Hillman Solutions Corp. 10-K

Item 8 – Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page(s) Report of Management on Internal Control Over Financial Reporting 43 Report of Independent Registered Public Accounting Firm 44 Consolidated Financial Statements: Consolidated Balance Sheets 46 Consolidated Statements of Comprehensive Loss 47 Consolidated Statements of Cash Flows 48 Consolidated Statements of Stockholders ' Equity 49 Notes to Consolidated Financial Statements 50 Financial Statement Schedule: Valuation Accounts 88 42 Report of Management on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of The Hillman Solutions Corp.. and its consolidated subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of The Hillman Solutions Corp. and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of The Hillman Solutions Corp. and its consolidated subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of The Hillman Solutions Corp. and its consolidated subsidiaries that could have a material effect on the consolidated financial statements. Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 25, 2021, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. Based on its assessment, our management has concluded that our internal control over financial reporting was effective, as of December 25, 2021, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management's assessment with the Audit Committee of The Hillman Companies, Inc. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report. /s/ DOUGLAS J. CAHILL /s/ ROBERT O. KRAFT Douglas J. Cahill Robert O. Kraft President and Chief Executive Officer Chief Financial Officer Dated: March 16, 2022 Dated: March 16, 2022 43 Report of Independent Registered Public Accounting Firm To the Stockholders' and Board of Directors The Hillman Solutions Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Hillman Solutions Corp. and subsidiaries (the Company) as of December 25, 2021 and December 26, 2020, the related consolidated statements of comprehensive loss, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 25, 2021, and the related notes and financial statement schedule II -Valuation Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 25, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated 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 consolidated 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 they relate. Valuation of Goodwill As discussed in Note 2 to the consolidated financial statements, the goodwill balance as of December 25, 2021 was $825,371 thousand. The Company performs goodwill impairment testing annually as of October 1st and whenever events or changes in circumstances indicate that the fair value of a reporting unit is less than the carrying value. With the assistance of a third-party specialist, management assesses the fair value of the reporting units based on a discounted cash flow model and multiples of earnings. Assumptions critical to the fair value estimates under the discounted cash flow model include the projected revenue growth rates and the discount rates. We identified the assessment of the fair value of two of the Company’s reporting units within its goodwill impairment analysis as a critical audit matter. The estimation of fair value of the two reporting units is complex and subject to significant management judgment and estimation uncertainties. Specifically, evaluating the short-term projected revenue growth rates and the discount rates used to determine the fair value of these reporting units required challenging auditor judgment, as they involved subjective assessments of market, industry and economic conditions 44 that were sensitive to variation. We performed sensitivity analyses to determine the significant assumptions used in the goodwill valuation, which required challenging auditor judgment. Changes to those assumptions could have had a significant effect on the Company’s assessment of the fair value of the two reporting units. Additionally, the audit effort associated with the discount rates required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to the Company’s goodwill impairment process, including controls related to the short-term projected revenue growth rates and the discount rates. We compared the Company’s historical revenue forecasts to actual results to assess the Company’s ability to accurately forecast. We compared short-term projected revenue growth rates used in the valuation model against underlying business strategies and growth plans. We evaluated the reasonableness of the Company’s forecasted short-term projected revenue growth rates for the two reporting units by comparing the growth assumptions to comparable entities within the industry. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rates used by management for the two reporting units by comparing them to a range of discount rates developed using market information for comparable entities within the industry. Determination of the accounting acquirer As discussed in Note 3 to the consolidated financial statements, on July 14, 2021, HMAN Group Holdings, Inc. (HMAN) and Landcadia Holdings III, Inc. (Landcadia) consummated a business combination pursuant to a merger agreement (the Merger Agreement), with HMAN becoming a wholly-owned subsidiary of Landcadia, which was renamed Hillman Solutions Corp. The Company accounted for the transaction as a reverse recapitalization and concluded that HMAN was the accounting acquirer based upon the terms of the Merger Agreement and evaluation of a number of indicative factors. We identified the evaluation of the Company’s determination of the accounting acquirer as a critical audit matter. Subjective auditor judgment was required in evaluating the relative importance of the indicative factors, individually and in the aggregate, including the post-combination voting rights, composition of the board of directors and management, the relative size of the entities, the minority voting rights, and the entity initiating the transaction. A different conclusion would have resulted in a material difference in the accounting for the transaction. The following are the primary procedures we performed to address this critical audit matter. We tested the Company’s conclusion regarding the determination of the accounting acquirer by evaluating management’s assessment of the post-combination voting rights, composition of the board of directors and management, the relative size of the entities, the minority voting rights, and the entity initiating the transaction, by comparing them to amended and restated bylaws of the Company, the Merger Agreement, and certain filings with the Securities and Exchange Commission. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Cincinnati, Ohio March 16, 2022 45 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 25, 2021 December 26, 2020 ASSETS Current assets: Cash and cash equivalents $ 14,605 $ 21,520 Accounts receivable, net of allowances of $ 2,891 ($ 2,395 - 2020) 107,212 121,228 Inventories, net 533,530 391,679 Other current assets 12,962 19,280 Total current assets 668,309 553,707 Property and equipment, net of accumulated depreciation of $ 284,069 ($ 236,031 - 2020) 174,312 182,674 Goodwill 825,371 816,200 Other intangibles, net of accumulated amortization of $ 352,695 ($ 291,434 - 2020) 794,700 825,966 Operating lease right of use assets 82,269 76,820 Deferred tax asset 1,323 2,075 Other assets 16,638 11,176 Total assets $ 2,562,922 $ 2,468,618 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 186,126 $ 201,461 Current portion of debt and capital lease obligations 11,404 11,481 Current portion of operating lease liabilities 13,088 12,168 Accrued expenses: Salaries and wages 8,606 29,800 Pricing allowances 10,672 6,422 Income and other taxes 4,829 5,986 Interest 1,519 12,988 Other accrued expenses 41,052 31,605 Total current liabilities 277,296 311,911 Long-term debt 906,531 1,535,508 Deferred tax liabilities 137,764 156,118 Operating lease liabilities 74,476 68,934 Other non-current liabilities 16,760 31,560 Total liabilities 1,412,827 2,104,031 Commitments and Contingencies (Note 18) — — Stockholders' equity: Common stock, $ 0.0001 par, 500,000,000 shares authorized, 194,083,625 issued and 193,995,320 outstanding at December 25, 2021 and 90,934,930 issued and outstanding at December 26, 2020 20 9 Additional paid-in capital 1,387,410 565,815 Accumulated deficit ( 210,181 ) ( 171,849 ) Accumulated other comprehensive loss ( 27,154 ) ( 29,388 ) Total stockholders' equity 1,150,095 364,587 Total liabilities and stockholders' equity $ 2,562,922 $ 2,468,618 The Notes to Consolidated Financial Statements are an integral part of these statements. 46 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (dollars in thousands) Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Net sales $ 1,425,967 $ 1,368,295 $ 1,214,362 Cost of sales (exclusive of depreciation and amortization shown separately below) 859,557 781,815 693,881 Selling, general and administrative expenses 437,875 398,472 382,131 Depreciation 59,400 67,423 65,658 Amortization 61,329 59,492 58,910 Management fees to related party 270 577 562 Other (income) expense ( 2,778 ) ( 5,250 ) 5,525 Income from operations 10,314 65,766 7,695 Gain on change in fair value of warrant liability ( 14,734 ) — — Interest expense, net 61,237 86,774 101,613 Interest expense on junior subordinated debentures 7,775 12,707 12,608 Investment income on trust common securities ( 233 ) ( 378 ) ( 378 ) Loss (income) on mark-to-market adjustment of interest rate swap ( 1,685 ) 601 2,608 Refinancing costs 8,070 — — Loss before income taxes ( 50,116 ) ( 33,938 ) ( 108,756 ) Income tax benefit ( 11,784 ) ( 9,439 ) ( 23,277 ) Net loss $ ( 38,332 ) $ ( 24,499 ) $ ( 85,479 ) Basic and diluted loss per share $ ( 0.28 ) $ ( 0.27 ) $ ( 0.96 ) Weighted average basic and diluted shares outstanding 134,699 89,891 89,444 Net loss from above $ ( 38,332 ) $ ( 24,499 ) $ ( 85,479 ) Other comprehensive income: Foreign currency translation adjustments (283) 2,652 5,550 Hedging activity 2,517 — — Total other comprehensive income 2,234 2,652 5,550 Comprehensive loss $ ( 36,098 ) $ ( 21,847 ) $ ( 79,929 ) The Notes to Consolidated Financial Statements are an integral part of these statements. 47 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Cash flows from operating activities: Net loss $ ( 38,332 ) $ ( 24,499 ) $ ( 85,479 ) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization 120,730 126,915 124,568 Loss (gain) on dispositions of property and equipment 221 161 ( 573 ) Impairment of long lived assets — 210 7,887 Deferred income taxes ( 21,846 ) ( 9,462 ) ( 23,586 ) Deferred financing and original issue discount amortization 4,336 3,722 3,726 Loss on debt restructuring, net of third party fees paid ( 8,372 ) — — Stock-based compensation expense 15,255 5,125 2,981 Change in fair value of warrant liabilities ( 14,734 ) — — Change in fair value of contingent consideration ( 1,806 ) ( 3,515 ) — Other non-cash interest and change in value of interest rate swap ( 1,685 ) 601 2,608 Changes in operating items: Accounts receivable 15,148 ( 32,417 ) 22,863 Inventories ( 137,849 ) ( 67,147 ) ( 3,205 ) Other assets 3,064 ( 10,743 ) 2,878 Accounts payable ( 20,253 ) 76,031 ( 11,975 ) Other accrued liabilities ( 24,131 ) 27,098 9,666 Net cash (used for) provided by operating activities ( 110,254 ) 92,080 52,359 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired ( 38,902 ) ( 800 ) ( 6,135 ) Capital expenditures ( 51,552 ) ( 45,274 ) ( 57,753 ) Proceeds from sale of property and equipment — — 10,400 Net cash (used for) investing activities ( 90,454 ) ( 46,074 ) ( 53,488 ) Cash flows from financing activities: Borrowings on senior term loans, net of discount 883,872 — — Repayments of senior term loans ( 1,072,042 ) ( 10,608 ) ( 10,608 ) Borrowings of revolving credit loans 322,000 99,000 43,500 Repayments of revolving credit loans ( 301,000 ) ( 140,000 ) ( 38,700 ) Repayments of senior notes ( 330,000 ) — — Financing fees ( 20,988 ) — ( 1,412 ) Proceeds from recapitalization of Landcadia, net of transaction costs 455,161 — — Proceeds from sale of common stock in PIPE, net of issuance costs 363,301 — — Repayment of Junior Subordinated Debentures ( 108,707 ) — — Principal payments under capitalized lease obligations ( 938 ) ( 836 ) ( 683 ) Proceeds from exercise of stock options 2,670 7,340 100 Proceeds from sale of Holdco stock — — 750 Net cash provided by (used for) financing activities 193,329 ( 45,104 ) ( 7,053 ) Effect of exchange rate changes on cash 464 645 ( 79 ) Net (decrease) increase in cash and cash equivalents ( 6,915 ) 1,547 ( 8,261 ) Cash and cash equivalents at beginning of period 21,520 19,973 28,234 Cash and cash equivalents at end of period $ 14,605 $ 21,520 $ 19,973 The Notes to Consolidated Financial Statements are an integral part of these statements. 48 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) Common Stock Treasury Stock Shares Amount Shares Amount Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive (Loss) Total Stockholders' Equity Balance at December 29, 2018 547,129 $ 5 ( 4,740 ) $ ( 4,320 ) $ 553,843 $ ( 61,871 ) $ ( 37,590 ) $ 450,067 Retroactive application of recapitalization 88,852,377 4 4,740 4,320 ( 4,324 ) — — — Balance at December 29, 2018 - Recast 89,399,506 9 — — 549,519 ( 61,871 ) ( 37,590 ) 450,067 Net Loss — — — — — ( 85,479 ) — ( 85,479 ) Stock-based compensation — — — — 2,981 — — 2,981 Proceeds from exercise of stock options 16,483 — — — 100 — — 100 Proceeds from sale of stock 88,299 — — — 750 — — 750 Vesting of restricted shares 45,327 — — — — — — — Change in cumulative foreign currency translation adjustment — — — — — — 5,550 5,550 Balance at December 28, 2019 89,549,615 $ 9 — $ — $ 553,350 $ ( 147,350 ) $ ( 32,040 ) $ 373,969 Net Loss — — — — — ( 24,499 ) — ( 24,499 ) Stock-based compensation — — — — 5,125 — — 5,125 Proceeds from exercise of stock options 1,208,705 — — — 7,340 — — 7,340 Vesting of restricted shares 176,610 — — — — — — — Change in cumulative foreign currency translation adjustment — — — — — — 2,652 2,652 Balance at December 26, 2020 90,934,930 $ 9 — $ — $ 565,815 $ ( 171,849 ) $ ( 29,388 ) $ 364,587 Net Loss — — ( 38,332 ) — ( 38,332 ) Stock-based compensation — 15,255 — — 15,255 Proceeds from exercise of stock options 435,107 — — — 2,670 — — 2,670 Vesting of restricted shares 88,305 — — — — — — — Recapitalization of Landcadia, net of issuance costs and fair value of of assets and liabilities acquired 58,672,000 6 — — 377,959 — — 377,965 Shares issued to PIPE, net of issuance costs 37,500,000 4 — — 363,297 — — 363,301 Hedging activity — — — — — — 2,517 2,517 Warrant redemption 6,364,978 1 — — 62,414 — — 62,415 Change in cumulative foreign currency translation adjustment — — — — — — ( 283 ) ( 283 ) Balance at December 25, 2021 193,995,320 $ 20 — $ — $ 1,387,410 $ ( 210,181 ) $ ( 27,154 ) $ 1,150,095 The Notes to Consolidated Financial Statements are an integral part of these statements. 49 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of The Hillman Solutions Corp. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). Unless the context requires otherwise, references to "Hillman," "we," "us," "our," or "our Company" refer to The Hillman Solutions Corp. and its wholly-owned subsidiaries. The Consolidated Financial Statements included herein have been prepared in accordance with accounting standards generally accepted in the United States of America ("U.S. GAAP") and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. References to 2021, 2020, and 2019 are for fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. On July 14, 2021, privately held HMAN Group Holdings Inc. ("Old Hillman"), and Landcadia Holdings III, Inc. (“Landcadia” and after the Business Combination described herein, “New Hillman”), a special purpose acquisition company ("SPAC") consummated the previously announced business combination (the “Closing”) pursuant to the terms of the Agreement and Plan of Merger, dated as of January 24, 2021 (as amended on March 12, 2021, the "Merger Agreement”) by and among Landcadia, Helios Sun Merger Sub, a wholly-owned subsidiary of Landcadia (“Merger Sub”), HMAN Group Holdings Inc., a Delaware corporation (“Hillman Holdco”) and CCMP Sellers’ Representative, LLC, a Delaware Limited Liability Company in its capacity as the Stockholder Representative thereunder (the “Stockholder Representative”). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Hillman Holdco with Hillman Holdco surviving the merger as a wholly owned subsidiary of New Hillman, which was renamed “Hillman Solutions Corp.” (the “Merger” and together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). Unless the context indicates otherwise, the discussion of the Company and its financial condition and results of operations is with respect to New Hillman following the closing date and Old Hillman prior to the closing date. See Note 3 - Merger Agreement for more information. In connection with the closing of the Business Combination on July 14, 2021, Landcadia changed its name from “Landcadia Holdings III, Inc." to “Hillman Solutions Corp.” and the Company’s common stock and warrants began trading on The Nasdaq Stock Market under the trading symbols “HLMN” and “HLMNW”, respectively. The Company has a 52-53 week fiscal year ending on the last Saturday in December. In a 52 week fiscal year, each of the Company’s quarterly periods will comprise of 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company’s first 53 week fiscal year will occur in fiscal year 2022. Nature of Operations: The Company is comprised of three separate operating business segments: (1) Hardware and Protective Solutions, (2) Robotics and Digital Solutions, and (3) Canada. Hillman provides and, on a limited basis, produces products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems, and accessories; personal protective equipment such as gloves and eye-wear; builder's hardware; and identification items, such as tags and letters, numbers, and signs, to retail outlets, primarily hardware stores, home centers and mass merchants, pet supply stores, grocery stores, and drug stores. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers, industrial Original Equipment Manufacturers (“OEMs”), and industrial distributors. On April 16, 2021, the Company completed the acquisition of Oz Post International, LLC ("OZCO"), a leading manufacturer of superior quality hardware that offers structural fasteners and connectors used for decks, fences and other outdoor structures, for a total purchase price of $ 38,902 . The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $ 35,000 of incremental term loan funds to be used to finance the acquisition. Ozco has business operations in the United States and its financial results reside within our Hardware and Protective Solutions segment. In the fourth quarter of 2019, the Company implemented a plan to restructure the management and operations of our U.S. business to achieve synergies and cost savings associated with the recent acquisitions. The restructuring plan includes management realignment, integration of sales and operations functions, and strategic review of our product offerings. See Note 17 - Restructuring for more information 50 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) On August 16, 2019, the Company acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a total purchase price of $ 21,100 . Resharp has existing operations in the United States and its operating results reside within the Company's Robotics and Digital reportable segment. See Note 6 - Acquisitions for additional information. 2. Summary of Significant Accounting Policies: Cash and Cash Equivalents : Cash and cash equivalents consist of commercial paper, U.S. Treasury obligations, and other liquid securities purchased with initial maturities less than 90 days and are stated at cost which approximates fair value. The Company has foreign bank balances of approximately $ 8,219 and $ 9,279 at December 25, 2021 and December 26, 2020, respectively. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances. Management believes it's credit risk is minimal. Restricted Investments : The Company's restricted investments are trading securities carried at fair market value which represent assets held in a Rabbi Trust to fund deferred compensation liabilities owed to the Company's employees. The current portion of the investments is included in other current assets and the long term portion in other assets on the accompanying Consolidated Balance Sheets. See Note 11 - Deferred Compensation Plan for additional information. Accounts Receivable and Allowance for Doubtful Accounts : The Company establishes the allowance for doubtful accounts by considering historical losses, adjusted to take into account current market conditions. The estimates for calculating the aggregate reserve are based on the financial condition of the customers, the length of time receivables are past due, historical collection experience, current economic trends, and reasonably supported forecasts. Increases to the allowance for doubtful accounts result in a corresponding expense. The Company writes off individual accounts receivable when collection becomes improbable. The allowance for doubtful accounts was $ 2,891 and $ 2,395 as of December 25, 2021 and December 26, 2020, respectively. In the years ended December 25, 2021 and December 26, 2020, the Company entered into agreements to sell, on an ongoing basis and without recourse, certain trade accounts receivable. The buyer is responsible for servicing the receivables. The sale of the receivables is accounted for in accordance with Financial Accounting Standards Board (“FASB”) ASC 860, Transfers and Servicing. Under that guidance, receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables, and the Company has surrendered control over the transferred receivables. The Company has received proceeds from the sales of trade accounts receivable of approximately $ 322,509 and $ 323,715 for the years ended December 25, 2021 and December 26, 2020, respectively, and has included the proceeds in net cash provided by operating activities in the Consolidated Statements of Cash Flows. Related to the sale of accounts receivable, the Company recorded losses of approximately $ 1,433 and $ 1,782 for the years ended December 25, 2021 and December 26, 2020, respectively. Inventories : Inventories consisting predominantly of finished goods are valued at the lower of cost or net realizable value, cost being determined principally on the standard cost method. The historical usage rate is the primary factor used in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to net realizable value is recorded for inventory with excess on-hand quantities as determined based on historic and projected sales, product category, and stage in the product life cycle. 51 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Property and Equipment : Property and equipment are carried at cost and include expenditures for new facilities and major renewals. For financial accounting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets, generally 2 to 15 years. Assets acquired under finance leases are depreciated over the terms of the related leases. Maintenance and repairs are charged to expense as incurred. The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets. Once the software is completed and placed into service, such costs are amortized over the estimated useful lives. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and the resulting gain or loss is reflected in income (loss) from operations. Property and equipment, net, consists of the following at December 25, 2021 and December 26, 2020: Estimated Useful Life (Years) 2021 2020 Leasehold improvements life of lease 11,773 11,506 Machinery and equipment 2 - 10 366,198 334,643 Computer equipment and software 2 - 5 64,648 61,737 Furniture and fixtures 6 - 8 5,390 5,467 Construction in process 10,372 5,352 Property and equipment, gross 458,381 418,705 Less: Accumulated depreciation 284,069 236,031 Property and equipment, net $ 174,312 $ 182,674 Goodwill : The Company has adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) : Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If, after assessing the totality of events or circumstances, the Company determines that the fair value of a reporting unit is less than the carrying value, then the Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company’s annual impairment assessment is performed for it's reporting units as of October 1st. With the assistance of an independent third-party specialist, management assessed the value the of the reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate and projected average revenue growth. The results of the quantitative assessment in 2021, 2020, and 2019 indicated that the fair value of each reporting unit was in excess of its carrying value. Therefore goodwill was not impaired as of our annual testing dates. No impairment charges were recorded in the years ended December 25, 2021, December 26, 2020, or December 28, 2019. 52 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Goodwill amounts by reportable segment are summarized as follows: Goodwill at Goodwill at December 26, 2020 Acquisitions Disposals Other (1) December 25, 2021 Hardware and Protective Solutions $ 565,578 $ 9,250 $ — $ ( 130 ) $ 574,698 Robotics and Digital Solutions 220,936 — — — 220,936 Canada 29,686 — — 51 29,737 Total $ 816,200 $ 9,250 $ — $ ( 79 ) $ 825,371 (1) The "Other" change to goodwill relates to adjustments resulting from fluctuations in foreign currency exchange rates for the Canada and Mexico reporting units. Intangible Assets : Intangible assets arise primarily from the determination of their respective fair market values at the date of acquisition. With the exception of certain trade names, intangible assets are amortized on a straight-line basis over periods ranging from 5 to 20, representing the period over which the Company expects to receive future economic benefits from these assets. Other intangibles, net, as of December 25, 2021 and December 26, 2020 consist of the following: Estimated Useful Life (Years) December 25, 2021 December 26, 2020 Customer relationships 13 - 20 $ 965,054 $ 941,648 Trademarks - indefinite Indefinite 85,591 85,603 Trademarks - other 7 - 15 29,000 26,400 Technology and patents 8 - 12 67,750 63,749 Intangible assets, gross 1,147,395 1,117,400 Less: Accumulated amortization 352,695 291,434 Intangible assets, net $ 794,700 $ 825,966 Estimated annual amortization expense for intangible assets subject to amortization at December 25, 2021 for the next five fiscal years is as follows: Fiscal Year Ended Amortization Expense 2022 $ 61,697 2023 $ 61,697 2024 $ 61,697 2025 $ 61,217 2026 $ 56,812 The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. With the assistance of an independent third-party specialist, management assessed the fair value of our indefinite-lived intangible assets based on a relief from royalties model. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. No impairment charges related to indefinite-lived intangible assets were recorded by the Company in 2021, 2020, or 2019 as a result of the quantitative annual impairment test. 53 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Long-Lived Assets : Long-lived assets, such as property plant and equipment and definite-lived intangibles assets, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset or asset group to its carrying value. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its' fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. No impairment charges were recorded in 2021. In the year ended December 26, 2020 and December 28, 2019, the Company recorded an impairment charge of $ 210 and $ 7,887 , respectively, related to the loss on the disposal of our FastKey self-service duplicating kiosks and related assets in our Robotics and Digital Solutions operating segment. All of the aforementioned impairment charges incurred were included within the respective other income/expense on the Consolidated Statements of Comprehensive Loss. Approximately 95% of the Company’s long-lived assets are held within the United States. Income Taxes : Deferred income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for tax benefits where management estimates it is more likely than not that certain tax benefits will not be realized. Adjustments to valuation allowances are recorded for changes in utilization of the tax related item. See Note 7 - Income Taxes for additional information. In accordance with guidance regarding the accounting for uncertainty in income taxes, the Company recognizes a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority. If a tax position does not meet the more likely than not recognition threshold, the Company does not recognize the benefit of that position in its Consolidated Financial Statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements. Interest and penalties related to income taxes are included in (benefit) provision for income taxes. Contingent Consideration : Contingent consideration relates to the potential payment for an acquisition that is contingent upon the achievement of the acquired business meeting certain product development milestones and/or certain financial performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred. The estimated fair value of the contingent consideration was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting payments. The resulting value captures the risk associated with the form of the payout structure. The risk neutral method is applied, resulting in a value that captures the risk associated with the form of the payout structure and the projection risk. The assumptions utilized in the calculation based on financial performance milestones include projected revenue and/or EBITDA amounts, volatility and discount rates. For potential payments related to product development milestones, we estimated the fair value based on the probability of achievement of such milestones. The assumptions utilized in the calculation of the acquisition date fair value include probability of success and the discount rates. Contingent consideration involves certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts. Risk Insurance Reserves : The Company self-insures our general liability including products liability, automotive liability, and workers' compensation losses up to $500 per occurrence. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and third-party actuarial analysis. The third-party actuarial analysis is based on historical information along with certain assumptions about future events. These reserves are classified as other current and other long-term liabilities within the balance sheets. The Company self-insures our group health claims up to an annual stop loss limit of $250 per participant. Historical group insurance loss experience forms the basis for the recognition of group health insurance reserves. 54 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Retirement Benefits : Certain employees of the Company are covered under a profit-sharing and retirement savings plan. The plan provides for a matching contribution for eligible employees of 50 % of each dollar contributed by the employee up to 6 % of the employee's compensation. In addition, the plan provides an annual contribution in amounts authorized by the Board of Directors, subject to the terms and conditions of the plan. Hillman Canada sponsors a Deferred Profit Sharing Plan (“DPSP”) and a Group Registered Retirement Savings Plan (“RRSP”) for all qualified, full-time employees, with at least three months of continuous service. DPSP is an employer-sponsored profit sharing plan registered as a trust with the Canada Revenue Agency (“CRA”). Employees do not contribute to the DPSP. There is no minimum required contribution; however, DPSPs are subject to maximum contribution limits set by the CRA. The DPSP is offered in conjunction with a RRSP. All eligible employees may contribute an additional voluntary amount of up to eight percent of the employee's gross earnings. Hillman Canada is required to match 100 % of all employee contributions up to 2 % of the employee's compensation into the DPSP account. The assets of the RRSP are held separately from those of Hillman Canada in independently administered funds. Retirement benefit costs were $ 4,218 , $ 3,343 , and $ 2,725 in the years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. Warrant Liabilities: The Company accounts for the warrants in accordance with the guidance contained in ASC 815-40 under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classified the warrants as liabilities at their fair value and adjusts the warrants to fair value at each reporting period. The warrants were fully redeemed in the year ended December 25, 2021, see Note 8 - Warrants for additional information. Revenue Recognition : Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company offers a variety of sales incentives to its customers primarily in the form of discounts and rebates. Discounts are recognized in the Consolidated Financial Statements at the date of the related sale. Rebates are based on the revenue to date and the contractual rebate percentage to be paid. A portion of the cost of the rebate is allocated to each underlying sales transaction. Discounts and rebate are included in the determination of net sales. The Company also establishes reserves for customer returns and allowances. The reserve is established based on historical rates of returns and allowances. The reserve is adjusted quarterly based on actual experience. Discounts and allowances are included in the determination of net sales. The following table disaggregates our revenue by product category: 55 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Hardware and Protective Solutions Robotics and Digital Solutions Canada Total Revenue Year Ended December 25, 2021 Fastening and Hardware $ 740,088 $ — $ 149,165 $ 889,253 Personal Protective 284,886 — 397 285,283 Keys and Key Accessories — 190,697 1,826 192,523 Engraving — 58,555 77 58,632 Resharp — 276 — 276 Consolidated $ 1,024,974 $ 249,528 $ 151,465 $ 1,425,967 Year Ended December 26, 2020 Fastening and Hardware $ 706,865 $ — $ 131,493 $ 838,358 Personal Protective 317,527 — 239 317,766 Keys and Key Accessories — 157,828 2,878 160,706 Engraving — 51,423 6 51,429 Resharp — 36 — 36 Consolidated $ 1,024,392 $ 209,287 $ 134,616 $ 1,368,295 Year Ended December 28, 2019 Fastening and Hardware $ 607,247 $ — $ 121,242 $ 728,489 Personal Protective 245,769 — — 245,769 Keys and Key Accessories — 185,451 4,009 189,460 Engraving — 50,613 9 50,622 Resharp — 22 — 22 Consolidated $ 853,016 $ 236,086 $ 125,260 $ 1,214,362 56 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The following table disaggregates our revenue by geographic location: Hardware and Protective Solutions Robotics and Digital Solutions Canada Total Revenue Year Ended December 25, 2021 United States $ 1,004,803 $ 246,494 $ — $ 1,251,297 Canada 7,326 3,034 151,465 161,825 Mexico 12,845 — — 12,845 Consolidated $ 1,024,974 $ 249,528 $ 151,465 $ 1,425,967 Year Ended December 26, 2020 United States $ 1,007,135 $ 207,283 $ — $ 1,214,418 Canada 7,789 2,004 134,616 144,409 Mexico 9,468 — — 9,468 Consolidated $ 1,024,392 $ 209,287 $ 134,616 $ 1,368,295 Year Ended December 28, 2019 United States $ 835,957 $ 234,216 $ — $ 1,070,173 Canada 5,905 1,870 125,260 133,035 Mexico 11,154 — — 11,154 Consolidated $ 853,016 $ 236,086 $ 125,260 $ 1,214,362 Our revenue by geography is allocated based on the location of our sales operations. Our Hardware and Protective Solutions segment contains sales of Big Time personal protective equipment into Canada. Our Robotics and Digital Solutions segment contains sales of MinuteKey Canada. Hardware and Protective Solutions revenues consist primarily of the delivery of fasteners, anchors, specialty fastening products, and personal protective equipment such as gloves and eye-wear as well as in-store merchandising services for the related product category. Robotics and Digital Solutions revenues consist primarily of sales of keys and identification tags through self service key duplication and engraving kiosks. It also includes our associate-assisted key duplication systems and key accessories. Canada revenues consist primarily of the delivery to Canadian customers of fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, personal protective equipment, and identification items as well as in-store merchandising services for the related product category. The Company’s performance obligations under its arrangements with customers are providing products, in-store merchandising services, and access to key duplicating and engraving equipment. Generally, the price of the merchandising services and the access to the key duplicating and engraving equipment is included in the price of the related products. Control of products is transferred at the point in time when the customer accepts the goods, which occurs upon delivery of the products. Judgment is required in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. Revenue is recognized for in-store service and access to key duplicating and engraving equipment as the related products are delivered, which approximates a time-based recognition pattern. Therefore, the entire amount of consideration related to the sale of products, in-store merchandising services, and access to key duplicating and engraving equipment is recognized upon the delivery of the products. The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer. 57 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The Company used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products. Shipping and Handling : The costs incurred to ship product to customers, including freight and handling expenses, are included in selling, general, and administrative (“SG&A”) expenses on the Company's Consolidated Statements of Comprehensive Loss. Shipping and handling costs were $ 60,991 , $ 50,891 , and $ 47,713 in the years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. Research and Development : The Company expenses research and development costs consisting primarily of internal wages and benefits in connection with improvements to the Company's fastening product lines along with the key duplicating and engraving machines. The Company's research and development costs were $ 2,442 , $ 2,876 , and $ 2,075 in the years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. Stock Based Compensation : 2021 Equity Incentive Plan Effective July 14, 2021, in connection with the Merger, the Company established the 2021 Equity Incentive Plan. Under the 2021 Equity Incentive Plan, the Company may grant options, stock appreciation rights, restricted stock, and other stock-based awards. Hillman reflects the options granted in accordance with Accounting Standards Codification 718 , Compensation - Stock Compensation ("ASC 718"). The Company uses a Black-Scholes option pricing model to determine the fair value of stock options on the dates of grant. The Black-Scholes pricing model requires various assumptions, including expected term, which is based on our historical experience and expected volatility which is estimated based on the average historical volatility of similar entities with publicly traded shares. The Company also makes assumptions regarding the risk-free interest rate and the expected dividend yield. The risk-free interest rate is based on the U.S. Treasury interest rate whose term is consistent with the expected term of the share-based award. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so in the future. Determining the fair value of stock options at the grant date requires judgment, including estimates for the expected life of the share-based award, stock price volatility, dividend yield, and interest rate. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time. HMAN Group Holdings Inc. 2014 Equity Incentive Plan Prior to the Merger, the Company had a stock-based employee compensation plan pursuant to which the Company granted options, stock appreciation rights, restricted stock, and other stock-based awards. Hillman reflects the options granted in its stand-alone Consolidated Financial Statements in accordance with Accounting Standards Codification 718, Compensation — Stock Compensation (“ASC 718”). The Company used a Black-Scholes option pricing model to determine the fair value of stock options on the dates of grant. The Black-Scholes pricing model requires various assumptions, including expected term, which is based on our historical experience and expected volatility which is estimated based on the average historical volatility of similar entities. The Company also made assumptions regarding the risk-free interest rate and the expected dividend yield. The risk-free interest rate is based on the U.S. Treasury interest rate whose term is consistent with the expected term of the share-based award. The dividend yield on our common stock is assumed to be zero since we have not historically paid dividends on these awards and have no current plans to do so in the future. Determining the fair value of stock options at the grant date requires judgment, including estimates for the expected life of the share-based award, stock price volatility, dividend yield, and interest rate. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time. 58 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The Company applied assumptions in the determination of the fair value of the common stock underlying the stock-based awards granted. With the assistance of an independent third-party specialist, management assessed the value of the Company’s common stock based on a combination of the income approach and guideline public company method. Factors that were considered in connection with estimating these grant date fair values are as follows: • The Company’s financial results and future financial projections; • The market value of equity interests in substantially similar businesses, which equity interests can be valued through nondiscretionary, objective means; • The lack of marketability of the Company’s common stock; • The likelihood of achieving a liquidity event, such as an initial public offering or business combination, given prevailing market conditions; • Industry outlook; and • General economic outlook, including economic growth, inflation and unemployment, interest rate environment and global economic trends Determination of the fair value of our common stock also involved the application of multiple valuation methodologies and approaches, with varying weighting applied to each methodology as of the grant date. Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding the Company’s expected future revenue, expenses, and future cash flows; discount rates; market multiples; the selection of comparable companies; and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact the valuations and may have a material impact on the valuation of our common stock. Prior to the Merger, the Company revalued the common stock annually, unless changes in facts or circumstances indicate the need for a mid-year revaluation. The valuation of the Company’s common stock was historically performed at the end of our fiscal year. The share prices for the years ended December 26, 2020 and December 28, 2019 were $1,647.13 and $1,315.00, respectively. The increases in the share price year over year reflect the Company’s revenue growth over that time period along with projected future growth in discounted cash flows and with the market inputs. Stock-based compensation expense is recognized using a fair value based recognition method. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite vesting period or performance period of the award on a straight-line basis. The stock-based compensation expense is recorded in general and administrative expenses. The plans are more fully described in Note 13 - Stock Based Compensation. Fair Value of Financial Instruments : The Company uses the accounting guidance that applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. Whenever possible, quoted prices in active markets are used to determine the fair value of the Company's financial instruments. Derivatives and Hedging : The Company uses derivative financial instruments to manage its exposures to (1) interest rate fluctuations on its floating rate senior term loan and (2) fluctuations in foreign currency exchange rates. The Company measures those instruments at fair value and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. The Company enters into derivative instrument transactions with financial institutions acting as the counter-party. The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes. The relationships between hedging instruments and hedged items are formally documented, in addition to the risk management objective and strategy for each hedge transaction. For interest rate swaps, the notional amounts, rates, and maturities of our interest rate swaps are closely matched to the related terms of hedged debt obligations. The critical terms of the interest rate swap are matched to the critical terms of the underlying hedged item to determine whether the derivatives used for hedging 59 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) transactions are highly effective in offsetting changes in the cash flows of the underlying hedged item. If it is determined that a derivative ceases to be a highly effective hedge, the hedge accounting is discontinued and all subsequent derivative gains and losses are recognized in the Statement of Comprehensive Loss. Derivative instruments designated in hedging relationships that mitigate exposure to the variability in future cash flows of the variable-rate debt and foreign currency exchange rates are considered cash flow hedges. The Company records all derivative instruments in other assets or other liabilities on the Consolidated Balance Sheets at their fair values. If the derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income or loss. The change in fair value for instruments not qualifying for hedge accounting are recognized in the Statement of Comprehensive Income or Loss in the period of the change. See Note 15 - Derivatives and Hedging for additional information. Translation of Foreign Currencies : The translation of the Company's Canadian and Mexican local currency based financial statements into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive loss in stockholders' equity. Use of Estimates in the Preparation of Financial Statements : The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the reporting period. Actual results may differ from these estimates. The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of December 25, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to the carrying value of the goodwill and other long-lived assets. In 2020, the pandemic had a significant impact on the Company's business, driving high demand for personal protective equipment, including face masks, disposable gloves, sanitizing wipes, and disinfecting sprays. During 2020, at the request of our customers, the Company began to sell certain categories of protective and cleaning equipment that are not a part of our core product offerings, including wipes, sprays, masks and bulk boxes of disposable gloves. High demand and limited supply of these products available for retail sale drove prices and cost up in 2020. In contrast, in 2021 the pandemic has had less of an impact on the Company's business, economic activity has generally recovered, and consumer access to personal protective equipment has normalized. By the end of the third quarter of 2021 the Company's product mix has begun to normalize back to near pre-pandemic levels. In 2021, demand for certain protective products softened as vaccines were rolled out and supply returned to a more normal level. In the third quarter of 2021, we evaluated our customers' needs and the market conditions and ultimately decided to exit certain protective product categories. In connection with the exit of these product lines, the Company recorded an inventory valuation charge of $32,026 including the write off of inventory along with costs for donation and disposal of the remaining inventory on hand. Excluding the inventory valuation charge, there was not a material impact to the Company’s consolidated financial statements as of and for the year ended December 25, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s Consolidated Financial Statements in future reporting periods. 3. Merger Agreement: On July 14, 2021, the Merger between HMAN and Landcadia was consummated. Pursuant to the Merger Agreement, at the closing date of the Merger, the outstanding shares of Old Hillman common stock were converted into 91,220,901 shares of New Hillman common stock as calculated pursuant to the Merger Agreement. 60 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The Merger was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, Landcadia is treated as the “acquired” company for financial reporting purposes. This determination was based primarily on Old Hillman having the ability to appoint a majority of the initial Board of the combined entity, Old Hillman's senior management comprising the majority of the senior management of the combined company, and the ongoing operations of Old Hillman comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of New Hillman issuing shares for the net assets of Landcadia, accompanied by a recapitalization. The net assets of Landcadia was stated at carrying value, with no goodwill or other intangible assets recorded. The historical statements of the combined entity prior to the Merger are presented as those of Old Hillman with the exception of the shares and par value of equity recast to reflect the exchange ratio on the Closing Date, adjusted on a retroactive basis. A summary of the impact of the reverse recapitalization on the cash, cash equivalents and restricted cash, change in net assets and the change in common shares is included in the tables below. Landcadia cash and cash equivalents (1) $ 479,602 PIPE investment proceeds (2) 375,000 Less cash paid to underwriters and other transaction costs, net of tax (3) ( 36,140 ) Net change in cash and cash equivalents as a result of recapitalization $ 818,462 Prepaid expenses and other current assets (1) 132 Accounts payable and other accrued expenses (1) ( 81 ) Warrant liabilities (1)(4) ( 77,190 ) Change in net assets as a result of recapitalization $ 741,323 The change in number of shares outstanding as a result of the reverse recapitalization is summarized as follows: Common shares issued to new Hillman shareholders (5) 91,220,901 Shares issued to SPAC sponsors and public shareholders (6) 58,672,000 Common shares issued to PIPE investors (2) 37,500,000 Common shares outstanding immediately after the business combination 187,392,901 1. These assets and liabilities represent the reported balances as of the Closing Date immediately prior to the Business Combination. The recapitalization of the assets and liabilities from Landcadia's balance sheet was a non-cash financing activity. 2. In connection with the Business Combination, Landcadia entered into subscription agreements with certain investors (the “PIPE Investors”), pursuant to which it issued 37,500,000 shares of common stock at $ 10.00 per share (the “PIPE Shares”) for an aggregate purchase price of $ 375,000 (the “PIPE Financing”), which closed simultaneously with the consummation of the Business Combination. 3. In connection with the Business Combination, the Company incurred $ 36,140 of transaction costs, net of tax, consisting of underwriting, legal and other professional fees which were recorded as accumulated deficit as a reduction of proceeds. 4. The warrants acquired in the Merger include (a) redeemable warrants issued by Landcadia and sold as part of the units in the Landcadia IPO (whether they were purchased in the Landcadia IPO or thereafter in the open market), which were exercisable for an aggregate of 16,666,628 shares of common stock at a purchase price of $ 11.50 per share (the “Public Warrants”) and (b) warrants issued by Landcadia to the Sponsors in a private placement simultaneously with the closing of the Landcadia IPO, which were exercisable for an aggregate of 8,000,000 shares of common stock at a purchase price of $ 11.50 per share (the “Private Placement Warrants”). 5. The Company issued 91,220,901 common shares in exchange for 553,439 Old Hillman common shares resulting in an exchange ratio of 164.83 . This exchange ratio was applied to Old Hillman's common shares which further impacted common stock held at par value and additional paid in capital as well as the calculation of weighted average shares outstanding and loss per common share. 61 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 6. The Company issued 50,000,000 shares to the public shareholders and 8,672,000 shares to the SPAC sponsor shareholders at the Closing Date . 4. Recent Accounting Pronouncements: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Subsequently, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. Effective December 30, 2018, the Company adopted the comprehensive new lease standard issued by the FASB. The most significant impact was the recognition of right-of-use ("ROU") assets and liabilities for operating and finance leases applicable to lessees. The Company elected to utilize the transition guidance within the new standard that allowed the Company to carry forward its historical lease classification(s). Operating and finance ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the implicit rate is not determinable for most of the Company's leases, management uses the Company's incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company elected to not separate lease and non-lease components for all classes of underlying assets in which it is the lessee and made an accounting policy election to not account for leases within an initial term of 12 months or less on the accompanying Consolidated Balance Sheets. The expected lease terms include options to extend or terminate the lease when its reasonably certain that the Company will exercise such option. Lease expense for minimum lease payments is recognized over a straight-line basis over the expected lease term. As of December 30, 2018, the Company recorded an Operating ROU Asset of $ 72,785 and a Finance ROU Asset of $ 672 within our Consolidated Balance Sheets. Short-term and long-term operating lease liabilities were recorded as $ 12,040 and $ 63,291 , respectively. Short-term and long-term finance lease liabilities were determined to be $ 436 and $ 477 , respectively. The adoption of this guidance did not have an impact on net income. Refer to Note 8 - Leases for full lease-related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The Company adopted this ASU in the first quarter of fiscal 2020, and it did not have a material impact on the Company's Consolidated Financial Statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020. The Company adopted this standard during fiscal 2021 and the adoption did not have a material impact on the Company's Consolidated Financial Statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating contract and the optional expedients provided by the new standard. In January 2021, FASB issued ASU 2021-01, Reference Rate Reform to expand the scope of ASU 2020-04 by allowing an entity to apply the optional expedients, by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires 62 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) designation. The entity may apply the contract modification relief provided in ASU 2020-04 and continue to account for the derivative in the same manner that existed prior to the changes resulting from reference rate reform or the discounting transition. The Company is currently evaluating contract and the optional expedients provided by the new standard. In August 2021, the FASB issues ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946) which amends SEC paragraphs in Topic 205, Topic 942 and Topic 946 from the Codification in response to the issuance of SEC Final Rule Nos. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses, and 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. These edits are predominantly formatting and paragraph references, with new guidance duplicated from SEC requirements on the presentation of financial statements for funds acquired or to be acquired. In October 28, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which amends ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. This update is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to 1) the recognition of an acquired contract liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment is effective on December 15, 2022. The Company is currently evaluating the impact provided by the new standard. 5. Related Party Transactions: The Company has recorded aggregate management fee charges and expenses from CCMP and Oak Hill Funds of $ 270 , $ 577 , and $ 562 for the years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. Subsequent to the Merger, the Company is no longer being charged management fees, Note 3 - Merger Agreement for additional details. Two members of our Board of Directors, Rich Zannino and Joe Scharfenberger, are partners at CCMP. Another director, Teresa Gendron, is the CFO of Jefferies. The Company recorded proceeds from the sale of stock to members of management and the Board of Directors for $ 750 during year ended December 28, 2019. There were no such sales in fiscal 2021 nor fiscal 2020. Gregory Mann and Gabrielle Mann are employed by Hillman. Hillman leases an industrial warehouse and office facility from companies under the control of the Manns. Rental expense for the lease of this facility was $ 351 for the year ended December 25, 2021 and December 26, 2020, and $ 350 for the year ended December 28, 2019. At the Closing, Hillman, the Sponsors, CCMP Investors and the Oak Hill Investors entered into the A&R Registration Rights Agreement, pursuant to which, among other things, the parties to the A&R Registration Rights Agreement agreed not to effect any sale or distribution of any equity securities of Hillman held by any of them during the lock-up period described therein and were granted certain registration rights with respect to their respective shares of Hillman common stock, in each case, on the terms and subject to the conditions therein. 6. Acquisitions Oz Post International, LLC On April 16, 2021, the Company completed the acquisition of Oz Post International, LLC ("OZCO"), a leading manufacturer of superior quality hardware that offers structural fasteners and connectors used for decks, fences and other outdoor structures, for a total purchase price of $ 38,902 . The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $ 35,000 of incremental term loan funds to be used to finance the acquisition. OZCO has business operations throughout North America and its financial results reside in the Company's Hardware and Protective Solutions reportable segment. 63 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The following table reconciles the fair value of the acquired assets and assumed liabilities to the preliminary total purchase price of OZCO. The total purchase price is preliminary as the Company is in the process of finalizing certain working capital adjustments. Accounts receivable $ 1,143 Inventory 3,564 Other current assets 24 Property and equipment 595 Goodwill 9,250 Customer relationships 23,500 Trade names 2,600 Technology 4,000 Total assets acquired $ 44,676 Less: Liabilities assumed ( 5,774 ) Total purchase price $ 38,902 Pro forma financial information has not been presented for OZCO as their associated financial results are insignificant to the financial results of the Company on a standalone basis. Sharp Systems, LLC On August 16, 2019, the Company acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a total purchase price of $ 21,100 , including a contingent consideration provision with an estimated fair value of $ 18,100 , with a maximum payout of $ 25,000 plus 1.8 % of net knife-sharpening revenues for five years after the $ 25,000 is fully paid. Contingent consideration to be paid subsequent to December 25, 2021 is contingent upon several business performance metrics over a multi-year period. See Note 16 - Fair Value Measurements for additional information on the contingent consideration payable as of December 25, 2021. Resharp has existing operations in the United States and its operating results reside within the Company's Robotics and Digital Solutions reportable segment. The following table reconciles the fair value of the acquired assets and assumed liabilities to the finalized total purchase price of the Resharp acquisition: Property and equipment $ 218 Goodwill 9,382 Technology 11,500 Total assets acquired $ 21,100 Less: Contingent consideration payable ( 18,100 ) Net cash paid $ 3,000 Pro forma financial information has not been presented for Resharp as their associated financial results are insignificant to the financial results of the Company on a standalone basis. Other Acquisitions On July 1, 2019, the Company acquired the assets of West Coast Washers, Inc. for a total purchase price of $ 3,135 . The financial results of West Coast Washers, Inc. reside within the Company's Hardware and Protective Solutions reportable 64 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) segment and have been determined to be immaterial for purposes of additional disclosure. On February 19, 2020, the Company acquired the assets of Instafob LLC ("Instafob") for a cash payment of $ 800 and a total purchase price of $ 2,618 , which includes $ 1,818 in contingent and non-contingent considerations that remain payable to the seller. The financial results of Instafob reside within the Company's Robotics and Digital Solutions reportable segment and have been determined to be immaterial for purposes of additional disclosure. 7. Income Taxes: Loss before income taxes are comprised of the following components for the periods indicated: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 United States based operations $ ( 56,597 ) $ ( 30,083 ) $ ( 101,197 ) Non-United States based operations 6,481 ( 3,855 ) ( 7,559 ) Loss before income taxes $ ( 50,116 ) $ ( 33,938 ) $ ( 108,756 ) Below are the components of the Company's income tax benefit for the periods indicated: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Current: Federal & State $ 894 $ 629 $ 1,235 Foreign 746 ( 49 ) 611 Total current 1,640 580 1,846 Deferred: Federal & State ( 13,651 ) ( 7,625 ) ( 23,333 ) Foreign 664 ( 1,356 ) ( 2,625 ) Total deferred ( 12,987 ) ( 8,981 ) ( 25,958 ) Valuation allowance ( 437 ) ( 1,038 ) 835 Income tax benefit $ ( 11,784 ) $ ( 9,439 ) $ ( 23,277 ) The Company has U.S. federal net operating loss (“NOL”) carryforwards totaling $ 119,805 as of December 25, 2021 that are available to offset future taxable income. These carryforwards expire from 2027 to 2038. A portion of the U.S. federal NOLs were acquired with the MinuteKey purchase in 2018. The MinuteKey NOLs are subject to limitation under IRC §382 from current and prior ownership changes. In addition, the Company's foreign subsidiaries have NOL carryforwards aggregating $ 23,535 . A portion of these carryforwards expire from 2035 to 2040. Management anticipates utilizing all foreign NOLs prior to their expiration. The Company has state NOL carryforwards with an aggregate tax benefit of $ 4,123 which expire from 2021 to 2041. The Company has maintained a valuation allowance of $ 9 in fiscal 2021 for the state NOLs expected to expire prior to utilization. The Company has $ 1,052 of general business tax credit carryforwards which expire from 2026 to 2041. A valuation allowance of $ 210 has been maintained for a portion of these tax credits. The Company has $ 816 of foreign tax credit carryforwards which expire from 2021 to 2027. A full valuation allowance has been established for these credits given insufficient foreign source income projected to utilize these credits. 65 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The table below reflects the significant components of the Company's net deferred tax assets and liabilities at December 25, 2021 and December 26, 2020: December 25, 2021 December 26, 2020 Non-current Non-current Deferred Tax Asset: Inventory $ 17,590 $ 11,423 Bad debt and other sales related reserves 2,029 1,497 Casualty loss reserve 685 279 Accrued bonus / deferred compensation 3,778 7,411 Deferred social security (CARES Act) 899 1,798 Interest limitation 30,094 21,011 Lease liabilities 23,008 21,241 Deferred revenue - shipping terms 320 315 Original issue discount amortization — 3,078 Transaction costs 2,218 3,061 Federal / foreign net operating loss 31,217 36,217 State net operating loss 4,123 3,806 Tax credit carryforwards 2,400 2,150 All other 1,233 1,481 Gross deferred tax assets 119,594 114,768 Valuation allowance for deferred tax assets ( 1,034 ) ( 1,471 ) Net deferred tax assets $ 118,560 $ 113,297 Deferred Tax Liability: Intangible asset amortization $ 205,328 $ 216,354 Property and equipment 27,722 29,901 Lease assets 21,446 20,598 All other items 505 487 Deferred tax liabilities $ 255,001 $ 267,340 Net deferred tax liability $ 136,441 $ 154,043 Realization of the net deferred tax assets is dependent on the reversal of deferred tax liabilities. Although realization is not assured, management estimates it is more likely than not that the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. The Company maintains a valuation allowance of $ 9 on U.S. state NOLs due to the Company's inability to utilize the losses prior to expiration. The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. Should management decide to repatriate the foreign earnings, the Company would need to adjust the income tax provision in the period the earnings will no longer be indefinitely invested outside the United States. 66 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Below is a reconciliation of statutory income tax rates to the effective income tax rates for the periods indicated: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 As Restated Statutory federal income tax rate 21.0 % 21.0 % 21.0 % Non-U.S. taxes and the impact of non-U.S. losses for which a current tax benefit is not available ( 1.3 ) % 0.6 % 0.4 % State and local income taxes, net of U.S. federal income tax benefit 2.9 % 5.7 % 3.0 % Change in valuation allowance 0.9 % 1.6 % ( 1.2 ) % Permanent differences: Acquisition and related transaction costs ( 2.2 ) % — % — % Decrease in fair value of warrant liability 6.2 % — % — % Reconciliation of tax provision to return ( 1.7 ) % 0.6 % ( 0.5 ) % Non-deductible compensation (1.9) % (1.0) % (0.7) % Reconciliation of other adjustments ( 0.4 ) % ( 0.7 ) % ( 0.6 ) % Effective income tax rate 23.5 % 27.8 % 21.4 % The Company's reserve for unrecognized tax benefits remains unchanged for the year ended December 25, 2021. A balance of $ 1,101 of unrecognized tax benefit is shown in the financial statements at December 25, 2021 as a reduction of the deferred tax asset for the Company's NOL carryforward. The following is a summary of the changes for the periods indicated below: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Unrecognized tax benefits - beginning balance $ 1,101 $ 1,101 $ 1,101 Gross increases - tax positions in current period — — — Gross increases - tax positions in prior period — — — Gross decreases - tax positions in prior period — — — Unrecognized tax benefits - ending balance $ 1,101 $ 1,101 $ 1,101 Amount of unrecognized tax benefit that, if recognized would affect the Company's effective tax rate $ 1,101 $ 1,101 $ 1,101 Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") On March 27, 2020, the CARES Act was signed into law by the President of the United States. The CARES Act included, among other things, corporate income tax relief in the form of accelerated alternative minimum tax ("AMT") refunds, allowed employers to defer certain payroll tax payments throughout 2020, and provided favorable corporate interest deductions for the 2019 and 2020 periods. During 2020, the Company received an accelerated AMT income tax refund of $1,147 and was able to defer $7,136 of payroll taxes. The CARES Act interest modification provisions allowed for increased interest deductions. The Company files a consolidated income tax return in the U.S. and numerous consolidated and separate income tax returns in various states and foreign jurisdictions. The Company is not under any significant audits for the period ended December 25, 2021. 8. Warrants Each whole warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $ 11.50 per share and a redemption price of $.10 a share. As of the date of the merger, as discussed in Note 3 - Merger Agreement, there were 24,666,628 warrants outstanding consisting of 16,666,628 public warrants, which were included in the units issued in 67 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Landcadia's initial public offering ("Public Warrants"), and 8,000,000 private placement warrants, which were included in the units issued in the concurrent private placement at the time of Landcadia's initial public offering ("Private Placement Warrants" and, collectively with the Public Warrants, the "Warrants"). The Public and Private Placement Warrants were accounted for as liabilities and are presented as warrant liabilities on the Consolidated Balance Sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within loss on change in fair value of warrant liabilities in the Consolidated Statements of Comprehensive Loss. As of the date of the Merger, the fair market value of the warranty liabilities were recorded as $ 77,190 on the Consolidated Balance Sheets. The Public Warrants were considered part of level 1 of the fair value hierarchy, as those securities are traded on an active public market. At the Closing Date, the Company valued the Private Warrants using Level 3 of the fair value hierarchy. The Private Warrants were valued using a Modified Black Scholes Model, which is considered to be a Level 3 fair value measurement. The primary unobservable input utilized in determining the fair value of the Private Warrants are the share price of the Company's common stock, the risk free rate, and the expected volatility of the Company’s common stock. The Public Warrants may only be exercised for a whole number of shares. No fractional warrants were issued upon separation of the units issued in the initial public offering into their component parts of Public Warrants and shares of common stock. The Public Warrants became exercisable on the later of 30 days after the completion of the Business Combination or 12 months from the closing of the Public Offering. On November 22, 2021, the Company announced that it would redeem all of its outstanding warrants (the “Public Warrants”) to purchase shares of the Company’s common stock, par value $ 0.0001 per share (the “Common Stock”), that were issued under the Amended and Restated Warrant Agreement (the “Warrant Agreement”), dated November 13, 2020, by and between the Company and Continental Stock Transfer & Trust Company (“CST”), as warrant agent (the “Warrant Agent”) as part of the units sold in the Company’s initial public offering (the “IPO”) and that remain outstanding at 5:00 p.m. New York City time on December 22, 2021 (the “Redemption Date”) for a redemption price of $ 0.10 per Public Warrant. In addition, the Company would redeem all of its outstanding warrants to purchase Common Stock that were issued under the Warrant Agreement in a private placement simultaneously with the IPO (the “Private Warrants” and, together with the Public Warrants, the “Warrants”) on the same terms as the outstanding Public Warrants. Under the terms of the Warrant Agreement, the Company was entitled to redeem all of the outstanding Public Warrants at a redemption price of $0.10 per Public Warrant if (i) the last sales price (the “Reference Value”) of the Common Stock equals or exceeds $10.00 per share on any twenty trading days within any thirty-day trading period ending on the third trading day prior to the date on which a notice of redemption is given and (ii) if the Reference Value is less than $18.00 per share, the Private Warrants must also concurrently be called for redemption on the same terms as the outstanding Public Warrants. At the direction of the Company, the Warrant Agent delivered a notice of redemption to each of the registered holders of the outstanding Warrants. As the Reference Value was less than $18.00 per share, payment upon exercise of the Warrants was made either (i) in cash, at an exercise price of $ 11.50 per share of Common Stock or (ii) on a “cashless basis” in which the exercising holder received a number of shares of Common Stock determined in accordance with the terms of the Warrant Agreement and based on the Redemption Date and the volume weighted average price (the “Fair Market Value”) of the Common Stock during the 10 trading days immediately following the date on which the notice of redemption was sent to holders of Warrants. The Company provided holders the Fair Market Value no later than one business day after such 10-trading day period ends. In no event did the number of shares of Common Stock issued in connection with an exercise on a cashless basis exceed 0.361 shares of Common Stock per Warrant. If any holder of Warrants would, after taking into account all of such holder’s Warrants exercised at one time, have been entitled to receive a fractional interest in a share of Common Stock, the number of shares the holder was entitled to receive was rounded down to the nearest whole number of shares. Any Warrants that remained unexercised at 5:00 p.m. New York City time on the Redemption Date was then void and no longer exercisable, and the holders of those Warrants were entitled to receive only the redemption price of $0.10 per warrant. As of December 25, 2021, the Company exercised and redeemed all of its warrants generating cash proceeds of $ 8 and cash paid of $ 47 and issuing 6,364,978 shares of Common Stock. Public and private warrant exercise activity and underlying Common Stock issued or surrendered for the year ended December 25, 2021 is: 68 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Public Warrants Private Warrants Total Beginning balance as of July, 14 2021 16,666,628 8,000,000 24,666,628 Shares issued for cash exercises ( 666 ) — ( 666 ) Shares issued for cashless exercises ( 16,199,169 ) ( 8,000,000 ) ( 24,199,169 ) Shares redeemed by the Company ( 466,793 ) — ( 466,793 ) Ending balance as of December 25, 2021 — — — 9. Long-Term Debt The following table summarizes the Company’s debt: December 25, 2021 December 26, 2020 Revolving loans $ 93,000 $ 72,000 Senior Term Loan, due 2025 — 1,037,044 Senior Term Loan, due 2028 851,000 — 6.375 % Senior Notes, due 2022 — 330,000 11.6 % Junior Subordinated Debentures - Preferred — 105,443 Junior Subordinated Debentures - Common — 3,261 Finance leases & other obligations 1,782 2,044 945,782 1,549,792 Unamortized premium on 11.6 % Junior Subordinated Debentures — 14,591 Unamortized discount on Senior Term Loan ( 5,948 ) ( 6,532 ) Current portion of long term debt and capital leases ( 11,404 ) ( 11,481 ) Deferred financing fees ( 21,899 ) ( 10,862 ) Total long term debt, net $ 906,531 $ 1,535,508 Revolving Loans and Term Loans As of December 25, 2021, the ABL Revolver had an outstanding amount of $ 93,000 and outstanding letters of credit of $ 32,908 . The Company has $ 124,092 of available borrowings under the revolving credit facility as a source of liquidity as of December 25, 2021. On April 16, 2021, the Company acquired Oz Post International, LLC ("OZCO"). The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $ 35,000 of incremental term loan funds to be used to finance the acquisition. See Note 6 - Acquisitions for additional information regarding the OZCO acquisition. In connection with the Closing as described in Note 1 - Basis of Presentation, the Company entered into a new credit agreement (the “Term Credit Agreement”), which provided for a new funded term loan facility of $ 835,000 and a delayed draw term loan facility of $ 200,000 (of which $ 16,000 was drawn). The Company also also entered into an amendment to their existing Asset-Based Revolving Credit Agreement (the “ABL Amendment”) extending the maturity and conformed certain provisions to the Term Credit Agreement. The proceeds of the funded term loans under the Term Credit Agreement and revolving credit loans under the ABL Credit Agreement were used, together with other available cash, to (1) refinance in full all outstanding term loans and to terminate all outstanding commitments under the credit agreement, dated as of May 31, 2018 ("2018 Term Loan" including the OZCO Amendment), (2) refinance outstanding revolving credit loans, and (3) redeem in full the senior notes due July 15, 2022 (the “ 6.375 % Senior Notes”). Additionally, the Company fully redeemed the 11.6 % Junior Subordinated Debentures. 69 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The interest rate on the Term Credit Agreement is, at the discretion of the Company, either the adjusted London Interbank Offered Rate ("LIBOR") rate plus a margin varying from 2.50 % and 2.75 % and per annum or an alternate base rate plus a margin varying from 1.50 % to 1.75 % per annum. The Term Credit Agreement is payable in installments equal 0.25 % of the original principal amount and delayed draw with a balloon payment due on the maturity date of July 14, 2028. The term loans and other amounts outstanding under the Term Credit Agreement are guaranteed by the Company's wholly-owned domestic subsidiaries and are secured by substantially all of the Borrower’s and the Guarantors' assets. The delayed draw term loan facility under the Term Credit Agreement may be used to finance permitted acquisitions and similar investments and to replenish cash and repay revolving credit loans previously used for permitted acquisitions. Portions of the ABL Revolver are separately available for borrowing by the Company's United States subsidiary and Canadian subsidiary for $ 200,000 and $ 50,000 , respectively. The interest rate for the ABL Revolver is, at the discretion of the Company, either adjusted LIBOR (or a Canadian banker’s acceptance rate in the case of Canadian Dollar loans) plus a margin varying from 1.25 % to 1.75 % per annum based on availability or an alternate base rate (or a Canadian prime rate or alternate base rate in the case of Canadian Dollar loans) plus a margin varying from 0.25 % to 0.75 % per annum based on availability. The stated maturity date of the revolving credit commitments under the ABL Credit Agreement is May 31, 2026. The loans and other amounts outstanding under the ABL Credit Agreement and related documents are guaranteed by Holdings and, subject to certain exceptions, the Borrower’s wholly-owned domestic subsidiaries and are secured by substantially all of the Borrower’s and the guarantors’ assets plus, solely in the case of the Canadian Borrower, its and its wholly-owned Canadian subsidiary’s assets, which has guaranteed by the Canadian portion under the ABL Credit Agreement. In connection with the Term Credit Agreement, the Company recorded $ 23,432 in deferred financing fees and $ 6,380 in discount which are recorded as long term debt on the Consolidated Balance Sheet. In connection with the ABL Amendment, the Company recorded $ 3,035 in deferred financing fees which are recorded as other non-current assets on the Consolidated Balance Sheet. Additionally, the Company recorded a loss (gain) on extinguishment of debt for each debt instrument included in the refinancing as detailed below. The Company amended it's interest rate swaps in connection with the refinancing, see Note 15 - Derivatives and Hedging for additional details. Loss (gain) on extinguishment of debt Term Credit Agreement $ 20,243 ABL Revolver 288 6.375% Senior Notes, due 2022 1,083 11.6% Junior Subordinated Debentures ( 13,603 ) Interest rate swaps 59 Total $ 8,070 Additional information with respect to the fair value of the Company’s fixed rate Senior Notes and Junior Subordinated Debentures is included in Note 16 - Fair Value Measurements. The interest rate on the 2018 Term Loan was, at the discretion of the Company, either the adjusted LIBOR rate plus 4.00 % per annum for LIBOR loans or an alternate base rate plus 3.00 % per annum. The 2018 Term Loan was payable in fixed installments of approximately $ 2,652 per quarter, with a balloon payment scheduled on the loan's maturity date of May 31, 2025. 6.375% Senior Notes, due 2022 On June 30, 2014, Hillman Group issued $ 330,000 aggregate principal amount of its senior notes due July 15, 2022 (the “6.375% Senior Notes”), which are guaranteed by The Hillman Solutions Corp. and its domestic subsidiaries other than the Hillman Group Capital Trust. Hillman Group pays interest on the 6.375 % Senior Notes semi-annually on January 15 and 70 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) July 15 of each fiscal year. The 6.375% senior notes were fully redeemed in 2021 in connection with the refinancing discussed above. Guaranteed Preferred Beneficial Interest in the Company's Junior Subordinated Debentures In September 1997, The Hillman Group Capital Trust ("Trust"), a Grantor trust, completed a $ 105,443 underwritten public offering of 4,217,724 Trust Preferred Securities (“TOPrS”). The Trust invested the proceeds from the sale of the preferred securities in an equal principal amount of 11.6 % Junior Subordinated Debentures of Hillman due September 30, 2027. The Company paid interest to the Trust on the Junior Subordinated Debentures underlying the TOPrS at the rate of 11.6 % per annum on their face amount of $ 105,443 , or $ 12,231 per annum in the aggregate. The Trust distributed monthly cash payments it received from the Company as interest on the debentures to preferred security holders at an annual rate of 11.6 % on the liquidation amount of $ 25.00 per preferred security. Pursuant to the Indenture that governed the TOPrS, the Trust was able to defer distribution payments to holders of the TOPrS for a period that could not exceed 60 months (the “Deferral Period”). During a Deferral Period, the Company was required to accrue the full amount of all interest payable, and such deferred interest payable became immediately payable by the Company at the end of the Deferral Period. During fiscal year 2020, the Company elected to defer interest payments to the bondholders during April 2020 through July 2020. The additional interest incurred as a result of the deferral was immaterial. Interest paid to the bondholders at the end of the Deferral Period was paid in full. There were no interest deferrals during fiscal 2021 or 2020. In connection with the public offering of TOPrS, the Trust issued $ 3,261 of trust common securities to the Company. The Trust invested the proceeds from the sale of the trust common securities in an equal principal amount of 11.6 % Junior Subordinated Debentures of Hillman due September 30, 2027. The Trust distributed monthly cash payments it received from the Company as interest on the debentures to the Company at an annual rate of 11.6 % on the liquidation amount of the common security. The Trust Preferred Securities were fully redeemed in 2021 in connection with the refinancing discussed above. The aggregate minimum principal maturities of the long-term debt obligations for each of the five years following December 25, 2021 are as follows: Year Amount 2022 $ 10,638 2023 8,510 2024 8,510 2025 8,510 2026 8,510 Thereafter 806,322 $ 851,000 Note that future finance lease payments were excluded from the maturity schedule above. Refer to Note 10 - Leases. Additional information with respect to the Company's fixed rate Senior Notes and Junior Subordinated Debentures is included in Note 16 - Fair Value Measurements 10. Leases Lessee The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both 1) the right to obtain substantially all of the economic benefits from the use of the asset and 2) the right to direct the use of the asset. The Company leases certain distribution center locations, vehicles, forklifts, computer equipment, and its corporate headquarters with expiration dates through 2032. Certain lease arrangements include escalating rent payments and options to extend the lease term. Expected lease terms include these 71 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) options to extend or terminate the lease when it is reasonably certain the Company will exercise the option. The Company's leasing arrangements do not contain material residual value guarantees nor material restrictive covenants. The components of operating and finance lease cost for the year ended December 25, 2021 and December 26, 2020 were as follows: Year Ended December 25, 2021 Year Ended December 26, 2020 Operating lease cost $ 20,860 $ 19,189 Short term lease costs 4,827 2,404 Variable lease costs 1,496 898 Finance lease cost: Amortization of right of use assets 914 813 Interest on lease liabilities 123 143 Rent expense is recognized on a straight-line basis over the expected lease term. Rent expense totaled $ 27,183 , $ 22,491 and $ 24,774 in the year ended December 25, 2021, December 26, 2020 and December 28, 2019, respectively. Rent expense includes operating lease cost as well as expense for non-lease components such as common area maintenance, real estate taxes, real estate insurance, variable costs related to our leased vehicles and also short-term rental expenses. The implicit rate is not determinable in most of the Company’s leases, as such management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 25, 2021 and December 26, 2020: December 25, 2021 December 26, 2020 Operating Leases Finance Leases Operating Leases Finance Leases Weighted average remaining lease term 6.60 2.60 7.19 2.61 Weighted average discount rate 7.88 % 5.59 % 8.28 % 7.14 % Supplemental balance sheet information related to the Company's finance leases as of December 25, 2021 and December 26, 2020: 72 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) December 25, 2021 December 26, 2020 Finance lease assets, net, included in property plant and equipment $ 1,768 $ 1,919 Current portion of long-term debt 767 872 Long-term debt, less current portion 1,015 1,172 Total principal payable on finance leases $ 1,782 $ 2,044 Supplemental cash flow information related to our operating leases was as follows for the year ended December 25, 2021 and December 26, 2020: Year Ended December 25, 2021 Year Ended December 26, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow from operating leases $ 19,767 $ 18,641 Operating cash outflow from finance leases 127 143 Financing cash outflow from finance leases 938 836 As of December 25, 2021, our future minimum rental commitments are immaterial for lease agreements beginning after the current reporting period. Maturities of our lease liabilities for all operating and finance leases are as follows a s of December 25, 2021: Operating Leases Finance Leases Less than one year $ 19,192 $ 922 1 to 2 years 17,224 632 2 to 3 years 16,058 315 3 to 4 years 15,349 92 4 to 5 years 14,582 41 After 5 years 29,649 — Total future minimum rental commitments 112,054 2,002 Less - amounts representing interest ( 24,490 ) ( 220 ) Present value of lease liabilities $ 87,564 $ 1,782 Beginning in 2022, the Company will have an additional operating lease for a new property located in Shannon, Georgia for the purposes of office, warehouse, and distribution that had not yet commenced with estimated future minimum rental commitments of approximately $26,721. Lessor The Company has certain arrangements for key duplication equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material. 11. Deferred Compensation Plan The Company maintains a deferred compensation plan for key employees (the “Nonqualified Deferred Compensation Plan” or “NQDC”) which allows the participants to defer up to 25 % of salary and commissions and up to 100 % of bonuses to be paid during the year and invest these deferred amounts into certain Company directed mutual fund investments, subject to the election of the participants. The Company is permitted to make a 25 % matching contribution on deferred amounts up to $ 10 , subject to a five year vesting schedule. 73 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) As of December 25, 2021 and December 26, 2020, the Company's Consolidated Balance Sheets included $ 1,686 and $ 1,911 , respectively, in restricted investments representing the assets held in mutual funds to fund deferred compensation liabilities owed to the Company's current and former employees. The current portion of the restricted investments was $ 138 and $ 595 as of December 25, 2021 and December 26, 2020, respectively, and is included in other current assets on the accompanying Consolidated Balance Sheets. The assets held in the NQDC are classified as an investment in trading securities, accordingly, the investments are marked-to-market, see Note 16 - Fair Value Measurements for additional detail. During the years ended December 25, 2021, December 26, 2020, and December 28, 2019 distributions from the deferred compensation plan aggregated $ 633 , $ 527 , and $ 686 , respectively. 12. Equity and Accumulated Other Comprehensive Loss Common Stock The Hillman Solutions Corp. has one class of common stock. Accumulated Other Comprehensive Loss The following is the detail of the change in the Company's accumulated other comprehensive loss from December 29, 2018 to December 25, 2021 including the effect of significant reclassifications out of accumulated other comprehensive income (net of tax): Foreign Currency Translation Balance at December 29, 2018 $ ( 37,590 ) Other comprehensive income before reclassifications 5,533 Amounts reclassified from other comprehensive income¹ 17 Net current period other comprehensive loss 5,550 Balance at December 28, 2019 ( 32,040 ) Other comprehensive income before reclassifications 2,652 Amounts reclassified from other comprehensive income² — Net current period other comprehensive income 2,652 Balance at December 26, 2020 ( 29,388 ) Other comprehensive loss before reclassifications 1,849 Amounts reclassified from other comprehensive income 3 385 Net current period other comprehensive income 2,234 Balance at December 25, 2021 $ ( 27,154 ) 1. In the year ended December 28, 2019, the Company fully liquidated its Luxembourg subsidiary which results resides within the Canada reportable segment.The $ 17 loss was recorded as other income on the Consolidated Statement of Comprehensive Loss. 2. In the year December 26, 2020, there were no amounts reclassified into other comprehensive income. 3. During the year ended December 25, 2021, the Company obtained and amended its interest rate swap agreements to hedge against effective cash flows (i.e. interest payments) on floating-rate debt associated with the Company's new Term Credit Agreement. Refer to Note 9 - Long-Term Debt for further details. In accordance with ASC 815, derivatives designated and that qualify as cash flow hedges of interest rate risk record the associated gain or loss within other comprehensive income. For the year ended December 25, 2021, the Company deferred a gain of $ 2,982 , reclassified a loss of $ 385 and a net of tax of $ 850 into other comprehensive income due to hedging activities. The amounts reclassified out of other comprehensive income were recorded as interest expense. See Note 15 - Derivatives and Hedging for additional information on the interest rate swaps. 74 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 13. Stock Based Compensation HMAN Group Holdings Inc. 2014 Equity Incentive Plan Following the Merger and in connection with the business combination described in Note 3 - Merger Agreement, Landcadia Holdings III, Inc. (“Landcadia”) became the direct parent company of HMAN and was renamed Hillman Solutions Corp. (“New Hillman”). Shares of Class A common stock of New Hillman (“New Hillman Shares”) are publicly traded on The Nasdaq Capital Market. Consequently, the outstanding stock options issued under the 2014 Equity Incentive Plan (the “Prior Plan”) prior to the Merger were converted and modified to purchase New Hillman Shares. At the Closing, each outstanding option to acquire common stock of Hillman Holdco (a “Hillman Holdco Option”), whether vested or unvested, was assumed by New Hillman and converted into an option to purchase common stock of New Hillman (“New Hillman Option”) with substantially the same terms and conditions (including expiration date and exercise provisions) as applicable to the Hillman Holdco Option immediately prior to the Closing, except both the number of shares and the exercise price were modified using the conversion ratio at closing. Each New Hillman Option is generally subject to the same vesting conditions as the Hillman Holdco Option from which it was converted, except that the performance-based vesting conditions of any Hillman Holdco Option granted prior to 2021 were adjusted such that the performance-based portion of the associated New Hillman Option will vest upon certain pre-established stock price hurdles. For all time based options and performance options granted during 2021 the change in fair value was immaterial and as such no additional compensation cost was recognized. For the performance options granted prior, the modification of the vesting criteria resulted in $ 11,542 of additional compensation expense, $ 8,228 of which was recognized in the year ended December 25, 2021, the remainder of which will be recognized through Q1 2022. At the Closing, (i) each share of unvested restricted Hillman Holdco common stock was cancelled and converted into the right to receive a number of shares of New Hillman restricted stock equal to the Closing Stock Per Restricted Share Amount (as defined in the Merger Agreement) with substantially the same terms and conditions as were applicable to the related share of Hillman Holdco restricted stock immediately prior to the Closing (including with respect to vesting and termination-related provisions), and (ii) each Hillman Holdco restricted stock unit was assumed by New Hillman and converted into a New Hillman restricted stock unit award with substantially the same terms and conditions as were applicable to such Hillman Holdco restricted stock unit immediately prior to the Closing (including with respect to vesting and termination-related provisions). Upon closing, the 2014 Equity Incentive Plan may grant options, stock appreciation rights, restricted stock, and other stock-based awards for up to an aggregate of 14,523,510 shares of its common stock. The following table summarizes the key assumptions used in the valuation model for valuing the Company's stock compensation awards under the 2014 Equity Incentive Plan: Dividend yield 0 % Risk free interest rate 0.40 % - 1.81 % Expected volatility 31.50 % Expected terms 6.25 years Stock Options The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The time-based stock option awards generally vest evenly over four years from the grant date and performance-based options vest based on specified targets such as Company performance and Company stock price hurdles. 75 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) A summary of the stock option activity under the 2014 Equity Inventive Plan for the year ended December 25, 2021 is presented below (share amounts in thousands): Number of Shares Weighted Avg. Exercise Price per Share (in whole dollars) Weighted Avg. Remaining Contractual Term Outstanding at December 26, 2020 12,749 $ 7.66 8.0 years Granted 2,348 Exercised ( 435 ) Forfeited or expired ( 1,186 ) Outstanding at December 25, 2021 13,476 $ 8.15 7.14 years Exercisable at December 25, 2021 4,954 $ 7.76 6.63 years In fiscal year ended December 25, 2021, 435 options were exercised. In fiscal year ended December 26, 2020, 7,333 options were exercised. In fiscal year ended December 28, 2019, 100 options were exercised. Stock option compensation expense of $ 13,634 , $ 3,960 , and $ 2,312 was recognized in the accompanying Consolidated Statements of Comprehensive Loss for the years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. As of December 25, 2021, there was $ 17,112 of unrecognized compensation expense for unvested common options. The expense will be recognized as a charge to earnings over a weighted average period of approximately 1.61 years. The weighted-average grant-date fair value of share options granted during the years 2021, 2020, and 2019 was $10.00, $7.95, and $8.47, respectively. The total intrinsic value of share options exercised during the years ended 2021, 2020, and 2019 was $1,594, $2,193, and $40, respectively. Restricted Stock The Company granted restricted stock at the grant date fair value of the underlying common stock securities. The restrictions lapse in one quarter increments on each of the three anniversaries of the award date, and one quarter on the completion of the relocation of the recipient to the Cincinnati area or earlier in the event of a change in control. The associated expense is recognized over the service period. A summary of the restricted stock activity under the 2014 Equity Incentive Plan for the year ended December 25, 2021 is presented below (share amounts in thousands): Number of Shares Weighted Avg. Grant Date Fair Value (in whole dollars) Unvested at December 26, 2020 177 $ 7.09 Awarded — Vested ( 88 ) Forfeited or expired — Unvested at December 25, 2021 89 $ 7.09 Restricted stock compensation expense of $ 624 , $ 1,165 , and $ 669 was recognized in the accompanying Consolidated Statements of Comprehensive Loss for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. Restricted Stock Units The Restricted Stock Units ("RSUs") granted to employees for service generally vest after three years, subject to continued employment. The RSUs granted to non-employee directors generally vest in full on the first anniversary of the grant date. 76 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) A summary of the restricted stock unit activity under the 2014 Equity Incentive Plan for the year ended December 25, 2021 is presented below (share amounts in thousands): Number of Shares Weighted Avg. Grant Date Fair Value (in whole dollars) Outstanding at December 26, 2020 — $ — Granted 323 $ 10.00 Exercised — Forfeited or expired — Outstanding at December 25, 2021 323 $ 10.00 Restricted stock compensation expense of $ 661 was recognized in the accompanying Consolidated Statements of Comprehensive Loss for the fiscal year ended December 25, 2021. 2021 Equity Incentive Plan Effective July 14, 2021, the Company established the 2021 Equity Incentive Plan. Under the 2021 Equity Incentive Plan (the “Plan”), the maximum number of shares of Stock that may be delivered in satisfaction of Awards under the Plan as of the Effective Date is (i) 7,150,814 shares, plus (ii) the number of shares of Stock underlying awards under the 2014 Equity Incentive Plan that on or after the Effective Date expire or become unexercisable, or are forfeited, cancelled or otherwise terminated, in each case, without delivery of shares or cash therefore, and would have become available again for grant under the Prior Plan in accordance with its terms (not to exceed 14,523,510 shares of Stock in the aggregate) (the “Share Pool”). Restricted Stock Units The RSUs granted to employees for service generally vest after three years, subject to continued employment. The RSUs granted to non-employee directors generally vest in full on the first anniversary of the grant date or the date of the annual meeting following the grant date, whichever is earlier. A summary of the restricted stock unit activity under the 2021 Equity Incentive Plan for the year ended December 25, 2021 is presented below (share amounts in thousands): Number of Shares Weighted Avg. Grant Date Fair Value (in whole dollars) Outstanding at December 26, 2020 $ — Granted 73 11.75 Exercised — Forfeited or expired — Outstanding at December 25, 2021 73 $ 11.75 Restricted stock compensation expense of $ 336 was recognized in the accompanying Consolidated Statements of Comprehensive Loss for the fiscal year ended December 25, 2021. 77 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 14. Earnings Per Share Basic earnings per share is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include the dilutive effect of stock options, restricted stock awards, and warrants. The following is a reconciliation of the basic and diluted Earnings Per Share ("EPS") computations for both the numerator and denominator (in thousands, except per share data): Year Ended December 25, 2021 Earnings (Numerator) Shares (Denominator) Per Share Amount Net loss $ ( 38,332 ) 134,699 $ ( 0.28 ) Dilutive effect of stock options and awards — — — Dilutive effect of warrants — — — Net loss per diluted common share $ (38,332) 134,699 $ (0.28) Year Ended December 26, 2020 Earnings (Numerator) Shares (Denominator) Per Share Amount Net loss $ ( 24,499 ) 89,891 $ ( 0.27 ) Dilutive effect of stock options and awards — — — Dilutive effect of warrants — — — Net loss per diluted common share $ (24,499) 89,891 $ (0.27) Year Ended December 28, 2019 Earnings (Numerator) Shares (Denominator) Per Share Amount Net loss $ ( 85,479 ) 89,444 $ ( 0.96 ) Dilutive effect of stock options and awards — — — Dilutive effect of warrants — — — Net loss per diluted common share $ ( 85,479 ) 89,444 $ ( 0.96 ) Stock options and awards outstanding totaling 3,274,172 , 7,309,703 and 1,886,429 wer e excluded from the computation for the years ended December 28, 2019, December 26, 2020 and December 25, 2021, respectively, as they would have had an antidilutive effect under the treasury stock method. Warra nts of 10,539,889 were excl uded from the computation for the year ended December 25, 2021 as they would have had an antidilutive effect under the treasury stock method. 15. Derivatives and Hedging FASB ASC 815, Derivatives and Hedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments, (3) how the entity accounts for derivative instruments and related hedged items, and (2) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company's objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments. The Company uses derivative financial instruments to manage its exposures to (1) interest rate fluctuations on its floating rate senior term loan and (2) fluctuations in foreign currency exchange rates. The Company measures those instruments at fair value 78 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes. Interest Rate Swap Agreements On January 8, 2018, the Company entered into a new forward Interest Rate Swap Agreement ("2018 Swap 1") with three year terms for $ 90,000 notional amount. The forward start date of the 2018 Swap was September 30, 2018 and the termination date is June 30, 2021. The 2018 Swap 1 has a fixed interest rate of 2.3 % plus the applicable interest rate margin of 4.0 % for an effective rate of 6.3 %. The 2018 Swap 1 was terminated on June 30, 2021. In accordance with ASC 815, the 2018 Swap 1 was not designated as a cash flow hedge and therefore changes in fair value were recorded in other (income) expense on the Company's Statements of Comprehensive Loss. On November 8, 2018, the Company entered into another new forward Interest Rate Swap Agreement ("2018 Swap 2") for $ 60,000 notional amount. The forward start date of the 2018 Swap 2 was November 30, 2018 and the termination date is November 30, 2022. The 2018 Swap 2 has a pay fixed interest rate of 3.1 % plus the applicable interest rate margin of 4.0 % for an effective rate of 7.1 %. The 2018 Swap 2 was effectively terminated on July 16, 2021 in connection with the Merger as described in Note 3 - Merger Agreement. In accordance with ASC 815, the 2018 Swap 2 was not designated as a cash flow hedge and therefore changes in fair value were recorded in other (income) expense on the Company's Statement of Comprehensive Loss. On July 9, 2021, the Company entered into an interest swap agreement ("2021 Swap 1") for a notional amount of $ 144,000 . The forward start date of the 2021 Swap 1 was July 30, 2021 and the termination date is July 31, 2024. The 2021 Swap 1 has a determined pay fixed interest rate of 0.75 %. In accordance with ASC 815, the Company determined the 2021 Swap 1 constituted an effective cash flow hedge and therefore changes in fair value are recorded within other comprehensive income within the Company's Statement of Comprehensive Loss and the deferred gains or losses are reclassified out of other comprehensive income into interest expense in the same period during which the hedged transactions affect earnings. On July 9, 2021, the Company entered into an interest swap agreement ("2021 Swap 2") for a notional amount of $ 216,000 . The forward start date of the 2021 Swap 2 was July 30, 2021 and the termination date is July 31, 2024. The 2021 Swap 2 has a determined pay fixed interest rate of 0.76 % . In accordance with ASC 815, the Company determined the 2021 Swap 2 constituted an effective cash flow hedge and therefore changes in fair value are recorded within other comprehensive income within the Company's Statement of Comprehensive Loss and the deferred gains or losses are reclassified out of other comprehensive income into interest expense in the same period during which the hedged transactions affect earnings. On July 16, 2021, the Company modified its original 2018 Swap 2 derivative instrument ("2021 Swap 3") for a notional amount of $ 60,000 . The forward start date of the 2021 Swap 3 was July 30, 2021 and the termination date is November 30, 2022. The 2021 Swap 3 has a determined pay fixed interest rate of 3.63%. In accordance with ASC 815, the Company determined the 2021 Swap 3 constituted an effective cash flow hedge and therefore changes in fair value are recorded within accumulated other comprehensive loss within the Company's Consolidated Balance Sheets and the deferred gains or losses are reclassified out of other comprehensive income into interest expense in the same period during which the hedged transactions affect earnings. Due to an other-than-insignificant financing element from the modification, the swap entered into during 2021 is considered a hybrid instrument, with a financing component treated as a debt instrument with an embedded at-market derivative. Within the Company’s consolidated balance sheets, the financing components are carried at amortized cost and the embedded at-market derivatives are carried at fair value. 79 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The following table summarizes the Company's derivatives financial instruments: Asset Derivatives Liability Derivatives As of December 25, 2021 As of December 25, 2021 As of December 26, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: 2021 Swap 1 Other non-current assets $ 1,513 Other accrued expenses $ ( 170 ) $ — 2021 Swap 2 Other non-current assets 2,250 Other accrued expenses ( 270 ) — 2021 Swap 3 Other current assets 59 Other accrued expenses/other non-current liabilities ( 1,880 ) — Total hedging instruments $ 3,822 $ ( 2,320 ) $ — Derivatives not designated as hedging instruments: 2018 Swap 1 $ — $ — Other accrued expenses $ ( 709 ) 2018 Swap 2 — — Other non-current liabilities ( 3,484 ) Total non-hedging instruments $ — $ — $ ( 4,193 ) During 2022, the Company estimates that an additional $560 will be reclassified as an increase to interest expense/income. Additional information with respect to the fair value of derivative instruments is included in Note 16 - Fair Value Measurements. Foreign Currency Forward Contracts During fiscal 2019, 2020, and 2021, the Company entered into multiple foreign currency forward contracts. The purpose of the Company's foreign currency forward contracts is to manage the Company's exposure to fluctuations in the exchange rate of the Canadian dollar. The total notional amount of contracts outstanding was C$ 4,464 and C$ 9,652 as of December 25, 2021 and December 26, 2020, respectively. The total fair value of the foreign currency forward contracts was $ 14 and $ 12 as of December 25, 2021 and December 26, 2020, respectively, and was reported on the accompanying Consolidated Balance Sheets in other current liabilities. A decrease in other income of $ 331 and $ 557 was recorded in the Consolidated Statement of Comprehensive Loss for the change in fair value during years ended December 25, 2021 and December 26, 2020, respectively. The Company's foreign currency forward contracts did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in other (income) expense in the Consolidated Statement of Comprehensive Loss. The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes. Additional information with respect to the fair value of derivative instruments is included in Note 16 - Fair Value Measurements. 16. Fair Value Measurements The Company uses the accounting guidance that applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value 80 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories. Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs reflecting the reporting entity's own assumptions. The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability's level is based on the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company's financial assets and liabilities that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy: As of December 25, 2021 Level 1 Level 2 Level 3 Total Trading securities $ 1,686 $ — $ — $ 1,686 Interest rate swaps — 1,502 — 1,502 Foreign exchange forward contracts — 14 — 14 Contingent consideration payable — — ( 12,347 ) ( 12,347 ) As of December 26, 2020 Level 1 Level 2 Level 3 Total Trading securities $ 1,911 $ — $ — $ 1,911 Interest rate swaps — ( 4,193 ) — ( 4,193 ) Foreign exchange forward contracts — 12 — 12 Contingent consideration payable — — ( 14,197 ) ( 14,197 ) Trading securities are valued using quoted prices on an active exchange. Trading securities represent assets held in a Rabbi Trust to fund deferred compensation liabilities and are included as restricted investments on the accompanying Consolidated Balance Sheets. The Company utilizes interest rate swap contracts to manage our targeted mix of fixed and floating rate debt, and these contracts are valued using observable benchmark rates at commonly quoted intervals for the full term of the swap contracts. As of December 25, 2021 and December 26, 2020 the Company's interest rate swaps were recorded on the accompanying Consolidated Balance Sheets in accordance with ASC 815. The Company utilizes foreign exchange forward contracts to manage our exposure to currency fluctuations in the Canadian dollar versus the U.S. dollar. The forward contracts were valued using observable benchmark rates at commonly quoted intervals during the term of the forward contract. As of December 25, 2021 and December 26, 2020, the foreign exchange forward contracts were included in other current liabilities on the accompanying Consolidated Balance Sheets. The contingent consideration represents future potential earn-out payments related to the Resharp acquisition in fiscal 2019 and the Instafob acquisition in the first quarter of 2020. Refer to Note 6 - Acquisitions for additional details. The estimated fair value of the contingent earn-out was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting earn-out payments. The resulting value captures the risk associated with the form of the payout structure. The risk neutral method is applied, resulting in a value that captures the risk associated with the form of the payout structure and the projection risk. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the liability's estimated value. As of December 25, 2021, the total contingent consideration for Resharp was recorded as $ 308 within other accrued expenses and $ 10,692 within other non-current liabilities on the accompanying Consolidated Balance Sheets. As of December 25, 2021, the total contingent consideration for Instafob was recorded as $ 168 within other accrued expenses and $ 1,179 within other non-current liabilities on the accompanying Consolidated Balance 81 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Sheets. As of December 26, 2020, the total contingent consideration was recorded as $ 417 within other accrued expenses and $ 13,780 within other non-current liabilities on the accompanying Consolidated Balance Sheets. This amount was moved to accounts payable as of December 25, 2021. The Company recorded a $ 1,178 decrease in the Resharp contingent consideration liability as of December 25, 2021 compared to December 26, 2020. The Company recorded a $ 628 decrease in the Instafob contingent consideration liability as of December 25, 2021 compared to Instafob's acquisition date of February 19, 2020. The total decrease of $ 1,806 in value was determined by using a simulation model of the Monte Carlo analysis that included updated projections applicable to the liability as of December 25, 2021 compared to the prior valuation period. The fair value of the Company's fixed rate senior notes and junior subordinated debentures as of December 25, 2021 and December 26, 2020 were determined by utilizing current trading prices obtained from indicative market data. As a result, the fair value measurement of the Company's senior term loans is considered to be Level 2. The Company fully redeemed the 6.375% Senior Notes and Junior Subordinated Debentures in the third quarter of 2021. See Note 9 - Long-Term Debt for additional details. December 25, 2021 December 26, 2020 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 6.375 % Senior Notes $ — $ — $ 328,333 $ 327,525 Junior Subordinated Debentures — — 123,295 128,022 Cash, restricted investments, accounts receivable, short-term borrowings and accounts payable are reflected in the Consolidated Financial Statements at book value, which approximates fair value, due to the short-term nature of these instruments. The carrying amount of the long-term debt under the revolving credit facility approximates the fair value at December 25, 2021 and December 26, 2020 as the interest rate is variable and approximates current market rates. The Company also believes the carrying amount of the long-term debt under the senior term loan approximates the fair value at December 25, 2021 and December 26, 2020 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk. Additional information with respect to the derivative instruments is included in Note 15 - Derivatives and Hedging. Additional information with respect to the Company's fixed rate senior notes and junior subordinated debentures is included in Note 9 - Long-Term Debt. 17. Restructuring Canadian Restructuring Plan During fiscal 2018, the Company initiated plans to restructure the operations of the Canada segment. The restructuring seeks to streamline operations in the greater Toronto area by consolidating facilities, exiting certain lines of business, and rationalizing Stock Keeping Units (“SKUs”). The intended result of the Canada restructuring will be a more streamlined and scalable operation focused on delivering optimal service and a broad offering of products across the Company's core categories. Plans were finalized during the fourth quarter of 2018. The Company completed restructuring related activities in our Canada segment in 2021. Charges incurred in part of the Canada Restructuring Plan included: 82 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Facility consolidation (1) Inventory valuation adjustments $ — $ 596 $ 3,799 Labor expense — 682 1,751 Consulting and legal fees 26 192 225 Other expense 5 1,118 2,126 Rent and related charges — 1,535 584 Severance 466 707 617 Exit of certain lines of business (2) Inventory valuation adjustments — — 535 Gain on disposal of assets — — ( 458 ) Other expense — — 488 Total $ 497 $ 4,830 $ 9,667 (1) Facility consolidation includes inventory valuation adjustments associated with SKU rationalization, labor expense related to organizing inventory and equipment in preparation for the facility consolidation, consulting and legal fees related to the project, and other expenses. The labor, consulting, and legal expenses were included in selling, general and administrative expense ("SG&A") on the Consolidated Statement of Comprehensive Loss. The inventory valuation adjustments were included in cost of sales on the Consolidated Statement of Comprehensive Loss. (2) As part of the restructuring, the Company is exiting a manufacturing business line. Related charges included adjustments to write inventory down to net realizable value, asset impairment charges, and employee severance, which were included in cost of sales, other income and expense, and SG&A on the Consolidated Statement of Comprehensive Loss, respectively. The following represents the roll forward of restructuring reserves for the year ended December 25, 2021: Severance and related expense Balance as of December 28, 2019 $ 1,121 Restructuring charges 707 Cash paid ( 1,519 ) Balance as of December 26, 2020 $ 309 Restructuring charges 466 Cash paid ( 436 ) Balance as of December 25, 2021 $ 339 During the year ended December 25, 2021, the Company paid approximately $ 436 in severance and related expense related to the Canada Restructuring Plan. 83 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) United States Restructuring Plan During fiscal 2019, the Company implemented a plan to restructure the management and operations within the United States to achieve synergies and cost savings associated with the recent acquisitions described in Note 6 - Acquisitions. This restructuring includes management realignment, integration of sales and operating functions, and strategic review of the Company's product offerings. This plan was finalized during the fourth quarter of fiscal year 2019. The Company incurred additional charges in fiscal 2021 related to the consolidation of two of our distribution centers. Charges incurred in part of the United States Restructuring Plan included: Year Ended December 25, 2021 Year Ended December 26, 2020 Management realignment & integration Severance $ 111 $ 886 Inventory valuation adjustments — — Facility closures Severance — 903 Inventory valuation adjustments — 1,568 Other 319 1,422 Total $ 430 $ 4,779 The following represents a roll forward of the restructuring reserves for the year ended December 25, 2021: Severance and related expense Balance as of December 29, 2019 $ 3,286 Restructuring charges 1,789 Cash paid (4,250) Balance as of December 26, 2020 $ 825 Restructuring charges 111 Cash paid ( 936 ) Balance as of December 25, 2021 $ — During the year ended December 25, 2021, the Company paid approximately $ 936 in severance and related expense related to the United States Restructuring Plan. 18. Commitments and Contingencies: The Company self-insures our general liability including products liability, automotive liability, and workers' compensation losses up to $500 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $ 250 up to $ 60,000 . The two risk areas involving the most significant accounting estimates are workers' compensation and automotive liability. Actuarial valuations performed by the Company's third-party risk insurance expert were used by the Company's management to form the basis for workers' compensation and automotive liability loss reserves. The actuary contemplated the Company's specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes that the liability of approximately $ 2,719 recorded for such risk insurance reserves is adequate as of December 25, 2021. As of December 25, 2021, the Company has provided certain vendors and insurers letters of credit aggregating $ 32,908 related to our product purchases and insurance coverage of product liability, workers' compensation, and general liability. 84 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) The Company self-insures our group health claims up to an annual stop loss limit of $250 per participant. Historical group insurance loss experience forms the basis for the recognition of group health insurance reserves. Provisions for losses expected under these programs are recorded based on an analysis of historical insurance claim data and certain actuarial assumptions. The Company believes that the liability of approximately $ 2,300 recorded for such group health insurance reserves is adequate as of December 25, 2021. The Company imports large quantities of fastener products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company could be subject to the assessment of additional duties and interest if it or its suppliers fail to comply with customs regulations or similar laws. The U.S. Department of Commerce (the "Department”) has received requests from petitioners to conduct administrative reviews of compliance with anti-dumping duty and countervailing duty laws for certain nails products sourced from Asian countries. The Company sourced products under review from vendors in China and Taiwan during the periods selected for review. The Company accrues for the duty expense once it is determined to be probable and the amount can be reasonably estimated. On June 3, 2019, The Hillman Group, Inc. ("Hillman Group") filed a complaint for patent infringement against KeyMe, LLC ("KeyMe"), a provider of self-service key duplication kiosks, in the United States District Court for the Eastern District of Texas (Marshall Division) (the "Texas Court"). On August 16, 2019, KeyMe filed a complaint for patent infringement against Hillman Group in the United States District Court for the District of Delaware. On March 2, 2020, Hillman Group filed a second complaint for patent infringement against KeyMe in the same Texas Court. On October 23, 2020, the Texas Court granted KeyMe’s motion to consolidate the two Texas cases and granted Hillman Group’s motion to add another patent. On April 12, 2021, a jury in the Texas case returned a verdict that KeyMe did not infringe any of the asserted patents and several of the asserted claims were invalid. Final judgment was entered on April 13, 2021. On June 14, 2021, Hillman Group and KeyMe entered into a Settlement Agreement which globally resolved all pending legal disputes, including the Texas and Delaware district court actions discussed above. On June 1, 2021, Hy-Ko Products Company LLC ("Hy-Ko"), a manufacturer of key duplication machines, filed a complaint for patent infringement against Hillman Group in the United States District Court for the Eastern District of Texas (Marshall Division). The case was assigned Civil Action No. 2:21-cv-0197. Hy-Ko's complaint alleges that Hillman's KeyKrafter and PKOR key duplication machines infringe U.S. Patent Nos. 9,656,332, 9,682,432, 9,687,920, and 10,421,113, which are assigned to Hy-Ko, and seeks damages and injunctive relief against Hillman Group. Hy-Ko's complaint additionally contains allegations of unfair competition under the Federal Lanham Act and conversion/receipt of stolen property, as well as a cause of action for "replevin" for return of stolen property. On August 2, 2021, Hy-Ko filed an Amended Complaint which did not deviate substantially from the initial Complaint. Hillman Group responded on August 16, 2021, by filing a Motion to Dismiss the conversion and replevin claims because they are barred by the statute of limitations. In its Motion to Dismiss, Hillman Group also requested that the Court strike numerous paragraphs of Hy-Ko's Amended Complaint that, on their face, have nothing to do with Hy-Ko's patent infringement, unfair competition, or conversion and replevin claims. Hillman Group also requested that the Court order Hy-Ko to provide a more definite statement regarding its unfair competition claim. Briefing on Hillman's Motion to Dismiss was completed on September 14, 2021. On January 14, 2022, the Court denied Hillman’s motion. Hillman filed an answer with counterclaims (for declaratory judgment and for breach of a prior settlement agreement) on February 1, 2022 and Hy-Ko responded to that pleading on February 22, 2022. The Court held a claim construction hearing on February 17, 2022. The Court has not yet issued a final claim construction order. Discovery in the matter is ongoing, and the discovery deadline is July 6, 2022. Trial has been set for October 3, 2022. Management and legal counsel for Hillman Group are still investigating this recent suit but are initially of the opinion that Hy-Ko's claims are without merit and Hillman Group intends to vigorously defend the claims. Hillman Group is unable to estimate the possible loss or range of loss at this early stage in the case. 85 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 19. Statement of Cash Flows: Supplemental disclosures of cash flows information are presented below: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Cash paid during the period for: Interest on junior subordinated debentures $ 7,542 $ 12,329 $ 11,211 Interest 64,522 81,024 94,461 Income taxes, net of refunds 2,500 ( 301 ) ( 489 ) 20. Concentration of Credit Risks: Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to sales and trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across geographic areas. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. For the year ended December 25, 2021, the largest two customers accounted for 47.6 % of total revenues and 47.0 % of the year-end accounts receivable balance. For the year ended December 26, 2020, the largest two customers accounted for 49.0 % of total revenues and 45.1 % of the year-end accounts receivable balance. No other customer accounted for more than 10% of the Company's accounts receivables in 2021, 2020, nor 2019. In each of the years ended December 25, 2021, December 26, 2020, and December 28, 2019, the Company derived over 10% of its total revenues from two separate customers which operated in each of the operating segments. The following table presents revenue from each customer as percentage of total revenue for each of the years ended: Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Lowe's 20.6 % 22.5 % 21.6 % Home Depot 27.0 % 26.5 % 24.7 % 21. Segment Reporting and Geographic Information: The Company's segment reporting structure uses the Company's management reporting structure as the foundation for how the Company manages its business. The Company periodically evaluates its segment reporting structure in accordance with ASC 350-20-55 and has concluded that it has three reportable segments as of December 25, 2021. The segments are as follows: • Hardware and Protective Solutions • Robotics and Digital Solutions • Canada The Hardware and Protective Solutions segment distributes fasteners and related hardware items, threaded rod, personal protective equipment, and letters, numbers, and signs to hardware stores, home centers, mass merchants, and other retail outlets primarily in the United States and Mexico. The Robotics and Digital Solutions segment consists of key duplication and engraving kiosks that can be operated directly by the consumer. The kiosks operate in retail and other high-traffic locations offering customized licensed and unlicensed products 86 HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) targeted to consumers in the respective locations. It also includes our associate-assisted key duplication systems and key accessories. The Robotics and Digital Solutions segment also includes Resharp, our robotic knife sharpening business, and Instafob, which specializes in RFID ("Radio Frequency Identification") key duplication technology. The Canada segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, personal protective equipment, and identification items, such as tags and letters, numbers, and signs to hardware stores, home centers, mass merchants, industrial distributors, automotive aftermarket distributors, and other retail outlets and industrial Original Equipment Manufacturers (“OEMs”) in Canada. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers and industrial OEMs. The Company uses profit or loss from operations to evaluate the performance of its segments, and does not include segment assets or non-operating income/expense items for management reporting purposes. Profit or loss from operations is defined as income from operations before interest and tax expenses. Segment revenue excludes sales between segments, which is consistent with the segment revenue information provided to the Company's Chief Operating Decision Maker ("CODM"). The table below presents revenues and income (loss) from operations for the reportable segments for the years ended December 25, 2021, December 26, 2020, and December 28, 2019. Year Ended December 25, 2021 Year Ended December 26, 2020 Year Ended December 28, 2019 Revenues Hardware and Protective Solutions $ 1,024,974 $ 1,024,392 $ 853,016 Robotics and Digital Solutions 249,528 209,287 236,086 Canada 151,465 134,616 125,260 Total revenues $ 1,425,967 $ 1,368,295 $ 1,214,362 Segment Income (Loss) from Operations Hardware and Protective Solutions $ ( 17,185 ) $ 67,313 $ 14,204 Robotics and Digital Solutions 23,558 3,177 3,385 Canada 3,941 ( 4,724 ) ( 9,894 ) Total segment income from operations $ 10,314 $ 65,766 $ 7,695 87 Financial Statement Schedule: Schedule II - VALUATION ACCOUNTS (dollars in thousands) Deducted From Assets in Balance Sheet Allowance for Doubtful Accounts Ending Balance - December 29, 2018 $ 846 Additions charged to cost and expense 790 Deductions due to: Others 255 Ending Balance - December 28, 2019 1,891 Additions charged to cost and expense 1,378 Deductions due to: Others ( 874 ) Ending Balance - December 26, 2020 2,395 Additions charged to cost and expense 522 Deductions due to: Others ( 26 ) Ending Balance - December 25, 2021 $ 2,891 88 Item 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.