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
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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.
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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.
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Results of Operations
Fiscal Years Ended
Fiscal Year Ended December 24, 2021 Compared to Fiscal Year Ended December 25, 2020
Net Sales
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 margin 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
Percentage of net sales 21.7 % 30.3 %
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.
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Other Operating Expenses, Net
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 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
Effective tax rate 27.3 % 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
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 margin 22.3 % 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.
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Selling, General and Administrative Expenses
Percentage of net sales 30.3 % 20.7 %
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
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 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
Effective tax rate 32.9 % 25.3 %
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):
Borrowings outstanding on asset-based loan facility $ 20,000 $ 40,000 $ —
Finance leases and other financing obligations $ 11,602 $ 15,798 $ 3,905
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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):
(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.
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Cash Flows
Fiscal Year Ended
Cash (used in) provided by operating activities $ (19,899) $ 42,881 $ 45,007
Cash (used in) provided by financing activities $ (9,222) $ 78,056 $ 96,947
Fiscal Year 2021 Cash Flows
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
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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:
Payments Due by Period (1, 2)
Total Less than One Year 1-3Years 4-5Years Thereafter
(In thousands)
(1)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.
(2)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
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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
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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
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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.
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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.
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Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to the Consolidated Financial Statements Page
Consolidated Balance Sheets 48
Consolidated Statements of Operations and Comprehensive (Loss) Income 49
Consolidated Statements of Changes in Stockholders’ Equity 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 52
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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
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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
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THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
Current assets:
Prepaid expenses and other current assets 37,774 33,479
Equipment, leasehold improvements and software, net 133,622 115,448
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term operating lease liabilities 15,882 17,167
Current portion of long-term debt 5,141 6,095
Other liabilities and deferred credits 5,110 4,416
Commitments and contingencies
Stockholders’ equity:
Accumulated other comprehensive loss (2,022) (2,051)
See accompanying notes to the consolidated financial statements.
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THE CHEFS’ WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Amounts in thousands, except share and per share amounts)
Fiscal Years Ended
Other comprehensive income (loss):
Foreign currency translation adjustments 29 (3) 173
Net (loss) income per share:
Weighted average common shares outstanding:
See accompanying notes to the consolidated financial statements.
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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)
Shares Amount
Cumulative effect adjustment — — — — (2,027) (2,027)
Cumulative translation adjustment — — — 173 — 173
Shares surrendered to pay withholding taxes (32,049) — (1,022) — — (1,022)
Cumulative translation adjustment — — — (3) — (3)
Shares surrendered to pay withholding taxes (201,888) (2) (3,668) — — (3,670)
Warrants issued for acquisition — — 1,120 — — 1,120
Cumulative translation adjustment — — — 29 — 29
Shares surrendered to pay withholding taxes (66,423) — (2,084) — — (2,084)
See accompanying notes to the consolidated financial statements.
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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:
Provision for allowance for doubtful accounts (422) 21,372 4,981
(Benefit) provision for deferred income taxes (1,845) (18,418) 2,063
Change in fair value of contingent earn-out liabilities (1,296) (11,479) 5,879
Changes in assets and liabilities, net of acquisitions:
Prepaid expenses and other current assets (2,183) (18,240) (1,813)
Cash flows from investing activities:
Cash flows from financing activities:
Proceeds from the issuance of common stock, net of issuance costs — 85,941 —
Payment of deferred financing fees (1,450) (856) (5,082)
Proceeds from exercise of stock options — — 1,541
Surrender of shares to pay withholding taxes (1,829) (3,670) (1,022)
Cash paid for contingent earn-out liabilities (83) (2,927) (2,412)
Borrowings under asset based loan facility — 100,000 —
Net cash (used in ) provided by financing activities (9,222) 78,056 96,947
Effect of foreign currency on cash and cash equivalents (14) 79 23
See accompanying notes to the consolidated financial statements.
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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
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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:
Fiscal Year Ended
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
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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
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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.
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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
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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
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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;
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b)quoted prices for identical or similar assets in inactive markets;
c)inputs other than quoted prices that are observable for the asset; and
d)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:
Fiscal Year Ended
Net (loss) income per share:
Weighted average common shares:
Reconciliation of net (loss) income per common share:
Fiscal Year Ended
Numerator:
Add effect of dilutive securities:
Interest on convertible notes, net of tax — — 207
Denominator:
Dilutive effect of unvested common shares — — 144,311
Dilutive effect of stock options and warrants — — 66,739
Dilutive effect of convertible notes — — 329,946
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:
Fiscal Year Ended
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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:
Fells Point Bassian Sid Wainer Other Acquisitions Total
Cash payments — — — (83) (83)
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.
Carrying Value Fair Value Carrying Value Fair Value
Note 5 – Acquisitions
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
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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:
Fiscal Year Ended
Loss before income taxes $ (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.
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The table below sets forth the purchase price allocation of these and other acquisitions:
Sid Wainer Bassian Other Acquisitions
Non-compete agreements — 1,000 —
Other assets — 10 —
Other long-term liabilities — — (499)
Issuance of warrants — — (1,120)
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:
Computers, data processing and other equipment 3 - 7 years 15,480 14,207
Less: accumulated depreciation and amortization (99,856) (79,662)
Equipment, leasehold improvements and software, net $ 133,622 $ 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,
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2020 and December 27, 2019.
The components of depreciation and amortization expense were as follows:
Fiscal Year Ended
Note 8 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are presented as follows:
Foreign currency translation 17
Foreign currency translation 66
Other intangible assets as of December 24, 2021 and December 25, 2020 consisted of the following:
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.
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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:
Note 9 – Debt Obligations
Debt obligations as of December 24, 2021 and December 25, 2020 consisted of the following:
Finance lease and other financing obligations 11,602 15,798
Deferred finance fees and original issue discount (4,976) (7,172)
Less: current installments (5,141) (6,095)
Total debt obligations excluding current installments $ 394,160 $ 398,084
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:
Thereafter —
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.
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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:
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%.
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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:
Unamortized deferred financing fees and premium (2,686) (3,999)
The components of interest expense on the Company’s Convertible Senior Notes were as follows:
Fiscal Year Ended
Amortization of deferred financing fees and premium $ 913 $ 1,000 $ 83
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
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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.
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The following table reflects the activity of RSAs during the fiscal year ended December 24, 2021:
Time-based Performance-based Market-based
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:
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.
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Note 11 – Leases
The components of net lease cost were as follows:
Fiscal Year Ended
Finance lease cost:
Interest expense on lease liabilities 555 552 96
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:
Operating Leases Finance Leases
Supplemental balance sheet information related to finance leases was as follows:
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
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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:
Fiscal Year Ended
Current income tax (benefit) expense:
Total current income tax (benefit) expense (8) (22,285) 6,147
Deferred income tax (benefit) expense:
Total deferred income tax (benefit) expense (1,845) (18,418) 2,063
Income tax (benefit) expense differed from amounts computed using the statutory federal income tax rate due to the following reasons:
Fiscal Year Ended
Differences due to:
State and local taxes, net of federal benefit (396) (6,414) 2,078
Changes in tax rates (55) 24 (95)
Federal NOL rate differential — (5,212) —
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Deferred tax assets and liabilities at December 24, 2021 and December 25, 2020 consist of the following:
Deferred tax assets:
Charitable contribution carryforward 3,865 3,166
Deferred tax liabilities:
Prepaid expenses and other (1,916) (2,071)
Operating lease right-of-use assets (35,862) (31,414)
Total net deferred tax asset $ 9,380 $ 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:
Fiscal Year Ended
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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 $ (230) $ 308 $ 6,046
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases $ 555 $ 3,856 $ 96
ROU assets obtained in exchange for lease liabilities:
Non-cash investing and financing activities:
Warrants issued for acquisition $ 1,120 $ — $ —
Contingent earn-out liabilities for acquisitions $ 5,500 $ 3,464 $ 7,929
Convertible notes issued for acquisitions $ — $ — $ 4,000
Note 14 – Employee Benefit Plans
Employee Tax-Deferred Savings Plan
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.
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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:
Allowance for doubtful accounts
Allowance for deferred tax assets
Note 18 – Subsequent Events
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.
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Item9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item9A. 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.
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