Chefs Warehouse Inc

(Amounts in thousands, except share and per share amounts)

Note 1 -Operations and Basis of Presentation

Description of Business and Basis of Presentation

The Chefs’ Warehouse, Inc. (the “Company”), and its wholly-owned subsidiaries, is a premier distributor of specialty food and center-of-the-plate products in the United States, the Middle East and Canada. The Company is focused on serving the specific needs of chefs who own and/or operate some of the nation’s leading menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolateries, cruise lines, casinos and specialty food stores.

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 ofthree operating segments: East, Midwest and West that aggregate intoone reportable segment, foodservice distribution, which is concentrated primarily in the United States.

Consolidation

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

Unaudited Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements and the related interim information contained within the notes to such unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules of the Securities and Exchange Commission (“SEC”) for interim information and quarterly reports on Form 10-Q. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2023 filed as part of the Company’s Annual Report on Form 10-K (the “2023 Form 10-K”).

The unaudited condensed consolidated financial statements appearing in this Form 10-Q have been prepared on the same basis as the audited consolidated financial statements included in the Company’s 2023 Form 10-K, and in the opinion of management, include all normal recurring adjustments that are necessary for the fair statement of the Company’s interim period results. The year-end consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by GAAP. Due to seasonal fluctuations and other factors, the results of operations for the thirteen weeks ended March 29, 2024 are not necessarily indicative of the results to be expected for the full year.

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

Note 2 –Summary of Significant Accounting Policies

Revenue Recognition

The following table presents the Company’s net sales disaggregated by principal product category:

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. Net sales by product category includes estimates of product mix for certain locations that are not yet fully integrated into the Company’s information technology systems as of the reporting date.

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 $19,070 and $11,674 for the thirteen weeks ended March 29, 2024 and March 31, 2023, respectively.

Share Repurchases

The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private market transactions. Shares purchased under the program are recorded at cost and held as treasury stock.

Guidance Not Yet Adopted

Improvements to Income Tax Disclosures: In December 2023, the Financial Accounting Standards Board (“FASB”) issued guidance designed to improve the transparency and usefulness of income tax disclosures. The amendments include provisions to address the consistency of the income tax rate reconciliation and requirement to disaggregate income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company expects to adopt this guidance when effective and is evaluating the impact of adoption on its consolidated financial statements, which is limited to financial statement disclosures.

Improvements to Reportable Segment Disclosures: In November 2023, the FASB issued guidance which requires entities, including those with one reportable segment, to enhance reportable segment disclosures requirements particularly with respect to significant expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company expects to adopt this guidance when effective and is evaluating the impact of adoption on its consolidated financial statements, which is limited to financial statement disclosures.

Note 3 –Net Income per Share

Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share adjusts basic net income per share for all the potentially dilutive shares outstanding during the period.

The following table sets forth the computation of basic and diluted net income per common share:

Reconciliation of net income per common share:

Potentially dilutive securities that have been excluded from the calculation of diluted net income per common share because the effect is anti-dilutive are as follows:

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 predominantly determined based on a probability-based approach which includes projected results, percentage probability of occurrence and the application of a discount rate to present value the payments. A significant change in projected results, discount rate, or probabilities of occurrence could result in a significantly higher or lower fair value measurement. Changes in the fair value of contingent earn-out liabilities are reflected inother operating expenses, net on the condensed consolidated statements of operations.

The following table presents the changes in Level 3 contingent earn-out liabilities:

The long-term portion of contingent earn-out liabilities were $593 and $50 as of March 29, 2024 and December 29, 2023, respectively, and are reflected asother liabilities on the Company’s condensed consolidated balance sheets. The remaining short-term portion of earn-out liabilities are reflected asaccrued liabilities on the Company’s condensed consolidated balance sheets.

Fair Value of Financial Instruments

The carrying amounts reported in the Company’s condensed 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 March 29, 2024 and December 29, 2023, as these instruments had variable interest rates that reflected current market rates available to the Company and are classified as Level 2 fair value measurements.

The following table presents the carrying value and fair value of the Company’s convertible notes and its unsecured note issued in connection with the acquisition of Oakville Produce Partners, LLC (“GreenLeaf”) in fiscal 2023 (“GreenLeaf Note”). The fair value of the Company’s 2028 Convertible Senior Notes was based on Level 1 inputs. In estimating the fair value of its 2024 Convertible Senior Notes, the Company utilized Level 3 inputs including prevailing market interest rates to estimate the debt portion of the instrument and a Black Scholes valuation model to estimate the fair value of the conversion option. The Black Scholes model utilizes the market price of the Company’s common stock, estimates of the stock’s volatility and the prevailing risk-free interest rate in calculating the fair value estimate. The fair value of the GreenLeaf Note was determined based upon observable market prices of similar debt instruments.

Note 5 –Acquisitions

The Company paid approximately $315 during the thirteen weeks ended March 29, 2024 upon settlement of net working capital true-ups on prior year acquisitions, resulting in measurement period adjustments which increased goodwill by $656 and reduced prepaid expenses and other current assets by $341.

The Company recognized professional fees related to acquisition activities ofzero and $1,243 during the thirteen weeks ended March 29, 2024 and March 31, 2023, respectively, presented within other operating expenses, net on the condensed consolidated statements of operations.

Unaudited Pro forma Financial Information

The table below presents unaudited pro forma condensed consolidated income statement information of the Company as if the GreenLeaf and Hardie’s Fresh Foods acquisitions had occurred on December 30, 2022. The pro forma results were prepared from financial information obtained from the sellers of the business, as well as information obtained during the due diligence process associated with the acquisitions. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisitions been completed on the above date, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, any incremental costs for transitioning to become a public company, and also does not reflect additional revenue opportunities following the acquisitions. The pro forma information reflects amortization and depreciation of the acquisitions at their respective fair value. The pro forma information also reflects additional interest expense that would have been incurred by the Company to finance the acquisitions. Pro forma interest expense was estimated based on the prevailing interest rates charged on the Company’s senior secured term loan during fiscal 2022.

Note 6 –Inventories

Inventories consist primarily of finished product and are reflected net of adjustments for shrinkage, excess and obsolescence to approximate their net realizable value totaling $11,256 and $11,205 at March 29, 2024 and December 29, 2023, respectively.

Note 7 –Property and Equipment

Property and equipment is net of accumulated depreciation and amortization of $146,138 and $137,008 at March 29, 2024 and December 29, 2023, respectively.

Note 8 –Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill are presented as follows:

(1) The goodwill adjustments represent measurement period adjustments related to certain acquisitions completed in the prior year.

Other intangible assets are net of accumulated amortization of $138,831 and $132,660 as of March 29, 2024 and December 29, 2023, respectively. Amortization expense for other intangibles was $6,171 and $4,697 for the thirteen weeks ended March 29, 2024 and March 31, 2023, respectively.

Note 9 –Debt Obligations

Debt obligations as of March 29, 2024 and December 29, 2023 consisted of the following:

Senior Secured Term Loan Credit Facility

In March 2024, the Company entered into an eleventh amendment (“Eleventh Amendment”) to its senior secured term loan agreement, which reduced the interest rate spread on its senior secured term loan B facility. As a result of this amendment, the Company incurred a loss on debt extinguishment of $50, which represents the portion of unamortized deferred financing fees attributable to the lender that exited the loan syndicate. Arrangement fees of $775 and third-party transaction costs of $91 were expensed as incurred and included ininterest expense andother operating expenses, respectively, within the Company’s condensed consolidated statements of operations.

Additionally, during the thirteen weeks ended March 29, 2024, the Company made voluntary principal prepayments totaling $6,000 towards the senior secured term loan. In connection with the prepayments, the Company wrote-off unamortized deferred financing fees of $239, which are included ininterest expense within the Company’s condensed consolidated statements of operations.

Convertible Notes

The net carrying value of the Company’s convertible senior notes as of March 29, 2024 and December 29, 2023 was:

The components of interest expense on the Company’s convertible notes were as follows:

As of March 29, 2024, the Company had reserved $27,970 of its asset-based loan facility for the issuance of letters of credit and funds totaling $162,064 were available for borrowing.

Note 10 –Stockholders’ Equity

Equity Awards

The following table reflects the activity of RSAs and RSUs during the thirteen weeks ended March 29, 2024:

The Company granted 583,338 RSAs and RSUs to its employees and directors at a weighted average grant date fair value of $37.97 during the thirteen weeks ended March 29, 2024. These awards are a mix of time-, market- and performance-based grants that generally vest over a range of periods up tofive years. The Company recognized expense totaling $3,590 and $4,790 on its RSAs during the thirteen weeks ended March 29, 2024 and March 31, 2023, respectively.

At March 29, 2024, the total unrecognized compensation cost for unvested RSAs was $30,463 and the weighted-average remaining period was approximately 2.2 years. Of this total, $15,195 related to RSAs with time-based vesting provisions and $15,268 related to RSAs with performance- and market-based vesting provisions. At March 29, 2024, the weighted-average remaining period for time-based vesting and performance-based vesting RSAs were approximately 2.1 years and 2.2 years, respectively.

No share-based compensation expense has been capitalized.

Share Repurchase Program

In November 2023, the Company announced atwo-year share repurchase program in an amount up to $100,000, targeting $25.0 million to $100.0 million of share repurchases by the end of fiscal 2025. The remaining share purchase authorization was $95,000 at March 29, 2024. The Company is not obligated to repurchase any specific number of shares and may suspend or discontinue the program at any time.

Note 11 –Related Parties

The Chefs’ Warehouse Mid-Atlantic, LLC, a subsidiary of the Company, leases a distribution facility that is 100% owned by entities controlled by Christopher Pappas, the Company’s Chairman, President and Chief Executive Officer, and John Pappas, the Company’s Vice Chairman and Chief Operating Officer, and are deemed to be affiliates of these individuals. Expense related to this facility totaled $176 and $123 during the thirteen weeks ended March 29, 2024 and March 31, 2023.

Note 12 –Income Taxes

The Company’s effective tax rate was 30.0% and 26.0% for the thirteen weeks ended March 29, 2024 and March 31, 2023, respectively. The higher effective tax rate for the thirteen weeks ended March 29, 2024 is primarily due by the non-deductibility of certain compensation related items.. The effective tax rate otherwise varies from the 21% statutory rate primarily due to state taxes.

The Company’s income tax provision reflects the impact of an expected income tax refund receivable of $23,301 as of March 29, 2024 which is reflected inprepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.

Note 13 –Supplemental Disclosures of Cash Flow Information