary
and bonus, less one dollar ($1.00), and certain other unpaid
accrued amounts as of the date of his termination, or (ii) is
terminated by the Company without Cause (as defined in the
agreement) or leaves the Company with Good Reason (as defined in
the agreement), Mr. Smith shall be entitled to a lump sum payment
equal to three times the combined Base Salary and bonus paid during
the immediately preceding calendar year, and such other unpaid
accrued amounts. In any of such cases, the Company will provide Mr.
Smith with certain Company fringe benefits for two years, subject
to certain conditions as provided for in the agreement, and all of
Mr. Smith’s unvested options to purchase Company stock shall
become fully vested and exercisable on the date of termination. Mr.
Smith will be entitled to exercise all such options for three years
from the date of termination and all restricted stock shall become
fully vested on the date of termination, if any. The Company will
have no further obligations to Mr. Smith, other than with respect
to the payment of royalties.
In the event Mr.
Smith’s employment by the Company is terminated as a result
of Mr. Smith’s (i) death, his estate shall be entitled to a
lump sum payment of one times the combined Base Salary and bonus,
and certain other accrued and unpaid amounts, or (ii) disability,
Mr. Smith shall be entitled to Base Salary and bonus for a period
of one year commencing with the date of termination, and all other
unpaid accrued amounts.
The employment
agreement also contains non-competition and non-solicitation
covenants for one year following Mr. Smith’s termination of
employment for any reason.
Mr. Smith is
currently being compensated in accordance with the employment
agreement.
25
Item
12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
The following table sets
forth, as of March 5, 2019, certain information concerning
ownership of the Company’s Common Stock by (i) each person
known by the Company to own of record or be the beneficial owner of
more than five percent (5%) of the Company’s Common Stock,
(ii) named executive officers and Directors, and (iii) all
Directors and Executive Officers as a group. Except as
otherwise indicated, the stockholders listed in the table have sole
voting and investment powers with respect to the shares
indicated.
|
Name and Address
of Beneficial Owner
|
Number of Shares
Beneficially
Owned (2)
|
Percentage
of Class
|
|
Rodney I. Smith
(1)(3)(4)(5)
|
684,798
|
13.3%
|
|
|
|
|
|
Ashley B. Smith
(1)(3)(4)(6)
|
173,042
|
3.4%
|
|
|
|
|
|
Wesley A. Taylor
(1)(7)
|
28,667
|
*
|
|
|
|
|
|
Richard Gerhardt
(8)(9)
|
2,000
|
*
|
|
|
|
|
|
James Russell
Bruner
|
—
|
—
|
|
|
|
|
|
Adam J. Krick
(1)(10)
|
3,390
|
*
|
|
|
|
|
|
ARS Investment Partners,
LLC (11)
|
391,206
|
7.6%
|
|
|
|
|
|
Thompson Davis &
Co., Inc. (12)
|
525,033
|
10.2%
|
|
|
|
|
|
Wax Asset Management,
LLC (13)
|
538,490
|
10.5%
|
|
|
|
|
|
All directors and
executive officers as a group (6 persons)(14)
|
891,897
|
17.4%
|
* Less than
1%.
(1) The address for
each of Messrs. Rodney I. Smith, Ashley B. Smith, Wesley A. Taylor,
and Adam J. Krick is c/o Smith-Midland Corporation, P.O. Box 300,
5119 Catlett Road, Midland, Virginia 22728.
(2) Pursuant to the
rules and regulations of the Securities and Exchange Commission,
shares of Common Stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purposes of computing
the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the
table.
(3) Ashley B. Smith
is the son of Rodney I. Smith. Each of Rodney I. Smith and
Ashley B. Smith disclaims beneficial ownership of the other’s
shares of Common Stock.
(4) Does not include
an aggregate of 79,883 shares of Common Stock held by Matthew Smith
and Roderick Smith. Matthew Smith and Roderick Smith are sons
of Rodney I. Smith, and brothers of Ashley B. Smith. Also,
does not include shares held by Merry Robin Bachetti, sister of
Rodney I. Smith and aunt of Ashley B. Smith, for which each of
Rodney I. Smith and Ashley B. Smith disclaims beneficial
ownership.
(5) Does not include
2,500 shares of Common Stock held by Hazel Bowling, former wife of
Rodney I. Smith, and mother of Mr. Smith’s children. Mr.
Smith disclaims beneficial ownership of the shares held by Hazel
Bowling. Includes 14,000 unvested restricted shares granted
pursuant to the Company's 2016 Equity Incentive Plan.
(6) Includes 10,667
unvested restricted shares granted pursuant to the Company's 2016
Equity Incentive Plan.
(7) Includes 5,667
unvested restricted shares granted pursuant to the Company's 2016
Equity Incentive Plan.
(8) Includes 667 unvested
restricted shares granted pursuant to the Company's 2016 Equity
Incentive Plan.
(9) Address of holder is
8305 Old Dumfries Road, Catlett, VA 20119.
(10)
Includes 167 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
26
(11)
Address of holder is 500 Fifth Avenue, Ste 1440, New York, NY
10110.
(12)
Address of holder is 15 S. 5th Street, Richmond, VA
23219.
(13)
Address of holder is 44 Cherry Lane, Madison, CT
06443.
(14)
Includes 31,168 unvested restricted shares for all directors and
executive officers as a group.
EQUITY COMPENSATION PLAN
INFORMATION
The following table
sets forth certain information as of December 31, 2018,
regarding the Company's equity compensation plans.
|
Plan Category
|
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
(b)
Weighted
average exercise
price of
outstanding
options,
warrants and
rights
|
(c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected in column (a))(1)
|
|
Equity compensation
plans approved by security holders (1)
|
—
|
—
|
—
|
|
Equity compensation
plans not approved by security holders
|
—
|
—
|
226,500
|
|
Total
|
—
|
—
|
226,500
|
(1) A brief description
of the Company's 2016 Equity Incentive Plan is contained in Note 6
of the Notes to Consolidated Financial Statements. The Equity
Incentive Plan has a balance of 226,500 shares of stock unissued
and available for award at December 31, 2018.
On October 13, 2016 the
Company's Board of Directors adopted the Smith-Midland Corporation
2016 Equity Incentive Plan (the "Equity Incentive Plan").
Employees, directors and consultants of the Company are eligible to
participate in the Equity Incentive Plan. The Equity Incentive Plan
is administered by the Compensation Committee of the Board of
Directors or the full Board during such times as no committee is
appointed by the Board or during such times as the Board is acting
in lieu of the committee (the "Committee"). The Equity Incentive
Plan provides for the grant of equity-based compensation in the
form of restricted stock, restricted stock units, performance
shares, performance cash and other share-based awards. The
Committee has the authority to determine the type of award, as well
as the amount, terms and conditions of each award, under the Equity
Incentive Plan subject to the limitations and other provisions of
the Equity Incentive Plan. An aggregate of 400,000 shares of the
Company's common stock, par value $.01 per share, were authorized
for issuance under the Equity Incentive Plan, subject to adjustment
for stock splits, dividends, distributions, recapitalizations and
other similar transactions or events, of which amount 226,500
remains available for issuance. If any shares subject to an award
are forfeited, expire, or otherwise terminate without issuance of
such shares, such shares shall, to the extent of such forfeiture,
expiration, or termination, again be available for issuance under
the Equity Incentive Plan.
27
Item
13. Certain Relationships and Related
Transactions, and Director Independence
There are two
independent directors of the Company, Mr. James Russell Bruner and
Mr. Richard Gerhardt. The test utilized by the Company for the
determination of independence is that under the NASDAQ Marketplace
Rules.
On an ongoing basis, the
Company reviews all “related party transactions” (those
transactions that are required to be disclosed by SEC Regulation
S-K, Item 404), if any, for potential conflicts of interest and all
such transactions must be approved by the Board of Directors. No
transactions meet the criteria for disclosure.
Item
14. Principal Accountant Fees and
Services
The aggregate fees
billed for each of the past two fiscal years for professional
services rendered by BDO USA, LLP, the principal accountant for the
audit of the Company; for assurance and related services related to
the audit; for tax compliance, tax advice, and tax planning; and
for all other fees for products and services are shown in the table
below (in thousands). Fees are reported as billed to the
Company.
Audit Fees. Fees charged
as audit fees are for the audit of the Company’s annual
financial statements and review of financial statements included in
the Company’s Forms 10-Q or services that are normally
provided by the accountant in connection with statutory and
regulatory filings or engagements.
Tax Fees. Tax fees are
for professional services rendered by BDO USA, LLP for tax
compliance, tax advice, and tax planning.
Audit-Related Fees.
Fees paid to BDO USA, LLP for the audit of the Company’s
401(k) benefit plan.
The Audit
Committee has established pre-approval policies and procedures with
respect to the engagement of BDO USA, LLP and such policies and
procedures do not include the delegation of the responsibilities of
the Audit Committee to management.
|
|
2018
|
2017
|
|
Audit Fees
|
$168
|
$186
|
|
Tax Fees
|
54
|
52
|
|
Audit-Related
Fees
|
10
|
10
|
|
|
|
|
|
Total Fees
|
$232
|
$248
|
28
PART IV
Item
15. Exhibits and Financial Statement
Schedules
|
|
|
|
(1)
|
The financial
statements of the Company are included following Part IV of this
Form 10-K.
|
|
|
|
|
(2)
|
Schedules have been
omitted since they are either not applicable, not required or the
information is included elsewhere herein.
|
|
|
|
|
(3)
|
The following
exhibits are filed herewith:
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Certificate of
Incorporation, as amended (Incorporated by reference to the
Company’s Registration Statement on Form SB-2 (No. 33-89312)
declared effective by the Commission on December 13,
1995).
|
|
|
|
|
|
3.2
|
|
Bylaws
(Incorporated by reference to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on August 16,
2018). |
|
|
|
|
|
4.1
|
|
Specimen Common Stock
Certificate (Incorporated by reference to the Company’s
Registration Statement on Form SB-2 (No. 33-89312) declared
effective by the Commission on December 13, 1995).
|
|
|
|
|
|
10.1
|
|
Lease Agreement, dated
January 1, 1995, between the Company and Rodney I. Smith
(Incorporated by reference to the Company’s Registration
Statement on Form SB-2 (No. 33-89312) declared effective by the
Commission on December 13, 1995).
|
|
|
|
|
|
10.2
|
|
Collateral Assignment of
Letters Patent, dated between the Company and Rodney I. Smith
(Incorporated by reference to the Company’s Registration Form
SB-2 (No. 33-89312) declared effective by the Commission on
December 13, 1995).
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
10.4
|
|
|
|
|
|
|
|
10.5
|
|
|
|
|
|
|
|
10.6
|
|
|
|
|
|
|
|
10.7
|
|
29
|
10.8
|
|
Contract for Purchase and Sale, dated February 16,
2016, between Nelson Cherry Properties, LLC and Smith-Columbia
Corporation (Incorporated by reference to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 27, 2016).
|
|
|
|
|
|
10.9
|
|
Promissory Note, dated July 19, 2016, in the amount of
$1,317,500 issued by the Company to Summit Community Bank
(Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on July
27, 2016).
|
|
|
|
|
|
10.10
|
|
Commercial Security Agreement, dated July 19, 2016,
between the Company, as debtor, and Summit Community Bank, as
secured party, related to Company’s note payable in the
amount of $1,317,500 with Summit Community Bank (Incorporated by
reference to the Company’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 27,
2016).
|
|
|
|
|
|
10.11
|
|
Commitment Letter, dated September 18,2018, for a line of credit in
the of $4,000,000 with Summit Community Bank (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2018).
|
|
|
|
|
|
10.12
|
|
Commitment Letter, dated September 18,2018, for an equipment line
of credit in the amount of $1,500,000 with Summit Community Bank
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2018).
|
|
|
|
|
|
10.13
|
|
|
|
|
|
|
|
10.14
|
|
|
|
|
|
|
|
10.15
|
|
Promissory Note, dated October 6, 2017, for the
acquisition of six acres of land purchased in 2016 in the amount of
$239,232 with Summit Community Bank (Incorporated by reference to
the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 8,
2017).
|
|
|
|
|
|
10.16
|
|
2016 Equity Incentive Plan (Incorporated by reference
to the Registration Statement on Form S-8 (No. 333-214788) filed on
November 23, 2016).
|
|
|
|
|
|
14.1
|
|
Code of Professional Conduct (Incorporated by reference
to the Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2003).
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries of
the Company (Incorporated by reference to the Company’s
Annual Report on Form 10-KSB for the year ended December 31,
1995).
|
|
|
|
|
|
23.1
|
|
|
|
|
|
|
|
31.1
|
|
|
|
|
|
|
|
31.2
|
|
|
|
|
|
|
|
32.1
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL Instance
Document.
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema Document.
|
|
101.CAL
|
|
XBRL Taxonomy Extension
Calculation Linkbase Document.
|
|
101.DEF
|
|
XBRL Taxonomy Extension
Definition Linkbase Document.
|
|
101.LAB
|
|
XBRL Taxonomy Extension
Label Linkbase Document.
|
|
101.PRE
|
|
XBRL Taxonomy Extension
Presentation Linkbase Document.
|
30
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
SMITH-MIDLAND
CORPORATION
|
|
|
|
|
|
|
|
|
Date: March 26, 2019
|
By:
|
/s/ Ashley B. Smith
|
|
|
|
|
Ashley B. Smith
|
|
|
|
|
Chief Executive Officer and
President
|
|
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 26, 2019
|
By:
|
/s/ Adam J. Krick
|
|
|
|
|
Adam J. Krick
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates
indicated.
|
Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
|
/s/ Rodney I.
Smith
|
|
Director
|
|
March 26, 2019
|
|
Rodney I.
Smith
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ashley B.
Smith
|
|
Director
|
|
March 26,
2019
|
|
Ashley B.
Smith
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Wesley A.
Taylor
|
|
Director
|
|
March 26,
2019
|
|
Wesley A.
Taylor
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James Russell
Bruner
|
|
Director
|
|
March 26,
2019
|
|
James Russell
Bruner
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard
Gerhardt
|
|
Director
|
|
March 26,
2019
|
|
Richard
Gerhardt
|
|
|
|
|
31
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Financial
Statements
Years Ended
December 31,
2018 and 2017
Smith-Midland
Corporation
and
Subsidiaries
Contents
|
|
|
|
|
|
|
|
|
|
Report of Independent
Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
Consolidated Balance
Sheets
|
|
|
|
|
|
Consolidated Statements
of Income
|
|
|
|
|
|
Consolidated Statements
of Comprehensive Income
|
|
|
|
|
|
Consolidated Statements
of Stockholders' Equity
|
|
|
|
|
|
Consolidated Statements
of Cash Flows
|
|
|
|
|
|
Summary of Significant
Accounting Policies
|
|
|
|
|
|
Notes to Consolidated
Financial Statements
|
|
F-1
Report of Independent
Registered Public Accounting Firm
Board of Directors
and Stockholders
Smith-Midland
Corporation
Midland,
Virginia
Opinion on the Consolidated
Financial Statements
We have audited the
accompanying consolidated balance sheets of Smith-Midland
Corporation (the “Company”) and subsidiaries as of
December 31, 2018 and 2017, the related consolidated statements of
income and comprehensive income, stockholders’ equity, and
cash flows for each of the two years in the period ended December
31, 2018, and the summary of significant accounting policies and
related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the
financial position of the Company and subsidiaries at December 31,
2018 and 2017, and the results of their operations and their cash
flows for each of the two years in the period ended December 31,
2018, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for
Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/BDO USA,
LLP
We have served as the
Company's auditor since 1996.
Richmond,
Virginia
March 26,
2019
F-2
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Balance
Sheets
(in thousands, except
share data)
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
|
$1,946
|
$3,390
|
|
Investment securities,
available-for-sale, at fair value
|
1,107
|
1,098
|
|
Accounts receivable,
net
|
|
|
|
Trade - billed (less
allowance for doubtful accounts of $214 and $208), including
contract retentions
|
12,281
|
8,967
|
|
Trade -
unbilled
|
1,313
|
251
|
|
Inventories,
net
|
|
|
|
Raw
materials
|
1,005
|
819
|
|
Finished
goods
|
2,555
|
2,696
|
|
Prepaid expenses and
other assets
|
480
|
452
|
|
Refundable income
taxes
|
909
|
1,359
|
|
|
|
|
|
Total current
assets
|
21,596
|
19,032
|
|
|
|
|
|
Property and equipment,
net
|
14,102
|
9,867
|
|
|
|
|
|
Deferred buy-back lease asset,
net
|
5,304
|
—
|
|
|
|
|
|
Other
assets
|
367
|
326
|
|
|
|
|
|
Total
assets
|
$41,369
|
$29,225
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-3
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Balance
Sheets
(in thousands, except
share data)
(continued)
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts payable -
trade
|
$4,212
|
$3,059
|
|
Accrued expenses and
other liabilities
|
610
|
588
|
|
Deferred
revenue
|
1,683
|
1,144
|
|
Accrued
compensation
|
1,556
|
1,231
|
|
Dividend
payable
|
281
|
256
|
|
Line-of-credit
construction draw
|
1,000
|
—
|
|
Current maturities of
notes payable
|
711
|
637
|
|
Customer
deposits
|
1,658
|
919
|
|
|
|
|
|
Total current
liabilities
|
11,711
|
7,834
|
|
|
|
|
|
Deferred buy-back lease
obligation
|
6,592
|
—
|
|
Notes payable - less
current maturities
|
2,792
|
2,896
|
|
Deferred tax
liability
|
1,427
|
1,290
|
|
|
|
|
|
Total
liabilities
|
22,522
|
12,020
|
|
|
|
|
|
Commitments and
contingencies
|
—
|
—
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
Preferred stock, $.01
par value; authorized 1,000,000 shares, none issued and
outstanding
|
—
|
—
|
|
Common stock, $.01 par
value; authorized 8,000,000 shares; 5,223,245 and 5,214,148 issued
and 5,112,825 and 5,047,895 outstanding, respectively
|
51
|
51
|
|
Additional paid-in
capital
|
5,973
|
5,719
|
|
Treasury stock, at cost,
40,920 shares
|
(102)
|
(102)
|
|
Accumulated other
comprehensive loss
|
(37)
|
(19)
|
|
Retained
earnings
|
12,962
|
11,556
|
|
|
|
|
|
Total stockholders’
equity
|
18,847
|
17,205
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
$41,369
|
$29,225
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-4
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Income
(in thousands, except
per share data)
|
|
Year Ended December
31,
|
|
|
|
2018
|
2017
|
|
Revenue
|
|
|
|
Product
sales
|
$29,159
|
$29,055
|
|
Barrier
rentals
|
1,729
|
4,267
|
|
Royalties
|
1,675
|
1,885
|
|
Shipping and
installation
|
7,657
|
6,510
|
|
|
|
|
|
Total
revenue
|
40,220
|
41,717
|
|
|
|
|
|
Cost of goods
sold
|
29,730
|
30,253
|
|
|
|
|
|
Gross
profit
|
10,490
|
11,464
|
|
|
|
|
|
General and
administrative expenses
|
5,675
|
5,253
|
|
Selling
expenses
|
2,599
|
2,496
|
|
|
|
|
|
Total operating
expenses
|
8,274
|
7,749
|
|
|
|
|
|
Operating
income
|
2,216
|
3,715
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
Interest
expense
|
(176)
|
(184)
|
|
Interest
income
|
42
|
37
|
|
Gain on sale of
assets
|
126
|
51
|
|
Other
income
|
51
|
122
|
|
|
|
|
|
Total other income
(expense)
|
43
|
26
|
|
|
|
|
|
Income before income tax
expense
|
2,259
|
3,741
|
|
|
|
|
|
Income tax
expense
|
572
|
1,057
|
|
|
|
|
|
Net income
|
$1,687
|
$2,684
|
|
|
|
|
|
Basic and diluted earnings per
share
|
$0.33
|
$0.53
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-5
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Comprehensive Income
(in
thousands)
|
|
Year Ended December
31,
|
|
|
|
2018
|
2017
|
|
Net income
|
$1,687
|
$2,684
|
|
Other comprehensive
income (loss), net of tax: (1)
|
|
|
|
Net
unrealized holding income (loss)
|
(18)
|
6
|
|
Comprehensive
income
|
$1,669
|
$2,690
|
(1) Net unrealized
income (loss) on available for sale securities are shown net of
income tax (benefit) expense of ($6) and $10 for the years ended
December 31, 2018 and 2017, respectively.
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-6
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Stockholders' Equity
(in
thousands)
|
|
Common
Stock
|
Additional
Paid-in
Capital
|
Treasury
Stock |
Accumulated Other
Comprehensive Loss
|
Retained
Earnings
|
Total
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2017
|
$50
|
$5,192
|
$(102)
|
$(25)
|
$9,128
|
$14,243
|
|
|
|
|
|
|
|
|
|
Accrued dividends
payable
|
—
|
—
|
—
|
—
|
(256)
|
(256)
|
|
|
|
|
|
|
|
|
|
Net unrealized holding
gain
|
—
|
—
|
—
|
6
|
—
|
6
|
|
|
|
|
|
|
|
|
|
Proceeds from options
exercised
|
1
|
116
|
—
|
—
|
—
|
117
|
|
|
|
|
|
|
|
|
|
Vesting of restricted
stock
|
—
|
411
|
—
|
—
|
—
|
411
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
—
|
—
|
—
|
2,684
|
2,684
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2017
|
51
|
5,719
|
(102)
|
(19)
|
11,556
|
17,205
|
|
|
|
|
|
|
|
|
|
Accrued dividends
payable
|
—
|
—
|
—
|
—
|
(281)
|
(281)
|
|
|
|
|
|
|
|
|
|
Net unrealized holding
loss
|
—
|
—
|
—
|
(18)
|
—
|
(18)
|
|
|
|
|
|
|
|
|
|
Proceeds from options
exercised
|
—
|
12
|
—
|
—
|
—
|
12
|
|
|
|
|
|
|
|
|
|
Vesting of restricted
stock
|
—
|
242
|
—
|
—
|
—
|
242
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
—
|
—
|
—
|
1,687
|
1,687
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2018
|
$51
|
$5,973
|
$(102)
|
$(37)
|
$12,962
|
$18,847
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-7
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Cash Flows
(in
thousands)
|
|
Year
Ended
December
31,
|
|
|
|
2018
|
2017
|
|
Reconciliation of net income
to net cash provided by operating activities
|
|
|
|
|
|
|
|
Net income
|
$1,687
|
$2,684
|
|
Adjustments to reconcile
net income to net cash provided by operating
activities
|
|
|
|
Depreciation and
amortization
|
1,247
|
926
|
|
Allowance for doubtful
accounts
|
6
|
(139)
|
|
Gain on sale of fixed
assets
|
(126)
|
(51)
|
|
Stock
compensation
|
242
|
411
|
|
Deferred taxes
|
153
|
526
|
|
(Increase) decrease
in
|
|
|
|
Accounts receivable -
billed
|
(3,320)
|
(1,640)
|
|
Accounts receivable -
unbilled
|
(1,062)
|
20
|
|
Inventories
|
(45)
|
(937)
|
|
Refundable income
taxes
|
450
|
(1,107
) |
|
Prepaid expenses and other
assets
|
(130)
|
(285)
|
|
Increase (decrease)
in
|
|
|
|
Accounts payable -
trade
|
1,153
|
969
|
|
Accrued expenses and other
liabilities
|
22
|
294
|
|
Deferred revenue
|
539
|
420
|
|
Accrued
compensation
|
325
|
347
|
|
Deferred buy-back lease
obligation, net
|
6,592
|
—
|
|
Customer
deposits
|
739
|
488
|
|
|
|
|
|
Net cash provided by
operating activities
|
$8,472
|
$2,926
|
F-8
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Cash Flows
(in
thousands)
(continued)
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
Cash Flows From Investing
Activities
|
|
|
|
Purchases of investment
securities available-for-sale
|
$(33)
|
$(32)
|
|
Purchases of property and
equipment
|
(5,234)
|
(2,741)
|
|
Deferred buy-back lease
asset
|
(5,507)
|
—
|
|
Proceeds from sale of
fixed assets
|
132
|
46
|
|
|
|
|
|
Net cash absorbed by
investing activities
|
(10,642)
|
(2,727)
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
Proceeds from the
line-of-credit construction draw
|
1,000
|
—
|
|
Proceeds from long-term
borrowings
|
630
|
184
|
|
Repayments of long-term
borrowings
|
(660)
|
(584)
|
|
Dividends paid on common
stock
|
(256)
|
(49)
|
|
Proceeds from options
exercised
|
12
|
117
|
|
|
|
|
|
Net cash provided by or
(absorbed by) financing activities
|
726
|
(332)
|
|
|
|
|
|
Net decrease in
cash
|
(1,444)
|
(133)
|
|
Cash, beginning of
year
|
3,390
|
3,523
|
|
|
|
|
|
Cash, end of
year
|
$1,946
|
$3,390
|
|
|
|
|
|
Cash payments for
interest
|
$176
|
$184
|
|
Cash payments for income
taxes
|
$—
|
$1,292
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-9
Smith-Midland
Corporation
and
Subsidiaries
Summary of Significant
Accounting Policies
Nature of
Business
Smith-Midland
Corporation and its wholly-owned subsidiaries (the
“Company”) develop, manufacture, license, sell and
install precast concrete products for the construction,
transportation and utilities industries in the Mid-Atlantic,
Northeastern, Midwestern and Southeastern regions of the United
States.
Principles of
Consolidation
The accompanying
consolidated financial statements include the accounts of
Smith-Midland Corporation and its wholly-owned
subsidiaries. The Company’s wholly-owned subsidiaries
consist of Smith-Midland Corporation, a Virginia corporation,
Smith-Carolina Corporation, a North Carolina corporation,
Smith-Columbia Corporation, a South Carolina corporation, Easi-Set
Industries, Inc., a Virginia corporation, Concrete Safety Systems,
Inc., a Virginia corporation, and Midland Advertising and Design,
Inc., doing business as Midland Advertising + Design, a Virginia
corporation. All material intercompany accounts and
transactions have been eliminated in consolidation.
Cash
The Company considers
all unrestricted cash and money market accounts purchased with an
original or remaining maturities of three months or less as
cash.
Investments
Investments in
marketable securities are classified as available-for-sale and are
stated at market value with unrealized holding gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity until realized.
Inventories
Inventories are stated
at the lower of cost, using the first-in, first-out (FIFO) method,
or net realizable value. Inventory reserves (in thousands) were
approximately $65 and $39 at December 31, 2018 and 2017,
respectively.
Property and
Equipment
Property and equipment
is stated at cost. Expenditures for ordinary maintenance and
repairs are charged to income as incurred. Costs of betterments,
renewals, and major replacements are capitalized. At the time
properties are retired or otherwise disposed of, the related cost
and allowance for depreciation are eliminated from the accounts and
any gain or loss on disposition is reflected in
income.
Depreciation is computed
using the straight-line method over the following estimated useful
lives:
|
|
Years
|
|
Buildings
|
10-40
|
|
Trucks and automotive
equipment
|
3-10
|
|
Shop machinery and
equipment
|
3-10
|
|
Land
improvements
|
10-15
|
|
Rental
equipment
|
5-10
|
|
Office
equipment
|
3-10
|
F-10
Income
Taxes
Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
As of December 31,
2018, the Company has not identified any uncertain tax
positions. The Company files tax returns in the U.S. Federal
and various state jurisdictions. The Company recognizes, when
applicable, interest and penalties related to income taxes in other
income (expense) in its consolidated statement of income. The
Company is no longer subject to U.S. or state tax examinations for
the years prior to 2015. The Company does not believe there
will be any material changes in unrecognized tax positions over the
next twelve months.
Stock
Compensation
Revenue
Recognition
Product Sales - Over Time
Under
Topic 606, the Company recognizes revenue to depict the transfer of
goods or services to customers in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
goods or services provided. Revenue associated with contracts with
customers is recognized over time as the Company's performance
creates or enhances customer controlled assets or creates or
enhances an asset with no alternative use, which the Company has an
enforceable right to receive compensation as defined under the
contract for performance completed. To determine the amount of
revenue to recognize over time, the Company recognizes revenue over
the contract terms based on the output method. The Company applied
the "as invoiced" practical expedient as the amount of
consideration the Company has the right to invoice corresponds
directly with the value of the Company's performance to
date.
As the
output method is driven by units produced, the Company recognizes
revenues based on the value transferred to the customer relative to
the remaining value to be transferred. The Company also matches the
costs associated with the units produced. If a contract is
projected to result in a loss, the entire contract loss is
recognized in the period when the loss was first determined and the
amount of the loss updated in subsequent reporting periods. Revenue
recognition also includes an amount related to a contract asset or
contract liability. If the recognized revenue is greater than the
amount billed to the customer, a contract asset is recorded in
accounts receivable - unbilled. Conversely, if the amount billed to
the customer is greater than the recognized revenue, a contract
liability is recorded in customer deposits on uncompleted
contracts. Changes in the job performance, job conditions and final
contract settlements are factors that influence management’s
assessment of total contract value and therefore, profit and
revenue recognition.
A portion of the
work the Company performs requires financial assurances in the form
of performance and payment bonds or letters of credit at the time
of execution of the contract. Some contracts include retention
provisions of up to 10% which are generally withheld from each
progress payment as retainage until the contract work has been
completed and approved.
F-11
Product Sales - Point in Time
For
certain product sales that do not meet the over time criteria,
under Topic 606 the Company recognizes revenue when the product has
been shipped to the destination in accordance with the terms
outlined in the contract where a present obligation to pay exists
as the customers have gained physical possession of the
product.
Accounts Receivable and Contract Balances
The
timing of when we bill our customers is generally dependent upon
advance billing terms, milestone billings based on the completion
of certain phases of the work, or when services are provided or
products are shipped. Projects with performance obligations
recognized over time that have costs and estimated earnings
recognized to date in excess of cumulative billings, are reported
on our Condensed Consolidated Balance Sheets as "Accounts
receivable trade - unbilled" (i.e. contract assets). Projects with
performance obligations recognized over time that have cumulative
billings in excess of costs and estimate earnings recognized to
date, are reported on our Condensed Consolidated Balance Sheets as
"Customer deposits" (i.e. contract liabilities).
Any
uncollected billed amounts for our performance obligations
recognized over time, including contract retentions, are recorded
within accounts receivable trade - billed. At December 31, 2018 and
December 31, 2017, accounts receivable included contract retentions
(in thousands) of approximately $1,704 and $1,065, respectively,
which are considered contract assets.
Our
billed and unbilled revenue may be exposed to potential credit risk
if our customers should encounter financial difficulties, and we
maintain reserves for specifically-identified potential
uncollectible receivables. At December 31, 2018 and December 31,
2017, our allowances for doubtful accounts (in thousands) were $214
and $208, respectively.
Effect of Adopting ASC Topic 606
No
adjustment to beginning 2018 retained earnings was recorded as a
result of our adoption of Topic 606 due to no changes in the timing
of our revenue recognition for our uncompleted contracts. Further,
the difference in our results for 2018 between application of the
new standard on our contracts and what results would have been if
such contracts had been reported using the accounting standards
previously in effect, for such contracts, did not
change.
Sale to Customer with a Buy-Back Guarantee
The
Company entered into a buy-back agreement with one specific
customer. Under this agreement, the Company guaranteed to buy-back
product at a predetermined price at the end of the long-term
project, subject to the condition of the product. Although the
Company receives payment in full as the product is produced, we are
required to account for these transactions as operating leases. The
amount of sale proceeds equal to the buy-back obligation, included
in "Deferred buy-back lease obligation" in the liabilities section
of the consolidated balance sheet, is deferred until the buy-back
is exercised or expired. The remaining sale proceeds are deferred
in the same account and recognized on a straight-line basis over
the usage period, such usage period commencing on delivery to the
job-site and ending at the time the buy-back is exercised or
expired. The Company capitalizes the cost of the product on the
consolidated balance sheet shown in "Deferred buy-back lease asset,
net", and depreciates the value, less residual value, to cost of
leasing revenue in "Cost of goods sold" over the estimated useful
life of the asset.
In the
case the customer does not exercise the buy-back option and retains
ownership of the product at the end of the usage period, the
guarantee buy-back liability and any deferred revenue balances
related to the product are settled to revenue, and the net book
value of the asset is expensed to cost of leasing revenue. If the
customer exercises the buy-back guarantee option, the Company
purchases the product back in the amount equal to the buy-back
guarantee, we settle any remaining deferred balances, in excess of
the buy-back payment, to leasing revenue, and we reclassify the net
book value of the product on the consolidated balance sheet to
"Inventories" or "Property and equipment, net" depending on the
intended use at the time. The revenue is being recognized in
accordance with Topic 840, Leases.
Barrier Rentals - Leasing Fees
Leasing
fees are paid by customers at the beginning of the lease agreement
and are recorded as deferred revenue. The deferred revenue is then
recognized each month as lease income for the duration of the
lease, in accordance with Topic 840, Leases.
Royalty Income
The
Company licenses certain products to other precast companies to
produce the Company's products to engineering specifications under
the licensing agreements. The agreements are typically for five
year terms and require royalty payments from 4% to 6% of total
sales of licensed products, which are paid on a monthly basis. The
revenues from licensing agreements are recognized in the month
earned, in accordance with Topic 606-10-55-65.
F-12
Shipping and Installation
Shipping and
installation revenues are recognized as a distinct performance
obligation in the period the shipping and installation services are
provided to the customer, in accordance with Topic
606.
Disaggregation of Revenue
In the
following table, revenue is disaggregated by primary sources of
revenue (in thousands):
|
Revenue by Type
|
|
|
|
|
|
|
2018
|
2017
|
Change
|
% of
Change
|
|
Product Sales:
|
|
|
|
|
|
Soundwall
Sales
|
$9,867
|
$7,571
|
$2,296
|
30.3%
|
|
Architectural
Sales
|
876
|
829
|
47
|
5.7%
|
|
Slenderwall
Sales
|
5,572
|
2,048
|
3,524
|
172.1%
|
|
Miscellaneous
Sales
|
1,760
|
2,793
|
(1,033)
|
(37.0)%
|
|
Barrier
Sales
|
7,264
|
11,276
|
(4,012)
|
(35.6)%
|
|
Easi-Set and Easi-Span
Building Sales
|
2,114
|
2,484
|
(370)
|
(14.9)%
|
|
Utility and Farm Product
Sales
|
1,232
|
1,492
|
(260)
|
(17.4)%
|
|
Miscellaneous Product
Sales
|
474
|
562
|
(88)
|
(15.7)%
|
|
Total Product
Sales
|
29,159
|
29,055
|
104
|
0.4%
|
|
Barrier
Rentals
|
1,729
|
4,267
|
(2,538)
|
(59.5)%
|
|
Royalty
Revenue
|
1,675
|
1,885
|
(210)
|
(11.1)%
|
|
Shipping and
Installation
|
7,657
|
6,510
|
1,147
|
17.6%
|
|
Total Service
Revenue
|
11,061
|
12,662
|
(1,601)
|
(12.6)%
|
|
Total
Revenue
|
$40,220
|
$41,717
|
$(1,497)
|
(3.6)%
|
Warranties
Smith-Midland products
are typically sold pursuant to an implicit warranty as to
merchantability only. Warranty claims are reviewed and
resolved on a case by case method. Although the Company does
incur costs for these types of expense, historically the amount of
expense is minimal.
Use taxes on
construction materials are reported gross in cost of goods
sold.
Segment
Reporting
Operating segments are
defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how
to allocate resources and assess performance. The Company currently
operates in one operating and reportable business segment for
financial reporting purposes.
Reclassifications of Certain
Items Included within Comparable Prior Year
Periods
Certain
minor reclassifications have been made to prior year amounts to
conform to current year presentation. Use tax was reclassified to
Cost of goods sold from General and administrative expenses on the
Condensed Consolidated Statements of Operations for the
year ending December 31, 2017 of $117. There was no impact to net
income for the period.
F-13
Risks and
Uncertainties
The Company sells
products to highway contractors operating under government funded
highway programs and other customers and extends credit based on an
evaluation of the customer’s financial condition, generally
without requiring collateral. Exposure to losses on receivables is
principally dependent on each customer’s financial condition.
The Company monitors its exposure to credit losses and maintains
allowances for anticipated losses. Management reviews accounts
receivable on a weekly basis to determine the probability of
collection. In performing this evaluation, the Company analyzes the
payment history and its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts
receivable aging statistics. Based on this information, along with
other related factors, the Company develops what it considers to be
a reasonable estimate of the uncollectible amounts included in
accounts receivable. Management believes the allowance for doubtful
accounts at December 31, 2018 is adequate. However,
actual write-offs may exceed the recorded allowance. Due to
inclement weather, the Company may experience reduced revenue from
December through February and may realize the substantial part of
its revenue during the other months of the year.
Fair Value of Financial
Instruments
The carrying value for
each of the Company’s financial instruments (consisting of
cash and cash equivalents, accounts receivable, accounts payable
and short-term line of credit) approximates fair value because of
the short-term nature of those instruments. The estimated fair
value of the long-term debt approximates carrying value based on
current rates offered to the Company for debt of the similar
maturities.
Estimates
The preparation of
financial statements in conformity with U.S. generally accepted
accounting (U.S. GAAP) principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Advertising
Costs
The Company expenses all
advertising costs as incurred. Advertising expense (in thousands)
was approximately $384 and $404 in 2018 and 2017,
respectively.
Earnings Per
Share
Earnings per share are
based on the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Basic earnings
per share is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect
the potential dilution of securities that could share in earnings
of the Company.
Long-Lived
Assets
The Company reviews the
carrying values of its long-lived and identifiable intangible
assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not
be recoverable based on undiscounted estimated future operating
cash flows. When any such impairment exists, the related
assets will be written down to fair value. No impairment
losses have been recorded through December 31,
2018.
Recent Accounting
Pronouncement
Leases. In 2016,
the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-02,
“Leases (Topic 842).” Topic 842 establishes a new lease
accounting model for leases. The most significant changes include
the clarification of the definition of a lease, the requirement for
lessees to recognize for all leases a right-of-use asset and a
lease liability in the consolidated balance sheet, and additional
quantitative and qualitative disclosures which are designed to give
financial statement users information on the amount, timing, and
uncertainty of cash flows arising from leases. Expenses are
recognized in the consolidated statement of income in a manner
similar to current accounting guidance. Lessor accounting under the
new standard is substantially unchanged. We adopted this standard,
and all related amendments thereto, effective January 1, 2019,
using the transition approach, which applies the provisions of the
new guidance at the effective date without adjusting the
comparative periods presented. We have elected the package of
practical expedients permitted under the transition guidance within
the new standard, which among other things, allows us to carry
forward the historical accounting relating to lease identification
and classification for existing leases upon adoption. We have made
an accounting policy election to keep leases with an initial tmer
of 12 months or less off the consolidated balance sheet. We are
finalizing our evaluation of the impacts that the adoption of this
accounting guidance will have on the consolidated financial
statements and estimate approximately $400 of right-of-use assets
and liabilities will be recognized in our consolidated balance
sheet upon adoption.
F-14
SMITH-MIDLAND
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. - PROPERTY AND
EQUIPMENT
|
Property and equipment consists of the following
(in thousands):
|
|
|
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Land and land
improvements
|
$2,452
|
$1,538
|
|
Buildings
|
6,949
|
5,394
|
|
Machinery and
equipment
|
12,709
|
10,913
|
|
Rental
equipment
|
3,659
|
2,763
|
|
|
|
|
|
|
25,769
|
20,608
|
|
Less: accumulated
depreciation and amortization
|
(11,667)
|
(10,741)
|
|
|
|
|
|
|
$14,102
|
$9,867
|
Depreciation expense and
amortization (in thousands) was approximately $1,247 and $926 for the years ended
December 31, 2018 and 2017, respectively.
NOTE 2. - NOTES
PAYABLE
Notes payable consist
of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Note payable to a Bank,
maturing September 2021; with monthly payments of approximately $26
of principal and interest fixed at 3.99%; collateralized by
principally all assets of the Company.
|
$799
|
$1,071
|
|
|
|
|
|
Note payable to a Bank,
maturing July 2031; with monthly payments of approximately $11 of
principal and interest fixed at 5.29%; collateralized by
principally all assets of Smith-Columbia Corporation and guaranteed
by Smith-Midland Corporation.
|
1,169
|
1,234
|
|
|
|
|
|
Note payable to a Bank,
maturing April 2021; with monthly payments of approximately $6.2 of
principal and interest at prime at variable rate (5.29% at December
31, 2018 and 2017); collateralized by certain property of the
Company.
|
163
|
227
|
|
|
|
|
|
Construction loan draw
on-line-of-credit for the North Carolina Expansion, which is part
of the $4,000 line-of-credit listed below
|
1,000
|
—
|
|
|
|
|
|
Installment notes,
collateralized by certain machinery and equipment maturing at
various dates, primarily through 2021; with monthly payments
varying from $0.3 to $4.1 with weighted average interest at 4.7%
and 4.2% at December 31, 2018 and 2017, respectively.
|
1,372
|
1,001
|
|
|
|
|
|
A revolving
line-of-credit evidenced by a note payable to a Bank, with the
maximum amount of $4,000, maturing October 1, 2019, with interest
only payments and an initial rate of 5.00% adjustable monthly
(5.50% at December 31, 2018). The line-of-credit is collateralized
by a first lien position on the Company's accounts receivable and
inventory and a second lien position on all other business
assets.
|
—
|
—
|
|
|
|
|
|
|
4,503
|
3,533
|
|
Less current
maturities
|
1,711
|
637
|
|
|
|
|
|
|
$2,792
|
$2,896
|
F-15
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
The Company’s note
payable, which matures in September 2021, with a balance (in
thousands) of $799 at December 31, 2018, is secured by all of
the assets of the Company. The commitment letter provided by
the bank dated September 18, 2018 includes certain restrictive
covenants, which require the Company to maintain minimum levels of
tangible net worth, places limits on annual capital expenditures
and the payment of cash dividends. At December 31, 2018, the
Company was in compliance with all covenants pursuant to the loan
agreement, with the increase in the annual capital expenditures
limit from $1,500 to $3,500, excluding acquisitions and plant
expansions, during the year ended December 31, 2017 and for
subsequent years.
The aggregate amounts
of notes payable maturing in each of the next five years and
thereafter are as follows (in thousands):
|
Year Ending December
31,
|
|
|
|
|
|
2019
|
$1,711
|
|
2020
|
737
|
|
2021
|
577
|
|
2022
|
271
|
|
2023
|
216
|
|
Thereafter
|
991
|
|
|
|
|
|
$4,503
|
The construction loan draw on the line-of-credit
is expected to be refinanced to long-term debt. Financing is
expected to be secured in the second quarter of 2019, and at that
time the $1,000 will be converted to a long-term note
payable.
The Company currently
leases a portion of its Midland, Virginia property from its
Chairman of the Board, on a month-to-month basis, as additional
storage space for the Company's finished work product. The
lease agreement calls for an annual rent of
$24,000.
The Company has
an employment agreement with its former CEO and current Chairman of
the Board, Rodney I. Smith. The agreement provides for an
annual base salary of $99,000 and an annual royalty fee of $99,000
payable as consideration for his assignment to the Company of all
of his rights, title and interest in certain patents. Payment
of the royalty continues for as long as the Company is using the
inventions underlying the patents.
In
the event the employment by the Company ceases as a result of the
(i) death, his estate shall be entitled to a lump sum payment of
one times the combined Base Salary and bonus, and certain other
accrued and unpaid amounts, or (ii) disability, he shall be
entitled to Base Salary and bonus for a period of one year
commencing with the date of termination, and all other unpaid
accrued amounts.
Mr. Smith is currently
being compensated in accordance with the employment
agreement.
F-16
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
NOTE 4. - INCOME
TAXES
Income tax expense is
comprised of the following (in thousands):
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
Federal:
|
|
|
|
Current
|
$334
|
$455
|
|
Deferred
|
119
|
421
|
|
|
453
|
876
|
|
State:
|
|
|
|
Current
|
85
|
76
|
|
Deferred
|
34
|
105
|
|
|
119
|
181
|
|
|
|
|
|
|
$572
|
$1,057
|
The provision for income
taxes differs from the amount determined by applying the federal
statutory tax rate to pre-tax income as a result of the following
(in thousands):
|
|
December 31,
|
|||
|
|
2018
|
2017
|
||
|
Income taxes at
statutory rate
|
$474
|
21.0%
|
$1,269
|
34.0%
|
|
Increase (decrease) in
taxes resulting from:
|
|
|
|
|
|
State income taxes, net
of federal benefit
|
89
|
4.0%
|
136
|
3.6%
|
|
Deferred
true-ups
|
58
|
2.6%
|
161
|
4.3%
|
|
Provision-to-return
|
(19)
|
(0.8)%
|
152
|
4.1%
|
|
Rate
reduction
|
—
|
—%
|
(664)
|
(17.8)%
|
|
Other
|
(30)
|
(1.5)%
|
3
|
0.1%
|
|
|
|
|
|
|
|
|
$572
|
25.3%
|
$1,057
|
28.3%
|
F-17
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
Deferred tax assets
(liabilities) are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Depreciation
|
$(1,667)
|
$(1,185)
|
|
Unrealized losses on
investments available for sale
|
(9)
|
5
|
|
Retainage
|
(425)
|
(264)
|
|
Allowance for doubtful
accounts
|
53
|
52
|
|
Prepaid
expenses
|
(78)
|
(98)
|
|
Vacation
accrued
|
78
|
67
|
|
Deferred
buy-back
|
321
|
—
|
|
State NOL
carryforward
|
26
|
48
|
|
Deferred
income
|
198
|
—
|
|
Other
|
76
|
85
|
|
|
|
|
|
Net deferred tax
liability
|
$(1,427)
|
$(1,290)
|
NOTE 5. - EMPLOYEE BENEFIT
PLANS
The Company has a
savings plan that qualifies under Section 401(k) of the Internal
Revenue Code ("IRC"). Participating employees may elect to
contribute a percentage of their salary, subject to certain
limitations. The Company contributes 50% of the participant's
contribution, up to 4% of the participant's compensation, as a
matching contribution. Total match contributions (in
thousands) by the Company for the years ended December 31,
2018 and 2017 were approximately $148 and $140,
respectively.
NOTE 6. - STOCK
COMPENSATION
On September 19, 2008,
the Board of Directors and Stockholders of the Company adopted the
2008 Stock Option Plan (the "2008 Plan") in addition to the 2004
Stock Option Plan, which allowed the Company to grant up to 500,000
options to employees, officers, directors and consultants to
purchase shares of the Company's Common Stock. Options granted
under the 2008 Plan could have been either Incentive Stock Options
or Non-Qualified Stock Options. There have not been any grants
under the 2008 Stock Option Plan since its inception. The Board of
Directors replaced the 2008 Stock Option Plan with the 2016 Equity
Incentive Plan described below.
Options granted under
granted under the 2004 Stock Option Plan, generally vested over a
three year period. The Company recognizes stock option expense over
the vesting period. The Company did not record any stock option
expense for the years 2018 and 2017 as all of the options were
fully vested.
There were 10,333
options exercised for the year ending December 31, 2018 and
there were 56,800 options exercised in 2017. There were no
options outstanding and exercisable at December 31,
2018.
F-18
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
The following tables
summarize activity under the 2004 Stock Option Plan of the Company
and the stock options outstanding at December 31,
2018:
|
|
Weighted
Average
Exercise
Price
|
Options
Outstanding
|
Vested and
Exercisable
|
|
Balance, December 31,
2016
|
$1.96
|
68,133
|
68,133
|
|
Granted
|
—
|
—
|
—
|
|
Forfeited
|
(2.21)
|
(1,000)
|
(1,000)
|
|
Exercised
|
(1.89)
|
(56,800)
|
(56,800)
|
|
|
|
|
|
|
Balance, December 31,
2017
|
1.21
|
10,333
|
10,333
|
|
Granted
|
—
|
—
|
—
|
|
Forfeited
|
—
|
—
|
—
|
|
Exercised
|
(1.21)
|
(10,333)
|
(10,333)
|
|
|
|
|
|
|
Balance, December 31,
2018
|
$—
|
—
|
—
|
|
|
|
|
|
On October 13, 2016, the
Board of Directors of the Company adopted the 2016 Equity Incentive
Plan, which allows the Company to grant up to 400,000 shares of
restricted common stock of the Company to employees, officers,
directors and consultants. The grants may be in the form of
restricted or performance shares of common stock of the Company.
There were 2,500 and 72,000 shares of restricted stock issued
during the years ended December 31, 2018 and December 31,
2017, respectively. The shares have a three year vesting period
which vests ratably, on an annual basis, over a three year period.
The total intrinsic value (in thousands) of the outstanding shares
of restricted stock is $361.
The fair value of
restricted stock awards is estimated to be the market price of the
Company's common stock at the close of date of grant. Restricted
stock activity during the years ended December 31, 2017 and
2018 is as follows:
|
|
Number of
Shares
|
Weighted Average Grant
Date Fair Value per Share
|
|
Non-vested, December 31,
2016
|
103,000
|
$4.95
|
|
Granted
|
72,000
|
5.45
|
|
Vested
|
49,667
|
5.10
|
|
Forfeited
|
—
|
—
|
|
|
|
|
|
Non-vested, December 31,
2017
|
125,333
|
5.19
|
|
Granted
|
2,500
|
7.00
|
|
Vested
|
54,333
|
5.27
|
|
Forfeited
|
4,000
|
4.95
|
|
|
|
|
|
Non-vested, December 31,
2018
|
69,500
|
$5.19
|
F-19
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
Awards are being
amortized to expense ratably, on an annual basis, over a three year
vesting term, except one grant that vested immediately. Stock
compensation (in thousands) for the year ended December 31,
2018 was approximately $242, based upon the value at the date of
grant. Stock compensation for the
year ended December 31, 2017 was approximately $411, based
upon the value at the date of grant. The total unrecognized
compensation cost related to the non-vested restricted stock is
approximately $361 as of December 31, 2018.
NOTE 7. Fair Value
Measurements
The Company applies
the guidance that is codified under ASC 820-10 related to assets
and liabilities recognized or disclosed in the financial statements
at fair value on a recurring basis. ASC 820-10 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of ASC
820-10 only apply to the Company’s investment securities,
which are carried at fair value.
ASC 820-10 clarifies
that fair value is an exit price, representing the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants based on the
highest and best use of the asset or liability. As such, fair value
is a market-based measurement that is determined based on
assumptions that market participants would use in pricing an asset
or liability. ASC 820-10 requires valuation techniques to measure
fair value that maximize the use of observable inputs and minimize
the use of unobservable inputs. These inputs are prioritized as
follows:
|
Fair Value
Hierarchy
|
Inputs to Fair Value
Methodology
|
|
Level 1
|
Quoted prices in active
markets for identical assets or liabilities
|
|
Level 2
|
Quoted prices for
similar assets or liabilities; quoted markets that are not active;
or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
financial instrument; inputs other than quoted prices that are
observable for the asset or liability; or inputs that are derived
principally from, or corroborated by, observable market
information
|
|
Level 3
|
Pricing models,
discounted cash flow methodologies or similar techniques and at
least one significant model assumption is unobservable or when the
estimation of fair value requires significant management
judgment
|
The Company
categorizes a financial instrument in the fair value hierarchy
based on the lowest level of input that is significant to its fair
value measurement.
|
|
As of December 31,
2018
|
|||
|
|
Quoted Market Prices in Active Markets
(Level 1) |
Internal Models with Significant Observable
Market Parameters (Level 2) |
Internal Models
with Significant Unobservable Market Parameters (Level 3) |
Total Fair Value
Reported in Financial Statements |
|
|
|
|
|
|
|
Mutual Funds
|
$1,107
|
$—
|
$—
|
$1,107
|
|
|
As of December 31,
2017
|
|||
|
|
Quoted Market Prices in Active Markets
(Level 1) |
Internal Models with Significant Observable
Market Parameters (Level 2) |
Internal Models
with Significant Unobservable Market Parameters (Level 3) |
Total Fair Value
Reported in
Financial Statements
|
|
|
|
|
|
|
|
Mutual Funds
|
$1,098
|
$—
|
$—
|
$1,098
|
F-20
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
NOTE 8. - COMMITMENTS AND
CONTINGENCIES
The Company has an
employment agreement with its former CEO and current Chairman of
the Board, Rodney I. Smith. The agreement provides for an
annual base salary of $99,000 and an annual royalty fee of $99,000
payable as consideration for his assignment to the Company of all
of his rights, title and interest in certain patents. Payment
of the royalty continues only for as long as the Company is using
the inventions underlying the patents.
In the event the
employment by the Company ceases as a result of the (i) death, his
estate shall be entitled to a lump sum payment of one times the
combined Base Salary and bonus, and certain other accrued and
unpaid amounts, or (ii) disability, he shall be entitled to Base
Salary and bonus for a period of one year commencing with the date
of termination, and all other unpaid accrued
amounts.
Mr. Smith is
currently being compensated in accordance with the employment
agreement.
The Company is party to
legal proceedings and disputes which may arise in the ordinary
course of business. In the opinion of the Company, it is
unlikely that liabilities, if any, arising from legal disputes will
have a material adverse effect on the consolidated financial
position of the Company.
F-21
NOTE 9. - EARNINGS PER
SHARE
Earnings per share are
calculated as follows (in thousands, except earnings per
share):
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
Income available to
common shareholder
|
$1,687
|
$2,684
|
|
|
|
|
|
Weighted average shares
outstanding
|
5,080
|
5,042
|
|
|
|
|
|
Basic earnings per
share
|
$0.33
|
$0.53
|
|
|
|
|
|
Diluted earnings per
share
|
|
|
|
|
|
|
|
Income available to
common shareholder
|
$1,687
|
$2,684
|
|
|
|
|
|
Weighted average shares
outstanding
|
5,080
|
5,042
|
|
Dilutive effect of stock
options and restricted stock
|
16
|
37
|
|
|
|
|
|
Total weighted average
shares outstanding
|
5,096
|
5,079
|
|
|
|
|
|
Diluted earnings per
share
|
$0.33
|
$0.53
|
There were no options or
restricted stock excluded from the diluted earnings per share
calculation for the years ended December 31, 2018 and
December 31, 2017.
F-22