NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”). These adjustments are of a normal, recurring nature. However, the financial statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for such disclosures. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated balance sheet as of that date. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K.
The Company has evaluated events and transactions subsequent to March 31, 2020 and through the date these condensed consolidated financial statements were issued.
Recently Issued and Adopted Accounting Standards
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 Disclosure 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 that the adoption of ASU 2018-14 will have a material impact on its consolidated financial statements.
In December 2019, the 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
2. Contingencies
There are no pending material legal proceedings to which the Company is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.
3. 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, sharpening and measuring category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and safety category includes first aid kits and refills 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. We generally recognize customer rebate costs as a deduction to gross sales at the time that the associated revenue is recognized.
9
Significant Payment Terms
Payment terms for each customer are dependent on the agreed upon contractual repayment terms. Payment terms typically are between 30 and 90 days and vary depending on the size of the customer and its risk profile to the Company. Some customers receive discounts for early payment.
Product Returns
The Company accepts product returns in the normal course of business. The Company estimates reserves for returns and the related refunds to customers based on historical experience. Reserves for returned merchandise are included as a component of “Accounts receivable” in the condensed consolidated balance sheets.
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 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 condensed 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 fulfilment 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 effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.
The Company has elected to exclude from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company 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 an impact on the Company’s condensed consolidated financial statements.
Disaggregation of Revenues
The following table represents external net sales disaggregated by product category, by segment (amounts in thousands):
For the three months ended March 31, 2020
|
|
U.S.
|
|
|
Canada
|
|
|
Europe
|
|
|
Total
|
|
Cutting, Sharpening and Measuring
|
|
$
|
11,728
|
|
|
$
|
1,422
|
|
|
$
|
2,598
|
|
|
$
|
15,748
|
|
First Aid and Safety
|
|
|
18,715
|
|
|
|
1,000
|
|
|
$
|
312
|
|
|
|
20,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
30,443
|
|
|
$
|
2,422
|
|
|
$
|
2,910
|
|
|
$
|
35,775
|
|
For the three months ended March 31, 2019
|
|
U.S.
|
|
|
Canada
|
|
|
Europe
|
|
|
Total
|
|
Cutting, Sharpening and Measuring
|
|
$
|
13,172
|
|
|
$
|
1,413
|
|
|
$
|
2,216
|
|
|
$
|
16,801
|
|
First Aid and Safety
|
|
|
14,267
|
|
|
|
—
|
|
|
|
302
|
|
|
|
14,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
27,439
|
|
|
$
|
1,413
|
|
|
$
|
2,518
|
|
|
$
|
31,370
|
|
10
4. 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 working capital, growth, dividends, acquisition, share repurchases 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. At March 31, 2020, the Company was in compliance with the covenants then in effect under the loan agreement.
As of March 31, 2020, and December 31, 2019, the Company had outstanding borrowings of approximately $33,852,898 and $33,240,407, respectively, under the Company’s revolving loan agreement with HSBC.
On October 26, 2017, the Company exercised its option to purchase its First Aid Only manufacturing and distribution center in Vancouver, WA for $4.0 million. The property consists of 53,000 square feet of office, manufacturing, and warehouse space on 2.86 acres. The purchase 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.
During the three months ended March 31, 2020 the Company paid approximately $457,027, to optionees who had elected a net cash settlement of their respective employee stock options.
During the three months ended March 31, 2020, the Company paid approximately $214,000 to repurchase a total of 10,719 shares of its Common Stock. As of March 31, 2020, 207,280 shares may be purchased in the future under the repurchase programs announced in 2010 and 2019.
5. Segment Information
The Company reports financial information based on the organizational structure used by the Company’s chief operating decision makers for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of: (1) United States; (2) Canada; and (3) Europe. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S. operations; accordingly, the Company’s chief operating decision makers review the financial results of both on a consolidated basis, and the results of the Asian operations have been aggregated with the results of the United States operations to form one reportable segment called the “United States segment” or “U.S. segment”. Each reportable segment derives its revenue from the sales of cutting and sharpening devices, measuring instruments and first aid and safety products for school, office, home, hardware, sporting and industrial use.
Domestic sales orders are filled primarily from the Company’s distribution centers in North Carolina, Washington, Massachusetts, Tennessee 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. Individual direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 6% of the Company’s total net sales for each of the three months ended March 31, 2020 compared to 7% for the comparable period in 2019.
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.
11
The following table sets forth certain financial data by segment for the three months ended March 31, 2020 and 2019:
Financial data by segment:
(in thousands)
|
|
Three months ended March 31,
|
|
Sales to external customers:
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
30,444
|
|
|
$
|
27,439
|
|
Canada
|
|
|
2,421
|
|
|
|
1,413
|
|
Europe
|
|
|
2,910
|
|
|
|
2,518
|
|
Consolidated
|
|
$
|
35,775
|
|
|
$
|
31,370
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,571
|
|
|
$
|
1,257
|
|
Canada
|
|
|
205
|
|
|
|
135
|
|
Europe
|
|
|
234
|
|
|
|
142
|
|
Consolidated
|
|
$
|
2,010
|
|
|
$
|
1,534
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
315
|
|
|
|
501
|
|
Other expense (income), net
|
|
|
43
|
|
|
|
(2
|
)
|
Consolidated income before income taxes
|
|
$
|
1,652
|
|
|
$
|
1,035
|
|
Assets by segment:
(in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
96,654
|
|
|
$
|
98,578
|
|
Canada
|
|
|
5,427
|
|
|
|
6,168
|
|
Europe
|
|
|
6,041
|
|
|
|
6,003
|
|
Consolidated
|
|
$
|
108,122
|
|
|
$
|
110,749
|
|
6. Stock Based Compensation
The Company recognizes share-based compensation at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period, which is generally the vesting period. Share-based compensation expenses were $242,924 and $212,000 for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, there was a total of $1,439,874 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share-based payments granted to the Company’s employees. As of that date, the remaining unamortized expense is expected to be recognized over a weighted average period of approximately three years.
7. Fair Value Measurements
The carrying value of the Company’s bank debt is a reasonable estimate of fair value because of the nature of its payment terms and maturity.
8. 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.
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.
12
ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. As most of our leases do not provide an implicit rate, the present value of lease payments is determined primarily using our incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term. For the three months ended March 31, 2020, $0.1 million was included in cost of goods sold and $0.2 million was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
Information related to leases (in 000’s):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Operating lease cost
|
|
$
|
307
|
|
|
$
|
290
|
|
Operating lease - cash flow
|
|
$
|
271
|
|
|
$
|
284
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Weighted-average remaining lease term
|
|
4.0 years
|
|
|
3.3 years
|
|
Weighted-average discount rate
|
|
|
5
|
%
|
|
|
5
|
%
|
Future minimum lease payments under non-cancellable leases as of March 31, 2020:
2020 (remaining)
|
|
$
|
837
|
|
2021
|
|
|
734
|
|
2022
|
|
|
467
|
|
2023
|
|
|
462
|
|
2024
|
|
|
278
|
|
Thereafter
|
|
|
294
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
3,072
|
|
Less: imputed interest
|
|
|
(304
|
)
|
Present value of lease liabilities - current
|
|
|
1,003
|
|
Present value of lease liabilities - non-current
|
|
$
|
1,765
|
|
9. Business Combinations
On January 7, 2020, the Company purchased the assets of First Aid Central, a Canadian first aid and safety supplier for approximately $2.1 million. Based in Laval, Canada and operating since 2007, First Aid Central produces and sells a broad line of first aid kits, refills, and safety products to a wide range of industries and end users. Its products meet federal Health Canada and provincial regulatory requirement.
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. Management’s assessment of the valuation of intangible assets is preliminary and finalization of the Company’s purchase price accounting assessment may result in changes to the valuation of the identified intangible assets.
Net sales for the three months ended March 31, 2020 attributable to First Aid Central products were approximately $1.0 million. Net income for the three months ended March 31, 2020 attributable to First Aid Central products was approximately $0.1 million.
Assuming First Aid Central assets were acquired on January 1, 2019, unaudited proforma combined net sales for the three months ended March 31, 2019, for the Company would have been approximately $32.1 million. Unaudited proforma combined net income for the three months ended March 31, 2019 for the Company would have been approximately $0.9 million.
13
10. Subsequent Events
On May 7, 2020, the Company received a loan from HSBC Bank, N.A. in the amount of $3,508,047 under the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief and Economic Security Act. 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 for six months; commencing November 5, 2020, the Company is required to pay to the lender equal monthly payments of principal and interest. 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 beginning 60 days after loan approval, 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 eight week period beginning on the date of funding of the loan. Not more than 25% of the amount forgiven may be for non-payroll costs.
The Company intends to use the proceeds of the PPP Loan for purposes which it believes to be consistent with the requirements of the PPP for loan forgiveness. However, no assurance can be given that any application for loan forgiveness that the Company may submit will be approved, in whole or in part.
14