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INTERIM FINANCIAL REPORTING | 9 Months Ended
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Sep. 30, 2022
INTERIM FINANCIAL REPORTING |
1. INTERIM FINANCIAL REPORTING | 1. INTERIM FINANCIAL REPORTING Basis of Presentation The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we have condensed or omitted certain information and footnote disclosures that are included in our annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, summary of significant accounting policies, and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated December 31, 2021 balance sheet was derived from the audited financial statements included in the Form 10-K. Dollar amounts in the footnotes are stated in thousands, except for per share data. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (which consist of normal, recurring adjustments) necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. The results disclosed in the condensed consolidated statements of income are not necessarily indicative of the results to be expected in any future periods. Although the ultimate impact is uncertain at this time, a resurgence of the coronavirus outbreak may significantly affect the Company's financial condition, liquidity, and results of operations. In this respect, the Company had previously experienced the following negative impacts on its business: backlog reduction during 2020 from that of 2019, lower production volumes, employee absence, and bidding restrictions within certain key states. The Company is continuing to experience delays in receipt of materials through its supply chain. Recently Issued Accounting Pronouncement The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures. Revenue Recognition Product Sales - Over Time Under Topic 606, the Company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services provided. Revenue associated with contracts with customers for customized products is recognized over time as the Company's performance creates or enhances customer-controlled assets or creates or enhances an asset with no alternative use, which the Company has an enforceable right to receive compensation as defined under the contract for performance completed. To determine the amount of revenue to recognize over time, the Company recognizes revenue over the contract terms based on the output method. The Company applied the "as invoiced" practical expedient as the amount of consideration the Company has the right to invoice corresponds directly with the value of the Company's performance to date. As the output method is driven by units produced, the Company recognizes revenues based on the value transferred to the customer relative to the remaining value to be transferred. The Company also matches the costs associated with the units produced. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined and the amount of the loss is 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. A portion of the work the Company performs requires financial assurances in the form of performance and payment bonds at the time of execution of the contract. Some contracts include retention provisions of up to 10%, which are generally withheld from each progress payment as retainage until the contract work has been completed and approved. Product Sales - Point in Time For certain product sales that do not meet the over time criteria, under Topic 606 the Company recognizes revenue when the product has been shipped to the destination in accordance with the terms outlined in the contract where a present obligation to pay exists and the customers have gained control of the product. Accounts Receivable and Contract Balances The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when services are provided or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our Condensed Consolidated Balance Sheets as "Accounts receivable trade - unbilled" (contract assets). Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimate earnings recognized to date, are reported on our Condensed Consolidated Balance Sheets as "Customer deposits" (contract liabilities). Any uncollected billed amounts for our performance obligations recognized over time, including contract retentions, are recorded within “Accounts receivable trade – billed”. On September 30, 2022, and December 31, 2021, accounts receivable included contract retentions (in thousands) of approximately $1,124 and $1,139, respectively, which are considered contract assets. Our billed and unbilled revenue may be exposed to potential credit risk if our customers should encounter financial difficulties, and we maintain reserves for specifically identified potential uncollectible receivables. On September 30, 2022, and December 31, 2021, our allowances for doubtful accounts (in thousands) were $438 and $437, respectively. Sale to Customer with a Buy-Back Agreement The Company entered into a buy-back agreement with one specific customer. Under this agreement, the Company guaranteed to buy-back barrier at a predetermined price at the end of the long-term project, subject to the condition of the product. Although the Company received payment in full when the product was produced, we are required to account for these transactions as operating leases. The amount of sale proceeds equal to the buy-back obligation, included in "Deferred buy-back lease obligation" in the liabilities section of the consolidated balance sheet, is deferred until the buy-back is executed. The remaining sale proceeds are deferred in the same account and recognized on a straight-line basis over the usage period, such usage period commencing on delivery to the job-site and ending at the time the buy-back is executed. The Company capitalizes the cost of the product on the consolidated balance sheet shown in "Deferred buy-back lease asset, net", and depreciates the value, less residual value, to cost of leasing revenue in "Cost of goods sold" over the estimated useful life of the asset. Pursuant to an amendment entered into by the Company with the customer on April 13, 2022, the Company agreed to purchase barrier back in the amount equal to the buy-back guarantee. Accordingly, the Company will settle any remaining deferred balances, in excess of the buy-back payment, to leasing revenue, and reclassify the net book value of the purchased product to "Inventories" or "Property and equipment, net" depending on the intended use. The revenue is being recognized in accordance with Topic 842, Leases. See Note 5. Commitments for additional information regarding the amendment. Barrier Rentals - Lease Income Leasing fees are paid by customers at the beginning of the lease agreement and are recorded as deferred revenue. The deferred revenue is then recognized each month as lease income for the duration of the lease, in accordance with Topic 842, Leases. Royalty Income The Company licenses certain products to other precast companies to produce the Company's products to engineering specifications under the licensing agreements. The agreements are typically for five-year terms and require royalty payments from 4% to 6% of total sales of licensed products, which are paid every month. The revenues from licensing agreements are recognized in the month earned, in accordance with Topic 606-10-55-65. Shipping and Installation Shipping and installation revenues are recognized as a distinct performance obligation in the period the shipping and installation services are provided to the customer, in accordance with Topic 606. Disaggregation of Revenue In the following table, revenue is disaggregated by primary sources of revenue:
Revenue by Type |  | Three Months Ended September 30, |  |  | Nine Months 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 Revenue |  | $ | 11,956 |  |  | $ | 13,100 |  |  | $ | (1,144 | ) |  |  | (9 | )% |  | $ | 35,644 |  |  | $ | 40,625 |  |  | $ | (4,981 | ) |  |  | (12 | )%
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. Warranties Smith-Midland products are typically sold pursuant to an implicit warranty as to merchantability only. Warranty claims are reviewed and resolved on a case-by-case method. Although the Company does incur costs for warranty claims, historically such amounts are minimal. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Risk Historically, various customers have comprised greater than 10% of revenue during a given quarter or year. These customers are typically not the same quarter to quarter or year to year. The Company views revenue details by jobs, and not by customers. In the event a customer were to go out of business during a project, it is likely that the owner of the project would assign a new contractor to the job, and the Company would complete its scope of work. Therefore, the Company believes that it does not have a short-term vulnerability of severe impact to operations. In cases where customers are less than 10% of revenue, the Company assesses if there is a near term severe impact. The Company has determined that no customer, if lost, would result in a near term severe impact to the Company’s operations. Segment Reporting Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and assess performance. The Company currently operates in one operating and reportable business segment for financial reporting purposes. Reclassifications of Certain Items Included within Comparable Prior Year Periods and Previous Current Year Interim Periods Certain minor reclassifications have been made to prior year amounts to conform to the current year’s presentation.

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