SMITH MIDLAND CORP (SMID)

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 and share 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.

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 outside of the Company’s 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.

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Overview

Overall, the Company’s financial bottom line performance was significantly greater in 2024 when compared to 2023. The Company had net income for 2024 of $7,675 compared to net income of $795 for 2023. Total revenue increased by $18,928 to $78,508 in 2024 from $59,580 in 2023. The increase in sales is mainly from barrier rentals, shipping and installation, and utility product sales. Fourth quarter 2024 revenues were $18,528 compared to $16,389 in the fourth quarter 2023. The increase in revenue for the fourth quarter 2024 as compared to the fourth quarter 2023 was primarily due to an increase in soundwall sales, architectural sales, utility sales, miscellaneous sales, Easi-Set building sales, and shipping and installation revenue.

Cost of sales as a percentage of revenue, not including royalties, decreased to 78% in 2024 compared to 86% in 2023. Cost of sales as a percentage of revenue, not including royalties, decreased to 80% for the fourth quarter 2024 as compared to 85% for the fourth quarter 2023.

Operating income was $9,899 for 2024, as compared to $1,118 for 2023. Operating expenses for 2024 was $10,111 compared to $9,534 in 2023. The increase is due to a minor increase in general and administrative expenses. Total operating expense was $2,519 for the fourth quarter 2024 and $2,580 for the fourth quarter 2023.

Income tax expense for 2024 was $2,143, or an effective tax rate of 21.7%, as compared to $528, or an effective tax rate of 40.0% for 2023, adversely affecting net income in 2023. The greater percentage in 2023 was mainly due to an increase in state tax liability for a true-up of state tax expense.

As of March 3, 2025, the Company’s sales backlog was approximately $59.5 million, as compared to approximately $60.8 million around the same time in the prior year. It is estimated that most of the projects in the current sales backlog will be produced within 12 months, but a few will be produced over multiple years. The Company anticipates greater sales volumes throughout 2025, although no assurance can be provided. The Company also anticipates funding related to the Infrastructure Investment and Jobs Act to continue coming through the state and local governments in 2025 and beyond to further promote growth in the revenue backlog related to the highway and transportation markets, although no assurance can be provided. State and local programs that support infrastructure spending, including gas tax increases, special tax districts, new funding mechanisms are increasing in number and size as these entities increase their role in infrastructure investment. The Company continues to increase marketing and sales efforts towards SlenderWall sales and barrier rentals, in line with long-term strategic objectives. In view of the policies of the new Administration and DOGE, including without limitation with respect to government spending cutbacks and tariffs, there can be no assurance of anticipated levels of infrastructure spending.

Results of Operations

Year ended December 31, 2024 compared to the year ended December 31, 2023

For the year ended December 31, 2024, the Company had total revenue of $78,508 compared to total revenue of $59,580 for the year ended December 31, 2023, an increase of $18,928 or 32%. 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 barriers, 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, 2024 and 2023 (in thousands):

The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous 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, and shipping and installation revenue are recognized as revenue at a point in time.

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Soundwall Sales – Soundwall panel sales increased by 54% in 2024 compared to 2023. The increase is due to higher production volumes at all three plants, as the Company increased production output to execute and deliver on the Company’s increased backlog. The Company expects soundwall panel sales to be similar in 2025 as compared to 2024, although no assurance can be provided.

Architectural Sales – Architectural panel sales increased by 272% in 2024 compared to 2023. The increase is related to production of two architectural projects that started production at the end of the first quarter of 2024. Architectural sales are expected to be similar in 2025, as compared to 2024, although no assurance can be provided.

SlenderWall Sales – SlenderWall panel sales decreased by 100% in 2024 compared to 2023. A SlenderWall project was in production during the first half of 2023, and the Company did not have a SlenderWall project in production during 2024. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor. SlenderWall sales are expected to increase in 2025 compared to 2024, as several SlenderWall projects are anticipated to start in the first half of 2025.

Miscellaneous Wall Sales – Miscellaneous wall sales are highly customized precast concrete products or retaining and lagging panels that do not fit other product categories. Miscellaneous wall sales decreased by 20% in 2024 when compared to 2023 due lower production volumes in the second and third quarter 2024. Miscellaneous sales are expected to be similar in 2025, as compared to 2024, although no assurance can be provided.

Barrier Sales – Barrier sales decreased by 50% in 2024 when compared to 2023. The decrease is due to the completion of large barrier projects in North Carolina and South Carolina during 2023. The decrease is consistent with the Company’s focus to shift from barrier sales to barrier rentals. Barrier sales are expected to trend lower in 2025 than previous years as the Company continues to shift from barrier sales to barrier rentals.

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 increased by 41% in 2024 as compared to 2023 due to increased sales at all locations, reflecting general product sale fluctuations. Building and restroom sales are expected to trend higher during 2025 as compared to 2024 due to demand from increased sales and marketing, although no assurance can be provided.

Utility Sales – Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales increased by 171% in 2024 compared to 2023. The increase is related to the increase in the market for dry utility vaults to support the growth in data centers. Utility sales are expected to be similar during 2025 as compared to 2024, although no assurance can be provided.

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 2024, miscellaneous product sales increased by 120% when compared to 2023. The increase is mainly from the Virginia plant that started production on one large project for the production of precast beams and platforms. Miscellaneous product sales are expected to trend lower during 2025 as compared to 2024, although no assurance can be provided.

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Barrier Rentals – Barrier rentals increased by 90% in 2024 as compared to 2023. Revenue from the Company’s core rental barrier fleet increased by 52% in 2024 as compared to 2023. This increase is attributed to an increase in utilization of rental barrier. Barrier rental revenue also increased due to multiple special barrier projects occurring and completed during the third quarter 2024. As indicated above, the Company is continuing to shift its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet that occurred during prior years. Barrier rental revenue, excluding revenue from special barrier projects, is expected to trend higher in 2025 as compared to barrier rental revenue, excluding revenue from special barrier projects, in 2024, as funding is expected to increase related to the Infrastructure Investment and Jobs Act, although no assurance can be given.

Royalty Income – Royalties increased by 24% in 2024 as compared to 2023. The increase in royalties is mainly due to the increase in barrier royalties during 2024 compared to 2023. As funding increases related to the Infrastructure Investment and Jobs Act, as anticipated, the Company expects 2025 royalties to continue to increase compared to 2024, 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 site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set® building at a customers' site, setting highway barrier, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenues increased by 48% for 2024 when compared to 2023. The increase is mainly attributed to the increase in shipping and installation of SlenderWall and architectural panels. This increase in shipping and installation revenue correlates with the increased production of SlenderWall panels that occurred, and for which revenue was previously recognized, throughout 2023.

Cost of Sales – Total cost of sales for the year ended December 31, 2024 was $58,498, an increase of $9,570, or 20%, from $48,928 for the year ended December 31, 2023. Total cost of sales as a percentage of total revenue, not including royalties, decreased to 78% for the year ended December 31, 2024 from 86% for the year ended December 31, 2023. The decrease in cost of sales as a percentage of revenue, not including royalties, is mainly due to higher revenue levels in 2024 than in 2023 having a favorable effect on margins reflecting the absorption of fixed overhead costs. In addition, the decrease in cost of sales as a percentage of revenue, not including royalties, was due to production throughout 2024 related to contracts that factored in the rising inflationary costs experienced throughout 2022 and 2023, and a one-time expense related to panels the Company chose to remake for one specific customer related to defective steel from a supplier used in the initial product in 2023.

General and Administrative Expenses – For the year ended December 31, 2024, the Company's general and administrative expenses increased by $564, or 9%, to $6,554 from $5,990 during the same period in 2023. General and administrative expenses for the year ended December 31, 2023 increased over the prior year due higher salary and wage rates, and an increase in the allowance for credit losses. General and administrative expenses were 8% and 10% of revenues for the years ended December 31, 2024 and 2023, respectively.

Selling Expenses – Selling expenses for the year ended December 31, 2024 increased by $13, or 0%, to $3,557 from $3,544 for the year ended December 31, 2023. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals.

Operating Income – The Company had operating income for the year ended December 31, 2024 of $9,899 compared to operating income of $1,118 for the year ended December 31, 2023, an increase of $8,781, or 785%. The increase in operating income was mainly due to the increase in revenues, decrease in cost of sales as a percentage of revenue, and a relatively flat operating expenses as a percent of revenue.

Income Tax Expense – The Company had income tax expense of $2,143 for the year ended December 31, 2024 compared to income tax expense of $528 for the year ended December 31, 2023. The Company had an effective rate of 21.7% for the year ended December 31, 2024 compared to an effective rate of 40.0% for the same period in 2023. The decrease in the effective tax rate is attributed to the increase in the Company’s state tax liability for a true-up of state tax expense during 2023.

Net Income – The Company had net income of $7,675 for the year ended December 31, 2024, compared to net income of $795 for the same period in 2023. The basic and diluted earnings per share was $1.45 for 2024 compared to basic and diluted earnings per share of $0.15 for the year ended December 31, 2023. There were 5,289 basic and diluted weighted average shares outstanding in 2024, and 5,258 basic and 5,292 diluted weighted average shares outstanding in 2023.

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Liquidity and Capital Resources

The Company financed its capital expenditures for 2024 with cash balances on hand. The Company had $5,094 of debt obligations at December 31, 2024, of which $658 is scheduled to mature within twelve months. During the twelve months ended December 31, 2024, the Company made repayments of outstanding debt in the amount $635.

The Company has a mortgage note payable to Burke & Herbert Bank & Trust Company, formally Summit Community Bank (the “Bank”) for the construction of its 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, 2024 was $1,166.

The Company also has a note payable to the Bank in the amount of $1,536 as of December 31, 2024. The loan is collateralized by a first lien position on the Midland, VA plant, building, and assets. 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.

On February 10, 2022, the Company completed the financing for its acquisition of certain real property in Midland, VA from the fourth quarter of 2021, totaling approximately 29.8 acres, with a note payable to the Bank. The balance of the note payable at December 31, 2024 was $2,379. The loan is collateralized by a first lien position on the related real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months for $21. The loan matures on February 10, 2037.

The Company additionally has one smaller installment loan with an annual interest rate of 2.90%, maturing in 2025, with a balance totaling $13.

Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $5,000 and has received a waiver for 2024 from the Bank. Also under the loan covenants with the Bank, the Company must maintain tangible net worth of $25,000. The Company is in compliance with all covenants pursuant to the loan agreements as of December 31, 2024.

In addition to the notes payable discussed above, the Company has a $5,000 line of credit with the Bank with no balance outstanding as of December 31, 2024. The line of credit is evidenced by a commercial revolving promissory note, which carries a variable interest rate of prime, with a floor of 4.99%. The line of credit was renewed on January 1, 2025 and matures January 1, 2026. 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 required the Company (i) to obtain bank approval for capital expenditures in excess of $5,000 during the term of the loan and (ii) to obtain bank approval prior to its funding of any acquisition. On October 1, 2023, 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 provided 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 3.50% 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 matured on October 1, 2024. As of October 31, 2024, the Company had not purchased any equipment pursuant to the $1,500 commitment.

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At December 31, 2024, the Company had cash totaling $7,548 compared to cash totaling $9,175 at December 31, 2023. Cash provided by operations was $5,584. Cash disbursements from investing activity was $6,576. Cash repayments on borrowings was $635. The decrease in cash is primarily the result of cash used for capital expenditures, specifically the expansion of the manufacturing facility in North Carolina.

Capital spending, including financed additions, increased from $5,010 in 2023 to $6,629 in 2024. Capital expenditures in 2024 were primarily related to spending for the expansion of the North Carolina production facility and new manufacturing equipment. The Company anticipates capital spending for 2025 to be approximately $5,000, which includes forms for increased production capacity, and miscellaneous manufacturing equipment. Anticipated capital expenditures excludes acquisitions.

The Company's 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 affect the interest paid by the Company if new debt is obtained, or an available line of credit is drawn upon, with a variable interest rate.

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 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 2024 and 2023 were 88 and 113 days, respectively. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company’s operations for at least the next 12 months.

The Company’s accounts receivable balance, net of allowance for credit losses, at December 31, 2024 was $19,420, compared to accounts receivable balance, net of allowance for credit losses, of $17,209 at December 31, 2023. The increase is primarily the result of increased revenue. The Company expects DSO to trend downwards, with increased collection efforts, although no assurance can be provided.

The Company’s inventory at December 31, 2024 was $6,677 and at December 31, 2023 was $5,150, an increase of $1,528. The annual inventory turns for 2024 and 2023 were 10.0 and 15.0, respectively.

Critical Accounting Policies and Estimates

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.

Allowance for Credit Losses-The Company evaluates the adequacy of its allowance for credit losses 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, macro-economic conditions, 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 an 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.

Over-Time Revenue Recognition-The Company recognizes revenue on the sale of its standard precast concrete products, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. 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 trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. 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.

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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 affected by inflation in 2024 and 2023, particularly in the purchases of labor costs will increase in 2025, although no assurance can be given regarding future pricing or costs.

Backlog

As of March 3, 2025, the Company's sales backlog was approximately $59.5 million as compared to approximately $60.8 million at approximately the same time in 2024. It is estimated that most of the projects in the sales backlog will be produced within 12 months, but a few will be produced over multiple years. The backlog remained consistent with the prior year level due to continued sales efforts for products to be produced at all three manufacturing facilities, as well as consistent sales efforts in barrier rentals. 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 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 2024 and 2023, 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 continuous improvement by 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 2025. 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.

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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.

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 outside of the Company’s 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.

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Overview

Overall, the Company’s financial bottom line performance was essentially equal in 2023 when compared to 2022. The Company had net income for 2023 of $795 compared to net income of $800 for 2022. Total revenue increased by $9,449 to $59,580 in 2023 from $50,131 in 2022. The increase in sales is mainly from an increase in SlenderWall, soundwall, and miscellaneous wall sales. Fourth quarter 2023 revenues were $16,389 compared to $14,487 in the fourth quarter 2022. The increase in revenue for the fourth quarter 2023 as compared to the fourth quarter 2022 was primarily due to an increase in barrier rental and an increase in soundwall sales.

Cost of sales as a percentage of revenue, not including royalties, increased to 86% in 2023 compared to 85% in 2022 due to additional costs, approximately $400, incurred for the remaking of panels for a specific project in the second quarter of 2023. Cost of sales as a percentage of revenue, not including royalties, remained flat at 85% for the fourth quarter 2023 as compared to the fourth quarter 2022.

Operating income was $1,118 for 2023, as compared to $854 for 2022. Operating expenses for 2023 was $9,534 compared to $8,614 in 2022. The increase is due to increased selling costs associated with additional sales personnel and increased general and administrative costs due to increased insurance costs for a specific project in New York. Total operating expense was $2,580 for both the fourth quarter 2023 and the fourth quarter 2022.

Income tax expense for 2023 was $528, or an effective tax rate of 40.0%, as compared to $145, or an effective tax rate of 15.4% for 2022, adversely affecting net income in 2023. The increase was mainly due to an increase in state tax liability for a true-up of state tax expense.

As of March 12, 2024, the Company’s sales backlog was approximately $60.8 million, as compared to approximately $52.4 million around the same time in the prior year. It is estimated that most of the projects in the current sales backlog will be produced within 12 months, but a few will be produced over multiple years. The Company anticipates greater sales volumes throughout 2024, although no assurance can be provided. The Company also anticipates funding related to the Infrastructure Investment and Jobs Act to begin coming through the state and local governments in the latter half of 2024 and beyond to further promote growth in the revenue backlog related to the highway and transportation markets, although no assurance can be provided. The Company continues to increase marketing and sales efforts towards SlenderWall sales and barrier rentals, in line with long-term strategic objectives.

Results of Operations

Year ended December 31, 2023 compared to the year ended December 31, 2022

For the year ended December 31, 2023, the Company had total revenue of $59,580 compared to total revenue of $50,131 for the year ended December 31, 2022, an increase of $9,449 or 19%. 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 barriers, 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, 2023 and 2022 (in thousands):

The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous 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, and shipping and installation revenue are recognized as revenue at a point in time.

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Soundwall Sales – Soundwall panel sales increased by 86% in 2023 compared to 2022. The increase is mainly due to higher production volumes at the North Carolina and South Carolina plants reflecting larger soundwall projects than in the prior period. The Company expects soundwall panel sales to be similar in 2024 as compared to 2023, although no assurance can be provided.

Architectural Sales – Architectural panel sales decreased by 74% in 2023 compared to 2022. The decrease is from the completion of two architectural projects in the third quarter of 2022. Architectural sales are expected to be higher during 2024, as compared to 2023, although no assurance can be provided.

SlenderWall Sales – SlenderWall panel sales increased by 257% in 2023 compared to 2022. The increase is due to two projects being produced consecutively throughout 2023 in comparison to a single project in 2022, which production was completed in the first quarter of 2022. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor. SlenderWall sales are expected to be lower during 2024, as compared to 2023.

Miscellaneous Wall Sales – Miscellaneous wall sales are highly customized precast concrete products or retaining and lagging panels that do not fit other product categories. Miscellaneous wall sales increased by 85% in 2023 when compared to 2022 due to the increased amount of wall panel projects in Virginia and increased retaining wall projects in South Carolina. Miscellaneous sales are expected to trend similar in 2024, as compared to 2023, although no assurance can be provided.

Barrier Sales – Barrier sales increased by 17% in 2023 when compared to 2022. The increase is due to large barrier projects at all three manufacturing facilities that had significant production volumes in the first and third quarters of 2023. Barrier sales are expected to trend lower in 2024 than previous years as the Company continues to shift from barrier sales to barrier rentals.

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 increased by 15% in 2023 as compared to 2022 due to increased sales at all locations, reflecting general product sale fluctuations. Building and restroom sales are expected to continue to trend similar during 2024 as compared to 2023, although no assurance can be provided.

Utility Sales – Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales increased by 41% in 2023 compared to 2022. The increase is related to the increase in the market for dry utility vaults to support the growth in data centers. Utility sales are expected to trend similar during 2024 as compared to 2023, although no assurance can be provided.

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 2023, miscellaneous product sales increased by 73% when compared to 2022. The change is mainly attributed to specialty products produced at the South Carolina plant throughout 2023. Miscellaneous product sales are expected to trend lower during 2024 as compared to 2023, although no assurance can be provided.

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Barrier Rentals – Barrier rentals decreased by 3% in 2023 as compared to 2022. Revenue from the Company’s core rental barrier fleet decreased by 43% in 2023 as compared to 2022. The decrease in barrier rental revenue from the core rental barrier fleet was due to additional revenue recognized in the prior period related to the barrier buy-back agreement, which was fully recognized as of December 31, 2022. Additionally, the decrease is related to a temporary slowdown in barrier rental projects during the first half of 2023, however the Company saw a significant increase in projects during the fourth quarter of 2023. The decrease in barrier rental revenue from the core rental in the current year, was offset, in part, by an increase in barrier rental revenue from special barrier projects. Barrier rental revenue from special projects increased 157% in 2023 as compared to 2022. As indicated above, the Company is continuing to shift its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet that occurred during 2022. Barrier rental revenue, excluding revenue from special barrier projects, is expected to trend higher in 2024 as compared to barrier rental revenue, excluding revenue from special barrier projects, in 2023, as funding increases related to the Infrastructure Investment and Jobs Act, although no assurance can be given.

Royalty Income – Royalties increased by 5% in 2023 as compared to 2022. The increase in royalties is mainly due to the increase in barrier royalties during 2023 compared to 2022. As funding increases related to the Infrastructure Investment and Jobs Act, the Company expects 2024 royalties to increase compared to 2023, 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 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 11% for 2023 when compared to 2022. The decrease is mainly attributed to the decrease in shipping and installation of SlenderWall and architectural panels. This is associated with the decreased production of SlenderWall and architectural panels that occurred in the third and fourth quarters of 2022 that would typically be shipped and installed throughout 2023.

Cost of Sales – Total cost of sales for the year ended December 31, 2023 was $48,928, an increase of $8,266, or 20%, from $40,662 for the year ended December 31, 2022. Total cost of sales as a percentage of total revenue, not including royalties, increased to 86% for the year ended December 31, 2023 from 85% for the year ended December 31, 2022. The increase in cost of sales as a percentage of revenue, not including royalties, is mainly due to additional costs incurred, approximately $400, for the production of panels remade for one specific project in the second quarter of 2023. To a lesser extent, the margins for the year ended December 31, 2023 were negatively impacted by the decrease in revenues derived from barrier rental revenue, which carry higher margins than product sales. Higher revenue levels in 2023 than in 2022 had a favorable affect on margins reflecting the absorption of fixed overhead costs. Increased material and labor costs also affected margins for the year ended December 31, 2023 as compared to the same period in 2022.

General and Administrative Expenses – For the year ended December 31, 2023, the Company's general and administrative expenses increased by $439, or 8%, to $5,990 from $5,551 during the same period in 2022. The increase is mainly attributed to increased insurance costs for a specific project in New York. The Company previously reported a loss due to a wire fraud incident in the second quarter of 2023. The Company recovered additional funds in the fourth quarter of 2023 resulting in a net loss of $25 for the full year 2023. General and administrative expenses for the year ended December 31, 2023 also increased over the prior year due to an increase in audit fees and an increase in salaries and wages.

Selling Expenses – Selling expenses for the year ended December 31, 2023 increased by $480, or 16%, to $3,544 from $3,064 for the year ended December 31, 2022. Selling expenses increased during 2023 due to additional salespersons hired, increased commissions related to the increased sales, and increased spending for advertising. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals.

Operating Income – The Company had operating income for the year ended December 31, 2023 of $1,118 compared to operating income of $854 for the year ended December 31, 2022, an increase of $264, or 31%. The increase in operating income was mainly due to the increase in gross profit and decrease in operating expenses as a percent of revenue.

Income Tax Expense – The Company had income tax expense of $528 for the year ended December 31, 2023 compared to income tax expense of $145 for the year ended December 31, 2022. The Company had an effective rate of 40.0% for the year ended December 31, 2023 compared to an effective rate of 15.4% for the same period in 2022. The increase in the effective tax rate is attributed to the increase in the Company’s state tax liability for a true-up of state tax expense.

Net Income – The Company had net income of $795 for the year ended December 31, 2023, compared to net income of $800 for the same period in 2022. The basic and diluted earnings per share was $0.15 for 2023 compared to basic and diluted earnings per share of $0.15 for the year ended December 31, 2022. There were 5,258 basic and 5,292 diluted weighted average shares outstanding in 2023, and 5,233 basic and 5,253 diluted weighted average shares outstanding in 2022.

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Liquidity and Capital Resources

The Company financed its capital expenditures for 2023 with cash balances on hand. The Company had $5,789 of debt obligations at December 31, 2023, of which $636 is scheduled to mature within twelve months. During the twelve months ended December 31, 2023, the Company made repayments of outstanding debt in the amount $627.

The Company has a mortgage note payable to Summit Community Bank (the “Bank”) for the construction of its 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, 2023 was $1,398.

The Company also has a note payable to the Bank in the amount of $2,701. The loan is collateralized by a first lien position on the Midland, VA plant, 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, 2023 was $1,814.

On February 10, 2022, the Company completed the financing for its acquisition of certain real property in Midland, VA from the fourth quarter of 2021, totaling approximately 29.8 acres, with a note payable to the Bank in the amount of $2,805. The loan is collateralized by a first lien position on the related real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months for $21. The loan matures on February 10, 2037. The balance of the note payable on December 31, 2023 was $2,547.

The Company additionally has two smaller installment loans with annual interest rates of 2.90% and 3.99%, maturing in 2025, with balances totaling $29.

Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $5,000 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, 2023.

In addition to the notes payable discussed above, the Company has a $5,000 line of credit with the Bank with no balance outstanding as of December 31, 2023. The line of credit is evidenced by a commercial revolving promissory note, which carries a variable interest rate of prime, with a floor of 3.50%, and matures on October 1, 2024. 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 $5,000 during the term of the loan and (ii) to obtain bank approval prior to its funding of any acquisition. On October 1, 2023, 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 3.50% 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 1, 2024. As of December 31, 2023, the Company had not purchased any equipment pursuant to the $1,500 commitment.

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At December 31, 2023, the Company had cash totaling $9,175 compared to cash totaling $6,726 at December 31, 2022. The increase in cash is primarily the result of cash provided from operations, more specifically related to the cash flow from barrier rentals in addition to an increase in customer deposits. Investing activities used $4,664 in cash primarily for the development of a storage lot for the barrier rental fleet and the purchase of a new batch plant system in South Carolina. Financing activities used $619 in cash in 2023 related to the repayment of notes payable throughout 2023.

Capital spending, including financed additions, decreased from $5,264 in 2022 to $5,010 in 2023. Capital expenditures in 2023 were primarily related to spending for the yard development for a storage lot for the barrier rental fleet, a new batch plant system for the South Carolina manufacturing facility, and the completion of the barrier buy-back. The Company anticipates capital spending for 2024 to be approximately $5,000, which includes expansion of the North Carolina manufacturing facility, soundwall forms for increased production capacity, and miscellaneous manufacturing equipment. Anticipated capital expenditures excludes acquisitions.

The Company's 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 affect the interest paid by the Company if new debt is obtained, or the available line of credit is drawn upon, with a variable interest rate.

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 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 2023 and 2022 were 113 and 99 days, respectively. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company’s operations for at least the next 12 months.

The Company’s accounts receivable balance, net of allowance for credit losses, at December 31, 2023 was $17,209, compared to accounts receivable balance, net of allowance for doubtful accounts, of $16,223 at December 31, 2022. The increase is primarily the result of increased revenue and to a lesser extent, lagging effects of turnover of the accounts receivable position throughout the later part of 2022 and through the first quarter of 2023. The Company expects DSO to trend downwards, with increased collection efforts, although no assurance can be provided.

The Company’s inventory at December 31, 2023 was $5,150 and at December 31, 2022 was $3,818, an increase of $1,331. The annual inventory turns for 2023 and 2022 were 15.0 and 14.1, respectively.

Critical Accounting Policies and Estimates

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.

Allowance for Credit Losses-The Company evaluates the adequacy of its allowance for credit losses 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, macro-economic conditions, 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 an 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.

Over-Time Revenue Recognition-The Company recognizes revenue on the sale of its standard precast concrete products, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. 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 trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. 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.

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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 affected by inflation in 2023 and 2022, particularly in the purchases of certain raw materials such as cement, aggregates, and steel, and with labor costs. The Company believes that raw material pricing and labor costs will increase in 2024, although no assurance can be given regarding future pricing or costs.

Backlog

As of March 12, 2024, the Company's sales backlog was approximately $60.8 million as compared to approximately $52.4 million at approximately the same time in 2023. It is estimated that most of the projects in the sales backlog will be produced within 12 months, but a few will be produced over multiple years. The increase in backlog was due to an increase in orders for products to be produced at all three manufacturing facilities, as well as an increase in the barrier rental backlog, as compared to the prior year. 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 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 2023 and 2022, 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 continuous improvement by 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 2024. 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.

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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.

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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 outside of the Company’s 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 had previously experienced an adverse impact to its business by a reduction in revenues in 2020 from that of 2019, a reduction in backlog during 2020 from that in 2019, lower production volumes, employee absences during 2020 and 2021, and bidding restrictions within certain key states such as Maryland and North Carolina. The Company is currently experiencing minor delays in receipt of materials through its 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 had been impacted at all locations in prior years, but this impact has substantially diminished in the current reporting year, but no assurance can be provided as to future impacts, particularly in view of potential 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 had previously 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 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 future years.

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.

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Overview

Overall, the Company’s financial bottom line performance was lower in 2022 when compared to 2021. The Company had net income for 2022 of $800 compared to net income of $7,570 for 2021. Sales decreased by $511 to $50,131 in 2022 from $50,642 in 2021. The decrease in sales is mainly from a decrease in barrier rentals and, to a lesser extent, a decrease in soundwall sales. The decrease in barrier rentals is attributed to a decrease in barrier rentals from short-term special barrier rental projects. Despite the decrease in total barrier rentals, barrier rental revenue from the core rental fleet increased 11% for the year ended December 31, 2022 from the year ended December 31, 2021. The decrease in soundwall sales was due to delays in approvals of customer drawings and therefore delays in production. Royalty income and shipping and installation revenue also increased in 2022 as compared to 2021. The increase in cost of goods sold as a percentage of revenue, not including royalties, for 2022 compared to 2021 is due to increased material and labor costs. Additionally, there were more short-term special barrier rental projects that occurred throughout 2021 than 2022, which carry higher margins than product sales. Operating expenses for 2022 increased over 2021 mainly due to increased selling costs associated with additional sales personnel and an increase in bad debt expense. Fourth quarter 2022 revenues were $14,487 compared to $10,017 in the fourth quarter 2021. The increase in revenue for the fourth quarter 2022 as compared to the fourth quarter 2021 was primarily due to an increase in barrier sales and an increase in shipping and installation. As of March 13, 2023, the Company’s sales backlog was approximately $52.4 million, as compared to approximately $29.0 million around the same time in the prior year. The Company anticipates greater sales volumes throughout 2023, although no assurance can be provided. The Company continues to increase marketing and sales efforts towards SlenderWall sales and barrier rentals, in line with long-term strategic objectives.

Results of Operations

Year ended December 31, 2022 compared to the year ended December 31, 2021

For the year ended December 31, 2022, the Company had total revenue of $50,131 compared to total revenue of $50,642 for the year ended December 31, 2021, a decrease of $511 or 1%. 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 barriers, 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, 2022 and 2021 (in thousands):

The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous 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, and shipping and installation revenue are recognized as revenue at a point in time.

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Soundwall Sales – Soundwall panel sales decreased by 49% in 2022 compared to 2021 primarily due to decreased production during 2022 at all facilities. Production for several projects concluded towards the end of 2021 at all facilities. Additionally, the Company experienced delays in customer drawing approvals throughout 2022 causing delays in production. The Company expects soundwall panel sales to be similar in 2023 as compared to 2022, although no assurance can be provided.

Architectural Sales – Architectural panel sales decreased by 13% in 2022 compared to 2021. The Company was awarded a large architectural project, which began production in the fourth quarter of 2020 and the majority of production occurred in 2021. Architectural sales are expected to decrease during 2023, as compared to 2022, with an anticipated shift to more SlenderWall sales, although no assurance can be provided.

SlenderWall Sales – SlenderWall panel sales decreased by 17% in 2022 compared to 2021. The decrease is mainly attributable to one large project, which started production in the second quarter of 2021 and concluded in the second quarter of 2022. Currently, the Company has the largest quantity of bids out for the SlenderWall product in history and expects to be awarded multiple projects in the near future. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor.

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 increased by 48% in 2022 when compared to 2021 due to the increased amount of retaining wall projects in production. Miscellaneous sales are expected to trend similar in 2023, as compared to 2022, although no assurance can be provided.

Barrier Sales – Barrier sales increased by 43% in 2022 when compared to 2021. The main reason for the increase is due to large barrier projects in North Carolina and South Carolina. The Company continues to focus on shifting barrier sales to barrier rentals in the Delaware to Virginia region. Barrier sales are expected to trend lower in 2023 than previous years as the Company continues to shift from barrier sales to barrier rentals.

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 increased by 35% in 2022 as compared to 2021 due to increased sales at all locations. Building and restroom sales are expected to continue to trend similar during 2023 as compared to 2022, although no assurance can be provided.

Utility Sales – Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales decreased by 18% in 2022 compared to 2021. The Company continues to competitively bid on utility projects to gain market share and has recently won multiple data center projects increasing the sales volume of dry utility vaults. Utility sales are expected to trend similar during 2023 as compared to 2022, although no assurance can be provided.

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 2022, miscellaneous product sales increased by 35% when compared to 2021. The change is mainly attributed to specialty products produced at the South Carolina plant throughout 2022. Miscellaneous product sales are expected to trend lower during 2023 as compared to 2022, although no assurance can be provided.

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Barrier Rentals – Barrier rentals decreased by 34% in 2022 as compared to 2021. While both 2022 and 2021 barrier rentals included short-term special projects, 2022 had less rental revenue from short-term special barrier projects. As indicated above, the Company is continuing to shift its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet that occurred during 2022. Barrier rental revenue, excluding revenue from special barrier projects, is expected to trend higher in 2023 as compared to barrier rental revenue, excluding revenue from special barrier projects, in 2022, although no assurance can be given.

Royalty Income – Royalties increased by 13% in 2022 as compared to 2021. The increase in royalties is mainly due to the increase in barrier royalties during 2022 compared to 2021. Infrastructure spending continues to drive royalties, and the Company anticipates 2023 royalties to increase compared to 2022, 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 site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set® building at a customers' site, setting highway barrier, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenues increased by 33% for 2022 when compared to 2021. The increase is mainly attributed to the increase in shipping and installation of SlenderWall and architectural panels. This is associated with the increased production of SlenderWall and architectural panels that occurred in the third and fourth quarters of 2021.

Cost of Goods Sold – Total cost of goods sold for the year ended December 31, 2022 was $40,662, an increase of $4,440, or 12%, from $36,222 for the year ended December 31, 2021. Total cost of goods sold as a percentage of total revenue, not including royalties, increased to 85% for the year ended December 31, 2022 from 75% for the year ended December 31, 2021. The increase in cost of goods sold as a percentage of revenue, not including royalties, is mainly due to the decrease in short-term special barrier rental projects, which carry higher margins than standard barrier rental projects due to the complexity and risk of the projects. Further, cost of goods sold for the year ended December 31, 2022 increased, as compared to the same period in 2021, due to inflationary impacts on material and labor costs.

General and Administrative Expenses – For the year ended December 31, 2022, the Company's general and administrative expenses increased by $135, or 2%, to $5,551 from $5,416 during the same period in 2021. The increase is mainly attributed to an increase in bad debt expense driven by the increase in accounts receivable. The increase was partially offset by a decrease in salaries and wages. General and administrative expense as a percentage of total revenue was 11% for the years ended December 31, 2022 and 2021.

Selling Expenses – Selling expenses for the year ended December 31, 2022 increased by $228, or 8%, to $3,064 from $2,836 for the year ended December 31, 2021. Selling expenses increased during 2022 due to additional salespersons hired and increased advertising expenses. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals.

Operating Income – The Company had operating income for the year ended December 31, 2022 of $854 compared to operating income of $6,168 for the year ended December 31, 2021, a decrease of $5,314, or 86%. The decrease in operating income was mainly due to the decrease in gross profit associated with the decrease in total revenue deriving from barrier rentals. Operating results for 2022 were also adversely impacted by rising costs of material and labor due to inflation.

Interest Expense – Interest expense was $260 for the year ended December 31, 2022 compared to $190 for the year ended December 31, 2021. The increase of $70, or 37%, was due primarily to the increased level of indebtedness from the financing that occurred in the first quarter of 2022 for the real property acquired in the fourth quarter 2021.

Income Tax Expense – The Company had income tax expense of $145 for the year ended December 31, 2022 compared to income tax expense of $1,524 for the year ended December 31, 2021. The Company had an effective rate of 15.4% for the year ended December 31, 2022 compared to an effective rate of 16.8% for the same period in 2021. The decrease in the effective tax rate is attributed to current year tax credits and a decrease in the Company’s state tax liability.

Net Income – The Company had net income of $800 for the year ended December 31, 2022, compared to net income of $7,570 for the same period in 2021. Net income in 2021 included a gain of $2,692 for forgiveness of a Paycheck Protection Program loan. The basic and diluted earnings per share was $0.15 for 2022 compared to basic and diluted earnings per share of $1.45 for the year ended December 31, 2021. There were 5,233 basic and 5,253 diluted weighted average shares outstanding in 2022, and 5,205 basic and 5,232 diluted weighted average shares outstanding in 2021.

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Liquidity and Capital Resources

The Company financed its capital expenditures requirements for 2022 with cash balances on hand and notes payable to a bank. The Company had $6,416 of debt obligations at December 31, 2022, of which $626 is scheduled to mature within twelve months. During the twelve months ended December 31, 2022, the Company made repayments of outstanding debt in the amount $581 and received $2,805 in proceeds of borrowings related to the financing that occurred in the first quarter of 2022 for the real property acquired during the fourth quarter of 2021.

The Company has a mortgage note payable to Summit Community Bank (the “Bank”) for the construction of its 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, 2022 was $1,609.

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, 2022 was $2,064.

On February 10, 2022, the Company completed the financing for its prior acquisition of certain real property in Midland, VA totaling approximately 29.8 acres with a note payable to the Bank in the amount of $2,805. The loan is collateralized by a first lien position on the related real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months for $21. The loan matures on February 10, 2037. The balance of the note payable on December 31, 2022 was $2,692.

The Company additionally has two smaller installment loans with annual interest rates of 2.90% and 3.99%, maturing in 2025, with balances totaling $51.

Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $5,000 and must maintain tangible net worth of $10,000. The Company received a special exception to the capital expenditure covenant from the Bank to purchase barrier during 2022 for $5,000 (see Note 7, Commitments and Contingencies, of the Financial Statements). The Company is in compliance with all covenants pursuant to the loan agreements as of December 31, 2022.

In addition to the notes payable discussed above, the Company has a $5,000 line of credit with the Bank with no balance outstanding as of December 31, 2022. The line of credit is evidenced by a commercial revolving promissory note, which carries a variable interest rate of prime, with a floor of 3.50%, and matures on October 1, 2023. 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 $5,000 during the term of the loan and (ii) to obtain bank approval prior to its funding of any acquisition. On October 1, 2022, 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 3.50% 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 1, 2023. As of December 31, 2022, the Company had not purchased any equipment pursuant to the $1,500 commitment.

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At December 31, 2022, the Company had cash totaling $6,726 compared to cash totaling $13,492 at December 31, 2021. The decrease in cash is primarily the result of higher accounts receivable at December 31, 2022 than at December 31, 2021 and from investing activities which used $2,631 in cash primarily for the purchase of rental barrier, manufacturing equipment, and a vehicle. Financing activities provided $2,199 in cash in 2022 mainly from the financing of real property purchased in the fourth quarter of 2021.

Capital spending, including financed additions, decreased from $5,367 in 2021 to $5,264 in 2022. Capital expenditures in 2022 were primarily related to spending for the buy-back of barrier for the barrier rental fleet. The Company anticipates capital spending for 2023 to be approximately $5,000, which includes a new batch plant system, completion of yard development, completion of the barrier buy-back, and miscellaneous manufacturing equipment. Anticipated capital expenditures excludes acquisitions and plant expansions.

The Company's 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 affect the interest paid by the Company if new debt is obtained, or the available line of credit is drawn upon, with a variable interest rate.

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 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 2022 and 2021 were 99 and 91 days, respectively. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company’s operations for at least the next 12 months.

The Company’s accounts receivable balances, net of allowance for doubtful accounts, at December 31, 2022 was $16,223, compared to $10,013 at December 31, 202. The increase is primarily the result of turnover of the accounts receivable position throughout the later part of 2022 until the first quarter of 2023. The Company expects accounts receivable balances to trend downwards, beginning in the second quarter of 2023, with increased collection efforts as a result of the fulfillment of the accounts receivable position, although no assurance can be provided.

The Company’s inventory at December 31, 2022 was $3,818 and at December 31, 2021 was $2,845, an increase of $974. The annual inventory turns for 2022 and 2021 were 14.1 and 15.4, respectively. Finished goods inventory slightly increased for 2022 as compared to 2021.

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, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. 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 trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. 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.

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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 affected by inflation in 2022 and 2021, particularly in the purchases of certain raw materials such as cement, aggregates, and steel, and with labor costs. The Company believes that raw material pricing and labor costs will increase in 2023, although no assurance can be given regarding future pricing or costs.

Backlog

As of March 13, 2023, the Company's sales backlog was approximately $52.4 million as compared to approximately $29.0 million at approximately the same time in 2022. It is estimated that most of the projects in the sales backlog will be produced within 12 months, but a few will be produced over multiple years. The increase in backlog was due to an increase in orders for products to be produced at all three manufacturing facilities, as well as an increase in the barrier rental backlog, as compared to the prior year. 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 2022 and 2021, 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 continuous improvement by 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 2023. 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.

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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.

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 outside of the Company’s 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.

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The full impact of the COVID-19 outbreak, including a recent resurgence in the United States, 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 had previously experienced an adverse impact to its business by a reduction in revenues in 2020 from that of 2019, a reduction in backlog during 2020 from that in 2019, lower production volumes, employee absences during 2020 and 2021, and bidding restrictions within certain key states such as Maryland and North Carolina. The Company is currently experiencing delays in receipt of materials through its supply chain. The Company may be further negatively impacted in the following respects:

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 future years.

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.

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Overview

Overall, the Company’s financial bottom line performance was significantly higher in 2021 when compared to 2020. The Company had net income for 2021 in the amount of $7,570 compared to net income of $2,665 for 2020. Sales increased by $6,780 to $50,642 in 2021 from $43,862 in 2020. The increase in sales is mainly from barrier rentals, which included multiple short-term special barrier rental projects in the first quarter 2021 and, to a lesser extent, an increase in linear feet rented over the prior year of the core rental fleet. Future barrier rental revenues are not expected to continue to trend at the same rate as in the first quarter of 2021 due to the nature and frequency of the short-term special barrier projects, although the Company anticipates continued growth of core rental revenues. Product sales, royalty income, and shipping and installation revenue also increased in 2021 as compared to 2020. The significant increase in barrier rentals also favorably impacted gross margins, excluding royalties, with an increase to 25% in 2021 from 22% in 2020. Operating expenses for 2021 increased over 2020 mainly due to increased non-cash stock compensation expense and increased selling costs associated with additional sales personnel. Fourth quarter 2021 revenues were $10,017 compared to $11,073 in the fourth quarter 2020. The net income for the fourth quarter 2021 was $24 compared to $713 in the fourth quarter 2020. The decrease in revenue and net income for the fourth quarter 2021 as compared to the fourth quarter 2020 was primarily due to one-time special projects occurring in the fourth quarter 2020, delays in customer approvals for production, and to a lesser extent an increase in material and labor costs due to inflationary factors. The Company expects the first quarter 2022 to experience similar inflationary factors and customer approval delays as the fourth quarter 2021. With the increase in backlog in March 2022, as compared to the prior year, from approximately $19.6 million to $29.0 million, the Company anticipates greater sales volumes in the second and third quarter 2022, although no assurance can be provided. The Company continues to increase marketing and sales efforts towards SlenderWall sales and barrier rentals, in line with long-term strategic objectives.

Results of Operations

Year ended December 31, 2021 compared to the year ended December 31, 2020

For the year ended December 31, 2021, the Company had total revenue of $50,642 compared to total revenue of $43,862 for the year ended December 31, 2020, an increase of $6,780, or 15%. 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, 2021 and 2020 (in thousands):

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The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous 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, and shipping and installation revenue are recognized as revenue at a point in time.

Soundwall Sales – Soundwall panel sales slightly increased by 7% in 2021 compared to 2020 due primarily to increased production during 2021 at the North Carolina and South Carolina facilities as compared to 2020, and continued production at the Virginia plant for the largest soundwall contract in Company history, which was initially awarded during 2018. The Company expects soundwall panel sales to be similar in 2022 as compared to 2021, although no assurance can be provided.

Architectural Sales – Architectural panel sales increased by 34% in 2021 compared to 2020. The Company was awarded a large architectural project which began production in the fourth quarter of 2020, with the majority of production occurring in 2021. Architectural sales are expected to decrease during 2022, as compared to 2021, with an anticipated shift to more SlenderWall sales, although no assurance can be provided.

SlenderWall Sales – SlenderWall panel sales increased by 89% in 2021 when compared to 2020. 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 increase is mainly attributable to one large project which started production at the end of the second quarter 2021. Currently, the Company has the largest quantity of bids out for the SlenderWall product in history and expects to be awarded multiple projects in the near future. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor.

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 decreased by 30% in 2021 when compared to 2020 due to the decreased amount of retaining wall projects in production. Miscellaneous sales are expected to trend similar in 2022, as compared to 2021, although no assurance can be provided.

Barrier Sales – Barrier sales decreased by 15% in 2021 when compared to 2020. The main reason for the decrease is due to reduced barrier production demand in North Carolina and South Carolina, combined with the increase in the core fleet of barrier rentals. Aligning with the Company’s strategy to shift to barrier rentals versus barrier sales in the Delaware to Virginia region, barrier sales are expected to trend lower in 2022 than previous years.

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 slightly increased by 3% in 2021 as compared to 2020. Building and restroom sales are expected to continue to trend similar during 2022 as compared to 2021, although no assurance can be provided.

Utility Sales – Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales increased by 88% in 2021 compared to 2020. The Company continues to competitively bid on utility projects to gain market share and has recently won multiple data center projects increasing the sales volume of dry utility vaults. Utility sales are expected to increase for 2022 as compared to 2021, although no assurance can be provided.

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 2021, miscellaneous product sales decreased by 22% when compared to 2020. The change is mainly attributed to specialty concrete blocks produced at the North Carolina plant which began in 2020 and significantly decreased during the third quarter 2021. Miscellaneous product sales are expected to decrease in 2022 as compared to 2021, although no assurance can be provided.

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Barrier Rentals – Barrier rentals increased significantly in 2021 as compared to 2020 due to the higher quantity of linear feet rented over the previous year and, to a greater extent, a few short-term special projects during 2021. A substantial portion of the total revenue from these special projects was earned in the first quarter 2021. As indicated above, the Company is shifting its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet beginning in late 2019, and continued plans to significantly increase the fleet during 2022. Future barrier rental revenues are not expected to continue trending at the same rate as in 2021 due to the nature and frequency of the short-term special barrier projects in the early part of that period, however the Company generally expects increased barrier rentals of the core rental fleet for future periods, although no assurance can be given.

Royalty Income – Royalties significantly increased by 31% in 2021 as compared to 2020. The increase in royalties is mainly due to the increase in barrier royalties during 2021 compared to 2020. Infrastructure spending continues to drive royalties, and the Company anticipates 2022 royalties to increase compared to 2021 with the approval of the J-J Hooks barrier in California and Florida, 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 site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set® building at a customers’ site, setting highway barrier, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenues increased by 17% for 2021 when compared to 2020. The increase is mainly attributed to the increase in shipping, setting, and offloading associated with core barrier rentals during 2021 as compared to the prior year.

Cost of Goods Sold – Total cost of goods sold for the year ended December 31, 2021 was $36,222, an increase of $3,402, or 10%, from $32,820 for the year ended December 31, 2020. Total cost of goods sold as a percentage of total revenue, not including royalties, decreased to 75% for the year ended December 31, 2021 from 78% for the year ended December 31, 2020. The decrease in cost of goods sold as a percentage of revenue, not including royalties, is mainly due to the increase in barrier rental revenues, which typically have higher margins than product sales, and the increase in short-term special barrier rental 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, 2021, the Company’s general and administrative expenses increased by $427, or 9%, to $5,416 from $4,989 during the same period in 2020. The increase is mainly attributed to an increase in non-cash stock compensation awarded and vested in 2021 as compared to 2020.

Selling Expenses – Selling expenses for the year ended December 31, 2021 increased by $542, or 24%, to $2,836 from $2,294 for the year ended December 31, 2020. Selling expenses increased during 2021 due to additional salespersons hired and increased advertising expenses. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals.

Operating Income – The Company had operating income for the year ended December 31, 2021 of $6,168 compared to operating income of $3,759 for the year ended December 31, 2020, an increase of $2,409, or 64%. The increase in operating income was mainly due to the increase in gross profit associated with the increase in total revenue, mainly deriving from royalties and barrier rentals. Operating results for the 2020 periods were also adversely affected due to COVID-19 related factors.

Interest Expense – Interest expense was $190 for the year ended December 31, 2021 compared to $217 for the year ended December 31, 2020. The decrease of $27, or 12%, was due primarily to the payoff of two long-term notes during 2021. Interest expense for 2022 is expected to increase, as compared to 2021, with the financing of real property acquired during the fourth quarter 2021.

Income Tax Expense – The Company had income tax expense of $1,524 for the year ended December 31, 2021 compared to income tax expense of $1,127 for the year ended December 31, 2020. The Company had an effective rate of 16.8% for the year ended December 31, 2021 compared to an effective rate of 29.7% for the same period in 2020. The decrease in the effective tax rate is mainly attributed to the exclusion of $2,692 from federal taxable income related to PPP loan forgiveness under section 1106(i) of the CARES Act.

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Net Income – The Company had net income of $7,570 for the year ended December 31, 2021, compared to net income of $2,665 for the same period in 2020. The basic and diluted earnings per share was $1.45 for 2021 compared to basic and diluted earnings per share of $0.51 for the year ended December 31, 2020. There were 5,205 basic and 5,232 diluted weighted average shares outstanding in 2021, and 5,185 basic and 5,187 diluted weighted average shares outstanding in 2020. Profitability for the year ended December 31, 2021 was positively impacted by the forgiveness of the PPP loan (described below in Liquidity and Capital Resources) in the amount of $2,692.

Liquidity and Capital Resources

The Company financed its capital expenditures requirements for 2021 with cash flows from operations, cash balances on hand and notes payable to a bank. The Company had $4,192 of debt obligations at December 31, 2021, of which $468 is scheduled to mature within twelve months. During the twelve months ended December 31, 2021, the Company made repayments of outstanding debt in the amount $793 and received $49 in proceeds of borrowings deriving from the financing of a vehicle. The Company did not draw on the line of credit during the twelve months ended December 31, 2021.

The Company has a mortgage note payable to Summit Community Bank (the “Bank”) for the construction of its 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, 2021 was $1,812.

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, 2021 was $2,304.

Additionally, the Company has 3 smaller installment loans with annual interest rates between 2.9% and 4.5%, maturing between 2022 and 2025, with varying balances totaling $76.

Subsequent to December 31, 2021, on February 10, 2022, the Company completed the financing for its prior acquisition of certain real property in Midland, VA totaling approximately 29.8 acres with a note payable to the Bank in the amount of $2,805. The loan is collateralized by a first lien position on the above-referenced real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months in the amount of $21. The loan matures on February 10, 2037.

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 received a special exception to the capital expenditure covenant from the Bank to purchase certain real property during 2021 in the amount of $3,300. The Company is in compliance with all covenants pursuant to the loan agreements as of December 31, 2021.

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 interest rate per the promissory note, dated April 16, 2020 and executed by the Company in favor of the Bank, was 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 proceeds of the loan were required to be utilized pursuant to the requirements of the PPP, and all or a portion of the loan could be forgiven in accordance with the PPP applicable rules, regulations, and guidelines. On July 9, 2021, the Company received loan forgiveness for the full amount of the loan of $2,692.

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The Company also has a $4,000 line of credit with the Bank with no balance outstanding as of December 31, 2021. 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, 2022. 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, 2021, 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 3.50% 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, 2022. As of December 31, 2021, the Company had not purchased any equipment pursuant to the $1,500 commitment.

At December 31, 2021, the Company had cash totaling $13,492 and no investment securities available for sale compared to cash totaling $8,764 and $1,228 of investment securities available for sale at December 31, 2020. Investment securities at December 31, 2020 consisted of shares of USVAX (a Virginia Bond Fund). In the fourth quarter 2021, the Company sold all of the investment securities. During 2021, the Company’s operating activities provided $9,126 of cash due mainly to operating income, collection of accounts receivable, cash received for deferred revenue, and accrued but unpaid income taxes. In 2021, investing activities used $3,654 in cash primarily for the purchase of additional land in Virginia, the purchase of rental barrier, manufacturing equipment, and a vehicle, partially offset by the sale of the USVAX shares in the fourth quarter 2021. Financing activities used $744 in cash in 2021 mainly as a result of repaying long-term debt.

Capital spending, including financed additions, increased from $2,627 in 2020 to $5,367 in 2021. Capital expenditures in 2021 included spending for additional land in Virginia, rental barrier, manufacturing equipment, and a vehicle. While the Company anticipates capital spending for 2022 to be approximately $8,000, which includes a significant expansion in the barrier rental fleet with approximate costs of $5,000, and approximately $3,000 for yard development and miscellaneous manufacturing equipment, 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 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 affect the interest paid by the Company if new debt is obtained with a variable interest rate.

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 2021 and 2020 were 91 and 89 days, respectively. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company’s operations for at least the next 12 months.

The Company’s inventory at December 31, 2021 was $2,845 and at December 31, 2020 was $2,194, an increase of $651. The annual inventory turns for 2021 and 2020 were 15.4 and 13.9, respectively. Finished goods inventory slightly increased for 2021 as compared to 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.

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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, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. 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 trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. 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.

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 affected by inflation in 2021 and 2020, particularly in the purchases of certain raw materials such as cement and aggregates, steel, and also with labor costs. The Company believes that raw material pricing and labor costs will increase in 2022, although no assurance can be given regarding future pricing or costs.

Backlog

As of March 14, 2022 the Company’s sales backlog was approximately $29.0 million as compared to approximately $19.6 million at approximately the same time in 2021. It is estimated that most of the projects in the sales backlog will be produced within 12 months, but a few will be produced over multiple years. The increase in backlog was due to an increase in orders for products to be produced at all three manufacturing facilities, as well as an increase in the barrier rental backlog, as compared to the prior year. 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.

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The Company continues to evaluate both production and administrative processes, and has streamlined many of these processes through lean activities. During 2021 and 2020, 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 continuous improvement by 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 2022. 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.