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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 001-35249
THE CHEFS’ WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware   20-3031526
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
100 East Ridge Road
Ridgefield, Connecticut 06877
(Address of principal executive offices)

Registrant’s telephone number, including area code: (203) 894-1345

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 CHEF The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
Number of shares of common stock, par value $.01 per share, outstanding at October 24, 2022: 38,270,107
1




THE CHEFS’ WAREHOUSE, INC.
FORM 10-Q
Table of Contents
    Page
PART I. FINANCIAL INFORMATION  
     
Item 1.
4
     
 
4
     
 
5
     
6
7
     
 
8
     
Item 2.
     
Item 3.
     
Item 4.
     
PART II. OTHER INFORMATION  
     
Item 1.
     
Item 1A.
     
Item 2.
     
Item 3.
Defaults Upon Senior Securities
     
Item 4.
     
Item 5.
     
Item 6.
     

 

2




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements in this report regarding the business of The Chefs’ Warehouse, Inc. (the “Company”) that are not historical facts are “forward-looking statements” that involve risks and uncertainties and are based on current expectations and management estimates; actual results may differ materially. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. The risks and uncertainties which could impact these statements include, but are not limited to the following: our sensitivity to general economic conditions, including disposable income levels and changes in consumer discretionary spending; our ability to expand our operations in our existing markets and to penetrate new markets through acquisitions; we may not achieve the benefits expected from our acquisitions, which could adversely impact our business and operating results; we may have difficulty managing and facilitating our future growth; conditions beyond our control could materially affect the cost and/or availability of our specialty food products or center-of-the-plate products and/or interrupt our distribution network; our increased distribution of center-of-the-plate products, like meat, poultry and seafood, involves increased exposure to price volatility experienced by those products; our business is a low-margin business and our profit margins may be sensitive to inflationary and deflationary pressures; because our foodservice distribution operations are concentrated in certain culinary markets, we are susceptible to economic and other developments, including adverse weather conditions, in these areas; fuel cost volatility may have a material adverse effect on our business, financial condition or results of operations; our ability to raise capital in the future may be limited; we may be unable to obtain debt or other financing, including financing necessary to execute on our acquisition strategy, on favorable terms or at all; interest charged on our outstanding debt may be adversely affected by changes in the method of determining the Secured Overnight Financing Rate (“SOFR”); our business operations and future development could be significantly disrupted if we lose key members of our management team; and significant public health epidemics or pandemics, including the COVID-19 pandemic, may adversely affect our business, results of operations and financial condition. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, speak only as of the date made. A more detailed description of these and other risk factors is contained in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 22, 2022 and other reports, including this Quarterly Report on Form 10-Q, filed by the Company with the SEC since that date. The Company is not undertaking to update any information in the foregoing report until the effective date of its future reports required by applicable laws.


3




PART I FINANCIAL INFORMATION

ITEM 1.            CONSOLIDATED FINANCIAL STATEMENTS

THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS 
(Amounts in thousands, except share data)
September 23, 2022 (unaudited) December 24, 2021
ASSETS    
Current assets:    
Cash and cash equivalents $ 145,425  $ 115,155 
Accounts receivable, net of allowance of $21,147 in 2022 and $20,260 in 2021
208,939  172,540 
Inventories, net 190,668  144,491 
Prepaid expenses and other current assets 46,464  37,774 
Total current assets 591,496  469,960 
Property, plant and equipment, net 158,569  133,622 
Operating lease right-of-use assets 135,286  130,701 
Goodwill 245,428  221,775 
Intangible assets, net 116,112  104,743 
Deferred taxes, net 2,259  9,380 
Other assets 3,609  3,614 
Total assets $ 1,252,759  $ 1,073,795 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Current liabilities:    
Accounts payable $ 142,963  $ 118,284 
Accrued liabilities 48,751  35,390 
Short-term operating lease liabilities 17,180  15,882 
Accrued compensation 21,929  22,321 
Current portion of long-term debt 6,067  5,141 
Total current liabilities 236,890  197,018 
Long-term debt, net of current portion 493,148  394,160 
Operating lease liabilities 131,910  127,296 
Other liabilities and deferred credits 5,862  5,110 
Total liabilities 867,810  723,584 
Commitments and contingencies
Stockholders’ equity:    
Preferred Stock - $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 23, 2022 and December 24, 2021
—  — 
Common Stock - $0.01 par value, 100,000,000 shares authorized, 38,270,107 and 37,887,675 shares issued and outstanding at September 23, 2022 and December 24, 2021, respectively
383  380 
Additional paid-in capital 322,505  314,242 
Accumulated other comprehensive loss (2,127) (2,022)
Retained earnings 64,188  37,611 
Total stockholders’ equity 384,949  350,211 
Total liabilities and stockholders’ equity $ 1,252,759  $ 1,073,795 

See accompanying notes to the consolidated financial statements
4




THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 23,
2022
September 24,
2021
September 23,
2022
September 24,
2021
Net sales $ 661,856  $ 484,321  $ 1,822,063  $ 1,187,506 
Cost of sales 504,068  374,346  1,390,758  922,710 
Gross profit 157,788  109,975  431,305  264,796 
Selling, general and administrative expenses 130,255  99,431  364,828  270,034 
Other operating expenses (income), net 5,458  105  10,504  (208)
Operating income (loss) 22,075  10,439  55,973  (5,030)
Interest expense 10,737  4,191  19,567  13,362 
Income (loss) before income taxes 11,338  6,248  36,406  (18,392)
Provision for income tax expense (benefit) 3,061  2,792  9,829  (5,025)
Net income (loss) $ 8,277  $ 3,456  $ 26,577  $ (13,367)
Other comprehensive (loss) income:    
Foreign currency translation adjustments (156) (90) (105) 67 
Comprehensive income (loss) $ 8,121  $ 3,366  $ 26,472  $ (13,300)
Net income (loss) per share:      
Basic $ 0.22  $ 0.09  $ 0.72  $ (0.36)
Diluted $ 0.21  $ 0.09  $ 0.68  $ (0.36)
Weighted average common shares outstanding:    
Basic 37,120,926  36,875,784  37,047,653  36,701,927 
Diluted 42,044,053  37,105,746  41,942,676  36,701,927 
 
See accompanying notes to the consolidated financial statements.
5




THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share amounts)
  Common Stock Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
Total
  Shares Amount
Balance December 24, 2021 37,887,675  $ 380  $ 314,242  $ (2,022) $ 37,611  $ 350,211 
Net income —  —  —  —  1,385  1,385 
Stock compensation 433,115  3,039  —  —  3,043 
Warrants issued for acquisition —  —  1,701  —  —  1,701 
Cumulative translation adjustment —  —  —  125  —  125 
Shares surrendered to pay tax withholding (64,329) (1) (2,039) —  —  (2,040)
Balance March 25, 2022 38,256,461  $ 383  $ 316,943  $ (1,897) $ 38,996  $ 354,425 
Net income —  —  —  —  16,915  16,915 
Stock compensation 16,131  —  2,939  —  —  2,939 
Cumulative translation adjustment —  —  —  (74) —  (74)
Shares surrendered to pay tax withholding (15,137) —  (518) —  —  (518)
Balance June 24, 2022 38,257,455  $ 383  $ 319,364  $ (1,971) $ 55,911  $ 373,687 
Net income —  —  —  —  8,277  8,277 
Stock compensation 9,986  —  3,099  —  —  3,099 
Exercise of stock options 3,407  —  69  —  —  69 
Cumulative translation adjustment —  —  —  (156) —  (156)
Shares surrendered to pay tax withholding (741) —  (27) —  —  (27)
Balance September 23, 2022 38,270,107  $ 383  $ 322,505  $ (2,127) $ 64,188  $ 384,949 

Balance December 25, 2020 37,274,768  $ 373  $ 303,734  $ (2,051) $ 42,534  $ 344,590 
Net loss —  —  —  —  (17,921) (17,921)
Stock compensation 673,430  2,452  —  —  2,458 
Cumulative translation adjustment —  —  —  81  —  81 
Shares surrendered to pay tax withholding (38,503) —  (1,192) —  —  (1,192)
Balance March 26, 2021 37,909,695  $ 379  $ 304,994  $ (1,970) $ 24,613  $ 328,016 
Net income —  —  —  —  1,098  1,098 
Stock compensation 69,245  3,279  —  —  3,280 
Warrants issued for acquisition —  —  1,120  —  —  1,120 
Cumulative translation adjustment —  —  —  76  —  76 
Shares surrendered to pay tax withholding (17,077) —  (541) —  —  (541)
Balance June 25, 2021 37,961,863  $ 380  $ 308,852  $ (1,894) $ 25,711  $ 333,049 
Net income —  —  —  —  3,456  3,456 
Stock compensation (75,597) —  2,710  —  —  2,710 
Cumulative translation adjustment —  —  —  (90) —  (90)
Shares surrendered to pay tax withholding (2,017) —  (59) —  —  (59)
Balance September 24, 2021 37,884,249  $ 380  $ 311,503  $ (1,984) $ 29,167  $ 339,066 

See accompanying notes to the consolidated financial statements.
6




THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Thirty-Nine Weeks Ended
September 23, 2022 September 24, 2021
Cash flows from operating activities:    
Net income (loss) $ 26,577  $ (13,367)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Depreciation and amortization 17,667  16,270 
Amortization of intangible assets 10,289  9,778 
Provision (benefit) for allowance for doubtful accounts 3,138  (744)
Non-cash operating lease expense 1,329  505 
Provision (benefit) for deferred income taxes 7,121  (4,855)
Amortization of deferred financing fees 1,621  1,832 
Loss on debt extinguishment 142  — 
Stock compensation 9,081  8,448 
Change in fair value of contingent earn-out liabilities 8,358  (1,359)
Intangible asset impairment —  597 
Loss on asset disposal 17  257 
Changes in assets and liabilities, net of acquisitions:    
Accounts receivable (25,402) (51,582)
Inventories (40,519) (49,148)
Prepaid expenses and other current assets (9,848) (3,304)
Accounts payable, accrued liabilities and accrued compensation 21,938  60,443 
Other assets and liabilities 238  (101)
Net cash provided by (used in) operating activities 31,747  (26,330)
Cash flows from investing activities:    
Capital expenditures (31,666) (17,872)
Cash paid for acquisitions, net of cash received (62,007) (7,280)
Net cash used in investing activities (93,673) (25,152)
Cash flows from financing activities:    
Payment of debt, finance lease and other financing obligations (171,434) (35,918)
Proceeds from debt issuance 300,000  51,750 
Payment of deferred financing fees (11,258) (1,450)
Proceeds from exercise of stock options 69  — 
Surrender of shares to pay withholding taxes (2,584) (1,792)
Cash paid for contingent earn-out liability (2,538) (83)
Payments under asset-based loan facility (20,000) (20,000)
Net cash provided by (used in) financing activities 92,255  (7,493)
Effect of foreign currency on cash and cash equivalents (59) (89)
Net change in cash and cash equivalents 30,270  (59,064)
Cash and cash equivalents-beginning of period 115,155  193,281 
Cash and cash equivalents-end of period $ 145,425  $ 134,217 

See accompanying notes to the consolidated financial statements.
7




THE CHEFS’ WAREHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)

Note 1 - Operations and Basis of Presentation
 
Description of Business and Basis of Presentation
 
The financial statements include the consolidated accounts of The Chefs’ Warehouse, Inc. (the “Company”), and its wholly-owned subsidiaries. The Company’s quarterly periods end on the thirteenth Friday of each quarter. Every six to seven years, the Company will add a fourteenth week to its fourth quarter to more closely align its year-end to the calendar year. Fiscal 2022 will include a fourteenth week in the fourth quarter. The Company’s business consists of three operating segments: East Coast, Midwest and West Coast that aggregate into one reportable segment, foodservice distribution, which is concentrated primarily in the United States. The Company’s customer base consists primarily of menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos, specialty food stores, grocers and warehouse clubs.

Consolidation

The consolidated financial statements include all the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements and the related interim information contained within the notes to such unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules of the Securities and Exchange Commission (“SEC”) for interim information and quarterly reports on Form 10-Q. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 24, 2021 filed as part of the Company’s Annual Report on Form 10-K, as filed with the SEC on February 22, 2022.

The unaudited consolidated financial statements appearing in this Form 10-Q have been prepared on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 22, 2022, and in the opinion of management, include all normal recurring adjustments that are necessary for the fair statement of the Company’s interim period results. The year-end consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by GAAP. Due to seasonal fluctuations, the COVID-19 pandemic and other factors, the results of operations for the thirteen and thirty-nine weeks ended September 23, 2022 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.

Note 2 – Summary of Significant Accounting Policies

Revenue Recognition
 
Revenues from product sales are recognized at the point at which control of each product is transferred to the customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The majority of customer orders are fulfilled within a day and customer payment terms are typically 14 to 60 days from delivery. Shipping and handling activities are costs to fulfill the Company’s performance obligations. These costs are expensed as incurred and presented within selling, general and administrative expenses on the consolidated statements of operations. The Company offers certain sales incentives to customers in the form of rebates or discounts. These sales incentives are accounted as variable consideration. The Company estimates these amounts based on the expected amount to be provided to customers and records a corresponding reduction in revenue. The Company does not expect a significant reversal in the amount
8




of cumulative revenue recognized. Sales tax billed to customers is not included in revenue but rather recorded as a liability owed to the respective taxing authorities at the time the sale is recognized.

The following table presents the Company’s net sales disaggregated by principal product category:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Center-of-the-Plate $ 280,272  42.3  % $ 238,783  49.3  % $ 803,334  44.1  % $ 593,717  50.0  %
Dry Goods 108,908  16.5  % 66,455  13.7  % 291,020  16.0  % 163,352  13.8  %
Pastry 79,899  12.1  % 48,842  10.1  % 213,970  11.7  % 118,952  10.0  %
Cheese and Charcuterie 61,123  9.2  % 40,403  8.3  % 163,720  9.0  % 97,805  8.2  %
Produce 39,302  5.9  % 35,900  7.4  % 104,413  5.7  % 87,049  7.3  %
Dairy and Eggs 41,780  6.3  % 21,922  4.5  % 111,046  6.1  % 53,405  4.5  %
Oils and Vinegars 33,437  5.1  % 21,855  4.5  % 89,041  4.9  % 48,210  4.1  %
Kitchen Supplies 17,135  2.6  % 10,161  2.2  % 45,519  2.5  % 25,016  2.1  %
Total $ 661,856  100  % $ 484,321  100  % $ 1,822,063  100  % $ 1,187,506  100  %

The Company determines its product category classification based on how the Company currently markets its products to its customers. The Company’s definition of its principal product categories may differ from the way in which other companies present similar information.

Food Processing Costs

Food processing costs include but are not limited to direct labor and benefits, applicable overhead and depreciation of equipment and facilities used in food processing activities. Food processing costs included in cost of sales were $10,089 and $7,524 for the thirteen weeks ended September 23, 2022 and September 24, 2021, respectively, and $28,523 and $19,599 for the thirty-nine weeks ended September 23, 2022 and September 24, 2021, respectively.

Note 3 – Net Income (Loss) per Share
 
The following table sets forth the computation of basic and diluted net income (loss) per common share:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Net income (loss) per share:      
Basic $ 0.22  $ 0.09  $ 0.72  $ (0.36)
Diluted $ 0.21  $ 0.09  $ 0.68  $ (0.36)
Weighted average common shares:      
Basic 37,120,926  36,875,784  37,047,653  36,701,927 
Diluted 42,044,053  37,105,746  41,942,676  36,701,927 













9




Reconciliation of net income (loss) per common share:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Numerator:      
Net income (loss) $ 8,277  $ 3,456  $ 26,577  $ (13,367)
Add effect of dilutive securities      
Interest on convertible notes, net of tax 683  —  2,048  — 
Net income (loss) available to common shareholders $ 8,960  $ 3,456  $ 28,625  $ (13,367)
Denominator:      
Weighted average basic common shares outstanding 37,120,926  36,875,784  37,047,653  36,701,927 
Dilutive effect of unvested common shares 316,358  229,962  304,391  — 
Dilutive effect of stock options and warrants 81,789  —  65,652  — 
Dilutive effect of convertible notes 4,524,980  —  4,524,980  — 
Weighted average diluted common shares outstanding 42,044,053  37,105,746  41,942,676  36,701,927 
 
Potentially dilutive securities that have been excluded from the calculation of diluted net income (loss) per common share because the effect is anti-dilutive are as follows:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Restricted share awards (“RSAs”) 80,844  50,412  68,784  297,978 
Stock options and warrants —  126,359  —  122,956 
Convertible notes 91,053  4,616,033  91,053  4,341,664 

Note 4 – Fair Value Measurements
 
Assets and Liabilities Measured at Fair Value
 
The Company’s contingent earn-out liabilities are measured at fair value. These liabilities were estimated using Level 3 inputs. Long-term earn-out liabilities were $4,130 and $3,252 as of September 23, 2022 and December 24, 2021, respectively, and are reflected as other liabilities and deferred credits on the consolidated balance sheets. The remaining short-term earn-out liabilities are reflected as accrued liabilities on the consolidated balance sheets. The fair value of contingent consideration was determined based on a probability-based approach which includes projected results, percentage probability of occurrence and the application of a discount rate to present value the payments. A significant change in projected results, discount rate, or probabilities of occurrence could result in a significantly higher or lower fair value measurement. Changes in the fair value of contingent earn-out liabilities are reflected in other operating expenses (income), net on the consolidated statements of operations.

The following table presents the changes in Level 3 contingent earn-out liabilities:
Total
Balance December 24, 2021 $ 6,877 
Acquisition value 1,200 
Cash payments (2,538)
Changes in fair value 8,358 
Balance September 23, 2022 $ 13,897 


10




Fair Value of Financial Instruments

The following table presents the carrying value and fair value of the Company’s convertible notes. In estimating the fair value of the convertible notes, the Company utilized Level 3 inputs including prevailing market interest rates to estimate the debt portion of the instrument and a Black Scholes valuation model to estimate the fair value of the conversion option. The Black Scholes model utilizes the market price of the Company’s common stock, estimates of the stock’s volatility and the prevailing risk-free interest rate in calculating the fair value estimate.
  September 23, 2022 December 24, 2021
Carrying Value Fair Value Carrying Value Fair Value
Convertible Senior Notes $ 200,000  $ 204,340  $ 200,000  $ 206,182 
Convertible Unsecured Note $ 4,000  $ 4,221  $ 4,000  $ 4,102 
 
Note 5 – Acquisitions
 
Capital Seaboard

On December 28, 2021, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of CGC Holdings, Inc. (“Capital Seaboard”), a specialty seafood and produce distributor in Maryland. The purchase price was approximately $31,036, consisting of $28,000 paid in cash at closing, common stock warrants valued at $1,701, and $1,335 paid upon settlement of a net working capital true-up. The Company is in the process of finalizing a valuation of tangible and intangible assets of Capital Seaboard as of the acquisition date. When applicable, these valuations require the use of Level 3 inputs. Goodwill for the Capital Seaboard acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty seafood and produce distributor to leverage the Company’s existing products in the markets served by Capital Seaboard, to supply Capital Seaboard’s product offerings to our East Coast markets and any intangible assets that do not qualify for separate recognition.

Other Acquisitions

During the thirty-nine weeks ended September 23, 2022 , the Company completed three other acquisitions for an aggregate purchase price of approximately $32,500, paid in cash, subject to customary working capital adjustments. The Company will also pay additional contingent consideration, if earned, in the form of earn-out amounts which could total $2,000 in the aggregate. The Company is in the process of finalizing a valuation of the tangible and intangible assets as of the acquisition date. When applicable, these valuations require the use of Level 3 inputs. Goodwill of $16,252 will be amortized over 15 years for tax purposes.

The Company reflected net sales and income before income taxes in its consolidated statement of operations related to the acquisitions follows:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 23, 2022
Net sales $ 58,466  $ 135,260 
Income before income taxes $ 4,970  $ 8,892 

The table below presents unaudited pro forma consolidated income statement information of the Company as if the acquisitions had occurred on December 26, 2020. The pro forma results were prepared from financial information obtained from the sellers of the business, as well as information obtained during the due diligence process associated with the acquisitions. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisitions been completed on the above date, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, any incremental costs for transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisitions. The pro forma information reflects amortization and depreciation of the acquisitions at their respective fair values.

11




  Thirteen Weeks Ended
Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Net sales $ 698,650  $ 544,562  $ 1,871,994  $ 1,357,312 
Income (loss) before income taxes $ 11,699  $ 7,875  $ 37,152  $ (16,040)

The table below sets forth the preliminary purchase price allocation for these acquisitions:
Capital Seaboard Other Acquisitions
Current assets $ 10,130  $ 11,498 
Customer relationships 7,250  11,100 
Trademarks 2,280  1,000 
Goodwill 8,334  16,252 
Fixed assets 9,552  633 
Other assets 122  18 
Current liabilities (6,632) (6,801)
Earn-out liability —  (1,200)
Total consideration $ 31,036  $ 32,500 
The Company recognized professional fees of $728 and $1,747 in operating expenses related to acquisition related activities during the thirteen and thirty-nine weeks ended September 23, 2022, respectively.

Note 6 – Inventories
 
Inventories consist primarily of finished product and are reflected net of adjustments for shrinkage, excess and obsolescence totaling $9,616 and $8,312 at September 23, 2022 and December 24, 2021, respectively.

Note 7 – Property, Plant and Equipment
 
Equipment, leasehold improvements and software as of September 23, 2022 and December 24, 2021 consisted of the following:
  Useful Lives September 23, 2022 December 24, 2021
Land Indefinite $ 5,542  $ 5,020 
Buildings 20 years 23,552  18,406 
Machinery and equipment
5 - 10 years
30,845  28,099 
Computers, data processing and other equipment
3 - 7 years
16,986  15,480 
Software
3 - 7 years
42,399  39,799 
Leasehold improvements
1 - 40 years
92,517  69,105 
Furniture and fixtures 7 years 3,671  3,582 
Vehicles
5 - 10 years
28,395  29,632 
Construction-in-process   27,870  24,355 
    271,777  233,478 
Less: accumulated depreciation and amortization   (113,208) (99,856)
Equipment, leasehold improvements and software, net   $ 158,569  $ 133,622 

Construction-in-process at September 23, 2022 related primarily to the implementation of the Company’s Enterprise Resource Planning (“ERP”) system and the build-out of the Company’s Miami distribution facility and at December 24, 2021 related primarily to the build-outs of the Company’s Miami and Los Angeles distribution facilities. The net book value of equipment financed under finance leases at September 23, 2022 and December 24, 2021 was $9,302 and $10,874, respectively.



12




The components of depreciation and amortization expense were as follows:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Depreciation expense $ 4,455  $ 3,903  $ 13,255  $ 11,679 
Software amortization $ 1,457  $ 1,707  $ 4,412  $ 4,591 
$ 5,912  $ 5,610  $ 17,667  $ 16,270 

Note 8 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill are presented as follows:
Carrying amount as of December 24, 2021 $ 221,775 
Goodwill adjustments (1)
(792)
Acquisitions 24,586 
Foreign currency translation (141)
Carrying amount as of September 23, 2022 $ 245,428 
(1) The goodwill adjustments represent measurement period adjustments related to certain acquisitions completed in the prior year.

Other intangible assets as of September 23, 2022 and December 24, 2021 consisted of the following:

September 23, 2022 Weighted-Average
Remaining
Amortization Period
Gross Carrying Amount Accumulated Amortization Net Amount
Customer relationships 120 months $ 174,105  $ (82,688) $ 91,417 
Non-compete agreements 17 months 8,579  (8,218) 361 
Trademarks 144 months 39,745  (15,411) 24,334 
Total $ 222,429  $ (106,317) $ 116,112 
December 24, 2021 Weighted-Average
Remaining
Amortization Period
Gross Carrying Amount Accumulated Amortization Net Amount
Customer relationships 120 months $ 155,678  $ (74,644) $ 81,034 
Non-compete agreements 26 months 8,579  (8,018) 561 
Trademarks 179 months 36,514  (13,366) 23,148 
Total $ 200,771  $ (96,028) $ 104,743 

Amortization expense for other intangibles was $3,470 and $3,135 for the thirteen weeks ended September 23, 2022 and September 24, 2021, respectively, and $10,289 and $9,778 for the thirty-nine weeks ended September 23, 2022 and September 24, 2021, respectively.

Estimated amortization expense for other intangible assets for the remainder of the fiscal year ending December 30, 2022 and each of the next four fiscal years and thereafter is as follows:
2022 $ 3,274 
2023 12,796 
2024 11,943 
2025 11,529 
2026 11,529 
Thereafter 65,041 
Total $ 116,112 

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Note 9 – Debt Obligations
 
Debt obligations as of September 23, 2022 and December 24, 2021 consisted of the following:
September 23, 2022 December 24, 2021
Senior secured term loans $ 300,000  $ 168,675 
Convertible senior notes 200,000  200,000 
Asset-based loan facility —  20,000 
Finance lease and other financing obligations 9,732  11,602 
Convertible unsecured note 4,000  4,000 
Deferred finance fees and original issue premium (discount) (14,517) (4,976)
Total debt obligations 499,215  399,301 
Less: current installments (6,067) (5,141)
Total debt obligations excluding current installments $ 493,148  $ 394,160 

On August 23, 2022, the Company entered into an eighth amendment (“Eight Amendment”) to its senior secured term loan credit agreement (“Term Credit Agreement”). The Company borrowed $300,000 maturing on August 23, 2029 (“2029 Term Loans”), comprising of a refinancing of the then existing term loans balance under the Term Credit Agreement of $167,391 and an incremental borrowing of $132,609. The incremental funds are to be used for capital expenditures, permitted acquisitions, working capital, and general corporate purposes of the Company. Additionally, the Term Credit Agreement includes an accordion which permits the Company to request that the lenders extend additional Term Loans based on certain performance, leverage ratio and other restrictions. The Eight Amendment includes a springing maturity of June 22, 2024 if, by June 22, 2024, more than $40,000 in principal remains outstanding on the Company’s Convertible Senior Notes has not been repaid, repurchased, redeemed or refinanced with permitted indebtedness having a maturity date not earlier than six months after August 23, 2029.

The interest charged on the 2029 Term Loans is equal to, at the Company’s option, either the Alternate Base Rate (as defined in the Eight Amendment) plus 375 basis points or the secured overnight financing rate (“SOFR”) for one, two, three or six-month interest periods chosen by the Company plus 475 basis points. The interest rate on the 2029 Term Loans at September 23, 2022 was 7.9%.

The Eight Amendment involved multiple members of a loan syndicate. The Company performed an analysis for each lender in accordance with ASC 470 “Debt” to determine whether the Eighth Amendment resulted in a substantial change to the remaining cash flows which is defined as a change in present value of remaining cash flows of 10% or more. As a result of the analysis, the Company incurred a loss on debt extinguishment of $142 which represents the portion of unamortized deferred financing fees attributable to lenders that exited the loan syndicate. The transaction was accounted for as a modification for existing lenders that participated in the 2029 Term Loans. The Company deferred lender and third-party fees of $10,852 as debt issuance costs, presented in other assets in the Company’s consolidated balance sheet, to be amortized over the term of the term loan. Arrangement and third-party transaction costs of $4,498 were expensed as incurred.

The Eight Amendment removed the minimum liquidity covenant which required the Company to maintain at least $35,000 of liquidity as of the last day of any fiscal quarter where EBITDA, as defined in the Term Credit Agreement, was less than $10,000.

The following table summarizes the key terms as of the Term Loans as of September 23, 2022:
Term Loans Principal Outstanding Interest Rate Maturity Date Scheduled Principal Payments
2029 Term Loans $ 300,000 
SOFR + 4.75%
August 23, 2029
0.25% per quarter

On March 11, 2022, the Company entered into a third amendment to its asset-based loan facility (“ABL Facility”) which increased the aggregate commitments from $150,000 to $200,000. The interest rate charged on borrowings under the ABL Facility is equal to a spread plus, at the Company’s option, either the Base Rate (as defined in the ABL Credit Agreement) or a forward-looking term rate based on the secured overnight financing rate term (except for swingline loans) for one-, three-, or six-month interest periods chosen by the Company. The ABL Facility matures on March 11, 2027 subject to a springing maturity date that occurs 90 days prior to the earliest maturity date under the Company’s senior secured term loan facility or
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March 24, 2024 if the Company’s 1.875% Convertible Senior Notes due 2024 in an aggregate principal amount in excess of $40,000 remain outstanding that have not been repaid, repurchased, redeemed or refinanced having a maturity date not earlier than six months after March 11, 2027.

The ABL Credit Agreement contains customary affirmative covenants, negative covenants and events of default as more particularly described in the ABL Credit Agreement. The Company is required to comply with a minimum consolidated fixed charge coverage ratio of 1:1 if the amount of availability under the ABL Facility falls below the greater of $14,000 and 10%, of the lesser of the aggregate commitments and the borrowing base then in effect.

The third amendment was accounted for as a debt modification. The Company incurred transaction costs of $406 which were capitalized as deferred financing fees, presented in other assets on the Company’s consolidated balance sheets, to be amortized over the term of the ABL Facility.

On September 23, 2022, the Company fully paid all borrowings outstanding under the ABL and had reserved $23,181 of the ABL Facility for the issuance of letters of credit. As of September 23, 2022, funds totaling $176,820 were available for borrowing under the ABL Facility.

The net carry value of the Company’s Convertible Senior Notes as of September 23, 2022 and December 24, 2021 was:

September 23, 2022 December 24, 2021
Principal amount outstanding $ 200,000  $ 200,000 
Unamortized deferred financing fees and premium (2,014) (2,686)
Net carry value $ 197,986  $ 197,314 

The components of interest expense on the Company’s Convertible Senior Notes were as follows:
  Thirteen Weeks Ended Thirty-Nine Weeks Ended
  September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Coupon interest $ 938  $ 938  $ 2,813  $ 2,656 
Amortization of deferred financing fees and premium $ 224  $ 224  $ 672  $ 689 
Total interest $ 1,162  $ 1,162  $ 3,485  $ 3,345 

Note 10 – Stockholders’ Equity

Equity Awards

The following table reflects the activity of RSAs during the thirty-nine weeks ended September 23, 2022:
Time-based Performance-based Market-based
Shares Weighted Average
Grant Date Fair Value
Shares Weighted Average
Grant Date Fair Value
Shares Weighted Average
Grant Date Fair Value
Unvested at December 24, 2021 617,996  $ 28.33  187,437  $ 32.04  185,129  $ 31.44 
Granted 183,244  33.60  167,261  32.44  167,261  29.12 
Vested (315,722) 26.43  —  —  —  — 
Forfeited (15,691) 29.83  (21,420) 32.14  (21,423) 30.82 
Unvested at September 23, 2022 469,827  $ 31.61  333,278  $ 32.23  330,967  $ 30.31 

The Company granted 517,766 RSAs to its employees at a weighted average grant date fair value of $31.41 during the thirty-nine weeks ended September 23, 2022. These awards are a mix of time-, market- and performance-based grants that generally vest over a range of periods up to four years. The Company recognized expense totaling $3,099 and $2,710 on its RSAs during the thirteen weeks ended September 23, 2022 and September 24, 2021, respectively and $9,081 and $8,448 during the thirty-nine weeks ended September 23, 2022 and September 24, 2021, respectively.
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At September 23, 2022, the total unrecognized compensation cost for unvested RSAs was $21,353 and the weighted-average remaining period was approximately 2.1 years. Of this total, $11,051 related to RSAs with time-based vesting provisions and $10,302 related to RSAs with performance- and market-based vesting provisions. At September 23, 2022, the weighted-average remaining period for time-based vesting and performance-based vesting RSAs were approximately 2.2 years and 2.0 years, respectively.

No share-based compensation expense related to the Company’s RSAs or stock options has been capitalized. As of September 23, 2022, there were 2,053,840 shares available for grant under the 2019 Omnibus Equity Incentive Plan.

The following table summarizes stock option activity during the thirty-nine weeks ended September 23, 2022:
Shares Weighted
Average
Exercise Price
Aggregate
Intrinsic
Value
Weighted Average
Remaining Contractual
Term (in years)
Outstanding December 24, 2021 115,639  $ 20.23  $ 2,051  6.2
Exercised (3,407) 20.23 
Outstanding September 23, 2022 112,232  $ 20.23  $ 1,127  3.5
Exercisable at September 23, 2022 112,232  20.23  $ 1,127  3.5

Note 11 – Related Parties
 
The Chefs’ Warehouse Mid-Atlantic, LLC, a subsidiary of the Company, leases a distribution facility that is 100% owned by entities controlled by Christopher Pappas, the Company’s chairman, president and chief executive officer, and John Pappas, the Company’s vice chairman and one of its directors, and are deemed to be affiliates of these individuals. Expense related to this facility totaled $123 during the thirteen weeks ended September 23, 2022 and September 24, 2021, and $369 during the thirty-nine weeks ended September 23, 2022 and September 24, 2021.

Note 12 – Income Taxes

The Company’s effective tax rate was 27.0% and 44.7% thirteen weeks ended September 23, 2022 and September 24, 2021 and 27.0% and 27.3% for the thirty-nine weeks ended September 23, 2022 and September 24, 2021. The effective tax rate varies from the 21% statutory rate primarily due to state taxes. The high effective tax rate for the thirteen weeks ended September 24, 2021 was driven by various discrete items.

As a result of the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”), the Company had carried back federal net operating losses resulting in a federal income tax refund receivable of $21,250, which is classified within prepaid expenses and other current assets on the Company’s consolidated balance sheets as of September 23, 2022 and December 24, 2021. The IRS is experiencing significant processing delays driven by an increase in net operating loss carryback requests as a result of the CARES Act, along with other factors. As a result, the processing and expected receipt of the federal income tax refund receivable has been significantly delayed. The Company is currently working with IRS Taxpayer’s Advocate Services and consultants to resolve the processing issue. While progress has been made with the IRS and the Company expects to receive the refund within one year, the exact timing of the receipt is difficult to predict.

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Note 13 – Supplemental Disclosures of Cash Flow Information
Thirty-Nine Weeks Ended
September 23, 2022 September 24, 2021
Supplemental cash flow disclosures:
Cash paid (received) for income taxes $ 3,483  $ (194)
Cash paid for interest, net of cash received $ 17,636  $ 10,690 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 20,835  $ 18,965 
Operating cash flows from finance leases $ 325  $ 422 
ROU assets obtained in exchange for lease liabilities:
Operating leases $ 21,779  $ 13,308 
Finance leases $ 791  $ 536 
Other non-cash investing and financing activities:
Warrants issued for acquisitions $ 1,701  $ 1,120 
Contingent earn-out liabilities for acquisitions $ 1,200  $ 3,400 

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ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 22, 2022. Unless otherwise indicated, the terms “Company”, “Chefs’ Warehouse”, “we”, “us” and “our” refer to The Chefs’ Warehouse, Inc. and its subsidiaries.

Business Overview

We are a premier distributor of specialty foods in nine of the leading culinary markets in the United States. We offer more than 50,000 stock-keeping units (“SKUs”), ranging from high-quality specialty foods and ingredients to basic ingredients and staples and center-of-the-plate proteins. We serve more than 35,000 customer locations, primarily located in our nineteen geographic markets across the United States and Canada, and the majority of our customers are independent restaurants and fine dining establishments. We also sell certain of our products directly to consumers through our Allen Brothers and “Shop Like a Chef” retail channels.

Effect of the COVID-19 Pandemic on our Business and Operations

The COVID-19 pandemic (“Pandemic”) had an adverse impact on numerous aspects of our business and those of our customers including, but not limited to, demand for our products, cost inflation and labor shortages. Despite these challenges, we continued to provide our core customers with high touch service, executed on our cost control measures and returned to profitability beginning in the second quarter of fiscal 2021. We continue to experience sequential improvement in our business which has contributed to organic sales growth of $107.2 million compared to the prior year quarter.

The extent to which the Pandemic may impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among others.

Recent Acquisitions

On December 28, 2021, pursuant to an asset purchase agreement, we acquired substantially all of the assets of CGC Holdings, Inc. (“Capital Seaboard”), a specialty seafood and produce distributor in Maryland. The purchase price was approximately $31.0 million consisting of $28.0 million paid in cash at closing, common stock warrants of $1.7 million , and $1.3 million paid upon settlement of a net working capital true-up.

During the thirty-nine weeks ended September 23, 2022, the Company completed three other acquisitions for an aggregate purchase price of approximately $32.5 million, paid in cash, subject to customary working capital adjustments. The Company will also pay additional contingent consideration, if earned, in the form of earn-out amounts which could total $2.0 million in the aggregate.

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RESULTS OF OPERATIONS
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 23, 2022 September 24, 2021 September 23, 2022 September 24, 2021
Net sales $ 661,856  $ 484,321  $ 1,822,063  $ 1,187,506 
Cost of sales 504,068  374,346  1,390,758  922,710 
Gross profit 157,788  109,975  431,305  264,796 
Selling, general and administrative expenses 130,255  99,431  364,828  270,034 
Other operating expenses (income), net 5,458  105  10,504  (208)
Operating income (loss) 22,075  10,439  55,973  (5,030)
Interest expense 10,737  4,191  19,567  13,362 
Income (loss) before income taxes 11,338  6,248  36,406  (18,392)
Provision for income tax expense (benefit) 3,061  2,792  9,829  (5,025)
Net income (loss) $ 8,277  $ 3,456  $ 26,577  $ (13,367)

Management evaluates the results of operations and cash flows using a variety of key performance indicators, including net sales compared to prior periods and internal forecasts, costs of our products and results of our cost-control initiatives, and use of operating cash. These indicators are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A.

Thirteen Weeks Ended September 23, 2022 Compared to Thirteen Weeks Ended September 24, 2021

Net Sales
2022 2021 $ Change % Change
Net sales $ 661,856  $ 484,321  $ 177,535  36.7  %

Organic growth contributed $107.2 million, or 22.2%, to sales growth and the remaining sales growth of $70.3 million, or 14.5%, resulted from acquisitions. Organic case count increased approximately 18.3% in our specialty category. In addition, specialty unique customers and placements increased 25.9% and 42.1%, respectively, compared to the prior year period. Organic pounds sold in our center-of-the-plate category increased 11.6% compared to the prior year. Estimated inflation was 15.0% in our specialty category and 2.2% in our center-of-the-plate category compared to the prior year period.

Gross Profit
2022 2021 $ Change % Change
Gross profit $ 157,788  $ 109,975  $ 47,813  43.5  %
Gross profit margin 23.8  % 22.7  %

Gross profit dollars increased primarily as a result of increased sales and price inflation. Gross profit margin increased approximately 113 basis points. Gross profit margins decreased 133 basis points in the Company’s specialty category and increased 238 basis points in the Company’s center-of-the-plate category. Estimated inflation was 15.0% in the Company’s specialty category and 2.2% in the center-of-the-plate category compared to the prior year period. Specialty margins decreased primarily due to significant year-over-year product cost inflation. Margin rates in the center-of-the-plate category increased as a result of the reopening of favorable margin markets versus the same period in 2021 and year-over-year deflation in certain protein categories.

Selling, General and Administrative Expenses
2022 2021 $ Change % Change
Selling, general and administrative expenses $ 130,255  $ 99,431  $ 30,824  31.0  %
Percentage of net sales 19.7  % 20.5  %

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The increase in selling, general and administrative expenses was primarily due to higher costs associated with compensation and benefits, facilities costs, and fuel costs to support sales growth. Our ratio of selling, general and administrative expenses to net sales decreased predominately due to sales growth which contributed to improved fixed cost leverage in the quarter.

Other Operating Expenses, Net
2022 2021 $ Change % Change
Other operating expenses, net $ 5,458  $ 105  $ 5,353  5,098.1  %

The increase in net other operating expenses was primarily due to non-cash charges of $4.7 million for changes in the fair value of our contingent earn-out liabilities compared to non-cash credits of $0.1 million in the prior year period.

Interest Expense
2022 2021 $ Change % Change
Interest expense $ 10,737  $ 4,191  $ 6,546  156.2  %

Interest expense increased primarily due to incurred arrangement and third-party transaction fees of $4.5 million and a $0.1 million loss on debit extinguishment from the refinancing of our term loan. Additionally, we had higher amounts of debt outstanding as a result our $300.0 million term loan issuance in August 2022 and increases in the variable portion of interest rates charged on our outstanding debt.

Provision for Income Taxes
2022 2021 $ Change % Change
Provision for income tax expense (benefit) $ 3,061  $ 2,792  $ 269  9.6  %
Effective tax rate 27.0  % 44.7  %

The effective tax rate in the prior period was driven by various discrete items. The Company’s effective tax rate excluding these discrete items was approximately 29.2%.

Thirty-Nine Weeks Ended September 23, 2022 Compared to Thirty-Nine Weeks Ended September 24, 2021

Net Sales
2022 2021 $ Change % Change
Net sales $ 1,822,063  $ 1,187,506  $ 634,557  53.4  %

Organic growth contributed $435.8 million, or 36.7%, to sales growth and the remaining sales growth of $198.8 million, or 16.7%, resulted from acquisitions. Organic case count increased approximately 31.3% in our specialty category. In addition, specialty unique customers and placements increased 30.3% and 46.4%, respectively, compared to the prior year period. Organic pounds sold in our center-of-the-plate category increased 16.4% compared to the prior year. Estimated inflation was 15.5% in our specialty category and 11.6% in our center-of-the-plate category compared to the prior year period.

Gross Profit
2022 2021 $ Change % Change
Gross profit 431,305  264,796  166,509  62.9  %
Gross profit margin 23.7  % 22.3  %

Gross profit dollars increased primarily as a result of sales growth and price inflation. Gross profit margin increased approximately 137 basis points. Gross profit margins decreased 31 basis points in the Company’s specialty category and increased 202 basis points in the Company’s center-of-the-plate category. Estimated inflation was 15.5% in our specialty category and 11.6% in our center-of-the-plate category compared to the prior year period. Higher inflation compressed margin rates in the specialty categories, while margin rates in the center-of-the-plate category were buoyed primarily by the reopening of favorable margin markets in the 2022 period.

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Selling, General and Administrative Expenses
2022 2021 $ Change % Change
Selling, general and administrative expenses 364,828  270,034  94,794  35.1  %
Percentage of net sales 20.0  % 22.7  %

The increase in selling, general and administrative expenses was primarily due to higher costs associated with compensation and benefits, facilities costs, and fuel costs to support sales growth. Our ratio of selling, general and administrative expenses to net sales decreased predominately due to sales growth which contributing to improved fixed cost leverage in the quarter.

Other Operating Expenses (Income ), Net
2022 2021 $ Change % Change
Other operating expenses (income), net 10,504  (208) 10,712  (5,150.0) %

The increase in net other operating expense relates primarily to non-cash charges of $8.4 million for changes in the fair value of our contingent earn-out liabilities in the fiscal 2022 period compared to non-cash credits of $1.4 million in the prior year period. The prior year period also includes a $0.6 million impairment of Cambridge trademarks as a result of a shift in brand strategy to leverage our Allen Brothers brand in our New England region during the second quarter of fiscal 2021.

Interest Expense
2022 2021 $ Change % Change
Interest expense 19,567  13,362  6,205  46.4  %

Interest expense increased primarily due to incurred arrangement and third-party transaction fees of $4.5 million and a $0.1 million loss on debit extinguishment from the refinancing of our term loan. Additionally, we had higher amounts of debt outstanding as a result our $300.0 million term loan issuance in August 2022 and increases in the variable portion of interest rates charged on our outstanding debt.

Provision for Income Taxes
2022 2021 $ Change % Change
Provision for income tax expense (benefit) 9,829  (5,025) 14,854  (295.6) %
Effective tax rate 27.0  % 27.3  %

The increase in income tax expense is due to pre-tax income in the current period compared to a pre-tax loss in the prior year period.


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LIQUIDITY AND CAPITAL RESOURCES

We finance our day-to-day operations and growth primarily with cash flows from operations, borrowings under our senior secured credit facilities and other indebtedness, operating leases, trade payables and equity financing.

Indebtedness

The following table presents selected financial information on our indebtedness (in thousands):
September 23, 2022 December 24, 2021
Senior secured term loan $ 300,000  $ 168,675 
Total convertible debt 204,000  204,000 
Borrowings outstanding on asset-based loan facility —  20,000 
Finance leases and other financing obligations 9,732  11,602 
Total $ 513,732  $ 404,277 

As of September 23, 2022, we have various floating- and fixed-rate debt instruments with varying maturities for an aggregate principal amount of $504.0 million.

On August 23, 2022, we entered into an eighth amendment to its senior secured term loan credit agreement in which we borrowed $300.0 million maturing on August 23, 2029. See Note 9 “Debt Obligations” to our consolidated financial statements for a full description.

On March 11, 2022, we entered into a third amendment to our asset-based loan facility ABL Facility which increased the aggregate commitments from $150.0 million to $200.0 million. See Note 9 “Debt Obligations” to our consolidated financial statements for a full description.

Liquidity

The following table presents selected financial information on liquidity (in thousands):
September 23, 2022 December 24, 2021
Cash and cash equivalents $ 145,425  $ 115,155 
Working capital, excluding cash and cash equivalents
209,181  157,787 
Availability under asset-based loan facility 176,820  109,459 
Total $ 531,426  $ 382,401 

We expect our capital expenditures, excluding cash paid for acquisitions, for fiscal 2022 will be approximately $36.0 million to $45.0 million. We believe our existing balances of cash and cash equivalents, working capital and the availability under our asset-based loan facility, are sufficient to satisfy our working capital needs, capital expenditures, debt service and other liquidity requirements associated with our current operations over the next 12 months.

Cash Flows

The following table presents selected financial information on cash flows (in thousands):
Thirty-Nine Weeks Ended
September 23, 2022 September 24, 2021
Net income (loss) $ 26,577  $ (13,367)
Non-cash charges $ 58,763  $ 30,729 
Changes in working capital $ (53,593) $ (43,692)
Net cash provided by (used in) operating activities $ 31,747  $ (26,330)
Net cash used in investing activities $ (93,673) $ (25,152)
Net cash provided by (used in) financing activities $ 92,255  $ (7,493)

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Net cash provided by operations was $31.7 million for the thirty-nine weeks ended September 23, 2022 compared to net cash used in operating activities of consisting of $13.4 million for the thirty-nine weeks ended September 24, 2021. The increase in cash provided by operating activities was primarily due to the increased net income, net of non-cash charges, in the current year of $85.3 million compared to $17.4 million in the prior year period. This improvement in cash-based profitability is primarily due to a 53.4% increase in sales compared to the prior year period. The sales growth also resulted in higher working capital (increased accounts receivable and inventory partially offset by higher accounts payable). The working capital growth of $9.9 million versus the prior year period partially offset the favorable impact of increased cash-based profitability. The Company’s increased working capital investment in the current year is the result of rapid sales growth driven by our recovery from the pandemic. We expect working capital growth to moderate in the future as sales growth normalizes.

Net cash used in investing activities was $93.7 million for the thirty-nine weeks ended September 23, 2022, driven by capital expenditures of $31.7 million which includes the purchase of our distribution facility in Columbus, Ohio and $62.0 million in cash paid for acquisitions.

Net cash provided financing activities was $92.3 million for the thirty-nine weeks ended September 23, 2022 driven by the $300.0 million issuance of senior secured term loans maturing in 2029 (“2029 Term Loans”). This was partially offset by $171.4 million of principal payments predominately driven by the pay off our 2025 tranche of senior secured term loans and $11.3 million of deferred financing fees paid in connection with the 2029 Term Loans. We paid $20.0 million to pay down all borrowings outstanding on our asset based loan facility. We also paid $2.6 million for shares surrendered to pay tax withholding related to the vesting of equity incentive plan awards and $2.5 million of earn-out liability payments classified as financing activities.

Seasonality

Excluding our direct-to-consumer business, we generally do not experience any material seasonality. However, our sales and operating results may vary from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages, weather patterns and general economic conditions.

Our direct-to-consumer business is subject to seasonal fluctuations, with direct-to-consumer center-of-the-plate protein sales typically higher during the holiday season in our fourth quarter; accordingly, a disproportionate amount of operating cash flows from this portion of our business is generated by our direct-to-consumer business in the fourth quarter of our fiscal year. Despite a significant portion of these sales occurring in the fourth quarter, there are operating expenses, principally advertising and promotional expenses, throughout the year.

The Pandemic has had a material impact on our business and operations and those of our customers. Our net sales were most significantly impacted during the second quarter of fiscal 2020 when, in an effort to limit the spread of the virus, federal, state and local governments began implementing various restrictions that resulted in the closure of non-essential businesses in many of the markets we serve, which forced our customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations.

Inflation

Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our customers. The impact of inflation and deflation on food, labor, energy and occupancy costs can significantly affect the profitability of our operations.

Critical Accounting Policies and Estimates

The preparation of the Company’s consolidated financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of the Company’s financial condition and results and require its most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining our allowance for doubtful accounts, (ii) inventory valuation, with regard to determining inventory balance adjustments for excess and obsolete inventory, (iii) business combinations, (iv) valuing goodwill and intangible assets, (v) self-insurance reserves, (vi) accounting for income taxes and (vii)
23




contingent earn-out liabilities. Our critical accounting policies and estimates are described in the Form 10-K filed with the SEC on February 22, 2022.

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ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of September 23, 2022, we had an aggregate $300.0 million of indebtedness outstanding under the Term Loan that bore interest at variable rates. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately $2.2 million per annum, holding other variables constant.

ITEM 4.         CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 23, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 23, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

We are involved in legal proceedings, claims and litigation arising out of the ordinary conduct of our business. Although we cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.

ITEM 1A.         RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 24, 2021 filed with the SEC on February 22, 2022. In addition to the information contained herein, you should consider the risk factors disclosed in our Annual Report on Form 10-K.

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Total Number
of Shares
Repurchased(1)
Average
Price
Paid Per Share
Total
Number of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Maximum
Number (or
Approximate
Dollar Value) of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
June 25, 2022 to July 22, 2022 —  $ —  —  — 
July 23, 2022 to August 19, 2022 741  35.01  —  — 
August 20, 2022 to September 23, 2022 —  —  —  — 
Total 741  $ 35.01  —  — 

(1)During the thirty-nine weeks ended September 23, 2022, we withheld 741 shares of our common stock to satisfy tax withholding requirements related to restricted shares of our common stock awarded to our officers and key employees resulting from either elections under 83(b) of the Internal Revenue Code of 1986, as amended, or upon vesting of such awards.

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ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.         MINE SAFETY DISCLOSURES

None.

ITEM 5.         OTHER INFORMATION

None.

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ITEM 7.         EXHIBITS
Exhibit No.   Description
Amendment No. 4, dated as of August 23, 2022, to the ABL Facility.
Redlined Amended ABL Credit Agreement, dated as of August 23, 2022.
Amendment No. 8, dated as of August 23, 2022, to the Term Loan Credit Agreement.
Redlined Amended Term Loan Credit Agreement, dated as of August 23, 2022.
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
   
101.SCH   XBRL Taxonomy Extension Schema Document
   
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

  Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on October 26, 2022.
  THE CHEFS’ WAREHOUSE, INC.
  (Registrant)
   
Date: October 26, 2022     /s/ James Leddy
James Leddy
  Chief Financial Officer
  (Principal Financial Officer)
 
Date: October 26, 2022     /s/ Timothy McCauley
Timothy McCauley
  Chief Accounting Officer
  (Principal Accounting Officer)

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