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 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.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 momentary slowdowns 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 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;
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 already seen 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 those types of projects in which the Company's products may be utilized;
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; and
i) as a micro cap public company, with minimal trading volume, we do not have access to the public capital markets as do larger public companies; in this respect, the Company has not raised equity funding through a private placement or underwritten public offering since its inital public offering in 1995.
Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
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.
The Company had (in thousands) a net incomeloss of $331$38 for the first quarter 20192020 and net income of $273$441 for the second quarter 2019,2020, resulting in net income of $604$403 for the six months ended June 30, 2019.2020. The cost of goods sold as a percent of revenue, not including royalties, for the three and six months ended June 30, 20192020 was 80% and 83%, as compared to 83% and 82%, respectively, as compared to 74% and 79% for the three and six months ended June 30, 2018, respectively.2019. The decrease in cost of goods sold as a percentage of revenue, not including royalties, for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, is mainly due to the increase in barrier rental revenues, which typically have higher margins than product sales. The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three andsix months ended June 30, 2020, compared to the six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, is mainly due to increased wagesmaintaining wage and the associated labor costs flat selling prices for certain products due to competitive pricing pressure, and the increase in shipping and installation which typically have lower margins than product sales, as compared to the first half 2018 costs when there were higher margin jobs.despite reduced production volumes.Total salesrevenues for the three and six month periods ended June 30, 20192020 were $10,450 and $20,275, respectively, compared to $10,852 and $21,041 respectively, compared to $9,833 and $18,958 for the three and six monthsmonth periods ended June 30, 2018, respectively.2019. The increasedecrease was mainly from thereduced sales in SlenderWall, barrier, and Easi-Set building sales, although offset by the increase in architectural and barrier rentals, which were impacted favorably from the deferred buy-back revenue recognition, and shipping and installation revenue. With respectmiscellaneous wall sales, compared to the barrier customer contract describedsame period in Note 1 ("Sale to Customer2019. Operating expenses for 2020 remain in line with a Buy-Back Guarantee"), although barrier product sales from this contract are not being recognized, the Company is recognizing barrier rental revenue which will continue through the life of the customer's project. Accordingly, once all product is delivered to this customer, the Company will nonetheless continue to recognize the net profits from this project until the buy-back option is either exercised or expired. Delivery of product commenced inprior year. During the second quarter of 2018 and is expected to be completed by the end of 2019. The buy-back option expires when the customer completes the project utilizing the barrier, which is expected to be in 2022. Thus, whereas2020, the Company will likely have completed its productionreceived a loan under the Paycheck Protection Program (the "PPP") in the amount of $2,692. The Company maintained wage and delivery/installation obligationslabor costs in 2019, it will nonetheless continue to recogaccordance with PPP rules.nize net profits through 2022. Management expects sales to increase At the current time, the Company has recorded the PPP loan as a note payable, but may in the future account for the second halfpossibility that all or a portion of 2019 as compared to the first six months of 2019, although no assurance canloan may be given.forgiven under the PPP rules. For further loan information see "Liquidity and Capital Resources".
Results of Operations (dollar amounts in thousands, except per share data)
Three and six months endedJune 30, 20192020 compared to the three and six months ended June 30, 20182019
Sales include revenues fromRevenue 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® and Easi-Span® buildings, utility products, and miscellaneous precast products. The following table summarizes the sales by product type and comparison for the three and six month periods ended June 30, 20192020 and 2018.
2019. As indicated in "Overview; Potential Effect of COVID-19 Outbreak" above, should the COVID-19 outbreak cause serious economic harm in our area of operations, our revenue expectations are unlikely to be fulfilled.Revenue by Type (Disaggregated Revenue)
| Three Months Ended June 30
| |
| | | | | | | | |
Soundwall Sales | $1,939 | $2,525 | $(586) | (23)% | $4,053 | $5,005 | $(952)
| (19)%
|
Architectural Panel Sales | 424 | 245 | 179 | 73% | 424 | 457 | (33)
| (7)%
|
SlenderWall Sales | 772 | 1,422 | (650)
| (46)% | 2,735 | 2,565 | 170 | 7%
|
Miscellaneous Wall Sales | 406 | 267 | 139 | 52% | 769 | 759 | 10 | 1%
|
Barrier Sales | 1,817 | 1,590 | 227 | 14% | 3,408 | 3,875 | (467)
| (12)%
|
Easi-Set and Easi-Span Building Sales | 1,335 | 560 | 775 | 138% | 2,369 | 1,062 | 1,307 | 123%
|
Utility Sales | 449 | 246 | 203 | 83% | 757 | 460 | 297 | 65%
|
| 185 | 88 | 97 | 110% | 316 | 213 | 103 | 47%
|
Total Product Sales | 7,327 | 6,943 | 384 | 6% | 14,831 | 14,396 | 435 | 3%
|
Barrier Rentals | 582 | 340 | 242 | 71% | 1,163 | 649 | 514 | 79%
|
Royalty Income | 429 | 506 | (77)
| (15)% | 735 | 727 | 8 | 1%
|
Shipping and Installation Revenue | 2,514 | 2,044 | 470 | 23% | 4,312 | 3,186 | 1,126 | 35%
|
Total Service Revenue | 3,525 | 2,890 | 635 | 22% | 6,210 | 4,562 | 1,648 | 36%
|
| | | | | | | | |
Total Revenue | $10,852 | $9,833 | $1,019 | 10% | $21,041 | $18,958 | $2,083 | 11%
|
| Three Months Ended June 30
| |
| | | | | | | | |
Soundwall Sales | $2,200 | $1,939 | $261 | 13% | $4,087 | $4,053 | $34 | 1% |
Architectural Panel Sales | 766 | 424 | 342 | 81% | 1,533 | 424 | 1,109 | 262% |
SlenderWall Sales | — | 772 | (772) | (100)% | 923 | 2,735 | (1,812) | (66)% |
Miscellaneous Wall Sales | 1,128 | 406 | 722 | 178% | 2,031 | 769 | 1,262 | 164% |
Barrier Sales | 945 | 1,817 | (872) | (48)% | 2,270 | 3,408 | (1,138) | (33)% |
Easi-Set and Easi-Span Building Sales | 768 | 1,335 | (567) | (42)% | 1,328 | 2,369 | (1,041) | (44)% |
Utility Sales | 388 | 449 | (61) | (14)% | 789 | 757 | 32 | 4% |
| 504 | 185 | 319 | 172% | 589 | 316 | 273 | 87% |
Total Product Sales | 6,699 | 7,327 | (628) | (9)% | 13,550 | 14,831 | (1,281) | (9)% |
Barrier Rentals | 907 | 582 | 325 | 56% | 1,650 | 1,163 | 487 | 42% |
Royalty Income | 413 | 429 | (16) | (4)% | 681 | 735 | (54) | (7)% |
Shipping and Installation Revenue | 2,431 | 2,514 | (83) | (3)% | 4,394 | 4,312 | 82 | 2% |
Total Service Revenue | 3,751 | 3,525 | 226 | 6% | 6,725 | 6,210 | 515 | 8% |
| | | | | | | | |
Total Revenue | $10,450 | $10,852 | $(402) | (4)% | $20,275 | $21,041 | $(766) | (4)% |
Soundwall Sales - Soundwall sales increased for the three and six month periods ended June 30, 2020 compared to the same periods in 2019. The increase for the three and six month periods in soundwall sales is mainly attributed to increased production at the Virginia plant. The Virginia plant continues to produce soundwall for the largest soundwall contract in Company history, which was initially awarded during 2018.
Architectural Sales - Architectural sales increased for the three and six months ended June 30, 2020 compared to the same periods in 2019. The Company had one large architectural panel project begin during the first quarter 2020, while there was much lower production in the first six months of 2019. The Company was also recently awarded a large architectural project expected to begin production during the third quarter 2020.
SlenderWall Sales - SlenderWall sales significantly decreased for the three and six month periods ended June 30, 2019 when2020 compared to the same periods in 2018.2019. 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 for the three and six month period in soundwall sales is mainly attributed to the reduction in soundwall production with lower sales prices at the North Carolina and South Carolina plants in the first half of 2019. The Virginia plant has increased soundwall production for their largest order ever, which will continue production into 2020. With the current backlog and continued increase in highway work, management expects soundwall sales to trend up for the remainder of the year 2019.
Architectural Panel Sales - Architectural panel sales increased for the three months endedperiods ending June 30, 20192020 compared to the same periodperiods in 2018, and decreased slightly for the six months ended June 30, 2019, comparedis mainly attributable to the same period in 2018. There will continue to beCompany finishing production during the remainder of 2019, at a low volume that will not be a large portion of revenue. Architectural panel sales continue to be a smaller complimentary product to the Company's high profile proprietary product SlenderWall.
SlenderWallTM - SlenderWall panel sales decreased for the three month period ended June 30, 2019 as compared to the same period in 2018, and increased for the six month period ended June 30, 2019 as compared to the same period in 2018. The Company finished producing a major SlenderWall project during the first and second quarter 2019, while only producing a coupleas compared to finishing several smaller projects during the secondfirst quarter 2019.of 2020. The Company continues to focus sales initiatives foron SlenderWall, withbut no assurance can be given as to success in this endeavor, particularly in view of the hiring of a new regional sales manager for the proprietary product.COVID-19 outbreak.
Miscellaneous Wall Sales - Miscellaneous wall sales increased significantly for the three and six month periods ended June 30, 20192020 compared to the same periods in 2018.2019 due to the amount of retaining wall projects in production. The Company had very fewwas awarded various miscellaneous wall panel projects duringin the first six monthslater part of 2019, and 2018. With varying market demand, miscellaneous wall sales arewith production expected to remain low for 2019 until selective miscellaneous wall projects are released, which can be highly profitable due to their unique characteristics.continue through the end of 2020.
Barrier Sales - Barrier sales increaseddecreased significantly during the three and six month periodperiods ended June 30, 20192020 compared to the same periodperiods in 2018,2019. The Company has, and decreased during the six month period ended June 30, 2019 comparedintends to the same period in 2018. Althoughcontinue to, place a greater emphasis on barrier production decreased during the more recent six month period, the Company completed production of its largestrentals versus barrier order ever during the second quarter of 2019. A portion of barrier production is not being recognized as barrier sales due to the guaranteed buy-back agreement with a customer; instead the Company is recognizing the income as barrier rental revenue over the duration of the project, for which deliveries began in the second quarter of 2018 and are expected to be completed by the end of 2019.Accordingly, during and after product delivery to this customer, the Company will recognize the revenue as barrier rental revenue until the buy-back option is either exercised by the customer, or expired, which is expected to be in 2022. Thus, whereas the Company is likely to have completed its production and delivery of all product in 2019, it will recognize net profits through 2022. Management expects barrier sales to be lower for 2019 as compared to annual barrier sales for 2018. Beyond 2019, future barrier sales growth is expected with the new MASH TL3 requirements which the Company product line can satisfy, although no assurance can be given.sales.
Easi-Set® and Easi-Span® Building Sales - Building and restroom sales increased significantlydecreased for the three and six month periods ended June 30, 20192020 compared to the same periods in 2018. The Company has increased building2019 mainly due to a decrease in production at all three manufacturing facilities. The Company has recently seen competitive pricing pressure in certain buildingthe North Carolina and restroom sales. The Columbia, South Carolina plant started producing a largeplants, with the decreased quantity of building order duringsales orders received at both locations compared to the second quartersame time period in 2019. Management expects there to be an increase during the third quarter of 2019 in building and restroom sales.
Utility Sales - Utility and farm products sales increased indecreased for the three and six month periodsperiod ended June 30, 20192020 compared to the same periodsperiod in 2018.2019, and slightly increased for the six month period ended June 30, 2020 compared to the same period in 2019. Utility products are tied closely with infrastructure spending by federal, state and local governments. The Company continues to bid on utility projects and is competitive on larger quantities, although there are competitors who specialize in lower priced utility products. Management believes utility product sales will remain at the current level or slightly increase during the remainder of 2019.
Miscellaneous Product Sales - Miscellaneous salesproducts are itemsproducts that are produced or sold that do not meet the criteria defined for other revenue categories. Examples would include precast concrete slabs, waste blocks or small add-on items. Miscellaneous product sales increased for the three and six month periods ended June 30, 20192020 compared to the same period in 2018. Management believes that miscellaneous product sales will remain low for2019. These products are typically small in nature and the remainder of the year.Company focuses it's priorities on larger, more profitable jobs.
Barrier Rentals - Barrier rentals increased significantly for the three and six month periods ended June 30, 20192020 compared to the same periods in 2018. The increase is mainly2019 due to the recognitionhigher quantity of revenue associatedlinear feet rented than the previous year and a few short-term security projects. Barrier rentals were also positively impacted in the first half of 2020 with the guaranteedrevenue recognition from the deferred buy-back agreement deferral. The Company's corelease obligation. As indicated above, the Company is shifting its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet also showed an increase forin late 2019. Its success in this endeavor will be affected by the three and six month periods ended June 30, 2019 compared to the same periods in 2018. With the Company expanding the barrier rental services, management believes it has the potential to increase barrier rental revenue for the remainderlevel of 2019, and moving forward as the outlays for infrastructuregovernmental spending on future public highway products, which spending may be adversely effected by federal and state governments continue to increase. As stated above in Barrier Sales, barrier rental revenue will continue to be positively effected for future periodscutbacks resulting from diversion of funds due to the accounting treatment afforded to the guaranteed buy-back agreement with a customer.COVID-19 outbreak.
Royalty Income - Royalties decreased for the three and six month periodperiods ended June 30, 20192020 compared to the same periodperiods in 2018, and slightly increased2019. Royalties for barriers started off slow in 2020 with the six month period ended June 30, 2019 comparednew transition to the same period in 2018. Royalties for barrier and buildings increased forMASH TL3 standard. The Company is uncertain how the six month period ended June 30, 2019 compared to the same period for 2018. SlenderWall royalties for the six months ended June 30, 2019 lag behind the same period in 2018, as projects can be multi-year initiatives. ManagementCOVID-19 outbreak will impact each licensee. The Company continues to seek new licenseelicense opportunities to expand product offerings around the world. With steady increases in construction and infrastructure spending, management believes royalty revenue will be higher in 2019 as compared to 2018, although no assurance can be given.
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 sites. Installation revenue resultsis recognized when attaching architectural and SlenderWall panels to a building, installing an Easi-Set® building at customers' sites, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenue increaseddecreased for the three and six month periodsperiod ended June 30, 2019,2020, compared to the same periodsperiod in 2018.2019. The decrease is mainly a result of less shipments from the North Carolina and South Carolina facilities. Shipping and installation revenue increased for the six month period ended June 30, 2020, compared to the same period in 2019. The increase is mainly derived from the installation associated with two SlenderWall projects being erected during the first quarter 2020 and an increase in the shipping and installation associated with barrier, barrier rental deliveries, and SlenderWall installation and deliveries, which increased significantly in the first six months of 2019 compared to the first six months of 2018. The Company continues to expand shipping and installation services through products such as barrier and barrier rentals to help drive top and bottom line performance.
during 2020.
Cost of Goods Sold - Total cost of goods sold, for the three months ended June 30, 2019 increased by $1,839 from the same period in 2018. Total cost of goods sold, as a percentage of total revenue, not including royalties, was 80% and 83% for the three monthsand six month periods ended June 30, 2019, an increase from 74%2020, respectively, compared to 83% and 82% for the same periodperiods in 2018.2019, respectively. Total cost of goods sold for the six months ended June 30, 2019 increased by $2,272 from the same periodThe decrease in 2018. Total cost of goods sold as a percentage of total revenue, not including royalties, was 82%for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, is mainly due to the increase in barrier rentals, which typically have higher margins than product sales.The increase in cost of goods sold as a percentage of revenue, not including royalties, for the six months ended June 30, 2019, an increase from 79% for the same period in 2018. The increase is due to increased wages and the associated labor costs, flat selling prices for certain products due to competitive pricing pressure, and the increase in shipping and installation which typically have lower margins than product sales, as 2020, compared to the first half 2018six months ended June 30, 2019, is mainly due to maintaining wage and labor costs when there were higher margin jobsdespite reduced production volumes.. The Company expects labor costs to continue to increase and raw material prices to slightly increase during the remainder of 2019, although it has had slight decreases in steel prices. The Company continues to seek vendor pricing opportunities, and focuses on lean production methods to improve quality, create capacity, and eliminate process waste, while driving value to the customer.
General and Administrative Expenses - For the three months ended June 30, 2020 the Company's general and administrative expenses increased by $87 to $1,230 from $1,143 during the same period in 2019 and for the six months ended June 30, 2020 the Company's general and administrative expenses decreased by $310$68 to $1,143$2,282 from $1,452 during$2,350 in the same period in 2018, and for the six months ended June 30, 2019 the Company's general and administrative expenses decreased by $569 to $2,350 from $2,919.prior year. The decreasedincreased general and administrative expenses for the three and six month periodsperiod ended June 30, 20192020 is mainly attributed to athe write-off of bad debts associated with retainage on two large jobs. The decrease in non-cashgeneral and administrative expenses for the six month period ended June 30, 2020 is mainly attributed to no provision for stock compensation as compared to the samesix month period in 2018, and a decrease in salaries and associated benefits.ended June 30, 2019. General and administrative expense as a percentage of total revenue was 11% and 15% for theboth six monthsmonth periods ended June 30, 20192020 and 2018,2019, respectively.
Selling Expenses - Selling expenses for the three months ended June 30, 2019 slightly increased2020 decreased to $640$574 from $613$640 for the same period in 2018. 2019. Selling expenses for the six months ended June 30, 2019 slightly2020 decreased to $1,207$1,164 from $1,290$1,207 for the same period in 2018. As the Company grows, additional2019. The reduction in selling expenses will be incurred. Management expects selling expensesfor the three and six month periods are attributed to increasea decrease in 2019 assales commissions compared to 2018.the same periods in the prior year.
Operating Income (Loss) - The Company had operating income for the three month period ended June 30, 20192020 of $373$573 compared to operating income of $911$373 for the same period in 2018.2019. The decreaseincrease in operating income for the three month period ended June 30, 20192020 compared to the same period in 2018,2019, was mainly due to the reductionincrease in gross profit margins. The Company had operating income for the six month period ended June 30, 20192020 of $821$532 compared to operating income of $358$821 for the same period in 2018.2019. The increasedecrease in operating income is mainly due to increasedlower sales andvolumes combined with higher cost of goods sold as a reduction in general and administrative costs.percentage of revenue, excluding royalties.
Interest Expense - Interest expense was $40$57 and $44$40 for the three month period ended June 30, 20192020 and 2018,2019, respectively. Interest expense was $85$113 and $90$85 for the six month period ended June 30, 20192020 and 2018,2019, respectively. The Company expects interest expense to slightly increase for the full year 2019,2020, as compared to the full year 2018,2020, due to the debt financing on the North Carolina expansion project.project completed in the fourth quarter 2019.
Income Tax Expense (Benefit) - The Company had an income tax expense of $130 with an effective rate of 23% for the three months ended June 30, 2020 compared to income tax expense of $86 with an effective rate of 23% for the three months ended June 30, 2019 compared to income tax expense of $225 with an effective rate of 24% for the same period in 2018.2019. The Company had an income tax expense of $185$120 with an effective rate of 23% for the six months ended June 30, 20192020 compared to income tax expense of $90$185 with an effective tax rate of 25%23% for the same period in 2018.2019.
Net Income (Loss) -The Company had net income of $273$441 for the three months ended June 30, 2019,2020, compared to net income of $691$288 for the same period in 2018.2019. The basic and diluted income per share was $0.05$0.09 for the three months ended June 30, 2019,2020, and the basic and diluted income per share was $0.14$0.06 for the three months ended June 30, 2018.2019. The Company had net income of $604$403 for the six months ended June 30, 2019,2020, compared to net income of $270$628 for the same period in 2018.2019. The basic and diluted income per share was $0.08 for the six months ended June 30, 2020, and the basic and diluted income per share was $0.12 for the six months ended June 30, 2019, and the basic and diluted income per share was $0.05 for the six months ended June 30, 2018.2019.
Liquidity and Capital Resources (dollar amounts in thousands)
The Company financed its capital expenditures and operating requirements for the first six monthsReference is made to "Overview; Potential Effect of 2019 primarily from cash balances and the line-of-credit construction draws. The Company had $3,208 of debt obligations at June 30, 2019, of which $740 was scheduled to mature within twelve months, along with the line of credit balance of $1,500. During the six months ended June 30, 2019, the Company made repayments of outstanding debtCOVID-19 Outbreak" above in the amountcontext of $343 and received $49 in proceeds of borrowings for the financing of a vehicle. The Company had draws on the line of credit of $500 during the six months ended June 30, 2019.discussion below.
The Company has a mortgage note payable to Summit Community Bank (the “Bank”), with a balance of $661$375 as of June 30, 2019.2020. The note has a maturity date of September 20, 2021 and a fixed interest rate of 3.99% annually with monthly payments of $26 and is secured by principally all of the assets of the Company. Under the terms of the note, the Bank will permit chattel mortgages on purchased equipment not to exceed $250 for any one individual loan so long as the Company is not in default.
The Company 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 purchasePromissory Note Rate Conversion Agreement, with monthly payments of $22, and is secured by all of the Columbia,assets of Smith-Carolina and a guarantee by the Company. The balance of the note payable at June 30, 2020 was $2,103.
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 facility. Such(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 ismatures on March 27, 2030.The balance of the note payable at June 30, 2020 was $2,647.
On April 16, 2020, the Company obtained a loan, evidenced by a promissory note, dated July 19, 2016.under the Paycheck Protection Program (the "PPP") from the Bank in the amount of $2,692. The notePPP provides for a 15 year term, a fixed annualloans 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 of 5.29%, monthly fixed payments of $11per the promissory note, dated April 16, 2020 and a security interestexecuted by the Company in favor of the Bank, is fixed at 1.00% per annum, with principal and interest payments starting November 16, 2020, payable monthly over 18 months in respect to the land, building and fixtures purchased with theamount of $152. The loan matures on April 16, 2022. The proceeds of the loan. The balanceloan must be utilized pursuant to the requirements of the PPP, and all or a portion of the loan at June 30, 2019 was $1,137. 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 additionally has 147 smaller installment loans with annual interest rates between 2.94%3.99% and 5.29%, maturing between 2020 and 2024,2025, with varying balances totaling $1,410.
$205.
Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $3,500 excluding the deferred buy-back lease asset.and must maintain tangible net worth of $10,000. The Company is in compliance with all covenants pursuant to the loan agreements.
agreements as of June 30, 2020.
In addition to the notes payable discussed above, the Company also has a $4,000 line of credit with the Bank that had awith no balance outstanding as of $1,500 at June 30, 2019 used to fund the construction of the North Carolina expansion, which will be converted to long-term debt when the financing closes in 2019.2020. The line of credit is evidenced by a commercial revolving promissory note which carries a variable interest rate of prime and matures on September 18, 2019.October 1, 2020. 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 per annum during the term of the loan; and (ii) to obtain bank approval prior to its funding any acquisition. On September 18, 2018 the Company received a Commitment Letter from the Bank to provide a guidance line of credit specifically to purchase business equipment in an amount up to $1,500. The commitment provides for the purchase of equipment with minimum advances of $50 for which a note payable will be executed with a term not to exceed five years with an interest rate at the Wall Street Journal prime rate plus 0.5% with a floor of 4.49% per annum. The loan is collateralized by a first lien position on all equipment purchased under the line. The commitment for the guidance line of credit matures on September 17, 2019. As of June 30, 2019, the Company had not purchased any equipment pursuant to the $1,500 commitment.
At June 30, 2019,2020, the Company had cash totaling $1,641$4,404 and investment securities totaling $1,156,$1,189, compared to cash totaling $1,946$1,364 and investment securities totaling $1,107$1,176 at December 31, 2018.2019. Investment securities at June 30, 20192020 consist of shares of USVAX (a Virginia Bond Fund). The decreaseincrease in cash is primarily the result of the purchase of capital expenditures for the six months ended June 30, 2019 as compared to the balance at December 31, 2018.
PPP loan received on April 16, 2020.
Capital spending for the six months ended June 30, 20192020 totaled $1,996,$2,326, as compared to $1,057$1,996 for the same period in 2018.2019. The 20192020 expenditures were mainly for the North Carolina plantrental barrier, yard expansion along with yardin Midland, Virginia in which the Company committed to during the fourth quarter 2019, and manufacturing equipment. The Company planshas completed the yard expansion at Midland, Virginia and intends to make additionalcontinue maintenance capital purchases of approximately $2,000expenditures as needed over the remainder of the year, excluding the North Carolina plant expansion. The additional 2019 expenditures are expected to be for rental barrier, land improvements, and miscellaneous manufacturing equipment.
year.
The Company received approval from the Bank for the financing of the North Carolina expansion and for additional land expansions at the Virginia manufacturing plant. The expansions are excluded from the capital expenditure limitations in the loan agreements with the Bank. See "North Carolina Plant Expansion" below.
The Company's twothree 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%99% of the Company's debt obligations are financed at a fixed interest rate, after consideration of the Promissory Note Rate Conversion Agreement, so that each 1% increase in the interest rates of the Company’s outstanding debt will reduce income by approximately $2 annually.
$1 annually, excluding the impact of fair value changes in the Promissory Note Rate Conversion Agreement.
The Company’s cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 35 to 90 days after the products are produced and with some architectural contracts, retainage may be held until the entire project is completed. This payment schedule may result in liquidity problems for the Company because it must bear a portion of the cost of production before it receives payment from its customers. The Company’s average days sales outstanding (DSO), excluding the effect of unbilled revenue, was 10099 days for the six months ended June 30, 20192020 compared to 8689 days for the year ended December 31, 2018.2019. The increase in DSO is mainly due to retainage being withheld on multiple large projects.
If actual results regarding the Company's production, sales, and subsequent collections on customer receivables are materially inconsistent with management's expectations, the Company may in the future encounter cash flow and liquidity issues. If the Company's operational performance deteriorates significantly, it may be unable to comply with existing financial covenants, and could cause defaults and acceleration under it's loan agreements and lose access to the credit facility. Although no assurances can be given, the Company believes that anticipated cash flow from operations and the availability under the linesline of creditscredit, which matures October 1, 2020 and is expected to be renewed, 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. As a micro cap public company, with minimal trading volume, the Company does not have access to the public capital markets as do larger public companies; in this respect the Company has not raised equity funding through a private placement or underwriting public offering since its initial public offering in 1995.
The Company’s inventory was $3,003$2,108 at June 30, 20192020 and $3,560$2,242 at December 31, 2018,2019, or a decrease of $557.$134. The decrease in inventory is due to salesthe reduction of barrier in finished goods on hand at December 31, 2018June 30, 2020 with the transition to the MASH TL3 standard and the decrease in raw materials for use in production during the first half of 2019.focus shifting from 'Barrier Sales' to 'Barrier Rentals'. Inventory turnover was 10.9,11.4, annualized for the six months ended June 30, 2019,2020, compared to 9.810.9, annualized for the same period in 2018.
2019.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are more fully described in its Summary of Accounting Policies to the Company’s consolidated financial statements on Form 10-K for the year ended December 31, 2018.2019. There have been no changes as of June 30, 2019.
2020.
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 a more significant 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
Raw material costs for the Company, cement, steel, aggregates, and other direct materials used in production have remained flat for the first six months of 2019.2020. The Company anticipates raw material prices willmay slightly increase overfor the remainder of 2019,2020, although no assurance can be given regarding future pricing.
Sales Backlog
As of August 2, 2019,3, 2020, the Company’s sales backlog was approximately $27.6$25.6 million, as compared to approximately $35.3$27.6 million at the same time in 2018.2019. The decrease is mainly due to the large orders bookedreduction in early 2018 combined with competitive pricing pressure on recent bids.bidding activity in 2020. It is estimated that majority of the projects in the sales backlog will be produced within 12 months, with a portion extending several years.
North Carolina Plant Expansion
The Company currently owns 46 acres on which it is in the process of building a 15,000 square foot manufacturing plant with additional space for future expansion in North Carolina. This expansion is estimated to cost $3,300 and will increase production and storage capacity. The project is being funded through bank financing and cash. Management expects completion of the new facility and production to commence during the third quarter 2019. The current North Carolina facility will remain operational during the construction of the new plant, with production continuing during the transition to the new facility. There can be no assurance as to the cost, financing, timetable, completion, or success of this project.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
ITEM 4. Controls and Procedures
(a) Disclosure controls and procedures
The Company carried out our evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and 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 this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at June 30, 2019.
2020.
(b) Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 20192020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PARTPART II — OTHER INFORMATIONITEM 1. Legal Proceedings
The Company is not presently involved in any litigation of a material nature.
Not required
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
Not applicable
ITEM 5. Other Information
None
Exhibit No. | | Exhibit Description |
| | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| | 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. |
Pursuant to the requirements 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 (Registrant) | |
| | | | |
Date: | August 8, 201911, 2020
| By: | /s/ Ashley B. Smith | |
| | | Ashley B. Smith, Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
Date: | August 8, 201911, 2020
| By: | /s/ Adam J. Krick | |
| | | Adam J. Krick, Chief Financial Officer | |
| | | (Principal Financial Officer) | |
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