SMITH MIDLAND CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Forward-looking statements



This Quarterly Report and related documents include "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act 1934. Forward-looking statements involve known
and unknown risks, uncertainties and other factors which could cause the
Company's actual results, performance (financial or operating), or achievements
expressed or implied by such forward looking statements not to occur or be
realized. Such forward looking statements generally are based upon the Company's
best estimates of future results, performance or achievement, based upon current
conditions and the most recent results of operations. Forward-looking statements
may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "believe," "estimate," "anticipate," "continue," or similar
terms, variations of those terms or the negative of those terms. Potential risks
and uncertainties include, among other things, such factors as:



when the Company had a net profit for the years ended December 31, 2021 and

2020 and the nine months ended September 30, 2022 there is no guarantee

that the Company can remain profitable in future periods; in agreement with

this risk, the Company incurred a net operating loss for the two quarters

ended December 31, 2021 and March 31, 2022

· there can be no guarantee of revenue growth; depending on this risk, the

The company reported lower revenue for the three and nine months ended September

30, 2022 than in the comparable periods of the previous year,

· while we have spent significant funds in recent years to increase

        manufacturing and barrier rental capacity, and plan to continue to
        increase manufacturing capacity, there is no assurance that we will
        achieve significantly greater revenues,

    ·   although the ultimate impact is uncertain at this time, resurgence of the

the coronavirus epidemic could significantly affect the Company’s financial results

condition, liquidity and results of operations. In this regard, the

The company had already experienced the following negative impacts on its

activity: reduction in the order book in 2020 compared to that of 2019,

production volumes, employee absences and bidding restrictions

        certain key states. The Company is continuing to experience delays in
        receipt of materials through its supply chain,

our level of indebtedness has increased considerably in February 2022and our ability

satisfying the same cannot be assured,

our ability to collect accounts receivable may be affected by

the coronavirus epidemic,

the continued availability of financing in the amounts, at the times and

under the conditions required, to support our future activities and our capital

projects,

the extent to which we are successful in developing, acquiring, licensing,

or obtain patents for proprietary products,

changes in economic conditions specific to one or more of our markets

(including the availability of public funds and subsidies for construction),

the activities of the Company during the first nine months of 2022 and for all

        year 2021 were adversely impacted by inflation in the purchase of raw
        materials such as cement and aggregates, steel, and also with labor costs,
        and expects such inflationary factors to continue throughout 2022,

    ·   changes in general economic conditions in our primary service areas,

    ·   adverse weather, which inhibits the demand for our products, or the
        installation or completion of projects,

    ·   our compliance with governmental regulations,

    ·   the outcome of future litigation, if any,

    ·   potential decreases in our year to year contract backlog,

    ·   cybersecurity incidents could disrupt business operations, result in the
        loss of critical and confidential information and adversely impact our
        reputation and results of operations,

our ability to produce and install products on building materials

projects in accordance with the specifications of the contract and within a period that

        meets the contract requirements,

    ·   the cyclical nature of the construction industry,

our exposure to increased interest payments if interest rates

        change, and

    ·   the other factors and information disclosed and discussed in other
        sections of this report.





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Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions that contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Insight; Potential effect of the COVID-19 epidemic



The Company invents, develops, manufactures, markets, leases, licenses, sells,
and installs a broad array of precast concrete products and systems for use
primarily in the construction, highway, utilities, and farming industries. The
Company's customers are primarily general contractors and federal, state, and
local transportation authorities located in the Mid-Atlantic and Northeastern
regions and in parts of the Midwestern and Southeastern regions of the United
States. The Company's operating strategy has involved producing innovative and
proprietary products, including SlenderWall™, a patented, lightweight,
energy-efficient concrete and steel exterior insulated wall panel for use in
building construction; J-J Hooks® Highway Safety Barrier, a positive-connected
highway safety barrier; and Easi-Set® transportable concrete buildings, also
patented. In addition, the Company produces custom order precast concrete
products with various architectural surfaces, as well as generic highway sound
barriers, utility vaults, and farm products such as cattleguards.



The Company was incorporated in Delaware on August 2, 1994. Prior to a corporate
reorganization completed in October 1994, the Company conducted its business
primarily through Smith-Midland Virginia, which was incorporated in 1960 as
Smith Cattleguard Company, a Virginia corporation, and subsequently changed its
name to Smith-Midland Corporation in 1985. The Company's principal offices are
located at 5119 Catlett Road, Midland, Virginia 22728 and its telephone number
is (540) 439-3266. As used in this report, unless the context otherwise
requires, the term the "Company" refers to Smith-Midland Corporation and its
subsidiaries.


As a part of the construction industry, the Company's sales and net income may
vary greatly from quarter to quarter over a given year. Because of the cyclical
nature of the construction industry, many factors not under our control, such as
weather and project delays, affect the Company's production schedule, possibly
causing momentary slowdowns in sales and net income. As a result of these
factors, the Company is not always able to earn a profit for each period,
therefore, please read Management's Discussion and Analysis of Financial
Condition and Results of Operations and the accompanying financial statements
with these factors in mind.


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 may 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 absence, 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:



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 chain issues should our vendors experience hardships and
have to reduce or terminate operations due to the COVID-19 outbreak, affecting
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 previously been
impacted with an effect on operations at all locations, but this impact has
substantially diminished as of the filing date, but no assurance can be provided
as to future impacts, particularly in view of new coronavirus outbreaks;

d) in the event that any of the three states in which we have facilities provide
for the quarantine of our manufacturing employees, our production manufacturing
will be significantly affected;

e) in the event that any of the states in which we sell our products and services may eliminate, cancel or delay projects due to monetary limitations resulting from the COVID-19 outbreak; in this regard, the Company had previously noted a reduction in tendering activity;

(f) reduced state infrastructure budgets due to reduced funding through the gas tax or other funding sources;

g) in the event of an increase in the overall number of payment defaults, which in turn affects the ability of the banking sector to finance projects in which the Company’s products may be used; 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. Given the
daily evolution of the COVID-19 outbreak and the global responses to curb its
spread, the Company is not able to estimate the ultimate effects of the COVID-19
outbreak on its results of operations, financial condition, or liquidity for the
remainder of 2022 or 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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Results of Operations (dollar amounts in thousands, except per share data)



The Company had a net loss of $119 for the first quarter 2022, net income of
$910 for the second quarter 2022, and net income of $5 for the third quarter
2022, resulting in net income of $796 for the nine months ended September 30,
2022. Total revenues for the three and nine month periods ended September 30,
2022 were $11,956 and $35,644 compared to $13,100 and $40,625 for the three and
nine month periods ended September 30, 2021. The decrease in total revenue for
the three month period ended September 30, 2022 from September 30, 2021 is due
to a decrease in SlenderWall and soundwall sales as the Company continued to
experience delays in approvals of customer drawings and therefore delaying
production on certain projects. The decrease in total revenue for the nine month
period ended September 30, 2022 from September 30, 2021 is primarily due to a
decrease in soundwall sales and barrier rentals. The Company continued to
experience delays in approvals of customer drawings for soundwall projects
during the current nine month period, in addition to the prior nine month period
having significant revenues from short-term special barrier rental projects. The
cost of goods sold as a percent of revenue, not including royalties, for the
three and nine months ended September 30, 2022, were 89% and 85%, as compared to
80% and 73% for the three and nine months ended September 30, 2021. The increase
in cost of goods sold as a percentage of revenue, not including royalties, for
the three and nine months ended September 30, 2022, compared to the three and
nine months ended September 30, 2021, is due to increased material and labor
costs. Additionally, reduced production volume during the first nine months of
2022 resulted in reduced absorption of overhead costs. Further, short-term
special barrier rental projects that occurred in the first quarter and third
quarter of 2021, which typically carry higher margins than product sales, also
affected margins for the three and nine month periods ended September 30, 2022
as compared to the same periods in 2021. As of October 21, 2022, the Company's
sales backlog was approximately $51.4 million, as compared to approximately
$28.5 million at the same time in 2021. The 80% backlog growth is primarily
related to large projects awarded at all three manufacturing facilities for
soundwall, SlenderWall, miscellaneous precast products, and barrier.



Three and nine months ended September 30, 2022compared to the three and nine month periods ended September 30, 2021



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® buildings, utility products, and miscellaneous precast
products. The following table summarizes the sales by product type and
comparison for the three and nine month periods ended September 30, 2022, and
2021. As indicated in "Overview; Potential Effect of the COVID-19 Outbreak"
above, should a resurgence of the COVID-19 outbreak cause serious economic harm
in our area of operations, our revenue expectations are unlikely to be
fulfilled.



Revenue by
Type                     Three Months Ended September 30,                  

Nine month period ended September 30,

                  2022          2021       $ Change      % Change         2022         2021       $ Change      % Change
Soundwall
Sales           $     833     $  2,407     $  (1,574 )         (65 )%   $  2,626     $  6,496     $  (3,870 )         (60 )%
Architectural
Panel Sales         1,223          406           817           201 %       3,476        3,843          (367 )         (10 )%
SlenderWall
Sales                  11        1,027        (1,016 )         (99 )%      1,018        1,247          (229 )         (18 )%
Miscellaneous
Wall Sales          1,396          520           876           168 %       2,384        1,804           580            32 %
Barrier Sales         847        1,022          (175 )         (17 )%      4,099        3,578           521            15 %
Easi-Set
Building
Sales               1,523          676           847           125 %       3,086        2,278           808            35 %
Utility Sales         523          891          (368 )         (41 )%      1,655        1,628            27             2 %
Miscellaneous
Sales                 720          256           464           181 %       1,370          994           376            38 %
Total Product
Sales               7,076        7,205          (129 )          (2 )%     19,714       21,868        (2,154 )         (10 )%
Barrier
Rentals             1,369        1,708          (339 )         (20 )%      4,816        8,667        (3,851 )         (44 )%
Royalty
Income                833          676           157            23 %       2,031        1,788           243            14 %
Shipping and
Installation
Revenue             2,678        3,511          (833 )         (24 )%      9,083        8,302           781             9 %
Total Service
Revenue             4,880        5,895        (1,015 )         (17 )%     

15,930 18,757 (2,827) (15)%

Total income $11,956 $13,100 ($1,144) (9)% $35,644 $40,625 ($4,981) (12)%




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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 building sales, utility sales, and shipping and installation
revenue are recognized as revenue at a point in time.



Soundwall Sales - Soundwall sales were significantly lower for the three and
nine month periods ended September 30, 2022, compared to the same periods in
2021. The decrease is mainly due to lower production, as the Company has
temporarily experienced delays in customer drawing approvals. Soundwall sales
are expected to trend slightly higher during the fourth quarter of 2022 as
compared to the third quarter of 2022, although no assurance can be given.



Architectural Panel Sales - Architectural panel sales increased for the three
months ended September 30, 2022, compared to the same period in 2021. The
increase is from a small architectural project that began production in the
second quarter of 2022 and continued throughout the third quarter of 2022.
Architectural sales decreased slightly for the nine month period ended September
30, 2022 compared to the same period in 2021. This decrease is related to
production of a large architectural project that began production in the first
quarter 2021, and concluded during the third quarter 2021. Architectural sales
are expected to trend slightly lower during the fourth quarter of 2022 as
compared to the third quarter of 2022.



SlenderWall Sales - SlenderWall sales decreased for the three and nine months
ended September 30, 2022, as compared to the same period in 2021. A large
SlenderWall project began production in 2021 that concluded during the second
quarter of 2022. With the production of a new SlenderWall project that began
late in the third quarter of 2022, SlenderWall sales are expected to trend
higher in the fourth quarter of 2022 than the third quarter of 2022, although no
assurance can be given. 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 increased for the three and
nine month periods ended September 30, 2022 compared to the same periods in 2021
due to the increased amount of retaining wall projects in production.
Miscellaneous wall sales are expected to trend similarly during the fourth
quarter of 2022 as the first three quarters of 2022, although no assurance
can
be provided.



Barrier Sales - Barrier sales decreased for the three month period ended
September 30, 2022, compared to the same period in 2021. The decrease is related
to the completion of production for a large project in North Carolina during the
second quarter of 2022. Barrier sales increased for the nine month period ended
September 30, 2022 compared to the same period in 2021. The increase is related
to the production of a large project in North Carolina through the second
quarter of 2022. Barrier sales are expected to trend slightly higher during the
fourth quarter of 2022 than the third quarter of 2022 as production begins for a
large barrier project that will be produced out of both the North Carolina
and
South Carolina plants.



Easi-Set® Building Sales - Building and restroom sales increased for the three
and nine month periods ended September 30, 2022, compared to the same period in
2021, mainly due to increased building sales at all manufacturing plants.
Building and restroom sales are expected to continue to trend slightly lower the
remainder of 2022 compared to the first three quarters of 2022.




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Utility Sales - Utility sales decreased for the three month period ended
September 30, 2022, compared to the same period in 2021 and increased for the
nine month period ended September 30, 2022, compared to the same period in 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 similarly for
the remainder of 2022 as compared to the third quarter of 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, concrete blocks, or
small add-on items. Miscellaneous product sales increased for the three and nine
month period ended September 30, 2022, compared to the same period in 2021. The
increase is mainly from the South Carolina facility that began production on a
few smaller jobs. Miscellaneous product sales are expected to be lower for the
fourth quarter of 2022 as compared to the third quarter of 2022.



Barrier Rentals - Barrier rentals decreased for the three and nine month periods
ended September 30, 2022 compared to the same periods in 2021. This decrease is
mainly attributed to short-term special projects that occurred during the first
and third quarters of 2021. Revenue from the Company's core rental barrier fleet
increased by 19% for the nine month period ended September 30, 2022 compared to
the same period in 2021. Due to the infrequent nature of special projects, full
year 2022 barrier rentals are expected to be lower than full year 2021 barrier
rentals. The Company expects increased barrier rentals of the core rental fleet
in the fourth quarter of 2022 with the expansion of the rental fleet, although
no assurance can be provided.



Royalty Income - Royalties increased for the three and nine month periods ended
September 30, 2022, compared to the same periods in 2021. Infrastructure
spending continues to drive royalties, and the Company expects royalties for
2022 to exceed royalty income for the full year 2021, although no assurance
can
be given.



Shipping and Installation - Shipping revenue is recognized when shipping our
products to the customers' final destination. Installation revenue is recognized
when attaching architectural and SlenderWall panels to a building, installing an
Easi-Set® building at customers' sites, or setting any of our other precast
products at a site, specific to the requirements of the owner. Generally, in
subsequent quarters, shipping and installation revenue trends follow the revenue
trends of SlenderWall and architectural panel sales. Shipping and installation
revenue decreased for the three months ended September 30, 2022 compared to the
same period in 2021. The decrease in shipping and installation is associated
with the decreased production of SlenderWall and architectural panels that
occurred in the first and second quarters of 2022. Shipping and installation
revenue increased for the nine months ended September 30, 2022, compared to the
same period in 2021. The increase for the nine month period of 2022 is mainly
attributed to the increase in shipping and installation of SlenderWall and
architectural panels that occurred in the first and second quarters of 2022.
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 as a percent of revenue, excluding
royalties, for the three and nine months ended September 30, 2022, was 89% and
85%, respectively, as compared to 80% and 73% for the three and nine months
ended September 30, 2021. The increase in cost of goods sold as a percentage of
revenue, not including royalties, for the three and nine months ended September
30, 2022, compared to the three and nine months ended September 30, 2021, is due
to the decrease in revenue generated from short-term barrier rental special
projects in 2022, which typically carry higher margins than product sales.
Additionally, cost of goods sold as a percentage of revenue increased due to the
reduced absorption of fixed overhead due to lower production volume. Further,
the margins for both the three and nine month periods ended September 30, 2022
increased, as compared to the same periods in 2021, due to inflationary impacts
on material and labor costs.



General and Administrative Expenses - For the three months ended September 30,
2022, the Company's general and administrative expenses increased by $14 to
$1,229 from $1,215 during the same period in 2021. The minor increase is mainly
attributed to additional administrative costs that occurred during the third
quarter of 2022. For the nine months ended September 30, 2022, the Company's
general and administrative expenses decreased by $83 to $3,797 from $3,880
during the same period in 2021. The decrease in general and administrative
expenses for the nine month period ended September 30, 2022 is mainly attributed
to a decrease in salaries and wages, as management continues to assess and
monitor total general and administrative expenses. General and administrative
expense as a percentage of total revenue was 10% and 9% for the three month
periods ended September 30, 2022, and 2021, respectively, and 11% and 10% for
the nine month periods ended September 30, 2022 and 2021, respectively.




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Selling Expenses - Selling expenses for the three months ended September 30,
2022 increased to $849 from $719 for the same period in 2021, and selling
expenses for the nine months ended September 30, 2022 increased to $2,236 from
$2,010 for the same period in 2021. The increase in selling expenses for the
three and nine month periods ended September 30, 2022 compared to the same
periods in 2021 is due to the hiring of additional salespeople and has driven
the increase in backlog to $51.4 million. 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 (Loss) - The Company had operating income for the three month
period ended September 30, 2022 of $4 compared to operating income of $1,934 for
the same period in 2021. The decrease is mainly due to the increase in cost of
goods sold as a percent of revenue and lower production volume. The Company had
operating income for the nine month period ended September 30, 2022 of $928
compared to operating income of $6,347 for the same period in 2021. The decrease
in operating income is due to a decrease in gross profit associated with lower
product sales, and to a greater extent, a few short-term special barrier rental
projects that occurred during the first and third quarters of 2021.



Interest Expense - Interest expense was $69 and $47 for the three month periods
ended September 30, 2022 and 2021, respectively. Interest expense was $187 and
$145 for the nine month periods ended September 30, 2022 and 2021, respectively.
The Company expects interest expense for 2022 to be higher compared to the full
year of 2021 due to the increased level of indebtedness.



Income Tax Expense (Benefit) - The Company had an income tax benefit of $12 for
the three months ended September 30, 2022, compared to income tax expense of
$442 for the same period in 2021. The Company had income tax expense of $256
with an effective rate of 24% for the nine months ended September 30, 2022
compared to income tax expense of $1,711 with an effective rate of 18% for the
same period in 2021. The rate was lower for the prior nine month period due to
the impact of the PPP loan forgiveness.



Net Income (Loss) - The Company had net income of $5 for the three months ended
September 30, 2022, compared to net income of $3,694 for the same period in
2021. The basic and diluted earnings per share was $0.00 for the three months
ended September 30, 2022, and the basic and diluted earnings per share was $0.71
for the three months ended September 30, 2021. The Company had net income of
$796 for the nine months ended September 30, 2022, compared to net income of
$7,546 for the same period in 2021. The basic and diluted earnings per share was
$0.15 for the nine months ended September 30, 2022 and the basic and diluted
earnings per share was $1.45 for the nine months ended September 30, 2021.
Profitability for the three and nine months ended September 30, 2021 was
positively impacted by the forgiveness of the PPP loan in the amount of $2,692.



Liquidity and capital resources (amounts in thousands of dollars)

Reference is made to “Overview; Potential Effect of the COVID-19 Outbreak” above in the context of the discussion below.



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 loan matures on
October 10, 2029. The balance of the note payable on September 30, 2022 was
$1,660.



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,
$678, was 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 manufacturing 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
for $27. The loan matures on March 27, 2030. The balance of the note payable on
September 30, 2022 was $2,125.




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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 September 30, 2022 was $2,726.



The Company also has two smaller installment loans with annual interest rates of 2.90% and 3.99%, maturing in 2025, with balances totaling $56.



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 5 Commitments
under Item 1 of the Financial Statements). The Company is in compliance with all
covenants pursuant to the loan agreements as of September 30, 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 September 30, 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 September 30,
2022, the Company had not purchased any equipment pursuant to the $1,500
commitment.



On September 30, 2022, the Company had cash totaling $10,808 compared to cash
totaling $13,492 on December 31, 2021. The decrease in cash is primarily the
result of cash absorbed by operations during the nine month period ended
September 30, 2022. More specifically, the Company's accounts receivable
position increased and significant income tax payments were remitted related to
the 2021 tax year during the nine month period ended September 30, 2022. The
Company's cash position will likely be further reduced related to the
significant capital expenditures described in the following paragraph.



Capital spending for the nine months ended September 30, 2022 totaled $3,739 as
compared to $1,210 for the same period in 2021. The 2022 expenditures were
primarily for the buy-back of barrier for the barrier rental fleet. The Company
intends to invest approximately $6,500 for the full year 2022. The total
investment comprises of approximately $5,000 for a significant expansion in the
barrier rental fleet from the barrier buy-back from a customer, approximately
$500 for yard development, and approximately $1,000 for miscellaneous
manufacturing equipment, excluding acquisitions and plant expansions (which none
are anticipated at this time), although no assurance can be provided.
Approximately $2,800 is expected to be paid in the fourth quarter of 2022.
Additional costs of approximately $1,000 for yard development and an additional
$500 for miscellaneous manufacturing equipment is expected to be incurred in the
first quarter of 2023.


The Company’s outstanding notes payable are funded at fixed interest rates. This leaves the Company almost insensitive to fluctuations in interest rates.

The Company's cash flow from operations is affected by production schedules set
by contractors, which generally provide for payment 30 to 90 days after the
products are produced, and with some architectural contracts, retainage may be
held until the entire project is completed. This payment schedule may result in
liquidity challenges for the Company because it must bear a portion of the cost
of production before it receives payment from its customers. The Company's
average days sales outstanding (DSO), excluding the effect of unbilled revenue,
was 99 days for the nine months ended September 30, 2022, compared to 91 days
for the year ended December 31, 2021.




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If actual results regarding the Company's production, sales, and subsequent
collections on customer receivables are materially inconsistent with
management's expectations, the Company may in the future encounter cash flow and
liquidity issues. If the Company's operational performance deteriorates
significantly, it may be unable to comply with existing financial covenants and
could cause defaults and acceleration under its loan agreements and lose access
to the credit facility. 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 was $3,984 on September 30, 2022, and $2,845 on
December 31, 2021, or an increase of $1,139. The increase in inventory is mainly
due to the increase of raw materials inventory on-hand compared to the prior
year. Inventory turnover was 13.8, annualized for the nine months ended
September 30, 2022, compared to 15.4, annualized for the same period in 2021.



Significant Accounting Policies and Estimates

The Company’s significant accounting policies are further described in its Summary of Accounting Policies in the Company’s Consolidated Financial Statements on Form 10-K for the year ended. December 31, 2021. There has been no change since September 30, 2022.


Seasonality



The Company services the construction industry primarily in areas of the United
States where construction activity may be inhibited by adverse weather during
the winter. As a result, the Company may experience reduced revenues from
December through February and realize a more significant part of its revenues
during the other months of the year. The Company may experience lower profits,
or losses, during the winter months, and as such, must have sufficient working
capital to fund its operations at a reduced level until the spring construction
season. The failure to generate or obtain sufficient working capital during the
winter may have a material adverse effect on the Company.



Inflation



Management believes that the Company's operations were affected by inflation
during the three and nine month periods ended September 30, 2022 and for the
full year 2021, 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 continue to increase in 2022,
although no assurance can be given regarding future pricing or costs.



Sales Backlog


From October 24, 2022the Company’s backlog was approximately $51.4 millionagainst approximately $28.5 million on the same date in 2021. It is estimated that the majority of projects in the backlog will be produced within 12 months, with some spanning several years.



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