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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2021
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Basis of Presentation: The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). Principles of Consolidation: The consolidated financial statements include the accounts of the Karat Packaging and its wholly owned and controlled operating subsidiaries Lollicup and Lollicup Franchising, LLC (“Lollicup Franchising”) (effective September 1, 2020, refer to Note 3) and Global Wells Investment Group LLC (“Global Wells”), a variable interest entity wherein the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated. Noncontrolling Interests: The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary. The Company became the primary beneficiary of Global Wells on March 23, 2018 upon execution of an operating lease agreement allowing the Company to lease Global Wells’ facility. Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the Company’s stockholders’ equity. The amount of net income (loss) attributable to noncontrolling interests is disclosed in the consolidated statements of income. Estimates and Assumptions: Management uses estimates and assumptions in preparing financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ materially from the estimates that were assumed in preparing the consolidated financial statements. Estimates that are significant to the consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for slow-moving and obsolete inventory. Reporting Segments: The Company manages and evaluates its operations in one reportable segment. This segment consists of manufacturing and supply of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, foam, post-consumer recycled content and renewable materials. It also consists of the distribution of personal protective equipment related products such as face shields and face masks. The Company’s long-lived assets are all located in the United States, and its revenues are all generated in the United States. Earnings per share: Basic earnings per common share is calculated by dividing net income attributable to Karat Packaging, Inc by the weighted average number of common shares outstanding during the related period. Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive shares. Cash and cash equivalents: The Company considers all highly liquid investments purchased with an original maturity at the date of purchase of three months or less to be cash equivalents. At December 31, 2021 and 2020, cash and cash equivalents were comprised of cash held in money markets, cash on hand and cash deposited with banks. Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable consists primarily of amounts due from customers. Accounts receivable are carried at their estimated collectible amounts and are periodically evaluated for collectability based on past credit history. The Company recognizes an allowance for bad debt on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt write-offs, current past due customers in the aging as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. Inventories: Inventories consist of raw materials, work-in-process, and finished goods. Inventory cost is determined using the first-in, first-out (FIFO) method and valued at lower of cost or net realizable value. The Company maintains reserves for excess and obsolete inventory considering various factors including historic usage, expected demand, anticipated sales price, and product obsolescence. Property and Equipment: Property and equipment are carried at cost, net of accumulated depreciation and amortization, and net of impairment losses, if any. Depreciation of property and equipment are computed by straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the term of the lease, or the estimated life of the improvement, whichever is less. The estimated useful life of property and equipment are as follows:
Machinery and equipment | 5 to 10 years
Leasehold Improvements | Lesser of useful life or lease term
Vehicles | 5 years
Furniture and fixtures | 7 years
Building | 28 to 40 years
Property held under capital leases | 3 to 5 years
Computer hardware and software | 3 years
Normal repairs and maintenance are expensed as incurred, whereas significant changes that materially increase values or extend useful lives are capitalized and depreciated over the estimated useful lives of the related assets. Deposits: Deposits are payments made for machinery and equipment, and construction and improvement for the Company’s facilities. Included in deposits are also payments made to lessors of leased properties as security for the full and faithful observance of contracts, which will be refunded to the Company upon expiration or termination of the contract. Impairment of Long-lived Assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The impairment test comprises two steps. The first step compares the carrying amount of the asset to the sum of expected undiscounted future cash flows. If the sum of expected undiscounted future cash flows exceeds the carrying amount of the asset, no impairment is taken. If the sum of expected undiscounted future cash flows is less than the carrying amount of the asset, a second step is warranted and an impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash flows. For the years ended December 31, 2021 and 2020, management concluded that an impairment write-down was not required. Business Combination and Goodwill: The Company applies the acquisition method of accounting for business combinations in accordance with GAAP, which requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets, and liabilities acquired. Such estimates may be based on significant unobservable inputs. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. During the years ended December 31, 2021 and 2020, the Company determined no impairments have occurred. The following table summarizes the activity in the Company's goodwill from December 31, 2019 to December 31, 2021:
| (in thousands)
Balance at December 31, 2019 | $3,113
Goodwill acquired | —
Balance at December 31, 2020 | $3,113
Goodwill acquired | 397
Balance at December 31, 2021 | $3,510
Government Grants: Government grants are not recognized unless there is reasonable assurance that the Company and Global Wells will comply with the grants’ conditions and that the grants will be received. As of December 31, 2021, the Company and Global Wells received cumulative grants of $1,200,000 and $1,302,000, respectively. As of December 31, 2020, the Company and Global Wells received cumulative grants of $900,000 and $1,302,000, respectively. These grants are reported as deferred income within other liabilities in the accompanying consolidated balance sheets as there are conditions attached to the grants that the Company and Global Wells have not met. These conditions include requiring its facility in Rockwall, Texas to maintain a certain minimum tax value for the next five calendar years through 2023 (the “Required Period”), continue operations in the facility for the Required Period, have a minimum number of full time equivalent employees with a minimum average annual gross wage employed in the operation of the facility in the Required Period, and promise to not engage in a pattern or practice of unlawful employment of aliens during the Required Period. Derivative Instruments: Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic No. 815, Derivatives and Hedging, requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statements of income during the current period. The Company and Global Wells entered into certain interest rate swaps to manage the interest rate risk, and accounted for such interest rate swaps as a derivative instrument under ASC 815. The interest rate swaps was not designated for hedge accounting and as such, the change in the fair value of interest rate swaps is recognized as interest income/expense in the accompanying consolidated statements of income. Variable Interest Entities: The Company has a variable interest in two entities, Global Wells and Lollicup Franchising, LLC (prior to September 1, 2020, the acquisition date, see Note 3). Global Wells In 2017, Lollicup along with three other unrelated parties formed Global Wells. Lollicup has a 13.5% ownership interest and a 25% voting interest in Global Wells, located in Rockwall, Texas. The purpose of this new entity is to own, construct, and manage a warehouse and manufacturing facility. Global Wells’ operating agreement may require its members to make additional contributions only upon the unanimous decision of the members or where the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000. Global Wells was determined to be a variable interest entity in accordance with ASC Topic 810, Consolidations. However, at the time the investment was made, it was determined that Lollicup was not the primary beneficiary. In 2018, Lollicup entered into an operating lease with Global Wells (“Texas Lease”). In June 2020, the Company entered into another operating lease with Global Wells (“New Jersey Lease”). Upon entering into the Texas Lease with Lollicup on March 23, 2018, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in Global Wells. As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC Topic 810, for the period from March 23, 2018. The monthly lease payments for the Texas Lease and New Jersey Lease are eliminated upon consolidation. Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets; they represent claims against the specific assets of Global Wells, except for the Company’s guarantee of Global Wells’ term loans. Global Wells has a term loan with a financial institution, which provides for advances up to $21,580,000 and expires May 2029 (the “2029 Term Loan”). The 2029 Term Loan is collateralized by substantially all of the Company’s and Global Well’s assets and is guaranteed by the Company and certain of its shareholders. Additionally, in June 2020, Global Wells entered into a $16,540,000 term loan with a financial institution that matured September 2021 to purchase land and building in Branchburg, New Jersey (the “2021 Term Loan”). The 2021 Term Loan was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and certain of its shareholders. In September 2021, Global Wells refinanced the 2021 Term Loan by entering into a $23,000,000 term loan that matures September 30, 2026 (the “2026 Term Loan”). The 2026 Term Loan provides an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000. The 2026 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s shareholders. As of December 31, 2021 and 2020, total loan guaranteed by the Company related to Global Wells amounted to $36,517,000 and $37,491,000, respectively. The following financial information includes assets and liabilities of Global Wells and are included in the accompanying consolidated balance sheets, except for those that eliminate upon consolidation:
| December 31, 2021 |  | December 31, 2020
| (in thousands)
Cash | $ | 1,163 |  |  | $ | 81 |
Accounts receivable | 384 |  |  | 343 |
Prepaid expenses and other current assets | 63 |  |  | 98 |
Property and equipment, net | 46,612 |  |  | 47,826 |
Other assets | 4,762 |  |  | 5,260 |
Total assets | 52,984 |  |  | 53,608 |
Accounts payable | $ | 497 |  |  | $ | 564 |
Accrued expenses | 68 |  |  | 128 |
Income tax payable | 9 |  | —
Customer deposits | 88 |  | —
Due to Lollicup USA Inc. | 2,620 |  |  | 2,990 |
Long-term debt, current portion | 1,178 |  |  | 694 |
Long-term debt, net of current portion | 35,339 |  |  | 36,697 |
Other liabilities | 2,636 |  |  | 3,906 |
Total liabilities | $ | 42,435 |  |  | $ | 44,979 |
Lollicup Franchising, LLC Prior to the acquisition on September 1, 2020 (see Note 3 — Acquisitions), the Company’s two major shareholders shared common ownership with Lollicup Franchising, LLC (“Lollicup Franchising”). Lollicup Franchising owns and operates two stores and also licenses its name to third party store owners and operators. The Company sells inventory to Lollicup Franchising and to the licensed third-party stores. In connection with the sales to third-party stores, the Company had an incentive program with Lollicup Franchising where a certain percentage of the sales to the third-party stores were paid to Lollicup Franchising prior the acquisition on September 1, 2020. The Company incurred incentive program expenses of $79,000 for the period from January 1, 2020 through August 31, 2020, which was reported as a contra to net sales in the accompanying consolidated statement of income. The Company determined that the Company held a variable interest in Lollicup Franchising, however, it was determined that the Company was not the primary beneficiary. The Company did not have any explicit arrangements and implicit variable interest where the Company was required to provide financial support to Lollicup Franchising. The Company determined that the maximum exposure to loss as a result of its involvement with Lollicup Franchising is zero. Revenue Recognition: The Company generates revenues from sale of products to customers that include national distributors, fast food restaurants with multiple locations, small businesses, and those that purchase for individual consumption. The Company considers revenue disaggregated by customer type to most accurately reflect the nature and uncertainty of its revenue and cash flows that are affected by economic factors. For the years ended December 31, 2021 and 2020, net sales disaggregated by customer type consist of the amounts shown below.
| Year Ended December 31,
| 2021 |  | 2020
| (in thousands)
National and regional chains | $ | 86,017 |  |  | $ | 67,875 |
Distributors | 199,902 |  |  | 157,164 |
Online | 50,271 |  |  | 33,194 |
Retail | 28,054 |  |  | 37,285 |
| $ | 364,244 |  |  | $ | 295,518 |
•Distributors revenue: Distributors revenues are derived from national and regional distributors across the U.S. that purchase the Company’s products for restaurants, offices, schools, and government entities. Revenue from national distributions is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. •National and regional chains revenue: National and regional chains revenue is derived from restaurants and supermarkets with locations across multiple states. Revenue from transactions with national and regional chains is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. •Retail revenue: Retail revenue is derived primarily from regional bubble tea shops, boutique coffee shops and frozen yogurt shops. Revenue from retail transactions is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. •Online revenue: Online revenue is derived from small businesses such as small restaurants, bubble tea shops, coffee shops, juice bars and smoothie shops. Revenue from online transactions is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. The transaction price is the amount of consideration to which the Company expects to be entitled to in exchange for transferring goods or services to the customer. Revenue is recorded based on the total estimated transaction price, which includes fixed consideration and estimates of variable consideration. Variable consideration includes estimates of rebates and other sales incentives, cash discounts for prompt payment, consideration payable to customers for cooperative advertising and other program incentives, and sales returns. The Company estimates its variable consideration based on contract terms and historical experience of actual results using the expected value method. The performance obligations are generally satisfied shortly after manufacturing and shipment as purchases made by the Company’s customers are manufactured and shipped with minimal lead time. The Company’s contract liabilities consist primarily of rebates and other sales incentives, consideration payable to customers for cooperative advertising and other program incentives, and sales return. As of December 31, 2021 and 2020, the contract liabilities were not considered significant to the financial statements. Shipping and handling fees billed to a customer are recorded within net sales, with corresponding shipping and handling costs recorded in selling expense on the accompanying consolidated statements of income. Shipping and handling fees billed to a customer are not deemed to be separate performance obligations for all of the Company’s product sales as these activities occur before the customer receives the products. Shipping and handling costs included within selling expenses in the consolidated statements of income for the years ended December 31, 2021 and 2020 were $28,525,000 and $17,572,000, respectively. Sales taxes collected concurrently with revenue-producing activities and remitted to governmental authorities are excluded from revenue. Sales commissions are expensed as incurred due to the amortization period being less than one year and are recorded in selling expense on the accompanying consolidated statements of income. Advertising Costs: The Company expenses costs of print production, trade show, online marketing, and other advertisements in the period in which the expenditure is incurred. Advertising costs included in the line item general and administrative expenses in the consolidated statements of income were $2,488,000 and $1,516,000 for the years ended December 31, 2021 and 2020, respectively. Income Taxes: The Company applies the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company applies ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes potential interest and/or penalties related to income tax matters as income tax expense in the accompanying consolidated statements of income. Accrued interest and penalties are included on the related tax liability in the consolidated balance sheets. The Company had no uncertain tax positions as of December 31, 2021 and 2020. Concentration of Credit Risk: Cash is maintained at financial institutions and, at times, balances exceed federally insured limits. Management believes that the credit risk related to such deposits is minimal. The Company extends credit based on the valuation of the customers’ financial condition and general collateral is not required. Management believes the Company is not exposed to any material credit risk on these accounts. For the years ended December 31, 2021 and 2020, purchases from the following vendor makes up greater than 10 percent of total purchases:
| Year Ended December 31,
| 2021 |  | 2020
Keary Global Ltd. (“Keary Global”) and its affiliate, Keary International, Ltd. – related parties | 12 | % |  | 11 | %
Amounts due to the following vendors at December 31, 2021 and 2020, respectively, that exceed 10 percent of total accounts payable are as follows:
| December 31, 2021 |  | December 31, 2020
Keary Global and its affiliate, Keary International – related parties | 10 | % |  | 18 | %
Taizhou Fuling Plastics Co.,Ltd | * |  | 11 | %
Fuling Technology Co., Ltd. | 21 | % |  | *
Wen Ho Industrial Co., Ltd | 11 | % |  | *
* Amounts payable represented less than 10% of total accounts payable. No customer accounted for more than 10 percent of sales or accounts receivable for the years ended December 31, 2021 and 2020. Fair Value Measurements: The Company follows ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows: Level 1— Quoted prices in active markets for identical assets or liabilities that the Center has the ability to access as of the measurement date. Level 2— Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. At December 31, 2021 and 2020, the Company has financial instruments classified within the fair value hierarchy, which consist of the following: •Interest rate swaps that meet the definition of a derivative, classified as Level 2 within the fair value hierarchy, and reported as an asset or liability on the consolidated balance sheets depending on its fair value. The fair value of interest rate swaps is calculated using pricing models that will use volatility to quantify the probability of changes around interest rate trends. •Money market account, classified as Level 1 within the fair value hierarchy, and reported as a current asset on the consolidated balance sheets. The following table summarize the Company’s fair value measurements by level at December 31, 2021 for the assets and liabilities measured at fair value on a recurring basis:
| Level 1 |  | Level 2 |  | Level 3
| (in thousands)
Cash equivalents | $ | 2,000 |  |  | $ | — |  |  | $ | — |
Interest rate swap | — |  |  | (1,334) |  |  | — |
Fair value, December 31, 2021 | $ | 2,000 |  |  | $ | (1,334) |  |  | $ | — |
The following table summarize the Company’s fair value measurements by level at December 31, 2020 for the assets and liabilities measured at fair value on a recurring basis:
| Level 1 |  | Level 2 |  | Level 3
| (in thousands)
Cash equivalents | $ | 448 |  |  | $ | — |  |  | $ | — |
Interest rate swaps | — |  |  | (2,847) |  |  | — |
Fair value, December 31, 2020 | $ | 448 |  |  | $ | (2,847) |  |  | $ | — |
The Company has not elected the fair value option as presented by ASC 825, Fair Value Option for Financial Assets and Financial Liabilities, for the financial assets and liabilities that are not otherwise required to be carried at fair value. Under ASC 820, material financial assets and liabilities not carried at fair value, including accounts receivable, accounts payable, accrued and other liabilities, and borrowings under promissory notes and line of credit, are reported at their carrying value. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities approximate fair value because of the short maturity of these instruments. The carrying amounts of long-term debt and line of credit at December 31, 2021 and 2020 approximates fair value because the interest rate approximates the current market interest rate. The fair value of these financial instruments was determined using level 2 inputs. Foreign Currency: The Company includes gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, in the consolidated statements of income. The Company recorded a loss on foreign currency transactions of $412,000 and $688,000 for the years ended December 31, 2021 and 2020, respectively. Stock-Based Compensation: The Company recognizes stock-based compensation expense related to shared-based payment awards, including stock options and restricted stock units, in accordance with ASC 718, Compensation — Stock Compensation. This standard requires the Company to record compensation expense equal to the fair value of awards granted to employees and non-employees. The fair value of share-based payment awards on the date of grant is estimated using the Black-Scholes option pricing model for stock options, and the closing price of the Company's common stock on the trading day immediately prior to the grant date for restricted stock units. Key input assumptions used in the Black-Scholes option pricing model to estimate the grant date fair value of stock options include the fair value of the Company’s common stock, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate, and the Company’s expected annual dividend yield. The risk-free interest rate assumption for options granted under the Plan is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company’s stock options. The expected term of employee stock options under the Plan represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is calculated based on the “simplified method,” which estimates the expected term based on the average of the vesting period and contractual term of the stock option. The Company determined the expected volatility assumption using the frequency of daily historical prices of comparable public company’s common stock for a period equal to the expected term of the options. The dividend yield assumption for options granted under the Plan is based on the Company’s history and expectation of dividend payouts. Stock-based compensation expense is based on awards that ultimately vest. Forfeitures are accounted for as they occur. The Company has elected to treat stock-based payment awards with graded vesting schedules and time-based service conditions as separate awards and recognizes stock-based compensation expense over the requisite service period using the graded vesting attribution method. The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If the Company had made different assumptions, its stock-based compensation expense, and its net income could have been significantly different. New and Recently Adopted Accounting Standards: The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, the Company has elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies. In February 2016, the FASB issued ASU 2016-02 (Topic 842), “Leases”. This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The FASB subsequently issued ASU 2018-11 (Topic 842), “Leases: Targeted Improvements” which amends ASC 842 in two important areas, including (i) allowing lessors to combine lease and associated nonlease components by class of underlying asset in contracts that meet certain criteria and, (ii) provides entities with an optional method for adopting the new leasing guidance by recognizing a cumulative-effect adjustment to the opening balance of the retained earnings, and not to restate the comparative periods presented at the adoption date. The effective date for ASC 842 for public business entities is annual reporting periods beginning after December 15, 2018. The effective date for all other entities is annual reporting periods beginning after December 15, 2021. The Company will adopt the new standard in annual reporting periods beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU 2016-13 “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which adds to U.S. GAAP an impairment model known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities that are SEC filers. For all other public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. The FASB subsequently issued ASU 2019-10 (Topic 326), “Financial Instruments-Credit Losses: Effective Dates” which amends the effective date for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. For calendar-year end companies that are eligible for the deferral, the effective date is January 1, 2023. The Company will adopt the new standard in annual reporting period beginning after January 1, 2023, and is currently assessing the impact of this standard on the Company’s consolidated financial statements. In June 2018, the FASB issued ASU 2018-07 (Topic 718), “Compensation — Stock Compensation: Improvements to Non-employee Share based Payment Accounting”, which supersedes Subtopic 505-50 and expands the scope of ASC Topic 718 to include share-based payments issued to nonemployees for goods and services. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606. The FASB subsequently issued ASU 2019-08 (Topic 718), “Compensation — Stock Compensation” which clarifies guidance in Topic 718 on measurement and classification of share-based payments to customers. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company adopted this ASU as of January 1, 2020 and adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow. In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820) Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance in this ASU eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. Certain provisions are applied prospectively while others are applied retrospectively. This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted this ASU as of January 1, 2020 and adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow. In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The guidance in this ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public entities, the amendments in this Update are effective for fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendment is permitted. The Company adopted the new standard as of January 1, 2021, and the adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow. In March 2020, the FASB issued ASU 2020-03 “Codification Improvements to Financial Instruments”. The guidance in this ASU clarifies the requirement for all entities to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s ASC. The guidance also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “Leases”, should be the contractual term used to measure expected credit losses under ASC 326, “Financial Instruments — Credit Losses”. This ASU is effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13.

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