ACME UNITED CORP 10-K

Item 8. Financial Statements and Supplementary Data 19 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2020 2019 Net sales $ 164,003,040 $ 142,457,342 Cost of goods sold 104,408,326 90,456,484 Gross profit 59,594,714 52,000,858 Selling, general and administrative expenses 48,182,050 43,571,510 Operating income 11,412,664 8,429,348 Non-operating items: Interest: Interest expense ( 944,363 ) ( 1,828,408 ) Interest income 24,654 39,896 Interest expense, net ( 919,709 ) ( 1,788,512 ) Other expense ( 666,227 ) ( 97,672 ) Total other expense, net ( 1,585,936 ) ( 1,886,184 ) Income before income tax expense 9,826,728 6,543,164 Income tax expense 1,727,962 1,029,556 Net income $ 8,098,766 $ 5,513,608 Earnings per share: Basic $ 2.42 $ 1.65 Diluted $ 2.31 $ 1.60 See accompanying Notes to Consolidated Financial Statements. 20 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2020 2019 Net income $ 8,098,766 $ 5,513,608 Other comprehensive gain Foreign currency translation 647,632 45,223 Change in net prior service credit and actuarial gains, net of income tax expense 514,271 143,906 Total other comprehensive income (loss) 1,161,903 189,129 Comprehensive income $ 9,260,669 $ 5,702,737 See accompanying Notes to Consolidated Financial Statements. 21 Acme United Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 4,167,376 $ 6,821,883 Accounts receivable, less allowance 27,173,431 25,484,865 Inventories 50,704,197 39,261,105 Prepaid expenses and other current assets 1,640,904 1,578,248 Total current assets 83,685,908 73,146,101 Property, plant and equipment: Land 1,770,453 1,420,104 Buildings 12,898,761 10,095,529 Machinery and equipment 24,524,045 19,111,801 Total property, plant and equipment 39,193,259 30,627,434 Less: accumulated depreciation 18,954,352 16,591,890 Net property, plant and equipment 20,238,907 14,035,544 Intangible assets, less accumulated amortization 18,721,423 15,792,738 Goodwill 4,799,829 4,696,370 Operating lease right-of-use asset, net 2,421,669 2,989,272 Other assets - 88,828 Total assets $ 129,867,736 $ 110,748,853 LIABILITIES Current liabilities: Accounts payable $ 7,601,123 $ 6,692,692 Operating lease liability - current portion 872,908 1,047,498 Current portion of mortgage payable 266,667 266,667 Other accrued liabilities 11,460,024 8,576,248 Total current liabilities 20,200,722 16,583,105 Long-term debt 38,767,167 33,240,407 Long-term debt-PPP Loan 3,508,047 - Mortgage payable, net of current portion 2,911,111 3,177,778 Operating lease liability - non-current portion 1,654,025 1,960,996 Deferred income taxes 110,221 49,284 Other non-current liabilities - 32,302 Total liabilities 67,151,293 55,043,872 STOCKHOLDERS' EQUITY Common stock, par value $ 2.50 : authorized 8,000,000 shares; issued - 4,840,571 shares in 2020 and 4,838,071 in 2019, including treasury stock 12,100,663 12,094,413 Treasury stock, at cost, 1,501,658 in 2020 and 1,487,238 shares in 2019 ( 14,522,178 ) ( 14,235,190 ) Additional paid-in capital 7,930,673 8,262,208 Accumulated other comprehensive loss ( 825,967 ) ( 1,987,870 ) Retained earnings 58,033,252 51,571,420 Total stockholders' equity 62,716,443 55,704,981 Total liabilities and stockholders' equity $ 129,867,736 $ 110,748,853 See accompanying Notes to Consolidated Financial Statements. 22 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Outstanding Shares of Common Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balances, December 31, 2018 3,350,833 $ 12,094,413 $ ( 14,235,190 ) $ 8,981,523 $ ( 2,057,985 ) $ 47,549,650 $ 52,332,411 Net income 5,513,608 5,513,608 Other comprehensive Income 189,129 189,129 Adoption of ASU 2018-02 ( 119,014 ) 119,014 - Stock compensation expense 968,467 968,467 Distribution to shareholders ( 1,610,852 ) ( 1,610,852 ) Cash settlement of stock options ( 1,687,782 ) ( 1,687,782 ) Balances, December 31, 2019 3,350,833 $ 12,094,413 $ ( 14,235,190 ) $ 8,262,208 $ ( 1,987,870 ) $ 51,571,420 $ 55,704,981 Net income 8,098,766 8,098,766 Other comprehensive income 1,161,903 1,161,903 Stock compensation expense 1,259,079 1,259,079 Distribution to shareholders ( 1,636,934 ) ( 1,636,934 ) Issuance of common stock 2,500 6,250 53,504 59,754 Cash settlement of stock options ( 1,644,118 ) ( 1,644,118 ) Purchase of treasury stock ( 14,420 ) ( 286,988 ) ( 286,988 ) Balances, December 31, 2020 3,338,913 $ 12,100,663 $ ( 14,522,178 ) $ 7,930,673 $ ( 825,967 ) $ 58,033,252 $ 62,716,443 See accompanying Notes to Consolidated Financial Statements. 23 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2020 2019 Operating activities: Net income $ 8,098,766 $ 5,513,608 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,427,557 2,181,060 Amortization 1,324,423 1,251,662 Stock compensation expense 1,259,079 968,467 Deferred income taxes 60,937 162,637 Non-cash lease expense 86,042 19,222 Provision for doubtful accounts 778,869 290,128 Pension settlement 526,857 — Changes in operating assets and liabilities Accounts receivable ( 2,028,341 ) ( 784,562 ) Inventories ( 10,049,513 ) 2,089,861 Prepaid expenses and other current assets 159,078 666,070 Accounts payable 460,179 ( 1,525,060 ) Other accrued liabilities 2,617,103 3,869,138 Total adjustments ( 2,377,730 ) 9,188,623 Net cash provided by operating activities 5,721,036 14,702,231 Investing activities: Purchase of property, plant and equipment ( 2,569,174 ) ( 1,680,479 ) Acquisition of Med-Nap ( 9,307,518 ) — Acquisition of First Aid Central ( 2,075,210 ) — Net cash used by investing activities ( 13,951,902 ) ( 1,680,479 ) Financing activities: Net borrowings (repayments) of long-term debt 5,526,760 ( 7,042,708 ) Proceeds from PPP Loan 3,508,047 — Repayments on mortgage ( 266,667 ) ( 266,667 ) Distributions to stockholders ( 1,604,706 ) ( 1,608,956 ) Cash settlement of stock options ( 1,644,118 ) ( 1,687,782 ) Purchase of treasury stock ( 286,988 ) — Issuance of common stock 58,754 — Net cash provided by (used in) financing activities 5,291,082 ( 10,606,113 ) Effect of exchange rate changes 285,277 ( 2,799 ) Net (decrease) increase in cash and cash equivalents ( 2,654,507 ) 2,412,841 Cash and cash equivalents at beginning of year 6,821,883 4,409,042 Cash and cash equivalents at end of year $ 4,167,376 $ 6,821,883 Supplemental cash flow information: Cash paid for income taxes $ 755,337 $ 422,339 Cash paid for interest expense $ 930,357 $ 1,863,961 See accompanying Notes to Consolidated Financial Statements. 24 Acme United Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Operations The operations of Acme United Corporation (the “Company”) consist of three reportable segments. The operations of the Company are structured and evaluated based on geographic location. The three reportable segments operate in the United States (including Asian operations), Canada and Europe. Principal products across all segments are scissors, shears, knives, rulers, pencil sharpeners, first aid safety kits, and related products which are sold primarily to wholesale, contract and retail stationery distributors, office supply super stores, mass market retailers, industrial distributors, school supply distributors, drug store retailers, sporting goods stores, hardware chains and wholesale florists. 2. Accounting Policies Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most sensitive and significant accounting estimates relate to customer rebates, valuation allowances for deferred income tax assets, obsolete and slow-moving inventories, potentially uncollectible accounts receivable, intangibles, accruals for income taxes and stock-based compensation. Actual results could differ from those estimates. Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned by the Company. All significant intercompany accounts and transactions are eliminated in consolidation. Translation of Foreign Currency – For foreign operations whose functional currencies are not U.S. dollars, assets and liabilities are translated at rates in effect at the end of the year; revenues and expenses are translated at average rates in effect during the year. Resulting translation adjustments are made directly to accumulated other comprehensive income. Foreign currency transaction gains and losses are recognized in operating results. Included in other expense were foreign currency transaction gains of $ 96,372 in 2020 and foreign currency transaction losses of $ 38,988 in 2019 . Cash Equivalents – Investments with an original maturity of three months or less, as well as time deposits and certificates of deposit that are readily redeemable at the date of purchase, are considered cash equivalents. Accounts Receivable – Accounts receivable are shown less an allowance for doubtful accounts of $ 1,151,715 at December 31, 2020 and $ 522,560 at December 31, 2019. Inventories – Inventories are stated at the lower of cost, or net realizable value, determined by the first-in, first-out method. Property, Plant and Equipment, and Depreciation – Property, plant and equipment is recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives of these assets are as follows: buildings useful lives range from 10 to 39 years ; machinery and equipment useful lives range from 3 to 10 years . Intangible Assets and Goodwill – Intangible assets with finite useful lives are recorded at cost upon acquisition and amortized over the term of the related contract, if any, or useful life, as applicable. Intangible assets held by the Company with finite useful lives include patents and trademarks. Patents and trademarks are amortized over their estimated useful lives. The weighted average amortization period for intangible assets at December 31, 2020 was 9 years. The Company periodically reviews the values recorded for intangible assets and goodwill to assess recoverability from future operations whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. At December 31, 2020 and 2019, the Company assessed the recoverability of its long-lived assets and goodwill and believed that there were no events or circumstances present that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. Deferred Income Taxes – Deferred income taxes are provided for the differences between the financial statement and tax bases of assets and liabilities, and on operating loss carryovers, using tax rates in effect in years in which the differences are expected to reverse. Leases – 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. Lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. These practical expedients must be elected as a package and consistently applied. The Company has elected to apply the package of practical expedients upon adoption. 25 ROU assets and lease liabilities are recognized at commencement date of the lease 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 d o 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 arrangements 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. Revenue Recognition – The Company's revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its contracts with customers, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Depending on the contractual terms of each customer, revenue is recognized either at the time of shipment or upon delivery. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Customer rebates and incentives earned based on promotional programs in place volume of purchases or other factors are also estimated at the time of revenue recognition and recorded as a reduction of that revenue. Refer to Note 9 – Revenue from Contracts with Customers, in the notes to consolidated financial statements in this report for a more detailed discussion. Research and Development – Research and development costs ($ 251,000 in 2020 and $ 596,000 in 2019) are included in selling, general and administrative expenses and expensed as incurred. Shipping Costs – The costs of shipping product to our customers ($ 7,486,600 in 2020 and $ 6,695,223 in 2019) are included in selling, general and administrative expenses. Advertising Costs – The Company expenses the production costs of advertising the first time that the related advertising takes place. Advertising costs ($ 1,084,261 in 2020 and $ 1,104,543 in 2019) are included in selling, general and administrative expenses. Subsequent Events – The Company has evaluated events and transactions subsequent to December 31, 2020 through the date the consolidated financial statements were included in this Form 10-K and filed with the SEC. Concentration – The Company performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Allowances for credit losses are provided and have been within management's expectations. The Company had two customers in 2020 and one customer in 2019 that individually exceeded 10% of consolidated net sales. Net sales to these customers were approximately 18 % and 13 % of consolidated net sales in 2020 and 17 % in 2019. Recently Issued and Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update eliminates, clarifies and modifies certain guidance related to the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12 to have a material effect on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosures Requirements for Defined Benefit Plans Income Statement - Reporting Comprehensive Income (Topic 220) . This ASU removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements. In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting . ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and non-employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The adoption of ASU 2018-07 did not have a material impact on the consolidated financial statements. 26 In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . ASU No. 2018-02 provides companies with an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU No. 2018-02 also requires disclosure of a description of the accounting policy for releasing income tax effects from AOCI and whether an election was made to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies can adopt the provisions of ASU No. 2018-02 in either the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. This ASU was adopted effective January 1, 2019 and result ed in a reclassification between retained earnings and accumulated other comprehensive loss . The impact from this ASU increase d retained earnings by approximately $0.1 million, with an offsetting increase to accumulated other comprehensive loss for the same amount. In January 2017 , the FASB issued ASU No. 2017 - 04 , Intangibles – Goodwill and Other (Topic 350 ): Simplifying the Test for Goodwill Impairment . The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company adopted this standard on January 1, 2020 . The adoption of this standard did not have an impact to the financial statements of the Company. 3. Inventories Inventories consisted of: December 31, 2020 2019 Finished goods $ 40,287,710 $ 32,899,114 Work in process 67,208 274,158 Materials and supplies 10,349,279 6,087,833 Inventories: $ 50,704,197 $ 39,261,105 Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $ 1,471,925 as of December 31, 2020 and $ 696,486 as of December 31, 2019. 4. Intangible Assets and Goodwill The Company’s intangible assets and goodwill consisted of: December 31, 2020 2019 First Aid Only Tradename $ 3,410,000 $ 3,410,000 First Aid Only Customer List 5,500,010 5,500,010 DMT Trademarks 1,387,000 1,387,000 DMT Customer List 1,369,000 1,369,000 DMT Non-Compete 183,000 183,000 Slice License Agreement 379,921 379,921 Patents 2,271,980 2,271,980 Trademarks 663,698 663,698 Pac-Kit Tradename, Customer List 1,500,000 1,500,000 Spill Magic Customer List 3,965,000 3,965,000 Spill Magic Trademarks 1,034,000 1,034,000 Spill Magic Non-Compete 67,111 67,111 C-Thru Customer List 1,050,000 1,050,000 FAC 1,332,963 - Med-Nap 2,920,145 - Subtotal 27,033,828 22,780,720 Less: Accumulated Amortization 8,312,405 6,987,982 Intangible Assets $ 18,721,423 $ 15,792,738 Goodwill $ 4,799,829 $ 4,696,370 Total: $ 23,521,252 $ 20,489,108 27 Amortization expense for patents and trademarks for the years ended December 31, 2020 and 2019 were $ 1,324,423 and $ 1,251,662 , respectively. The estimated aggregate amortization expense for each of the next five succeeding years, calculated on a similar basis, is as follows: 2021 - $ 1,305,088 ; 2022 - $ 1,301,802 ; 2023 - $ 1,297,605 ; 2024 - $ 1,292,415 ; and 2025 - $ 1,290,222 . 5. Other Accrued Liabilities The Company’s other current and non-current accrued liabilities consisted of: December 31, 2020 2019 Customer Rebates $ 6,068,294 $ 4,849,081 Pension Liability — 44,667 Accrued Compensation 3,072,375 1,695,464 Dividend Payable 434,546 402,318 Income Taxes Payable 459,596 261,539 Other 1,425,213 1,355,481 Total: $ 11,460,024 $ 8,608,550 6. Pension and Profit Sharing United States employees, hired prior to July 1, 1993, are covered by a funded, defined benefit pension plan. The benefits of this pension plan are based on years of service and the average compensation of the highest three consecutive years during the last ten years of employment. In December 1995, the Company's Board of Directors approved an amendment to the United States pension plan that terminated all future benefit accruals as of February 1, 1996, without terminating the pension plan. In 2020, the Company entered into agreements with an insurance company to transfer future benefit obligations and annuity administration for retirees (or their beneficiaries) in the Company’s defined benefit pension plan. As a result of this agreement, the Company recorded pension settlement charges of $ 793,524 . The Company’s funding policy with respect to its qualified plan was to contribute at least the minimum amount required by applicable laws and regulations. In 2020, the Company contributed $ 222,857 to the plan. The plan asset weighted average allocation at December 31, 2019, by asset category, were as follows: Asset Category: 2019 Equity Securities 66 % Fixed Income Securities 32 % Other Securities / Investments 2 % Total: 100 % The Company’s investment policy for the pension plan is to minimize risk by balancing investments between equity securities and fixed income securities. Plan funds are invested in long-term obligations with a history of moderate to low risk. The pension plan asset information included below is presented at fair value. ASC 820 establishes a framework for measuring fair value and requires disclosures about assets and liabilities measured at fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows: • Level 1 – Inputs to the valuation methodology based on unadjusted quoted market prices in active markets that are accessible at the measurement date. • Level 2 – Inputs to the valuation methodology that include quoted market prices that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly. • Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following tables present the pension plan assets by level within the fair value hierarchy as of December 31, 2019: 2019 Level 1 Level 2 Level 3 Total Money Market Fund $ 31 $ 16,763 $ — $ 16,794 Equity Common and Collected Funds 102,030 580,839 — 682,869 Fixed Income Common and Collected Funds 82,670 246,316 — 328,986 Total: $ 184,731 $ 843,918 $ — $ 1,028,649 28 Other disclosures related to the pension plan follow: 2020 2019 Assumptions used to determine benefit obligation: Discount rate 2.74 % 2.74 % Changes in benefit obligation: Benefit obligation at beginning of year $ ( 1,073,316 ) $ ( 1,160,930 ) Interest cost ( 27,671 ) ( 41,841 ) Service cost ( 30,195 ) ( 25,000 ) Actuarial loss ( 160,884 ) ( 46,288 ) Benefits and plan expenses paid 203,596 200,743 Curtailments, settlements and special termination benefits 1,088,470 — Benefit obligation at end of year: $ — $ ( 1,073,316 ) Changes in plan assets: Fair value of plan assets at beginning of year $ 1,028,649 $ 1,013,831 Actual return on plan assets 40,560 201,148 Employer contribution 222,857 14,413 Benefits and plan expenses paid ( 203,596 ) ( 200,743 ) Settlements ( 1,088,470 ) — Fair value of plan assets at end of year — 1,028,649 Funded status: $ — $ ( 44,667 ) Amounts recognized in accumulated other comprehensive income: Net actuarial loss $ — $ 689,398 Prior service cost — 538 Total: $ — $ 689,936 Accrued benefits costs are included in other accrued liabilities (non-current). 2020 2019 Assumptions used to determine net periodic benefit cost: Discount rate 2.74 % 3.87 % Expected return on plan assets 6.00 % 6.00 % Components of net benefit expense: Service cost $ 30,195 $ 25,000 Interest cost 27,671 41,841 Expected return on plan assets ( 40,560 ) ( 54,330 ) Settlement cost 793,524 — Amortization of prior service costs 538 544 Amortization of actuarial loss 56,739 90,442 837,912 78,497 Net periodic benefit cost: $ 868,107 $ 103,497 The Company employed a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equity securities and fixed income securities are preserved consistent with the widely-accepted capital market principle that assets with higher volatility generate higher returns over the long run. Our expected 6 % long-term rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation and projected long-term rates of return. The following table discloses the change recorded in other comprehensive income related to benefit costs: 2020 2019 Balance at beginning of the year $ 689,936 $ 881,452 Change in net loss ( 617,800 ) ( 100,530 ) Amortization of actuarial loss ( 71,598 ) ( 90,442 ) Amortization of prior service cost ( 538 ) ( 544 ) Change recognized in other comprehensive income ( 689,936 ) ( 191,516 ) Total recognized in other comprehensive income $ — $ 689,936 29 The Company also has a qualified, 401k plan covering substantially all of its United States employees. Annual Company contributions to this plan are determined by the Company’s Compensation Committee. For the years ended December 31, 2020 and 2019, the Company contributed 50 % of employee’s contributions, up to the first 6 % contributed by each employee. Total contribution expense under this 401k plan was $ 369,890 in 2020 and $ 309,922 in 2019. 7. Income Taxes The amounts of income tax expense (benefit) reflected in operations is as follows: 2020 2019 Current: Federal $ 880,149 $ ( 82,673 ) State 159,909 109,593 Foreign 788,314 887,556 Total: $ 1,828,372 $ 914,476 Deferred: Federal $ ( 59,801 ) $ 92,446 State ( 40,609 ) 22,634 Total: ( 100,410 ) 115,080 Total Income Tax Expense: $ 1,727,962 $ 1,029,556 The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located. A summary of United States and foreign income before income taxes follows: 2020 2019 United States $ 4,524,432 $ 800,796 Foreign 5,302,296 5,742,368 Total: $ 9,826,728 $ 6,543,164 As discussed in Note 11 below, for segment reporting, direct import sales are included in the United States segment. However, the revenues are earned by our Hong Kong subsidiary and related income taxes are paid in Hong Kong whose rate approximates 16.5 %. As such, income of the Asian subsidiary is included in the foreign income before taxes. The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations: 2020 2019 Federal income taxes at 21% statutory rate $ 1,864,097 $ 1,365,124 State and local taxes, net of federal income tax effect 89,842 109,593 Permanent items ( 99,877 ) ( 137,051 ) Foreign tax rate difference ( 126,100 ) ( 209,216 ) Change in deferred income tax valuation allowance — ( 98,894 ) Provision for income taxes: $ 1,727,962 $ 1,029,556 The following summarizes deferred income tax assets and liabilities: 2020 2019 Deferred income tax liabilities: Plant, property and equipment $ 1,556,398 $ 1,022,898 1,556,398 1,022,898 Deferred income tax assets: Asset valuations 992,101 604,755 Pension — 81,561 Other 454,076 287,298 1,446,177 973,614 Net deferred income tax liability: $ 110,221 $ 49,284 30 On January 22, 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company considers any potential GILTI as an expense in the period the tax is incurred. In 2020, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result, concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2017 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2020. Due to the uncertain nature of the realization of the Company's deferred income tax assets based on past performance of its German subsidiary and net loss carry forward expiration dates, the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized. This valuation allowance, all of which is related to deferred tax assets resulting from net operating losses of the Company’s German subsidiary, is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future operations as a reduction of the Company's tax expense. 8. Long-Term Debt and Shareholders’ Equity Long-term debt consists of borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. The agreement provides for borrowings of up to $ 50 million at Prime Rate less 1.25 % . The credit facility has an expiration date of 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. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisition and other 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 zero, measured as of the end of each fiscal year. December 31, 2020, the Company was in compliance with the covenants then in effect under the loan agreement. As of December 31, 2020, $ 38,767,167 was outstanding and $ 11,232,833 was available for borrowing under the Company’s revolving loan agreement. The Company’s First Aid Only manufacturing and distribution center in Vancouver, WA was financed by a variable rate mortgage with HSBC Bank, N.A. at an interest rate of LIBOR plus 2.5 % . Commencing on December 1, 2017, principal payments of $ 22,222 are due monthly, with all amounts outstanding due on maturity on October 31, 2024 . Minimum annual mortgage payments are due as follows: 2021 - $ 266,667 ; 2022 - $ 266,667 ; 2023 - $ 266,667 ; 2024 - $ 266,667 ; 2025 - $ 266,667 ; and thereafter - $ 1,844,443 . On November 14, 2019, the Company announced a Common Stock repurchase program of up to a total of 200,000 shares. The program does not have an expiration date. During the twelve months ended December 31, 2020, the Company repurchased 14,420 shares of its Common Stock. As of December 31, 2020, a total of 203,579 shares may be purchased in the future under the repurchase programs announced in 2010 and 2019. On May 7, 2020, the Company received a loan (the “PPP Loan”) from HSBC Bank, N.A. in the amount of $ 3,508,047 under the Paycheck Protection Program established by the Coronavirus Aid, Relief and Economic Security Act. Subject to potential forgiveness, as described below, the PPP Loan matures in two years on May 8, 2022 , bears interest at a rate of 1.00 % per year and is evidenced by a promissory note dated May 7, 2020 (the “Note”). Monthly payments of principal and interest are deferred until after any application for forgiveness submitted by the Company has been acted upon, as described below. The PPP Loan is unsecured and federally guaranteed. The Note contains customary events of default relating to, among other things, failure to make payments of principal and interest and breaches of representations and warranties. The Company may prepay the PPP Loan at any time prior to maturity with no penalty. All or a portion of the PPP Loan may be eligible to be forgiven by the U.S. Small Business Administration (“SBA”) and the lender upon application by the Company, provided that the Company shall have used the loan proceeds for eligible purposes, including the payment of payroll, benefits, rent, mortgage interest and utilities, during the 24 week period beginning on the date of funding of the loan (the “covered period”). Not more than 40 % of the amount forgiven may be for non-payroll costs. Consistent with the requirements of the PPP for loan forgiveness, the Company used the loan proceeds solely for payment of payroll and otherwise in a manner which it believes satisfy the requirements for loan forgiveness. In August 2020, the Company submitted an application for forgiveness of the entire amount of the PPP loan to HSBC Bank, N.A. (the Lender). The lender approved the forgiveness application and, on August 26, 2020, submitted the Company’s application to the SBA for its approval. The SBA subsequently asked the Company to provide certain additional information and documentation in connection with it review of the Company’s forgiveness application and the Company has done so. The application is presently pending. No assurance can be given that the Company’s application for loan forgiveness will be approved by the SBA, in whole or in part. The SBA reserves the right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. Under the CARES Act, all borrowers are required to maintain their loan documentation for six years after the PPP loan was forgiven or repaid in full and to provide that documentation to the SBA upon request The carrying value of the Company’s bank debt is a reasonable estimate of fair value because of the nature of its payment terms and maturity. 31 9. Revenue from Contracts with Customers Nature of Goods and Services The Company recognizes revenue from the sales of a broad line of products that are grouped into two main categories: (i) cutting, sharpening and measuring; and (ii) first aid and safety. The cutting and sharpening category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and safety category includes first aid kits and refills, over-the-counter medications and a variety of safety 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 customers. Sales contracts (purchase orders) generally have a single performance obligation that is satisfied at a point in time, with shipment or delivery, depending on the terms of the 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. The Company generally recognizes 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. Typically between 30 and 90 days, but they vary dependent 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 receivables” in the consolidated balance sheets. Practical Expedient Usage and Accounting Policy Elections For the Company’s contracts that have an original duration of one year or less, the Company uses the practical expedient in ASC 606-10-32-18 applicable to such contracts and accordingly, 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 Company’s consolidated financial statements. Per ASC 606-10-25-18B, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfillment activity instead of a performance obligation. Furthermore, shipping and handling activities performed before transfer of control of the product also do not constitute a separate and distinct performance obligation. 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 from a customer. Applying the practical expedient in ASC 340-40-25-4 – Other Assets and Deferred Costs , the Company recognizes the incremental costs of obtaining contracts as an expense when incurred. These costs are included in “Selling, general and administrative expenses.” The effect of applying this practical expedient did not have a material impact on the Company’s consolidated financial statements in the year ended December 31, 2020. 32 Disaggregation of Revenues The following table represents external net sales disaggregated by product category, by segment: For the twelve months ended December 31, 2020 (amounts in 000's) United States Canada Europe Total Cutting, Sharpening and Measuring $ 65,805 $ 6,434 $ 11,843 $ 84,082 First Aid and Safety 74,386 4,552 983 79,921 Total Net Sales $ 140,191 $ 10,986 $ 12,826 $ 164,003 For the twelve months ended December 31, 2019 (amounts in 000's) United States Canada Europe Total Cutting, Sharpening and Measuring $ 63,189 $ 6,678 $ 10,062 $ 79,929 First Aid and Safety 62,528 — — 62,528 Total Net Sales $ 125,717 $ 6,678 $ 10,062 $ 142,457 10. 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 cutting devices, 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 and facilities in North Carolina, Washington, Massachusetts, Tennessee, Florida and 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 14 % of the Company’s total net sales in 2020 and 2019, respectively. 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 eliminated to arrive at consolidated financial results. The following table sets forth certain financial data by segment for the fiscal years ended December 31, 2020 and 2019: Financial data by segment: (000’s omitted) Year Ended December 31, 2020 United States Canada Europe Consolidated Net sales $ 140,191 $ 10,986 $ 12,826 $ 164,003 Operating income 8,872 1,332 1,209 11,413 Assets 113,831 7,432 8,605 129,868 Additions to property, plant and equipment 2,386 34 149 2,569 Depreciation and amortization 3,668 95 78 3,841 33 Year Ended December 31, 2019 United States Canada Europe Consolidated Net sales $ 125,717 $ 6,678 $ 10,062 $ 142,457 Operating income 7,199 771 459 8,429 Assets 98,577 6,168 6,003 110,749 Additions to property, plant and equipment 1,646 2 32 1,680 Depreciation and amortization 3,347 16 70 3,433 The following is a reconciliation of segment operating income to consolidated income before taxes: 2020 2019 Total operating income $ 11,413 $ 8,429 Interest expense, net 920 1,789 Other expense 666 97 Consolidated income before taxes $ 9,827 $ 6,543 The table below presents revenue by geographic area. Revenues are attributed to countries based on location of the customer. Revenues 2020 2019 United States $ 138,921 $ 124,059 International: Canada 10,986 6,678 Europe 12,826 10,062 Other 1,270 1,658 Total International $ 25,082 $ 18,398 Total Revenues $ 164,003 $ 142,457 11. Stock Option Plans The Company grants stock options under the 2012 Employee Stock Option Plan (the “2012 Employee Plan”) and under the 2017 Non-Salaried Director Stock Option Plan (the “2017 Director Plan”). The Company also has two plans under which the Company no longer grants options but under which certain options remain outstanding: the 2002 Employee stock Option Plan and the 2005 Non-Salaried Director Stock Option Plan (the “2005 Director Plan”). The 2012 Employee Plan, which became effective April 23, 2012, provides for the issuance of incentive and nonqualified stock options at an exercise price equal to the fair market value of the Common Stock on the date the option is granted. The terms of the options granted are subject to the provisions of the 2012 Employee Plan. Options granted under the 2012 Employee Plan vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. As of December 31, 2020, the number of shares available for grant under the 2012 Employee Plan was 79,375 . Under the terms of the 2012 Employee Plan, no option may be granted under that plan after the tenth anniversary of the adoption of the plan. Options outstanding under the Company’s 2002 Employee Stock Option Plan have the same vesting schedule as the 2012 Employee Plan. The 2017 Director Plan provides for the issuance of stock options for up to a total of 50,000 shares of the Company's common stock to non-salaried directors. Under the 2017 Director Plan, Directors elected after the effective date and at subsequent Annual Meetings who have not received any prior grant under this or previous plans shall receive an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected Director not receiving an Initial Option will receive an option to purchase 5,000 shares of Common Stock (the “Annual Option”). The Initial Option vests 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option becomes fully exercisable one day after the date of grant. The exercise price of each option granted equals the fair market value of the Common Stock on the date the option is granted, and expires ten (10) years from the date of grant. As provided in the Director Plan, no options may be granted under the 2017 Director Plan after the tenth anniversary of the adoption of the Plan, i.e., after April 24, 2027. As of December 31, 2020, there were 25,000 shares available for grant under the 2017 Director Plan. The 2005 Director Plan, as amended, provided for the issuance of stock options for up to a total of 180,000 shares of the Company's common stock to non-salaried directors. Under the 2005 Director Plan, Directors elected on April 25, 2005 and at subsequent Annual Meetings who had not received any prior grant under this or previous plans received an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected Director not receiving an Initial Option received a 5,000 share option (the “Annual Option”). The Initial Option vested 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option became fully exercisable one day after the date of grant. The exercise price of each option granted equaled the fair market value of the Common Stock on the date the option was granted, and expired ten (10) years from the date of grant. As provided in the Director Plan, no options could be granted under the 2005 Director Plan after the tenth anniversary of the adoption of the Plan, i.e., after April 25, 2015. The Company has amended certain of its stock option plans for both employees and directors to permit options to be exercised on a net basis and receive either cash or shares of the Company’s Common Stock. Specifically, optionees may, at the time of exercise of an option and subject to the consent of the Company, elect either (i) to receive from the Company cash in an amount equal to the number of shares of 34 Common Stock subject to the option (or portion thereof) that is being exercised multiplied by the excess of (a) the fair market value per share over (b) the exercise price per share of the option (a “net cash settlement”); or (ii) to make payment of the exercise price of the option by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such option by the number of shares having an aggregate fair market value equal to the total exercise price of the option (or portion thereof). In 20 20 and 2019 , the Company paid a total of approximately $ 1,644,118 and $ 1,687,782 respectively, to optionees who had elected a net cash settlement of their respective share options. A summary of changes in options issued under the Company’s stock option plans follows: 2020 2019 Options outstanding at the beginning of the year 1,363,694 1,434,280 Options granted 280,750 120,000 Options forfeited ( 9,125 ) ( 26,500 ) Options exercised ( 147,394 ) ( 164,086 ) Options outstanding at the end of the year 1,487,925 1,363,694 Options exercisable at the end of the year 985,475 932,094 Common stock available for future grants at the end of the year 104,372 44,875 Weighted average exercise price per share: Granted $ 23.05 $ 19.88 Forfeited 21.72 23.29 Exercised 14.51 10.54 Outstanding 20.26 19.08 Exercisable 18.99 17.50 A summary of options outstanding as December 31, 2020 is as follows: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted- Average Remaining Contractual Life (Years) Weighted- Average Exercise Price Number Exercisable Weighted- Average Exercise Price $9.26 to $16.08 290,200 2 $ 12.39 290,200 $ 12.39 $16.09 to $21.35 282,000 6 18.41 204,500 17.95 $21.36 to $22.86 350,375 7 22.14 261,375 21.97 $22.87 to $23.97 255,450 9 23.17 11,350 23.94 $23.98 to $28.20 309,900 7 24.80 218,050 24.94 1,487,925 985,475 The weighted average remaining contractual life of all outstanding stock options is 6 years. Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of employee and non-employee director stock options. The determination of the fair value of stock-based payment awards on the date of grant, using an option-pricing model, is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s Common Stock price over the expected term (“volatility”) and the number of options that will not fully vest in accordance with applicable vesting requirements (“forfeitures”). The Company estimates the expected term of options granted by evaluating various factors, including the vesting period, historical employee information, as well as current and historical stock prices and market conditions. The Company estimates the volatility of its common stock by calculating historical volatility based on the closing stock price on the last day of each of the 60 months leading up to the month the option was granted. The risk-free interest rate that the Company uses in the option valuation model is the interest rate on U.S. Treasury zero-coupon bond issues with remaining terms similar to the expected term of the options granted. Historical information was the basis for calculating the dividend yield. The Company is required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized over the requisite service periods of the awards, which are generally the vesting periods. 35 The assumptions used to value option grants for the twelve months ended December 31, 2020 and December 31, 2019 were as follows: 2020 2019 Expected life in years 6 5 - 6 Interest rate .30 - 1.63% 1.52 - 2.39% Volatility .358 - .384 .358 - .375 Dividend yield 2.0 - 2.2% 2.0 - 2.2% Total stock-based compensation recognized in the Company’s consolidated statements of operations for the years ended December 31, 2020 and 2019 was $ 1,259,079 and $ 968,467 , respectively. At December 31, 2020, there was approximately $ 1,853,873 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to the Company’s employees. As of December 31, 2020, the remaining unamortized expense is expected to be recognized over a weighted average period of 3 years. The weighted average fair value at the date of grant for options granted during 2020 and 2019 was $ 6.59 and $ 5.88 per option, respectively. The aggregate intrinsic value of outstanding options was $ 14,681,187 at December 31, 2020. The aggregate intrinsic value of exercisable options was $ 10,974,625 at December 31, 2020. The aggregate intrinsic value of options exercised during 2020 was $ 1,743,568 . 12. Earnings Per Share The calculation of earnings per share follows: 2020 2019 Numerator: Net income $ 8,098,766 $ 5,513,608 Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 3,342,630 3,351,731 Effect of diluted employee stock options 166,867 100,892 Denominator for dilutive earnings per share 3,509,497 3,452,623 Basic earnings per share $ 2.42 $ 1.65 Diluted earnings per share $ 2.31 $ 1.60 For 2020 and 2019, respectively, 309,900 and 705,725 stock options were excluded from diluted earnings per share calculations because they would have been anti-dilutive. 13. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss follow: Foreign currency translation adjustment Net prior service credit and actuarial losses Total Balances, January 1, 2019 $ ( 1,518,822 ) $ ( 539,163 ) $ ( 2,057,985 ) Change in net prior service credit and actuarial losses, net of tax — 143,906 143,906 Adoption of ASU 2018-02 — ( 119,014 ) ( 119,014 ) Translation adjustment 45,223 — 45,223 Balances, December 31, 2019 $ ( 1,473,599 ) $ ( 514,271 ) $ ( 1,987,870 ) Change in net prior service credit and actuarial losses, net of tax — 514,271 514,271 Translation adjustment 647,632 — 647,632 Balances, December 31, 2020 $ ( 825,967 ) $ — $ ( 825,967 ) 14. Leases The Company 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. 36 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. Operating lease cost was $ 1.1 million for the twelve-months ended December 31, 2020. For the twelve months ended December 31, 2020, $ 0.4 million was included in cost of goods sold and $ 0.7 million was included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Information related to leases (in 000’s) : Twelve months ended December 31, 2020 Operating lease cost $ 1,186 Operating lease - cash flow $ 1,087 December 31, 2020 Weighted-average remaining lease term 4.0 years Weighted-average discount rate 5 % Future minimum lease payments under non-cancellable leases as of December 31, 2020: 2021 $ 916 2022 690 2023 569 2024 309 2025 220 Thereafter 75 Total future minimum lease payments $ 2,779 Less : imputed interest ( 252 ) Less : present value of lease liabilities - current ( 873 ) Present value of lease liabilities - non-current $ 1,654 15. Business Combinations Med-Nap, LLC On December 16, 2020, the Company purchased the assets of Med-Nap LLC., located in Brooksville, Florida for $ 9.3 million. Med-Nap is a leading manufacturer of alcohol prep pads, alcohol wipes, benzalkonium chloride wipes (BZK), antiseptic wipes, castile soap, and lens cleaning products. The purchase price was allocated to assets acquired and liabilities assumed as follows (in thousands): Assets: Inventory $ 591 Prepaid expense 25 Land & buildings 1,800 Equipment 4,195 Goodwill 149 Intangible assets 2,882 Total assets $ 9,642 Accounts payable 336 Total considerations $ 9,308 The acquisition was accounted for as a business combination, pursuant to ASC 805 – Business Combinations . All assets acquired in the acquisition are included in the Company’s US segment. First Aid Central: 37 On January 7, 2020, the Company purchased the assets of First Aid Central, a Canadian first aid and safety supplier, based in Laval, Canada for approximately $ 2.1 million in cash. First Aid Central products consist of a broad line of first aid kits, refills, and safety products that are sold to a wide range of industries and end users. The products meet federal Health Canada and provincial regulatory requirements. The purchase price was allocated to assets acquired as follows (in thousands): Assets: Accounts receivable $ 232 Inventory 440 Prepaid Expense 47 Equipment 45 Intangible assets 1,310 Total assets $ 2,074 The acquisition was accounted for as a business combination, pursuant to ASC 805 – Business Combinations . All assets acquired in the acquisition are included in the Company’s Canada segment. Net sales for the year ended December 31, 2020 attributable to the sales of First Aid Central products were approximately $ 4.6 million. Net income for the year ended December 31, 2020 attributable to First Aid Central products was approximately $ 0.3 million. Assuming First Aid Central assets were acquired on January 1, 2019, unaudited proforma combined net sales for the year ended December 31, 2019 for the Company would have been approximately $ 145.9 million. Unaudited proforma combined net income for the year ended December 31, 2019 for the Company would have been approximately $ 5.9 million. 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Acme United Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Acme United Corporation and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the period ended December 31, 2020 and 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the period ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 31, 2021, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2008; such date takes into consideration the acquisition of a portion of UHY LLP by Marcum LLP in April 2010. Marcum LLP New Haven, Connecticut March 31, 2021 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Shareholders and Board of Directors of Acme United Corporation Adverse Opinion on Internal Control over Financial Reporting We have audited Acme United Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in “Management's Annual Report on Internal Control over Financial Reporting”: The Company’s controls related to the existence of inventory at the Rocky Mount, NC warehouse were not effective as the cycle count program used did not demonstrate inventory quantities were sufficiently counted. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements for the year ended December 31, 2020, and this report does not affect our report dated March 31, 2021 on those consolidated financial statements. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2020 and 2019 and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows and the related notes for each of the two years in the period ended December 31, 2020, and our report dated March 31, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management’s Annual Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate. Marcum llp New Haven, Connecticut March 31, 2021 40 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with accountants related to accounting and financial disclosures in 2020.