ACME UNITED CORP 10-K

Item 8. Financial Statements and Supplementary Data 20 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2022 2021 Net sales $ 193,962,357 $ 182,087,559 Cost of goods sold 130,403,572 117,287,202 Gross profit 63,558,785 64,800,357 Selling, general and administrative expenses 57,285,483 52,030,370 Operating income 6,273,302 12,769,987 Non-operating items: Interest: Interest expense ( 2,396,431 ) ( 921,965 ) Interest income 31,970 13,742 Interest expense, net ( 2,364,461 ) ( 908,223 ) PPP loan forgiveness — 3,508,047 Other expense ( 246,396 ) ( 194,877 ) Total other (expense) income, net ( 246,396 ) 3,313,170 Income before income tax expense 3,662,445 15,174,934 Income tax expense 627,679 1,519,255 Net income $ 3,034,766 $ 13,655,679 Earnings per share: Basic $ 0.86 $ 3.93 Diluted $ 0.82 $ 3.45 See accompanying Notes to Consolidated Financial Statements. 21 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2022 2021 Net income $ 3,034,766 $ 13,655,679 Other comprehensive (loss) Foreign currency translation ( 707,251 ) ( 554,681 ) Comprehensive income $ 2,327,515 $ 13,100,998 See accompanying Notes to Consolidated Financial Statements. 22 Acme United Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 6,100,409 $ 4,843,349 Accounts receivable, less allowance 32,603,463 34,220,635 Inventories 63,325,206 53,552,254 Prepaid expenses and other current assets 2,820,935 2,634,376 Restricted cash 750,000 - Total current assets 105,600,013 95,250,614 Property, plant and equipment: Land 1,979,474 1,761,434 Buildings and building improvements 16,614,149 13,455,514 Machinery and equipment 31,491,637 29,760,410 Total property, plant and equipment 50,085,260 44,977,358 Less: accumulated depreciation 23,669,724 20,949,861 Net property, plant and equipment 26,415,536 24,027,497 Intangible assets, less accumulated amortization 20,790,535 17,230,529 Goodwill 8,188,829 4,799,829 Operating lease right-of-use asset, net 2,632,191 3,130,215 Other assets - restricted cash 750,000 - Total assets $ 164,377,104 $ 144,438,684 LIABILITIES Current liabilities: Accounts payable $ 10,514,288 $ 8,976,629 Operating lease liability - current portion 1,130,244 1,000,470 Current portion of mortgage payable 404,588 388,536 Other accrued liabilities 10,077,542 9,909,477 Total current liabilities 22,126,662 20,275,112 Long-term debt 49,915,649 33,037,172 Mortgage payable, net of current portion 10,693,612 11,080,923 Operating lease liability - non-current portion 1,683,323 2,364,236 Deferred income taxes 305,285 599,280 Other non-current liabilities 622,441 - Total liabilities 85,346,972 67,356,723 STOCKHOLDERS' EQUITY Common stock, par value $ 2.50 : - 5,083,051 shares issued and 3,538,179 shares outstanding in 2022; 5,065,518 shares issued and 3,520,646 shares outstanding in 2021 12,698,624 12,654,787 Treasury stock, at cost, 1,544,872 shares in 2022 and 2021 ( 15,995,622 ) ( 15,995,622 ) Additional paid-in capital 13,447,797 11,930,067 Accumulated other comprehensive loss ( 2,087,899 ) ( 1,380,648 ) Retained earnings 70,967,232 69,873,377 Total stockholders' equity 79,030,132 77,081,961 Total liabilities and stockholders' equity $ 164,377,104 $ 144,438,684 See accompanying Notes to Consolidated Financial Statements. 23 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, 2020 3,338,913 $ 12,100,663 $ ( 14,522,178 ) $ 7,930,673 $ ( 825,967 ) $ 58,033,252 $ 62,716,443 Net income 13,655,679 13,655,679 Other comprehensive loss ( 554,681 ) ( 554,681 ) Stock compensation expense 1,806,758 1,806,758 Distribution to shareholders ( 1,815,554 ) ( 1,815,554 ) Issuance of common stock 224,947 554,124 2,534,921 3,089,045 Cash settlement of stock options ( 342,285 ) ( 342,285 ) Purchase of treasury stock ( 43,214 ) ( 1,473,444 ) ( 1,473,444 ) Balances, December 31, 2021 3,520,646 12,654,787 ( 15,995,622 ) 11,930,067 ( 1,380,648 ) 69,873,377 77,081,961 Net income 3,034,766 3,034,766 Other comprehensive loss ( 707,251 ) ( 707,251 ) Stock compensation expense 1,803,302 1,803,302 Distribution to shareholders ( 1,940,911 ) ( 1,940,911 ) Issuance of common stock 7,466 18,669 66,046 84,715 Cash settlement of stock options ( 108,155 ) ( 108,155 ) Net share settlement of stock options 10,067 25,168 ( 243,463 ) ( 218,295 ) Balances, December 31, 2022 3,538,179 $ 12,698,624 $ ( 15,995,622 ) $ 13,447,797 $ ( 2,087,899 ) $ 70,967,232 $ 79,030,132 See accompanying Notes to Consolidated Financial Statements. 24 Acme United Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2022 2021 Operating activities: Net income $ 3,034,766 $ 13,655,679 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,762,276 2,557,680 Amortization of intangible assets 1,815,508 1,490,894 Stock compensation expense 1,803,302 1,806,758 Deferred income taxes ( 293,995 ) 489,059 Non-cash lease adjustment ( 42,570 ) 158,250 Provision for excess and obsolete inventory 189,874 Provision for doubtful accounts 199,996 - Amortization of deferred financing costs 30,151 — PPP loan forgiveness - ( 3,508,047 ) Changes in operating assets and liabilities Accounts receivable 1,839,243 ( 7,228,368 ) Inventories ( 9,606,835 ) ( 3,209,330 ) Prepaid expenses and other current assets ( 173,341 ) ( 1,040,319 ) Accounts payable 1,914,813 1,497,258 Other accrued liabilities ( 581,449 ) ( 1,528,936 ) Total adjustments ( 143,027 ) ( 8,515,101 ) Net cash provided by operating activities 2,891,739 5,140,578 Investing activities: Purchase of property, plant and equipment ( 4,304,264 ) ( 6,372,615 ) Purchase of intellectual property ( 300,000 ) - Acquisition of Safety Made ( 9,622,391 ) - Net cash used by investing activities ( 14,226,655 ) ( 6,372,615 ) Financing activities: Net borrowings (repayments) of long-term debt 16,848,326 ( 5,729,995 ) Repayments on mortgage ( 401,410 ) ( 3,177,778 ) Borrowing on mortgage - 11,469,459 Distributions to stockholders ( 1,903,346 ) ( 1,792,356 ) Cash settlement of stock options ( 108,155 ) ( 342,285 ) Tax paid on net share settlement of stock options ( 243,463 ) - Purchase of treasury stock - ( 1,473,444 ) Issuance of common stock 84,715 3,089,045 Net cash provided by financing activities 14,276,667 2,042,646 Effect of exchange rate changes ( 184,691 ) ( 134,636 ) Net increase in cash and cash equivalents 2,757,060 675,973 Cash, cash equivalents and restricted cash at beginning of year 4,843,349 4,167,376 Cash, cash equivalents and restricted cash at end of year $ 7,600,409 $ 4,843,349 Supplemental cash flow information: Cash paid for income taxes $ 978,378 $ 874,996 Cash paid for interest expense $ 2,124,144 $ 908,781 Non-cash investing activities Safety Made acquisition contingent consideration $ 1,330,000 $ - Non-cash financing activities Dividends accrued not paid $ 495,406 $ 457,745 See accompanying Notes to Consolidated Financial Statements. 25 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 first aid kits and medical products, scissors, shears, knives, rulers and pencil sharpeners, 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 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 losses of $ 288,191 and $ 239,753 in 2022 and 2021, respectively. 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 $ 1,060,812 at December 31, 2022 and $ 1,007,187 at December 31, 2021. 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 are 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 . The Company tests its property, plant and equipment whenever events or changes in circumstances (triggering event) indicate that its carrying amount may not be recoverable. During 2022 and 2021, there were no triggering events that would indicate its carrying amount may not be recoverable. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. 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, 2022 was 9 years. The Company periodically reviews the values recorded for finite lived intangible assets whenever events or changes in circumstances (triggering event) indicate that its carrying amount may not be recoverable. During 2022 and 2021, there were no triggering event that would indicate its carrying amount may not be recoverable. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. The Company annually reviews 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, 2022 and 2021, the Company assessed the recoverability of its intangible 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. Contingent Consideration - As part of the acquisition of Safety Made, a $ 1.5 million payment will be due, contingent on the acquired business meeting certain revenue milestones over a two-year period, commencing on the date of the acquisition. The fair value of the contingent liability at each reporting date is based on certain estimates and judgements made by management. Those estimates are made from the most relevant data available at that time and include historical data and future projections. At December 31, 2022, the fair value of the contingent consideration was $ 1,330,000 . 26 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. ROU assets and lease liabilities are recognized at the 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 the Company’s 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 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 are 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, for a more detailed discussion. Shipping Costs – The costs of shipping product to the Company’s customers ($ 11,328,276 in 2022 and $ 10,071,710 in 2021) 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 ($ 1,563,477 in 2022 and $ 976,268 in 2021) are included in selling, general and administrative expenses. Subsequent Events – The Company has evaluated events and transactions subsequent to December 31, 2022 through the date the consolidated financial statements were issued. 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 2022 and 2021, that individually exceeded 10% of consolidated net sales. Net sales to these customers were approximately 15 % and 10 % of consolidated net sales in 2022 and 17 % and 11 % in 2021. Recently Issued and Adopted Accounting Standards Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements. 3. Inventories Inventories consisted of: December 31, 2022 2021 Finished goods $ 45,371,042 $ 40,412,875 Work in process 408,346 88,847 Materials and supplies 17,545,818 13,050,532 Inventories: $ 63,325,206 $ 53,552,254 27 Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $ 1,720,350 as of December 31, 2022 and $ 1,554,217 as of December 31, 2021. 4. Intangible Assets and Goodwill The Company’s intangible assets and goodwill consisted of: December 31, 2022 2021 Tradename $ 10,007,698 $ 7,994,698 Customer List 18,502,207 16,066,973 Non-Compete 1,247,536 320,256 Slice License Agreement 379,921 379,921 Patents 2,271,980 2,271,980 Subtotal 32,409,342 27,033,828 Less: Accumulated Amortization 11,618,807 9,803,299 Intangible Assets $ 20,790,535 $ 17,230,529 Goodwill $ 8,188,829 $ 4,799,829 Total: $ 28,979,364 $ 22,030,358 Amortization expense for intangible assets for the years ended December 31, 2022 and 2021 were $ 1,815,508 and $ 1,490,894 , respectively. The estimated aggregate amortization expense for each of the next five years, calculated on a similar basis, is as follows: 2023 - $ 2,012,133 ; 2024 - $ 1,921,376 ; 2025 - $ 1,919,183 ; 2026 - $ 1,651,089 ; and 2027 - $ 1,322,225 . 5. Other Accrued Liabilities The Company’s other current and non-current accrued liabilities consisted of: December 31, 2022 2021 Customer Rebates $ 5,533,802 $ 5,413,829 Contingent Liability - Safety Made 1,330,000 — Accrued Compensation 791,231 1,585,938 Dividend Payable 495,406 457,745 Income Taxes Payable 533,746 564,172 Other 2,015,798 1,887,793 Total: $ 10,699,983 $ 9,909,477 6. Profit Sharing The Company 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, 2022 and 2021, 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 $ 426,594 in 2022 and $ 419,298 in 2021. 7. Income Taxes The amounts of income tax expense reflected in operations is as follows: 2022 2021 Current: Federal $ 65,263 $ 4,980 State 192,215 153,937 Foreign 664,766 870,739 Total: $ 922,244 $ 1,029,656 Deferred: Federal $ ( 238,408 ) $ 401,196 State ( 56,157 ) 88,403 Total: ( 294,565 ) 489,599 Total Income Tax Expense: $ 627,679 $ 1,519,255 28 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: 2022 2021 United States $ ( 142,095 ) $ 9,721,756 Foreign 3,804,540 5,453,178 Total: $ 3,662,445 $ 15,174,934 As discussed in Note 10 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: 2022 2021 Federal income taxes at 21% statutory rate $ 716,122 $ 2,915,698 State and local taxes, net of federal income tax effect 120,922 115,855 Permanent items ( 128,169 ) ( 1,508,877 ) Foreign tax rate difference ( 81,196 ) ( 3,421 ) Provision for income taxes: $ 627,679 $ 1,519,255 Income tax expense in 2021 included a $ 1.4 million tax credit for stock-based compensation. The following summarizes deferred income tax assets and liabilities: 2022 2021 Deferred income tax liabilities: Property, plant and equipment $ 2,004,200 $ 1,916,218 2,004,200 1,916,218 Deferred income tax assets: Asset valuations 1,109,954 983,055 Other 588,961 333,883 1,698,915 1,316,938 Net deferred income tax liability: $ 305,285 $ 599,280 In 2022, 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, 2020 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2022. 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 of approximately $ 3.9 million, 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 (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. and (ii) amounts outstanding under the fixed rate mortgage related to the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. On May 31, 2022, the Company amended its revolving loan agreement with HSBC Bank N.A. The amendment increases the amount available for borrowing to $ 65 million from $ 50 million, at an interest rate of the Secured Overnight Financing Rate (SOFR) plus 1.75 % ; interest is payable monthly. In addition, the expiration date of the revolving loan agreement was extended to May 31, 2026 . The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent ( .125 %) 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 funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA. The amendment is in effect for four quarters commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for the four quarters ranging from a low 29 of 4.75 to 1 to a high of 5.75 to 1. The amendment also increases the interest rate from SOFR +1.75 % up to a high of SOFR + 2.35 % on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of December 31, 20 2 2 , the Company was in compliance with the covenants under the revolving loan agreement , as amended. As of December 31, 2022, $ 50,000,000 was outstanding and $ 15,000,000 was available for borrowing under the Company’s revolving loan agreement. 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 . Long-term debt consisted of the following at December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Mortgage payable - HSBC Bank N.A. $ 11,232,990 $ 11,620,000 Less debt issuance costs ( 134,790 ) ( 150,541 ) 11,098,200 11,469,459 Less current maturities 404,588 388,536 Long-term mortgage payable less current maturities $ 10,693,612 $ 11,080,923 Minimum annual mortgage payments are due as follows: 2023 - $ 404,588 ; 2024 - $ 419,309 ; 2025 - $ 436,949 ; 2026 - $ 454,112 ; 2027 - $ 471,949 ; and thereafter - $ 8,911,293 . 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 year ended December 31, 2022, the Company did no t repurchase any shares of its Common Stock. As of December 31, 2022, a total of 160,365 shares may be purchased in the future under the repurchase program. On May 7, 2020, the Company received a two-year loan (the “PPP Loan”) from HSBC Bank, N.A., the lender, in the amount of $ 3,508,047 under the Paycheck Protection Program established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Under the CARES Act, all or a portion of the PPP Loan was 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 certain eligible purposes. The PPP Loan was fully forgiven by the SBA and on June 9, 2021, payment in the amount of $ 3,508,047 was made by the SBA to the lender. The Company recorded the amount forgiven as income for the year ending December 31, 2021. 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. 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) first aid and medical; and (ii) cutting, sharpening and measuring. The first aid and medical category includes first aid kits and refills, over-the-counter medications and a variety of safety products. The cutting and sharpening category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. 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. The repayment terms are 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. 30 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.” Disaggregation of Revenues The following table represents external net sales disaggregated by product category, by segment: For the year ended December 31, 2022 (amounts in 000's) United States Canada Europe Total First Aid and Safety $ 95,820 $ 7,110 $ 1,702 $ 104,632 Cutting, Sharpening and Measuring 69,385 6,669 13,276 89,330 Total Net Sales $ 165,205 $ 13,779 $ 14,978 $ 193,962 For the year ended December 31, 2021 (amounts in 000's) United States Canada Europe Total First Aid and Safety $ 82,955 $ 7,012 $ 1,548 $ 91,515 Cutting, Sharpening and Measuring 69,520 7,329 13,724 90,573 Total Net Sales $ 152,475 $ 14,341 $ 15,272 $ 182,088 10. Segment Information The Company reports financial information based on the organizational structure used by the Company’s chief operating decision maker 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 maker reviews 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, California and New Hampshire. 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 8 % and 9 % of the Company’s total net sales in 2022 and 2021, 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 31 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, 2022 and 2021: Financial data by segment: (000’s omitted) Year Ended December 31, 2022 United States Canada Europe Consolidated Net sales $ 165,205 $ 13,779 $ 14,978 $ 193,962 Operating income 4,783 1,136 354 6,273 Assets 144,466 9,078 10,833 164,377 Additions to property, plant and equipment 4,174 52 79 4,305 Depreciation and amortization 4,398 96 84 4,578 Year Ended December 31, 2021 (000's omitted) United States Canada Europe Consolidated Net sales $ 152,475 $ 14,341 $ 15,272 $ 182,088 Operating income 9,521 1,893 1,356 12,770 Assets 125,521 9,100 9,818 144,439 Additions to property, plant and equipment 6,309 10 54 6,373 Depreciation and amortization 3,822 147 80 4,049 The following is a reconciliation of segment operating income to consolidated income before taxes: (000’s omitted) 2022 2021 Total operating income $ 6,273 $ 12,770 Interest expense, net 2,364 908 Other expense (income) 247 ( 3,313 ) Consolidated income before taxes $ 3,662 $ 15,175 The table below presents revenue by geographic area. Revenues are attributed to countries based on location of the customer. (000’s omitted) Revenues 2022 2021 United States $ 163,546 $ 151,205 International: Canada 13,779 14,341 Europe 14,978 15,272 Other 1,659 1,270 Total International $ 30,416 $ 30,883 Total Revenues $ 193,962 $ 182,088 11. Stock Option Plans The Company grants stock options under the 2022 Employee Stock Option Plan (the “2022 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 2005 Non-Salaried Director Stock Option Plan (the “2005 Director Plan”) and the 2012 Employee Stock Option Plan (the “2012 Employee Plan”). 32 The 2022 Employee Plan, which was approved by the shareholders of the Company at the April 20, 2022, Annual Meeting, 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 2022 Employee Plan. Options granted under the 2022 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, 2022, the number of shares available for grant under the 2022 Employee Plan is 166,750 . Under the terms of the 2022 Employee Plan, no option may be granted under that plan after the tenth anniversary of the adoption of the 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. 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. 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 the plan 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 non-salaried 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. The 2017 Director Plan provides that the Board of Directors has the authority to increase or decrease the number of shares of Common Stock which are the subject of the annual or initial option grants to directors. 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, 2022, there were no shares available for grant under the 2017 Director Plan. Annual Options were customarily granted to non-salaried Directors on the date of the respective Annual Meeting of Shareholders. However, in 2022, there were then no options available for grant under the 2017 Director Plan. As a result, options were not granted to Directors in 2022. Because the Company did not make the customary annual grant of options to the non-salaried directors in 2022, the Company, instead, paid a cash fee to each of the non-salaried directors in an amount equal to $ 61,800 . 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 equalled 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’s stock option plans for both employees and directors 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 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 2022 and 2021, the Company paid a total of approximately $ 108,155 and $ 342,285 respectively, to optionees who had elected a net cash settlement of their respective share options. In 2022 and 2021, the Company issued 10,067 and 7,726 shares, respectively, to optionees who had elected a net share settlement. 33 A summary of changes in options issued under the Company’s stock option plans follows: 2022 2021 Options outstanding at the beginning of the year 1,537,052 1,487,925 Options granted 133,250 299,750 Options forfeited ( 6,562 ) ( 5,525 ) Options exercised ( 46,068 ) ( 245,098 ) Options outstanding at the end of the year 1,617,672 1,537,052 Options exercisable at the end of the year 1,132,174 971,568 Common stock available for future grants at the end of the year 166,750 18,650 Weighted average exercise price per share: Granted $ 29.35 $ 38.38 Forfeited 31.50 23.01 Exercised 12.73 15.15 Outstanding 25.30 24.60 Exercisable 22.83 21.33 A summary of options outstanding as December 31, 2022 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 $12.27 to $20.96 320,534 3 $ 17.05 297,284 $ 16.86 $20.97 to $22.86 334,875 5 22.09 333,125 22.10 $22.87 to $24.03 349,950 6 23.41 236,450 23.57 $24.04 to $31.00 315,875 7 26.92 172,125 25.21 $31.01 to $39.56 296,438 9 38.97 93,190 38.28 1,617,672 1,132,174 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 84 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. The assumptions used to value option grants for the years ended December 31, 2022 and 2021 were as follows: 2022 2021 Expected life in years 7 6 - 7 Interest rate 2.79 % .42 - 1.11% Volatility .413 .397 - .415 Dividend yield 1.9% % 1.3 - 1.8% 34 Total stock-based compensation recognized in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021 were $ 1,803,302 and $ 1,806,758 , respectively. At December 31, 2022, there was approximately $ 3,599,153 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, 2022, 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 2022 and 2021 was $ 11.14 and $ 13.63 per option, respectively. The aggregate intrinsic value of outstanding options was $ 1,622,738 and $ 15,436,026 at December 31, 2022 and 2021, respectively. The aggregate intrinsic value of exercisable options was $ 1,565,553 and $ 12,128,507 at December 31, 2022 and 2021, respectively. The aggregate intrinsic value of options exercised during 2022 and 2021 was $ 747,730 and $ 6,582,918 , respectively. 12. Earnings Per Share The calculation of earnings per share is as follows: 2022 2021 Numerator: Net income $ 3,034,766 $ 13,655,679 Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 3,527,626 3,471,374 Effect of diluted employee stock options 191,624 483,861 Denominator for dilutive earnings per share 3,719,250 3,955,235 Basic earnings per share $ 0.86 $ 3.93 Diluted earnings per share $ 0.82 $ 3.45 For 2022 and 2021, respectively, 296,438 and 229,250 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 Total Balances, December 31, 2020 $ ( 825,967 ) $ ( 825,967 ) Translation adjustment ( 554,681 ) ( 554,681 ) Balances, December 31, 2021 $ ( 1,380,648 ) $ ( 1,380,648 ) Translation adjustment ( 707,251 ) ( 707,251 ) Balances, December 31, 2022 $ ( 2,087,899 ) $ ( 2,087,899 ) 14. Cash, Cash Equivalents and Restricted Cash (dollars in 000’s): December 31, December 31, 2022 2021 Cash and cash equivalents $ 6,100 $ 4,843 Restricted Cash - current 750 - Restricted Cash - non-current 750 - Total cash, cash equivalents and restricted cash $ 7,600 $ 4,843 Restricted cash, which is reported within other short-term and long-term assets in the consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of certain assets of Safety Made. See Note 16 – Business Combinations, for additional information related to the acquisition of certain assets of Safety Made. 15. 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. 35 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. Operating lease cost was $ 1.2 million and $ 1.3 million for the year ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022 and 2021, $ 0.5 million was included in cost of goods sold and $ 0.7 million and $ 0.8 million, respectively, was included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Information related to leases (dollars in 000’s) : Year ended Year ended Operating cash flow information: December 31, 2022 December 31, 2021 Operating lease cost $ 1,239 $ 1,265 Operating lease - cash flow $ 1,281 $ 1,098 Non-cash activity: ROU assets obtained in exchange for lease liabilities $ 545 $ 1,760 December 31, 2022 December 31, 2021 Weighted-average remaining lease term 3.0 years 4.0 years Weighted-average discount rate 5 % 5 % Future minimum lease payments under non-cancellable leases as of December 31, 2022: (dollars in 000’s) : 2023 $ 1,239 2024 918 2025 691 2026 155 Total future minimum lease payments $ 3,003 Less: imputed interest ( 190 ) Present value of lease liabilities - current 1,130 Present value of lease liabilities - non-current $ 1,683 16. Business Combinations On June 1, 2022, the Company purchased certain assets of Live Safely Products, LLC (d/b/a “Safety Made”) for approximately $ 11 million, including $ 1.5 million of which is contingent upon meeting certain annual financial targets during a two-year period. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry. The purchase price was allocated to assets acquired as follows (in thousands): Assets: Accounts Receivable $ 512 Inventory 944 Prepaid Expense 14 Property, plant and equipment 877 Intangible Assets Backlog 23 Non-Compete 920 Tradename 1,990 Customer list 2,210 Goodwill 3,389 Total assets $ 10,879 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 United States operating segment. Intangible assets include Customer List, Trade Names, Non-Compete Agreements, and Goodwill. The useful lives of the identified intangible assets range from 5 years to 15 years. 36 As part of the purchase agreement, there is a $ 1.5 million payment due to the owners that is contingent on certain revenue milestones being met and the owners being employed by the Company at the end of the two-year period. The $ 1.5 million will be held by the Escrow Agent in escrow for twenty-five (25) months after the closing date. After one year from the closing date, the Escrow Agent will disburse to the Seller a payment up to $ 750,000 or a portion thereof determined by the calculation outlined in the purchase agreement. After two years from the closing date, the Escrow Agent will disburse to the seller the remaining escrow amount, or a portion thereof determined by the calculation outlined in the agreement. The $ 1.5 million contingent payment that is being held in escrow is classified as restricted cash. Of this amount, $ 750,000 is recorded in current assets, with the remaining $ 750,000 reported in other long-term assets on the consolidated balance sheet. Net sales for the year ended December 31, 2022, attributable to the sales of Safety Made products were approximately $ 3.6 million. Income from operations for the year ended December 31, 2022, attributable to Safety Made products was approximately $ 0.6 million. Assuming Safety Made assets were acquired on January 1, 2021 , unaudited proforma combined net sales for the years ended December 31, 2022 and 2021 for the Company would have been approximately $ 195.8 million and $ 187.0 million, respectively. Unaudited proforma combined net income for the years ended December 31, 2022 and 2021 for the Company would have been approximately $ 3.4 million and $ 15.5 million. 37 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 sheet s of Acme United Corporation and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income , changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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, 2022, 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 10, 2023, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates. Business Combination As described in Note 16 to the Company’s financial statements, the Company completed the acquisition of Live Safely Products, LLC for approximately $11 million on June 1, 2022, including $1.5 million of contingent earn-out liabilities. This transaction resulted in recording of $5.1 million of intangible assets. Management applied significant judgment in estimating the fair value of the intangible assets, each of which involved the use of significant estimates and assumptions with respect to expected future cash flows and discount rates. We identified the valuation of the intangible assets as a critical audit matter. Changes to management's judgments and assumptions used in determining the fair values of the intangible assets could have a material impact on the financial statements. The significant estimation was primarily due to the complexity of the valuation models used to measure the fair value as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the intangible assets included discount rates, revenue and earnings before tax. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including estimates of future revenue and earnings before tax. How We Addressed the Matter in Our Audit Our audit procedures related to the business combination include the following, amongst others: 38 • We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the accounting for the business combination and over the determination of the purchase price allocation. We considered the results of our tests of controls in our other audit procedures. • To test the acquisition of Live Safely Products, LLC, our audit procedures included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. • We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions including the discount rate. • Specifically, when assessing the key assumptions, we focused on discount rates and revenue growth rates amongst others. /s/ Marcum llp Marcum LLP 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. Boston, Massachusetts March 10, 2023 PCAOB Firm ID # 688 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 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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, 2022 and 2021 and the related consolidated statements of operations, 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, 2022, of the Company, and our report dated March 10, 2023 expressed an unqualified opinion on those 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 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. /s/ Marcum llp Marcum LLP Boston, Massachusetts March 10, 2023 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 2022.