20

Part I - FINANCIAL INFORMATION

Item 1: Financial Statements

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(all amounts in thousands)

See Notes to Condensed Consolidated Financial StatementsStatements.

3

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(all amounts in thousands, except share amounts)

See Notes to Condensed Consolidated Financial Statements  Statements.

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(all amounts in thousands, except per share amounts)

See Notes to Condensed Consolidated Financial StatementsStatements.

5

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(all amounts in thousands)

See Notes to Condensed Consolidated Financial StatementsStatements.

6

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

(all amounts in thousands, except share amounts)

For the three months ended March 31, 2021  

For the three months ended March 31, 2022

See Notes to Condensed Consolidated Financial Statements.

7

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(all amounts in thousands)

See Notes to Condensed Consolidated Financial StatementsStatements.

ACME UNITED CORPORATION

Notes toNOTES TO CONDENSED CONSOLIDATED Financial StatementsFINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

In the opinion of management, theThe accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”). These adjustments are of a normal, recurring nature. However, the financial statements do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 20162021 for such disclosures. The condensed consolidated balance sheet as of December 31, 20162021 was derived from the audited consolidated balance sheet as of that date. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s 20162021 Annual Report on Form 10-K.

The Company has evaluated events and transactions subsequent to September 30, 2017March 31, 2022 and through the date these condensed consolidated financial statements were included in this Form 10-Q and filed with the SEC.issued.

Recently Issued and Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (FASB) issued Auditing Standards Update (ASU) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of first quarter 2017 and it has not had a material impact on our financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect that ASU 2017-01 will have a material impact on our financial statements.

In March 2016, the FASB issued ASU 2016-09 to improve the accounting for employee share-based payments. This standard simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, as part of FASB’s simplification initiative to reduce cost and complexity in accounting standards while maintaining or improving the usefulness of the information provided to the users of financial statements. The new standard was effective for the Company beginning on January 1, 2017. The adoption of the new standard resulted in the recognition of excess tax benefits in the amount of approximately $350,000 in our provision for income taxes within the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017, rather than additional paid-in capital.Additionally, our Condensed Consolidated Statement of Cash Flows now present excess tax benefits as an operating activity included in other accrued liabilities, adjusted prospectively.

In February 2016, the FASB issued guidance that will change the requirements for accounting for leases. The principal change under the new accounting guidance is that lessees under leases classified as operating leases will recognize a right-of-use asset and a lease liability. Current lease accounting does not require lessees to recognize assets and liabilities arising under operating leases on the balance sheet. Under the new guidance, lessees (including lessees under leases classified as finance leases and operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Expense recognition and cash flow presentation guidance will be based upon whether the lease is classified as an operating lease or a finance lease (the classification criteria for distinguishing between finance leases and operating leases is substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current guidance). The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; the guidance provides certain practical expedients. The Company will evaluate this guidance in 2018 to determine its impact on the Company’s results of operations, cash flows and financial position.

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.  ASU 2014-09 supersedes most existing revenue recognition guidance in U.S. GAAP.  In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which had the effect of deferring the effective date of ASU 2014-09 to March 1, 2018 for the Company.  Early adoption of ASU 2014-09 became permitted in the first quarter of fiscal year 2017.  The Company expects to adopt ASU 2014-09 in the first quarter of 2018.  The guidance permits the use of either the retrospective or cumulative effect transition method.  We have not yet selected a transition method, and we continue to evaluate the effect that the updated standard will have on our consolidated financial condition, results of operations and cash flows. We generally do not have significant customer contracts and do not provide post-delivery services. As such, adoption of the new guidance is not expected to result in a significant change in the amount of revenue recognized or the timing of when such revenue is recognized and accordingly we do not expect adoption of the guidance to have a material impact on our financial results.

2. Commitment and Contingencies

The Company may be involved from time to time in disputes and other litigation in the ordinary course of business and may encounter other contingencies, which may include environmental and other matters. There are no pending material legal proceedings to which the registrantCompany is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.

3. Revenue from Contracts with Customers

In 2014,Nature of Goods and Services

The Company recognizes revenue from the Company soldsales of a broad line of products that are grouped into two main categories: (a) first aid and medical; and (b) cutting, sharpening and measuring. The cutting, sharpening and measuring category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and medical category includes first aid kits and refills, over-the-counter medications and a variety of medical products. Revenue recognition is evaluated through the following five steps: (i) identification of the contract or contracts with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

When Performance Obligations Are Satisfied

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is generated by the sale of the Company’s products to its Fremont, NC distribution facility for $850,000customers.  Sales contracts (purchase orders) generally have a single performance obligation that is satisfied at a point in cash. Undertime, with shipment or delivery, depending on the terms of the sale agreement,underlying contract. Revenue is measured based on the consideration specified in the contract. The amount of consideration we receive and revenue we recognize is impacted by incentives ("customer rebates"), including sales rebates, which are generally tied to sales volume levels, in-store promotional allowances, shared media and customer catalogue allowances and other cooperative advertising arrangements; freight allowance programs offered to our customers; and allowance for returns and discounts. We generally recognize customer rebate costs as a deduction to gross sales at the time that the associated revenue is recognized.

Significant Payment Terms

Payment terms for each customer are dependent on the agreed upon contractual repayment terms. Payment terms typically are between 30 and 90 days and vary depending on the size of the customer and its risk profile to the Company. Some customers receive discounts for early payment.

Product Returns

The Company accepts product returns in the normal course of business. The Company estimates reserves for returns and the related refunds to customers based on historical experience. Reserves for returned merchandise are included as a component of “Accounts receivable” in the condensed consolidated balance sheets.

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Practical Expedient Usage and Accounting Policy Elections

For the Company’s contracts that have an original duration of one year or less, the Company is responsibleuses the practical expedient in ASC 606-10-32-18 applicable to remediate any environmental contaminationsuch contracts and does not consider the time value of money in relation to significant financing components.  The effect of applying this practical expedient election did not have an impact on the property. In conjunction withCompany’s condensed consolidated financial statements.  

Per ASC 606-10-25-18B, the saleCompany has elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfilment activity instead of a performance obligation. Furthermore, shipping and handling activities performed before transfer of control of the property,product also do not constitute a separate and distinct performance obligation. The effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.  

The Company has elected to exclude from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company recordedfrom a liability of $300,000customer.

Applying the practical expedient in ASC 340-40-25-4, Other Assets and Deferred Costs,the second quarter of 2014, related toCompany recognizes the remediation of the property. The accrual includes the total estimatedincremental costs of remedial activitiesobtaining contracts as an expense when incurred. These costs are included in “Selling, general and post-remediation monitoring costs.administrative expenses.” The effect of applying this practical expedient did not have an impact on the Company’s condensed consolidated financial statements.

Disaggregation of Revenues

The following table represents external net sales disaggregated by product category, by segment (amounts in thousands):

For the three months ended March 31, 2022

For the three months ended March 31, 2021

Remediation work on the project was completed in 2015. The monitoring period is expected to be completed by the end of 2020.

The change in the accrual for environmental remediation for the nine months ended September 30, 2017 follows (in thousands):

3. Pension

Components of net periodic benefit cost (income) are as follows (in thousands):

The Company’s funding policy with respect to its qualified plan is to contribute at least the minimum amount required by applicable laws and regulations. In 2017, the Company is not required to contribute to the plan. As of September 30, 2017, the Company had not made any contributions to the plan in 2017 and the Company does not anticipate that it will make any such contributions in the balance of 2017.

4. Debt and Shareholders’ Equity

On January 27, 2017,Long-term debt consists of (i) borrowings under the Company amended itsCompany’s revolving credit loan agreement with HSBC Bank, N.A. on a temporary basis in order to provide forand (ii) amounts outstanding under the funding offixed rate mortgage on the Company’s acquisitionmanufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. The revolving loan agreement provides for borrowings of the assets of Spill Magic, Inc. as described in Note 8 above. The amended facility provided for an increase in borrowings fromup to $50 million to $55 million for the period commencing on April 1, 2017 and ending on September 30, 2017. Commencing October 1, 2017, the maximum amount outstanding at any time under thePrime Rate less 1.25%. The credit facility returned to $50 million. The interest rate on borrowings remains unchanged at a ratehas an expiration date of LIBOR plus 2.0%. In addition, the amendment modified the debt to net worth ratio covenant applicable during the same nine month period.May 24, 2023. The Company must pay a facility fee, payable quarterly, in an amount equal to two tenths of one percent (.20%) per annum of the average daily unused portion of the revolving credit line.  All principal amounts outstanding under the agreement are requiredThe facility is intended to be repaid in a single amount on May 6, 2019, the date the loan agreement expires; interest is payable monthly. Funds borrowed under the agreement may be usedprovide liquidity for working capital, acquisitions, general operating expenses,growth, share repurchases, dividends, acquisitions and certain other purposes.business activities.  Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt to net worth ratio and a fixed charge coverage ratio and must have annual net income greater than $0,zero, measured as of the end of each fiscal year.At September 30, 2017, As of March 31, 2022, the Company was in compliance with the covenants then in effect under the loan agreement.

As of September 30, 2017March 31, 2022 and December 31, 2016,2021, the Company had outstanding borrowings of $45,969,000$40,151,000 and $32,936,000,$33,037,000, respectively, under the Company’s revolving loan agreement with HSBC.

The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC Bank, N.A. at a fixed interest rate of 3.8%. The Company entered into the agreement on December 1, 2021.  Commencing on January 1, 2022, payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031.As of March 31, 2022 and December 31, 2021, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):

During the three months ended September 30, 2017,March 31, 2022, the Company, issued a total of 2,108 shares of common stock and received aggregate proceeds of $21,291 upon exercise of employee stock options. During the nine months ended September 30, 2017, the Company issued a total of 49,106 shares of common stock and received aggregate proceeds of $649,232 upon exercise of employee stock options. Also during the three and nine months ended September 30, 2017, the Companyat its discretion, paid approximately $27,680 and $759,573, respectively,$108,000 to optionees who had elected (subject to the approval of the Company) a net cash settlement of certain of their respective options.

5. Segment Information

The Company reports financial information based on the organizational structure used by the Company’s chief operating decision makers for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of: (1) United States; (2) Canada; and (3) Europe. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S. operations; accordingly, the Company’s chief operating decision makers review the financial results of both on a consolidated basis, and the results of the Asian operations have been aggregated with the results of the United States operations to form one reportable segment called the “United States segment” or “U.S. segment”. Each reportable segment derives its revenue from the sales of first aid and medical products, cutting and sharpening devices and measuring instruments and safety products for school, office, home, hardware, sporting and industrial use.

Domestic sales orders are filled primarily from the Company’s distribution centers in North Carolina, Washington, Massachusetts, CaliforniaTennessee, Florida and Tennessee.California. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products. Orders filled from the Company’s inventory are generally for less than container-sized lots.

Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers, who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 10% and 12%6% of the Company’s total net sales for the three and nine months ended September 30, 2017March 31, 2022, compared to 15% and 19%7% for the comparable periodsperiod in 2016.

2021. The decrease resulted primarily from COVID-related supply chain disruptions in China.

The chief operating decision maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment revenues are defined as total revenues, including both external customer revenue and inter-segment revenue. Segment operating earnings are defined as segment revenues, less cost of goods sold and operating expenses. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Inter-segment amounts are presented after convertingeliminated to U.S. dollars and consolidating eliminations.

arrive at consolidated financial results.

The following table sets forth certain financial data by segment for the three and nine months ended September 30, 2017March 31, 2022 and 2016:

2021:

Financial data by segment:

(in thousands)

Assets by segment:

(in thousands)

6. Stock Based Compensation

The Company recognizes share-based compensation at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period.period, which is generally the vesting period of the equity instrument. Share-based compensation expenses were $315,000 and $122,001expense was approximately $400,000 for the three months ended September 30, 2017 and 2016, respectively. Share-based compensation expenses were $551,717 and $305,536March 31, 2022, compared to approximately $306,000 for the ninethree months ended September 30, 2017 and 2016, respectively.

March 31, 2021.

As of September 30, 2017,March 31, 2022, there was a total of $1,053,504$3,600,603 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share–basedshare-based payments granted to the Company’s employees. As of that date, the remaining unamortized expense iswas expected to be recognized over a weighted average period of approximately three years.

7. Fair Value Measurements

The carrying value of the Company’s bank debt approximatesis a reasonable estimate of fair value. Fair value was determined using a discounted cash flow analysis.

because of the nature of its payment terms and maturity.

8. Business Combinations

On February 1, 2017, the Company purchased the assets of Spill Magic, Inc., located in Santa Ana, CA and Smyrna, TN for $7.2 million in cash. The Spill Magic products are leaders in absorbents that encapsulate spills into dry powders that can be safely disposed. Many large retail chains use its products to remove liquids from broken glass containers, oil and gas spills, bodily fluids and solvents.

Leases

The purchase priceCompany has operating leases for office and warehouse space and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2026.

Certain of the Company’s lease arrangements contain renewal provisions, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with right-of-use (“ROU”) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. As most of our leases do not provide an implicit rate, the present value of lease payments is determined primarily using our incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment.  Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term.  For the three months ended March 31, 2022 and 2021, lease expense in the amount of $0.1 million was allocatedincluded in cost of goods sold and $0.3 million and $0.2 million, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.                             

Information related to assets acquired as followsleases (in thousands):

Future minimum lease payments under non-cancellable leases as of March 31, 2022:

Management’s assessment of the valuation of intangible assets is preliminary and finalization of the Company’s purchase price accounting assessment may result in changes to the valuation of the identified intangible assets. The Company will finalize, as of December 31, 2017, the purchase price allocation within the measurement period in accordance with Accounting Standards Codification Topic 805 “Business Combinations”.

9. Other Accrued Liabilities

Assuming Spill Magic assets were acquired on January 1, 2017, unaudited pro forma combined net sales for the nine months ended September 30, 2017 for the Company would have been approximately $100.8 million. Unaudited pro forma combined net income for the nine months ended September 30, 2017 for the Company would have been approximately $4.8 million.

Net sales for the three and nine months ended September 30, 2017 attributable to Spill Magic products were approximately $1.9 million and $4.9 million, respectively. Net income for the three and nine months ended September 30, 2017 attributable to Spill Magic products was approximately $0.2 million and $0.5 million, respectively.

Assuming Spill Magic assets were acquired on January 1, 2016, unaudited proforma combined net sales for the three and nine months ended September 30, 2016, for the Company would have been approximately $33.6 million and $103.2 million, respectively. Unaudited proforma combined net income for the three and nine months ended September 30, 2016 for the Company would have been approximately $1.8 million and $6.1 million, respectively.