UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 24, 2021
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
(State or other jurisdiction of incorporation or organization)
20-3031526
(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
Common Stock, par value $0.01
Trading Symbol(s)
CHEF
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 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
Non-accelerated filer
☒
☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the
registrant’s most recently completed second quarter (June 25, 2021): $910,539,402
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $.01 par value per share
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders expected to be held on May 20,
2022 (“Proxy Statement”)
Outstanding at February 7, 2022
37,886,478 shares
Parts Into Which Incorporated
Part III
Total number of pages: 83
1
THE CHEFS’ WAREHOUSE, INC.
INDEX
Description
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part IV
Item 15
Item 16
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
2
Page
Number
5
15
28
29
29
29
30
31
32
44
45
74
74
76
76
76
76
76
76
77
77
83
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of The Chefs’ Warehouse, Inc. contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current
expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or
assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans
and objectives, cost management, liquidity and ability to refinance our indebtedness as it matures, anticipated capital expenditures (and access to capital)
required to complete projects, amounts of cash distributions to our stockholders in the future, if any, and other matters. 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.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. Investors in our common stock are cautioned
not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the following:
•
•
our success depends to a significant extent upon general economic conditions, including disposable income levels and changes in consumer
discretionary spending;
a significant portion of our future growth is dependent upon our ability to expand our operations in our existing markets and to penetrate new
markets through acquisitions;
our business is a low-margin business and our profit margins may be sensitive to inflationary and deflationary pressures;
• 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;
•
• we have significant competition from a variety of sources, and we may not be able to compete successfully;
•
•
our customers are generally not obligated to continue purchasing products from us;
damage to our reputation or lack of acceptance of our specialty food products, center-of-the-plate products and/or the brands we carry in existing
and new markets could materially and adversely impact our business, financial condition or results of operations;
• we have experienced losses due to our inability to collect accounts receivable in the past and could experience increases in such losses in the
•
•
•
•
•
•
•
•
•
future if our customers are unable to pay their debts to us in a timely manner or at all;
new information or attitudes regarding diet and health or adverse opinions about the health effects of the products we distribute could result in
changes in consumer eating habits, which could have a material adverse effect on our business, financial condition or results of operations;
our business operations and future development could be significantly disrupted if we lose key members of our management team;
our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could
negatively impact our profitability. In addition, if we fail to establish proper reserves and adequately estimate future expenses, the costs associated
with our self-insured group medical, workers’ compensation liability and auto liability plans may adversely affect our business, financial condition
or results of operations;
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 distribution of center-of-the-plate products, like meat, poultry and seafood, involves increased exposure to price volatility experienced by
those products;
group purchasing organizations may become more active in our industry and increase their efforts to add our customers as members of these
organizations;
fuel cost volatility may have a material adverse effect on our business, financial condition or results of operations;
increases in our labor costs, including as a result of labor shortages, the unionization of some of our associates, the price or unavailability of
insurance and changes in government regulation, could slow our growth or harm our business;
significant public health epidemics or pandemics, including the COVID-19 pandemic (the “Pandemic”), may adversely affect our business, results
of operations and financial condition;
3
•
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;
information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business;
our investments in information technology may not produce the benefits that we anticipate;
•
•
• we may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely affect our
business;
product liability claims could have a material adverse effect on our business, financial condition or results of operations;
•
• we are subject to significant governmental regulation and failure to comply could subject us to enforcement actions, recalls or other penalties,
•
which could have a material adverse effect on our business, financial condition or results of operations;
federal, state, provincial and local tax rules in the United States and Canada may adversely impact our business, financial condition or results of
operations;
our substantial indebtedness may limit our ability to invest in the ongoing needs of our business;
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;
changes in the method of determining London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative rate, may
adversely affect interest charged on our outstanding debt;
the price of our common stock may be volatile and our stockholders could lose all or a part of their investment;
concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing
significant corporate decisions;
if securities analysts or industry analysts downgrade our stock, publish negative research or reports or do not publish reports about our business,
our stock price and trading volume could decline;
• we do not intend to pay dividends for the foreseeable future and our stock may not appreciate in value;
•
•
our issuance of preferred stock or debt securities could adversely affect holders of our common stock and discourage a takeover; and
some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others,
even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current
management.
This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. Investors in our
common stock should carefully review the risks that are set forth under the caption “Risk Factors” included in Part I, Item 1A of this Form 10-K.
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “The Chefs’ Warehouse,” “we,” “our,” “our Company,” “the
Company” or “us” as used in this Form 10-K refer to The Chefs’ Warehouse, Inc. and its subsidiaries.
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Item 1. BUSINESS
We are a premier distributor of specialty food and center-of-the-plate products in the United States and Canada. We are focused on serving the specific
needs of chefs who own and/or operate some of the leading menu-driven independent restaurants, fine dining establishments, country clubs, hotels,
caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores in the United States and Canada (collectively,
our “core customers”). We believe that we have a distinct competitive advantage in serving these customers as a result of our extensive selection of
distinctive and hard-to-find specialty and center-of-the-plate food products, our product knowledge and our customer service.
We define specialty food products as gourmet foods and ingredients that are of the highest grade, quality or style as measured by their uniqueness, exotic
origin or particular processing method. Our product portfolio includes over 50,000 stock-keeping units (“SKUs”) from more than 2,500 different suppliers
and is comprised primarily of imported and domestic specialty food products, such as artisan charcuterie, specialty cheeses, unique oils and vinegars,
truffles, caviar, chocolate and pastry products. We also offer an extensive line of center-of-the-plate products, including custom cut beef, seafood and
hormone-free poultry, as well as produce and broadline food products, such as cooking oils, butter, eggs, milk and flour. When marketing our products to
our customers, we focus our efforts on chefs, and we believe that, by offering a wide selection of both distinctive and hard-to-find products, together with
center-of-the-plate proteins and staple broadline food products, we are able to differentiate ourselves from larger, traditional broadline foodservice
distributors, while simultaneously enabling our customers to utilize us as their primary foodservice distributor. Additionally, we market certain of our
center-of-the-plate products directly to consumers through our mail and e-commerce platform of Allen Brothers, Inc. (“Allen Brothers”) and through our
direct-to-consumer e-commerce platform by launching our “Shop Like a Chef” online home delivery platform in several of the markets we serve.
Since our formation in 1985, we have expanded our distribution network, product selection and customer base both organically and through acquisitions.
Our net revenues have increased from approximately $1.3 billion for the fiscal year ended December 29, 2017 to $1.7 billion for the fiscal year ended
December 24, 2021. Our historical sales growth and our ability to manage through the material adverse impacts of the COVID-19 pandemic (the
“Pandemic”) on our business are the result of an increase in the breadth and depth of our product portfolio, our commitment to customer service, the efforts
of our experienced and sophisticated sales professionals, the increased use of technology in the operations and management of our business and our
ongoing consolidation of the fragmented specialty foodservice distribution industry. Since December 29, 2017, we have completed twelve acquisitions
which have increased our penetration in existing markets, expanded our footprint into new markets and/or enhanced our product capabilities. The up-front
cash purchase prices for these twelve acquisitions resulted in aggregate up-front cash consideration of more than $112.7 million, which we funded with
cash generated from our operations, borrowings under our then existing indebtedness and the proceeds of our common stock offerings.
Excluding our direct-to-consumer business, we currently serve more than 35,000 core customer locations in our nineteen primary geographic markets
across the United States and Canada, including New York, Washington, D.C., Los Angeles, San Francisco, New England, Las Vegas, Miami, Portland,
Columbus, Cincinnati, Chicago, Vancouver, Edmonton, Toronto, Seattle, Sacramento, Philadelphia, Texas, and Denver. By leveraging an experienced and
sophisticated sales force of approximately 570 sales and customer service professionals, we maintain collaborative relationships with thousands of chefs
while also acting as a critical marketing arm and route-to-market for many of our suppliers. We operate 40 distribution centers and provide service six days
a week in many of our service areas, utilizing our fleet of delivery trucks to fill our customers’ orders.
Effect of the COVID-19 Pandemic on our Business
The Pandemic has had and continues to have 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 during the second quarter of fiscal 2021. Furthermore, as of December 24, 2021,
we had $157.8 million of working capital, including cash and cash equivalents of $115.2 million, on our balance sheet and $109.5 million of availability on
our asset-based loan facility. Our liquidity position, puts us in a strategic position to invest in growth and take advantage of business development
opportunities as we continue to recover from the Pandemic.
The extent to which the Pandemic will impact our financial condition or results of operations in the future 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.
5
Competitive Strengths
We believe that, during our over 30-year history, we have achieved, developed and/or refined the following strengths which provide us with a distinct
competitive position in the foodservice distribution industry and also the opportunity to achieve superior margins relative to most large broadline
foodservice distributors:
Leading Distributor of Specialty Food Products in Many of the Key Culinary Markets. Based on our management’s industry knowledge and experience, we
believe we are the largest distributor of specialty food products, as measured by net sales, in the New York, Washington, D.C., San Francisco and Los
Angeles metropolitan markets. We believe these markets, along with a number of other markets we serve, including Las Vegas, Miami, New England,
Portland, Columbus, Cincinnati, Chicago, Vancouver, Edmonton, Toronto, Seattle, Sacramento and Texas, create and set the culinary trends for the rest of
the United States and Canada and provide us with valuable insight into the latest culinary and menu practices. Furthermore, we believe our established
relationships with many of the top chefs, culinary schools and dining establishments in these key culinary markets have benefited us when we entered into
new markets where we believe that chefs at our potential customers were generally knowledgeable of our brand and commitment to quality and excellence
from their experience working in other markets which we serve or through their personal relationships throughout the culinary industry.
Expansive Product Offering. We offer an extensive portfolio of high-quality specialty food products, ranging from basic ingredients and staples, such as
milk and flour, to custom-cut steaks, seafood, produce and pastries, as well as delicacies and specialty ingredients sourced from North America, Europe,
Asia and South America, which we believe helps our customers distinguish their menu offerings. We carry more than 50,000 SKUs and we constantly
evaluate our portfolio and introduce new products to address regional trends and preferences and ensure that we are on the leading edge of broader culinary
trends. Through our importing division, we provide our customers with access to a portfolio of exclusive items, including regional olive oils, truffles and
charcuterie from Italy, Spain, France and other Mediterranean countries. In addition, and as evidence of our commitment to aid our customers in creating
unique and innovative menu items, we regularly utilize our sourcing relationships and industry insights to procure additional products that we do not
regularly carry but that our customers specifically request. We believe that the breadth and depth of our product portfolio facilitates our customers’ ability
to distinguish and enhance their menu offerings and differentiates us from larger traditional broadline foodservice distributors. For example, we provide a
selection of more than 200 different varieties of olive oil, while large broadline foodservice distributors only carry, on average, 5-10 types of olive oil.
Critical Route-to-Market for Specialty Food Suppliers. We currently distribute products from more than 2,500 different suppliers. Our suppliers are located
throughout North America, Europe, Asia and South America and include numerous small, family-owned entities and artisanal food producers. We are the
largest customer for many of our suppliers. As a result, our experienced and sophisticated sales professionals, customer relationships and distribution
platform are important to these suppliers’ route-to-market, which enables us to offer a wide range of products on an exclusive basis.
Expanding Base of Premier Customer Relationships. Our breadth and depth of product offerings coupled with our highly regarded customer service has
allowed us to develop and retain a loyal customer base that is comprised of chefs who own or work at more than 35,000 of the nation’s leading menu-
driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines,
casinos and specialty food stores. Our focus on product selection, product knowledge and customer service has rewarded us with a number of long-term
customer relationships, which often begin when chefs are introduced to us while attending the nation’s leading culinary schools, including The Culinary
Institute of America which has been a customer of ours for more than ten years. Based on our management’s industry experience and our relationships and
dealings with our customers, we believe we are the primary distributor of specialty food products to the majority of our core customers.
Collaborative Professional and Educational Relationships with our Customers. We employ a sophisticated and experienced sales force of approximately
570 sales and customer service professionals, a significant number of whom have formal culinary training, degrees in the culinary arts or prior experience
working in the culinary industry. Equipped with advanced culinary and industry knowledge, our sales professionals seek to establish a rapport with our
customers’ chefs, so that they can more fully understand and anticipate the needs of and offer cost-effective food product solutions to the chefs who own or
operate these businesses. We believe that the specialized knowledge base of our sales professionals enables us to take a more collaborative and educational
approach to selling our gourmet foods and ingredients and to further differentiate ourselves from our traditional broadline competitors.
Expertise in Logistics and Distribution. We have built a first-class, scalable inventory management and logistics platform that enables us to efficiently fill
our customers’ orders and to profitably meet our customers’ needs for varying drop sizes, high service levels and timely delivery. With 40 distribution
centers located throughout the United States and Canada, we are able to
6
leverage our geographic footprint and reduce our inbound freight costs. This scale enables us to maintain a portfolio of more than 50,000 SKUs, and
through the operation of our sophisticated information technology, inventory management and logistics systems, we believe we provide our customers with
some of the highest levels of customer service and responsiveness in our industry.
Experienced and Proven Management Team. Our senior management team has demonstrated the ability to grow the business through various economic
environments. With collective experience of more than 90 years at The Chefs’ Warehouse and other foodservice distribution companies, our founders and
senior management are experienced operators and are passionate about our future. Our senior management team is comprised of our founders, as well as
experienced professionals with expertise in the foodservice distribution industry and in a wide range of functional areas, including finance and accounting,
sales and marketing, operations, information technology, legal and human resources.
Our Growth Strategies
We believe substantial organic growth opportunities exist to recover our sales volumes to pre-Pandemic levels in all our current markets through increased
penetration of our existing customers and the addition of new customers, and we have identified new markets that we believe also present opportunities for
future expansion. Key elements of our growth strategy include the following:
Increase Penetration with Existing Customers. We intend to sell more products to our existing customers by increasing the breadth and depth of our product
selection and increasing the efficiency of our sales professionals, while at the same time continuing to provide excellent customer service. We are a data-
driven and goal-oriented organization, and our management and sales professionals are highly focused on our weekly sales and gross profit contribution
from each of our core customers and increasing the number of unique products we distribute to such customers. We believe our acquisition activity reflects
this focus, as we have sought to complement our existing product offerings and enhance our product capabilities through the acquisition of wholesale
specialty food and produce distributors and high quality center-of-the-plate protein suppliers, manufacturers and distributors.
Expand our Customer Base Within our Existing Markets. We serve more than 35,000 core customer locations, excluding our direct-to-consumer business,
in the United States and Canada. We plan to expand our market share in the fragmented specialty food distribution industry by cultivating new customer
relationships within our existing markets through the continued penetration of menu-driven independent restaurants, fine dining establishments, country
clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores. We believe we have the
opportunity to continue to gain market share in our existing markets by offering an extensive selection of specialty food products, as well as center-of-the-
plate proteins, produce and traditional broadline staple food products through our unique, collaborative and educational sales efforts and efficient, scalable
distribution solution.
Improve our Operating Margins. As we continue to grow, we believe that the investments we are making in our facilities and information technology
platforms, along with improved efficiencies that we are working to achieve in our general and administrative functions, should yield both improved
customer service and increased profitability. Utilizing our fleet of delivery trucks, we usually fill customer orders within 12-24 hours of order placement.
We intend to continue to offer our customers this high level of customer service, while maintaining our focus on realizing efficiencies and economies of
scale in purchasing, warehousing, distribution and general and administrative functions which, when combined with incremental fixed-cost leverage, we
believe will lead to continued improvements in our operating margin over time.
Pursue Selective Acquisitions. Throughout our over 35-year history, we have successfully identified, consummated and integrated multiple strategic
acquisitions, which were designed to increase our penetration in existing markets, expand our footprint into new markets and/or enhance our product
capabilities. We believe that, over time, we will be able to improve the operations and overall profitability of each acquired company by leveraging our
sourcing relationships to provide an expanded product portfolio, implementing our tested sales force training techniques and metrics and installing
improved warehouse management and information systems. We believe we have the opportunity to capitalize on our existing infrastructure and expertise
by continuing to selectively pursue opportunistic acquisitions in order to expand the breadth of our distribution network, increase our operating efficiency
and add additional products and capabilities. Since our initial public offering (“IPO”), we have completed twenty-three acquisitions, which have increased
our penetration in existing markets, expanded our footprint into new markets and enhanced our product capabilities.
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Our Markets and the Customers that We Serve
Excluding our direct-to-consumer business, we distribute our specialty food products to over 35,000 distinct core customer locations from distribution
centers located in our primary markets, which include New York, Washington, D.C., Los Angeles, San Francisco, New England, Las Vegas, Miami,
Portland, Columbus, Cincinnati, Chicago, Vancouver, Edmonton, Toronto, Seattle, Sacramento, Philadelphia, Texas, and Denver. We believe that many of
these markets set the culinary trends for the rest of the United States and Canada and provide us with valuable insight into the latest culinary and menu
trends. We have established collaborative professional and educational relationships with some of the United States’ and Canada’s most demanding chefs,
which allows us to anticipate the needs of, and offer cost-effective food product solutions to, our customers while allowing our customers to locate
ingredients that will enable them to create unique and differentiated menu items. Our target customers include menu-driven independent restaurants, fine
dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores.
We have no meaningful customer concentration as our top ten customers accounted for less than 7.5% of total net sales for our 2021 fiscal year.
Our Allen Brothers subsidiary markets certain of our center-of-the-plate proteins directly to consumers through a mail and e-commerce platform.
Additionally, in response to the Pandemic, we expanded our direct-to-consumer product offerings by launching our “Shop Like a Chef” online home
delivery platform in several of the markets we serve.
Set forth below is a breakdown of the primary geographic markets we serve and the year we entered each market:
Market Name
New York
Washington, D.C.
Los Angeles
San Francisco
Las Vegas
Miami
Portland
Columbus
Cincinnati
Chicago
Vancouver
Edmonton
Toronto
Seattle
Sacramento
Philadelphia
Texas
New England
Denver
Geographies Served
New York to Atlantic City
Baltimore to Richmond
Santa Barbara to San Diego and Phoenix
Napa Valley to Monterey Bay
Las Vegas
Orlando to Miami
Portland
Midwest
Dayton to Lexington
Chicago
Vancouver and Western Canada
Edmonton and Calgary
Toronto
Seattle
Sacramento
Philadelphia
Texas
New England
Denver
Year Entered
1985
1999
2005
2005
2005
2010
2011
2012
2013
2013
2013
2013
2013
2013
2015
2018
2018
2020
2021
We extend credit to virtually all of our core customers on varying terms. Most of our customers have payment terms from 14 -60 days. We complete a
formal credit assessment of all significant new core customers, and our Credit and Collections Department regularly evaluates credit terms for each such
customer based upon several factors, including order frequency, average order size, the types of products purchased and the length of the relationship. We
believe that we are skilled at managing customer credit.
Our Gourmet Food Products
We strive to be the primary food source solution for our customers, and, to this end, we offer our customers a comprehensive product portfolio that ranges
from basic ingredients and staples, such as milk and flour, to custom-cut steaks, seafood, produce and pastries, as well as delicacies and specialty
ingredients sourced from North America, Europe, Asia and South America. We carry more than 50,000 SKUs and we are fully committed to utilizing our
sourcing relationships and industry insights to procure products that we do not regularly carry but that our customers specifically request as they seek to
create unique and innovative menu offerings.
8
We continuously evaluate potential additions to our product portfolio based on both existing and anticipated trends in the culinary industry. Our buyers
have numerous contacts with suppliers throughout North America, Europe, Asia and South America and are always looking for new and interesting
products that will aid our customers as they seek to keep up with the latest developments in the culinary industry. Our ability to successfully distribute a
significant portion of the total production of smaller, regional and artisanal specialty food producers allows us the opportunity to be these producers’
primary route-to-market in our markets without, in most cases, requiring us to make contractual commitments regarding guaranteed volume. We are also
able to leverage our scale and successful track record of distributing products sourced from outside the United States and Canada to minimize importing
costs.
We seek to differentiate ourselves from our competitors by offering a more extensive depth and breadth of specialty products. We carry a wide range of
high-quality specialty food products, including artisan charcuterie, specialty cheeses, unique oils and vinegars, truffles, caviar, chocolate and pastry
products across each of our markets, but we also offer a number of items in each of our respective markets that are tailored to meet the unique preferences
of the individual chefs in that market. We regularly rotate our inventory to identify and bring to market new products that will continue to support our value
proposition.
Within our product offerings, we carry numerous gourmet brands, and at the same time, we seek to maximize product contribution through the sale of our
proprietary brands, which we offer in a number of staple products, including bulk olive oil, Italian grating cheeses and butter. We believe that our ability to
offer simultaneously high-quality specialty foods and ingredients, center-of-the-plate products, produce and more traditional broadline staple food products
provides our customers with foodservice distribution solutions that are efficient and cost effective.
Our Sophisticated and Experienced Sales Professionals
We employ a sophisticated and experienced sales force of approximately 570 sales and customer service professionals focused on meeting our customers’
goals and objectives, while concurrently educating them regarding our latest products and broader culinary trends. Our sales force is composed of the
following three distinct groups which are all focused on providing outstanding service to our customers:
• Outside Sales Associates: Responsible for identifying sales opportunities, educating customers and acting as our public representatives.
•
•
Inside Sales Associates: Responsible for processing customer orders and arranging for delivery and payment.
Product Specialists: Responsible for maintaining specialized product knowledge and educating our outside sales associates and customers regarding
new products and general developments in several specific categories, including meat, seafood, pastry and cheese.
A significant number of our sales professionals have formal culinary training, degrees in the culinary arts and/or prior experience working in the culinary
industry. We strive to harness this culinary knowledge and passion for food and to concurrently promote an entrepreneurial working environment. Utilizing
advanced pricing optimization software available to them on a real-time basis, our sales professionals are afforded flexibility to determine the pricing of
individual items for our customers within a range of pricing options. The majority of our outside sales professionals are compensated on a commission
basis, and their performance is measured primarily upon their gross profit dollars obtained. We have historically experienced low turnover among our
seasoned sales professionals.
Because we are highly focused on collaborating with our customers and educating them regarding our latest products and broader culinary trends, we view
the ongoing education and training of our sales force as crucial to our continued success. To ensure that our sales professionals remain on the forefront of
new culinary products and trends, we regularly hold “vendor shows” at our distribution centers, where our sales force is able to interact with vendors and
learn more about the vendors’ latest product offerings and the performance of these products relative to competitive offerings.
Our Suppliers
We are committed to providing our customers with an unrivaled portfolio of specialty food products, as well as a comprehensive broadline product
offering, produce and center-of-the-plate products. To fulfill this commitment, we maintain strong sourcing relationships with numerous producers of high-
quality artisan and regional specialty food products, as well as a wide range of broadline product suppliers, produce and protein vendors. Our importing
arm also provides us with access to exclusive items such as regional olive oils, truffles and charcuterie sourced from Italy, Spain, France and other
Mediterranean countries.
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We constantly seek out and evaluate new products in order to satisfy our customers’ desire to be at the forefront of the latest culinary and menu trends, and,
as evidence of our commitment to aid our customers in creating unique and innovative menu items, we regularly utilize our sourcing relationships and
industry insights to procure other products that we do not regularly carry but that our customers specifically request.
We currently distribute products from more than 2,500 different suppliers. We carry multiple products and utilize multiple suppliers in all of our product
categories, thereby eliminating our dependence upon any single supplier. Additionally, we seek to limit commodity risk by utilizing sophisticated
forecasting and inventory management systems to minimize the inventory carrying time of commodity-oriented products and by leveraging the specialized
product knowledge of our product specialists to manage purchasing and inventory levels when appropriate.
Our Operations and Distribution Centers
Operating out of 40 distribution centers of varying size and, despite the impacts of the Pandemic, providing service six days a week in many areas, we
utilize our fleet of delivery trucks to fill customer orders, usually within 12-24 hours of order placement. We have invested significantly in sophisticated
warehousing, inventory control and distribution systems, as described in more detail below.
We have implemented pick-to-voice technology in each of our distribution facilities, which enables our warehouse employees to fill orders with greater
speed and accuracy and are implementing inventory scanning platforms in an effort to reduce damages and returns.
Products are delivered to our distribution centers primarily by contract carriers, the suppliers themselves and our fleet of trucks. Out trucks are either owned
or leased from national leasing companies and regional firms that offer competitive services. Customer orders are assembled in our distribution centers and
then sorted, placed on pallets and loaded onto trucks and trailers in delivery sequence. The majority of our trucks and delivery trailers have multiple,
temperature-controlled compartments that ensure all product is delivered to the customer at its optimal temperature.
We employ advanced routing and logistics planning software, which maximizes the number of daily deliveries that each of our trucks can make, while also
enabling us to typically make deliveries within each customer’s preferred two to three hour time window. We’ve deployed truck scanning across most of
our fleet which allows us to monitor the delivery of product to our customers on a real-time basis. For our direct-to-consumer business, we ship through
nationally recognized couriers. We also use GPS and vehicle monitoring technology, including on-board camera technology, to regularly evaluate the
condition of our delivery trucks and monitor the performance of our drivers, by tracking their progress relative to their delivery schedule and providing
information regarding hard braking, idling and fast starts. Our use of this technology allows us to conduct proactive fleet maintenance, provide timely
customer service and improve our risk management.
Our Technology Systems
We maintain an advanced information technology platform that enables us to manage our operations across our various markets, as we seek to drive our
growth and profitability and ensure that the needs of our customers are met in an accurate and efficient manner. Over recent years, we have made
significant investments in distribution, sales, information and warehouse management systems and are in the process of implementing a fully-integrated
ERP system. Our systems improvements include the implementation of route optimization software, a warehouse management system at all specialty
warehouses that integrates with pick-to-voice and directed put-away systems. We are driving increasing sales volume through our ecommerce platforms
and a new mobile ordering tool which we believe will enable a much more seamless online customer experience. We also leverage a reporting and analytics
platform that provides our sales team and management with the information required to drive efficiency and growth. We believe that our current systems
are scalable and can be leveraged together with targeted investments in new technology to provide the fuel to drive profitable growth.
Intellectual Property
Except for the Spoleto, Bel Aria, Grand Reserve, Provvista, Argonaut, Praml, Black Falls, Michael’s, Chocoa, Crescendo, Matisse, Qzina, Coccinelle,
Allen Brothers, The Great Steakhouse Steaks, Del Monte, Fells Point, Bassian Farms, Sid Wainer & Son, Cambridge Packing, Foley Fish, Silver State
Meats and The Chefs’ Warehouse trademarks, we do not own or have the right to use any patent, trademark, trade name, license, franchise or concession,
the loss of which would have a material adverse effect on our business, financial condition or results of operations.
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Competition
The foodservice distribution industry is highly competitive. We compete with numerous smaller distributors on a local level, as well as with a limited
number of national broadline foodservice distributors. Certain of these distributors have greater financial and other resources than we do. Bidding for
contracts or arrangements with customers, particularly larger hotels and caterers, is highly competitive and distributors may market their services to a
particular customer over a long period of time before they are invited to bid. We believe that most purchasing decisions in the foodservice distribution
industry are based upon the quality and price of the product distributed and the distributor’s ability to completely and accurately fill orders and deliver them
in a timely manner.
Human Capital Management
As of December 24, 2021, we had 2,712 full-time employees, 243 of whom (approximately 9%) are currently represented by unions and operate under
collective bargaining agreements, which expire at various times between fiscal 2022 and 2025. We offer attractive compensation and benefit packages, and
we believe our relationship with our employees is satisfactory.
Workforce Health and Safety
The safety and health of our employees is a top priority for us. In response to the Pandemic, we implemented new procedures and protocols recommended
by the Centers for Disease Control, federal and state governments, and other major health authorities. This includes, but is not limited to, instructing our
employees to practice social distancing on our premises and those of our customers, frequent sanitation of our work environments, truck fleet and
equipment, supplying personal protective equipment to our workforce and allowing our administrative employees to work from home.
Social and Environmental Responsibility
We are committed to upholding ethical, socially responsible and environmentally conscious business practices, consistent with our corporate values, to
promote long-term and sustainable change. In 2021, we adopted or amended corporate policies intended to further strengthen and promote our commitment
to social and environmental responsibility with our directors, employees, leaders and business partners. Our policy on salient human rights risks identifies
key human rights issues related to our business activities and business relationships, including promoting a safe and healthy work environment, providing a
fair and inclusive work environment and combating forced and underage labor. Our Human Rights Policy details our commitment to upholding
fundamental human rights, and our Code of Conduct for Suppliers reflects our commitment to extending ethical business practices throughout our supply
chain. Our Environmental, Health and Safety Policy promotes and protects the health and safety of our employees and reinforces our commitment to
environmental stewardship, such as through our endorsement of the United Nations Global Compact CEO Water Mandate.
Regulation
As a distributor of specialty food products and meat and seafood in the United States and Canada, we are subject to regulation by numerous international,
federal, state, provincial and local regulatory agencies. For example, at the U.S. federal level, we are subject to the Federal Food, Drug and Cosmetic Act,
the Bioterrorism Act and regulations promulgated by the U.S. Food and Drug Administration (“FDA”). The FDA regulates manufacturing and holding
requirements for foods, specifies the standards of identity for certain foods and prescribes the format and content of certain information required to appear
on food product labels, among other responsibilities. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products
Inspection Act, the Perishable Agricultural Commodities Act, the Country of Origin Labeling Act and regulations promulgated thereunder by the U.S.
Department of Agriculture (“USDA”). The USDA imposes standards for product quality and sanitation, including the inspection and labeling of meat and
poultry products and the grading and commercial acceptance of produce shipments from vendors. The products we distribute in Canada are also subject to
regulation and inspection by Health Canada and the Canadian Food Inspection Agency. Our suppliers are also subject to similar regulatory requirements
and oversight. The failure to comply with applicable regulatory requirements could result in civil or criminal fines or penalties, product recalls, closure of
facilities or operations, the loss or revocation of existing licenses, permits or approvals or the failure to obtain additional licenses, permits or approvals in
new jurisdictions where we intend to do business.
We are also subject to state and local regulation through such measures as the licensing of our facilities, enforcement by state and local health agencies of
state and local standards for our products and facilities and regulation of our trade practices in connection with the sale of products. Our facilities are
generally inspected at least annually by federal and/or state authorities. These facilities are also subject to inspections and regulations issued pursuant to the
Occupational Safety and Health Act by the
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U.S. Department of Labor, which require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents and
to establish hazard communication programs to transmit information about the hazards of certain chemicals present in certain products that we distribute.
Our Canadian distribution facilities, repackaging activities and other operations also are subject to regulation and inspection by the Canadian Food
Inspection Agency and provincial health authorities.
Our trucking operations are regulated by the Surface Transportation Board, the Federal Highway Administration, Transport Canada and Canadian
provincial transportation authorities. In addition, interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of
Transportation and other relevant federal and state agencies. Such matters as weight and dimension of equipment are also subject to federal and state
regulations. We believe that we are in compliance with applicable regulatory requirements relating to our motor carrier operations. Our failure to comply
with the applicable motor carrier regulations could result in substantial fines or revocation of our operating permits.
Our operations are subject to a broad range of federal, state, provincial and local environmental health and safety laws and regulations, including those
governing discharges to air, soil and water, the handling and disposal of hazardous substances and the investigation and remediation of contamination
resulting from releases of petroleum products and other hazardous substances.
We believe that we are in material compliance with all international, federal, state, provincial and local regulations applicable to our operations, and
management is unaware of any related issues that may have a material adverse effect upon our business, financial condition or results of operations.
Litigation and Insurance
We may be subject to lawsuits, claims and assessments in the normal course of business. Our management does not believe that there are any suits, claims
or unasserted claims or assessments pending which would have a material adverse effect on our operations or financial condition.
We maintain comprehensive insurance packages with respect to our facilities, equipment, product liability, directors and officers, workers’ compensation
and employee matters in amounts which management believes to be prudent and customary within the foodservice distribution industry.
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 Allen Brothers 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 in the fourth quarter. 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 temporary 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, among other things, on 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 on food, labor, energy and occupancy costs can significantly
affect the profitability of our operations.
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Available Information
Our principal executive office is located at 100 East Ridge Road, Ridgefield, Connecticut 06877, and our telephone number is (203) 894-1345. Our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of
charge through the Investors section of our website (http://www.chefswarehouse.com) as soon as practicable after such material is electronically filed with,
or furnished to, the Securities and Exchange Commission (“SEC”). Material contained on our website is not incorporated by reference into this report.
We have also adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all of our employees, including our principal executive
officer, principal financial officer and principal accounting officer. Our Code of Ethics is publicly available on the Investor Relations section of our website
(http://www.chefswarehouse.com) and is available free of charge by writing to The Chefs’ Warehouse, Inc., 100 East Ridge Road, Ridgefield, Connecticut
06877, Attn: Investor Relations. If we make any substantive amendments to the Code of Ethics or grant any waiver, including any implicit waiver, from a
provision of the Code of Ethics to our principal executive officer, principal financial officer or principal accounting officer, or persons performing similar
functions, we intend to make any legally required disclosures regarding such amendments or waivers on the Investors section of our website
(http://www.chefswarehouse.com).
The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers, including us,
that file electronically with the SEC located at http://www.sec.gov.
Information about our Executive Officers
Name & Position
Christopher Pappas
President, Chief Executive Officer
and Chairman of the Board of
Directors
John Pappas
Vice Chairman and Director
James Leddy
Chief Financial Officer
Age
62
58
58
Business Experience
Christopher Pappas is our founder and has served as our Chief Executive Officer since 1985 and has
been our chairman since March 1, 2011. He has been our President since April 11, 2009 and before that
was our President from our formation to January 1, 2007. Prior to founding our company, Mr. Pappas
played basketball professionally in Europe for several years following his graduation from Adelphi
University in 1981 with a Bachelor of Arts degree in Business Administration. Mr. Pappas currently
oversees all of our business activities, with a focus on product procurement, sales, marketing and strategy
development. Mr. Pappas's qualifications to serve on our board of directors include his extensive
knowledge of our company and the specialty food products distribution business and his years of
leadership at the Company.
John Pappas is a founder of our company and currently serves as our Vice Chairman, a position he has
held since March 1, 2011. From our founding in 1985 to March 1, 2011, he served as our Chief
Operating Officer. He has 25 years of experience in logistics, facility management and global
procurement and oversees our network of distribution centers nationwide. Mr. Pappas is also active in the
development of our corporate strategy. Mr. Pappas's qualifications to serve on our board of directors
include his extensive knowledge of our company and the specialty food products distribution industry
and his years of leadership at the Company.
James“Jim” Leddy is our Chief Financial Officer and assistant secretary, positions he has held since his
appointment as of November 11, 2017. Prior to his appointment, Mr. Leddy served as our Executive Vice
President of Finance since joining the Company in September 2017. Mr. Leddy previously served as
interim Chief Financial Officer at JetBlue Airways from November 2016 to February 2017 and served as
Senior Vice President and Treasurer from 2012 to November 2016. Prior to joining JetBlue, Mr. Leddy
served as Senior Vice President, Treasury and Cash Management at NBCUniversal from 2008 until 2012,
and as a Senior Technical Advisor at General Electric from 2003 until 2008. Previously, Mr. Leddy held
corporate risk and treasury management positions at First Union National Bank and Dai-ichi Kangyo
Bank. Mr. Leddy holds an M.B.A. in Finance and Management of Technology from the University of
Connecticut and a B.A. in Economics from Fordham University.
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Alexandros Aldous
General Counsel, Corporate Secretary
& Chief Government Relations
Officer
41
Timothy McCauley
Chief Accounting Officer
57
Alexandros Aldous is our General Counsel, Corporate Secretary, Chief Government Relations Officer &
Chief Administrative Officer, positions he has held since joining us in March 2011, our IPO on July 27,
2011, March 8, 2017, and September 16, 2021, respectively. Mr. Aldous is also an adjunct Professor of
Law at the Washington College of Law, American University. Mr. Aldous's prior work experience
includes working as an attorney with Barclays Capital, the investment banking division of Barclays Bank
PLC, in London, where he focused primarily on mergers and acquisitions and capital markets, and prior
to that, working as an attorney with Shearman & Sterling LLP, in New York, where he focused primarily
on mergers and acquisitions. Mr. Aldous is a member of both the Government Relations Leadership
Committee and General Counsel Committee of the International Foodservice Distributors Association; a
member of the Board of Directors of World Trade Center Miami, including chairperson of its
Government Relations Committee; a member of the Board of Trustees of the American College of
Greece, including a member of both its Audit Committee and Pierce College Committee; co-chairperson
of the Global Alumni Advisory Board of the American College of Greece; and a member of the Board of
Advisors of American University's School of International Service. Mr. Aldous earned a B.A. in Classics
and Government from Colby College, a Juris Doctor and M.A. from American University and an LL.M.
from the London School of Economics and Political Science. Mr. Aldous is licensed to practice law in
the State of New York, District of Columbia, and England and Wales.
Timothy McCauley has served as our Chief Accounting Officer, since his appointment on February 16,
2018 and previously served as our Controller since joining the Company in May 2015. Mr. McCauley
has over 30 years of experience in accounting and finance roles across a variety of industries. Mr.
McCauley’s prior work experience includes serving as Vice President – Finance at MacDermid Inc.,
Corporate Controller at Northern Tier Energy LP, Director of Financial Reporting and Investor Relations
at Presstek, Inc. and Finance Director at Eastman Kodak Company. Prior to joining Eastman Kodak
Company, Mr. McCauley worked with PricewaterhouseCoopers for eleven years in their assurance and
business advisory practice. Mr. McCauley holds a Bachelor of Science degree in Business - Accounting
from the University of Connecticut and is a registered certified public accountant in the state of
Connecticut.
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Item 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below and elsewhere in
this Annual Report on Form 10-K. This section discusses factors that, individually or in the aggregate, we think could cause our actual results to differ
materially from our expected and historical results. Risk factors are organized in categories where they primarily apply, but other categories may also apply.
Our business, financial condition or results of operations could be materially adversely affected by any of these risks. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995.
Business and Macroeconomic Risk
Our success depends to a significant extent upon general economic conditions, including disposable income levels and changes in consumer
discretionary spending.
Our business is exposed to reductions in consumer discretionary spending because our target customers operate in the food-away-from-home industry.
Consumer discretionary spending may be affected by many factors outside of our control, including general economic conditions, inflation, disposable
income levels and consumer confidence levels. In uncertain economic environments, consumers may choose to spend discretionary dollars less frequently
which could result in a decline in consumers’ food-away-from-home purchases, particularly in more expensive restaurants, and, consequently, adversely
impact the businesses of our customers by, among other things, reducing the frequency with which our customers’ customers choose to dine out or the
amount they spend on meals while dining out. If our customers’ sales decrease, our profitability could decline as we spread fixed costs across lower sales
volume. Also, similar economic conditions could lead to consumers purchasing less from our direct-to-consumer platforms. Moreover, if a prolonged
downturn or uncertain outlook in the economy were to occur, consumers might ultimately make long-lasting changes to their discretionary spending
behavior, including dining out less frequently on a permanent basis or purchasing less on our direct-to-consumer platforms. Accordingly, adverse changes
to consumer preferences or consumer discretionary spending, each of which could be affected by many different factors which are out of our control, could
harm our business, financial condition or results of operations. Our continued success will depend in part upon our ability to anticipate, identify and
respond to changing economic and other conditions and the impact that those conditions may have on discretionary consumer spending.
A significant portion of our future growth is dependent upon our ability to expand our operations in our existing markets and to penetrate new markets
either through organic growth or through acquisitions.
We intend to expand our presence in our existing markets by adding to our existing customer base through the expansion of our product portfolio and the
increase in the volume and/or number of purchase orders from our existing customers. We cannot assure investors, however, that we will be able to
continue to successfully expand or acquire critical market presence in our existing markets, as we may not successfully market our specialty food and
center-of-the-plate products and brands or may encounter larger and/or more well-established competitors with substantially greater financial resources.
Moreover, competitive circumstances and consumer characteristics in new segments of existing markets may differ substantially from those in the segments
in which we have substantial experience. If we are unable to expand in existing markets, our ability to increase our revenues and profitability may be
affected in a material and adverse manner. At times, we have grown our business by expanding into new geographic markets. Efforts to expand organically
may take time to produce revenues that exceed our expenses in these new markets, which can be high as we build out our infrastructure and hire associates
to run our operations.
We also regularly evaluate opportunities to acquire other companies. To the extent our future growth includes acquisitions, we cannot assure investors that
we will successfully identify suitable acquisition candidates, obtain financing for such acquisitions, if necessary, consummate such potential acquisitions,
effectively and efficiently integrate any acquired entities or successfully expand into new markets as a result of our acquisitions. Moreover, there may be
additional risks that we face to the extent that we acquire companies that are principally involved in the distribution of products that we have not
historically distributed, like fresh produce.
We may not achieve benefits expected from our acquisitions which could adversely impact our business and operating results.
We believe that there are risks related to acquiring companies, including overpaying for acquisitions, losing key employees of acquired companies, failing
to identify potential liabilities associated with the acquisition of the business prior to our acquisition and failing to achieve potential synergies. Additionally,
our business could be adversely affected if we are unable to integrate the companies we acquired.
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A significant portion of our past growth has been achieved through acquisitions of, or mergers with, other distributors of specialty food products and
center-of-the-plate protein items. Our future acquisitions may have a material adverse effect on our results of operations, particularly in periods
immediately following the consummation of those transactions while the operations of the acquired business are being integrated with our operations.
Achieving the benefits of acquisitions depends on timely, efficient and successful execution of a number of post-acquisition events, including successful
integration of the acquired entity. Integration requires, among other things:
• maintaining the existing customer and supplier base and personnel;
•
•
•
optimizing delivery routes;
coordinating administrative, distribution and finance functions; and
integrating management information systems and personnel.
The integration process may temporarily redirect resources previously focused on reducing product cost, resulting in lower gross profits in relation to sales.
In addition, the process of combining companies could cause the interruption of, or a loss of momentum in, the activities of the respective businesses,
which could have an adverse effect on their combined operations. We have an integration team which is dedicated to onboarding new acquisitions and
integrating information technology systems as quickly and efficiently as possible. We believe that having a team dedicated to integration helps make sure
the people, processes and products we add through acquisitions are consistent with our historical business and allows our management team to focus its
attention on our day-to-day operations. If the integration team does not improve our integration process, the integration of acquisitions could divert the
attention of management, and any difficulties or problems encountered in the integration process could have a material adverse effect on our business,
financial condition or results of operations.
In connection with our acquisition of businesses in the future, if any, we may decide to consolidate the operations of any acquired business with our
existing operations or make other changes with respect to the acquired business, which could result in special charges or other expenses. Our results of
operations also may be adversely affected by expenses we incur in making acquisitions, by amortization of acquisition-related intangible assets with
definite lives and by additional depreciation attributable to acquired assets. Any of the businesses we acquire may also have liabilities or adverse operating
issues, including some that we fail to discover before the acquisition, and our indemnity for such liabilities typically has been limited and may, with respect
to future acquisitions, also be limited. Additionally, our ability to make any future acquisitions may depend upon obtaining additional financing or the
consents of our lenders. We may not be able to obtain this additional financing or these consents on acceptable terms or at all. Moreover, we may need to
finance our acquisition activity with the issuance of equity or debt securities, which may have rights and preferences superior to those of our common stock
and, in the case of common equity securities, may be issued at such prices and in such amounts as may cause significant dilution to our then-existing
common stockholders. To the extent we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a
material adverse effect on our ability to complete acquisitions.
In addition, although we enter into acquisition agreements with each company or business we acquire that contain customary representations, warranties,
covenants and indemnities, there is no guarantee that we will recover all of our losses that may result from a breach of such agreements. For example, most
acquisition agreements contain baskets or deductibles and caps and limitations on damages and on periods in which we may bring a claim. In addition,
there can be no guarantee that we will be successful on the merits of any claim that we bring arising out of a breach of an acquisition agreement or that if
we are successful on the merits in bringing a claim that the sellers of the businesses we acquire will be able to pay us for our losses. Moreover, the costs
that we incur to investigate a potential matter may not be fully recoverable. Additionally, as a result of an acquisition, we may enter into a new business or
market or offer products that differ from our core business. Any such new business or market or the sale and distribution of new products may present new
challenges for us, and we may not be able to overcome such challenges. Additionally, we may seek to distribute a different set of products than the business
that we acquire, which may cause a loss of customers of those businesses if we can no longer carry the products they desire or charge more for those
products than was charged before we acquired the business.
Our failure to realize the benefits expected from our acquisitions could result in a reduction in the price of our common stock as well as in increased costs,
decreases in the amount of expected revenues and diversion of management’s time and energy and could materially and adversely impact our business,
financial condition or results of operations.
We may have difficulty managing and facilitating our future growth.
At times since our inception, we have rapidly expanded our operations through organic growth, acquisitions or otherwise. This growth has placed and will
continue to place significant demands upon our administrative, operational and financial resources. This growth, however, may not continue. To the extent
that our customer base and our distribution networks continue to grow, this future growth may be limited by our inability to acquire new distribution
facilities or expand our existing distribution
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facilities, make acquisitions, successfully integrate acquired entities, implement information systems initiatives or adequately manage our personnel.
Moreover, our future growth may be limited in part by the size and location of our distribution centers. As we near maximum utilization of a given facility,
our operations may be constrained and inefficiencies may be created, which could adversely affect our results of operations unless the facility is expanded,
volume is shifted to another facility or additional processing capacity is added. Conversely, as we add additional facilities or expand existing operations or
facilities, excess capacity may be created. Any excess capacity may also create inefficiencies and adversely affect our results of operations. We cannot
assure investors that we will be able to successfully expand our existing distribution facilities or open new distribution facilities in new or existing markets
as needed to facilitate growth.
Even if we are able to expand our distribution network, our ability to compete effectively and to manage future growth, if any, will depend on our ability to
continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and
manage our employees. We cannot assure investors that our existing personnel, systems, procedures and controls will be adequate to support the future
growth of our operations. Accordingly, our inability to manage our growth effectively could have a material adverse effect on our business, financial
condition or results of operations.
Our business is a low-margin business and our profit margins may be sensitive to inflationary and deflationary pressures.
We operate within a segment of the foodservice distribution industry, which is an industry characterized by a high volume of sales with relatively low profit
margins. Although our profit margins are typically higher than more traditional broadline foodservice distributors, they are still relatively low compared to
other industries’ profit margins. Volatile food costs may have a direct impact upon our profitability. Prolonged periods of product cost inflation may have a
negative impact on our profit margins and results of operations to the extent we are unable to pass on all or a portion of such product cost increases to our
customers. In addition, product cost inflation may negatively impact consumer discretionary spending decisions within our customers’ establishments,
which could adversely impact our sales. Conversely, our profit levels may be negatively impacted during periods of product cost deflation even though our
gross profit as a percentage of sales may remain relatively constant. However, some of our products, particularly certain of our center-of-the-plate protein
items, are priced on a “cost plus” markup, which helps mitigate the negative impact of deflation. If our product mix changes, we may face increased risks
of margin compression, as we may be unable to achieve the same level of profit margins as we are able to capture on our traditional specialty products. Our
inability to effectively price our specialty food products, produce or center-of-the-plate products, to quickly respond to inflationary and deflationary cost
pressures and to reduce our expenses could have a material adverse impact on our business, financial condition or results of operations.
We have significant competition from a variety of sources, and we may not be able to compete successfully.
The foodservice distribution industry is highly fragmented and competitive, and our future success will be largely dependent upon our ability to profitably
meet our customers’ needs for certain gourmet foods and ingredients, varying drop sizes, high service levels and timely delivery. We compete with
numerous smaller distributors on a local level, as well as with a limited number of larger, traditional broadline foodservice distributors. We cannot assure
investors that our current or potential competitors will not provide specialty food products and ingredients, produce, center-of-the-plate protein items or
services that are comparable or superior to those provided by us at prices that are lower than the prices we charge or adapt more quickly than we do to
evolving culinary trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant
market share. Accordingly, we cannot assure investors that we will be able to compete effectively against current and future competitors, and increased
competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our
business, financial condition or results of operations.
Our customers are generally not obligated to continue purchasing products from us.
Most of our customers buy from us pursuant to individual purchase orders, as we generally do not enter into long-term agreements with our customers for
the purchase of our products. Because our customers are generally not obligated to continue purchasing products from us, we cannot assure investors that
the volume and/or number of our customers’ purchase orders will remain constant or increase or that we will be able to maintain or add to our existing
customer base. Significant decreases in the volume and/or number of our customers’ purchase orders or our inability to retain or grow our current customer
base may have a material adverse effect on our business, financial condition or results of operations.
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Damage to our reputation or lack of acceptance of our specialty food products, center-of-the-plate products and/or the brands we carry in existing and
new markets could materially and adversely impact our business, financial condition or results of operations.
We believe that we have built a strong reputation for the breadth and depth of our product portfolio and the brands we carry and that we must protect and
grow their value to be successful in the future. Any incident that erodes consumer confidence in or affinity for our specialty food, produce or center-of-the-
plate products or brands, whether or not justified, could significantly reduce their respective values and damage our business. If our customers perceive or
experience a reduction in the quality or selection of our products and brands or our customer service, or in any way believe that we failed to deliver a
consistently positive experience, our business, financial condition or results of operations may be affected in a materially adverse manner.
A specialty foods distribution business such as ours can be adversely affected by negative publicity or news reports, whether or not accurate, regarding
food quality issues, public health concerns, illness, safety, injury or government or industry findings concerning our products or others across the food
distribution industry. Although we have taken steps to mitigate food quality, public health and other foodservice-related risks, these types of health
concerns or negative publicity cannot be completely eliminated or mitigated and may harm our results of operations and damage the reputation of, or result
in a lack of acceptance of, our products or the brands we carry.
In addition, our ability to successfully penetrate new markets may be adversely affected by a lack of awareness or acceptance of our product portfolio or
our brands in these new markets. To the extent we are unable to foster name recognition and affinity for our products and brands in new markets, we may
not be able to penetrate these markets as anticipated, and, consequently, our growth may be significantly delayed or impaired.
We have experienced losses due to our inability to collect accounts receivable in the past and could experience increases in such losses in the future if
our customers are unable to pay their debts to us in a timely manner or at all.
Certain of our customers have experienced bankruptcy, insolvency and/or an inability to pay their debts to us as they come due. If our customers suffer
significant financial difficulties or bankruptcies, they may be unable to pay their debts to us in a timely manner or at all. It is possible that our customers
may contest their obligations to pay us under bankruptcy laws or otherwise. Even if our customers do not contest their obligations to pay us, if our
customers are unable to pay their debts to us in a timely manner, it could adversely impact our ability to collect accounts receivable and may require that
we take larger provisions for bad debt expense. Moreover, we may have to negotiate significant discounts and/or extended financing terms with these
customers in such a situation in an attempt to secure payment for outstanding debts. Accordingly, if we are unable to collect upon our accounts receivable
as they come due in an efficient and timely manner, our business, financial condition or results of operations may be materially and adversely affected.
During periods of economic weakness, small to medium-sized businesses, like many of our independent restaurant and fine dining establishment
customers, may be impacted more severely and more quickly than larger businesses. Consequently, the ability of such businesses to repay their obligations
to us may deteriorate, and in some cases this deterioration may occur quickly, which could adversely impact our business, financial condition or results of
operations.
New information or attitudes regarding diet and health or adverse opinions about the health effects of the products we distribute could result in
changes in consumer eating habits, which could have a material adverse effect on our business, financial condition or results of operations.
Consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects
of consuming the products we distribute. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items
in our product portfolio, and we may experience higher costs associated with the implementation of those changes. Additionally, changes in consumer
eating habits may result in the enactment of laws and regulations that impact the ingredients and nutritional content of our products or require us to disclose
the nutritional content of products. Compliance with these laws and regulations, as well as others regarding the ingredients and nutritional content of our
products, may be costly and time consuming. We cannot assure investors that we will be able to effectively respond to changes in consumer health
perceptions or resulting new laws or regulations or to adapt our product offerings to trends in eating habits.
Our business operations and future development could be significantly disrupted if we lose key members of our management team.
The success of our business significantly depends upon the continued contributions of our founders and key employees, both individually and as a group.
Our future performance will substantially depend upon our ability to motivate and retain our
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founders Christopher Pappas, our chairman, president and chief executive officer, and John Pappas, our vice chairman, as well as certain other senior key
employees. The loss of the services of either of our founders or any of our key employees, including key employees of the businesses we have acquired,
could have a material adverse effect on our business, financial condition or results of operations. We have no reason to believe that we will lose the services
of these individuals in the foreseeable future; however, we currently have no effective replacement for these individuals due to their experience, reputation
in the foodservice distribution industry and special role in our operations.
Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could
negatively impact our profitability. In addition, if we fail to establish proper reserves and adequately estimate future expenses, the costs associated with
our self-insured group medical, workers’ compensation liability and auto liability plans may adversely affect our business, financial condition or
results of operations.
We believe that our insurance coverage is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be
insured against or that we believe are not commercially reasonable to insure. These losses, should they occur, could have a material and adverse effect on
our business, financial condition or results of operations. In addition, the cost of workers’ compensation insurance, auto liability insurance, general liability
insurance and directors’ and officers’ liability insurance fluctuates based upon our historical trends, market conditions and availability. Because our
operations principally are centered in large, metropolitan areas, our insurance costs are higher than if our operations and facilities were based in more rural
markets. Additionally, health insurance costs in general have risen significantly over the past few years. These increases, as well as federal legislation
requiring employers to provide specified levels of health insurance to all employees, could have a negative impact upon our business, financial condition or
results of operations, and we cannot assure investors that we will be able to successfully offset the effect of such increases with plan modifications and cost
control measures, additional operating efficiencies or the pass-through of such increased costs to our customers.
We maintain a self-insured group medical program. The program contains individual stop loss thresholds of $300 thousand per incident and aggregate stop
loss thresholds based upon the average number of employees enrolled in the program throughout the year. The amount in excess of the self-insured levels is
fully insured by third party insurers. We record a liability for medical claims during the period in which they occur, as well as an estimate of incurred but
not reported claims. Management determines the adequacy of these accruals based on a monthly evaluation of our historical claims experience and medical
cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends. If we suffer a substantial loss that is not covered
by our self- insurance reserves, the loss and attendant expenses could harm our business and operating results.
We are self-insured for workers’ compensation and automobile liability to deductibles or self-insured retentions of $500 thousand per occurrence. The
amounts in excess of our deductibles are fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering
historical claims experience and cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims
occurrences and could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Supply Chain and Labor Risk
Conditions beyond our control could materially affect the cost and/or availability of our specialty food products, produce or center-of-the-plate products
and/or interrupt our distribution network.
Our profitability and operating margins are dependent upon, among other things, our ability to anticipate and react to any interruptions in our distribution
network and changes to food costs and availability. We obtain a significant portion of our specialty food products, produce and center-of-the-plate products
from local, regional, national and international third-party suppliers. We generally do not enter into long-term contracts with our suppliers, whereby they
would be committed to provide products to us for any appreciable duration of time. Although our purchasing volume can provide leverage when dealing
with suppliers, particularly smaller suppliers for whom we may be their largest customer, suppliers may not provide or may be unable to provide the
specialty food products, produce or center-of-the-plate products we need in the quantities and at the times and prices we request. Failure to identify an
alternate source of supply for these items or comparable products that meet our customers’ expectations may result in significant cost increases.
Additionally, weather, governmental regulation, water shortages, availability and seasonality may affect our food costs or cause a disruption in the quantity
of our supply. For example, weather patterns in recent years have resulted in lower than normal or, conversely, higher than normal levels of rainfall and
snowfall in key agricultural states such as California, impacting the price of water and the corresponding prices of food products grown in states affected by
such weather. Additionally, the route-to-market for some of the products we sell, such as baking chocolate, depends upon the stability of political climates
and a stable labor force in developing nations, such as the
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Ivory Coast. In such countries, political and social unrest may cause the prices for these products to rise to levels beyond those that our customers are
willing to pay, if the product is available at all. If we are unable to obtain these products, our customers may seek a different supplier for these or other
products which could negatively impact our business, financial condition or results of operations.
We do not currently use financial instruments to hedge our risk exposure to market fluctuations in the price of food products. Similarly, our suppliers may
also be affected by higher costs to source or produce and transport food products, as well as by other related expenses that they pass through to their
customers, which could result in higher costs for the specialty food products or center-of-the-plate products they supply to us. Our inability to anticipate
and react to changing food costs through our sourcing and purchasing practices in the future could therefore negatively impact our business, financial
condition or results of operations.
We may also be subject to material supply chain interruptions based upon conditions outside of our control. These interruptions could include work
slowdowns, work interruptions, strikes or other adverse employment actions taken by employees of ours or our suppliers, short-term weather conditions or
more prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions within our distribution channels,
unavailability of fuel or increases in fuel costs, competitive demands and natural disasters or other catastrophic events, such as food-borne illnesses,
pandemics or bioterrorism. The efficiency and effectiveness of our distribution network is dependent upon our suppliers’ ability to consistently deliver the
specialty food products, produce, meat, poultry and seafood we need in the quantities and at the times and prices we request. Accordingly, if we are unable
to obtain the specialty food products, produce, meat, poultry or seafood that comprise a significant percentage of our product portfolio in a timely manner
and in the quantities and at the prices we request as a result of any of the foregoing factors or otherwise, we may be unable to fulfill our obligations to
customers who may, as a result of any such failure, resort to other distributors for their food product needs or change the types of products they buy from us
to products that are less profitable for us.
Our distribution of center-of-the-plate products, like meat, poultry and seafood involves exposure to price volatility experienced by those products.
With our distribution of center-of-the-plate products like meat, poultry and seafood, we are susceptible to increases in the prices of those products, and we
cannot assure investors in our common stock that all or part of any increased costs experienced by us from time to time can be passed along to consumers
of our products, in a timely manner or at all. Conversely, rapid downward pricing for these products, including as a result of export restrictions on U.S. beef
products or lower demand internationally for U.S. beef products, may result in us lowering our prices to our customers even though our inventory on hand
is at a higher cost. The supply and market price of our center-of the plate products are typically more volatile than most of our core specialty products and
are dependent upon a variety of factors over which we have no control, including the relative cost of feed and energy, weather, livestock diseases,
government regulation and the availability of beef, chicken and seafood.
The prices of our meat and poultry products are largely dependent on the production of feed ingredients, which is affected primarily by the global level of
supply inventories and demand for feed ingredients, the agricultural policies of the U.S. and foreign governments and weather patterns throughout the
world. In particular, weather patterns often change agricultural conditions in an unpredictable manner. A significant change in weather patterns could affect
supplies of feed ingredients, as well as the industry’s ability to obtain feed ingredients or deliver products. More recently, feed prices have been impacted
by increased demand both domestically for ethanol and globally for protein production.
Additionally, our center-of-the-plate category is subject to risks relating to animal health and diseases. An outbreak of diseases affecting livestock (such as
foot-and-mouth disease or bovine spongiform encephalopathy, commonly referred to as mad cow disease) could result in restrictions on sales of products,
restrictions on purchases of livestock from suppliers or widespread destruction of livestock. Outbreaks of diseases, or the perception by the public that an
outbreak has occurred, or other concerns regarding diseases, can lead to inadequate supply, cancellation of orders by customers and adverse publicity, any
of which can have a significant negative impact on consumer demand and, as a result, on our business, financial condition or results of operations.
In addition, meat, poultry and seafood products that we distribute could be subject to recall because they are, or are alleged to be, contaminated, spoiled or
inappropriately labeled. Our meat, poultry and seafood products may be subject to contamination by disease-producing organisms, or pathogens, such as
Listeria monocytogenes, Salmonella and generic E.coli. These pathogens are generally found in the environment, and, as a result, there is a risk that they, as
a result of food processing, could be present in the meat, poultry and seafood products that we distribute. These pathogens can also be introduced as a result
of improper handling in our facilities or at the consumer level. These risks may be controlled, although not eliminated, by adherence to good manufacturing
practices and finished product testing. We have little, if any, control over proper handling
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before we receive the product or once the product has been shipped to our customers. Illness and death may result if the pathogens are not eliminated
before these products are sold to customers.
We are also susceptible to increases in the prices of our seafood products. The prices of our seafood products are largely dependent on the continuous
supply of fresh seafood, which in turn could be affected by a large number of factors, including, but not limited to, environmental factors, the availability of
seafood stock, weather conditions, water contamination, the policies and regulations of the governments of the relevant territories where such fishing is
carried out, the ability of the fishing companies and fishermen that supply us to continue their operations and pressure from environmental or animal rights
groups. The major raw material for our seafood products is fresh seafood, and any shortage in supply or upsurge in demand of fresh seafood may lead to an
increase in prices, which may adversely affect our profitability, including as a result of increased production costs and lower profit margins.
Our operations are subject to extensive regulation and oversight by the USDA, the FDA, and other federal, state, local and foreign authorities regarding the
processing, packaging, storage, safety, distribution, advertising and labeling of its products. Recently, food safety practices and procedures in the meat
processing industry have been subject to more intense scrutiny and oversight by the USDA. Failure to comply with existing or new laws and regulations
could result in administrative penalties and injunctive relief, civil remedies, fines, interruption of operations, recalls of products or seizures of properties,
potential criminal sanctions and personal injury or other damage claims. These remedies, changes in the applicable laws and regulations or discovery of
currently unknown conditions could increase costs, limit business operations and reduce profitability.
Group purchasing organizations may become more active in our industry and increase their efforts to add our customers as members of these
organizations.
Some of our customers, including a majority of our hotel customers, purchase their products from us through group purchasing organizations. These
organizations have increased their efforts to aggregate the purchasing power of smaller, independent restaurants in an effort to lower the prices paid by
these customers on their foodservice orders, and we have experienced some pricing pressure from these purchasers. If these group purchasing organizations
are able to add a significant number of our customers as members, we may be forced to lower the prices we charge these customers in order to retain the
business, which would negatively affect our business, financial condition or results of operations. Additionally, if we were unable or unwilling to lower the
prices we charge for our products to a level that was satisfactory to the group purchasing organization, we may lose the business of those of our customers
that are members of these organizations, which could have a material adverse impact on our business, financial condition or results of operations.
Fuel cost volatility may have a material adverse effect on our business, financial condition or results of operations.
Fuel cost volatility may have a negative impact on our business, financial condition or results of operations. The cost of diesel fuel can increase the price
we pay for products as well as the costs we incur to distribute products to our customers. These factors, in turn, may negatively impact our net sales,
margins, operating expenses and operating results. Although we have been able to pass along a portion of increased fuel costs to our customers in the past,
we cannot assure investors that we can do so again. If fuel costs increase in the future, we may experience difficulties in passing all or a portion of these
costs along to our customers, which could have a material adverse effect on our business, financial condition or results of operations.
Increases in our labor costs, including as a result of labor shortages, the unionization of some of our associates, the price or unavailability of insurance
and changes in government regulation could slow our growth or harm our business.
We are subject to a wide range of labor costs. Because our labor costs (particularly those in our center-of-the-plate category) are, as a percentage of
revenues, higher than other industries, we may be significantly harmed by labor cost increases.
Our operations are dependent upon our experienced and sophisticated sales professionals, warehouse personnel and drivers, and, in our center-of-the plate
facilities, on the experienced butchers we employ. Qualified individuals have historically been in short supply and an inability to attract and retain them
may limit our ability to expand our operations in existing markets, as well as our ability to penetrate new markets. We cannot assure investors that we will
be able to attract and retain qualified individuals in the future. Additionally, the cost of attracting and retaining qualified individuals may be higher than we
currently anticipate, and as a result, our profitability could decline. We are subject to the risk of employment-related litigation, which we believe increased
as a result of our large workforce in California and New York, at both the state and federal levels, including claims styled as class action lawsuits, which are
more costly to defend. Also, some employment-related claims in the area of wage and hour disputes are not insurable risks.
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Despite our efforts to control costs while still providing competitive healthcare benefits to our staff members, significant increases in healthcare costs
continue to occur, and we can provide no assurance that our cost containment efforts in this area will be effective. Moreover, we are continuing to assess
the impact of federal healthcare legislation on our healthcare benefit costs, and significant increases in such costs could adversely impact our operating
results. We cannot assure investors that we will be able to pass through the costs of such legislation in a manner that will not adversely impact our operating
results.
In addition, many of our delivery and warehouse personnel are hourly workers subject to various minimum wage requirements. Mandated increases in
minimum wage levels have recently been and continue to be proposed and implemented at both federal and state government levels. Minimum wage
increases may increase our labor costs.
We are also subject to the regulations of the U.S. Citizenship and Immigration Services and U.S. Customs and Immigration Enforcement. Our failure to
comply with federal and state labor laws and regulations, or our employees’ failure to meet federal citizenship or residency requirements, could result in a
disruption in our work force, sanctions or fines against us as well as adverse publicity and additional cost.
As of December 24, 2021, we had 2,712 full-time employees, 243 of whom (approximately 9%) are represented by unions and are operating under
collective bargaining agreements which expire at various times between fiscal 2022 and 2025. We have in the past been the focus of union negotiating
efforts, and it is likely that we will be the focus of similar efforts in the future.
As we increase our employee base and broaden our distribution operations to new geographic markets, including as a result of acquisitions, our increased
visibility could result in increased or expanded union-organizing efforts or we may acquire businesses with unionized workforces. Three labor unions have
been certified to represent bargaining units at our New York, Chicago and Maryland facilities, and we have entered into a collective bargaining agreement
with our union employees in New York, Chicago and Maryland. Although we have not experienced a work stoppage to date, if we are unable to
successfully negotiate union contracts, or renewals of existing contracts, if additional employees were to unionize or if we acquire additional businesses
with unionized employees, we could be subject to work stoppages and increases in labor costs, either of which could have a material adverse effect on our
business, financial condition or results of operations.
Geographic and Global Risk
Significant public health epidemics or pandemics, including COVID-19, may adversely affect our business, results of operations and financial
condition.
A public health epidemic or pandemic can significantly impact our business or those of our core customers or suppliers, particularly if located in
geographies in which we have significant operations. Such events could significantly impact the food-away-from-home industry and other industries that
are sensitive to changes in consumer discretionary spending habits. In addition, our operations could be disrupted if we were required to quarantine
employees that work at our various distribution centers and processing facilities.
For instance, the outbreak of the Pandemic has had, and could continue to have, an adverse impact on numerous aspects of our business, financial condition
and results of operations including, but not limited to, our growth, product costs, supply chain disruptions, labor shortages, logistics constraints, customer
demand for our products and industry demand generally, consumer spending, our liquidity, the price of our securities and trading markets with respect
thereto, our ability to access capital markets, and the global economy and financial markets generally. The Pandemic may also have exacerbated many of
the other risks described in this section or may have the potential to do so in the future. The extent to which the Pandemic impacts 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.
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.
Our financial condition and results of operations are highly dependent upon the local economies of the culinary markets in which we distribute our
products. In recent years, certain of these markets have been more resilient to economic downturns than others. Moreover, sales in our New York market,
which we define as our operations spanning from New York to Atlantic City, accounted for approximately 19.1% of our net sales for fiscal year 2021. We
are therefore particularly exposed to downturns in this regional economy. We also have significant operations in the San Francisco Bay area, Los Angeles,
California and New England. Deterioration in the economic conditions of our key markets generally, or in the local economy of the New York
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metropolitan area, San Francisco Bay or Los Angeles, California and New England areas, specifically, could affect our business, financial condition or
results of operations in a materially adverse manner.
In addition, given our geographic concentrations, other regional occurrences such as adverse weather conditions, terrorist attacks and other catastrophic
events could have a material adverse effect on our business, financial condition or results of operations. Adverse weather conditions can significantly
impact the business of our customers and our ability to profitably and efficiently conduct our operations and, in severe cases, could result in our trucks
being unable to make deliveries or cause the temporary closure or the destruction of one or more of our distribution centers. Our operations and/or
distribution centers which are located in (i) New York City, New England, Ohio, Washington D.C., Chicago and Canada are particularly susceptible to
significant amounts of snowfall and ice, (ii) Miami and Orlando are particularly susceptible to hurricanes and (iii) Los Angeles and San Francisco are
particularly susceptible to earthquakes, mudslides and wildfires. In addition, our restaurant customers, many of which are independently owned with
operations limited to one or two markets, may be less able to withstand the impact on their business from adverse weather conditions than national chain
restaurants because they are unable to spread the risks of such events across numerous locations. In some cases, these customers may not be able to re-open
their restaurants, and consequently make payment to us for products previously provided, if the weather event or other catastrophic event is severe,
particularly if they lacked sufficient insurance or their insurance claims are not processed quickly.
Due to their prominence as, among other characteristics, densely-populated major metropolitan cities and as international hubs for intermodal
transportation, a majority of our markets are known as targets for terrorist activity and other catastrophic events. If our or our customers’ operations are
significantly disrupted or if any one or more of our distribution centers is temporarily closed or destroyed for any of the foregoing reasons, our business,
financial condition or results of operations may be materially adversely affected. In anticipation of any such adverse weather conditions, terrorist attacks,
man-made disasters or other unforeseen regional occurrences, we have implemented a disaster recovery plan. Should any of these events occur, and if we
are unable to execute our disaster recovery plan, we may experience challenges in acquiring and distributing our products, failures or delays in the recovery
of critical data, delayed reporting and compliance with governmental entities, inability to perform necessary corporate functions and other breakdowns in
normal operating procedures that could have a material adverse effect on our business and create exposure to administrative and other legal claims against
us.
Information Technology, Intellectual Property and Data Risk
Information technology system failures, cybersecurity incidents or other disruptions to our use of technology and networks could interrupt our
operations and adversely affect our business.
We rely upon information technology solutions including enterprise networks and software to process, transmit and store data related to virtually all our
business processes and activities. Our business involves the storage and transmission of many types of sensitive or confidential information, including
customers’ and suppliers’ personal information, private information about employees, and financial and strategic information about us and our operations.
We leverage a suite of integrated hardware and software that relies on the availability of private and public networks to facilitate collaboration among all
stakeholders. Likewise, we use mobile networks, web social media and other online applications to conduct business with suppliers and customers. Our
operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss,
telecommunications failure or other catastrophic events, as well as from internal and external cybersecurity breaches, viruses, worms and other disruptive
problems. We are continuously improving our information technology solutions, resulting in a larger technological presence and corresponding increase in
exposure to cybersecurity risk. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations, due
to theft, destruction, loss, misappropriation, or release of confidential information or intellectual property, or interference with our information technology
systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of
privacy laws, loss of customers, potential liability, remediation costs, and competitive disadvantage, which in turn could adversely affect our business and
results of operations. While we have implemented cybersecurity solutions, conducted employee awareness campaigns, employed both internal resources
and external consultants to conduct auditing and testing for weaknesses in our systems, controls, firewalls and encryption and intend to maintain and
upgrade our security technology and operational procedures to prevent such damage, breaches or other disruptive problems, we cannot assure investors that
these security measures will either continue or be successful.
Our investments in information technology may not produce the benefits that we anticipate.
In an attempt to reduce our operating expenses, increase our operational efficiencies, boost our operating margins and more closely track the movement of
our inventory in our center-of-the-plate category, we have aggressively invested in the development and implementation of new information technology.
We may not be able to implement these technological changes in the time frame we have planned, and any delays in implementation could negatively
impact our business, financial
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condition or results of operations. In addition, the costs to make these changes may exceed our estimates and will likely exceed any benefits that we realize
during the early stages of implementation. Even if we are able to implement the changes as planned, and within our cost estimates, we may not be able
achieve the expected efficiencies, cost savings and operational enhancements from these investments which could have an adverse effect on our business,
financial condition or results of operations.
We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely affect our
business.
Our ability to implement our business plan successfully depends in part upon our ability to further build brand recognition, including for our proprietary
products, using our trademarks, service marks and other proprietary intellectual property, including our names and logos. We have registered or applied to
register a number of our trademarks. We cannot assure investors that our trademark applications will be approved. Third parties may also oppose our
trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced
to rebrand our goods and services, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing
new brands. If our efforts to register, maintain and protect our intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes
upon our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business, financial condition or
results of operations and might prevent our brands from achieving or maintaining market acceptance.
We may also face the risk of claims that we have infringed third parties’ intellectual property rights. If third parties claim that we have infringed or are
infringing upon their intellectual property rights, our operating profits could be affected in a materially adverse manner. Any claims of intellectual property
infringement, even those without merit, could be expensive and time consuming to defend, require us to rebrand our services, if feasible, divert
management’s attention and resources or require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual
property. Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement
against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products
or services, any of which could have a negative impact on our business, financial condition or results of operations and could harm our future prospects.
Legal and Regulatory Risk
Product liability claims could have a material adverse effect on our business, financial condition or results of operations.
Like any other distributor of food products, we face an inherent risk of exposure to product liability claims if the products we sell cause injury or illness.
We may be subject to liability, which could be substantial, because of actual or alleged contamination in products sold by us, including products sold by
companies before we acquired them. We have, and the companies we have acquired have had, liability insurance with respect to product liability claims.
This insurance may not continue to be available at a reasonable cost or at all, and it may not be adequate to cover product liability claims against us or
against any of the companies we have acquired. We generally seek contractual indemnification from manufacturers or suppliers of the product, but any
such indemnification is limited, as a practical matter, to the creditworthiness of the indemnifying party. If we or any of our acquired companies do not have
adequate insurance or contractual indemnification available, product liability claims and costs associated with product recalls, including a loss of business,
could have a material adverse effect on our business, financial condition or results of operations.
We are subject to significant governmental regulation, and failure to comply could subject us to enforcement actions, recalls or other penalties, which
could have a material adverse effect on our business, financial condition or results of operations.
Our business is highly regulated at the federal, state and local levels, and our specialty food products, meat, poultry and seafood products and distribution
operations require various licenses, permits and approvals. For example:
•
•
•
the products we distribute in the United States are subject to regulation and inspection by the FDA and the USDA, and the products we distribute
in Canada are subject to regulation by Health Canada and the Canadian Food Inspection Agency;
our warehouse, distribution facilities, repackaging activities and other operations also are subject to regulation and inspection, as applicable, by the
FDA, the USDA, Health Canada, the Canadian Food Inspection Agency and state and provincial health authorities; and
our U.S. and Canadian trucking operations are subject to regulation by, as applicable, the U.S. Department of Transportation, the U.S. Federal
Highway Administration, Transport Canada, the Surface Transportation Board and provincial transportation authorities.
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Our suppliers are also subject to similar regulatory requirements and oversight. The failure to comply with applicable regulatory requirements could result
in civil or criminal fines or penalties, product recalls, closure of facilities or operations, the loss or revocation of any existing licenses, permits or approvals
or the failure to obtain additional licenses, permits or approvals in new jurisdictions where we intend to do business, any of which could have a material
adverse effect on our business, financial condition or results of operations.
In addition, as a distributor and repackager of specialty food products and meat, poultry and seafood products, we are subject to increasing governmental
scrutiny of and public awareness regarding food safety and the manufacture, sale, packaging, storage and marketing of natural, organic and other food
products. Compliance with these laws may impose a significant burden upon our operations. If we were to distribute foods that are or are perceived to be
contaminated, or otherwise not in compliance with applicable laws, any resulting product recalls could have a material adverse effect on our business,
financial condition or results of operations. We cannot assure investors in our common stock that these actions will not adversely impact us or others in our
industry further, including suppliers of the products we sell, many of whom are small-scale producers who may be unable or unwilling to bear the expected
increases in costs of compliance and as a result cease operations or seek to pass along these costs to us.
Additionally, concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory
efforts to limit greenhouse gas emissions. Increased regulation regarding greenhouse gas emissions, especially diesel engine emissions, could impose
substantial costs upon us. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or
replacing our vehicles prematurely.
Until the timing, scope and extent of such regulation becomes known, we cannot predict its effect on our business, financial condition or results of
operations. It is reasonably possible, however, that such regulation could impose material costs on us that we may be unable to pass on to our customers.
Federal, state, provincial and local tax rules in the United States and Canada may adversely impact our business, financial condition or results of
operations.
We are subject to federal, state and local taxes in the United States, as well as federal, provincial and local taxes in Canada. Although we believe that our
tax estimates are reasonable, if the Internal Revenue Service (“IRS”) or any other taxing authority disagrees with the positions we have taken on our tax
returns, we could face additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of
any disputes could have a material impact on our business, financial condition or results of operations.
Complying with new tax rules, laws or regulations could impact our business, financial condition or results of operations, and increases to federal,
provincial or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective tax rate. Any increase in our effective
tax rate could have a material impact on our business, financial condition or results of operations.
We estimate our ability to recover deferred tax assets within the jurisdiction from which they arise. A valuation allowance is recognized if, based on the
available positive and negative evidence, it is more likely than not that some or all of a deferred tax asset is not recoverable. This evaluation considers
several factors, including recent results of operations, future taxable income, scheduled reversal of deferred tax liabilities, and tax planning strategies. Our
financial condition and results of operations could be adversely impacted if our valuation allowances increase due to an unfavorable change in our estimate
of the recoverability of our deferred tax assets or changes in laws or regulations that limit our ability to recover them.
Financial Risk
Our substantial indebtedness may limit our ability to invest in the ongoing needs of our business.
As of December 24, 2021, we had approximately $404.3 million of total indebtedness, consisting of $168.7 million of loans outstanding on our senior
secured term loan facility (“Term Loan”), $204.0 million of convertible debt and $11.6 million of finance leases. We had $20.0 million borrowings
outstanding under our asset-based loan facility (“ABL”). See Note 9 “Debt Obligations” to our consolidated financial statements for a full description of
our debt instruments.
25
Our indebtedness could have important consequences for us and our investors. For example our indebtedness:
•
requires us to utilize a substantial portion of our cash flows from operations to make payments on our indebtedness, reducing the availability of
our cash flows to fund working capital, capital expenditures, development activity and other general corporate purposes;
increases our vulnerability to adverse general economic or industry conditions;
limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
•
•
• makes us more vulnerable to increases in interest rates, as borrowings under our Term Loan and ABL (together the “Credit Facilities”) are at
variable rates;
in the case of our convertible debt, could result in the issuance of additional shares of our common stock that would result in the dilution of our
then-existing stockholders;
limits our ability to obtain additional financing in the future for working capital or other purposes, including to finance acquisitions; and
places us at a competitive disadvantage compared to our competitors with less indebtedness.
•
•
•
If our earnings are insufficient to fund our operations, including our acquisition growth strategy, we will need to raise additional capital or issue additional
debt, including longer-term, fixed-rate debt, to pay our indebtedness as it comes due or as our availability under our ABL is exhausted. If we are unable to
obtain funds necessary to make required payments or if we fail to comply with the various requirements of our Credit Facilities and convertible debt
agreements, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause
defaults under any indebtedness we may incur in the future. Any default under our indebtedness requiring the repayment of outstanding borrowings would
have a material adverse effect on our business, financial condition and results of operations. If we are unable to refinance or repay our indebtedness as it
becomes due, we may become insolvent and be unable to continue operations.
Although the agreements governing the Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions
do not prevent us from incurring obligations that do not constitute indebtedness.
The agreements governing the Credit Facilities require us to maintain fixed charge coverage ratios and leverage ratios. Our ability to comply with these
ratios in the future may be affected by events beyond our control, and our inability to comply with the required financial ratios could result in a default
under the Credit Facilities. In the event of events of default, the lenders under the Credit Facilities could elect to terminate lending commitments and
declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable. See “Management’s
Discussion and Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources, including availability under our ABL, faster than we currently anticipate. In the future, we may need
to raise additional funds through the issuance of new equity securities, debt, including longer-term, fixed-rate debt, or a combination of both. Additional
financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital
requirements or grow our business through acquisitions, or otherwise. If we issue new debt securities, the debt holders may have rights senior to those of
our common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on
our common stock. If we issue additional equity securities or convertible debt, existing stockholders will experience dilution, and the new equity securities
could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend upon market conditions
and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the
risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
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.
There are inherent risks in our ability to borrow debt capital. Lenders, including those participating in the Credit Facilities, may become insolvent or tighten
their lending standards, which could make it more difficult for us to borrow under our ABL, refinance our existing indebtedness or obtain other financing
on favorable terms or at all. Our access to funds under the Credit Facilities is dependent upon the ability of our lenders to meet their funding commitments.
Our financial condition and results of operations would be adversely affected in a material manner if we were unable to draw funds under the ABL because
of a lender default or if we had to obtain other cost-effective financing. Longer term disruptions in the capital and credit markets as
26
a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our
access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative
credit arrangements or other funding for our business can be arranged. Such measures could include deferring capital expenditures (including our entry into
new markets, including through acquisitions) and reducing or eliminating other discretionary uses of cash.
Changes in the method of determining London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with an alternative rate, may adversely
affect interest charged on our outstanding debt.
A portion of the interest rate charged on our Term Loan is currently based on LIBOR and, at our option, a component of the interest charged on the
borrowings outstanding on our ABL, if any, may bear interest rates based on LIBOR. On July 27, 2017, the Financial Conduct Authority in the U.K.
announced that it would phase out LIBOR by the end of 2021. On November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced
plans to delay the phase out of LIBOR to June 30, 2023. The U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index
called the Secured Overnight Funding Rate (“SOFR”), a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.
If LIBOR ceases to exist, we may need to renegotiate the Credit Facilities and may not be able to do so with terms that are favorable to us. The overall
financing market may be disrupted as a result of the phase-out or replacement of LIBOR with SOFR or any other reference rate. Disruption in the financial
market or the inability to renegotiate the Credit Facilities with favorable terms could have a material adverse effect on our business, financial condition or
results of operations.
Risks Relating to Ownership of our Common Stock
The price of our common stock may be volatile and our stockholders could lose all or part of their investment.
Volatility in the market price of our common stock may prevent our stockholders from being able to sell their shares at or above the price the stockholders
paid for their shares. The market price of our common stock could fluctuate significantly for various reasons, which include the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our quarterly or annual earnings or those of other companies in our industry;
changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in accounting standards, policies, guidance, interpretations or principles;
additions or departures of our senior management personnel;
sales of common stock by our directors and executive officers;
adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
actions by stockholders;
the level and quality of research analyst coverage for our common stock, changes in financial estimates or investment recommendations by
securities analysts following our business or failure to meet such estimates;
the financial disclosure we may provide to the public, any changes in such disclosure or our failure to meet projections included in our public
disclosure;
various market factors or perceived market factors, including rumors, whether or not correct, involving us, our customers, our distributors or
suppliers or our competitors;
introductions of new products or new pricing policies by us or by our competitors;
acquisitions or strategic alliances by us or our competitors;
short sales, hedging and other derivative transactions in our common stock;
the operating and stock price performance of other companies that investors may deem comparable to us; and
other events or factors, including changes in general conditions in the United States and global economies or financial markets (including those
resulting from acts of God, war, incidents of terrorism, global pandemics or responses to such events).
Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant
corporate decisions.
As of February 7, 2022, our executive officers, directors and their affiliates beneficially owned, in the aggregate, approximately 10.8% of our outstanding
shares of common stock. In particular, Christopher Pappas, our president and chief executive officer, and John Pappas, our vice chairman, beneficially
owned approximately 9.3% of our outstanding shares of common stock as of February 7, 2022. As a result of their significant individual ownership levels,
these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors,
amendment of
27
our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of
control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these
stockholders.
If securities analysts or industry analysts downgrade our stock, publish negative research or reports or do not publish reports about our business, our
stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business
and our industry. If one or more analysts adversely change their recommendation regarding our stock or our competitors’ stock, our stock price may likely
decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in
turn could cause our stock price or trading volume to decline.
We do not intend to pay dividends for the foreseeable future and our stock may not appreciate in value.
We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any cash dividends in
the foreseeable future. As a result, the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There
is no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares will be able
to be maintained.
Our issuance of preferred stock or debt securities could adversely affect holders of our common stock and discourage a takeover.
Our board of directors is authorized to issue up to 5 million shares of preferred stock without any action on the part of our stockholders. Our board of
directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights,
dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In
the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our
liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the
holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue
shares of preferred stock without any action on the part of our stockholders may impede a takeover of us and prevent a transaction favorable to our
stockholders.
Additionally, in the future, we may need to raise additional funds or pay all, or a portion, of the acquisition price for a business we acquire through the
issuance of new debt, including longer-term, fixed-rate debt. If we issue new debt securities, the debt holders may have rights senior to those of our
common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our
common stock.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even
if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our certificate of incorporation and bylaws as well as provisions of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders
might otherwise receive a premium for their shares. These provisions include:
•
•
•
•
authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
eliminating the ability of stockholders to call a special meeting of stockholders; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at
stockholder meetings.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
28
Item 2. PROPERTIES
We operate 40 distributions centers located in the United States and Canada totaling approximately 2.5 million square feet. We own two distribution
facilities in Massachusetts with a combined 241,00 square feet, a 59,500 square foot distribution center in Cincinnati, Ohio and a 10,000 square foot protein
processing facility and distribution center in Chicago, Illinois. All of our other properties are leased. The following table sets forth our significant
distribution, protein processing, corporate and other support facilities by state or province and their approximate aggregate square footage as of
February 11, 2022.
State / Province
California
Maryland
Massachusetts
Florida
Texas
New York
Illinois
Ohio
Nevada
Oregon
Ontario
New Jersey
Connecticut
British Columbia
Alberta
Arizona
Washington
Colorado
Total
(1)
Number of Facilities
Aggregate Size
9
4
4
4
4
1
3
2
2
1
1
1
1
1
2
1
1
1
43
684,700
275,500
274,000
262,400
234,700
231,100
144,200
120,400
101,900
55,500
51,300
38,400
29,200
24,900
18,100
14,500
10,500
3,600
2,574,900
(1)
Represents our corporate headquarters in Ridgefield, Connecticut.
We consider our properties to be in good condition generally and believe our facilities are adequate for our operations and provide sufficient capacity to
meet our anticipated requirements.
Item 3. LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings that arise from the normal course of business activities. If an unfavorable ruling were to
occur, there exists the possibility of a material adverse impact on our results of operations, prospects, cash flows, financial position and brand. We are not
currently aware of any pending or threatened legal proceeding against us that could have a material adverse effect on our business, operating results or
financial condition.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
29
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Chefs’ Warehouse, Inc. Common Stock
Our common stock is publicly traded under the symbol “CHEF” on the NASDAQ Global Select Market. As of February 8, 2022, there were 198 holders of
record of our common stock. This does not include the number of persons whose stock is in nominee or “street” name accounts through brokers.
We have never paid a cash dividend on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Furthermore, we are prohibited from paying cash dividends under the terms of our senior secured credit facilities without the consent of the lenders
thereunder.
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock during the period from December 30, 2016 through
December 24, 2021 with the cumulative total return on the NASDAQ Composite and the S&P Smallcap Food Distributor Index. The comparison assumes
that $100 was invested on December 30, 2016 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, each as amended, except to the extent that we specifically incorporate such information by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG THE CHEFS’ WAREHOUSE, INC.
NASDAQ COMPOSITE INDEX AND THE S&P SMALLCAP FOOD DISTRIBUTOR INDEX
ASSUMES $100 INVESTED ON DECEMBER 30, 2016
The Chefs’ Warehouse, Inc.
NASDAQ Composite Index
S&P Smallcap Food Distributor Index
December 30,
2016
December 29,
2017
December 28,
2018
December 27,
2019
December 25,
2020
December 24,
2021
$
$
$
100.00 $
100.00 $
100.00 $
129.75 $
128.24 $
68.41 $
198.29 $
122.32 $
43.45 $
240.32 $
167.31 $
40.68 $
151.20 $
237.87 $
43.41 $
206.14
290.79
84.12
30
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares
Repurchased(1)
Average
Price
Paid Per Share
— $
1,096
7,730
8,826 $
—
36.06
32.57
33.00
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
—
—
—
—
—
—
—
—
September 25, 2021 to October 22, 2021
October 23, 2021 to November 19, 2021
November 20, 2021 to December 24, 2021
Total
(1) During the thirteen weeks ended December 24, 2021, we withheld 8,826 shares of our common stock to satisfy tax withholding requirements upon the
vesting of restricted shares of our common stock awarded to certain of our officers and key employees.
Equity Compensation Plan Information
See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.
Item 6. RESERVED
31
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with information included in Item 8 of this report. Unless otherwise indicated, the terms
“Company”, “Chefs’ Warehouse”, “we”, “us”, and “our” refer to The Chefs’ Warehouse, Inc. and its subsidiaries.
Overview and Recent Developments
Overview
We are a premier distributor of specialty foods in the leading culinary markets in the United States. We offer more than 50,000 SKUs, ranging from high-
quality specialty foods and ingredients to basic ingredients and staples, produce and center-of-the-plate proteins. We serve more than 35,000 core 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. Our Allen Brothers subsidiary sells certain of our center-of-the-plate products directly to consumers. We
expanded our direct-to-consumer product offerings in fiscal 2020 by launching our “Shop Like a Chef” online home delivery platform in several of the
markets we serve.
We believe several key differentiating factors of our business model have enabled us to execute our strategy consistently and profitably across our
expanding customer base. These factors consist of a portfolio of distinctive and hard-to-find specialty food products, an extensive selection of center-of-
the-plate proteins, a highly trained and motivated sales force, strong sourcing capabilities, a fully integrated warehouse management system, a highly
sophisticated distribution and logistics platform and a focused, seasoned management team.
In recent years, our sales to existing and new customers have increased through the continued growth in demand for specialty food and center-of-the-plate
products in general; increased market share driven by our large percentage of sophisticated and experienced sales professionals, our high-quality customer
service and our extensive breadth and depth of product offerings, including, as a result of our acquisitions; the expansion of our existing distribution
centers; our entry into new distribution centers, including the construction of new distribution centers in San Francisco, Toronto, Dallas, Los Angeles and
Miami; and the import and sale of our proprietary brands. Through these efforts, we believe that we have been able to expand our customer base, enhance
and diversify our product selections, broaden our geographic penetration and increase our market share.
Effect of the COVID-19 Pandemic on our Business and Operations
The COVID-19 pandemic (“Pandemic”) has had and continues to have 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 during the second quarter of fiscal 2021.
Furthermore, as of December 24, 2021, we had $157.8 million of working capital, including $115.2 million of cash and cash equivalents, on our balance
sheet and $109.5 million of availability on our asset-based loan facility. Our liquidity position, puts us in a strategic position to invest in growth and take
advantage of business development opportunities as we continue to recover from the Pandemic.
The extent to which the Pandemic will 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 Significant Acquisitions
On January 27, 2020, we entered into an asset purchase agreement to acquire substantially all of the assets, including certain real-estate assets, of Sid
Wainer & Son (“Sid Wainer”), a specialty food and produce distributor in New England. The cash purchase price was approximately $44.1 million,
inclusive of a $2.4 million working capital true-up. We are required to pay additional contingent consideration, if earned, of up to $4.0 million over a two-
year period upon successful attainment of certain gross profit targets.
On February 3, 2020, we entered into an asset purchase agreement to acquire substantially all of the assets of Cambridge Packing Co, Inc. (“Cambridge”), a
specialty center-of-the-plate producer and distributor in New England. The cash purchase price was approximately $16.4 million, inclusive of a $0.6
million working capital true-up. We are required to pay additional
32
contingent consideration, if earned, of up to $3.0 million over a two-year period upon successful attainment of certain gross profit targets.
On February 25, 2019, pursuant to an asset purchase agreement, we acquired substantially all of the assets of Bassian Farms, Inc. and related entities
(“Bassian”), a specialty center-of-the-plate distributor based in northern California. The aggregate purchase price for the transaction was approximately
$31.8 million, consisting of $28.0 million in cash paid at closing and the issuance of a $4.0 million unsecured convertible note, partially offset by the
settlement of a net working capital true-up. We are also required to pay additional contingent consideration, if earned, which could total $9.0 million over a
four-year period. The payment of the earn-out liability is subject to the successful achievement of certain gross profit targets.
Transition of Trademarks
During the second quarter of fiscal 2021, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our New England
market and determined our Cambridge trademark did not fit our long-term strategic objectives. As a result, we recognized a $0.6 million impairment
charge, $0.4 million net of tax, to fully write-down the net book value of our Cambridge trademark.
During the fourth quarter of fiscal 2020, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our west coast region
and determined that our Del Monte, Ports Seafood and Bassian Farms trademarks did not fit our long-term strategic objectives. This brand transition began
in the second quarter of fiscal 2021. As a result, we recorded a $24.2 million impairment charge, $17.5 million net of tax, to write-down the value of our
Del Monte and Bassian Farms trademarks.
Our Growth Strategies and Outlook
We continue to invest in our people, facilities and technology in an effort to achieve the following objectives and maintain our premier position within the
specialty foodservice distribution market:
•
•
•
•
•
•
sales and service territory expansion;
operational excellence and high customer service levels;
expanded purchasing programs and improved buying power;
product innovation and new product category introduction;
operational efficiencies through system enhancements; and
operating expense reduction through the centralization of general and administrative functions.
Our growth has allowed us to improve upon our organization’s infrastructure, open new distribution facilities and pursue selective acquisitions. Over the
last several years, we have increased our distribution capacity to approximately 2.5 million square feet in 40 distribution facilities as of February 11, 2022.
From fiscal 2019 through the end of fiscal 2021, we have invested significantly in acquisitions, infrastructure and management.
Key Factors Affecting Our Performance
Due to our focus on menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries,
chocolateries, cruise lines, casinos and specialty food stores, our results of operations are materially impacted by the success of the food-away-from-home
industry in the United States and Canada, which is materially impacted by general economic conditions, weather, discretionary spending levels and
consumer confidence. When economic conditions deteriorate, our customers’ businesses are negatively impacted as fewer people eat away-from-home and
those who do spend less money. As economic conditions begin to improve, our customers’ businesses historically have likewise improved, which
contributes to improvements in our business. Similarly, the direct-to-consumer business of our Allen Brothers subsidiary is significantly dependent on
consumers’ discretionary spending habits, and weakness or uncertainty in the economy could lead to consumers buying less from Allen Brothers.
Volatile food costs may have a direct impact upon our profitability. Prolonged periods of product cost inflation may have a negative impact on our profit
margins and results of operations to the extent we are unable to pass on all or a portion of such product cost increases to our customers. In addition, product
cost inflation may negatively impact consumer discretionary spending decisions within our customers’ establishments, which could adversely impact our
sales. Conversely, our profit levels may be negatively impacted during periods of product cost deflation even though our gross profit as a percentage of
sales may remain relatively constant. However, some of our products, particularly certain of our center-of-the-plate protein items, are priced on a “cost
plus” markup, which helps mitigate the negative impact of deflation.
33
Given our wide selection of product categories, as well as the continuous introduction of new products, we can experience shifts in product sales mix that
have an impact on net sales and gross profit margins. This mix shift is most significantly impacted by the introduction of new categories of products in
markets that we have more recently entered, the shift in product mix resulting from acquisitions, as well as the continued growth in item penetration on
higher velocity items such as dairy products.
The foodservice distribution industry is fragmented but consolidating, and we have supplemented our internal growth through selective strategic
acquisitions. We believe that the consolidation trends in the foodservice distribution industry will continue to present acquisition opportunities for us, which
may allow us to grow our business at a faster pace than we would otherwise be able to grow the business organically.
Performance Indicators
In addition to evaluating our income from operations, our management team analyzes our performance based on net sales growth, gross profit and gross
profit margin.
•
Net sales growth. Our net sales growth is driven principally by changes in volume and, to a lesser degree, changes in price related to the impact of
inflation in commodity prices and product mix. In particular, product cost inflation and deflation impacts our results of operations and, depending on
the amount of inflation or deflation, such impact may be material. For example, inflation may increase the dollar value of our sales, and deflation
may cause the dollar value of our sales to fall despite our unit sales remaining constant or growing.
• Gross profit and gross profit margin. Our gross profit and gross profit as a percentage of net sales, or gross profit margin, are driven principally by
changes in volume and fluctuations in food and commodity prices and our ability to pass on any price increases to our customers in an inflationary
environment and maintain or increase gross profit margin when our costs decline. Our gross profit margin is also a function of the product mix of
our net sales in any period. Given our wide selection of product categories, as well as the continuous introduction of new products, we can
experience shifts in product sales mix that have an impact on net sales and gross profit margins. This mix shift is most significantly impacted by the
introduction of new categories of products in markets that we have more recently entered, impact of product mix from acquisitions, as well as the
continued growth in item penetration on higher velocity items such as dairy products.
Key Financial Definitions
•
•
•
Net sales: Net sales consist primarily of sales of specialty products, produce, center-of-the-plate proteins and other food products to independently-
owned restaurants and other high-end foodservice customers, which we report net of certain group discounts and customer sales incentives. Net sales
also include direct-to-consumer sales on our e-commerce platforms.
Cost of sales: Cost of sales include the net purchase price paid for products sold, plus the cost of transportation necessary to bring the product to our
distribution facilities and 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. Our cost of sales may not be comparable to other similar companies
within our industry.
Selling, general and administrative expenses: Selling, general and administrative expenses include facilities costs, product shipping and handling
costs, warehouse costs, and other selling, general and administrative costs.
• Other operating expenses: Other operating expenses includes expenses primarily related to changes in the fair value of the Company’s earn-out
liabilities, gains and losses on asset disposals, asset impairments and certain third-party deal costs incurred in connection with business acquisitions
or financing arrangements.
Interest expense: Interest and other expense consists primarily of interest on our outstanding indebtedness and, as applicable, the amortization or
write-off of deferred financing fees.
•
34
Results of Operations
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating expenses
Operating income (loss)
Interest and other expense, net
(Loss) income before income taxes
Provision for income tax (benefit) expense
Net (loss) income
December 24, 2021
Fiscal Years Ended
December 25, 2020
December 27, 2019
$
$
1,745,757 $
1,355,272
390,485
379,252
422
10,811
17,587
(6,776)
(1,853)
(4,923) $
1,111,631 $
863,480
248,151
336,394
14,417
(102,660)
20,946
(123,606)
(40,703)
(82,903) $
1,591,834
1,205,266
386,568
329,542
6,359
50,667
18,264
32,403
8,210
24,193
Fiscal Year Ended December 24, 2021 Compared to Fiscal Year Ended December 25, 2020
Net Sales
Net sales
2021
1,745,757 $
2020
1,111,631 $
$
$ Change
% Change
634,126
57.0 %
Organic growth contributed $574.2 million, or 51.6%, to sales growth in the year primarily driven by our recovery from the Pandemic. The remaining
growth of $59.9 million, or 5.4%, resulted from acquisitions. Organic case count increased approximately 33.8% in our specialty category. In addition,
specialty unique customers and placements increased 26.1% and 31.6%, respectively, compared to the prior year. Pounds sold in our center-of-the-plate
category increased 28.2% compared to the prior year. Estimated inflation was 9.6% in our specialty category and 18.1% in our center-of-the-plate category
compared to fiscal 2020.
Gross Profit
Gross profit
Gross profit margin
2021
2020
$ Change
% Change
$
390,485
$
248,151
$
142,334
57.4 %
22.4 %
22.3 %
Gross profit increased primarily due to increased sales volumes. Gross profit margin increased approximately 4 basis points. Gross profit
margins increased 379 basis points in the Company’s specialty category and decreased 350 basis points in the Company’s center-of-the-plate category
compared to the prior year period. Our prior year gross profit results include a charge of approximately $14.6 million related to estimated inventory losses
from obsolescence due to the Pandemic’s impact on our customers’ purchasing behavior.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
Percentage of net sales
2021
379,252
21.7 %
2020
$ Change
% Change
336,394
30.3 %
42,858
12.7 %
The increase in selling, general and administrative expense relates primarily to increased sales volumes and acquisitions. Our prior year results include an
estimated non-cash charge of approximately $15.8 million to bad debt expense incurred during the first quarter of fiscal 2020 at the onset of the Pandemic.
Our ratio of selling, general and administrative expenses to net sales was lower as a result of sales growth.
35
Other Operating Expenses, Net
Other operating expenses
2021
2020
$ Change
% Change
422
14,417
(13,995)
(97.1)%
The decrease in net other operating expenses relates primarily to a $24.2 million impairment charge for Del Monte and Bassian trademarks as a result of a
shift in brand strategy to leverage our Allen Brothers brand in our west coast region during the fourth quarter of fiscal 2020 and non-cash credits of $1.3
million for changes in the fair value of our contingent earn-out liabilities in the fiscal 2021 period compared to non-cash credits of $11.5 million in the prior
year period.
Interest Expense
Interest expense
2021
2020
$ Change
% Change
17,587
20,946 $
(3,359)
(16.0)%
Interest expense decreased primarily due to $1.2 million in one-time third-party costs incurred during the second quarter of 2020 in connection with the
extension of a majority of our senior secured term loans and lower effective interest rates charged on our outstanding debt as a result of the $50.0 million
aggregate principal amount of Convertible Senior Notes issued on March 1, 2021 which were used to repay higher interest rate debt.
Provision for Income Tax Benefit
Provision for income tax benefit
Effective tax rate
2021
2020
$ Change
% Change
(1,853)
27.3 %
(40,703)
$
38,850
(95.4)%
32.9 %
The higher effective tax rate in the prior period is primarily related to the carryback of a portion of our fiscal 2020 net taxable loss which allowed us to
claim tax refunds against taxes paid in fiscal 2015 and 2017, both of which were at statutory tax rates of 35%.
Fiscal Year Ended December 25, 2020 Compared to Fiscal Year Ended December 27, 2019
Net Sales
Net sales
2020
1,111,631 $
2019
1,591,834 $
$
$ Change
% Change
(480,203)
(30.2)%
Sales growth from acquisitions contributed $136.5 million, or 8.6%, to sales growth. Organic sales declined $616.7 million, or 38.8%, versus the prior year
primarily due to impacts of the Pandemic. Organic case count declined approximately 43.5% in our specialty category. In addition, specialty unique
customers and placements declined 30.4% and 43.6%, respectively, compared to the prior year. Pounds sold in our center-of-the-plate category decreased
38.0% compared to the prior year. Estimated deflation was 0.3% in our specialty category and inflation of 3.5% in our center-of-the-plate category
compared to fiscal 2019.
Gross Profit
Gross profit
Gross profit margin
2020
248,151
22.3 %
2019
$ Change
% Change
386,568
$
(138,417)
(35.8)%
24.3 %
Gross profit decreased primarily due to decreased sales volumes. Gross profit margin decreased approximately 196 basis points. Gross profit margins
decreased 441 basis points in the Company’s specialty category and increased 117 basis points in the Company’s center-of-the-plate category compared to
the prior year period. Our gross profit results include a charge of approximately $14.6 million related to estimated inventory losses from obsolescence due
to the Pandemic’s impact on our customers’ purchasing behavior.
36
Selling, General and Administrative Expenses
Selling, general and administrative expenses
Percentage of net sales
2020
336,394
30.3 %
2019
$ Change
% Change
329,542
20.7 %
6,852
2.1 %
The increase in selling, general and administrative expense relates primarily to our recent acquisitions and an estimated non-cash charge of approximately
$15.8 million to bad debt expense incurred during the first quarter of fiscal 2020 at the onset of the Pandemic, partially offset by cost measures
implemented during the year in response to the Pandemic’s adverse impact on demand for our products. Our ratio of selling, general and administrative
expenses to net sales was higher as a result of the Pandemic’s adverse impacts on our sales growth and a 161 basis point increase in non-cash charges
related to bad debt expense.
Other Operating Expenses, Net
Other operating expenses
2020
2019
$ Change
% Change
14,417
6,359
8,058
126.7 %
The increase in other operating expenses relates primarily to a $24.2 million impairment charge on Del Monte and Bassian trademarks and non-cash credits
of $11.5 million for changes in the fair value of our contingent earn-out liabilities compared to non-cash charges of $5.9 million in the prior year period.
Interest Expense
Interest expense
2020
2019
$ Change
% Change
20,946
18,264 $
2,682
14.7 %
Interest and other expense increased primarily due to $1.2 million in one-time third-party costs incurred during the second quarter of 2020 in connection
with the extension of a majority of our senior secured term loans and the full year impact of interest charged on our Convertible Senior Notes issued on
November 22, 2019.
Provision for Income Tax (Benefit) Expense
Provision for income tax (benefit) expense
Effective tax rate
2020
(40,703)
32.9 %
2019
$ Change
% Change
8,210
25.3 %
$
(48,913)
(595.8)%
The higher effective tax rate is primarily related to our net taxable loss for fiscal 2020 which allows us to claim tax refunds against taxes paid in fiscal 2015
and 2017, both of which were at statutory tax rates of 35%.
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):
Senior secured term loan
Total convertible debt
Borrowings outstanding on asset-based loan facility
Finance leases and other financing obligations
December 24, 2021
December 25, 2020
December 27, 2019
$
$
$
$
168,675 $
204,000 $
20,000 $
11,602 $
201,553 $
154,000 $
40,000 $
15,798 $
238,129
154,000
—
3,905
37
As of December 24, 2021, we have various floating- and fixed-rate debt instruments with varying maturities for an aggregate principal amount of $392.7
million. See Note 9 “Debt Obligations” to our consolidated financial statements for a full description of our debt instruments.
On March 1, 2021, the we issued $50.0 million aggregate principal amount of 1.875% Convertible Senior Notes at a premium which were offered as an
additional issuance of our $150.0 million Convertible Senior Notes due 2024 issued on November 22, 2019. Net proceeds were used to repay all
outstanding borrowings under the our 2022 tranche of senior secured term loans of $31.2 million and repay a portion of borrowings outstanding under our
asset-based loan facility. We incurred transaction costs of approximately $1.4 million which were capitalized as deferred financing fees to be amortized
over the term of the underlying debt.
On June 8, 2020, we amended our senior secured credit agreement which converted $238.1 million of the term loans then outstanding into a new tranche of
term loans (the “2025 Tranche”), which, among other things, extended the maturity date by three years and increased the fixed-rate portion of interest
charged by 200 basis points. The Company made a prepayment of $35.7 million on the 2025 Tranche immediately after it was established. See Note 9
“Debt Obligations” to our consolidated financial statements for a full description.
On March 18, 2020, we drew $100.0 million on our asset-based loan facility to increase our cash on hand during the early stages of the Pandemic’s impact
to our business and have subsequently repaid $80.0 million of the draw.
On November 22, 2019, we issued $150.0 million aggregate principal amount of 1.875% Convertible Senior Notes (the “Senior Notes”). Approximately
$43.2 million of the net proceeds were used to repay all borrowings then outstanding under our ABL and the remainder was used for working capital,
general corporate purposes and acquisitions.
A portion of the interest rate charged on our Term Loan is currently based on LIBOR and, at our option, a component of the interest charged on the
borrowings outstanding on our ABL, if any, may bear interest rates based on LIBOR. LIBOR has been the subject of reform and was expected to phase out
by the end of fiscal 2021, however, on November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced plans to delay the phase out of
LIBOR to June 30, 2023. The consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense we incur
on these debt instruments. We will negotiate alternatives to LIBOR with our lenders before LIBOR ceases to be a widely available reference rate.
Equity Offering
On May 14 and June 2, 2020, we completed public offerings for a total of 6,634,615 shares of our common stock which resulted in net proceeds of
approximately $85.9 million. See Note 10 “Stockholders’ Equity” to our consolidated financial statements for a full description.
Liquidity
The following table presents selected financial information on liquidity (in thousands):
Cash and cash equivalents
Working capital,
Availability under asset-based loan facility
(1)
excluding cash and cash equivalents
December 24, 2021
December 25, 2020
December 27, 2019
$
$
$
115,155 $
157,787 $
109,459 $
193,281 $
94,279 $
50,282 $
140,233
162,772
90,015
(1)
We define working capital as current assets less current liabilities.
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
twelve months.
Our capital expenditures, excluding cash paid for acquisitions, were approximately $38.8 million for fiscal 2021. We believe our capital expenditures,
excluding cash paid for acquisitions, for fiscal 2022 will be approximately $35.0 million to $45.0 million.
38
Cash Flows
Net (loss) income
Non-cash charges
Changes in working capital
Cash (used in) provided by operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
Fiscal Year 2021 Cash Flows
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
$
$
$
$
$
$
(4,923) $
47,372 $
(62,348) $
(19,899) $
(48,991) $
(9,222) $
(82,903) $
62,509 $
63,275 $
42,881 $
(67,968) $
78,056 $
24,193
47,625
(26,811)
45,007
(44,154)
96,947
Net cash used in operations was $19.9 million for fiscal 2021 consisting of a $4.9 million net loss and and investments in working capital of $62.3 million,
partially offset by $47.4 million of non-cash charges. Non-cash charges decreased predominately due to the $24.2 million write down of Del Monte and
Bassian trademarks in fiscal 2020. The cash used in working capital of $62.3 million is primarily driven by reinvestment in working capital to support
growth.
Net cash used in investing activities was $49.0 million in fiscal 2021 driven by $38.8 million in capital expenditures which included the build-outs of our
Los Angeles, New England and Miami distribution facilities. We used $10.2 million in cash to fund several acquisitions.
Net cash used in financing activities was $9.2 million for fiscal 2021 driven by $37.6 million of payments made on senior term loans and finance lease
obligations and a $20.0 million payment on our asset-based loan facility, partially offset by $51.8 million of proceeds from the issuance of additional
convertible senior notes.
Fiscal Year 2020 Cash Flows
Net cash provided by operations was $42.9 million for fiscal 2020 consisting of a $82.9 million net loss, offset by $62.5 million of non-cash charges and an
increase in working capital of $63.3 million. Non-cash charges increased predominately due to the $24.2 million write down of Del Monte and Bassian
trademarks. The increase in working capital of $63.3 million is primarily driven by negotiating favorable credit terms with our customers and suppliers and
maintaining lower inventory balances as a result of reduced demand due to the Pandemic.
Net cash used in investing activities was $68.0 million in fiscal 2020 driven by $7.0 million in capital expenditures which included implementations of our
Enterprise Resource Planning (“ERP”) system. We used $60.9 million in cash to fund acquisitions, the most significant of which were Sid Wainer and
Cambridge.
Net cash provided by financing activities was $78.1 million for fiscal 2020 driven by $85.9 million net proceeds from our common stock offering and
$40.0 million of net draws on our asset-based loan facility, partially offset by payments of debt and finance lease obligations of $40.4 million.
Seasonality
Excluding our Allen Brothers 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 Allen Brothers 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
39
Indebtedness
Finance lease obligations
Pension exit liabilities
Long-term operating leases
Total
(1)
(2)
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 on food, labor, energy and occupancy costs can significantly
affect the profitability of our operations.
Commitments and Significant Contractual Obligations
The following table summarizes our contractual obligations and commercial commitments at December 24, 2021:
Total
Less than One
Year
Payments Due by Period (1, 2)
1-3
Years
(In thousands)
4-5
Years
Thereafter
403,991 $
12,748 $
1,861 $
216,423 $
5,662 $
3,834 $
170 $
24,726 $
234,790 $
5,553 $
375 $
38,167 $
163,539 $
3,192 $
428 $
27,644 $
—
169
888
125,886
635,023 $
34,392 $
278,885 $
194,803 $
126,943
$
$
$
$
$
Interest on our various outstanding debt instruments is included in the above table, except for our Term Loans and ABL, which have floating
interest rates. At December 24, 2021, we had borrowings of $168.7 million under our Term Loans and $20.0 million under our ABL. See Note 9
“Debt Obligations” to our consolidated financial statements for further information on our debt instruments.
The table above excludes $6.9 million of total contingent earn-out liabilities related to certain acquisitions as of December 24, 2021 and
approximately $10.0 million of lease payments related leases for distribution facilities that do not commence until fiscal 2022.
We had outstanding letters of credit of approximately $20.5 million and $20.1 million at December 24, 2021 and December 25, 2020, respectively.
Substantially all of our assets are pledged as collateral to secure our borrowings under our credit facilities.
Off-Balance Sheet Arrangements
As of December 24, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us 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 our financial condition and results and require our 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) contingent earn-out liabilities. For all financial statement
periods presented, there have been no material modifications to the application of these critical accounting policies.
Allowance for Doubtful Accounts
We analyze customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt
40
levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer,
future sales to the customer are either conducted using cash-on-delivery terms or the account is closely monitored so that agreed-upon payments are
received prior to orders being released. A failure to pay results in held or cancelled orders. We also estimate receivables that will ultimately be uncollectible
based upon historical write-off experience. Management incorporates current macro-economic factors in existence as of the balance sheet date that may
impact the food-away-from-home industry and/or its customers, and specifically, beginning in the first quarter of fiscal 2020, the impact of the Pandemic.
We may be required to increase or decrease our allowance for doubtful accounts due to various factors, including the overall economic environment and
particular circumstances of individual customers. Our accounts receivable balance was $172.5 million and $96.4 million, net of the allowance for doubtful
accounts of $20.3 million and $24.0 million, as of December 24, 2021 and December 25, 2020, respectively.
Inventory Valuation
We adjust our inventory balances for excess and obsolete inventories. These adjustments are primarily based upon customer demand, inventory age,
specifically identified inventory items and overall economic conditions. A sudden and unexpected change in consumer preferences or change in overall
economic conditions could result in a significant change to these adjustments that could require a corresponding charge to earnings. We actively manage
our inventory levels as we seek to minimize the risk of loss and have consistently achieved a relatively high level of inventory turnover. As a result of the
impacts of the Pandemic on our customer demand we incurred additional inventory valuation charges of $14.6 million in fiscal 2020.
Business Combinations
We account for acquisitions in accordance with Accounting Standards Codification Topic 805 “Business Combinations.” Assets acquired and liabilities
assumed are recorded at their estimated fair values, as of the acquisition date. The judgments made in determining the estimated fair value of assets
acquired and liabilities assumed, including estimated useful life, may have a material impact on our consolidated balance sheet and may materially impact
the amount of depreciation and amortization expense recognized in periods subsequent to the acquisition. We determine the fair value of intangible assets
using an income approach and, when appropriate, we engage a third party valuation firm. Generally, we utilize the multi-period excess earnings method to
determine the fair value of customer relationships and the relief from royalty method to determine the fair value of tradenames. These valuation methods
contain significant assumptions and estimates including forecasts of expected future cash flows and discount rates. Determining the useful life of an
intangible asset also requires judgment, as different types of intangible assets will have different useful lives. The excess of the purchase price over the fair
values of identifiable assets and liabilities is recorded as goodwill.
Valuation of Goodwill and Intangible Assets
We are required to test goodwill for impairment at each of our reporting units annually, or more frequently when circumstances indicate an impairment may
have occurred. We have elected to perform our annual tests for indications of goodwill impairment during the fourth quarter of each fiscal year.
Goodwill is tested at the reporting unit level, which is an operating segment or a component of an operating segment. When analyzing whether to aggregate
components into single reporting units, management considers whether each component has similar economic characteristics. We have evaluated the
economic characteristics of our different geographic markets, including our recently acquired businesses, along with the similarity of the operations and
margins, nature of the products, type of customer and methods of distribution of products and the regulatory environment in which we operate and
concluded that the business consists of three operating segments: East Coast, Midwest and West Coast and these operating segments represent our reporting
units.
In testing goodwill for impairment, we may elect to perform a qualitative assessment to evaluate whether it is more likely than not that the fair value of
each reporting unit is less than its carrying amount. The qualitative analysis considers various factors including macroeconomic conditions, market
conditions, industry trends, cost factors and financial performance, among others. If our qualitative assessment indicates that goodwill impairment is more
likely than not, we proceed to perform a quantitative assessment to determine the fair value of the reporting unit.
When a quantitative analysis is required, we estimate the fair value of our reporting units using an income approach that incorporates the use of a
discounted cash flow model that involves many management assumptions that are based upon future growth projections. Assumptions include estimates of
future revenue based upon budget projections and growth rates which include estimates for the duration of the Pandemic’s impact on the Company’s
customers. We develop estimates of future levels of gross and operating profits and projected capital expenditures. This methodology includes the use of
estimated discount rates
41
based upon industry and competitor analysis as well as other factors. A goodwill impairment loss, if any, would be recognized for the amount by which a
reporting unit’s carrying value exceeds its fair value.
For the fiscal year ended December 24, 2021, the Company assessed the recoverability of goodwill using a qualitative analysis and determined that it is
more likely than not that the fair value of its reporting units exceeded their respective carry values.
Due to the Pandemic’s adverse impact on our business in fiscal 2020, we performed an interim quantitative goodwill impairment test as of March 27, 2020
and concluded that goodwill was not impaired. We performed our annual goodwill impairment test during the fourth quarter of fiscal 2020 using a
quantitative analysis, the results of which indicated that goodwill was not impaired. Total goodwill as of December 24, 2021 and December 25, 2020 was
$221.8 million and $214.9 million, respectively.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Cash flows expected to be generated by the related assets are estimated over the assets useful lives based on updated projections. If the
evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted
cash flow model.
During the second quarter of fiscal 2021, we committed to a plan to shift our brand strategy to leverage the Allen Brothers brand in our New England
region and determined the Cambridge trademark did not fit our long-term strategic objectives. As a result, we recognized a $0.6 million impairment charge,
$0.4 million net of tax, to fully write-down the net book value of our Cambridge trademark
During the fourth quarter of fiscal 2020, we committed to a plan to shift our brand strategy to leverage our Allen Brothers brand in our west coast region
and determined our Del Monte, Ports Seafood and Bassian Farms trademarks did no fit our long-term strategic objectives. This brand transition began in
the second quarter of fiscal 2021. The Company assessed these trademarks for impairment and used the relief of royalty method to determine fair value.
Significant assumptions used include future sales forecasts, royalty rates and discount rates. As a result, we recorded a $24.2 million impairment charge,
$17.5 million net of tax, to write-down the value of our Del Monte and Bassian Farms trademarks.
There have been no other events or changes in circumstances during fiscal 2021 or 2020 indicating that the carrying value of our finite-lived intangible
assets are not recoverable. Total finite-lived intangible assets as of December 24, 2021 and December 25, 2020 were $104.7 million and $111.7 million,
respectively.
The assessment of the recoverability of goodwill and intangible assets contain uncertainties requiring management to make assumptions and to apply
judgment to estimate economic factors and the profitability of future operations. Actual results could differ from these assumptions and projections,
resulting in us revising our assumptions and, if required, recognizing an impairment loss.
Self-Insurance Reserves
We maintain a self-insured group medical program. The program contains individual stop loss thresholds of $300 thousand per incident and aggregate stop
loss thresholds based upon the average number of employees enrolled in the program throughout the year. The amount in excess of the self-insured levels is
fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering historical claims experience and medical
cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends.
We are self-insured for workers’ compensation and automobile liability to deductibles or self-insured retentions of $500 thousand per occurrence. The
amounts in excess of our deductibles are fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering
historical claims experience and cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims
occurrences and could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Income Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex
tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various U.S. federal and state jurisdictions.
Jurisdictional tax law changes, increases or decreases in permanent
42
differences between book and tax items, accruals or adjustments of accruals for unrecognized tax benefits, and our change in the mix of earnings from these
taxing jurisdictions all affect the overall effective tax rate.
We estimate our ability to recover deferred tax assets within the jurisdiction from which they arise. This evaluation considers several factors, including
recent results of operations, scheduled reversal of deferred tax liabilities, future taxable income and tax planning strategies. As of December 24, 2021 and
December 25, 2020, we had valuation allowances of $2.0 million and $2.3 million, respectively, relating to certain net operating losses that may not be
realizable in the future based on taxable income forecasts and certain state net operating loss limitations.
Contingent Earn-out Liabilities
We account for contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and
continually remeasure the liability at each balance sheet date by recording changes in the fair value through our consolidated statements of operations. We
determine the fair value of contingent consideration based on future operating projections under various potential scenarios, including the use of Monte
Carlo simulations, and weight the probability of these outcomes. The ultimate settlement of contingent earn-out liabilities relating to business combinations
may be for amounts which are materially different from the amounts initially recorded and may cause volatility in our results of operations.
Management has discussed the development and selection of these critical accounting policies with our board of directors, and the board of directors has
reviewed the above disclosure. Our consolidated financial statements contain other items that require estimation, but are not as critical as those discussed
above. These other items include our calculations for bonus accruals, depreciation and amortization. Changes in estimates and assumptions used in these
and other items could have an effect on our consolidated financial statements.
Recent Accounting Pronouncements
See Note 1 “Operations and Basis of Presentation” to our consolidated financial statements for a full description of recent accounting pronouncements
including the respective expected dates of adoption and expected effects on our consolidated financial statements.
43
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate market risk relates primarily to our long-term debt. The Company has various floating- and fixed-rate debt instruments as
described in Note 9 “Debt Obligations” to our consolidated financial statements. As of December 24, 2021, we had an aggregate $188.7 million of floating-
rate indebtedness. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately $1.4 million per annum,
holding other variables constant.
44
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Stamford, Connecticut, PCAOB ID#243)
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive (Loss) Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
45
Page
46
48
49
50
51
52
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
The Chefs’ Warehouse, Inc.
Ridgefield, CT
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Chefs’ Warehouse, Inc. (the “Company”) and subsidiaries as of December 24, 2021
and December 25, 2020, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 24, 2021, and the related notes. In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 24, 2021 and December 25, 2020, and the results of its operations and its cash flows
for each of the three years in the period ended December 24, 2021, in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's
internal control over financial reporting as of December 24, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 22, 2022 expressed an unqualified
opinion thereon.
Basis for Opinions
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
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.
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter 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 matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Notes
As described in Notes 2 and 9 to the consolidated financial statements, the Company issued $50.0 million aggregate principal amount of 1.875%
Convertible Senior Notes (the “Notes”) due 2024 in a private placement. In accounting for the issuance of the Notes, the Company concluded that were no
potential derivatives that should be accounted for separately.
We identified the accounting evaluation of the Notes as a critical audit matter. The principal considerations for our determination were: (i) the evaluation of
the contract terms and conditions in accordance with the appropriate existing and recently adopted accounting literature, and (ii) the evaluation of the
potential derivatives that may require bifurcation from the debt instrument and evaluation of the appropriate accounting treatment. Auditing these elements
involved especially
46
challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skills or
knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
Utilizing personnel with specialized skills and knowledge in valuation approach and methodologies to assist in: (i) evaluating relevant contract
terms and conditions of the Notes in relation to the appropriate existing and recently adopted accounting literature, and (ii) assessing the appropriateness of
conclusions reached by the Company with respect to the evaluation of potential derivatives, bifurcation, and accounting treatment for the Notes.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2006.
Stamford, CT
February 22, 2022
47
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
December 24,
2021
December 25,
2020
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $20,260 in 2021 and $24,027 in 2020
Inventories, net
Prepaid expenses and other current assets
Total current assets
Equipment, leasehold improvements and software, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Deferred taxes, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Short-term operating lease liabilities
Accrued compensation
Current portion of long-term debt
Total current liabilities
Long-term debt, net of current portion
Operating lease liabilities
Other liabilities and deferred credits
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred Stock - $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 24,
2021 and December 25, 2020, respectively
Common Stock, - $0.01 par value, 100,000,000 shares authorized, 37,887,675 and 37,274,768 shares issued
and outstanding at December 24, 2021 and December 25, 2020, respectively
Additional paid in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the consolidated financial statements.
48
$
$
$
$
115,155 $
172,540
144,491
37,774
469,960
133,622
130,701
221,775
104,743
9,380
3,614
1,073,795 $
118,284 $
35,390
15,882
22,321
5,141
197,018
394,160
127,296
5,110
723,584
—
380
314,242
(2,022)
37,611
350,211
1,073,795 $
193,281
96,383
82,519
33,479
405,662
115,448
115,224
214,864
111,717
7,535
3,875
974,325
57,515
27,924
17,167
9,401
6,095
118,102
398,084
109,133
4,416
629,735
—
373
303,734
(2,051)
42,534
344,590
974,325
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Amounts in thousands, except share and per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating expenses, net
Operating income (loss)
Interest expense
(Loss) income before income taxes
Provision for income tax (benefit) expense
Net (loss) income
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
December 24,
2021
Fiscal Years Ended
December 25,
2020
December 27,
2019
$
$
$
$
$
1,745,757 $
1,355,272
390,485
379,252
422
10,811
17,587
(6,776)
(1,853)
(4,923) $
1,111,631 $
863,480
248,151
336,394
14,417
(102,660)
20,946
(123,606)
(40,703)
(82,903) $
29
(4,894) $
(3)
(82,906) $
(0.13) $
(0.13) $
(2.46) $
(2.46) $
1,591,834
1,205,266
386,568
329,542
6,359
50,667
18,264
32,403
8,210
24,193
173
24,366
0.82
0.81
36,744,304
36,744,304
33,716,157
33,716,157
29,532,342
30,073,338
See accompanying notes to the consolidated financial statements.
49
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Fiscal Years Ended December 24, 2021, December 25, 2020, and December 27, 2019
(Amounts in thousands, except share amounts)
Common Stock
Amount
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Balance December 28, 2018
Cumulative effect adjustment
Net income
Stock compensation
Option exercises
Cumulative translation adjustment
Shares surrendered to pay withholding
taxes
Balance December 27, 2019
Net income
Stock compensation
Public offering
Cumulative translation adjustment
Shares surrendered to pay withholding
taxes
Balance December 25, 2020
Net loss
Stock compensation
Warrants issued for acquisition
Cumulative translation adjustment
Shares surrendered to pay withholding
taxes
Balance December 24, 2021
Shares
29,968,483 $
—
—
329,338
76,169
—
(32,049)
30,341,941 $
—
500,100
6,634,615
—
(201,888)
37,274,768 $
—
679,330
—
—
(66,423)
37,887,675 $
300 $
—
—
3
1
—
—
304 $
—
5
66
—
(2)
373 $
—
7
—
—
—
380 $
207,326 $
—
—
4,396
1,540
—
(1,022)
212,240 $
—
9,287
85,875
—
(3,668)
303,734 $
—
11,472
1,120
—
(2,084)
314,242 $
(2,221) $
—
—
—
—
173
—
(2,048) $
—
—
—
(3)
—
(2,051) $
—
—
—
29
—
(2,022) $
103,271 $
(2,027)
24,193
—
—
—
—
125,437 $
(82,903)
—
—
—
—
42,534 $
(4,923)
—
—
—
—
37,611 $
308,676
(2,027)
24,193
4,399
1,541
173
(1,022)
335,933
(82,903)
9,292
85,941
(3)
(3,670)
344,590
(4,923)
11,479
1,120
29
(2,084)
350,211
See accompanying notes to the consolidated financial statements.
50
THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 24, 2021, December 25, 2020, and December 27, 2019
(Amounts in thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
activities:
December 24,
2021
December 25,
2020
December 27,
2019
$
(4,923) $
(82,903) $
24,193
Depreciation and amortization
Amortization of intangible assets
Provision for allowance for doubtful accounts
Non-cash operating lease expense
(Benefit) provision for deferred income taxes
Amortization of deferred financing fees
Stock compensation
Change in fair value of contingent earn-out liabilities
Intangible asset impairment
Loss on asset disposal
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable, accrued liabilities and accrued compensation
Other assets and liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Cash paid for acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Payment of debt, finance lease and other financing obligations
Proceeds from the issuance of common stock, net of issuance costs
Proceeds from debt issuance
Payment of deferred financing fees
Proceeds from exercise of stock options
Surrender of shares to pay withholding taxes
Cash paid for contingent earn-out liabilities
Borrowings under asset based loan facility
Payments under asset based loan facility
Net cash (used in ) provided by financing activities
Effect of foreign currency on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
21,998
12,967
(422)
1,402
(1,845)
2,299
11,479
(1,296)
597
193
(70,777)
(60,799)
(2,183)
71,519
(108)
(19,899)
(38,801)
(10,190)
(48,991)
(37,610)
—
51,750
(1,450)
—
(1,829)
(83)
—
(20,000)
(9,222)
19,774
13,502
21,372
689
(18,418)
3,426
9,292
(11,479)
24,200
151
77,590
49,050
(18,240)
(46,442)
1,317
42,881
(7,036)
(60,932)
(67,968)
(40,432)
85,941
—
(856)
—
(3,670)
(2,927)
100,000
(60,000)
78,056
(14)
(78,126)
193,281
115,155 $
79
53,048
140,233
193,281 $
$
13,328
12,663
4,981
2,043
2,063
2,168
4,399
5,879
—
101
(13,213)
(9,439)
(1,813)
3,775
(6,121)
45,007
(16,077)
(28,077)
(44,154)
(1,894)
—
150,000
(5,082)
1,541
(1,022)
(2,412)
—
(44,184)
96,947
23
97,823
42,410
140,233
See accompanying notes to the consolidated financial statements.
51
THE CHEFS’ WAREHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. The Company’s business consists of three operating segments: East Coast, Midwest and West
Coast that aggregate into one reportable segment, food product distribution, which is concentrated 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 and specialty food stores.
The COVID-19 Pandemic
The COVID-19 pandemic (the “Pandemic”), has had and continues to have an adverse impact on numerous aspects of the Company’s business and those of
its customers including, but not limited to, demand for the Company’s products, cost inflation and labor shortages.
The future impact of the Pandemic on the Company’s business, operations and liquidity is difficult to predict at this time and is highly dependent 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.
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.
Guidance Adopted in Fiscal 2021
Simplifying the Accounting for Income Taxes: In December 2019, the Financial Accounting Standards Board (the “FASB”) issued guidance that eliminates
certain exceptions related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and other
simplifications and clarifications. As a result of the new guidance, the Company may recognize additional income tax benefits during interim periods in
which interim losses exceed full year projections due to provisions in the guidance that remove loss limitation rules. This guidance was adopted on
December 26, 2020 and adoption had an immaterial impact on the Company’s consolidated financial statements.
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: In August 2020, the FASB issued guidance that simplifies the accounting
models for financial instruments with characteristics of debt and equity. The amendments in the guidance result in fewer instances in which an embedded
conversion feature must be accounted for separately from its host contract. This guidance will be effective for fiscal years beginning after December 15,
2021. This guidance was adopted on December 26, 2020 and adoption did not impact the Company’s consolidated financial statements.
Guidance Not Yet Adopted
There is no recent accounting guidance not yet adopted that is expected to have a material impact on the Company’s financial statements when adopted.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles requires it to make
estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Estimates
are used in determining, among other items, the allowance for doubtful accounts, inventory valuation adjustments, self-insurance reserves for group
medical insurance, workers’ compensation insurance and automobile liability insurance, future cash flows associated with impairment testing for intangible
52
assets (including goodwill) and long-lived assets, useful lives for intangible assets, stock-based compensation, contingent earn-out liabilities and tax
reserves. Actual results could differ from 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 20 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 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:
Center-of-the-Plate
Dry Goods
Pastry
Cheeses and Charcuterie
Produce
Dairy and Eggs
Oils and Vinegars
Kitchen Supplies
Total
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
$
$
877,060
238,758
178,352
143,048
120,759
79,512
71,369
36,899
1,745,757
50.2 % $
13.7 %
10.2 %
8.2 %
6.9 %
4.6 %
4.1 %
2.1 %
100 % $
533,813
150,631
135,913
107,915
80,920
38,172
40,389
23,878
1,111,631
48.0 % $
13.6 %
12.2 %
9.7 %
7.3 %
3.4 %
3.6 %
2.2 %
100 % $
711,980
260,976
221,041
158,834
17,955
110,740
80,155
30,153
1,591,834
44.7 %
16.4 %
13.9 %
10.0 %
1.1 %
7.0 %
5.0 %
1.9 %
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.
Deferred Revenue
Certain customer arrangements in the Company’s direct-to-consumer business, prepaid gift plans and gift card purchases, result in deferred revenues when
cash payments are received in advance of performance. The Company recognizes revenue on its prepaid gift plans when control of each product is
transferred to the customer. Performance obligations under the Company’s prepaid gift plans are satisfied within a period of twelve months or less. Gift
cards issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards at the time gift cards are sold and the
liability is reduced when the card is redeemed, the value of the card is escheated to the appropriate government agency, or through breakage. Gift card
breakage is estimated based on the Company’s historical redemption experience and expected trends in redemption patterns. Amounts recognized through
breakage represent the portion of the gift card liability that is not subject to unclaimed property laws and for which the likelihood of redemption is remote.
The Company recorded deferred revenues, reflected as accrued liabilities on the Company’s consolidated balance sheets, of $2,294 and $2,558 as of
December 24, 2021 and December 25, 2020, respectively.
Right of Return
The Company’s standard terms and conditions provide customers with a right of return if the goods received are not merchantable. Customers are either
issued a replacement order at no cost, or are issued a credit for the returned goods. The Company recorded a refund liability of $389 and $174 as
of December 24, 2021 and December 25, 2020, respectively. Refund liabilities are reflected as accrued liabilities on the Company’s consolidated balance
sheets. The Company recognized a
53
corresponding asset of $238 and $107 as of December 24, 2021 and December 25, 2020, respectively, for its right to recover products from customers on
settling its refund liabilities. This asset is reflected as inventories, net on the Company’s consolidated balance sheets.
Contract Costs
Sales commissions are expensed when incurred because the amortization period is one year or less. These costs are presented within selling, general and
administrative expenses on the Company’s consolidated statements of operations.
Cost of Sales
The Company records cost of sales based upon the net purchase price paid for a product, including applicable freight charges incurred to deliver the
product to the Company’s warehouse, and 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 $28,374,
$18,682 and $19,785 for fiscal 2021, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include facilities costs, product shipping and handling costs, warehouse costs, and other selling, general and
administrative costs. Shipping and handling costs included in selling, general and administrative expenses were $98,697, $78,152 and $85,620 for fiscal
2021, 2020 and 2019, respectively.
Other Operating Expenses
Other operating expenses includes expenses primarily related to changes in the fair value of the Company’s earn-out liabilities, gains and losses on asset
disposals, asset impairments and certain third-party deal costs incurred in connection with business acquisitions or financing arrangements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents. The Company periodically
maintains balances at financial institutions which may exceed Federal Deposit Insurance Corporation insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Accounts Receivable
Accounts receivable consist of trade receivables from customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful
accounts is determined based upon a number of specific criteria, such as whether a customer has filed for or been placed into bankruptcy, has had accounts
referred to outside parties for collections or has had accounts significantly past due. The allowance also covers short paid invoices the Company deems to
be uncollectable as well as a portion of trade accounts receivable balances projected to become uncollectable based upon historic patterns and macro-
economic factors in existence as of the balance sheet date that may impact the food-away-from-home industry and/or its customers, and specifically,
beginning in the first quarter of fiscal 2020, the impact of the Pandemic.
Inventories
Inventories consist primarily of finished goods, food and related food products held for resale and are valued at the lower of cost or market. Our different
entities record inventory using a mixture of first-in, first-out and average cost, which we believe approximates first-in, first-out. The Company adjusts
inventory balances for excess and obsolete inventories to approximate their net realizable value.
Vendor Rebates and Other Promotional Incentives
The Company receives consideration and product purchase credits from certain vendors that the Company accounts for as a reduction of cost of sales.
There are several types of cash consideration received from vendors. The purchase incentive is primarily in the form of a specified amount per pound or per
case, or an amount for year-over-year growth. For the fiscal years
54
ended December 24, 2021, December 25, 2020 and December 27, 2019, the recorded purchase incentives totaled approximately $20,296, $12,678 and
$21,769, respectively.
Concentrations of Credit Risks
Financial instruments that subject the Company to concentrations of credit risk consist of cash, temporary cash investments and trade receivables. The
Company’s policy is to deposit its cash and temporary cash investments with major financial institutions. The Company distributes its food and related
products to a customer base that consists primarily of leading menu-driven independent restaurants, fine dining establishments, country clubs, hotels,
caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers’ financial conditions. The Company generally does not require collateral. However, the Company, in certain
instances, has obtained personal guarantees from certain customers. There is no significant balance with any individual customer.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are depreciated on a straight-line basis over the shorter of the estimated useful life of the
asset or the lease term. Equipment and leasehold improvements are reviewed for impairment in accordance with ASC 360-10-35-15, “Impairment or
Disposal of Long-Lived Assets” which only requires testing whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. If any indicators are present, a recoverability test is performed by comparing the carrying amount of the asset to the net
undiscounted cash flows expected to be generated from the asset. If the net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not
recoverable), an additional step is performed that determines the fair value of the asset and the Company records an impairment, if any. The adverse impact
to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the first quarter of fiscal
2020, and accordingly, the Company performed a long-lived asset recoverability test as of March 27, 2020 the results of which indicated no impairment.
The Company has not recorded any impairment of equipment and leasehold improvements in fiscal 2021, 2020 or 2019.
Leases
The Company leases various distribution centers, office facilities, vehicles and equipment. The Company determines if an arrangement contains a lease at
contract inception. An arrangement is or contains a lease if the agreement identifies an asset, implicitly or explicitly, that the Company has the right to use
over a period of time. If an arrangement contains a lease, the Company classifies the lease as either an operating lease or as a finance lease based on the
five criteria defined in ASC 842.
Lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. The corresponding
right-of-use (“ROU”) asset is recognized for the same amount as the lease liability adjusted for any payments made at or before the commencement date,
any lease incentives received, and any initial direct costs. The Company’s lease agreements may include options to renew, extend or terminate the lease.
These clauses are included in the initial measurement of the lease liability when at lease commencement the Company is reasonably certain that it will
exercise such options. The discount rate used is based on the Company’s incremental borrowing rate since the implicit rate in the Company’s leases is not
readily determinable.
Operating lease expense is recognized on a straight-line basis over the lease term and presented within selling, general and administrative expenses on the
Company’s consolidated statements of operations. Finance lease ROU assets are amortized on a straight-line basis over the shorter of the useful life of the
asset or the lease term. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest
expense on the Company’s consolidated statements of operations. Variable rent payments related to both operating and finance leases are expensed as
incurred. The Company’s variable lease payments primarily consist of real estate taxes, maintenance and usage charges. The Company made an accounting
policy election to combine lease and non-lease components (maintenance, taxes and insurance) when measuring lease liabilities for vehicle and equipment
leases.
The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date,
it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.
55
Software Costs
The Company capitalizes certain computer software licenses and software implementation costs that are included in software costs in its consolidated
balance sheets. These costs were incurred in connection with developing or obtaining computer software for internal use if it has a useful life in excess of
one year, in accordance with Accounting Standards Codification (“ASC”) 350-40 “Internal-Use Software.” Subsequent additions, modifications or
upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task that it previously did not perform. Internal
use software is amortized on a straight-line basis over a three to seven year period. Capitalized costs include direct acquisitions as well as software and
software development acquired under capitalized leases and internal labor where appropriate. Capitalized software purchases and related development
costs, net of accumulated amortization, were $14,780 at December 24, 2021 and $14,087 at December 25, 2020.
Convertible Debt
The Company evaluates debt instruments with embedded conversion features in accordance with ASC 815 “Derivatives and Hedging” and ASC 470
“Debt” both of which provide several criteria that determine whether a conversion feature must be bifurcated from its debt host and accounted as a separate
financial instrument. An entity is not required to bifurcate if the conversion feature is indexed to its own stock, meets all equity classification criteria and
does not contain a beneficial conversion feature. The Company determined that bifurcation of its convertible debt instruments was not required and
recognized the principal amount of these instruments as debt in its consolidated balance sheets.
Debt Issuance Costs
Certain up-front costs associated with the Company’s asset based loan facility are capitalized and included in other non-current assets in the Company’s
consolidated balance sheets. The Company had $460 and $826 of such unamortized costs as of December 24, 2021 and December 25, 2020, respectively.
Costs associated with the issuance of other debt instruments are capitalized and presented as a direct deduction from the carrying amount of the underlying
debt liability. The Company had $4,976 and $7,172 of such unamortized costs as of December 24, 2021 and December 25, 2020, respectively. These costs
are amortized over the terms of the related debt instruments by the effective interest rate method. Amortization of debt issuance costs was $2,299 for the
fiscal year ended December 24, 2021, $3,426 for the fiscal year ended December 25, 2020 and $2,168 for the fiscal year ended December 27, 2019.
Business Combinations
The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed are recorded in the
accompanying consolidated balance sheets at their estimated fair values, as of the acquisition date. The excess of the purchase price over the fair values of
identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are
expensed as incurred and presented in operating expenses in the Company’s consolidated results of operations. Results of operations are included in the
Company’s financial statements from the date of acquisition.
Intangible Assets
The intangible assets recorded by the Company consist of customer relationships, covenants not to compete and trademarks which are amortized over their
useful lives on a schedule that approximates the pattern in which economic benefits of the intangible assets are consumed. Intangible assets with finite lives
are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If any indicators are
present, a recoverability test is performed by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from
the asset. Undiscounted cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. If
the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted
cash flow model. The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering
events during the first quarter of fiscal 2020, and accordingly, the Company performed a long-lived asset recoverability test as of March 27, 2020 the
results of which indicated no impairment.
During the second quarter of fiscal 2021, the Company recorded a $597 impairment charge, $433 net of tax, to fully write-down the net book value of its
Cambridge trademark. During the fourth quarter of fiscal 2020, the Company recorded a $24,200 impairment charge, $17,545 net of tax, to write-down the
value of its Del Monte and Bassian Farms trademarks. These
56
impairment charges are presented within other operating expenses on the consolidated statements of operations. See Note 8 for more information.
There have been no other events or changes in circumstances during fiscal 2021, 2020 or 2019, indicating that the carrying value of the Company’s finite-
lived intangible assets are not recoverable.
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of identifiable net assets acquired in accordance with ASC 350, “Intangibles-
Goodwill and Other.” The Company’s business consists of three operating segments: East Coast, Midwest and West Coast and these operating segments
represent our reporting units. The Company evaluates the recoverability of goodwill at each of its reporting units annually in the fourth quarter, or more
frequently when circumstances indicate an impairment may have occurred. A goodwill impairment loss, if any, would be recognized for the amount by
which a reporting unit’s carrying value exceeded its fair value. The Company has the option to evaluate goodwill impairment using a qualitative or
quantitative analysis.
The adverse impact to the Company’s customer base and market capitalization at the onset of the Pandemic were considered triggering events during the
first quarter of fiscal 2020, and accordingly, the Company performed an interim goodwill impairment test as of March 27, 2020, the results of which
indicated no impairment.
For its annual goodwill impairment test performed during the fourth quarter of fiscal 2020, the Company tested goodwill for impairment using a
quantitative analysis. The Company estimated the fair value of its reporting units using an income approach and determined the fair value of its reporting
units substantially exceeded their respective carry values. The Company’s income approach incorporates the use of a discounted cash flow methodology
that involves many management assumptions that are based upon future growth projections which include estimates for the duration of the Pandemic’s
impact on the Company’s customers. Assumptions include estimates of future revenue based upon budget projections and growth rates. The Company
develops estimates of future levels of gross and operating profits and projected capital expenditures. This methodology includes the use of estimated
discount rates based upon industry and competitor analysis as well as other factors. The Company also performed a reconciliation of its market
capitalization and the estimate of the aggregate fair value of its reporting units, including consideration of a control premium.
For the fiscal years ended December 24, 2021 and December 27, 2019, the Company assessed the recoverability of goodwill using a qualitative analysis
and determined that it is more likely than not that the fair value of its reporting units exceeded their respective carry values. The qualitative analysis
considered various factors including macroeconomic conditions, market conditions, industry trends, cost factors and financial performance, among others.
There have been no events or changes in circumstances, other than the onset of the Pandemic, during fiscal 2021, 2020 or 2019, indicating that goodwill
may be impaired.
Employee Benefit Programs
The Company sponsors a defined contribution plan covering substantially all full-time employees (the “401(k) Plan”). The Company recognized expense
related to the 401(k) Plan totaling $683, $720 and $1,268, respectively, for fiscal 2021, 2020 and 2019.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets or liabilities are recorded to reflect the future
tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts
are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse. The Company estimates
its ability to recover deferred tax assets within the jurisdiction from which they arise. This evaluation considers several factors, including results of recent
operations, future taxable income, scheduled reversal of deferred tax liabilities, and tax planning strategies. As of December 24, 2021 and December 25,
2020, the Company had valuation allowances of $2,046 and $2,261, respectively, relating to certain net operating losses that may not be realizable in the
future based on taxable income forecasts and certain state net operating loss limitations.
The Company follows certain provisions of ASC 740, “Income Taxes” which established a single model to address accounting for uncertain tax positions
and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a
57
tax position is required to meet before being recognized in the financial statements. The Company evaluates uncertain tax positions, if any, by determining
if it is more likely than not to be sustained upon examination by the tax authorities. The Company records uncertain tax positions when it is estimable and
probable that such liabilities have been incurred. The Company, when required, will accrue interest and penalties related to income tax matters in income
tax expense. The Company releases disproportionate tax effects from accumulated other comprehensive income as individual items are liquidated.
Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under
contractual and other commercial obligations. The Company recognizes liabilities for contingencies and commitments when a loss is probable and can be
reasonably estimated.
Contingent Earn-out Liabilities
The Company accounts for contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the
acquisition and continually remeasures the liability at each balance sheet date by recording changes in the fair value through the consolidated statements of
operations. The Company determines the fair value of contingent consideration based on future operating projections under various potential scenarios,
including the use of Monte Carlo simulations, and weighs the probability of these outcomes. The ultimate settlement of contingent earn-out liabilities
relating to business combinations may be for amounts which are materially different from the amounts initially recorded and may cause volatility in the
Company’s results of operations.
Stock-Based Compensation
The Company measures stock-based compensation at the grant date based on the fair value of the award. Restricted stock awards (“RSAs”) and
performance share units are valued based on the fair value of the stock on the grant date. The related compensation expense is recognized over the service
period on a straight-line basis and reduced by forfeitures when they occur. Compensation expense on performance share units reflects the estimated
probable outcome at the end of the performance period. The fair value of stock options and RSAs with market conditions is determined based on a Monte
Carlo simulation in order to simulate a range of possible future stock prices for the Company’s common stock. For awards subject to graded vesting, the
Company ensures that the compensation expense recognized is at least equal to the vested portion of the award.
Self-Insurance Reserves
The Company maintains a self-insured group medical program. The program contains individual stop loss thresholds of $300 per incident and aggregate
stop loss thresholds based upon the average number of employees enrolled in the program throughout the year. The amount in excess of the self-insured
levels is fully insured by third party insurers. Liabilities associated with this program are estimated in part by considering historical claims experience and
medical cost trends. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends.
The Company maintains an insurance program for its automobile liability and workers’ compensation insurance subject to deductibles or self-insured
retentions of $500 per occurrence. The amounts in excess of the deductibles are fully insured by third party insurers. Liabilities associated with this
program are estimated in part by considering historical claims experience and cost trends. Projections of future loss expenses are inherently uncertain
because of the random nature of insurance claims occurrences and could be significantly affected if future occurrences and claims differ from these
assumptions and historical trends.
Assets and Liabilities Measured at Fair Value
The Company accounts for certain assets and liabilities at fair value. The Company categorizes each of its fair value measurements in one of the following
three levels based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities include the following:
a) quoted prices for similar assets in active markets;
58
b) quoted prices for identical or similar assets in inactive markets;
c)
d)
inputs other than quoted prices that are observable for the asset; and
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset.
Level 3 - Inputs to the valuation methodology are unobservable (i.e., supported by little or no market activity) and significant to the fair value measure.
Note 3 – Net (Loss) Income per Share
The following table sets forth the computation of basic and diluted earnings per share:
Net (loss) income per share:
Basic
Diluted
Weighted average common shares:
Basic
Diluted
Reconciliation of net (loss) income per common share:
Numerator:
Net (loss) income
Add effect of dilutive securities:
Interest on convertible notes, net of tax
Adjusted net (loss) income
Denominator:
Weighted average basic common shares outstanding
Dilutive effect of unvested common shares
Dilutive effect of stock options and warrants
Dilutive effect of convertible notes
Weighted average diluted common shares outstanding
$
$
$
$
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
(0.13) $
(0.13) $
(2.46) $
(2.46) $
36,744,304
36,744,304
33,716,157
33,716,157
0.82
0.81
29,532,342
30,073,338
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
(4,923) $
(82,903) $
—
(4,923) $
—
(82,903) $
36,744,304
—
—
—
36,744,304
33,716,157
—
—
—
33,716,157
24,193
207
24,400
29,532,342
144,311
66,739
329,946
30,073,338
Potentially dilutive securities that have been excluded from the calculation of diluted net (loss) income per common share because the effect is anti-dilutive
are as follows:
Restricted share awards
Stock options and warrants
Convertible notes
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
306,084
139,198
4,410,639
505,568
115,639
3,484,788
132,861
—
76,384
59
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. 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. The Pandemic’s impact on the Company’s revenue growth and profitability resulted in a
significant reduction in the fair value of its contingent earn-out liabilities. Changes in the fair value of contingent earn-out liabilities are reflected in other
operating expenses on the Company’s consolidated statements of operations.
The following table presents the changes in Level 3 contingent earn-out liabilities:
Balance December 27, 2019
Acquisition value
Cash payments
Changes in fair value
Balance December 25, 2020
Acquisition value
Cash payments
Changes in fair value
Balance December 24, 2021
Fells Point
Bassian
Sid Wainer
Other
Acquisitions
Total
$
$
4,544 $
—
—
(4,544)
—
—
—
—
— $
7,957 $
—
(2,250)
(4,631)
1,076
—
—
57
1,133 $
— $
2,081
—
(1,570)
511
—
—
(511)
— $
2,197 $
1,383
(1,677)
(734)
1,169
5,500
(83)
(842)
5,744 $
14,698
3,464
(3,927)
(11,479)
2,756
5,500
(83)
(1,296)
6,877
The long-term portion of contingent earn-out liabilities was $3,252 and $2,556 as of December 24, 2021 and December 25, 2020, respectively, and are
reflected as other liabilities and deferred credits on the Company’s consolidated balance sheets. The remaining short-term portion of earn-out liabilities are
reflected as accrued liabilities on the Company’s consolidated balance sheets. Contingent earn-out liability payments in excess of the acquisition date fair
value of the underlying contingent earn-out liability are classified as operating activities on the Company’s consolidated statements of cash flows and all
other such payments are classified as financing activities.
Fair Value of Financial Instruments
The carrying amounts reported in the Company’s consolidated balance sheets for accounts receivable and accounts payable approximate fair value due to
the immediate to short-term nature of these financial instruments. The fair values of the asset based loan facility and term loan approximated their book
values as of December 24, 2021 and December 25, 2020 as these instruments had variable interest rates that reflected current market rates available to the
Company.
The following table presents the carrying value and fair value of the Company’s convertible notes (more fully described in Note 9). In estimating the fair
value of its 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 options. 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 estimates.
Convertible Senior Notes
Convertible Unsecured Note
Note 5 – Acquisitions
December 24, 2021
December 25, 2020
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
200,000 $
4,000 $
206,182 $
4,102 $
150,000 $
4,000 $
163,204
4,290
During fiscal 2021, the Company completed three acquisitions for an aggregate purchase price of approximately $11,310, consisting of $10,190 paid in
cash, subject to customary working capital adjustments, and common stock warrants of $1,120. The Company will also pay additional contingent
consideration, if earned, in the form of earn-out amounts which could total $9,750 in aggregate. The Company is in the process of finalizing valuations of
tangible and intangible assets as of the
60
acquisition dates. When applicable, these valuations require the use of Level 3 inputs. Goodwill for these acquisitions will be amortized over 15 years for
tax purposes.
The Company reflected net sales and loss before taxes in its consolidated statement of operations related to the fiscal 2021 acquisitions as follows:
Net sales
Loss before income taxes
Fiscal Year Ended
December 24, 2021
$
$
49,485
(44)
Pro forma financial information for these acquisitions are not presented because the effect of these acquisition are not material to the Company’s results of
operations.
Sid Wainer
On January 27, 2020, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets, including certain real-estate assets, of
Sid Wainer & Son (“Sid Wainer”), a specialty food and produce distributor in New England. The final purchase price was approximately $44,081,
consisting of $46,450 paid in cash at closing, partially offset by a $2,369 net working capital true-up. The Company will also pay additional contingent
consideration, if earned, in the form of an earn-out amount which could total $4,000 over a two-year period. The payment of the earn-out liability is subject
to the successful achievement of certain gross profit targets.
Trademarks were valued at fair value using Level 3 inputs and are being amortized over 15 years. Goodwill for the Sid Wainer acquisition will be
amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established specialty food and produce
distributor to leverage the Company’s existing products in the markets served by Sid Wainer, to supply Sid Wainer’s produce offerings to the Company’s
metro New York market and any intangible assets that do not qualify for separate recognition.
Bassian
On February 25, 2019, pursuant to an asset purchase agreement, the Company acquired substantially all of the assets of Bassian Farms, Inc. and certain
affiliated entities (“Bassian”), a specialty center-of-the-plate distributor based in northern California. The aggregate purchase price for the transaction was
approximately $31,777, including $27,990 paid in cash at closing and the issuance of a $4,000 unsecured convertible note, partially offset by the settlement
of a net working capital true-up. The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could
total $9,000 over a four-year period. The payment of the contingent earn-out liability is subject to the successful achievement of certain gross profit targets.
Customer relationships, non-compete agreements and trademarks are valued at fair value using Level 3 inputs and are being amortized
over 15, 5 and 10 years, respectively. Goodwill for the Bassian acquisition is being amortized over 15 years for tax purposes. The goodwill recorded
primarily reflects the value of acquiring an established center-of-the-plate distributor to grow the Company's center-of-the-plate product category in the
West Coast region, as well as any intangible assets that do not qualify for separate recognition.
61
The table below sets forth the purchase price allocation of these and other acquisitions:
Current assets
Customer relationships
Trademarks
Non-compete agreements
Goodwill
Fixed assets
Other assets
Right-of-use assets
Lease liabilities
Current liabilities
Earn-out liability
Other long-term liabilities
Issuance of warrants
Total consideration
Sid Wainer
Bassian
Other Acquisitions
$
$
22,960 $
—
3,500
—
11,571
19,425
—
8,259
(8,259)
(11,294)
(2,081)
—
—
44,081 $
6,657 $
15,530
4,610
1,000
13,065
856
10
—
—
(2,501)
(7,450)
—
—
31,777 $
14,244
11,067
2,812
—
13,636
1,433
—
2,787
(2,787)
(6,449)
(7,783)
(499)
(1,120)
27,341
The Company recognized professional fees of $450, $435 and $235 in other operating expenses related to acquisition activities in fiscal 2021, 2020 and
2019, respectively. During the years ended December 24, 2021, December 25, 2020, and December 27, 2019, the Company also paid
approximately $10,190, $16,851, and $300 respectively, on other strategic acquisitions.
Note 6 – Inventories
Inventories consist primarily of finished product. Our entities record inventory using a mixture of first-in, first-out and average cost, which we believe
approximates first-in, first-out. Inventory is reflected net of adjustments for shrinkage, excess and obsolescence totaling $8,312 and $9,013 at December 24,
2021 and December 25, 2020, respectively.
Note 7 – Equipment, Leasehold Improvements and Software
Equipment, leasehold improvements and software as of December 24, 2021 and December 25, 2020 consisted of the following:
Land
Buildings
Machinery and equipment
Computers, data processing and other equipment
Software
Leasehold improvements
Furniture and fixtures
Vehicles
Construction-in-process
Less: accumulated depreciation and amortization
Equipment, leasehold improvements and software, net
Useful Lives
Indefinite
20 years
5 - 10 years
3 - 7 years
3 - 7 years
1- 40 years
7 years
5 - 10 years
$
$
December 24, 2021
December 25, 2020
5,020 $
18,406
28,099
15,480
39,799
69,105
3,582
29,632
24,355
233,478
(99,856)
133,622 $
5,020
15,685
24,900
14,207
33,063
68,747
3,500
21,873
8,115
195,110
(79,662)
115,448
Construction-in-process at December 24, 2021 related primarily to the build-outs of the Company’s Los Angeles and Miami distribution facilities which are
expected to be completed in fiscal 2022 for approximately $20,000. Construction-in-process at December 25, 2020 related primarily to the implementation
of the Company’s Enterprise Resource Planning (“ERP”) system.
The net book value of equipment financed under finance leases at December 24, 2021 and December 25, 2020 was $10,874 and $14,705, respectively. No
interest expense was capitalized during the fiscal years ended December 24, 2021, December 25,
62
2020 and December 27, 2019.
The components of depreciation and amortization expense were as follows:
Depreciation expense
Software amortization
December 24, 2021
$
$
15,918 $
6,080 $
Fiscal Year Ended
December 25, 2020
December 27, 2019
14,984 $
4,790 $
9,535
3,793
Note 8 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are presented as follows:
Carrying amount as of December 27, 2019
Acquisitions
Foreign currency translation
Carrying amount as of December 25, 2020
Acquisitions
Foreign currency translation
Carrying amount as of December 24, 2021
$
$
197,743
17,104
17
214,864
6,845
66
221,775
Other intangible assets as of December 24, 2021 and December 25, 2020 consisted of the following:
Weighted Average
Remaining Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Amount
December 24, 2021
Customer relationships
Non-compete agreements
Trademarks
Total
December 25, 2020
Customer relationships
Non-compete agreements
Trademarks
Total
120 months
26 months
179 months
128 months
37 months
209 months
$
$
$
$
155,678 $
8,579
36,514
200,771 $
141,679 $
8,579
44,520
194,778 $
(74,644) $
(8,018)
(13,366)
(96,028) $
(55,135) $
(7,752)
(20,174)
(83,061) $
81,034
561
23,148
104,743
86,544
827
24,346
111,717
During the second quarter of fiscal 2021, the Company recorded a $597 impairment charge, $433 net of tax, to fully write-down the net book value of its
Cambridge trademark.
During fourth quarter of fiscal 2020, the Company committed to a plan to shift its brand strategy, to commence in the second quarter of fiscal 2021, to
leverage its Allen Brothers brand in its west coast region and determined its Del Monte, Ports Seafood and Bassian Farms trademarks did not fit the
Company’s long-term strategic objectives. The Company assessed these trademarks for impairment and used the relief of royalty method to determine fair
value. Significant assumptions used include future sales forecasts, royalty rates and discount rates. As a result of the assessment, the Company recorded a
$24,200 impairment charge, $17,545 net of tax, to write-down the value of its Del Monte and Bassian Farms trademarks. This impairment charge is
presented within other operating expenses on the consolidated statements of operations.
Amortization expense for other intangibles was $12,967, $13,502 and $12,663 for the fiscal years ended December 24, 2021, December 25, 2020 and
December 27, 2019, respectively.
63
As of December 24, 2021, estimated amortization expense for other intangible assets for each of the next five fiscal years and thereafter is as follows:
2022
2023
2024
2025
2026
Thereafter
Total
$
$
11,984
10,955
10,097
9,680
9,680
52,347
104,743
Note 9 – Debt Obligations
Debt obligations as of December 24, 2021 and December 25, 2020 consisted of the following:
December 24, 2021
December 25, 2020
Senior secured term loan
Convertible senior notes
Asset-based loan facility
Finance lease and other financing obligations
Convertible unsecured note
Deferred finance fees and original issue discount
Total debt obligations
Less: current installments
Total debt obligations excluding current installments
$
$
168,675 $
200,000
20,000
11,602
4,000
(4,976)
399,301
(5,141)
394,160 $
Maturities of the Company’s debt, excluding finance leases, for each of the next five years and thereafter at December 24, 2021 are as follows:
2022
2023
2024
2025
2026
Thereafter
Total
$
$
201,553
150,000
40,000
15,798
4,000
(7,172)
404,179
(6,095)
398,084
1,712
25,712
201,712
163,539
—
—
392,675
Senior Secured Term Loan Credit Facility
On June 22, 2016, the Company refinanced its debt structure by entering into a credit agreement (the “Term Loan Credit Agreement”) with a group of
lenders for which Jefferies Finance LLC acts as administrative agent and collateral agent. The Term Loan Credit Agreement provides for a senior secured
term loan B facility (the “Term Loan Facility”) in an aggregate amount of $305,000 (the loans outstanding under the Term Loan Facility, the “Term
Loans”) maturing on June 22, 2022. Additionally, the Term Loan Facility includes an accordion which permits the Company to request that the lenders
extend additional Term Loans in an aggregate principal amount of up to $50,000 (less the aggregate amount of certain indebtedness incurred to finance
acquisitions) plus an unlimited amount subject to the Company’s Total Leverage Ratio not exceeding 4.90:1.00 on a pro forma basis. Substantially all of the
Company’s assets are pledged as collateral. Borrowings were used to repay the Company’s senior secured notes, as well as the prior term loan and
revolving credit facility. Remaining funds were used for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the
Company.
On December 13, 2017, the Company completed a repricing of the Term Loan Facility to reduce Applicable Rate (as defined in the Term Loan Credit
Agreement) from 475 basis points to 400 basis points over the London Inter-bank Offered Rate (“LIBOR”). In connection with the repricing, the Company
paid debt financing costs of $761 which were capitalized as deferred financing charges.
64
On July 6, 2018, the Company made a $47,100 prepayment and was no longer required to make quarterly amortization payments on the Term Loans. On
November 16, 2018, the Company completed a repricing of the Term Loan Facility to reduce the Applicable Rate from 400 basis points to 350 basis points
over LIBOR. In connection with the repricing, the Company paid debt financing costs of $626 which were capitalized as deferred financing charges. The
Company wrote off unamortized deferred financing fees of $1,081 as a result of this repricing.
On June 8, 2020, the Company entered into a sixth amendment (the “Sixth Amendment”) to its Term Loan Credit Agreement. Upon the consent of the
lenders, the Sixth Amendment converted a portion of the term loans then outstanding of $238,129 (the “Term Loans”) into a new tranche of term loans (the
“2025 Tranche”) which among other things extended the maturity date by three years and increased the fixed-rate portion of interest charged by 200 basis
points. The portion of the Term Loans that did not convert (the “2022 Tranche”) retained the maturity date and interest rate in effect prior to the Sixth
Amendment. The Company made a prepayment of $35,719 on the 2025 Tranche immediately after it was established.
On March 1, 2021, the Company repaid all outstanding borrowings under the 2022 tranche of senior secured term loans.
The following table summarizes the key terms of the Term Loans as of December 24, 2021:
Term Loans
Principal Outstanding
2025 Tranche
$
168,675
Interest Rate
LIBOR + 5.5%
Maturity Date
June 22, 2025
Scheduled Principal Payments
0.25% per quarter
The 2025 Tranche has a springing maturity date of June 22, 2024 if, as of that date, the Company’s 1.875% convertible senior notes maturing on December
1, 2024 have not been repaid or refinanced by debt having a maturity date on or after December 23, 2025. The Sixth Amendment was accounted for as a
debt modification. The Company incurred lender fees of $856 which were capitalized as debt issuance costs. Third-party transaction costs of $1,233 were
expensed as incurred.
The interest charged on the Term Loans, will be equal to a spread plus, at the Company’s option, either the Base Rate (as defined in the Term Loan Credit
Agreement) or LIBOR for one, two, three, six or (if consented to by the lenders) twelve-month interest periods chosen by the Company. The interest rate on
the Term Loans at December 24, 2021 was 5.6%.
The Term Loan Facility contains affirmative covenants, negative covenants and events of default customary for a term loan B facility of this type, as more
particularly described in the Term Loan Credit Agreement. The Sixth Amendment introduced a minimum liquidity covenant which requires 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 Credit Agreement, is less than $10,000.
The Company had minimum liquidity, as defined in the Credit Agreement, of $225,886 as of December 24, 2021. On February 16, 2022, the Company
obtained unconditional waivers from its Term Loan and ABL lenders in connection with noncompliance with certain negative covenants under the
Company’s Term Loan Credit Agreement.
Asset-Based Loan Facility
On June 29, 2018, the Company entered into a credit agreement (the “ABL Credit Agreement”) with a group of lenders for which BMO Harris Bank, N.A.
acts as administrative agent. The ABL Credit Agreement provides for an asset-based loan facility (the “ABL”) in the aggregate amount of up to $150,000.
Borrowings under the ABL will be used, and are expected to be used, for capital expenditures, permitted acquisitions, working capital and general
corporate purposes of the Company. Availability under the ABL will be limited to a borrowing base equal to the lesser of: (i) the aggregate amount of
commitments or (ii) the sum of specified percentages of eligible receivables and eligible inventory, minus certain availability reserves. The co-borrowers
under the ABL are entitled on one or more occasions, subject to the satisfaction of certain conditions, to request an increase in the commitments under the
ABL in an aggregate principal amount of up to $25,000. The ABL matures on the earlier of June 29, 2023 and 90 days prior to the maturity date of the
Company’s Term Loan Facility. The Company incurred transaction costs of $877 which were capitalized as deferred financing fees to be amortized over
the term of the ABL.
The interest rate charged on borrowing under the ABL is equal to a spread plus, at the Company’s option, either the Base Rate (as defined in the ABL
Credit Agreement) or LIBOR (except for swingline loans) for one, two, three, six or (if consented to by the lenders) twelve-month, interest periods chosen
by the Company. The Company will pay certain recurring fees with respect to the ABL, including fees on unused lender commitments. The interest rate on
the ABL at December 24, 2021 was 1.4%.
65
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 falls below $10,000 or 10% of the borrowing base.
The Company had reserved $20,541 of the ABL for the issuance of letters of credit. As of December 24, 2021, funds totaling $109,459 were available for
borrowing under the ABL.
Convertible Senior Notes
On November 22, 2019, the Company issued $150,000 aggregate principal amount of 1.875% Convertible Senior Notes (the “Senior Notes”). The Senior
Notes were issued pursuant to an indenture, dated as of November 22, 2019 (the “Indenture”), between the Company and The Bank of New York Mellon
Trust Company, N.A., as trustee. Approximately $43,225 of the net proceeds were used to repay all borrowings then outstanding under the ABL and the
remainder was used for working capital, general corporate purposes and acquisitions. The Company incurred transaction costs of approximately $5,082
which were capitalized as deferred financing fees to be amortized over the term of the Senior Notes.
On March 1, 2021, the Company issued $50,000 aggregate principal amount of Senior Notes at a premium which were offered as an additional issuance
and under the same terms as the Senior Notes initially issued on November 22, 2019. Net proceeds were used to repay all outstanding borrowings under the
Company's 2022 tranche of senior secured term loans of $31,166 and repay a portion of borrowings outstanding under the Company’s ABL. The Company
incurred transaction costs of approximately $1,350 which were capitalized as deferred financing fees to be amortized over the term of the Convertible
Senior Notes due 2024. At December 24, 2021, the effective interest rate charged on the Company’s Convertible Senior Notes was approximately 2.3%.
The net carry value of the Company’s Convertible Senior Notes as of December 24, 2021 and December 25, 2020 was:
Principal amount outstanding
Unamortized deferred financing fees and premium
Net carry value
December 24, 2021
December 25, 2020
$
$
200,000 $
(2,686)
197,314 $
150,000
(3,999)
146,001
The components of interest expense on the Company’s Convertible Senior Notes were as follows:
Coupon interest
Amortization of deferred financing fees and premium
Total interest
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
$
$
$
3,594 $
913 $
4,507 $
2,813 $
1,000 $
3,813 $
234
83
317
The Senior Notes bear interest of 1.875% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2020.
At any time before the close of business on the scheduled trading day immediately before the maturity date, the Senior Notes will be convertible at the
option of holders into shares of the Company’s common stock, together with cash in lieu of any fractional share, at an initial conversion price of
approximately $44.20 per share. The conversion price is subject to adjustments upon the occurrence of certain events. The Senior Notes will mature on
December 1, 2024, unless earlier converted or repurchased in accordance with their terms.
The Company may not redeem the Senior Notes at its option prior to maturity. In addition, if the Company undergoes a fundamental change, as described
in the Indenture, holders may require the Company to repurchase for cash all or part of their Senior Notes at a repurchase price equal to 100% of the
principal amount of the Senior Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the required repurchase date.
Convertible Unsecured Note
On February 25, 2019, the Company issued a $4,000 convertible unsecured note (the “Unsecured Note”), maturing on June 29, 2023, to Bassian Farms,
Inc. (the “Holder”) as partial consideration in the Bassian acquisition. The interest rate charged on the Unsecured Note is 4.5% per annum and increases to
5.0% after the two-year anniversary of the closing date. The Company
66
may, in certain instances beginning eighteen months after issuance of the Unsecured Note, redeem the Unsecured Note in whole or in part for cash or
convert the Unsecured Note into shares of the Company’s common stock at the conversion price of $43.93 per share. After the two-year anniversary of the
closing date, the Holder may convert the Unsecured Note into shares of the Company’s common stock at the conversion price. Upon a change of control
event, the Holder may convert the Unsecured Note into shares of the Company’s common stock at the conversion price or redeem the Unsecured Note for
cash.
Note 10 – Stockholders’ Equity
Warrants
In connection with an acquisition during the second quarter of fiscal 2021, the Company issued warrants with a fair value of $1,120 to purchase up to
150,000 shares of the Company’s common stock at an exercise price of $31.96 per share. These warrants expire on April 22, 2024.
Preferred Stock Purchase Rights
On March 22, 2020, the Company’s board of directors approved a limited duration Preferred Stock Purchase Rights Agreement (the “Rights Agreement”).
Under the Rights Agreement, the board of directors approved a dividend of one preferred share purchase right (a “Right”) for each share outstanding share
of the Company’s common stock to purchase one one-thousandth of a share of Series A Preferred Stock of the Company at a price of $40.00 per Unit of
Preferred Stock, subject to adjustment as provided in the Rights Agreement. The Rights expired on March 21, 2021.
Public Common Stock Offering
On May 14, 2020, the Company completed a public offering of 5,769,231 shares of its common stock at a price of $13.00 per share to the underwriters, to
be reoffered by the underwriters at variable prices per share, which resulted in net proceeds of approximately $74,691 after deducting underwriters’ fees,
commissions and transaction expenses. In addition, the Company granted a 30-day option to purchase up to an additional 865,384 shares of its common
stock at a price of $13.00 per share to the underwriters, to be reoffered by the underwriters at variable prices per share. The option was fully exercised on
June 2, 2020 and resulted in additional proceeds of $11,250.
Equity Incentive Plan
On May 17, 2019, the Company’s stockholders approved the 2019 Omnibus Equity Incentive Plan (the “2019 Plan”). Concurrently, the 2011 Omnibus
Equity Incentive Plan (the “2011 Plan”) was terminated and any shares remaining available for new grants under the 2011 Plan share reserve were
extinguished. The purpose of the 2019 Plan is to promote the interests of the Company and its stockholders by (i) attracting and retaining key officers,
employees and directors of, and consultants to, the Company and its Subsidiaries and Affiliates; (ii) motivating such individuals by means of performance-
related incentives to achieve long-range performance goals; (iii) enabling such individuals to participate in the long-term growth and financial success of
the Company; (iv) encouraging ownership of stock in the Company by such individuals; and (v) linking their compensation to the long-term interests of the
Company and its stockholders.
The 2019 Plan is administered by the Compensation and Human Capital Committee (the “Committee”) of the Board of Directors and allows for the
issuance of stock options, stock appreciation rights (“SARs”), RSAs, restricted share units, performance awards, or other stock-based awards. Stock option
exercise prices are fixed by the Committee but shall not be less than the fair market value of a common share on the date of the grant of the option, except
in the case of substitute awards. Similarly, the grant price of an SAR may not be less than the fair market value of a common share on the date of the grant.
The Committee will determine the expiration date of each stock option and SAR, but in no case shall the stock option or SAR be exercisable after the
expiration of 10 years from the date of the grant. The 2019 Plan provides for 2,600,000 shares available for grant. As of December 24, 2021, there were
883,042 shares available for grant.
Stock compensation expense was $11,479, $9,292 and $4,399 for the fiscal years ended December 24, 2021, December 25, 2020 and December 27, 2019,
respectively. The related tax benefit for stock-based compensation was $49, $133 and $883 for the fiscal years ended December 24, 2021, December 25,
2020 and December 27, 2019, respectively.
67
The following table reflects the activity of RSAs during the fiscal year ended December 24, 2021:
Unvested at December 25, 2020
Granted
Vested
Forfeited
Unvested at December 24, 2021
Time-based
Performance-based
Market-based
Weighted
Average
Grant Date Fair
Value
Shares
Weighted
Average
Grant Date Fair
Value
Shares
Weighted
Average
Grant Date Fair
Value
Shares
901,318 $
377,154
(592,057)
(68,419)
617,996 $
16.14
31.89
12.14
27.36
28.33
— $
201,547
—
(14,110)
187,437 $
—
32.03
—
32.00
32.04
26,952 $
199,241
(24,981)
(16,083)
185,129 $
30.16
31.44
30.17
31.25
31.44
The fair value of RSAs vested during the fiscal years ended December 24, 2021, December 25, 2020 and December 27, 2019, was $7,848, $8,109 and
$3,742, respectively.
These awards are a mix of time-, market- and performance-based grants awarded to key employees and non-employee directors that generally vest over a
range of periods up to five-years. The market- and performance-based RSAs generally cliff vest, if at all, after the conclusion of a three-year performance
period and vesting is subject to the award recipient’s continued service to the Company as of the vesting date. The number of performance-based RSAs that
ultimately vest is based on the Company’s attainment of certain profitability and return on invested capital targets.
During fiscal 2019, the Company awarded market-based RSAs that vest based on the Company’s attainment of an average closing trade price of the
Company’s common stock of $39.86 per share, based on an average of 20 consecutive trading days. The grant date fair value of these market-based
performance awards was determined using a Monte Carlo simulation in order to simulate a range of possible future stock prices. Key assumptions used
included a risk-free interest rate of 2.2% and expected volatility of 44.6%.
During the fourth quarter of fiscal 2020, the Company modified its 2018 performance-awards and certain 2018 time-based awards such that they vested on
December 17, 2020. The modifications affected seventeen employees and resulted in incremental stock compensation expense of $1,999. Concurrent with
these modifications, the Company also cancelled its 2020 and 2019 performance-based awards and its 2020 market-based equity awards.
At December 24, 2021, the total unrecognized compensation cost for the Company’s unvested RSAs was $18,302 to be recognized over a weighted-
average period of approximately 2.2 years. Of this total, $10,946 related to RSAs with time-based vesting provisions to be recognized over a weighted
average period of 2.1 years and $7,356 related to RSAs with performance- or market-based vesting provisions to be recognized over a weighted average
period of 2.2 years.
The following table summarizes stock option activity during the fiscal year ended December 24, 2021:
Outstanding December 25, 2020
Outstanding December 24, 2021
Exercisable at December 24, 2021
Shares
115,639 $
115,639 $
115,639
Weighted
Average
Exercise Price
Aggregate
Intrinsic
Value
Weighted Average
Remaining Contractual
Term (in years)
20.23 $
20.23 $
20.23 $
2,051
1,427
1,427
6.2
5.2
5.2
The Company issues new shares upon the exercise of stock options. No stock option expense was recognized during the fiscal years ended December 24,
2021 and December 25, 2020. The Company recognized expense on stock options of $114 during the fiscal year ended December 27, 2019, the year in
which all options outstanding were fully vested. No compensation expense related to the Company’s RSAs or stock options has been capitalized.
68
Note 11 – Leases
The components of net lease cost were as follows:
Operating lease cost
Finance lease cost:
Amortization of right-of-use asset
Interest expense on lease liabilities
Total finance lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost, net
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
$
$
$
26,531 $
4,667
555
5,222 $
3,491
3,331
(430)
38,145 $
27,521 $
4,166
552
4,718 $
2,475
1,990
(96)
36,608 $
27,415
308
96
404
2,143
2,707
(514)
32,155
The maturities of the Company’s lease liabilities for each of the next five fiscal years and thereafter at December 24, 2021 were as follows:
Related Party Real
Estate
Third Party Real
Estate
Vehicles and
Equipment
Total
Operating Leases
Finance Leases
Vehicles and
Equipment
2022
2023
2024
2025
2026
Thereafter
Total
Less interest
Present value
$
$
509 $
387
—
—
—
—
896 $
17,085 $
16,145
14,711
13,644
12,949
125,886
200,420 $
7,132 $
4,738
2,186
1,048
3
—
15,107 $
$
24,726 $
21,270
16,897
14,692
12,952
125,886
216,423 $
(73,245)
143,178 $
3,834
3,041
2,512
1,992
1,200
169
12,748
(1,146)
11,602
Supplemental balance sheet information related to finance leases was as follows:
Short-term finance lease liabilities
Long-term finance lease liabilities
Balance Sheet Location
Current portion of long-term debt
Long-term debt, net of current portion
$
$
December 24, 2021
December 25, 2020
3,429 $
8,173 $
4,383
11,415
At December 24, 2021, the weighted-average lease term for operating and finance leases was 12.0 years and 4.0 years, respectively. At December 24, 2021,
the weighted-average discount rate for operating and finance leases was 6.8% and 4.1%, respectively.
As of December 24, 2021, the Company is contractually obligated to make payments of approximately $9,983 related to leases for distribution facilities
that have not commenced. Accordingly, the Company has not recognized ROU assets or lease liabilities associated with these leases.
Note 12 – Income Taxes
In response to the Pandemic, the Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27, 2020. Among other provisions it
allows for a refundable Employee Retention Tax Credit (“ERTC”) to eligible employers equal to 50% of qualified wages paid to employees from March 12,
2020 to December 31, 2020, capped at $10 per employee. In December 2020, the Consolidated Appropriations Act of 2021 was passed, which expands the
ERTC by increasing the credit to 70% of qualified wages paid from January 1, 2021 through June 30, 2021, capped at $10 per employee per quarter. During
the
69
second quarter of fiscal 2021, the Company recognized a receivable of $1,418 related to the ERTC which is presented within prepaid expenses and other
current assets on the consolidated balance sheet and the related expense reduction is presented within selling, general and administrative expenses on the
consolidated statements of operations
The Company’s effective income tax rate was 27.3% and 32.9% for the fifty-two weeks ended December 24, 2021 and December 25, 2020, respectively.
The higher effective tax rate in the prior fiscal year is primarily related to the carryback of a portion of the Company’s fiscal 2020 net loss which, under the
CARES Act, allows the Company to claim Federal tax refunds against prior year taxes paid, including taxes paid in fiscal 2015 and 2017, both of which
were at statutory tax rates of 35%. The Company’s fiscal 2020 income tax provision reflects the impact of an expected income tax refund receivable of
$21,250 which is reflected in prepaid expenses and other current assets on the Company’s consolidated balance sheets as of December 24, 2021 and
December 25, 2020.
The provision for income taxes consists of the following:
Current income tax (benefit) expense:
Federal
State
Total current income tax (benefit) expense
Deferred income tax (benefit) expense:
Federal
Foreign
State
Total deferred income tax (benefit) expense
Total income tax (benefit) expense
$
$
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
(285) $
277
(8)
(2,002)
(22)
179
(1,845)
(1,853) $
(21,877) $
(408)
(22,285)
(10,740)
50
(7,728)
(18,418)
(40,703) $
4,003
2,144
6,147
1,617
17
429
2,063
8,210
Income tax (benefit) expense differed from amounts computed using the statutory federal income tax rate due to the following reasons:
Statutory U.S. Federal tax
Differences due to:
State and local taxes, net of federal benefit
Change in valuation allowance
Changes in tax rates
Federal NOL rate differential
Stock compensation
Other
Income tax (benefit) expense
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
$
$
(1,423) $
(396)
(215)
(55)
—
(361)
597
(1,853) $
(25,957) $
(6,414)
1,354
24
(5,212)
(102)
(4,396)
(40,703) $
6,805
2,078
95
(95)
—
(676)
3
8,210
70
Deferred tax assets and liabilities at December 24, 2021 and December 25, 2020 consist of the following:
December 24, 2021
December 25, 2020
Deferred tax assets:
Receivables and inventory
Self-insurance reserves
Net operating loss carryforwards
Debt discount and interest
Stock compensation
Charitable contribution carryforward
Operating lease liabilities
Other
Total deferred tax assets
Deferred tax liabilities:
Property & equipment
Goodwill and intangible assets
Prepaid expenses and other
Operating lease right-of-use assets
Total deferred tax liabilities
Valuation allowance
Total net deferred tax asset
$
$
9,425 $
2,211
15,177
2,526
3,246
3,865
39,335
1,875
77,660
(7,808)
(20,648)
(1,916)
(35,862)
(66,234)
(2,046)
9,380 $
10,944
2,210
15,413
3,093
1,686
3,166
34,460
1,307
72,279
(11,289)
(17,709)
(2,071)
(31,414)
(62,483)
(2,261)
7,535
The deferred tax provision results from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company files
income tax returns in the U.S. Federal and various state and local jurisdictions as well as the Canadian Federal and provincial districts. For Federal income
tax purposes, the 2018 through 2021 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations and the
fact that we have not yet filed our tax return for 2021. For state tax purposes, the 2017 through 2021 tax years remain open for examination by the tax
authorities under a four-year statute of limitations. The Company records interest and penalties, if any, in income tax expense.
The Company considered all available positive and negative evidence to determine if based on the weight of such evidence, a valuation allowance is
needed. At December 24, 2021, the Company had a valuation allowance of $2,046, which consisted of $1,235 and $811 against foreign and certain state net
operating loss carryforwards, respectively, as they are not expected to be fully realizable in the future. Despite the loss for fiscal year ended December 24,
2021 as a direct impact of the Pandemic, the Company considered the substantial amount of taxable income available in carryback years under applicable
tax law, strong history of earnings, no history of tax attributes expiring before utilization, reversing taxable temporary differences scheduled to reverse
within the reversal period of the respective deferred tax assets, the long term and indefinite nature of tax attributes on hand, and forecasts of future taxable
income in determining a valuation allowance is not needed on the remaining deferred tax assets. However, the impacts of the Pandemic on the Company’s
business are uncertain and will depend on future developments, and as such, it is possible that under certain circumstances the Company may be required to
recognize a valuation allowance in the future.
The Company’s Canada net operating loss carryforward of $1,458 expires at various dates between fiscal 2038 and 2040. The Company’s state net
operating loss carryforwards of $6,328 expire at various dates, the earliest of which expire in fiscal 2026 while others are indefinite-lived. The Company’s
federal net operating loss carry forward of $7,391 is indefinite-lived and its charitable contributions carry forward of $3,865 expire between fiscal 2024 and
2026.
The Company’s foreign subsidiaries had operating (loss) income before income taxes as follows:
Foreign subsidiaries operating (loss) income before income taxes
$
(2,420) $
(4,231) $
18
December 24, 2021
Fiscal Year Ended
December 25, 2020
December 27, 2019
71
The Company is permanently reinvesting the earnings of it’s foreign operations which are disregarded for US tax purposes. In addition, the US tax
consequences and foreign withholding taxes on any future remittances are immaterial.
As of December 24, 2021 and December 25, 2020, the Company did not have any material uncertain tax positions.
Note 13 – Supplemental Disclosures of Cash Flow Information
Cash paid for income taxes, net of cash received
Cash paid for interest
Cash paid for amounts included in the measurement of lease
liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
ROU assets obtained in exchange for lease liabilities:
Operating leases
Finance leases
Non-cash investing and financing activities:
Warrants issued for acquisition
Contingent earn-out liabilities for acquisitions
Convertible notes issued for acquisitions
Note 14 – Employee Benefit Plans
Employee Tax-Deferred Savings Plan
$
$
$
$
$
$
$
$
$
December 24, 2021
December 25, 2020
December 27, 2019
(230) $
15,387 $
25,111 $
555 $
32,741 $
536 $
1,120 $
5,500 $
— $
308 $
18,182 $
25,090 $
3,856 $
7,201 $
16,063 $
— $
3,464 $
— $
6,046
16,271
25,302
96
155,027
4,183
—
7,929
4,000
The Company offers a 401(k) Plan to eligible employees that provides for tax-deferred salary deductions for eligible employees. Employees may choose to
make voluntary contributions of their annual compensation to the 401(k) Plan, limited to an annual maximum amount as set periodically by the Internal
Revenue Service. The Company provides discretionary matching contributions equal to 50 percent of the employee’s contribution amount, up to a
maximum of six of the employee’s annual salary, capped at $2.5 per employee per year. Matching contributions begin vesting after one year and are fully
vested after five years. Employee contributions are fully vested when made. As a result of the Pandemic, the Company’s matching contributions were
temporarily suspended from March 31, 2020 through August 31, 2021. Under the 401(k) Plan there is no option available to the employee to receive or
purchase the Company’s common stock. Matching contributions under the 401(k) Plan were $683, $720 and $1,268, respectively, for fiscal 2021, 2020 and
2019.
Note 15 – 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 was $493 for fiscal 2021, $488 for fiscal 2020 and $433 for
fiscal 2019. This lease was amended during the first quarter of fiscal 2020 and expires on September 30, 2023.
Note 16 – Commitments and Contingencies
Legal Contingencies
The Company is involved in various legal proceedings. The Company establishes reserves for specific legal proceedings when it determines that the
likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal
matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. The
Company does not believe that there is a reasonable possibility of material loss or loss in excess of the amount that the Company has accrued. The
Company recognizes legal fees related to any ongoing legal proceeding as incurred.
72
Tax Audits
The Company is involved in various tax matters, with respect to some of which the outcome is uncertain. These audits may result in the assessment of
additional taxes that are subsequently resolved with authorities or potentially through the courts.
Risk Management Programs
The Company’s self-insurance reserves for its medical program totaled $2,373 and $1,220 at December 24, 2021 and December 25, 2020, respectively.
The Company’s self-insurance reserves for its automobile liability program totaled $3,980 and $3,450 at December 24, 2021 and December 25, 2020,
respectively. Self-insurance reserves for workers’ compensation totaled $7,053 and $7,696 at December 24, 2021 and December 25, 2020, respectively.
Workforce
As of December 24, 2021, approximately 9% of the Company’s employees are represented by unions, all of whom are operating under collective
bargaining agreements which expire at various times between fiscal 2022 and 2025. Approximately 0.9% of the Company’s employees are under a
collective bargaining agreement that expires in fiscal 2022.
Note 17 – Valuation Reserves
The following tables summarize the activity in our valuation accounts during the fiscal years ended December 24, 2021, December 25, 2020 and
December 27, 2019:
Balance at Beginning of
Period
Additions (Recoveries)
Charged to Expense
Deductions
Balance at End of
Period
Allowance for doubtful accounts
December 24, 2021
December 25, 2020
December 27, 2019
Allowance for deferred tax assets
December 24, 2021
December 25, 2020
December 27, 2019
Note 18 – Subsequent Events
$
$
24,027 $
8,846
7,460
2,261 $
907
812
(422) $
21,372
4,981
(215) $
1,354
95
(3,345) $
(6,191)
(3,595)
— $
—
—
20,260
24,027
8,846
2,046
2,261
907
On December 28, 2021, the Company entered into an asset purchase agreement to acquire substantially all of the assets of CGC Holdings, Inc., a specialty
seafood and produce distributor in Maryland. The purchase price was $28,000 paid in cash at closing and is subject to a customary working capital true-up.
The Company has not provided the preliminary purchase price allocations for this acquisition as the initial accounting is incomplete.
73
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
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 December 24,
2021.
Management’s Annual Report on Internal Control Over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a–
15(f) and 15d–15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s
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 Company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 24, 2021. In making this assessment, management used the criteria set forth in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment,
our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s internal control over financial reporting was effective as of
December 24, 2021.
The Company’s financial statements included in this Annual Report on Form 10-K have been audited by BDO USA, LLP, an independent registered public
accounting firm, as indicated in the report appearing on page 46 of this Form 10-K. BDO USA, LLP has also provided an attestation report on the
Company’s internal control over financial reporting.
Changes In Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
74
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
The Chefs’ Warehouse, Inc.
Ridgefield, CT
Opinion on Internal Control over Financial Reporting
We have audited, The Chefs’ Warehouse, Inc. (the “Company’s”) internal control over financial reporting as of December 24, 2021, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 24,
2021, based on the COSO criteria
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company as of December 24, 2021 and December 25, 2020, the related consolidated statements of operations and comprehensive
(loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 24, 2021, and the related notes and our report
dated February 22, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Stamford, CT
February 22, 2022
75
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Corporate Governance,” “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders to be held on May 20, 2022, which we intend to
file within 120 days after our fiscal year-end, is incorporated herein by reference. As provided in General Instruction G(3) to Form 10-K and Instruction 3
to Item 401(b) of Regulation S-K, information regarding executive officers of our Company is provided in Part I of this Annual Report on Form 10-K
under the caption, “Information about our Executive Officers.”
Item 11. EXECUTIVE COMPENSATION
The information set forth under the caption “Executive Compensation” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders to
be held on May 20, 2022, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption “Stock Ownership of Certain Beneficial Owners and Management” in our definitive Proxy Statement for our
2022 Annual Meeting of Stockholders to be held on May 20, 2022, which we intend to file within 120 days after our fiscal year-end, is incorporated herein
by reference.
The following table provides certain information with respect to equity awards under our equity compensation plans as of December 24, 2021:
Plan Category
Plans approved by stockholders
Plans not approved by stockholders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the
second column)
115,639 $
—
115,639 $
20.23
—
20.23
767,403
—
767,403
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “Corporate Governance – Director Independence” and “Corporate Governance – Certain Relationships and
Related Transactions” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders to be held on May 20, 2022, which we intend to file
within 120 days after our fiscal year-end, is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the captions “Proposal 2 – Ratification of Independent Registered Public Accounting Firm – Fees Paid to BDO USA, LLP”
and “Proposal 2 – Ratification of Independent Registered Public Accounting Firm – Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders to be held on May 20, 2022, which we intend to file
within 120 days after our fiscal year-end, is incorporated herein by reference.
76
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as part of this report:
1. Financial Statements – See Index to the Consolidated Financial Statements at Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules - Supplemental schedules are not provided because of the absence of conditions under which they are required or
because the required information is given in the financial statements or notes thereto.
3. Exhibits – The exhibits listed in the accompanying Index of Exhibits are filed as part of, or incorporated by reference into, this Annual Report on
Form 10-K.
Item 16. FORM 10-K SUMMARY
None.
77
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
3.3
INDEX OF EXHIBITS
Description
Asset Purchase Agreement, dated as of January 11, 2015, by and among The Chefs’ Warehouse, Inc., a Delaware corporation,
Del Monte Capitol Meat Company, LLC, a Delaware limited liability company, T.J. Foodservice Co., Inc., a California
corporation, TJ Seafood, LLC, a California limited liability company, John DeBenedetti, Victoria DeBenedetti, Theresa Lincoln,
and John DeBenedetti, as the Sellers’ Representative (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed
on January 15, 2015) (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted,
but will be provided supplementally to the Securities and Exchange Commission upon request).
Merger Agreement, dated as of January 11, 2015, by and among The Chefs’ Warehouse, Inc., a Delaware corporation, Del Monte
Merger Sub, LLC, a Delaware limited liability company, Del Monte Capitol Meat Co., Inc., a California corporation, David
DeBenedetti, Victoria DeBenedetti, DeBenedetti/Del Monte Trust, and John DeBenedetti, as the Sellers’ Representative
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 15, 2015) (Pursuant to Item 601(b)(2) of
Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Securities
and Exchange Commission upon request).
Earn-Out Agreement, dated April 6, 2015 by and among The Chefs' Warehouse, Inc., Del Monte Capitol Meat Company, LLC,
T.J. Foodservice Co., Inc., TJ Seafood, LLC, and John DeBenedetti, as the Sellers' Representative (incorporated by reference to
Exhibit 2.1 to the Company's 8-K filed on April 9, 2015)(Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and
exhibits to this agreement are omitted, but will be provided supplementally to the Securities and Exchange Commission upon
request).
Indemnification Agreement, dated April 6, 2015, by and among Del Monte Merger Sub, LLC, The Chefs' Warehouse, Inc., Del
Monte Capitol Meat Company, LLC, DeBenedetti/Del Monte Trust, Victoria DeBenedetti, David DeBenedetti, Del Monte
Capitol Meat Co., Inc., T.J. Foodservice Co., Inc., TJ Seafood, LLC, John DeBenedetti, Theresa Lincoln and John DeBenedetti,
as the Selling Parties' Representative (incorporated by reference to Exhibit 2.2 to the Company's 8-K filed on April 9, 2015)
(Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided
supplementally to the Securities and Exchange Commission upon request).
Earn-Out Agreement, dated August 25, 2017 by and among Fells Point, LLC, Fells Point Wholesale Meats, Inc., Erik M.
Oosterwijk and Leendert H. Pruissen (incorporated by reference to Exhibit 2.1 to the Company’s 8-K filed on August 25, 2017).
Asset Purchase Agreement dated as of August 25, 2017, by and among Fells Point, LLC, a Delaware limited liability company,
Fells Point Wholesale Meats, Inc., a Maryland close corporation, Erik M. Oosterwijk, and Leendert H. Pruissen (incorporated by
reference to Exhibit 10.1 to the Company’s 8-K filed on August 25, 2017) (Pursuant to Item 601(b)(2) of Regulation S-K, the
schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Securities and Exchange
Commission upon request).
Certificate of Incorporation of the Company, dated as of July 27, 2011 (incorporated by reference to Exhibit 3.1 to the
Company’s Form 8-K filed on August 2, 2011).
Bylaws of the Company, dated as of January 30, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed
on January 31, 2017).
Certificate of Designation of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special
Rights and Qualifications, Limitations and Restrictions of the Series A Preferred Stock of The Chefs’ Warehouse, Inc.
(incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on March 23, 2020).
78
4.0
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5*
10.6*
10.7*
10.8*
10.9*
Description of Securities (incorporated by reference to Exhibit 4.0 to the Company's From 10-K filed on February 24, 2020).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s S-1/A filed on July 1, 2011).
Indenture, dated as of November 22, 2019, between The Chefs’ Warehouse, Inc. and The Bank of New York Mellon Trust
Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on November 22, 2019).
Form of 1.875% Convertible Senior Note due 2024 (included as an exhibit to Exhibit 4.2)
Rights Agreement, dated as of March 22, 2020, between The Chefs’ Warehouse, Inc. and American Stock Transfer & Trust
Company, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 23, 2020).
Joint and Several Guaranty of Payment, dated as of April 26, 2012, among The Chefs’ Warehouse, Inc., Chefs’ Warehouse
Parent, LLC, Dairyland USA Corporation, The Chefs’ Warehouse Mid-Atlantic, LLC, Bel Canto Foods, LLC, The Chefs’
Warehouse West Coast, LLC, and The Chefs’ Warehouse of Florida, LLC (incorporated by reference to Exhibit 10.4 to the
Company’s Form 8-K filed on April 30, 2012).
Lease between The Chefs’ Warehouse Leasing Co., LLC and Dairyland USA Corporation, dated as of December 29, 2004
(incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/A filed on June 8, 2011).
First Amendment of Lease dated as of January 1, 2015 between Dairyland USA Corporation and TCW Leasing Co., LLC, f/k/a
The Chefs' Warehouse Leasing Co., LLC (incorporated by reference to Exhibit 10.12 to the Company's Form 10-Q filed on
August 5, 2015).
Lease Agreement, dated as of June 30, 2015, between CW LV Real Estate, LLC, The Chefs' Warehouse, Inc., Chefs' Warehouse
Parent, LLC and The Chefs' Warehouse West Coast, LLC, jointly and severally as the Tenant, and CW Nevada Landlord, LLC, as
the Landlord (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed on July 7, 2015).
Employment Agreement between Christopher Pappas and The Chefs’ Warehouse, Inc., together with its subsidiaries, dated as of
August 2, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 2, 2011).
Amended and Restated Employment Agreement between John Pappas and The Chefs’ Warehouse, Inc., together with its
subsidiaries, dated as of January 12, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
January 19, 2012).
Offer letter between Chefs’ Warehouse Holdings, LLC and Alexandros Aldous, dated as of February 18, 2011 (incorporated by
reference to Exhibit 10.17 to the Company’s Form 10-K filed on March 13, 2013).
Severance Agreement, made as of August 1, 2014, by and between The Chefs’ Warehouse, Inc. and Alexandros Aldous
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on August 6, 2014).
The Chefs’ Warehouse, Inc. 2011 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s
Form S-1/A filed on July 1, 2011).
10.10*
The Chefs’ Warehouse, Inc. Executive Change in Control Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form
10-Q filed on May 6, 2020).
79
10.11
10.12*
10.13
10.14
10.15*
10.16
10.17*
10.18*
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Form of Non-Qualified Stock Option Agreement (Officers and Employees) (incorporated by reference to Exhibit 10.21 to the
Company's Form 10-K filed on March 10, 2017).
Form of Non-Qualified Stock Option Agreement (Directors) (incorporated by reference to Exhibit 10.15 to the Company’s Form
S-1/A filed on July 1, 2011).
Form of Restricted Share Award Agreement (Officers and Employees), for awards granted starting March 6, 2017 (incorporated
by reference to Exhibit 10.24(b) to the Company's Form 10-K filed on March 10, 2017).
Form of Restricted Share Award Agreement (Directors) (incorporated by reference to Exhibit 10.25 to the Company’s Form 10-K
filed on March 10, 2017).
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.19 to the Company’s Form S-1/A filed on
July 1, 2011).
Form of Performance Restricted Share Award Agreement (Officers and Employees), for awards granted starting March 6, 2017
(incorporated by reference to Exhibit 10.27(b) to the Company’s Form 10-K filed on March 10, 2017).
Form of Restricted Share Award Agreement for a Transaction Bonus Award Grant (incorporated by reference to Exhibit 10.6 to
the Company's Form 8-K filed on April 9, 2015).
Form of LTIP award agreement (incorporated by reference to Exhibit 10.8 to the Company's Form 10-Q filed on May 6, 2015).
Credit Agreement, dated as of June 22, 2016, by and among Dairyland USA Corporation and Chefs’ Warehouse Parent, LLC, as
Borrowers, and The Chefs’ Warehouse, Inc. and the other Loan Parties party thereto, as Guarantors, the Lenders party thereto and
Jefferies Finance LLC, as administrative agent and collateral agent (the “Term Loan Facility”) (incorporated by reference to
Exhibit 10.2 to the Company’s Form 8-K filed on June 22, 2016).
Amendment No. 1, dated as of September 14, 2016, to the Term Loan Facility (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on September 15, 2016).
Amendment No. 2, dated as of September 1, 2017, to the Term Loan Facility (incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-Q filed on November 8, 2017).
Amendment No. 3, dated as of December 13, 2017, to the Term Loan Facility (incorporated by reference to Exhibit 10.25 to the
Company’s Form 10-K filed on March 1, 2019).
Amendment No. 4, dated as of November 16, 2018, to the Term Loan Facility (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on November 19, 2018).
Amendment No. 5, dated as of November 28, 2019, to the Term Loan Facility (incorporated by reference to Exhibit 10.25 to the
Company's Form 10-K filed on February 24, 2020).
Sixth Amendment to Credit Agreement, dated June 8, 2020, by and among Dairyland USA Corporation and Chefs’ Warehouse
Parent, LLC, as borrowers, The Chefs’ Warehouse, Inc., certain other subsidiaries, as guarantors, the lenders party thereto and
Jefferies Finance LLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed on June 8, 2020).
80
10.26
10.27
10.28*
10.29*
10.30
10.31*
10.32*
Credit Agreement, dated as of June 29, 2018, by and among Chefs’ Warehouse Parent, LLC and Dairyland USA Corporation, as
Borrowers, and The Chefs’ Warehouse, Inc., The Chefs’ Warehouse Mid-Atlantic, LLC, Bel Canto Foods, LLC, The Chefs’
Warehouse West Coast, LLC, The Chefs’ Warehouse Of Florida, LLC, Michael’s Finer Meats, LLC, Michael’s Finer Meats
Holdings, LLC, The Chefs’ Warehouse Midwest, LLC, Fells Point Holdings, LLC and other Loan Parties party thereto as
Guarantors, the Lenders party thereto and BMO Harris Bank N.A., as Administrative Agent and Swing Line Lender (the “ABL
Facility”) (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 2, 2018).
Amendment No. 1, dated as of November 28, 2019, to the ABL Facility (incorporated by reference to Exhibit 10.27 to the
Company's Form 10-K filed on February 24, 2020).
Offer Letter, dated October 17, 2017, by and between The Chefs’ Warehouse, Inc. and James Leddy (incorporated by reference to
Exhibit 99.2 to the Company’s Form 8-K filed on October 17, 2017).
Offer Letter, dated February 19, 2018, by and between The Chefs’ Warehouse Inc. and Tim McCauley (incorporated by reference
to Exhibit 99.2 to the Company’s Form 8-K filed on February 20, 2018).
Cooperation Agreement dated January 15, 2018, among The Chefs’ Warehouse, Inc., Legion Partners, L.P. I, Legion Partners,
L.P. II, Legion Partners Special Opportunities, L.P. VII, Legion Partners, LLC, Legion Partners Asset Management, LLC, Legion
Partners Holdings, LLC, Christopher S. Kiper, and Raymond White (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed on January 16, 2018).
Form of Indemnification Agreement by and between The Chefs’ Warehouse, Inc. and its directors and executive officers
(incorporated by reference to Exhibit 10.24 to the Company’s Form S-1/A filed on July 14, 2011).
The Chefs’ Warehouse, Inc. 2019 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s
Form 10-Q filed on October 30, 2019).
10.33*†
The Chefs’ Warehouse, Inc. Amended and Restated 2019 Omnibus Equity Incentive Plan.
10.34*
10.35*
10.36*
10.37*
10.38*
10.39*
Form of Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Form 10-Q filed on July 31, 2019).
Form of Performance Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan
(incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on July 31, 2019).
Form of Non-Qualified Stock Option Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q filed on July 31, 2019).
Form of Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. 2019 Omnibus Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed on May 6, 2020.
Form of Executive Severance Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on May
6, 2020).
The Chefs’ Warehouse, Inc 2020 Cash Incentive Plan (incorporated by reference to Exhibit 10.41 to the Company’s Form 10-K
filed on February 23, 2021).
81
10.40*
10.41*
14.1
21
23.1†
31.1†
31.2†
32.1†
32.2†
2021 Form of Restricted Share Award Agreement - Directors (incorporated by reference to Exhibit 10.2 to the Company’s Form
10-Q filed on July 28, 2021).
2021 Non-Employee Director Deferral Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on July
28, 2021).
The Chefs’ Warehouse, Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Company’s
Form 10-Q filed on August 6, 2013).
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Form 10-K filed on February 24, 2020).
Consent of the Independent Registered Public Accounting Firm.
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†
101.SCH†
101.CAL†
101.DEF†
101.LAB†
101.PRE†
104
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embedded within the Inline XBRL document
XBRL Schema Document
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Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
*
†
Management Contract or Compensatory Plan or Arrangement
Filed herewith
82
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 February 22, 2022.
SIGNATURES
February 22, 2022
THE CHEFS’ WAREHOUSE, INC.
/s/ Christopher Pappas
Christopher Pappas
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Capacity
/s/ Christopher Pappas
Christopher Pappas
/s/ James Leddy
James Leddy
/s/ Timothy McCauley
Timothy McCauley
/s/ John Pappas
John Pappas
/s/ Alan Guarino
Alan Guarino
/s/ Dominick C. Cerbone
Dominick C. Cerbone
/s/ Joseph Cugine
Joseph Cugine
/s/ Stephen Hanson
Stephen Hanson
/s/ Katherine Oliver
Katherine Oliver
/s/ Steven F. Goldstone
Steven F. Goldstone
/s/ Ivy Brown
Ivy Brown
/s/ Aylwin Lewis
Aylwin Lewis
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Date
February 22, 2022
February 22, 2022
February 22, 2022
Director and Vice Chairman
February 22, 2022
Director
Director
Director
Director
Director
Director
Director
Director
83
February 22, 2022
February 22, 2022
February 22, 2022
February 22, 2022
February 22, 2022
February 22, 2022
February 22, 2022
February 22, 2022
THE CHEFS’ WAREHOUSE, INC.
2019 OMNIBUS EQUITY INCENTIVE PLAN
TABLE OF CONTENTS
PAGE
Section 1. Purpose.
Section 2. Definitions.
Section 3. Administration.
Section 4. Shares Available For Awards.
Section 5. Eligibility.
Section 6. Stock Options And Stock Appreciation Rights.
Section 7. Restricted Shares And Restricted Share Units.
Section 8. Performance Awards.
Section 9. Other Stock-Based Awards.
Section 10. Non-Employee Director And Outside Director Awards.
Section 11. Separation from Service.
Section 12. Change In Control.
Section 13. Amendment And Termination.
Section 14. General Provisions.
Section 15. Term Of The Plan.
1
1
5
7
8
8
11
13
14
14
14
15
16
17
21
THE CHEFS’ WAREHOUSE, INC.
2019 OMNIBUS EQUITY INCENTIVE PLAN
Section 1. Purpose.
This plan shall be known as the “The Chefs’ Warehouse, Inc. 2019 Omnibus Equity Incentive Plan” (as amended from
time to time, the “Plan”). The purpose of the Plan is to promote the interests of The Chefs’ Warehouse, Inc. (the “Company”) and
its stockholders by (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its
Subsidiaries and Affiliates; (ii) motivating such individuals by means of performance-related incentives to achieve long-range
performance goals; (iii) enabling such individuals to participate in the long-term growth and financial success of the Company;
(iv) encouraging ownership of stock in the Company by such individuals; and (v) linking their compensation to the long-term
interests of the Company and its stockholders.
Section 2. Definitions.
As used in the Plan, the following terms shall have the meanings set forth below:
1.1
“Affiliate” means (i) any entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which
the Company has a significant equity interest, and (iii) an affiliate of the Company, as defined in Rule 12b-2 promulgated under
Section 12 of the Exchange Act.
1.2
“Award” means any Option, Stock Appreciation Right, Restricted Share Award, Restricted Share Unit,
Performance Award, or Other Stock-Based Award granted under the Plan, whether singly, in combination or in tandem, to a
Participant by the Committee (or the Board) pursuant to such terms, conditions, restrictions and/or limitations, if any, as the
Committee (or the Board) may establish.
1.3
“Award Agreement” means any written agreement, contract or other instrument or document evidencing any
Award, which may, but need not, be executed or acknowledged by a Participant.
1.4
“Board” means the Board of Directors of the Company.
1.5
“Cause” means, unless otherwise defined in the applicable Award Agreement, (i) the engaging by the Participant
in willful misconduct that is injurious to the business, financial condition or reputation of the Company or its Subsidiaries or
Affiliates, or (ii) the embezzlement or misappropriation of funds or property of the Company or its Subsidiaries or Affiliates by
the Participant. For purposes of this paragraph, no act, or failure to act, on the Participant’s part shall be considered “willful”
unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant’s action
or omission was in the best interest of the Company. Any determination of Cause for purposes of the Plan or any Award shall be
made by the Committee in its sole discretion. Any such determination shall be final and binding on a Participant.
1.6
“Change in Control” means, unless otherwise provided in the applicable Award Agreement, the happening of
one of the following:
(a)
any person or entity, including a “group” as defined in Section 13(d)(3) of the Exchange Act, other than the
Company or a wholly-owned Subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiaries,
becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than
as a result of an issuance of securities initiated by the Company in the ordinary course of business); or
(b)
as the result of, or in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of
the combined voting power of the then outstanding securities of the Company or any successor corporation or entity
entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such
transaction are held in the aggregate by the holders of the Company’s securities entitled to vote generally in the election of
directors of the Company immediately prior to such transaction; or
(c)
during any period of two consecutive years, individuals who at the beginning of any such period constitute
the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election
by the Company’s stockholders, of each director of the Company first elected during such period was approved by a vote
of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the
beginning of any such period.
Notwithstanding the foregoing, unless otherwise provided in the applicable Award Agreement, with respect to Awards
subject to Section 409A of the Code, a Change in Control shall mean a “change in the ownership of the Company,” a “change in
the effective control of the Company,” or a “change in the ownership of a substantial portion of the assets of the Company” as
such terms are defined in Section 1.409A-3(i)(5) of the Treasury Regulations.
1.7
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
1.8
“Committee” means a committee of the Board composed of not less than two Non-Employee Directors, each of
whom shall be (i) a “non-employee director” for purposes of Exchange Act Section 16 and Rule 16b-3 thereunder and (ii)
“independent” within the meaning of the listing standards of the Nasdaq Stock Market.
1.9
“Consultant” means any consultant to the Company or its Subsidiaries or Affiliates.
1.10
“Director” means a member of the Board.
1.11
“Disability” means, unless otherwise defined in the applicable Award Agreement, a disability that would qualify
as a total and permanent disability under the Company’s then current long-term disability plan. With respect to Awards subject to
Section 409A of the Code, unless otherwise defined in the applicable Award Agreement, the term “Disability” shall have the
meaning set forth in Section 409A of the Code.
1.12
“Early Retirement” means, unless otherwise provided in an Award Agreement, retirement with the express
consent of the Committee at or before the time of such retirement, from active employment with the Company and any
Subsidiary or Affiliate prior to age 65, in accordance with any applicable early retirement policy of the Company then in effect or
as may be approved by the Committee.
1.13
“Effective Date” has the meaning provided in Section 15.1 of the Plan.
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1.14
“Employee” means a current or prospective officer or employee of the Company or of any Subsidiary or Affiliate.
1.15
“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.
1.16
“Fair Market Value” with respect to the Shares, means, for purposes of a grant of an Award as of any date, (i) the
reported closing sales price of the Shares on the Nasdaq Stock Market, or any other such market or exchange as is the principal
trading market for the Shares, on such date, or in the absence of reported sales on such date, the closing sales price on the
immediately preceding date on which sales were reported or (ii) in the event there is no public market for the Shares on such date,
the fair market value as determined, in good faith and by the reasonable application of a reasonable valuation method (as
applicable), by the Committee in its sole discretion, and for purposes of a sale of a Share as of any date, the actual sales price on
that date.
1.17
“Good Reason” means, unless otherwise provided in an Award Agreement, (i) a material reduction in a
Participant’s position, authority, duties or responsibilities following a Change in Control as compared to such level immediately
prior to a Change in Control, (ii) any material reduction in a Participant’s annual base salary as in effect immediately prior to a
Change in Control; (iii) the relocation of the office at which the Participant is to perform the majority of his or her duties
following a Change in Control to a location more than 30 miles from the location at which the Participant performed such duties
prior to the Change in Control; or (iv) the failure by the Company or its successor to continue to provide the Participant with
benefits substantially similar in aggregate value to those enjoyed by the Participant under any of the Company’s pension, life
insurance, medical, health and accident or disability plans in which Participant was participating immediately prior to a Change
in Control, unless the Participant is offered participation in other comparable benefit plans generally available to similarly
situated employees of the Company or its successor after the Change in Control.
1.18
“Grant Price” means the price established at the time of grant of an SAR pursuant to Section 6 used to determine
whether there is any payment due upon exercise of the SAR.
1.19
“Incentive Stock Option” means an option to purchase Shares from the Company that is granted under Section 6
of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
1.20
“Non-Employee Director” means a member of the Board who is not an officer or employee of the Company or
any Subsidiary or Affiliate.
1.21
“Non-Qualified Stock Option” means an option to purchase Shares from the Company that is granted under
Sections 6 or 10 of the Plan and is not intended to be an Incentive Stock Option.
1.22
“Normal Retirement” means, unless otherwise defined in the applicable Award Agreement, retirement of a
Participant from active employment with the Company or any of its Subsidiaries or Affiliates on or after such Participant’s 65th
birthday.
1.23
“Option” means an Incentive Stock Option or a Non-Qualified Stock Option.
1.24
“Option Price” means the purchase price payable to purchase one Share upon the exercise of an Option.
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1.25
“Other Stock-Based Award” means any Award granted under Sections 9 or 10 of the Plan. For purposes of the
share counting provisions of Section 4.1 hereof, an Other Stock-Based Award that is not settled in cash shall be treated as (i) an
Option Award if the amounts payable thereunder will be determined by reference to the appreciation of a Share, and (ii) a
Restricted Share Award if the amounts payable thereunder will be determined by reference to the full value of a Share.
1.26
Committee.
“Outside Director” means, with respect to the grant of an Award, a member of the Board then serving on the
1.27
“Participant” means any Employee, Director, Consultant or other person who receives an Award under the Plan.
1.28
“Performance Award” means any Award granted under Section 8 of the Plan. For purposes of the share counting
provisions of Section 4.1 hereof, a Performance Award that is not settled in cash shall be treated as (i) an Option Award if the
amounts payable thereunder will be determined by reference to the appreciation of a Share, and (ii) a Restricted Share Award if
the amounts payable thereunder will be determined by reference to the full value of a Share.
1.29
“Person” means any individual, corporation, partnership, limited liability company, association, joint-stock
company, trust, unincorporated organization, government or political subdivision thereof or other entity.
1.30
“Registration Date” means the time that the registration statement on Form S-1 of Chefs’ Warehouse Holdings,
LLC, predecessor to the Company, becomes effective.
1.31
“Restricted Share” means any Share granted under Sections 7 to 10 of the Plan.
1.32
“Restricted Share Unit” means any unit granted under Sections 7 to 10 of the Plan.
1.33
“Retirement” means Normal or Early Retirement.
1.34
“SEC” means the Securities and Exchange Commission or any successor thereto.
1.35
“Section 16” means Section 16 of the Exchange Act and the rules promulgated thereunder and any successor
provision thereto as in effect from time to time.
1.36
“Separation from Service” or “Separates from Service” shall have the meaning ascribed to such term pursuant
to Section 409A of the Code and the regulations promulgated thereunder.
1.37
“Shares” means shares of the common stock, par value $0.01 per share, of the Company.
1.38
“Share Reserve” has the meaning set forth in Section 4.1 hereof.
1.39
“Specified Employee” has the meaning ascribed to such term pursuant to Section 409A of the Code and the
regulations promulgated thereunder.
1.40
“Stock Appreciation Right” or “SAR” means a stock appreciation right granted under Sections 6, 8 or 10 of the
Plan that entitles the holder to receive, with respect to each Share encompassed by the exercise of such SAR, the amount
determined by the Committee and specified in an Award Agreement. In the absence of such a determination, the holder shall be
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entitled to receive, with respect to each Share encompassed by the exercise of such SAR, the excess of the Fair Market Value of
such Share on the date of exercise over the Grant Price.
1.41
“Subsidiary” means any Person (other than the Company) of which 50% or more of its voting power or its equity
securities or equity interest is owned directly or indirectly by the Company.
1.42
“Substitute Awards” means Awards granted solely in assumption of, or in substitution for, outstanding awards
previously granted by a company acquired by the Company or with which the Company combines.
Section 3. Administration.
1.1
Authority of Committee. The Plan shall be administered by a Committee, which shall be appointed by and serve at
the pleasure of the Board; provided, however, with respect to Awards to Outside Directors, all references in the Plan to the
Committee shall be deemed to be references to the Board. Subject to the terms of the Plan and applicable law, and in addition to
other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and
authority in its discretion (and in accordance with Section 409A of the Code with respect to Awards subject thereto) to: (i)
designate Participants; (ii) determine eligibility for participation in the Plan and decide all questions concerning eligibility for and
the amount of Awards under the Plan; (iii) determine the type or types of Awards to be granted to a Participant; (iv) determine the
number of Shares to be covered by, or with respect to which payments, rights or other matters are to be calculated in connection
with Awards; (v) determine the timing, terms, and conditions of any Award; (vi) accelerate the time at which all or any part of an
Award may be settled or exercised;(vii) determine whether, to what extent, and under what circumstances Awards may be settled
or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended and the method
or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; (viii) determine whether, to what
extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable
with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (ix)
grant Awards as an alternative to, or as the form of payment for grants or rights earned or payable under, other bonus or
compensation plans, arrangements or policies of the Company or a Subsidiary or Affiliate; (x) grant Substitute Awards on such
terms and conditions as the Committee may prescribe, subject to compliance with the Incentive Stock Option rules under Section
422 of the Code and the nonqualified deferred compensation rules under Section 409A of the Code, where applicable; (xi) make
all determinations under the Plan concerning any Participant’s Separation from Service with the Company or a Subsidiary or
Affiliate, including whether such separation occurs by reason of Cause, Good Reason, Disability, Retirement, or in connection
with a Change in Control and whether a leave constitutes a Separation from Service; (xii) interpret and administer the Plan and
any instrument or agreement relating to, or Award made under, the Plan; (xiii) except to the extent prohibited by Section 6.2,
amend or modify the terms of any Award at or after grant with the consent of the holder of the Award; (xiv) establish, amend,
suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of
the Plan; and (xv) make any other determination and take any other action that the Committee deems necessary or desirable for
the administration of the Plan, subject to the exclusive authority of the Board under Section 13 hereunder to amend or terminate
the Plan.
1.2
Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any
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Subsidiary or Affiliate, any Participant and any holder or beneficiary of any Award. A Participant or other holder of an Award
may contest a decision or action by the Committee with respect to such person or Award only on the grounds that such decision
or action was arbitrary or capricious or was unlawful, and any review of such decision or action shall be limited to determining
whether the Committee’s decision or action was arbitrary or capricious or was unlawful.
1.3
Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more
officers or managers of the Company or of any Subsidiary or Affiliate, or to a Committee of such officers or managers, the
authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to or to cancel, modify or
waive rights with respect to, or to alter, discontinue, suspend or terminate Awards held by Participants who are not officers or
directors of the Company for purposes of Section 16 or who are otherwise not subject to such Section.
1.4
No Liability. No member of the Board or Committee shall be liable for any action taken or determination made in
good faith with respect to the Plan or any Award granted hereunder.
Section 4. Shares Available For Awards.
1.1
Shares Available. Subject to the provisions of Section 4.2 below, the maximum aggregate number of Shares which
may be issued pursuant to all Awards after the Effective Date of the Plan is 2,600,000 Shares (the “Share Reserve”). The number
of Shares with respect to which Incentive Stock Options may be granted shall be no more than 2,600,000 Shares. Each Share
issued pursuant to an Option shall reduce the Share Reserve by one (1) share. Each Share subject to a redeemed portion of a SAR
shall reduce the Share Reserve by one (1) share. Each Share issued pursuant to a Restricted Stock Award or a Restricted Stock
Unit Award shall reduce the Share Reserve by one (1) share. If any Award granted under the Plan (whether before or after the
Effective Date of the Plan) shall expire, terminate, be settled in cash (in whole or in part) or otherwise be forfeited or canceled for
any reason before it has vested or been exercised in full, the Shares subject to such Award shall, to the extent of such expiration,
cash settlement, forfeiture, or termination, again be available for Awards under the Plan, in accordance with this Section 4.1. The
Committee may make such other determinations regarding the counting of Shares issued pursuant to the Plan as it deems
necessary or advisable, provided that such determinations shall be permitted by law. Notwithstanding the foregoing, if an Option
or SAR is exercised, in whole or in part, by tender of Shares or if the Company’s tax withholding obligation is satisfied by
withholding Shares, the number of Shares deemed to have been issued under the Plan for purposes of the limitation set forth in
this Section 4.1 shall be the number of Shares that were subject to the Option or SAR or portion thereof, and not the net number
of Shares actually issued and any SARs to be settled in Shares shall be counted in full against the number of Shares available for
issuance under the Plan, regardless of the number of shares issued upon the settlement of the SAR. Any Shares that again become
available for grant pursuant to this Section shall be added back as (i) one (1) Share if such Shares were subject to Options or
Stock Appreciation Rights granted under the Plan, and (ii) as one (1) Share if such Shares were subject to Awards other than
Options or Stock Appreciation Rights granted under the Plan. Notwithstanding the foregoing and subject to adjustment as
provided in Section 4.2 hereof, no Participant may receive Options or SARs under the Plan in any calendar year that, taken
together, relate to more than 200,000 Shares.
1.2
Adjustments. Without limiting the Committee’s discretion as provided in Section 12 hereof, in the event that the
Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities or other
property, and other than a normal cash dividend), recapitalization, stock split, reverse stock split, reorganization, merger,
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consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event
affects the Shares, then the Committee shall, in an equitable and proportionate manner as determined by the Committee (and, as
applicable, in such manner as is consistent with 422 and 409A of the Code and the regulations thereunder) either: (i) adjust any or
all of (1) the aggregate number of Shares or other securities of the Company (or number and kind of other securities or property)
with respect to which Awards may be granted under the Plan; (2) the number of Shares or other securities of the Company (or
number and kind of other securities or property) subject to outstanding Awards under the Plan, provided that the number of
Shares subject to any Award shall always be a whole number; (3) the grant or exercise price with respect to any Award under the
Plan, and (4) the limits on the number of Shares or Awards that may be granted to Participants under the Plan in any calendar
year; (ii) provide for an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other
transaction or event having a similar effect; or (iii) make provision for a cash payment to the holder of an outstanding Award.
Any such adjustments to outstanding Awards shall be effected in a manner that precludes the material enlargement of rights and
benefits under such Awards.
1.3
Substitute Awards. Any Shares issued by the Company as Substitute Awards in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not reduce the Shares available for Awards under the Plan.
1.4
Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole
or in part, of authorized and unissued Shares or of issued Shares which have been reacquired by the Company.
Section 5. Eligibility.
Any Employee, Director or Consultant shall be eligible to be designated a Participant; provided, however, that Outside
Directors shall only be eligible to receive Awards granted consistent with Section 10.
Section 6. Stock Options And Stock Appreciation Rights.
1.1
Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine
the Participants to whom Options and SARs shall be granted, the number of Shares subject to each Award, the exercise price and
the conditions and limitations applicable to the exercise of each Option and SAR. An Option may be granted with or without a
related SAR. An SAR may be granted with or without a related Option. The grant of an Option or SAR shall occur when the
Committee by resolution, written consent or other appropriate action determines to grant such Option or SAR for a particular
number of Shares to a particular Participant at a particular Option Price or Grant Price, as the case may be, or such later date as
the Committee shall specify in such resolution, written consent or other appropriate action. The Committee shall have the
authority to grant Incentive Stock Options and to grant Non-Qualified Stock Options. In the case of Incentive Stock Options, the
terms and conditions of such grants shall be subject to and comply with Section 422 of the Code, as from time to time amended,
and any regulations implementing such statute. To the extent the aggregate Fair Market Value (determined at the time the
Incentive Stock Option is granted) of the Shares with respect to which all Incentive Stock Options are exercisable for the first
time by an Employee during any calendar year (under all plans described in Section 422(d) of the Code of the Employee’s
employer corporation and its parent and Subsidiaries) exceeds $100,000, such Options shall be treated as Non-Qualified Stock
Options.
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1.2
Price. The Committee in its sole discretion shall establish the Option Price at the time each Option is granted and
the Grant Price at the time each SAR is granted. Except in the case of Substitute Awards, the Option Price of an Option may not
be less than the Fair Market Value of a Share on the date of grant of such Option, and the Grant Price of an SAR may not be less
than the Fair Market Value of a Share on the date of grant of such SAR. In the case of Substitute Awards or Awards granted in
connection with an adjustment provided for in Section 4.2 hereof in the form of Options or SARS, such grants shall have an
Option Price (or Grant Price) per Share that is intended to maintain the economic value of the Award that was replaced or
adjusted as determined by the Committee. Notwithstanding the foregoing and except as permitted by the provisions of Section
4.2 hereof, the Committee shall not have the power to (i) amend the terms of previously granted Options to reduce the Option
Price of such Options, (ii) amend the terms of previously granted SARs to reduce the Grant Price of such SARs, (iii) cancel such
Options and grant substitute Options with a lower Option Price than the cancelled Options, (iv) cancel such SARs and grant
substitute SARs with a lower Grant Price than the cancelled SARs (v) cancel or provide for the surrender of any previously
granted Options or previously granted SARs with an Option Price or Grant Price above the then-current Fair Market Value of a
Share in exchange for a cash payment, in each case without the approval of the Company’s stockholders.
1.3
Term. Subject to the Committee’s authority under Section 3.1 and the provisions of Section 6.6, each Option and
SAR and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the Award
Agreement. The Committee shall be under no duty to provide terms of like duration for Options or SARs granted under the Plan.
Notwithstanding the foregoing, but subject to Section 6.4(a) hereof, no Option or SAR shall be exercisable after the expiration of
ten (10) years from the date such Option or SAR was granted.
1.4
Exercise.
(a)
Subject to Section 14.3, each Option and SAR shall be exercisable at such times and subject to such terms
and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The
Committee shall have full and complete authority to determine, subject to Section 6.6 herein, whether an Option or SAR
will be exercisable in full at any time or from time to time during the term of the Option or SAR, or to provide for the
exercise thereof in such installments, upon the occurrence of such events and at such times during the term of the Option
or SAR as the Committee may determine. An Award Agreement may provide that the period of time over which an
Option, other than an Incentive Stock Option, or SAR may be exercised shall be automatically extended if on the
scheduled expiration of such Award, the Participant’s exercise of such Award would, in the reasonable judgment of the
Company, violate applicable securities law or would be prohibited by a Company “blackout” policy; provided, however,
that during the extended exercise period the Option or SAR may only be exercised to the extent such Award was
exercisable in accordance with its terms immediately prior to such scheduled expiration date; provided further, however,
that such extended exercise period shall end not later than thirty (30) days after the exercise of such Option or SAR first
would no longer violate such laws or policy.
(b)
The Committee may impose such conditions with respect to the exercise of Options or SARs, including
without limitation, any relating to the application of federal, state or foreign securities laws or the Code, as it may deem
necessary or advisable. The exercise of any Option granted hereunder shall be effective only at such time as the sale of
Shares pursuant to such exercise will not violate any state or federal securities or other laws.
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(c)
An Option or SAR may be exercised in whole or in part at any time, with respect to whole Shares only,
within the period permitted thereunder for the exercise thereof, and shall be exercised by written notice of intent to
exercise the Option or SAR, delivered to the Company at its principal office, and payment in full to the Company at the
direction of the Committee of the amount of the Option Price for the number of Shares with respect to which the Option is
then being exercised.
(d)
Payment of the Option Price shall be made in (i) cash or cash equivalents, (ii) at the discretion of the
Committee, by transfer, either actually or by attestation, to the Company of unencumbered Shares previously acquired by
the Participant, valued at the Fair Market Value of such Shares on the date of exercise (or next succeeding trading date, if
the date of exercise is not a trading date), together with any applicable withholding taxes, such transfer to be upon such
terms and conditions as determined by the Committee, (iii) by a combination of (i) or (ii), or (iv) by any other method
approved or accepted by the Committee in its sole discretion, including, if the Committee so determines, (x) a cashless
(broker-assisted) exercise or (y) withholding Shares (net-exercise) otherwise deliverable to the Participant pursuant to the
Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price. Until the optionee
has been issued the Shares subject to such exercise, he or she shall possess no rights as a stockholder with respect to such
Shares. The Company reserves, at any and all times in the Company’s sole discretion, the right to establish, decline to
approve or terminate any program or procedures for the exercise of Options by means of a method set forth in subsection
(iv) above, including with respect to one or more Participants specified by the Company notwithstanding that such
program or procedures may be available to other Participants.
(e)
At the Committee’s discretion, the amount payable as a result of the exercise of an SAR may be settled in
cash, Shares or a combination of cash and Shares. A fractional Share shall not be deliverable upon the exercise of a SAR
but a cash payment will be made in lieu thereof.
1.5
Separation from Service. Except as otherwise provided in the applicable Award Agreement, an Option or SAR
may be exercised only to the extent that it is then exercisable, and if at all times during the period beginning with the date of
granting such Award and ending on the date of exercise of such Award the Participant is an Employee, Non-Employee Director or
Consultant, and shall terminate immediately upon a Separation from Service by the Participant. An Option or SAR shall cease to
become exercisable upon a Separation from Service of the holder thereof. Notwithstanding the foregoing provisions of this
Section 6.5 to the contrary, the Committee may determine in its discretion that an Option or SAR may be exercised following any
such Separation from Service, whether or not exercisable at the time of such separation; provided, however, that in no event may
an Option or SAR be exercised after the expiration date of such Award specified in the applicable Award Agreement, except as
provided in Section 6.4(a).
1.6
Ten Percent Stock Rule. Notwithstanding any other provisions in the Plan, if at the time an Option is otherwise to
be granted pursuant to the Plan, the optionee or rights holder owns directly or indirectly (within the meaning of Section 424(d) of
the Code) Shares of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of
Stock of the Company or its parent or Subsidiary or Affiliate corporations (within the meaning of Section 422(b)(6) of the Code),
then any Incentive Stock Option to be granted to such optionee or rights holder pursuant to the Plan shall satisfy the requirement
of Section 422(c)(5) of the Code, and the Option Price shall be not less than one hundred ten percent (110%) of the Fair Market
Value of the Shares of the Company, and such Option by its terms shall not be exercisable after the expiration of five (5) years
from the date such Option is granted.
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Section 7. Restricted Shares And Restricted Share Units.
1.1
Grant.
(a)
Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine
the Participants to whom Restricted Shares and Restricted Share Units shall be granted, the number of Restricted Shares
and/or the number of Restricted Share Units to be granted to each Participant, the duration of the period during which, and
the conditions under which, the Restricted Shares and Restricted Share Units may be forfeited to the Company, and the
other terms and conditions of such Awards. The Restricted Share and Restricted Share Unit Awards shall be evidenced by
Award Agreements in such form as the Committee shall from time to time approve, which agreements shall comply with
and be subject to the terms and conditions provided hereunder and any additional terms and conditions established by the
Committee that are consistent with the terms of the Plan.
(b)
Each Restricted Share and Restricted Share Unit Award made under the Plan shall be for such number of
Shares as shall be determined by the Committee and set forth in the Award Agreement containing the terms of such
Restricted Share or Restricted Share Unit Award. Such agreement shall set forth a period of time (not less than one year)
during which the grantee must remain in the continuous employment (or other service-providing capacity) of the
Company in order for the forfeiture and transfer restrictions to lapse. If the Committee so determines, the restrictions may
lapse during such restricted period in installments with respect to specified portions of the Shares covered by the
Restricted Share or Restricted Share Unit Award. The Award Agreement may also, in the discretion of the Committee, set
forth performance or other conditions that will subject the Shares to forfeiture and transfer restrictions. The Committee
may, at its discretion, waive all or any part of the restrictions applicable to any or all outstanding Restricted Share and
Restricted Share Unit Awards.
1.2
Delivery of Shares and Transfer Restrictions.
(a)
At the time a Restricted Share Award is granted, a certificate representing the number of Shares awarded
thereunder shall be registered in the name of the grantee. Such certificate shall be held by the Company or any custodian
appointed by the Company for the account of the grantee subject to the terms and conditions of the Plan, and shall bear
such a legend setting forth the restrictions imposed thereon as the Committee, in its discretion, may determine. The
foregoing to the contrary notwithstanding, the Committee may, in its discretion, provide that a Participant’s ownership of
Restricted Shares prior to the lapse of any transfer restrictions or any other applicable restrictions shall, in lieu of such
certificates, be evidenced by a “book entry” (i.e., a computerized or manual entry) in the records of the Company or its
designated agent in the name of the Participant who has received such Award, and confirmation and account statements
sent to the Participant with respect to such book-entry Shares may bear the restrictive legend referenced in the preceding
sentence. Such records of the Company or such agent shall, absent manifest error, be binding on all Participants who
receive Restricted Share Awards evidenced in such manner. The holding of Restricted Shares by the Company or such an
escrow holder, or the use of book entries to evidence the ownership of Restricted Shares, in accordance with this Section
7.2(a), shall not affect the rights of Participants as owners of the Restricted Shares awarded to them, nor affect the
restrictions applicable to such shares under the Award Agreement or the Plan, including the transfer restrictions.
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(b)
Unless otherwise provided in the applicable Award Agreement, the grantee shall have all rights of a
stockholder with respect to the Restricted Shares, including the right to receive dividends and the right to vote such
Shares, subject to the following restrictions: (i) the grantee shall not be entitled to delivery of the stock certificate until the
expiration of the restricted period and the fulfillment of any other restrictive conditions set forth in the Award Agreement
with respect to such Shares; (ii) none of the Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of during such restricted period or until after the fulfillment of any such other restrictive
conditions; (iii) except as otherwise determined by the Committee at or after grant, all of the Shares shall be forfeited and
all rights of the grantee to such Shares shall terminate, without further obligation on the part of the Company, unless the
grantee remains in the continuous employment of the Company for the entire restricted period in relation to which such
Shares were granted and unless any other restrictive conditions relating to the Restricted Share Award are met; and (iv)
dividends declared and paid on Restricted Shares during such restricted period shall be retained by the Company and paid
to the grantee upon the satisfaction of the continuous employment and any other restrictive conditions relating to such
Restricted Shares. Restricted Share Units shall be subject to similar transfer restrictions as Restricted Share Awards,
except that no Shares are actually awarded to a Participant who is granted Restricted Share Units on the date of grant, and
such Participant shall have no rights of a stockholder with respect to such Restricted Share Units until the restrictions set
forth in the applicable Award Agreement have lapsed.
1.3
Termination of Restrictions. At the end of the restricted period and provided that any other restrictive conditions of
the Restricted Share Award are met, or at such earlier time as otherwise determined by the Committee, all restrictions set forth in
the Award Agreement relating to the Restricted Share Award or in the Plan shall lapse as to the Restricted Shares subject thereto,
and a stock certificate for the appropriate number of Shares, free of the restrictions and restricted stock legend, shall be delivered
to the Participant or the Participant’s beneficiary or estate, as the case may be (or, in the case of book-entry Shares, such
restrictions and restricted stock legend shall be removed from the confirmation and account statements delivered to the
Participant or the Participant’s beneficiary or estate, as the case may be, in book-entry form).
1.4
Payment of Restricted Share Units. Each Restricted Share Unit shall have a value equal to the Fair Market Value
of a Share. Restricted Share Units may be paid in cash, Shares, other securities or other property, as determined in the sole
discretion of the Committee, upon the lapse of the restrictions applicable thereto, or otherwise in accordance with the applicable
Award Agreement. The applicable Award Agreement shall specify whether a Participant will be entitled to receive dividend
equivalent rights in respect of Restricted Share Units at the time of any payment of dividends to stockholders on Shares. If the
applicable Award Agreement specifies that a Participant will be entitled to dividend equivalent rights, (i) the amount of any such
dividend equivalent right shall equal the amount that would be payable to the Participant as a stockholder in respect of a number
of Shares equal to the number of vested Restricted Share Units then credited to the Participant, and (ii) any such dividend
equivalent right shall be paid in accordance with the Company’s payment practices as may be established from time to time and
as of the date on which such dividend would have been payable in respect of outstanding Shares (and in accordance with Section
409A of the Code with regard to Awards subject thereto); provided, that no dividend equivalents shall be paid on Restricted Share
Units that have not vested and such dividend equivalents shall instead accumulate and be paid upon vesting of the Restricted
Share Units to which they relate. Except as otherwise determined by the Committee at or after grant, Restricted Share Units may
not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of, and all Restricted Share Units
and all rights of the grantee to such Restricted Share Units shall terminate, without further obligation on
11
the part of the Company, unless the grantee remains in continuous employment of the Company for the entire restricted period in
relation to which such Restricted Share Units were granted and unless any other restrictive conditions relating to the Restricted
Share Unit Award are met.
Section 8. Performance Awards.
1.1
Grant. The Committee shall have sole and complete authority to determine the Participants who shall receive a
Performance Award, which shall consist of a right that is (i) denominated in cash or Shares (including but not limited to
Restricted Shares and Restricted Share Units), (ii) valued, as determined by the Committee, in accordance with the achievement
of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and
in such form as the Committee shall determine.
1.2
Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall
determine the performance goals to be achieved during any performance period, the length of any performance period, the
amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance
Award, and may amend specific provisions of the Performance Award; provided, however, that such amendment may not
adversely affect existing Performance Awards made within a performance period commencing prior to implementation of the
amendment.
1.3
Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the
close of the performance period or, in accordance with the procedures established by the Committee, on a deferred basis.
Separation from Service prior to the end of any performance period, other than for reasons of death or Disability, will result in the
forfeiture of the Performance Award, and no payments will be made. Notwithstanding the foregoing, the Committee may in its
discretion, waive any performance goals and/or other terms and conditions relating to a Performance Award. A Participant’s
rights to any Performance Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or
disposed of in any manner, except by will or the laws of descent and distribution, and/or except as the Committee may determine
at or after grant.
Section 9. Other Stock-Based Awards.
The Committee shall have the authority to determine the Participants who shall receive an Other Stock-Based Award,
which shall consist of any right that is (i) not an Award described in Sections 6 and 7 above and (ii) an Award of Shares or an
Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares
(including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes
of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and
conditions of any such Other Stock-Based Award.
Section 10. Non-Employee Director And Outside Director Awards.
1.1
The Board may provide that all or a portion of a Non-Employee Director’s annual retainer, meeting fees and/or
other awards or compensation as determined by the Board, be payable (either automatically or at the election of a Non-Employee
Director) in the form of Non-Qualified Stock Options, Restricted Shares, Restricted Share Units and/or Other Stock-Based
Awards, including unrestricted Shares. The Board shall determine the terms and conditions of any such Awards, including the
terms and conditions which shall apply upon a termination of the Non-Employee Director’s service as a member of the Board,
and shall have full power and authority in its discretion to administer such Awards, subject to the terms of the Plan and applicable
law.
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1.2
The Board may also grant Awards to Outside Directors pursuant to the terms of the Plan, including any Award
described in Sections 6, 7 and 9 above. With respect to such Awards, all references in the Plan to the Committee shall be deemed
to be references to the Board.
Section 11. Separation from Service.
The Committee shall have the full power and authority to determine the terms and conditions that shall apply to any
Award upon a Separation from Service with the Company, its Subsidiaries and Affiliates, including a separation from the
Company with or without Cause, by a Participant voluntarily, or by reason of death, Disability, Early Retirement or Retirement,
and may provide such terms and conditions in the Award Agreement or in such rules and regulations as it may prescribe.
Section 12. Change In Control.
1.1
Certain Terminations. Unless otherwise provided by the Committee, or in an Award Agreement or by a contractual
agreement between the Company and a Participant, if, within one year following a Change in Control, a Participant Separates
from Service with the Company (or its successor) by reason of (a) death; (b) Disability; (c) Normal Retirement or Early
Retirement; (d) for Good Reason by the Participant; or (e) involuntary termination by the Company for any reason other than for
Cause, all outstanding Awards of such Participant shall vest, become immediately exercisable and payable and have all
restrictions lifted. For purposes of an Award subject to Section 409A of the Code, Good Reason shall exist only if (i) the
Participant notifies the Company of the event establishing Good Reason within 90 days of its initial existence, (ii) the Company
is provided 30 days to cure such event and (iii) the Participant Separates from Service with the Company (or its successor) within
180 days of the initial occurrence of the event.
1.2
Accelerated Vesting. The Committee may (in accordance with Section 409A, to the extent applicable), in its
discretion, provide in any Award Agreement, or, in the event of a Change in Control, may take such actions as it deems
appropriate to provide, for the acceleration of the exercisability, vesting and/or settlement in connection with such Change in
Control of each or any outstanding Award or portion thereof and Shares acquired pursuant thereto upon such conditions (if any),
including termination of the Participant’s service prior to, upon, or following such Change in Control, to such extent as the
Committee shall determine. In the event of a Change of Control, and without the consent of any Participant, the Committee may,
in its discretion, provide that for a period of at least fifteen (15) days prior to the Change in Control, any Options or Stock
Appreciation Rights shall be exercisable as to all Shares subject thereto and that upon the occurrence of the Change in Control,
such Stock Options or Stock Appreciation Rights shall terminate and be of no further force and effect.
1.3
Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing,
successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the "Acquiror"), may (in
accordance with Section 409A, to the extent applicable), without the consent of any Participant, either assume or continue the
Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in
Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to
the Acquiror’s stock, as applicable; provided, that in the event of such an assumption, the Acquiror must grant the rights set forth
in Section 12.1 to the Participant in respect of such assumed Awards. For purposes of this Section, if so determined by the
Committee, in its discretion, an Award denominated in Shares shall be deemed assumed if, following the Change in Control, the
Award (as adjusted, if applicable, pursuant to Section 4.2 hereof) confers the right to receive, subject to the terms and
13
conditions of the Plan and the applicable Award Agreement, for each Share subject to the Award immediately prior to the Change
in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a
share of Stock on the effective date of the Change in Control was entitled; provided, however, that if such consideration is not
solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be
received upon the exercise or settlement of the Award, for each Share subject to the Award, to consist solely of common stock of
the Acquiror equal in Fair Market Value to the per share consideration received by holders of Shares pursuant to the Change in
Control. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in
Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be
outstanding effective as of the time of consummation of the Change in Control.
1.4
Cash-Out of Awards. The Committee may (in accordance with Section 409A, to the extent applicable), in its
discretion at or after grant and without the consent of any Participant, determine that, upon the occurrence of a Change in
Control, each or any Award or a portion thereof outstanding immediately prior to the Change in Control and not previously
exercised or settled shall be canceled in exchange for a payment with respect to each vested Share (and each unvested Share, if so
determined by the Committee) subject to such canceled Award in (i) cash, (ii) stock of the Company or of a corporation or other
business entity a party to the Change in Control, or (iii) other property which, in any such case, shall be in an amount having a
Fair Market Value equal to the Fair Market Value of the consideration to be paid per Share in the Change in Control, reduced by
the exercise or purchase price per share, if any, under such Award (which payment may, for the avoidance of doubt, be $0, in the
event the per share exercise or purchase price of an Award is greater than the per share consideration in connection with the
Change in Control). In the event such determination is made by the Committee, the amount of such payment (reduced by
applicable withholding taxes, if any), if any, shall be paid to Participants in respect of the vested portions of their canceled
Awards as soon as practicable following the date of the Change in Control and may be paid in respect of the unvested portions of
their canceled Awards in accordance with the vesting schedules applicable to such Awards.
1.5
Performance Awards. The Committee may (in accordance with Section 409A, to the extent applicable), in its
discretion at or after grant, provide that in the event of a Change in Control, (i) any outstanding Performance Awards relating to
performance periods ending prior to the Change in Control which have been earned but not paid shall become immediately
payable, (ii) all then-in-progress performance periods for Performance Awards that are outstanding shall end, and either (A) any
or all Participants shall be deemed to have earned an award equal to the relevant target award opportunity for the performance
period in question, or (B) at the Committee’s discretion, the Committee shall determine the extent to which performance criteria
have been met with respect to each such Performance Award, if at all, and (iii) the Company shall cause to be paid to each
Participant such partial or full Performance Awards, in cash, Shares or other property as determined by the Committee, within
thirty (30) days of such Change in Control, based on the Change in Control consideration, which amount may be zero if
applicable. In the absence of such a determination, any Performance Awards relating to performance periods that will not have
ended as of the date of a Change in Control shall be terminated and canceled for no further consideration.
Section 13. Amendment And Termination.
1.1
Amendments to the Plan. The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion
thereof at any time (and in accordance with Section 409A of the Code with regard to Awards subject thereto); provided that no
such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such
14
approval is necessary to comply with any tax or regulatory requirement for which or with which the Board deems it necessary or
desirable to comply.
1.2
Amendments to Awards. Subject to the restrictions of Section 6.2, the Committee may waive any conditions or
rights under, amend any terms of or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively
or retroactively in time (and in accordance with Section 409A of the Code with regard to Awards subject thereto); provided that
any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and
adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent
be effective without the consent of the affected Participant, holder or beneficiary.
1.3
Adjustments of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is
hereby authorized to make equitable and proportionate adjustments in the terms and conditions of, and the criteria included in,
Awards in recognition of unusual or nonrecurring events (and shall make such adjustments for the events described in Section 4.2
hereof) affecting the Company, any Subsidiary or Affiliate, or the financial statements of the Company or any Subsidiary or
Affiliate, or of changes in applicable laws, regulations or accounting principles.
Section 14. General Provisions.
1.1
Limited Transferability of Awards. Except as otherwise provided in the Plan, an Award Agreement or by the
Committee at or after grant, no Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a Participant, except by will or the laws of descent and distribution. No transfer of an Award by will or by laws of
descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice
thereof and an authenticated copy of the will and/or such other evidence as the Committee may deem necessary or appropriate to
establish the validity of the transfer. No transfer of an Award for value shall be permitted under the Plan.
1.2
Dividend Equivalents. In the sole and complete discretion of the Committee, an Award may provide the
Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a deferred basis.
Dividends or dividend equivalents with respect to Performance Awards shall be accumulated until, and shall be paid only to the
extent that, such Award is earned and vested based on the satisfaction of the applicable performance measures and time-based
vesting restrictions. Dividends or dividend equivalents with respect to Awards that are subject to time-based vesting restrictions
shall be accumulated until, and shall be paid only to the extent that, such Awards vest in accordance with their terms. All
dividends or dividend equivalents may, at the Committee’s discretion, accrue interest or be invested into additional Shares.
Notwithstanding the foregoing, with respect to an Award subject to Section 409A of the Code, the payment, deferral or crediting
of any dividends or dividend equivalents shall conform to the requirements of Section 409A of the Code.
1.3
Minimum Vesting. All Awards shall be subject to a minimum time-based vesting or performance period, as
applicable, of not less than one year from the grant date, except in the case of a Substitute Award made in replacement of an
award that is already fully vested or scheduled to vest in less than one year from the grant date of such Substitute Award.
Notwithstanding the foregoing, up to 5% of the total shares authorized for issuance under the Plan pursuant to Section 4.1 (as
adjusted, if applicable, pursuant to Section 4.2) may provide for a vesting period or performance period of less than one year
following the grant date.
1.4
Compliance with Section 409A of the Code. No Award (or modification thereof) shall provide for deferral of
compensation that does not comply with Section 409A of the Code
15
unless the Committee, at the time of grant, specifically provides that the Award is not intended to comply with Section 409A of
the Code. Notwithstanding any provision of the Plan to the contrary, if one or more of the payments or benefits received or to be
received by a Participant pursuant to an Award would cause the Participant to incur any additional tax or interest under Section
409A of the Code, the Committee may reform such provision to maintain to the maximum extent practicable the original intent of
the applicable provision without violating the provisions of Section 409A of the Code. In addition, if a Participant is a Specified
Employee at the time of his or her Separation from Service, any payments with respect to any Award subject to Section 409A of
the Code to which the Participant would otherwise be entitled by reason of such Separation from Service shall be made on the
date that is six months after the Participant’s Separation from Service (or, if earlier, the date of the Participant’s death). Although
the Company intends to administer the Plan so that Awards will be exempt from, or will comply with, the requirements of Section
409A of the Code, the Company does not warrant that any Award under the Plan will qualify for favorable tax treatment under
Section 409A of the Code or any other provision of federal, state, local or foreign law. The Company shall not be liable to any
Participant for any tax, interest, or penalties that Participant might owe as a result of the grant, holding, vesting, exercise, or
payment of any Award under the Plan.
1.5
No Rights to Awards. No Person shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Participants or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the
same with respect to each Participant.
1.6
Recoupment. Notwithstanding anything in the Plan to the contrary, all Awards granted under the Plan and any
payments made under the Plan shall be subject to clawback or recoupment as permitted or mandated by applicable law, rules,
regulations or Company policy as enacted, adopted or modified from time to time. For the avoidance of doubt, this provision
shall apply to any gains realized upon exercise or settlement of an Award.
1.7
Share Certificates. All certificates for Shares or other securities of the Company or any Subsidiary or Affiliate
delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the SEC or
any state securities commission or regulatory authority, any stock exchange or other market upon which such Shares or other
securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions.
1.8
Tax Withholding. A Participant may be required to pay to the Company or any Subsidiary or Affiliate and the
Company or any Subsidiary or Affiliate shall have the right and is hereby authorized to withhold from any Award, from any
payment due or transfer made under any Award or under the Plan, or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding or other
tax-related obligations in respect of an Award, its exercise or any other transaction involving an Award, or any payment or
transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of
Options to defray or offset any tax arising from the grant, vesting, exercise or payment of any Award. Without limiting the
generality of the foregoing, the Committee may in its discretion permit a Participant to satisfy or arrange to satisfy, in whole or in
part, the tax obligations incident to an Award by: (a) electing to have the Company withhold Shares or other property otherwise
deliverable to such Participant pursuant to the Award (provided, however, that the amount of any Shares so withheld shall not
exceed the amount necessary to satisfy required federal, state local and foreign withholding obligations using the
16
minimum statutory withholding rates for federal, state, local and/or foreign tax purposes, including payroll taxes, that are
applicable to supplemental taxable income) and/or (b) tendering to the Company Shares owned by such Participant (or by such
Participant and his or her spouse jointly) and purchased or held for the requisite period of time as may be required to avoid the
Company’s or the Affiliates’ or Subsidiaries’ incurring an adverse accounting charge, based, in each case, on the Fair Market
Value of the Shares on the payment date as determined by the Committee. All such elections shall be irrevocable, made in
writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion,
deems appropriate.
1.9
Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement that shall be delivered to
the Participant and may specify the terms and conditions of the Award and any rules applicable thereto. In the event of a conflict
between the terms of the Plan and any Award Agreement, the terms of the Plan shall prevail. The Committee shall, subject to
applicable law, determine the date an Award is deemed to be granted. The Committee or, except to the extent prohibited under
applicable law, its delegate(s) may establish the terms of agreements or other documents evidencing Awards under the Plan and
may, but need not, require as a condition to any such agreement’s or document’s effectiveness that such agreement or document
be executed by the Participant, including by electronic signature or other electronic indication of acceptance, and that such
Participant agree to such further terms and conditions as specified in such agreement or document. The grant of an Award under
the Plan shall not confer any rights upon the Participant holding such Award other than such terms, and subject to such
conditions, as are specified in the Plan as being applicable to such type of Award (or to all Awards) or as are expressly set forth in
the agreement or other document evidencing such Award.
1.10 No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide
for the grant of Options, Restricted Shares, Restricted Share Units, Other Stock-Based Awards or other types of Awards provided
for hereunder.
1.11 No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be
retained in the employ of the Company or any Subsidiary or Affiliate. Further, the Company or a Subsidiary or Affiliate may at
any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly
provided in an Award Agreement.
1.12 No Rights as Stockholder. Subject to the provisions of the Plan and the applicable Award Agreement, no
Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be
distributed under the Plan until such person has become a holder of such Shares.
1.13 Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan
and any Award Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to
conflicts of laws principles.
1.14
Severability. If any provision of the Plan or any Award is, or becomes, or is deemed to be invalid, illegal or
unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it
cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan
or the Award, such provision shall be stricken as to such
17
jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
1.15 Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if,
acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate
any applicable law or regulation (including applicable non-U.S. laws or regulations) or entitle the Company to recover the same
under Exchange Act Section 16(b), and any payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary.
1.16 No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate
fund of any kind or a fiduciary relationship between the Company or any Subsidiary or Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary or Affiliate
pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any
Subsidiary or Affiliate.
1.17 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the
Committee shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional
Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.
1.18 Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate
reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or
any provision thereof.
Section 15. Term Of The Plan.
1.1
Effective Date. The Plan shall be effective upon the later to occur of (i) its adoption by the Board or (ii)
immediately prior to the Registration Date (the “Effective Date”).
1.2
Expiration Date. No new Awards shall be granted under the Plan after the tenth (10th) anniversary of the Effective
Date. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may,
and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award or to
waive any conditions or rights under any such Award shall, continue after the tenth (10th) anniversary of the Effective Date.
18
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Chefs’ Warehouse, Inc.
Ridgefield, CT
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-175974 and 333-231587), the Registration
Statement on Form S-3 (No. 333-211827), the Registration Statement on Form S-3ASR (No. 333-237646), and the Registration Statement on Form S-4
(No. 333-187349) of The Chefs’ Warehouse, Inc. of our reports dated February 22, 2022, relating to the consolidated financial statements and the
effectiveness of the Chefs’ Warehouse, Inc.’s internal control over financial reporting, which appear in this Annual Report on Form 10-K of The Chefs’
Warehouse, Inc. for the fiscal year ended December 24, 2021.
/s/ BDO USA, LLP
Stamford, CT
February 22, 2022
CERTIFICATIONS
Exhibit 31.1
I, Christopher Pappas, certify that:
1. I have reviewed this annual report on Form 10-K of The Chefs’ Warehouse, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)
and Rule 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: February 22, 2022
By:
/s/ Christopher Pappas
Christopher Pappas
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATIONS
Exhibit 31.2
I, James Leddy, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of The Chefs’ Warehouse, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and Rule 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
function):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: February 22, 2022
By:
/s/ James Leddy
James Leddy
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of The Chefs’ Warehouse, Inc. (the “Company”) on Form 10-K for the year ended December 24, 2021 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher Pappas, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 22, 2022
By:
/s/ Christopher Pappas
Christopher Pappas
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff
upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report of The Chefs’ Warehouse, Inc. (the “Company”) on Form 10-K for the year ended December 24, 2021 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, James Leddy, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 22, 2022
By:
/s/ James Leddy
James Leddy
Chief Financial Officer (Principal Financial Officer)
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff
upon request.