SMITH MIDLAND CORP - Annual Report: 2020 (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,
2020
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)
Registrant's telephone number,
including area code: (540) 439-3266
Securities Registered Under Section 12(b) of
the Act:
|
Title of each
class
|
Trading
Symbol
|
Name of exchange on
which registered
|
|
Common Stock,
$0.01 par value per share
|
SMID
|
NASDAQ
|
Securities Registered Pursuant to Section 12(g)
of the Act: None
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 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
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
Smaller
reporting company
|
☒
|
Emerging growth
company
|
☐
|
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ☐
Indicate by
check mark whether the registrant has filed a report on and
attestation to its management's assessment of the effectiveness of
its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
☐
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, 2020 (the last
business day of the Company’s most recently completed second
fiscal quarter) was $29,911,628. 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 8, 2021, the
Company had outstanding 5,202,158 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:
•
Although the ultimate impact is
uncertain at this time, the coronavirus outbreak may significantly
affect the Company's financial condition, liquidity, and future
results of operations. In this respect, the Company has already
experienced the following negative impacts on its business: a
reduction in revenues in 2020 from that of 2019, backlog reduction,
lower production volumes, employee absence, bidding restrictions
within certain key states, and minor delays in receipt of materials
through the Company's supply chain,
•
while the Company reported net income
for the years ended December 31, 2020 and 2019, there are no
assurances the Company can remain profitable in future
periods,
•
our debt level increased in 2020 and
2019, and our ability to satisfy the same cannot be
assured,
•
our ability to collect accounts
receivable may be adversely affected by the coronavirus
outbreak,
•
the continued availability of
financing in the amounts, at the times, and on the terms required,
to support our future business and capital projects,
•
while
we have expended significant funds in recent years to increase
manufacturing and rental capacity, there is no assurance that we
will achieve significantly greater sales,
•
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, or the installation or completion of
projects,
•
our compliance with governmental
regulations,
•
the outcome of future litigation, if
any,
•
the decrease in our year to year
contract backlog,
•
our ability to produce and install
product on material construction projects 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, 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 and systems 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 and marketing innovative and proprietary products,
including SlenderWall®, a patented, 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, Inc., a Virginia corporation doing business as Easi-Set
Worldwide; 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, and Trinidad.
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
SlenderWall® Lightweight
Construction Panels
The SlenderWall®
system is a patented 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
repellent), 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, metal, or thin
brick and can be integrated with other cladding
materials.
Sierra
Wall™
The 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.
J-J
Hooks® Highway Safety Barrier
The 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 been 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 Barrier 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 design
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 38 states have approved the MASH restrained barrier
and 34 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 Buildings and Easi-Span®
Expandable
Precast Buildings
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
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
Beach Prisms™ is 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. 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. State and local approvals are necessary for installation
of the product, and the Company has experienced challenges
receiving approvals in their local markets.
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 and, in the case of Beach Prisms™, there can be no
assurance of regulatory approvals.
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
experienced minor delays in obtaining materials, but believes that
it will 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™. Generally, licenses are granted for a point of
manufacture. The Company receives an initial one-time training
and 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 54
licensing agreements in the United States, 9 in Canada, and 1 each
in Australia, Belgium, Mexico, New Zealand and Trinidad, for a
total of 68 licenses 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, virtual meetings,
advertisements in trade publications, and direct mail to end
users.
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 within a 450 mile radius from its facilities,
which includes the majority of the eastern United
States.
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
production 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 Hopkins
(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.
Intellectual
Property
The Company seeks
to protect our intellectual property rights by relying on federal,
state and common law rights in the United States and other
countries, as well as contractual restrictions. Our intellectual
property assets include patents, patent applications, trade
secrets, trademarks, trade dress, copyrights, operating and
instruction manuals, crash tests, non-disclosure and other
contractual arrangements.
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 could 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.
Human Capital
Resources
As of March 8, 2021, the
Company had a total of 200 employees, of which 162 are full-time, 8
are part-time and 30 are temporary workers, with 141 located at the
Company's Midland, Virginia facility, 29 are located at the
Company's facility in Reidsville, North Carolina and 30 are located
at the Company's facility in Hopkins (Columbia), 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.
We manage our Company
according to our vision, mission, and core
principles.
Included among
these principles are respect for people, lead with humility, kaizen
spirit, focus on process, seek perfection, assure quality at the
source, create consistency of purpose, embrace scientific thinking,
think systemically, and create value for the customer. We continue
to focus on training and development of our associates at every
level in the organization, and pride ourselves on safety, quality,
delivery, morale, and cost. We expect that these approaches to
leading and empowering our associates will create trust with our
customers, creating sustainability and growth of the
business.
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 owns an
additional 19 acres in Midland, Virginia, approximately two miles
from the operations facility, of which 3 acres is developed as a
storage yard for the rental barrier division.
The Company's second
manufacturing facility is located in Reidsville, North Carolina on
46 acres of owned land and includes a 15,000 square foot
manufacturing plant and administrative offices with additional
space for future expansion. The facility began production in the
fourth quarter 2019. The previous North Carolina facility, on ten
acres of owned land, including an 8,000 square foot manufacturing
plant with administrative offices, remains operational with future
use not determined at this time.
The Company's third
manufacturing facility is located in Hopkins (Columbia), South
Carolina. The facility is located on 39 acres of land owned by the
Company 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 NASDAQ Capital Market under the symbol
"SMID".
As of March 8, 2021,
there were approximately 200 record holders of the Company's Common
Stock. Management believes there are at least 900 beneficial owners
of the Company's Common Stock.
Dividends
Although the Company
paid a dividend for the previous eight consecutive years, the
Company did not declare a dividend in 2020. 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, bank loan covenants, general economic conditions,
potential coronavirus outbreak concerns, 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 and systems for the
construction, utility and farming industries. The Company's
operating strategy has involved producing and marketing 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.
On
January 30, 2020, the World Health Organization (“WHO”)
announced a global health emergency because of a new strain of
coronavirus originating in Wuhan, China (the “COVID-19
outbreak”) and the risks to the international community as
the virus spread globally beyond its point of origin. In March
2020, the WHO classified the COVID-19 outbreak as a pandemic, based
on the rapid increase in exposure globally.
The
full impact of the COVID-19 outbreak continues to evolve as of the
date of this report. As such, it is uncertain as to the full
magnitude that the pandemic will have on the Company’s
financial condition, liquidity, and future results of operations.
The Company has already experienced an adverse impact to its
business by a reduction in revenues in 2020 from that in 2019, a
reduction in backlog, lower production volumes, employee absence,
bidding restrictions within certain key states such as Maryland and
North Carolina, and minor delays in receipt of materials through
the Company's supply chain. The Company may be further negatively
impacted in the following respects:
a) by the potential inability of customers of
the Company to pay amounts owed to the Company for products or
services already provided should their businesses suffer setbacks;
this risk is heightened by the relatively long lag time experienced
by the Company in collecting accounts receivable (see "Liquidity
and Capital Resources" below);
b) by potential supply side issues should our
vendors experience hardships, and have to reduce or terminate
operations, due to the COVID-19 outbreak, impacting the Company's
sourcing of materials;
c) by increased adverse effects on our
workforce due to contracting or taking care of a relative who has
contracted COVID-19, or have been quarantined by a medical
professional; in this respect, our workforce has been impacted as
of this date with an effect on operations at all locations, but
this impact has diminished as of the filing date, but no assurance
can be provided as to future impacts, particularly in view of new
coronavirus outbreaks;
d) in the event that any of the three states in
which we have facilities provide for the quarantine of our
manufacturing employees, our production manufacturing will be
significantly affected;
e) in the event that any of the states in which
we sell our products and services may eliminate, cancel, or delay
projects due to monetary limitations resulting from the COVID-19
outbreak; in this respect, the Company has experienced a reduction
in bidding activity;
f) the reduction of state infrastructure budgets
due to the reduction in funding through the gas tax, or other
funding sources;
g) the increase in the overall loan defaults,
which in turn impacts the banking sector's ability to fund projects
in which the Company's products may be utilized;
and
h) in the event that economic hardships force
the Company to default on loan payments, our loans may be called
and our ability to borrow under our bank line of credit could
cease;
Management
is actively monitoring the global situation on its financial
condition, liquidity, operations, suppliers, industry, and
workforce. Although the Company experienced a loss in the first
quarter of 2020 and reduced revenues for the year 2020 as compared
to 2019, as well as experiencing factors described above, given the
daily evolution of the COVID-19 outbreak and the global responses
to curb its spread, the Company is not able to ultimately estimate
the effects of the COVID-19 outbreak on its results of operations,
financial condition, or liquidity for fiscal year
2021.
The discussions below, including without limitation with respect to liquidity, are subject to the future effects of the COVID-19 outbreak. In this respect, should the outbreak cause serious economic harm in our areas of operation, our revenue expectations are unlikely to be fulfilled.
13
Overview
Overall, the
Company’s financial bottom line performance was higher in
2020 when compared to 2019. The Company had net income for 2020 in
the amount of $2,665 compared to net income of $1,949 for
2019. Sales decreased by
$2,829 to $43,862 in 2020 from $46,691 in 2019. The decrease in
sales is mainly attributed to the decrease in product sales, which
was derived from reduced SlenderWall, Easi-Set Building, and
barrier sales partially offset by an increase in Architectural
sales. The reduction in barrier sales is in line with the
Company's strategy to shift toward barrier rentals versus barrier
sales. The decrease in product sales was offset in
part by the significant increase in barrier rentals in 2020
compared to 2019 which is mainly due to the increased linear feet
rented over the prior year, short-term special projects, and the
continued revenue recognition of the deferred buy-back lease
obligation (as described in our financial statements under "Summary
of Significant Accounting Policies - Revenue Recognition - Sale to
a Customer with a Buy-Back Guarantee - Lease Income"). The
significant
increase in barrier rentals also favorably impacted gross margins,
excluding royalties, with an increase to 22% in 2020 from 18% in
2019. Operating expenses for 2020 remain in line with the
prior year. The Company continues to manage costs with the
strategic goals in place to increase marketing and sales efforts
towards SlenderWall sales and barrier rentals.
Results of
Operations
Year ended December 31, 2020
compared to the
year ended December 31,
2019
For the year ended
December 31, 2020, the Company had total revenue of $43,862
compared to total revenue of $46,691 for the year ended
December 31, 2019, a decrease of $2,829, or 6%. Revenue
includes product sales, barrier rentals, royalty income, and
shipping and installation revenues. Product sales are further
divided into soundwall, architectural and SlenderWall™
panels, miscellaneous wall panels, highway barrier,
Easi-Set®/Easi-Span® buildings, utility products, and
miscellaneous precast products. The following table summarizes
the revenue by type and a comparison for the years ended
December 31, 2020 and 2019 (in thousands):
|
Revenue by Type (Disaggregated
Revenue)
|
2020
|
2019
|
Change
|
%
Change
|
|
Product Sales:
|
|
|
|
|
|
Soundwall
Sales
|
$7,499
|
$7,736
|
$(237)
|
(3)%
|
|
Architectural
Sales
|
3,668
|
1,104
|
2,564
|
232%
|
|
SlenderWall
Sales
|
948
|
5,063
|
(4,115)
|
(81)%
|
|
Miscellaneous Wall
Sales
|
3,371
|
1,685
|
1,686
|
100%
|
|
Barrier
Sales
|
5,507
|
8,582
|
(3,075)
|
(36)%
|
|
Easi-Set and Easi-Span
Building Sales
|
2,935
|
5,937
|
(3,002)
|
(51)%
|
|
Utility
Sales
|
1,310
|
1,608
|
(298)
|
(19)%
|
|
Miscellaneous
Sales
|
1,538
|
513
|
1,025
|
199%
|
|
Total Product
Sales
|
26,776
|
32,228
|
(5,452)
|
(17)%
|
|
Barrier
Rentals
|
6,879
|
2,488
|
4,391
|
176%
|
|
Royalty
Income
|
1,688
|
1,672
|
16
|
1%
|
|
Shipping and
Installation Revenue
|
8,519
|
10,303
|
(1,784)
|
(17)%
|
|
Total Service
Revenue
|
17,086
|
14,463
|
2,623
|
18%
|
|
Total
Revenue
|
$43,862
|
$46,691
|
$(2,829)
|
(6)%
|
The revenue items: soundwall sales, architectural panel sales,
SlenderWall sales, miscellaneous wall sales, barrier rentals, and
royalty income are recognized as revenue over time. The revenue
items: barrier sales, Easi-Set and Easi-Span building sales,
utility sales, miscellaneous sales, and shipping and installation
revenue are recognized as revenue at a point in
time.
14
Soundwall
Sales – Soundwall panel sales slightly decreased by 3%
in 2020 compared to 2019 due primarily to the smaller number of
projects in production during 2020 at the North Carolina and South
Carolina facilities as compared to 2019.
The Virginia plant continues to produce soundwall for the largest
soundwall contract in Company history, which was initially awarded
during 2018, and for which production is expected to continue in
2021.
Architectural
Sales – Architectural panel sales significantly
increased by 232% in 2020 compared to 2019.
The Company had one large architectural panel project begin during
the first quarter 2020 with continued production through the third
quarter 2020. The Company was also awarded a large architectural
project which began production the fourth quarter 2020, with
additional production scheduled into 2021.
SlenderWall
Sales – SlenderWall panel sales decreased by 81% in
2020 when compared to 2019.
SlenderWall sales are generated on a project basis, and success is
determined by the number and dollar value of projects awarded and
produced in any particular period. The decrease is mainly
attributable to the Company finishing production of a major
SlenderWall project during the first and second quarter 2019, as
compared to the completion of several smaller projects during the
first quarter of 2020. The Company recorded revenue in the third
quarter 2020 for a customer sample test panel which is part of the
sales strategy to expand the product offering and capabilities. The
Company continues to focus sales initiatives on SlenderWall, but no
assurance can be given as to the success of this endeavor,
particularly in light of the COVID-19 outbreak.
Miscellaneous
Wall Sales – Miscellaneous wall sales can be highly
customized precast concrete products or retaining and lagging
panels that do not fit other product categories. Miscellaneous wall
sales doubled in 2020 when compared to 2019.
The Company was awarded various miscellaneous wall panel projects
in the later part of 2019, with production expected to continue
into 2021.
Barrier
Sales – Barrier sales decreased by 36% in 2020 when
compared to 2019.
Aligning with the Company's strategy to shift to barrier rentals
versus barrier sales, barrier sales are expected to continue to
trend lower than previous periods.
Easi-Set®
and Easi-Span® Building Sales – The
Easi-Set® Buildings program includes Easi-Set®, plant
assembled and Easi-Span®, site assembled, and an extensive
line of pre-engineered restrooms. Building sales decreased
significantly by 51% in 2020 as compared to 2019 which was
mainly due to a large building and restroom project occuring in
2019 which was produced at multiple plants.
Utility
Sales – Utility products are mainly comprised of
underground utility vaults used in infrastructure construction.
Utility product sales decreased by 19% in 2020 compared to 2019.
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 and continues to
bid on utility projects.
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, blocks or small add-on items. For 2020,
miscellaneous product sales increased by 199% when compared to
2019. These products are typically small in nature and the Company
focuses it's priorities on larger, more profitable
jobs.
15
Barrier
Rentals – Barrier rentals increased by 176% in 2020
when compared to 2019. The increase was due
to the higher quantity of linear feet rented than the previous year
and a few short-term special projects, which carried slightly
higher margins due to the complexity and risk of the projects.
Barrier rentals were also positively impacted by the revenue
recognition from the deferred buy-back lease obligation. As
indicated above, the Company is shifting its focus to barrier
rentals compared to barrier sales with the significant investment
in the rental fleet in late 2019. Its success in this endeavor will
be affected by the level of governmental spending on future public
highway products, which spending may be adversely effected by
cutbacks resulting from diversion of funds due to the COVID-19
outbreak.
Royalty
Income – Royalties increased by 1% in 2020 as compared
to 2019. Royalty
income increased during the second half of the year 2020 with a
large increase in barrier and building royalties. The Company is
uncertain how the COVID-19 outbreak will impact each licensee in
future periods. The Company continues to seek new license
opportunities to expand product offerings around the
world.
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 decreased by 17% for 2020 when compared to
2019.
The decrease is mainly a result of less SlenderWall and Easi-Set
building installation occurring in 2020 as compared to the prior
year.
Cost
of Goods Sold – Total cost of goods sold for the year
ended December 31, 2020 was $32,820, a decrease of $3,902, or
11%, from $36,722 for the year ended December 31,
2019. Total cost of goods sold, as a percentage of total
revenue not including royalties, decreased to 78% for the year
ended December 31, 2020 from 82% for the year ended
December 31, 2019.
The decrease in cost of goods sold as a percentage of revenue, not
including royalties is mainly due to the increase in barrier
rentals, which typically have higher margins than product sales,
and the short-term special projects, which carry slightly higher
margins due to the complexity and risk of the
projects.
General
and Administrative Expenses – For the year ended
December 31, 2020, the Company's general and administrative
expenses increased by $102, or 2%, to $4,989 from $4,887 during the
same period in 2019. The increase is mainly attributed to
the write-off of bad debts associated with retainage on two
jobs.
Selling
Expenses – Selling expenses for the year ended
December 31, 2020 decreased by $242, or 10%, to $2,294 from
$2,536 for the year ended December 31, 2019. The
reduction in selling expenses
are attributed to a decrease in wages and sales commissions
compared to the same periods in the prior
year.
Operating
Income – The Company had operating income for the year
ended December 31, 2020 of $3,759 compared to operating income
of $2,546 for the year ended December 31, 2019, an increase of
$1,213, or 48%. The increase in operating income was primarily the
result of
the increase in gross profit margins associated with barrier
rentals.
Interest
Expense – Interest expense was $217 for the year ended
December 31, 2020 compared to $179 for the year ended
December 31, 2019. The increase of $38, or 21%, was due
primarily to the debt financing on the North Carolina expansion
project completed in the fourth quarter 2019.
Income Tax
Expense – The Company had
income tax expense of $1,127 for the year ended December 31,
2020 compared to income tax expense of $549 for the year ended
December 31, 2019. The Company had an effective rate of 29.7%
for the year ended December 31, 2020 compared to an effective
rate of 21.9% for the same period in 2019. The increase in the tax
rate is mainly attributed to the change in various state tax
rates.
Net Income
– The Company had net income of $2,665 for the year ended
December 31, 2020, compared to net income of $1,949 for the
same period in 2019. The basic and diluted income per share
was $0.51 for 2020, compared to basic and diluted income per share
of $0.38 for the year ended December 31, 2019. There were
5,185 basic and 5,185 diluted weighted average shares outstanding
in 2020 and 5,142 basic and 5,147 diluted weighted average shares
outstanding in the 2019.
16
Liquidity and Capital
Resources
The Company financed its
capital expenditures requirements for 2020 with cash flows from
operations, cash balances on hand and notes payable to a bank. The
Company had $4,936 of debt obligations at December 31, 2020,
of which $740 is scheduled to mature within twelve months. During
the twelve months ended December 31, 2020, the Company made
repayments of outstanding debt in the amount $2,868 and received
$2,793 in proceeds of borrowings mainly deriving from a refinance
consolidating notes payable, yard expansion in Virginia, and a
vehicle. The Company did not draw on the line of credit during the
twelve months ended December 31, 2020.
The Company has a mortgage note payable to the Bank for the
construction of it's North Carolina facility. The note carries a
ten year term at a fixed interest rate of 3.64% annually per the
Promissory Note Rate Conversion Agreement, with monthly payments of
$22, and is secured by all of the assets of Smith-Carolina and a
guarantee by the Company. The balance of the note payable at
December 31, 2020 was $2,008.
On March 27, 2020, the Company completed the
refinancing of existing loans with a note payable to the Bank in
the amount of $2,701. A portion of the funds in the amount of $678
were secured for improvements to an existing five acre parcel for
additional storage at the Midland, Virginia plant. The loan is
collateralized by a first lien position on the Virginia property,
building, and assets. The refinance also released the lien on the
Smith-Columbia plant in Hopkins, South Carolina (Columbia). The
interest rate per the Promissory Note is fixed at 3.99% per annum,
with principal and interest payments payable monthly over 120
months in the amount of $27. The loan matures on March 27, 2030.
The balance of the note payable at December 31, 2020 was
$2,535.
The Company additionally has 5 smaller installment loans with
annual interest rates between 3.99% and 5.29%, maturing between
2020 and 2025, with varying balances totaling
$166.
Under the loan covenants with the Bank, the Company is limited to
annual capital expenditures of $3,500 and must maintain tangible
net worth of $10,000. The Company is in compliance with all
covenants pursuant to the loan agreements as of December 31,
2020.
In addition to the
notes payable discussed above, on April 16, 2020, the Company
obtained a loan, evidenced by a promissory note, under the Paycheck
Protection Program (the "PPP") from the Bank in the amount of
$2,692. The PPP provides for loans to qualifying businesses, the
proceeds of which may ony be used for payroll costs, rent,
utilities, mortgage interest, and interest on other pre-existing
indebtedness (the "permissible expenses"). The interest rate per
the promissory note, dated April 16, 2020 and executed by the
Company in favor of the Bank, is fixed at 1.00% per annum, with
principal and interest payments starting thirty (30) days after the
amount of forgiveness is determined under section 1106 of the CARES
Act. The loan matures on April 16, 2022. The proceeds of the loan
must be utilized pursuant to the requirements of the PPP, and all
or a portion of the loan may be forgiven in accordance with the PPP
applicable rules, regulations, and guidelines. Pursuant to the loan
agreement relating to the PPP loan, the Bank may accelerate the
loan in the event of a default under this or any other loan
agreement with the Bank. The Company has currently applied for loan
forgiveness in the full amount of the loan, but no assurance can be
given as to the amount, if any, of forgiveness.
Also in addition to the notes payable discussed above,
the Company has a $4,000 line of credit with the Bank with no
balance outstanding as of December 31, 2020. The line of credit is evidenced by a commercial
revolving promissory note which carries a variable interest rate of
prime and matures on October 1, 2021. 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
October 21, 2020 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 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 0.50% with
a floor of 4.00% 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 October 21,
2021. As of December 31, 2020, the Company had not purchased any
equipment pursuant to the $1,500 commitment.
17
At December 31,
2020, the Company had cash totaling $8,764 and $1,228 of investment
securities available for sale compared to cash totaling $1,364 and
$1,176 of investment securities available for sale at
December 31, 2019. Investment securities at December 31, 2020
consist of shares of USVAX (a Virginia Bond Fund). During 2020, the
Company’s operating activities provided $7,487 of cash due
mainly to operating income and the collection of accounts
receivable. In 2020, investing activities used $2,421 in cash
primarily for the yard expansion in Virginia, the purchase of
rental barrier, manufacturing equipment, and a
vehicle. Financing activities provided $2,334 in cash in 2020,
resulting primarily from the PPP loan received in April as a result
of the CARES Act.
Capital spending,
including financed additions, decreased from $4,513 in 2019 to
$2,627 in 2020. Capital expenditures in 2020 included spending for
the yard expansion in Virgnia, rental barrier, manufacturing
equipment, and a vehicle. While the Company anticipates capital
spending for 2021 to be approximately $2,000, excluding
acquisitions and plant expansions (which none are anticipated at
this time), such plans may change if the Company is adversely
effected by the coronavirus outbreak.
The
Company's three mortgage notes payable are financed at fixed rates
of interest. This leaves the Company almost impervious to
fluctuating interest rates. Increases in such rates will only
slightly affect the interest paid by the Company on an annual
basis. Approximately 95% of the Company's debt obligations are
financed at a fixed interest rate so that each 1% increase in
the interest rates of the Company’s outstanding debt will
reduce income by approximately $1
annually.
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 2020 and 2019 was 89 days
for both periods.
Although no assurances can be given, the Company believes that it's
current cash resources, anticipated cash flow from operations, the
availability under the line of credit, and the Payment Protection
Plan loan received during the second quarter 2020 will be
sufficient to finance the Company’s operations for at least
the next 12 months.
The Company’s
inventory at December 31, 2020 was $2,194 and at
December 31, 2019 was $2,242, a decrease of $48. The
annual inventory turns for 2020 and 2019 were 13.9 and 12.1,
respectively. The inventory turns for 2020 have increased due to
the Company having limited inventory, and all major contracts were
recognized in revenue as produced. Finished goods inventory
decreased for 2020 as compared to 2019 mainly staying consistent
with prior years by limiting standard products produced and held at
the end of 2020.
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, comparative accounts
receivable aging statistics, and other customer specific
considerations existing and known as of the time of the
analysis. 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 over time. Certain sales of Soundwall, Slenderwall, and
other architectural concrete products are recognized over time
because as the Company's performance creates or enhances customer
controlled assets or creates or enhances an asset with no
alternative use, and the Company has an enforceable right to
receive compensation. Over time product 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.
18
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 2020 and 2019, particularly in the purchases of
certain raw materials such as cement and steel. The Company
believes that raw material pricing will slightly increase in 2021,
although no assurance can be given regarding future
pricing.
Backlog
As of March 8, 2021 the
Company's sales backlog was approximately $19.6 million as compared to
approximately $30.9 million at approximately the same time in 2020.
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 2022. The reduction in backlog was due to reduced bidding
opportunities and delays in contract awards. The Company expects
the backlog to increase with continued bidding on large
infrastructure and SlenderWall/architectural projects, although no
assurance can be given.
The risk exists that
recessionary economic conditions and the coronavirus outbreak 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 both production and administrative processes, and has
streamlined many of these processes through lean activities. During
2020 and 2019, the Company, through lean activities, continued to
see positive effects in production and office areas. The lean
business philosophy is a long-term, customer focused approach to
eliminating waste and providing value. It is management's intention
to continue on the lean journey while implementing a lean culture
throughout the Company to help reach our goals for 2021. The
Company's lean efforts are aimed to increase quality to the
customer, significantly reduce defects, while increasing production
capacity and sales volume. In order to meet these goals,
substantial improvements through lean tools and lean thinking are
being implemented company wide.
19
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-1,
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 (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) as of December 31, 2020, 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.
20
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, 2020 that has materially
affected, or is reasonably likely to materially affect, its
internal control over financial reporting.
Item
9B. Other Information
None.
21
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
|
|
82
|
|
1970
|
|
Chairman of the Board of
Directors
|
|
|
|
|
|
|
|
|
|
Ashley B.
Smith
|
|
58
|
|
1994
|
|
Chief Executive Officer,
President, and Director
|
|
|
|
|
|
|
|
|
|
Wesley A.
Taylor
|
|
73
|
|
1994
|
|
Director
|
|
|
|
|
|
|
|
|
|
James Russell
Bruner
|
|
65
|
|
2018
|
|
Director
|
|
|
|
|
|
|
|
|
|
Richard
Gerhardt
|
|
54
|
|
2016
|
|
Director
|
|
|
|
|
|
|
|
|
|
Adam J.
Krick
|
|
35
|
|
2018
|
|
Chief Financial Officer,
Secretary, and Treasurer
|
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. 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, and as a Director since 1994.
Mr. Smith was Vice President of the Company from 1990 to 2011. He
is a past Chairman of the National Precast Concrete Association.
Mr. Smith serves on the Board of
Trustees of Bridgewater College in Bridgewater, Virginia.
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 gives 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 January 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.
22
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. 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 President of Sales Services
International, Inc., a consulting firm, and Chief Sales Officer for
IMEX Global Solutions, Inc., a logistics company, since April 2019,
and is also serving as a Fauquier County, Virginia Supervisor for
the Cedar Run Magisterial District since January 2016. 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 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 serves as the Treasurer for
Precast/Prestressed Concrete Institute Mid-Atlantic Chapter. Mr.
Krick is a Certified Public Accountant and holds a Bachelor of
Business Administration degree in Accounting from James Madison
University.
Section 16(a)
Reports
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 Company’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
2020.
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 June 3, 2020. 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.
The code of ethics is also posted on the Company's website at
www.smithmidland.com on the home page.
23
Audit
Committee
The Company created an
Audit Committee in August 2018. The Audit Committee consists of
James Russell Bruner, Richard Gerhardt, and Wesley A. Taylor, the
three independent board members. Mr. James Russell Bruner is an
audit committee financial expert.
Item
11. Executive
Compensation
The following table sets
forth the compensation paid by the Company for services rendered
for 2020 and 2019 to the principal executive officer, as well as
the other executive officer of the Company (the “named
executive officers”):
Summary Compensation
Table
|
|
|
Year
|
Salary
($)(1)
|
Bonus
($)(2)
|
Stock
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
Ashley B.
Smith
|
|
2020
|
313,666
|
133,894
|
89,800
|
—
|
537,360
|
|
Chief Executive Officer
and President (3)
|
|
2019
|
275,100
|
152,420
|
—
|
—
|
427,520
|
|
|
|
|
|
|
|
|
|
|
Adam J.
Krick
|
|
2020
|
168,468
|
34,687
|
53,880
|
—
|
257,035
|
|
Chief Financial Officer
(4)
|
|
2019
|
144,569
|
55,741
|
—
|
—
|
200,310
|
(1) Represents salaries paid in 2020
and 2019 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)
Includes 10,000
restricted shares granted in December 2020 pursuant to the
Company's 2016 Equity Incentive Plan, which 3,333 shares vested in
full immediately on the grant date, 3,333 shares vest one year
following the grant date, and the remaining 3,334 vest two years
following the grant date. The value of the common stock shares at
the grant date was $89,800.
(4) Includes 6,000
restricted shares granted in December 2020 pursuant to the
Company's 2016 Equity Incentive Plan, which 2,000 shares vested in
full immediately on the grant date, 2,000 shares vest one year
following the grant date, and the remaining 2,000 vest two years
following the grant date. The value of the common stock shares at
the grant date was $53,880.
24
Outstanding Equity Awards At
Fiscal Year-End
The following table
sets forth information for the named executive officers regarding
any common share purchase options, stock awards or equity incentive
plan awards that were outstanding as of December 31,
2020.
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price
($/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 ($)
|
Equity Incentive Plan
Awards: Number of Unearned Shares, Units or Other Rights that have
not Vested (#)
|
Equity Incentive Plan
Awards: Market or Payout Value of Unearned Shares, Units or Other
Rights that have not Vested ($)
|
|
Ashley B.
Smith
|
—
|
—
|
—
|
—
|
—
|
—
|
6,667
|
$63,003
|
|
Adam J.
Krick
|
—
|
—
|
—
|
—
|
—
|
—
|
4,000
|
$37,800
|
|
TOTAL
|
—
|
—
|
|
|
—
|
—
|
10,667
|
$100,803
|
(1) Restricted shares
granted vest, ratably, with 1/3 vesting immediately upon grant, 1/3
one year following the grant date, and 1/3 two years following the
grant date. All shares were granted in December 2020.
Compensation of
Directors
All non-executive
officer Directors receive $3,000 per meeting as compensation for
their services as Directors, with an additional $3,000 annual fee
for service as the chair of the Audit Committee, $3,000 annual fee
for service as the chair of the Compensation Committee, and $6,000
annual fee for service as the Chairman of the Board.
The Company does
not pay any additional compensation to directors who are members of
our management or are employed by the Company, but the Company
reimburses all directors for out-of-pocket expenses incurred in
connection with attending Board and committee meetings or otherwise
in their capacity as directors.
Fiscal 2020 Director
Compensation
|
Name
|
Fees
Earned
or Paid in
Cash ($)
|
Stock
Awards
($)(1)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
|
Non-
Qualified
Deferred
Compensation
Earnings
|
All Other
Compensation
|
Total ($)
|
|
Rodney I. Smith
(2)
|
15,000
|
13,470
|
—
|
—
|
—
|
—
|
28,470
|
|
Ashley B. Smith
(3)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Wesley A.
Taylor
|
9,000
|
35,920
|
—
|
—
|
—
|
—
|
44,920
|
|
James Russell
Bruner
|
12,000
|
35,920
|
—
|
—
|
—
|
—
|
47,920
|
|
Richard
Gerhardt
|
12,000
|
35,920
|
—
|
—
|
—
|
—
|
47,920
|
(2) Does not
include an annual royalty fee of $99,000 paid to Mr. Smith,
pursuant to an employment agreement, payable as consideration for
his assignment to the Company of all of his rights, title, and
interest in certain patents.
(3) All
compensation for Ashley B. Smith is reported in Item 11. Executive
Compensation.
25
Employment Contracts and
Termination of Employment and Change in Control
Arrangements.
The
Company has entered into an employment agreement (the
“Employment Agreement”), dated as of November 11, 2020,
with Ashley B. Smith pursuant to which Mr. Smith serves as the
Chief Executive Officer and President of the Company.
The Employment Agreement is for a term of three
years commencing on November 11, 2020 (the “Effective
Date”) through and including November 10, 2023 (the
“Employment Period”), subject to early termination as
provided therein. Commencing on the first anniversary of the
Effective Date, and on each annual anniversary thereafter (such
date and each annual anniversary thereof shall be hereinafter
referred to as the “Renewal Date”), unless previously
terminated, the Employment Period shall be automatically extended
so as to terminate three years from such Renewal Date, unless at
least 180 days prior to the Renewal Date the Company shall give
notice to Mr. Smith, or Mr. Smith shall give notice to the Company,
that the Employment Period shall not be so extended. The Employment Agreement provides for a base
salary (“Base Salary”) of $300,000 per year,
with an increase of no less than 3% per annum. Mr. Smith’s Base Salary shall
be reviewed annually by the Compensation Committee of the Board of
Directors (the “Compensation Committee”) pursuant to
its normal performance review policies for senior executives and
may be increased but not decreased. Mr. Smith is also entitled to
receive an annual bonus incentive payment (the “Incentive
Bonus Payment”) as determined by the Compensation Committee
in its discretion and, if applicable, in accordance with the terms
of any applicable incentive plan of the Company and subject to the
achievement of any performance goals established by the
Compensation Committee with respect to such fiscal year. Mr. Smith
shall also be eligible to participate in long term cash and equity
incentive plans and programs applicable to senior officers of the
Company.
The Employment Agreement further provides that if
Mr. Smith is terminated by the Company without Cause or leaves the
Company with Good Reason (generally, for material diminution in Mr.
Smith’s Base Salary, target Incentive Bonus Payment,
or position, authority, duties or
responsibilities, relocation of
Mr. Smith’s principal place of business to a location more
than 30 miles from Mr. Smith’s principal place of
business or material breach by the
Company of the Employment Agreement), Mr. Smith shall be
paid his Base Salary pro-rated through the date of termination, any
Incentive Bonus Payment earned for a prior award period but not yet
paid, any accrued vacation or paid time off to the extent not paid
and unreimbursed business expenses (collectively, the
“Accrued Obligations”) and any other amounts or
benefits required to be paid or provided or which Mr. Smith is
eligible to receive through the date of termination (the
“Other Benefits”). In the event such termination occurs
within two years following a change of control, Mr. Smith shall also be entitled to a lump sum
payment equal to the product of (a) 2.99 multiplied by (b) the sum
of Mr. Smith’s Base Salary in effect prior to such
termination and the Target Incentive Bonus Payment for the year of
termination of employment (or, if higher, or if no Target Incentive
Bonus Payment has been established for such year, the Incentive
Bonus Payment for the year prior to the date of termination). In
the event such termination does not occur within two years
following a change of control, Mr. Smith shall be entitled to
receive an aggregate amount, payable in equal monthly cash payments
over a period of 24 months, equal to the product of (a) 2.0
multiplied by (b) the sum of Mr. Smith’s Base Salary in
effect prior to such termination and the Target Incentive Bonus
Payment for the year of termination of employment (or, if higher,
or if no Target Incentive Bonus Payment has been established for
such year, the Incentive Bonus Payment for the year prior to the
date of termination). The Company shall also continue to provide
Mr. Smith and his dependents with health and other insurance
coverage for 24 months following such
termination.
If Mr. Smith’s employment is terminated for
Cause, because Mr. Smith voluntarily resigns without Good Reason or
due to the death of Mr. Smith, Mr. Smith, or his estate, as
applicable, shall be paid the Accrued Obligations and the
Other Benefits. If Mr. Smith’s employment is terminated due
to disability, Mr. Smith shall be paid his Base Salary in equal
monthly payments for one year commencing on the date of
termination, the Target Incentive
Bonus Payment for the year of termination of employment (or, if no
Target Incentive Bonus Payment has been established for such year,
the Incentive Bonus Payment for the year prior to the date of
termination), the Accrued Obligations and the Other
Benefits.
Mr.
Smith is also subject to non-competition and non-solicitation
restrictions during the Employment Period and for a period of two
years thereafter.
The Company has an employment agreement with its
former Chief Executive Officer and current Chairman of the Board,
Rodney I. Smith. While Mr. Smith ceased providing services as Chief
Executive Officer in May 2018, he received his salary, pursuant to
the terms of the agreement, through September 2019. The agreement
also provides for 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. Mr. Smith also received
compensation from the Company for his services as a Director and
Chairman of the Board. Mr. Smith is currently being
compensated with respect to royalty payments in accordance with the
employment agreement.
26
Item
12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
The following table sets
forth, as of March 8, 2021, 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.
|
|
|
Number of Shares
Beneficially
Owned (2)
|
|
Percentage
of Class
|
|
Rodney I. Smith
(1)(3)(4)(5)
|
|
686,298
|
|
13.2%
|
|
|
|
|
|
|
|
Ashley B. Smith
(1)(3)(4)(6)
|
|
190,242
|
|
3.7%
|
|
|
|
|
|
|
|
Wesley A. Taylor
(1)(7)
|
|
32,667
|
|
*
|
|
|
|
|
|
|
|
Richard Gerhardt
(1)(7)
|
|
6,000
|
|
*
|
|
|
|
|
|
|
|
James Russell Bruner
(1)(7)
|
|
10,000
|
|
*
|
|
|
|
|
|
|
|
Adam J. Krick
(1)(8)
|
|
9,545
|
|
*
|
|
|
|
|
|
|
|
Thompson Davis &
Co., Inc. (9)
|
|
769,643
|
|
14.8%
|
|
|
|
|
|
|
|
Wax Asset Management,
LLC (10)
|
|
410,880
|
|
7.9%
|
|
|
|
|
|
|
|
All directors and
executive officers as a group (6 persons)(11)
|
|
934,752
|
|
17.9%
|
* Less than
1%.
(1) The address for
each of Messrs. Rodney I. Smith, Ashley B. Smith, Wesley A. Taylor,
Richard Gerhardt, James Russell Bruner, 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 116,621 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, for which
each of Rodney I. Smith and Ashley B. Smith disclaims beneficial
ownership.
27
(5)
Includes 1,000 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
(6)
Includes 6,667 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
(7)
Includes 2,667 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
(8)
Includes 4,000 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
(9)
Address of holder is 15 S. 5th Street, Richmond, VA
23219.
(10) Address
of holder is 44 Cherry Lane, Madison, CT 06443.
(11)
Includes 19,668 unvested restricted shares granted pursuant to the
Company's 2016 Equity Incentive Plan.
EQUITY COMPENSATION PLAN
INFORMATION
The following table
sets forth certain information as of December 31, 2020,
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
|
—
|
—
|
170,334
|
|
Total
|
—
|
—
|
170,334
|
(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 170,334 shares of stock unissued
and available for award at December 31, 2020.
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 170,334
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.
28
Item
13. Certain Relationships and Related
Transactions, and Director Independence
There are three
independent directors of the Company, Mr. James Russell Bruner, Mr.
Richard Gerhardt, and Mr. Welsey A. Taylor. The test utilized
by the Company for the determination of independence is that under
the NASDAQ listing standards.
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).
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.
|
|
2020
|
2019
|
|
Audit Fees
|
$175
|
$155
|
|
Tax Fees
|
—
|
30
|
|
Audit-Related
Fees
|
—
|
10
|
|
|
|
|
|
Total Fees
|
$175
|
$195
|
29
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:
|
|
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).
|
|
|
|
|
|
|
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).
|
|
|
|
|
|
|
Employment Agreement,
dated September 30, 2002, between the Company and Rodney I.
Smith. (Incorporated by reference to the Company’s
Annual Report on Form 10-KSB for the year ended December 31,
2003).
|
|
|
|
|
|
|
|
Amendment No. 1 to
Employment Agreement, dated as of December 31, 2008, between the
Company and Rodney I. Smith (Incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2008).
|
|
|
|
|
|
|
|
Promissory Note, dated
April 20, 2011 and executed on April 26, 2011, in the amount of
$575,000 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 April 28,
2011).
|
|
|
|
|
|
|
|
A Credit Line Deed of
Trust, dated April 20, 2011 and executed on April 26, 2011, between
the Company and Summit Community Bank (Incorporated by reference to
the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 28, 2011).
|
|
|
|
|
|
|
|
Promissory Note, dated
September 12, 2013, in the amount of $2,100,000 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 September 18, 2013).
|
30
|
|
Promissory Note for
PPP loan, dated April 16, 2020, in the amount of $2,691,700 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 April 16, 2020).
|
|
|
|
|
|
|
|
Business Loan
Agreement related to the Promissory Note dated April 16, 2020
(Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on April
16, 2020).
|
|
|
|
|
|
|
|
Change in Terms
Agreement, dated September 23, 2020, for the payment schedule
modification to the PPP loan with Summit Community Bank
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on
November 10, 2020).
|
|
|
|
|
|
|
|
Commitment Letter,
dated October 21, 2020, for the renewal of the 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 filed with the Securities and Exchange Commission on
November 10, 2020).
|
|
|
|
|
|
|
|
Commercial Line of
Credit Agreement and Note, dated October 1, 2020, for the renewal
of the line of credit in the amount of $4,000,000 with Summit
Community Bank (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 10, 2020).
|
|
|
|
|
|
|
|
Promissory Note,
dated October 11, 2019, in the amount of $2,228,000 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 October 17, 2019).
|
|
|
|
|
|
|
|
Commercial Security
Agreement, dated October 1, 2018, 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).
|
|
|
|
|
|
|
|
Deed of Trust dated
October 11, 2019, related to the Promissory Note dated October 11,
2019 between the Company and Summit Community Bank (Incorporated by
reference to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on October 17,
2019).
|
|
|
|
|
|
|
|
Commercial Security
Agreement dated October 11, 2019, related to the Promissory Note
dated October 11, 2019 between the Company and Summit Community
Bank (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
October 17, 2019).
|
|
|
|
|
|
|
|
Promissory Note,
dated March 27, 2020, in the amount of $2,701,404 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 April 1, 2020).
|
|
|
|
|
|
|
|
Business Loan
Agreement related to the Promissory Note dated March 27, 2020
(Incorporated by reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 1, 2020).
|
|
|
|
|
|
|
|
Modification and
Supplemental Deed of Trust, dated March 27, 2020, between the
Company and Summit Community Bank (Incorporated by
reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 1, 2020) to the Credit Line Deed
of Trust, dated April 20, 2011 (Incorporated by
reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 28, 2011).
|
|
|
|
|
|
|
|
Modification Deed
of Trust, dated March 27, 2020, between the Company and Summit
Community Bank (Incorporated by
reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 1, 2020) to the Credit Line Deed
of Trust, dated September 12, 2013 (Incorporated by
reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2013).
|
|
|
|
|
|
|
|
2016 Equity
Incentive Plan (Incorporated by reference to the Registration
Statement on Form S-8 (No. 333-214788) filed on November 23,
2016).
|
|
|
|
|
|
|
|
Employment
Agreement, dated as of November 11, 2020, between the Company and
Ashley B. Smith (Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on November 17, 2020).
|
|
|
|
|
|
|
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).
|
|
|
|
|
|
|
Consent of BDO USA,
LLP.
|
|
|
|
|
|
|
|
Certification of
Chief Executive Officer.
|
|
|
|
|
|
|
|
Certification of
Principal Financial Officer.
|
|
|
|
|
|
|
|
Certification
pursuant 18 U.S.C. Section 1350 as adapted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
101.INS
|
|
XBRL Instance
Document.
|
|
101.SCH
|
|
XBRL Taxonomy
Extension Schema Document.
|
|
101.CAL
|
|
XBRL Taxonomy
Extension Calculation Linkbase Document.
|
|
101.DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase Document.
|
|
101.LAB
|
|
XBRL Taxonomy
Extension Label Linkbase Document.
|
|
101.PRE
|
|
XBRL Taxonomy
Extension Presentation Linkbase Document.
|
31
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 30,
2021
|
By:
|
/s/ Ashley B.
Smith
|
|
|
|
|
Ashley B. Smith
|
|
|
|
|
Chief Executive
Officer and President
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 30,
2021
|
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 30, 2021
|
|
Rodney I.
Smith
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ashley B.
Smith
|
|
Director
|
|
March 30,
2021
|
|
Ashley B.
Smith
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Wesley A.
Taylor
|
|
Director
|
|
March 30,
2021
|
|
Wesley A.
Taylor
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James Russell
Bruner
|
|
Director
|
|
March 30,
2021
|
|
James Russell
Bruner
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard
Gerhardt
|
|
Director
|
|
March 30,
2021
|
|
Richard
Gerhardt
|
|
|
|
|
32
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Financial
Statements
Years Ended
December 31,
2020 and 2019
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 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 and subsidiaries (the
“Company”) as of December 31, 2020 and 2019, the
related consolidated statements of income, stockholders’
equity, and cash flows for each of the two years in the period
ended December 31, 2020, and the related summary of significant
accounting policies and notes (collectively referred to as the
“consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 2020 and 2019, and the results of its operations and
its cash flows for each of the two years in the period ended
December 31, 2020, 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.
Critical Audit Matter
The
critical audit matter communicated below is a matter arising from
the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit
committee and that: (1) relates to accounts or disclosures that are
material to the consolidated financial statements and (2) involved
our especially challenging, subjective, or complex judgments. The
communication of critical audit matter does not alter in any way
our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter
below, providing separate opinions on the critical audit matter or
on the accounts or disclosures to which it relates.
Valuation of Accounts Receivable
As
described in the Summary of Significant Accounting Policies to the
consolidated financial statements, the Company’s consolidated
accounts receivable balance at December 31, 2020 was $10.5 million,
inclusive of contract retainage receivables of $1.7 million, and
net of an allowance for doubtful accounts of $0.4 million.
Management performs an evaluation quarterly as to the adequacy of
the allowance for doubtful accounts for accounts receivable,
analyzing payment history of accounts past due, subsequent cash
collections, aging of receivable balances, and other customer
specific considerations such as known disputes. Based on these
factors along with others, management records an estimate of
uncollectable amounts. Developing a reasonable estimate involves
significant judgement by management.
We
identified the valuation of accounts receivable as a critical audit
matter. The principle considerations for our determination that
this is a critical audit matter are (i) that the allowance for
doubtful accounts involves significant judgement and subjectivity
since the estimate relies on a variety of factors including
historical experience, current economic factors and current
customer specific conditions; (ii) relates to accounts receivable
balances that can remain outstanding under contract retainage
provisions for extended periods of time; and (iii) the Company may
also be acting as a subcontractor to a prime contractor, which can
result in potential delays in the awareness of disputes at that
level that may affect collection. Auditing these elements involved
especially challenging and subjective auditor judgment to properly
assess the collectability of customer balances and to determine the
extent of audit effort required to address this
matter.
The
primary procedures we performed to address this critical audit
matter included:
●
Evaluating
management’s allowance for doubtful accounts methodology
through performing a retrospective review of historical
write-offs.
●
Testing a sample of
overdue accounts receivable balances, targeting contract retentions
over a defined dollar value, evaluating the need for an allowance
for doubtful accounts based on procedures including independent
confirmations, collections occurring subsequent to year-end, review
of contract retention provisions and appropriate application to
invoicing, inspection of customer correspondence, inquiries of
financial management, liens filed against selected outstanding
balances, and inquiries of project specific personnel for potential
known disputes.
/s/BDO USA,
LLP
We have served as the
Company's auditor since 1996.
Richmond,
Virginia
March 30,
2021
F-2
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Balance
Sheets
(in thousands, except
share data)
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
|
$8,764
|
$1,364
|
|
Investment securities,
available-for-sale, at fair value
|
1,228
|
1,176
|
|
Accounts receivable,
net
|
|
|
|
Trade - billed (less
allowance for doubtful accounts of $397 and $333), including
contract retentions
|
9,798
|
12,723
|
|
Trade -
unbilled
|
742
|
310
|
|
Inventories,
net
|
|
|
|
Raw
materials
|
643
|
488
|
|
Finished
goods
|
1,551
|
1,754
|
|
Prepaid expenses and
other assets
|
615
|
784
|
|
Refundable income
taxes
|
—
|
432
|
|
|
|
|
|
Total current
assets
|
23,341
|
19,031
|
|
|
|
|
|
Property and equipment,
net
|
18,602
|
17,735
|
|
|
|
|
|
Deferred buy-back lease asset,
net
|
4,237
|
5,042
|
|
|
|
|
|
Other
assets
|
319
|
307
|
|
|
|
|
|
Total
assets
|
$46,499
|
$42,115
|
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,
|
|
|
|
2020
|
2019
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts payable -
trade
|
$1,866
|
$3,180
|
|
Accrued expenses and
other liabilities
|
875
|
125
|
|
Deferred
revenue
|
1,774
|
1,891
|
|
Accrued
compensation
|
1,318
|
1,075
|
|
Dividend
payable
|
—
|
282
|
|
Accrued income
tax
|
470
|
—
|
|
Deferred buy-back lease
obligation
|
1,203
|
966
|
|
Operating lease
liabilities
|
85
|
81
|
|
Current maturities of
notes payable
|
740
|
925
|
|
Customer
deposits
|
569
|
1,077
|
|
|
|
|
|
Total current
liabilities
|
8,900
|
9,602
|
|
|
|
|
|
Deferred
revenue
|
600
|
241
|
|
Deferred buy-back lease
obligation
|
3,790
|
5,183
|
|
Operating lease
liabilities
|
211
|
296
|
|
Notes payable - less
current maturities
|
4,196
|
4,086
|
|
PPP
loan
|
2,692
|
—
|
|
Deferred tax
liability
|
2,461
|
1,886
|
|
|
|
|
|
Total
liabilities
|
22,850
|
21,294
|
|
|
|
|
|
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; 5,279,411 and 5,224,911 issued
and 5,202,158 and 5,164,324 outstanding, respectively
|
52
|
52
|
|
Additional paid-in
capital
|
6,405
|
6,242
|
|
Treasury stock, at cost,
40,920 shares
|
(102)
|
(102)
|
|
Retained
earnings
|
17,294
|
14,629
|
|
|
|
|
|
Total stockholders’
equity
|
23,649
|
20,821
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
$46,499
|
$42,115
|
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,
|
|
|
|
2020
|
2019
|
|
Revenue
|
|
|
|
Product
sales
|
$26,776
|
$32,228
|
|
Barrier
rentals
|
6,879
|
2,488
|
|
Royalty
income
|
1,688
|
1,672
|
|
Shipping and
installation revenue
|
8,519
|
10,303
|
|
|
|
|
|
Total
revenue
|
43,862
|
46,691
|
|
|
|
|
|
Cost of goods
sold
|
32,820
|
36,722
|
|
|
|
|
|
Gross
profit
|
11,042
|
9,969
|
|
|
|
|
|
General and
administrative expenses
|
4,989
|
4,887
|
|
Selling
expenses
|
2,294
|
2,536
|
|
|
|
|
|
Total operating
expenses
|
7,283
|
7,423
|
|
|
|
|
|
Operating
income
|
3,759
|
2,546
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
Interest
expense
|
(217)
|
(179)
|
|
Interest
income
|
35
|
40
|
|
Gain on sale of
assets
|
133
|
46
|
|
Other
income
|
82
|
45
|
|
|
|
|
|
Total other income
(expense)
|
33
|
(48)
|
|
|
|
|
|
Income before income tax
expense
|
3,792
|
2,498
|
|
|
|
|
|
Income tax
expense
|
1,127
|
549
|
|
|
|
|
|
Net income
|
$2,665
|
$1,949
|
|
|
|
|
|
Basic and diluted earnings per
share
|
$0.51
|
$0.38
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-5
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Stockholders' Equity
(in
thousands)
|
|
Common
Stock
|
Additional
Paid-in
Capital
|
Treasury
Stock |
Retained
Earnings
|
Total
|
|
|
|
|
|
|
|
|
Balance, January 1,
2019
|
$51
|
$5,973
|
$(102)
|
$12,962
|
$18,884
|
|
|
|
|
|
|
|
|
Accrued dividends
payable
|
—
|
—
|
—
|
(282)
|
(282)
|
|
|
|
|
|
|
|
|
Vesting of restricted
stock
|
1
|
269
|
—
|
—
|
270
|
|
|
|
|
|
|
|
|
Net income
|
—
|
—
|
—
|
1,949
|
1,949
|
|
|
|
|
|
|
|
|
Balance, December 31,
2019
|
52
|
6,242
|
(102)
|
14,629
|
20,821
|
|
|
|
|
|
|
|
|
Vesting of restricted
stock
|
—
|
163
|
—
|
—
|
163
|
|
|
|
|
|
|
|
|
Net income
|
—
|
—
|
—
|
2,665
|
2,665
|
|
|
|
|
|
|
|
|
Balance, December 31,
2020
|
$52
|
$6,405
|
$(102)
|
$17,294
|
$23,649
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-6
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Cash Flows
(in
thousands)
|
|
Year
Ended
December
31,
|
|
|
|
2020
|
2019
|
|
Reconciliation of net income
to net cash provided by operating activities
|
|
|
|
|
|
|
|
Net income
(loss)
|
$2,665
|
$1,949
|
|
Adjustments to reconcile
net income (loss) to net cash provided by (used in) operating
activities
|
|
|
|
Depreciation and
amortization
|
2,412
|
1,793
|
|
Allowance for doubtful
accounts
|
64
|
119
|
|
Gain on sale of fixed
assets
|
(133)
|
(46)
|
|
Unrealized gain
(loss)
|
(23)
|
10
|
|
Stock
compensation
|
163
|
270
|
|
Deferred
taxes
|
575
|
459
|
|
(Increase) decrease
in
|
|
|
|
Accounts receivable -
billed
|
2,861
|
(561)
|
|
Accounts receivable -
unbilled
|
(432)
|
1,003
|
|
Inventories
|
48
|
1,318
|
|
Refundable income
taxes
|
432
|
477
|
|
Prepaid expenses and
other assets
|
128
|
(286)
|
|
Increase (decrease)
in
|
|
|
|
Accounts payable -
trade
|
(1,314)
|
(1,032)
|
|
Accrued expenses and
other liabilities
|
750
|
(485)
|
|
Deferred
revenue
|
242
|
450
|
|
Accrued
compensation
|
243
|
(481)
|
|
Accrued income
taxes
|
470
|
—
|
|
Deferred buy-back lease
obligation, net
|
(1,156)
|
(444)
|
|
Customer
deposits
|
(508)
|
(581)
|
|
|
|
|
|
Net cash provided by
(used in) operating activities
|
$7,487
|
$3,932
|
F-7
Smith-Midland
Corporation
and
Subsidiaries
Consolidated Statements of
Cash Flows
(in
thousands)
(continued)
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Cash Flows From Investing
Activities
|
|
|
|
Purchases of investment
securities available-for-sale
|
$(29)
|
$(32)
|
|
Purchases of property
and equipment
|
(2,627)
|
(4,513)
|
|
Deferred buy-back lease
asset
|
—
|
(358)
|
|
Proceeds from sale of
fixed assets
|
235
|
162
|
|
|
|
|
|
Net cash provided by
(used in) investing activities
|
(2,421)
|
(4,741)
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
Proceeds from the
line-of-credit construction draw
|
—
|
500
|
|
Repayments on the
line-of-credit construction draw
|
—
|
(1,500)
|
|
Proceeds from long-term
borrowings
|
5,485
|
2,277
|
|
Repayments of long-term
borrowings
|
(2,869)
|
(769)
|
|
Dividends paid on common
stock
|
(282)
|
(281)
|
|
|
|
|
|
Net cash provided by
(used in) financing activities
|
2,334
|
227
|
|
|
|
|
|
Net increase (decrease)
in cash
|
7,400
|
(582)
|
|
Cash, beginning of
year
|
1,364
|
1,946
|
|
|
|
|
|
Cash, end of
year
|
$8,764
|
$1,364
|
|
|
|
|
|
Supplemental Cash Flow
information:
|
|
|
|
Non-cash transaction -
dividends payable
|
$—
|
$282
|
|
Non-cash transaction -
right of use asset and lease liability upon lease standard
adoption
|
$—
|
$414
|
|
Cash payments for
interest
|
$217
|
$179
|
|
Cash payments for income
taxes
|
$22
|
$73
|
See accompanying
summary of significant accounting policies and notes to
consolidated financial statements.
F-8
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.
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 $72 at December 31, 2020 and 2019.
Property and
Equipment
Property and equipment
is stated at cost. Expenditures for ordinary maintenance and
repairs are charged to income as incurred. Costs of improvements,
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 expense 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-9
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,
2020, 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 2017. The Company does not have any
uncertain tax positions as of December 31, 2020, and believes there
will be no material changes in unrecognized tax positions over the
next twelve months.
Stock
Compensation
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
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. The fair value
of each restricted stock grant is estimated to be the sales price
of the common stock at the close of business on the day of the
grant.
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-10
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 and the customers have
gained control 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" (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" (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, 2020 and December 31,
2019, accounts receivable included contract retentions (in
thousands) of approximately $1,709 and $2,146, 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, 2020 and December 31, 2019, our
allowances for doubtful accounts (in thousands) were $397 and $333,
respectively.
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, the Company settles any remaining deferred balances, in
excess of the buy-back payment, to leasing revenue, and the Company
reclassifies 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 842, Leases.
Barrier Rentals - Lease Income
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 842, 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-11
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
|
2020
|
2019
|
Change
|
%
Change
|
|
Product Sales:
|
|
|
|
|
|
Soundwall
Sales
|
$7,499
|
$7,736
|
$(237)
|
(3)%
|
|
Architectural
Sales
|
3,668
|
1,104
|
2,564
|
232%
|
|
SlenderWall
Sales
|
948
|
5,063
|
(4,115)
|
(81)%
|
|
Miscellaneous Wall
Sales
|
3,371
|
1,685
|
1,686
|
100%
|
|
Barrier
Sales
|
5,507
|
8,582
|
(3,075)
|
(36)%
|
|
Easi-Set and Easi-Span
Building Sales
|
2,935
|
5,937
|
(3,002)
|
(51)%
|
|
Utility
Sales
|
1,310
|
1,608
|
(298)
|
(19)%
|
|
Miscellaneous
Sales
|
1,538
|
513
|
1,025
|
199%
|
|
Total Product
Sales
|
26,776
|
32,228
|
(5,452)
|
(17)%
|
|
Barrier
Rentals
|
6,879
|
2,488
|
4,391
|
176%
|
|
Royalty
Income
|
1,688
|
1,672
|
16
|
1%
|
|
Shipping and
Installation Revenue
|
8,519
|
10,303
|
(1,784)
|
(17)%
|
|
Total Service
Revenue
|
17,086
|
14,463
|
2,623
|
18%
|
|
Total
Revenue
|
$43,862
|
$46,691
|
$(2,829)
|
(6)%
|
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.
The revenue items:
soundwall sales, architectural sales, SlenderWall sales,
miscellaneous wall sales, barrier rentals, and royalty income are
recognized as revenue over time. The revenue items: barrier sales,
Easi-Set and Easi-Span building sales, utility sales, miscellaneous
sales, and shipping and installation revenue are recognized as
revenue at a point in time.
Sales and Use
Taxes
The Company does report
sales taxes as part of revenue and 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.
F-12
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 regular 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, comparative accounts receivable
aging statistics, and other customer
specific considerations existing and known as of the time of the
analysis. 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, 2020 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 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
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 $383 and $393 in 2020 and 2019,
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 during the two years ended
December 31, 2020.
Recently Issued Accounting
Pronouncement
F-13
SMITH-MIDLAND
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. PROPERTY AND
EQUIPMENT
|
Property and equipment consists of the following
(in thousands):
|
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Land and land
improvements
|
$3,764
|
$2,688
|
|
Buildings and
improvements
|
8,930
|
8,962
|
|
Machinery and
equipment
|
13,952
|
13,621
|
|
Rental
equipment
|
5,895
|
5,201
|
|
|
|
|
|
|
32,541
|
30,472
|
|
Less: accumulated
depreciation and amortization
|
(13,939)
|
(12,737)
|
|
|
|
|
|
|
$18,602
|
$17,735
|
Depreciation expense and
amortization (in thousands) was approximately $2,412 and $1,793 for
the years ended December 31, 2020 and 2019,
respectively.
2. NOTES
PAYABLE
Notes payable consist
of the following (in thousands):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Note payable to Summit
Community Bank (the "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.
|
$227
|
$519
|
|
|
|
|
|
Note payable to the
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 the Company.
|
—
|
1,103
|
|
|
|
|
|
Note payable to the Bank, maturing October 2029;
with monthly payments of approximately $22 of principal and
interest fixed at 3.64% under a swap agreement; collateralized by
principally all assets of Smith-Carolina Corporation and guaranteed
by the Company.
|
2,008
|
2,197
|
|
|
|
|
|
Note payable to the
Bank, maturing March 2030; with monthly payments of approximately
$27 of principal and interest fixed at 3.99%; collateralized by
principally all assets of the Company.
|
2,535
|
—
|
|
|
|
|
|
Installment notes,
collateralized by certain machinery and equipment maturing at
various dates; with monthly payments varying from $0.7 to $6.2 with
annual interest rates between 2.90% and 5.29%.
|
166
|
1,192
|
|
|
|
|
|
A revolving
line-of-credit evidenced by a note payable to the Bank, with the
maximum amount of $4,000, maturing October 1, 2021, with interest
only payments and an initial rate of 4.49% adjustable monthly
(4.75% at December 31, 2020). 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.
|
—
|
—
|
|
|
|
|
|
|
4,936
|
5,011
|
|
Less current
maturities
|
(740)
|
(925)
|
|
|
|
|
|
|
$4,196
|
$4,086
|
In addition to the notes payable discussed above, on
April 16, 2020, the Company obtained a loan, evidenced by a
promissory note, under the Paycheck Protection Program (the "PPP")
from the Bank in the amount of $2,692. The PPP provides for loans
to qualifying businesses, the proceeds of which may only be used
for payroll costs, rent, utilities, mortgage interest, and interest
on other pre-existing indebtedness (the "permissible expenses").
The interest rate per the promissory note, dated April 16, 2020 and
executed by the Company in favor of the Bank, is fixed at 1.00% per
annum, with principal and interest payments starting
thirty (30) days after the amount of forgiveness is determined
under section 1106 of the CARES Act. The loan matures on April 16, 2022. The proceeds of
the loan must be utilized pursuant to the requirements of the PPP,
and all or a portion of the loan may be forgiven in accordance with
the PPP applicable rules, regulations, and guidelines. Pursuant to
the loan agreement relating to the PPP loan, the Bank may
accelerate the loan in the event of a default under this or any
other loan agreement with the Bank. The Company has currently applied for loan forgiveness
in the full amount of the loan, but no assurance can be given as to
the amount, if any, of forgiveness.
F-14
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
The Company's notes
payable 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, 2020, the Company was in compliance
with all covenants pursuant to the loan agreements, with the $10
million net worth, and with the annual capital expenditures of
$3,500, excluding acquisitions and plant expansions.
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,
|
|
|
|
|
|
2020
|
$740
|
|
2021
|
471
|
|
2022
|
483
|
|
2023
|
496
|
|
2024
|
511
|
|
Thereafter
|
2,235
|
|
|
|
|
|
$4,936
|
3. RELATED PARTY
TRANSACTIONS
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. Mr. Smith received his salary, pursuant
to the terms of the agreement, through September 2019. While Mr.
Smith has ceased providing executive officer services pursuant to
such agreement, the agreement provides for 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. Mr. Smith
also received compensation from the Company for his services as a
Director and Chairman of the Board.
F-15
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
4. INCOME
TAXES
Income tax expense is
comprised of the following (in thousands):
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Federal:
|
|
|
|
Current
|
$212
|
$(1)
|
|
Deferred
|
416
|
440
|
|
|
628
|
439
|
|
State:
|
|
|
|
Current
|
340
|
91
|
|
Deferred
|
159
|
19
|
|
|
499
|
110
|
|
|
|
|
|
|
$1,127
|
$549
|
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,
|
|||
|
|
2020
|
2019
|
||
|
Income taxes at
statutory rate
|
$796
|
21.0%
|
$527
|
21.0%
|
|
Increase (decrease) in
taxes resulting from:
|
|
|
|
|
|
State income taxes, net
of federal benefit
|
443
|
11.7%
|
81
|
3.2%
|
|
Deferred
true-ups
|
184
|
4.9%
|
(127)
|
(5.1)%
|
|
Provision-to-return
|
(33)
|
(0.9)%
|
81
|
3.2%
|
|
Rate
change
|
—
|
—
|
(42)
|
(1.7)%
|
|
CARES Act
Benefit
|
(253)
|
(6.7)%
|
—
|
—
|
|
Other
|
(10)
|
(0.3)%
|
29
|
1.3%
|
|
|
|
|
|
|
|
|
$1,127
|
29.7%
|
$549
|
21.9%
|
F-16
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
Deferred tax assets
(liabilities) are as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$26
|
$21
|
|
Allowance for doubtful
accounts
|
100
|
81
|
|
Amortization -
Intangibles
|
—
|
4
|
|
Charitable
contributions
|
—
|
43
|
|
Accrued
liabilities
|
—
|
7
|
|
Accrued
vacation
|
60
|
76
|
|
Deferred buy-back
asset
|
1,259
|
1,776
|
|
Deferred
income
|
314
|
304
|
|
Right-of-use
asset
|
75
|
91
|
|
Other
|
80
|
83
|
|
Gross deferred tax
assets
|
1,914
|
2,486
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Retainage
|
(424)
|
(518)
|
|
Deferred buy-back
obligation
|
(1,069)
|
(1,421)
|
|
Fixed
assets
|
(2,685)
|
(2,236)
|
|
Prepaids
|
(114)
|
(104)
|
|
Amortization -
Intangibles
|
(8)
|
—
|
|
Unrealized gain
loss
|
—
|
(2)
|
|
Lease
liability
|
(75)
|
(91)
|
|
Gross deferred tax
liabilities
|
(4,375)
|
(4,372)
|
|
|
|
|
|
Valuation
allowance
|
—
|
—
|
|
Net deferred tax
liability
|
$(2,461)
|
$(1,886)
|
As of December 31,
2020, the Company had approximately $2,611 of state NOL's available
to offset future state taxable income. The state NOL's begin
expiring at various times between 2029 and 2038.
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,
2020 and 2019 were approximately $183 and $179,
respectively.
F-17
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
6. STOCK
COMPENSATION
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.
The total intrinsic value (in thousands) of the outstanding shares
of restricted stock is $326.
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, 2019 and
2020 is as follows:
|
|
Number of
Shares
|
Weighted Average Grant
Date Fair Value per Share
|
|
Non-vested, December 31,
2018
|
69,500
|
$5.19
|
|
Granted
|
2,000
|
7.43
|
|
Vested
|
51,499
|
5.27
|
|
Forfeited
|
334
|
4.95
|
|
|
|
|
|
Non-vested, December 31,
2019
|
19,667
|
5.45
|
|
Granted
|
54,500
|
8.98
|
|
Vested
|
37,831
|
7.14
|
|
Forfeited
|
—
|
—
|
|
|
|
|
|
Non-vested, December 31,
2020
|
36,336
|
$8.98
|
Awards are being
amortized to expense ratably, based upon the vesting schedule.
Stock compensation (in thousands) for the year ended
December 31, 2020 was approximately $163, based upon the value
at the date of grant. Stock compensation for the year ended
December 31, 2019 was approximately $270, based upon the value
at the date of grant. There was $326 of unrecognized compensation
cost related to the non-vested restricted stock as of
December 31, 2020.
F-18
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
7. FAIR VALUE
DISCLOSURES
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,
2020
|
|||
|
|
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
|
$1,228
|
$—
|
$—
|
$1,228
|
|
|
As of December 31,
2019
|
|||
|
|
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
|
$1,176
|
$—
|
$—
|
$1,176
|
F-19
Smith-Midland
Corporation
and
Subsidiaries
Notes to Consolidated
Financial Statements
(continued)
8. COMMITMENTS AND
CONTINGENCIES
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-20
9. EARNINGS PER
SHARE
Earnings per share are
calculated as follows (in thousands, except earnings per
share):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
Income available to
common shareholder
|
$2,665
|
$1,949
|
|
|
|
|
|
Weighted average shares
outstanding
|
5,185
|
5,142
|
|
|
|
|
|
Basic earnings per
share
|
$0.51
|
$0.38
|
|
|
|
|
|
Diluted earnings per
share
|
|
|
|
|
|
|
|
Income available to
common shareholder
|
$2,665
|
$1,949
|
|
|
|
|
|
Weighted average shares
outstanding
|
5,185
|
5,142
|
|
Dilutive effect of
restricted stock
|
2
|
5
|
|
|
|
|
|
Total weighted average
shares outstanding
|
5,187
|
5,147
|
|
|
|
|
|
Diluted earnings per
share
|
$0.51
|
$0.38
|
There was no restricted stock
excluded from the diluted earnings per share calculation for the
years ended December 31, 2020 and December 31,
2019.
F-21