THE CHEFS’ WAREHOUSE, INC.

FORM 10-Q

Table of Contents



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited):	4

	Consolidated Balance Sheets ~~at March 29, 2019 and December 28, 2018~~	4

	Consolidated Statements of Operations and Comprehensive Income ~~for the thirteen weeks ended March 29, 2019 and March 30, 2018~~	5

	Consolidated Statements of Changes in Stockholders’ Equity ~~for the thirteen weeks ended March 29, 2019 and March 30, 2018~~	6

	Consolidated Statements of Cash Flows ~~for the thirteen weeks ended March 29, 2019 and March 30, 2018~~	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2325

Item 4.	Controls and Procedures	2325

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	2426

Item 1A.	Risk Factors	2426

Item 2.	Issuer Purchases of Equity Securities	2426

Item 3.	Defaults Upon Senior Securities	2426

Item 4.	Mine Safety Disclosures	2426

Item 5.	Other Information	2426

Item 6.	Exhibits	2527

	Signature	2527

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

Statements in this report regarding the business of The Chefs’ Warehouse, Inc. (the “Company”) that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and are based on current expectations and management estimates; actual results may differ materially. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. The risks and uncertainties which could impact these statements include, but are not limited to the following: our sensitivity to general economic conditions, including disposable income levels and changes in consumer discretionary spending; our ability to expand our operations in our existing markets and to penetrate new markets through acquisitions; we may not achieve the benefits expected from our acquisitions, which could adversely impact our business and operating results; we may have difficulty managing and facilitating our future growth; conditions beyond our control could materially affect the cost and/or availability of our specialty food products or center-of-the-plate products and/or interrupt our distribution network; our increased distribution of center-of-the-plate products, like meat, poultry and seafood, involves increased exposure to price volatility experienced by those products; our business is a low-margin business and our profit margins may be sensitive to inflationary and deflationary pressures; because our foodservice distribution operations are concentrated in certain culinary markets, we are susceptible to economic and other developments, including adverse weather conditions, in these areas; fuel cost volatility may have a material adverse effect on our business, financial condition or results of operations; our ability to raise capital in the future may be limited; we may be unable to obtain debt or other financing, including financing necessary to execute on our acquisition strategy, on favorable terms or at all; our business operations and future development could be significantly disrupted if we lose key members of our management team; and other risks and uncertainties included under the heading Risk Factors in our Annual Report on Form 10-K filed on March 1, 2019 with the Securities and Exchange Commission (the “SEC”).

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

THE CHEFS’ WAREHOUSE, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)


	March 29, 2019 (unaudited)			December 28, 2018			June 28, 2019 (unaudited)			December 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	17,317		$	42,410		$	24,294		$	42,410
Accounts receivable, net of allowance of $7,461 in 2019 and $7,460 in 2018	152,123			161,758
Accounts receivable, net of allowance of $7,993 in 2019 and $7,460 in 2018							157,461			161,758
Inventories, net	113,540			112,614			122,592			112,614
Prepaid expenses and other current assets	12,216			11,953			12,650			11,953
Total current assets	295,196			328,735			316,997			328,735
Equipment, leasehold improvements and software, net	88,549			85,276			90,198			85,276
Operating lease right-of-use assets	118,792			—			128,922			—
Goodwill	195,546			184,280			193,526			184,280
Intangible assets, net	145,242			130,033			144,420			130,033
Other assets	3,787			4,074			3,688			4,074
Total assets	$	847,112		$	732,398		$	877,751		$	732,398
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	78,120		$	87,799		$	86,814		$	87,799
Accrued liabilities	22,872			24,810			24,787			24,810
Short-term operating lease liabilities	16,499			—			16,554			—
Accrued compensation	8,536			12,872			10,779			12,872
Current portion of long-term debt	1,804			61			304			61
Total current liabilities	127,831			125,542			139,238			125,542
Long-term debt, net of current portion	281,675			278,169			281,628			278,169
Operating lease liabilities	111,140			—			121,846			—
Deferred taxes, net	9,952			9,601			10,153			9,601
Other liabilities and deferred credits	8,091			10,410			7,491			10,410
Total liabilities	538,689			423,722			560,356			423,722
Commitments and contingencies	—			—			—			—
Stockholders’ equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding March 29, 2019 and December 28, 2018	—			—
Common Stock, $0.01 par value, 100,000,000 shares authorized, 29,941,184 and 29,968,483 shares issued and outstanding at March 29, 2019 and December 28, 2018, respectively	300			300
Preferred Stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding June 28, 2019 and December 28, 2018							—			—
Common Stock, $0.01 par value, 100,000,000 shares authorized, 30,291,364 and 29,968,483 shares issued and outstanding at June 28, 2019 and December 28, 2018, respectively							303			300
Additional paid-in capital	207,911			207,326			209,016			207,326
Accumulated other comprehensive loss	(2,166		)	(2,221		)	(2,048		)	(2,221		)
Retained earnings	102,378			103,271			110,124			103,271
Stockholders’ equity	308,423			308,676			317,395			308,676
Total liabilities and stockholders’ equity	$	847,112		$	732,398		$	877,751		$	732,398

See accompanying notes to consolidated financial statements.

THE CHEFS’ WAREHOUSE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

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


	Thirteen Weeks Ended					Thirteen Weeks Ended					Twenty-six Weeks Ended
	March 29, 2019		March 30, 2018			June 28, 2019		June 29, 2018			June 28, 2019		June 29, 2018
Net sales	$	357,027	$	318,615		$	411,420	$	370,442		$	768,447	$	689,057
Cost of sales	266,838		239,093			304,945		277,202			571,783		516,295
Gross profit	90,189		79,522			106,475		93,240			196,664		172,762
Operating expenses	84,039		73,782			90,939		78,292			174,978		152,074
Operating income	6,150		5,740			15,536		14,948			21,686		20,688
Interest expense	4,551		4,979			4,845		5,381			9,396		10,360
Loss on asset disposal	34		—			6		30			40		30
Income before income taxes	1,565		761			10,685		9,537			12,250		10,298
Provision for income tax expense	431		217			2,939		2,718			3,370		2,935
Net income	$	1,134	$	544		$	7,746	$	6,819		$	8,880	$	7,363
Other comprehensive income (loss):
Foreign currency translation adjustments	55		(922		)	118		(281		)	173		(1,203		)
Comprehensive income (loss)	$	1,189	$	(378	)
Comprehensive income						$	7,864	$	6,538		$	9,053	$	6,160
Net income per share:
Basic	$	0.04	$	0.02		$	0.26	$	0.24		$	0.30	$	0.26
Diluted	$	0.04	$	0.02		$	0.26	$	0.24		$	0.30	$	0.26
Weighted average common shares outstanding:
Basic	29,457,257		28,122,723			29,527,167		28,166,875			29,492,138		28,144,782
Diluted	29,840,979		28,197,247			29,848,285		29,595,247			29,844,614		28,311,549

See accompanying notes to consolidated financial statements.

THE CHEFS’ WAREHOUSE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Amounts in thousands, except share data)


	Common Stock				Additional Paid in Capital				Accumulated Other Comprehensive Loss			Retained Earnings				Total			Common Stock					Additional Paid in Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total
	Shares		Amount					Shares				Retained Earnings			Amount									Additional Paid in Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total
Balance December 28, 2018	29,968,483		$	300	Additional Paid in Capital			$	Accumulated Other Comprehensive Loss	207,326		$	(2,221	)		Total		$	103,271		$	308,676	29,968,483			$	300			$	207,326			$	(2,221	)		$	103,271	$	308,676
Cumulative effect adjustment due to adoption of new accounting standard	—		—		—				—			(2,027		)		(2,027		)	—		—			—				—				(2,027		)		(2,027		)
Net income	—		—		—				—			1,134				1,134			—		—			—				—				1,134				1,134
Stock compensation	(23,680	)	—		915				—			—				915			(23,680	)	—			915				—				—				915
Exercise of stock options	20,383		—		412				—			—				412			20,383		—			412				—				—				412
Cumulative translation adjustment	—		—		—				55			—				55			—		—			—				55				—				55
Shares surrendered to pay withholding taxes	(24,002	)	—		(742		)		—			—				(742		)	(24,002	)	—			(742		)		—				—				(742		)
Balance March 29, 2019	29,941,184		$	300	$	207,911			$	(2,166	)	$	102,378			$	308,423		29,941,184		$	300		$	207,911			$	(2,166	)		$	102,378			$	308,423
Net income																			—		—			—				—				7,746				7,746
Stock compensation																			346,915		3			1,085				—				—				1,088
Exercise of stock options																			7,193		—			146				—				—				146
Cumulative translation adjustment																			—		—			—				118				—				118
Shares surrendered to pay withholding taxes																			(3,928	)				(126		)		—				—				(126		)
Balance June 28, 2019																			30,291,364		$	303		$	209,016			$	(2,048	)		$	110,124			$	317,395


Balance December 29, 2017	28,442,208		$	284	$	166,997		$	(1,549	)	$	82,869	$	248,601		28,442,208		$	284	$	166,997		$	(1,549	)	$	82,869	$	248,601
Net income	—		—		—			—			544		544			—		—		—			—			544		544
Stock compensation	284,618		3		834			—			—		837			284,618		3		834			—			—		837
Cumulative translation adjustment	—		—		—			(922		)	—		(922		)	—		—		—			(922		)	—		(922		)
Shares surrendered to pay withholding taxes	(20,100	)	—		(472		)	—			—		(472		)	(20,100	)	—		(472		)	—			—		(472		)
Balance March 30, 2018	28,706,726		$	287	$	167,359		$	(2,471	)	$	83,413	$	248,588		28,706,726		$	287	$	167,359		$	(2,471	)	$	83,413	$	248,588
Net income																—		—		—			—			6,819		6,819
Stock compensation																23,547		—		1,072			—			—		1,072
Cumulative translation adjustment																—		—		—			(281		)	—		(281		)
Shares surrendered to pay withholding taxes																(4,200	)	—		(99		)	—			—		(99		)
Balance June 29, 2018																28,726,073		$	287	$	168,332		$	(2,752	)	$	90,232	$	256,099

See accompanying notes to consolidated financial statements.

THE CHEFS’ WAREHOUSE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)


	Thirteen Weeks Ended						Twenty-six Weeks Ended
	March 29, 2019			March 30, 2018			June 28, 2019			June 29, 2018
Cash flows from operating activities:
Net income	$	1,134		$	544		$	8,880		$	7,363
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,881			2,316			6,055			4,500
Amortization	2,877			2,903			6,184			5,983
Provision for allowance for doubtful accounts	851			497			1,914			1,646
Non-cash operating lease expense	537			312			1,151			471
Deferred taxes	1,131			340			1,332			185
Amortization of deferred financing fees	522			549			1,044			1,102
Stock compensation	915			837			2,003			1,909
Change in fair value of contingent earn-out liability	107			124			2,795			228
Loss on asset disposal	34			—			40			30
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	13,778			6,497			7,424			(173		)
Inventories	677			754			(7,965		)	(10,182		)
Prepaid expenses and other current assets	(207		)	2,759			(640		)	1,524
Accounts payable, accrued liabilities and accrued compensation	(18,010		)	(7,324		)	(5,482		)	5,692
Other assets and liabilities	164			(568		)	(2,845		)	(1,360		)
Net cash provided by operating activities	7,391			10,540			21,890			18,918
Cash flows from investing activities:
Capital expenditures	(4,125		)	(2,903		)	(8,549		)	(5,545		)
Proceeds from asset disposals							—			30
Cash paid for acquisitions, net of cash received	(27,990		)	(2,377		)	(28,292		)	(11,899		)
Net cash used in investing activities	(32,115		)	(5,280		)	(36,841		)	(17,414		)
Cash flows from financing activities:
Payment of debt, finance lease and other financing obligations	(37		)	(1,179		)	(1,716		)	(2,248		)
Cash paid for deferred financing fees							—			(534		)
Proceeds from exercise of stock options	412			—			558			—
Surrender of shares to pay withholding taxes	(742		)	(472		)	(868		)	(571		)
Cash paid for contingent earn-out liability							(200		)	—
Payments under revolving credit facility							(960		)	—
Net cash used in financing activities	(367		)	(1,651		)	(3,186		)	(3,353		)
Effect of foreign currency translation on cash and cash equivalents	(2		)	(39		)	21			(62		)
Net increase (decrease) in cash and cash equivalents	(25,093		)	3,570
Net decrease in cash and cash equivalents							(18,116		)	(1,911		)
Cash and cash equivalents-beginning of period	42,410			41,504			42,410			41,504
Cash and cash equivalents-end of period	$	17,317		$	45,074		$	24,294		$	39,593

See accompanying notes to consolidated financial statements.

THE CHEFS’ WAREHOUSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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 operates in one reportable segment, foodservice distribution, which is concentrated primarily in the United States. The Company’s customer base consists primarily of menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolatiers, cruise lines, casinos and specialty food stores.

Consolidation

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

Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements and the related interim information contained within the notes to such unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules of the Securities and Exchange Commission (“SEC”) for interim information and quarterly reports on Form 10-Q. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2018 filed as part of the Company’s Annual Report on Form 10-K, as filed with the SEC on March 1, 2019.

The unaudited consolidated financial statements appearing in this Form 10-Q have been prepared on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 1, 2019, 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 and twenty-sixweeks ended ~~March 29,~~June 28, 2019 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.

Guidance Adopted in 2019

Leases: In February 2016, the Financial Accounting Standard Board (“FASB”) issued guidance (“ASC 842”) to increase the transparency and comparability among organizations by recognizing right-of-use assets (“ROU assets”) and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASC 842 on December 29, 2018, using an optional transition method that allows entities to initially apply the new lease standard at the adoption date. Under this approach, comparative periods are not restated. The Company adopted a package of practical expedients that allowed the Company to:

apply hindsight in determining the lease term of its leases;

not reassess whether any expired or existing contracts are or contain leases;

not reassess the lease classification of any expired or existing leases; and

not reassess initial direct costs for any existing leases.

The use of hindsight in assessing lease term resulted in a $2,027 cumulative effect adjustment to opening retained earnings. Adoption had a material impact on the Company’s consolidated balance sheet as a result of recognizing ROU assets and lease liabilities for its operating leases of $118,031 and $126,309, respectively, but it did not materially impact the Company’s consolidated statements of operations or debt covenants. There has been no significant change to the accounting of finance leases.

Comprehensive Income: In February 2018, the FASB issued guidance that permits a Company to reclassify the stranded tax effects in accumulated other comprehensive income resulting from the enactment of H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Tax Act”), to retained earnings. The Company elected to not reclassify such amounts to retained earnings. The Company releases disproportionate tax effects from accumulated other comprehensive income as individual items are liquidated. The Company adopted this guidance on December 29, 2018 and adoption did not have a material impact on the Company’s consolidated financial statements.

Implementation Costs Incurred in a Cloud Computing Arrangement Service Contract: In August 2018, the FASB issued guidance that aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred to obtain or develop internal-use software. The Company adopted this guidance prospectively on December 29, 2018 and adoption did not have a material impact on the Company’s consolidated financial statements.

Guidance Not Yet Adopted

Measurement of Credit Losses on Financial Instruments: In June 2016 and as further amended in November 2018, the FASB issued guidance which requires entities to use a forward-looking expected loss model to estimate credit losses. It also requires additional disclosure related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. The guidance is effective for fiscal years beginning after December 15, 2019. The Company expects to adopt this guidance when effective and adoption is not expected to have a material effect on the Company’s consolidated financial statements.

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 operating 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:


	Thirteen Weeks Ended								Thirteen Weeks Ended								Twenty-six Weeks Ended
	March 29, 2019				March 30, 2018				June 28, 2019				June 29, 2018				June 28, 2019				June 29, 2018
Center-of-the-Plate	$	156,616	43.9	%	$	141,743	44.5	%	$	183,513	44.6	%	$	160,126	43.2	%	$	340,128	44.3	%	$	301,868	43.8	%
Dry Goods	63,754		17.9	%	54,673		17.2	%	72,764		17.7	%	65,302		17.6	%	136,519		17.8	%	119,974		17.4	%
Pastry	50,205		14.1	%	43,677		13.7	%	56,532		13.7	%	51,483		13.9	%	106,737		13.9	%	95,160		13.8	%
Cheese and Charcuterie	35,355		9.9	%	32,911		10.3	%	41,218		10.0	%	39,105		10.6	%	76,573		10.0	%	72,016		10.5	%
Dairy and Eggs	25,614		7.2	%	22,768		7.1	%	28,671		7.0	%	27,499		7.4	%	54,285		7.1	%	50,267		7.3	%
Oils and Vinegar	18,693		5.2	%	16,874		5.3	%	20,937		5.1	%	19,643		5.3	%	39,630		5.2	%	36,518		5.3	%
Kitchen Supplies	6,790		1.8	%	5,969		1.9	%	7,785		1.9	%	7,284		2.0	%	14,575		1.7	%	13,254		1.9	%
Total	$	357,027	100	%	$	318,615	100	%	$	411,420	100	%	$	370,442	100	%	$	768,447	100	%	$	689,057	100	%

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

Deferred Revenue

Certain customer arrangements in the Company’s direct-to-consumer business, prepaid gift plans and gift card purchases, result in deferred revenues when cash payments are received in advance of performance. The Company recognizes revenue on its prepaid gift plans when control of each product is transferred to the customer. Performance obligations under the Company’s prepaid gift plans are satisfied within a period of twelve months or less. Gift cards issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards at the time gift cards are sold and the liability is reduced when the card is redeemed, the value of the card is escheated to the appropriate government agency, or through breakage. Gift card breakage is estimated based on the Company’s historical redemption experience and expected trends in redemption patterns. Amounts recognized through breakage represent the portion of the gift card liability that is not subject to unclaimed property laws and for which the likelihood of redemption is remote. The Company recorded deferred revenues, reflected as accrued liabilities on the Company’s consolidated balance sheets, of ~~$1,362~~$1,232 and $1,496 as of ~~March 29,~~June 28, 2019 and December 28, 2018, 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 ~~$288~~$309 as of ~~March 29,~~June 28, 2019. Refund liabilities are reflected as accrued liabilities on the consolidated balance sheets. The Company recognized a corresponding asset of ~~$181~~$194 as of ~~March 29,~~June 28, 2019 for its right to recover products from customers on settling its refund liabilities. This asset is reflected as inventories, net on the 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 operating expenses on the Company’s consolidated statements of operations.

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 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 operating expenses on the Company’s consolidated statements of operations. Finance lease ~~right-of-use~~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 consists 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.

Note 3 Earnings Per Share

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



	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net income per share:
Basic	$	0.26	$	0.24	$	0.30	$	0.26
Diluted	$	0.26	$	0.24	$	0.30	$	0.26
Weighted average common shares:
Basic	29,527,167		28,166,875		29,492,138		28,144,782
Diluted	29,848,285		29,595,247		29,844,614		28,311,549

Thirteen Weeks Ended
March 29, 2019 March 30, 2018
Net income per share:
Basic $ 0.04
$ 0.02
Diluted $ 0.04
$ 0.02
Weighted average common shares:

Basic 29,457,257
28,122,723
Diluted 29,840,979
28,197,247

Reconciliation of net income per common share:



	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Numerator:
Net income	$	7,746	$	6,819	$	8,880	$	7,363
Add effect of dilutive securities:
Interest on convertible notes, net of tax	—		164		—		—
Net income available to common shareholders	$	7,746	$	6,983	$	8,880	$	7,363
Denominator:
Weighted average basic common shares outstanding	29,527,167		28,166,875		29,492,138		28,144,782
Dilutive effect of unvested common shares	321,118		190,998		352,476		166,767
Dilutive effect of convertible notes	—		1,237,374		—		—
Weighted average diluted common shares outstanding	29,848,285		29,595,247		29,844,614		28,311,549

Thirteen Weeks Ended
March 29, 2019 March 30, 2018
Numerator:
Net income $ 1,134
$ 544
Denominator:

Weighted average basic common shares outstanding 29,457,257
28,122,723
Dilutive effect of unvested common shares 383,722
74,524
Weighted average diluted common shares outstanding 29,840,979
28,197,247

The following table presents potentially dilutive securities that have been excluded from the calculation of diluted net income per common share because the effect is anti-dilutive:



	Thirteen Weeks Ended		Twenty-six Weeks Ended
	June 28, 2019	June 29, 2018	June 28, 2019	June 29, 2018
Restricted share awards (“RSAs”)	148,793	—	74,291	5,762
Convertible notes	91,053	—	91,053	1,237,374

Thirteen Weeks Ended
March 29, 2019 March 30, 2018
Restricted share awards (RSAs) —
81,218
Stock options —
191,808
Convertible notes 91,053
1,237,374

Note 4 Fair Value Measurements

Assets and Liabilities Measured at Fair Value

The Company’s contingent earn-out liabilities are measured at fair value. These liabilities were estimated using Level 3 inputs. Long-term earn-out liabilities were ~~$5,960~~$5,339 and $2,792 as of ~~March 29,~~June 28, 2019 and December 28, 2018, respectively, and are reflected as other liabilities and deferred credits on the consolidated balance sheets. The remaining short-term earn-out liabilities are reflected as accrued liabilities on the consolidated balance sheets. The fair value of contingent consideration was determined based on a probability-based approach which includes projected results, percentage probability of occurrence and the application of a discount rate to present value the payments. A significant change in projected results, discount rate, or probabilities of occurrence could result in a significantly higher or lower fair value measurement. Changes in the fair value of contingent earn-out liabilities are reflected in operating expenses on the consolidated statements of operations. In May 2019, the Company made a $200 cash payment to fully settle its Del Monte earn-out liability.

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



	Del Monte			Fells Point		Bassian		Other Acquisitions		Total
Balance December 28, 2018	$	—		$	3,649	$	—	$	1,441	$	5,090
Acquisition value	—			—		2,800		—		2,800
Cash payments	(200		)	—		—		—		(200		)
Changes in fair value	200			1,760		85		750		2,795
Balance June 28, 2019	$	—		$	5,409	$	2,885	$	2,191	$	10,485

Fells Point Bassian Other Acquisitions Total
Balance December 28, 2018 $ 3,649
$ —
$ 1,441
$ 5,090
Acquisition —
4,080
—
4,080
Changes in fair value 79
—
28
107
Balance March 29, 2019 $ 3,728
$ 4,080
$ 1,469
$ 9,277

Fair Value of Financial Instruments

The following table presents the carrying value and fair value of the Company’s convertible unsecured note. In estimating the fair value of the ~~Note,~~convertible unsecured note, 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.



	June 28, 2019
	Carrying Value		Fair Value
Convertible unsecured note	$	4,000	$	3,987

March 29, 2019
Carrying Value Fair Value
Convertible unsecured note $ 4,000
$ 4,029

Note 5 Acquisitions

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 protein manufacturer and distributor based in northern California. The aggregate purchase price for the transaction at acquisition date was approximately $31,990 and is subject to a customary working capital true-up. The acquisition was funded with $27,990 in cash and the issuance of a $4,000 unsecured convertible note.

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 earn-out liability is subject to the successful achievement of certain gross profit targets. ~~At March 29, 2019 and February 25, 2019, the~~The Company estimated the fair value of this contingent earn-out liability to be ~~$4,080. The~~$2,885 and $2,800 as of June 28, 2019 and February 25, 2019, respectively. During the second quarter of 2019, the Company ~~is in~~updated the ~~process of finalizing a~~ valuation of the ~~earn-out liability, and~~ tangible and intangible assets of Bassian as of the acquisition date. ~~These~~As a result, the Company recorded a measurement period adjustment that decreased goodwill by $2,098 mainly due to a $2,455 increase in fair value related to other intangible assets ~~will be~~fair value and a $1,331 decrease in current liabilities, partially offset by a $1,280 decrease in the fair value of the earn-out liability. Customer relationships, non-compete agreement and trademarks are valued at fair value using Level 3 ~~inputs.~~inputs and are being amortized over 15, 5 and 10 years, respectively. Goodwill for the Bassian acquisition will be amortized over 15 years for tax purposes. The goodwill recorded primarily reflects the value of acquiring an established meat processor to grow the Company's protein business in the West Coast region, as well as any intangible assets that do not qualify for separate recognition. The Company recognized professional fees of ~~$178~~$210 in operating expenses related to the Bassian acquisition. ~~For the thirteen weeks ended March 29, 2019, the~~The Company reflected net sales of ~~$5,527~~$14,836 and $20,363 for Bassian in its consolidated statement of ~~operations.~~operations for the thirteen and twenty-six weeks ended June 28, 2019, respectively. The Company has determined that separate disclosure of Bassian earnings is impracticable due to the commencement of integration of the Bassian business into the Company's operations in the San Francisco market. The purchase price allocation of the Bassian acquisition is based on preliminary valuations and is subject to change as the Company obtains additional information during the measurement period.

The table below sets forth the purchase price allocation of the Bassian acquisition:



	Bassian
Current assets (includes cash acquired)	$	6,656
Customer relationships	13,250
Trademarks	6,320
Non-compete agreement	940
Goodwill	9,149
Fixed assets	856
Other assets	10
Current liabilities	(2,391		)
Earn-out liability	(2,800		)
Total consideration	$	31,990

Bassian
Current assets (includes cash acquired) $ 6,659
Customer relationships 11,984
Trademarks 6,071
Goodwill 11,247
Fixed assets 1,159
Other assets 10
Current liabilities (1,060 )
Earn-out liability (4,080 )
Total consideration $ 31,990

Note 6 Inventories

Inventories consist primarily of finished product. Our different entities record inventories using a mixture of first-in, first-out and average cost, which we believe approximates first-in, first-out. Inventories are reflected net of adjustments for shrinkage, excess and obsolescence totaling ~~$2,044~~$1,888 and $1,921 at ~~March 29,~~June 28, 2019 and December 28, 2018, respectively.

Note 7 Equipment, Leasehold Improvements and Software

Equipment, leasehold improvements and software as of ~~March 29,~~June 28, 2019 and December 28, 2018 consisted of the following:



	Useful Lives	June 28, 2019			December 28, 2018
Land	Indefinite	$	1,170		$	1,170
Buildings	20 years	1,292			1,292
Machinery and equipment	5-10 years	19,539			17,837
Computers, data processing and other equipment	3-7 years	12,615			11,244
Software	3-7 years	22,963			22,779
Leasehold improvements	1-40 years	64,919			60,565
Furniture and fixtures	7 years	3,364			3,268
Vehicles	5-7 years	4,164			2,769
Other	7 years	95			95
Construction-in-process		17,422			15,757
		147,543			136,776
Less: accumulated depreciation and amortization		(57,345		)	(51,500		)
Equipment, leasehold improvements and software, net		$	90,198		$	85,276

Useful Lives March 29, 2019 December 28, 2018
Land Indefinite $ 1,170
$ 1,170
Buildings 20 years 1,292
1,292
Machinery and equipment 5-10 years 18,467
17,837
Computers, data processing and other equipment 3-7 years 11,962
11,244
Software 3-7 years 22,779
22,779
Leasehold improvements 7-22 years 60,580
60,565
Furniture and fixtures 7 years 3,277
3,268
Vehicles 5-7 years 3,227
2,769
Other 7 years 95
95
Construction-in-process 19,887
15,757
142,736
136,776
Less: accumulated depreciation and amortization (54,187 ) (51,500 )
Equipment, leasehold improvements and software, net $ 88,549
$ 85,276

Construction-in-process at ~~March 29,~~June 28, 2019 and December 28, 2018 related primarily to the implementation of the Company’s ERP system and the buildout of the Company’s headquarters in Ridgefield, ~~CT and distribution center in Dallas, TX.~~CT. The buildout of the Company’s headquarters ~~and distribution center~~ is expected to be completed during fiscal 2019. The rollout of its ERP system will continue through fiscal 2020.

The net book value of equipment financed under finance leases at ~~March 29,~~June 28, 2019 and December 28, 2018 was ~~$910~~$1,729 and $52, respectively. The Company recorded depreciation of ~~$43~~$70 and $16 on these assets during the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and $113 and $32 during the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively.

Depreciation expense, excluding finance leases, was ~~$1,930~~$2,192 and ~~$1,827~~$1,708 for the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and $4,122 and $3,535 during the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively. Amortization expense on software was ~~$908~~$912 and ~~$473~~$460 for the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and $1,820 and $930 for the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively.

Note 8 Goodwill and Other Intangible Assets

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



Carrying amount as of December 28, 2018	$	184,280
Acquisitions	9,207
Foreign currency translation	39
Carrying amount as of June 28, 2019	$	193,526

Carrying amount as of December 28, 2018 $ 184,280
Acquisitions 11,247
Foreign currency translation 19
Carrying amount as of March 29, 2019 $ 195,546

Other intangible assets consist of customer relationships being amortized over a period ranging from four to twenty years, trademarks being amortized over a period of one to forty years, and non-compete agreements being amortized over a period of two to six years. Other intangible assets as of ~~March 29,~~June 28, 2019 and December 28, 2018 consisted of the following:


March 29, 2019:	Gross Carrying Amount		Accumulated Amortization			Net Amount
June 28, 2019:								Gross Carrying Amount		Accumulated Amortization			Net Amount
Customer relationships	$	131,476	$	(38,334	)	$	93,142	$	132,766	$	(40,705	)	$	92,061
Non-compete agreements	7,579		(7,269		)	310		8,519		(7,335		)	1,184
Trademarks	65,960		(14,170		)	51,790		66,215		(15,040		)	51,175
Total	$	205,015	$	(59,773	)	$	145,242	$	207,500	$	(63,080	)	$	144,420



December 28, 2018:
Customer relationships	$	119,488	$	(36,185	)	$	83,303
Non-compete agreements	7,579		(7,251		)	328
Trademarks	59,862		(13,460		)	46,402
Total	$	186,929	$	(56,896	)	$	130,033

December 28, 2018:

Customer relationships $ 119,488
$ (36,185 ) $ 83,303
Non-compete agreements 7,579
(7,251 ) 328
Trademarks 59,862
(13,460 ) 46,402
Total $ 186,929
$ (56,896 ) $ 130,033

The Company occasionally makes small, tuck-in acquisitions that are immaterial, both individually and in the aggregate. Therefore, increases in goodwill and gross intangible assets per the above tables may not agree to the increases of these assets as shown for specific acquisitions in Note 5 “Acquisitions.”

Amortization expense for other intangibles was ~~$2,877~~$3,307 and ~~$2,903~~$3,080 for the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and $6,184 and $5,983 for the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively.

Estimated amortization expense for other intangibles for the remainder of the fiscal year ending December 27, 2019 and each of the next four fiscal years and thereafter is as follows:



2019	$	6,560
2020	12,859
2021	12,854
2022	12,074
2023	11,046
Thereafter	89,027
Total	$	144,420

2019 $ 10,394
2020 12,230
2021 12,204
2022 11,340
2023 10,380
Thereafter 88,694
Total $ 145,242

Note 9 Debt Obligations

Debt obligations as of ~~March 29,~~June 28, 2019 and December 28, 2018 consisted of the following:



	June 28, 2019			December 28, 2018
Senior secured term loan	$	238,129		$	239,745
Convertible unsecured note	4,000			—
Asset based loan facility	43,225			44,185
Finance leases and other financing obligations	1,629			193
Deferred finance fees and original issue discount	(5,051		)	(5,893		)
Total debt obligations	281,932			278,230
Less: current installments	(304		)	(61		)
Total debt obligations excluding current installments	$	281,628		$	278,169

March 29, 2019 December 28, 2018
Senior secured term loan $ 239,745
$ 239,745
Convertible unsecured note 4,000
—
Asset based loan facility 44,185
44,185
Finance leases and other financing obligations 1,021
193
Deferred finance fees and original issue discount (5,472 ) (5,893 )
Total debt obligations 283,479
278,230
Less: current installments (1,804 ) (61 )
Total debt obligations excluding current installments $ 281,675
$ 278,169

Convertible Unsecured Note

On February 25, 2019, the Company issued a $4,000 convertible unsecured note (the “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 Note is 4.5% per annum and increases to 5.0% after the two-year anniversary of the closing date. The Company may, in certain instances beginning eighteen months after issuance of the Note, redeem the Note in whole or in part for cash or convert the 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 Note into shares of the Company’s common stock at the conversion price. Upon a

change of control event, the Holder may convert the Note into shares of the Company’s common stock at the conversion price or redeem the Note for cash.

As of ~~March 29,~~June 28, 2019, the Company was in compliance with all debt covenants and the Company had reserved ~~$15,800~~$16,760 of the asset based loan facility (“ABL Facility”) for the issuance of letters of credit. As of ~~March 29,~~June 28, 2019, funds totaling $90,015 were available for borrowing under the ABL Facility. The interest rates on the Company’s senior secured term loan and ABL Facility were ~~6.0%~~5.9% and ~~4.0%~~3.7%, respectively, at ~~March 29,~~June 28, 2019.

Note 10 Leases

The components of net lease cost were as follows:



	Thirteen Weeks Ended			Twenty-six Weeks Ended
	June 28, 2019			June 28, 2019
Operating lease cost	$	6,808		13,440
Finance lease cost
Amortization of right-of-use asset	70			113
Interest expense on lease liabilities	23			40
Total finance lease cost	$	93		$	153
Short-term lease cost	486			897
Variable lease cost	660			1,311
Sublease income	(191		)	(371)
Total lease cost, net	$	7,856		$	15,430

March 29, 2019
Operating lease cost $ 6,632
Finance lease cost
Amortization of right-of-use asset 43
Interest expense on lease liabilities 17
Total finance lease cost $ 60
Short-term lease cost 411
Variable lease cost 651
Sublease income (180 )
Total lease cost, net $ 7,574

Supplemental balance sheet information related to finance leases was as follows:



	Balance Sheet Location	June 28, 2019
Short-term finance lease liabilities	Current portion of long-term debt	$	294
Long-term finance lease liabilities	Long-term debt, net of current portion	$	1,320

Balance Sheet Location March 29, 2019
Short-term finance lease liabilities Current portion of long-term debt $ 179
Long-term finance lease liabilities Long-term debt, net of current portion $ 824

The maturities of the Company’s operating and finance lease liabilities for the remainder of the fiscal year ending December 27, 2019 and each of the next four fiscal years and thereafter were as follows:



	Operating Leases									Finance Leases
	Related Party Real Estate		Third Party Real Estate		Vehicles and Equipment		Total			Vehicles and Equipment
2019	$	257	$	5,364	$	6,575	$	12,196		$	194
2020	365		12,709		11,629		24,703			387
2021	—		12,639		9,338		21,977			382
2022	—		12,606		7,293		19,899			364
2023	—		12,084		4,797		16,881			305
Thereafter	—		96,923		2,354		99,277			272
Total	$	622	$	152,325	$	41,986	$	194,933		$	1,904
Less interest							(56,533		)	(290		)
Present value							$	138,400		$	1,614

Operating Leases Finance Leases
Related Party Real Estate Third Party Real Estate Vehicles and Equipment Total Vehicles and Equipment
2019 $ 388
$ 7,489
$ 10,048
$ 17,925
$ 181
2020 365
11,172
11,621
23,158
242
2021 —
10,685
9,338
20,023
236
2022 —
10,657
7,293
17,950
227
2023 —
10,120
4,797
14,917
171
Thereafter —
84,439
2,354
86,793
151
Total $ 753
$ 134,562
$ 45,451
$ 180,766
$ 1,208
Less interest (53,127 ) (205 )
Present value $ 127,639
$ 1,003

At ~~March 29,~~June 28, 2019, the weighted-average lease term for operating and finance leases was ~~10.4~~13.4 years and 5.3 years, respectively. At ~~March 29,~~June 28, 2019, the weighted-average discount rate for operating and finance leases was ~~6.6%~~6.3% and ~~5.7%~~5.6%, respectively.

As of ~~March 29,~~June 28, 2019, the Company is contractually obligated to make payments of approximately ~~$23,500,~~$3,000, related to a lease ~~for a distribution center and~~ for several vehicle and equipment leases that have not commenced. Accordingly, the Company has not recognized ROU assets or lease liabilities associated with these leases.

The Company’s future minimum lease payments as of December 28, 2018, in accordance with legacy lease accounting standards, under non-cancelable operating and finance lease agreements were as follows:



	Operating Leases		Finance Leases
2019	$	24,666	$	56
2020	23,047		55
2021	19,918		50
2022	17,838		42
2023	14,876		4
Thereafter	47,330		—
Total minimum lease payments	$	147,675	207
Less interest			(49		)
Present value of capital lease obligations			$	158

Operating Leases Finance Leases
2019 $ 24,666
$ 56
2020 23,047
55
2021 19,918
50
2022 17,838
42
2023 14,876
4
Thereafter 47,330
—
Total minimum lease payments $ 147,675
207
Less interest (49 )
Present value of capital lease obligations $ 158

Note 11 Stockholders’ Equity

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 ten years from the date of the grant. The 2019 Plan provides for 2,600,000 shares available for grant.

The following table reflects the activity of RSAs during the ~~thirteen~~twenty-six weeks ended ~~March~~June 28, 2019:



	Shares		Weighted Average Grant Date Fair Value
Unvested at December 28, 2018	526,730		$	20.60
Granted	355,433		34.30
Vested	(102,929	)	22.10
Forfeited	(32,198	)	18.74
Unvested at June 28, 2019	747,036		$	26.99

The Company granted 355,433 RSAs to its employees and directors at a weighted average grant date fair value of $34.30 during the twenty-six weeks ended June 29, ~~2019:~~

Shares Weighted Average
Grant Date Fair Value
Unvested at December 28, 2018 526,730
$ 20.60
Granted —
—
Vested (67,610 ) 19.99
Forfeited (23,680 ) 18.30
Unvested at March 29, 2019 435,440
$ 20.81

2018. These awards are a mix of time and performance-based grants that generally vest over a one- to five-year period. The Company recognized expense totaling ~~$801~~$1,088 and ~~$687~~$921 on its RSAs during the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, $1,889 and $1,608 during the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively.

At ~~March 29,~~June 28, 2019, the total unrecognized compensation cost for unvested RSAs was ~~$3,993~~$12,376 and the weighted-average remaining ~~useful life~~period was approximately ~~1.8~~2.6 years. Of this total, ~~$2,059~~$7,555 related to RSAs with time-based vesting provisions and ~~$1,934~~$4,821 related to RSAs with performance-based vesting provisions. At ~~March 29,~~June 28, 2019, the weighted-average remaining ~~useful lives~~period for time-based vesting and performance-based vesting RSAs were approximately ~~1.9~~2.8 years and ~~1.7~~2.3 years, respectively.

The following table summarizes stock option activity during the ~~thirteen~~twenty-six weeks ended ~~March 29,~~June 28, 2019:



	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (in years)
Outstanding December 28, 2018	191,808		$	20.23	$	2,129	7.2
Granted	—		—
Exercised	(27,576	)	20.23
Canceled/Forfeited	—		—
Outstanding and vested at June 28, 2019	164,232		$	20.23	$	2,437	6.7
Exercisable at June 28, 2019	164,232		$	20.23	$	2,437	6.7

Shares Weighted
Average
Exercise Price Aggregate Intrinsic Value
Weighted-Average Remaining Contractual Term
(in years)
Outstanding December 28, 2018 191,808
$ 20.23
$ 2,129
7.2
Granted —
—

Exercised (20,383 ) 20.23

Canceled/Forfeited —
—

Outstanding and vested at March 29, 2019 171,425
$ 20.23
$ 1,855
6.9
Exercisable at March 29, 2019 171,425
$ 20.23
$ 1,855
6.9

The Company recognized expense of ~~$114~~$0 and ~~$150~~$151 on stock options during the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and $114 and $301 during the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively.

As of ~~March 29,~~June 28, 2019, there were ~~266,937~~2,244,567 shares available for grant under the ~~Company’s 2011 Omnibus Equity Incentive~~2019 Plan. No share-based compensation expense has been capitalized.

Note 12 Related Parties

The Chefs’ Warehouse Mid-Atlantic, LLC, a subsidiary of the Company, leases a distribution facility that is 100% owned by entities controlled by Christopher Pappas, the Company’s chairman, president and chief executive officer, and John Pappas, the Company’s vice chairman and one of its directors, and are deemed to be affiliates of these individuals. Expense related to this facility totaled ~~$108~~$109 and $133 during the thirteen weeks ended ~~March 29,~~June 28, 2019 and ~~March 30, 2018.~~June 29, 2018, respectively, and $217 and $266 during the twenty-six weeks ended June 28, 2019 and June 29, 2018, respectively. This lease was amended during the first quarter of fiscal 2019 and expires on September 30, 2020.

Christopher Pappas’s brother, John Pappas, is one of the Company’s employees and a member of the Company’s Board of Directors. The Company paid John Pappas approximately ~~$436~~$115 and ~~$427~~$103 in total compensation for the thirteen weeks ended ~~March 29,~~

June 28, 2019 and ~~March 30,~~June 29, 2018, ~~respectively.~~respectively, and $551 and $530 for the twenty-six weeks ended June 28, 2019 and June 29, 2018. John Pappas did not receive any compensation during the ~~thirteen~~twenty-six weeks ended ~~March 29,~~June 28, 2019 or ~~March 30,~~June 29, 2018 for his service on the Company’s Board of Directors.

Note 13 Supplemental Disclosures of Cash Flow Information



	Twenty-six Weeks Ended
	June 28, 2019		June 29, 2018
Supplemental cash flow disclosures:
Cash paid for income taxes, net of cash received	$	3,690	$	2,650
Cash paid for interest	$	9,494	$	9,703
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating expenses	$	12,174	$	—
Operating cash flows from finance leases	$	40	$	—
ROU assets obtained in exchange for lease liabilities:
Operating leases	$	146,726	$	—
Finance leases	$	1,728	$	—
Other non cash investing and financing activities:
Convertible notes issued for acquisitions	$	4,000	$	—
Contingent earn-out liabilities for acquisitions	$	2,800	$	964

Thirteen Weeks Ended
March 29, 2019 March 30, 2018
Supplemental cash flow disclosures:

Cash paid for income taxes, net of cash received $ 964
$ (585 )
Cash paid for interest $ 5,271
$ 4,035
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating expenses $ 5,890
$ —
Operating cash flows from finance leases $ 17
$ —
ROU assets obtained in exchange for lease liabilities:
Operating leases $ 131,819
$ —
Finance leases $ 854
$ —
Other non cash investing and financing activities:
Convertible notes issued for acquisitions $ 4,000
$ —
Contingent earn-out liabilities for acquisitions $ 4,080
$ —

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

RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019. Unless otherwise indicated, the terms “Company”, “Chefs’ Warehouse”, “we”, “us” and “our” refer to The Chefs’ Warehouse, Inc. and its subsidiaries.

OVERVIEW

We are a premier distributor of specialty foods in eight of the leading culinary markets in the United States. We offer more than 55,000 SKUs, ranging from high-quality specialty foods and ingredients to basic ingredients and staples and center-of-the-plate proteins. We serve more than 34,000 customer locations, primarily located in our 16 geographic markets across the United States and Canada, and the majority of our customers are independent restaurants and fine dining establishments. As a result of our acquisition of Allen Brothers, Inc. (“Allen Brothers”) we also sell certain of our center-of-the-plate products directly to consumers.

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 products 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; the acquisition of other specialty food and center-of-the-plate distributors; the expansion of our existing distribution centers; our entry into new distribution centers; 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.

RECENT ACQUISITIONS

On February 25, 2019, pursuant to an asset purchase agreement, we acquired substantially all of the assets of Bassian Farms, Inc. and certain affiliated entities (“Bassian”), a specialty protein manufacturer and distributor based in northern California. The aggregate purchase price for the transaction at acquisition date was approximately $32.0 million and is subject to a customary working capital true-up. The acquisition was funded with $28.0 million in cash and the issuance of a $4.0 million unsecured convertible note. The Company will also pay additional contingent consideration, if earned, in the form of an earn-out amount which could total $9.0 million over a four year period.

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 ~~1.6~~1.9 million square feet in 2930 distribution facilities at ~~March 29,~~June 28, 2019 and 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, chocolatiers, 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. Likewise, 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 items, are priced on a “cost plus” markup, which helps mitigate the negative impact of deflation.

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.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:


	Thirteen Weeks Ended				Thirteen Weeks Ended				Twenty-six Weeks Ended
	March 29, 2019		March 30, 2018		June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	74.7	%	75.0	%	74.1	%	74.8	%	74.4	%	74.9	%
Gross profit	25.3	%	25.0	%	25.9	%	25.2	%	25.6	%	25.1	%
Operating expenses	23.5	%	23.2	%	22.1	%	21.1	%	22.8	%	22.1	%
Operating income	1.8	%	1.8	%	3.8	%	4.1	%	2.8	%	3.0	%
Other expense	1.3	%	1.6	%	1.2	%	1.5	%	1.2	%	1.5	%
Income before income tax expense	0.5	%	0.2	%	2.6	%	2.6	%	1.6	%	1.5	%
Provision for income taxes	0.1	%	0.1	%	0.7	%	0.7	%	0.4	%	0.4	%
Net income	0.4	%	0.1	%	1.9	%	1.9	%	1.2	%	1.1	%

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

Thirteen Weeks Ended ~~March 29,~~June 28, 2019 Compared to Thirteen Weeks Ended ~~March 30,~~June 29, 2018

Net Sales

Our net sales for the thirteen weeks ended ~~March 29,~~June 28, 2019 increased approximately ~~12.1%~~11.1%, or ~~$38.4~~$41.0 million, to ~~$357.0~~$411.4 million from ~~$318.6~~$370.4 million for the thirteen weeks ended ~~March 30,~~June 29, 2018. Organic growth contributed ~~$17.9~~$14.6 million, or ~~5.6%~~4.0% to sales growth in the quarter. The remaining sales growth of ~~$20.5~~$26.4 million, or ~~6.5%~~7.1%, resulted from acquisitions. Organic case count grew approximately ~~5.2%~~2.4%, in our specialty category with unique customers and placements growth at ~~6.2%~~4.4% and ~~5.2%~~3.5%, respectively, compared to the prior year quarter. Pounds sold in our center-of-the-plate category increased ~~3.1%~~1.0% compared to the prior year quarter. Estimated inflation was ~~1.4%~~2.6% in our specialty category and ~~1.3%~~1.9% in our center-of-the-plate category compared to the prior year quarter.

Gross Profit

Gross profit increased approximately ~~13.4%~~14.2%, or ~~$10.7~~$13.2 million, to ~~$90.2~~$106.5 million for the thirteen weeks ended ~~March 29,~~June 28, 2019, from ~~$79.5~~$93.2 million for the thirteen weeks ended ~~March 30,~~June 29, 2018. Gross profit margin increased approximately 3071 basis points to ~~25.3%~~25.9% from ~~25.0%~~25.2%. Gross margins increased 44 basis points in the Company’s specialty category ~~decreased 39 basis points~~ and increased ~~106~~122 basis points in the Company’s center-of-the-plate category compared to the prior year quarter.

Operating Expenses

Total operating expenses increased by approximately ~~13.9%~~16.2%, or ~~$10.3~~$12.6 million, to ~~$84.0~~$90.9 million for the thirteen weeks ended ~~March 29,~~June 28, 2019 from ~~$73.8~~$78.3 million for the thirteen weeks ended ~~March 30,~~June 29, 2018. ~~The increase in operating expense relates primarily to certain corporate related costs and facilities costs as a result of growth.~~ As a percentage of net sales, operating expenses were ~~23.5%~~22.1% in the ~~first~~second quarter of 2019 compared to ~~23.2%~~21.1% in the ~~first~~second quarter of 2018. The increase in total operating expenses includes a $2.6 million increase in non-cash charges for changes in the fair value of certain contingent earn-out liabilities compared to the prior year quarter. The earn-out adjustments and higher distribution costs versus the prior year quarter were the primary drivers of the increase in the ratio of operating expense to revenue. This was partially offset by lower selling and general administration related expenses as a percentage of revenue versus the second quarter of 2018.

Operating Income

Operating income for the thirteen weeks ended ~~March 29,~~June 28, 2019 was ~~$6.2~~$15.5 million compared to ~~$5.7~~$14.9 million for the thirteen weeks ended ~~March 30,~~June 29, 2018. The increase in operating income was driven primarily by increased gross profit, offset in part by higher operating expenses, as discussed above. As a percentage of net sales, operating income was ~~1.8% for~~3.8% in the ~~thirteen weeks ended March 29,~~second quarter of 2019 ~~and March 30,~~compared to 4.1% in the second quarter of 2018.

Interest ~~Expense~~ and Other Expense

Interest and other expense decreased to ~~$4.6~~$4.9 million for the thirteen weeks ended ~~March 29,~~June 28, 2019 compared to ~~$5.0~~$5.4 million for the thirteen weeks ended ~~March 30,~~June 29, 2018 due to lower effective interest rates charged on the Company’s outstanding debt and the conversion of the $36.8 million of convertible subordinated notes during the third quarter of 2018.

Provision for Income Taxes

For the thirteen weeks ended ~~March 29,~~June 28, 2019, we recorded an effective income tax rate of 27.5%. For the thirteen weeks ended ~~March 30,~~June 29, 2018, our effective income tax rate was 28.5%.

Net Income

Reflecting the factors described above, net income was ~~$1.1~~$7.7 million for the thirteen weeks ended ~~March 29,~~June 28, 2019, compared to net income of ~~$0.5~~$6.8 million for the thirteen weeks ended ~~March 30,~~June 29, 2018.

Twenty-six Weeks Ended June 28, 2019 Compared to Twenty-six Weeks Ended June 29, 2018

Net Sales

Our net sales for the twenty-six weeks ended June 28, 2019 increased approximately 11.5%, or $79.4 million, to $768.4 million from $689.1 million for the twenty-six weeks ended June 29, 2018. Organic growth contributed $32.5 million or 4.7% to sales growth in the period. The remaining sales growth of $46.8 million, or 6.8% resulted from acquisitions. Organic case count grew approximately 3.7%, in our specialty category. In addition, growth in unique customers and placements grew 5.3% and 4.6%, respectively, compared to the prior year period. Pounds sold in our center-of-the-plate category increased 2.0% compared to the prior year period. Estimated inflation was 2.0% in our specialty category and 1.6% in our center-of-the-plate category compared to the prior year period.

Gross Profit

Gross profit increased approximately 13.8%, or $23.9 million, to $196.7 million for the twenty-six weeks ended June 28, 2019, from $172.8 million for the twenty-six weeks ended June 29, 2018. Gross profit margin increased approximately 52 basis points to 25.6% from 25.1%, due in large part to the impact of inflation in certain center-of-the-plate categories. Gross margins increased 6 basis points in the Company’s specialty category and increased 115 basis points in the Company’s center-of-the-plate category compared to the prior year period.

Operating Expenses

Total operating expenses increased by approximately 15.1%, or $22.9 million, to $175.0 million for the twenty-six weeks ended June 28, 2019 from $152.1 million for the twenty-six weeks ended June 29, 2018. As a percentage of net sales, operating expenses were 22.8% in the current period compared to 22.1% in the prior year period. The 70 basis point increase in the Company’s operating expense ratio is net of a $2.6 million increase in non-cash charges for changes in the fair value of certain contingent earn-out liabilities compared to the prior year period.

Operating Income

Operating income for the twenty-six weeks ended June 28, 2019 was $21.7 million compared to $20.7 million for the twenty-six weeks ended June 29, 2018. The increase in operating income was driven primarily by increased gross profit, offset in part by higher operating expenses, as discussed above. As a percentage of net sales, operating income was 2.8% for the twenty-six weeks ended June 28, 2019 compared to 3.0% for the twenty-six weeks ended June 29, 2018.

Interest and Other Expense

Interest and other expense decreased to $9.4 million for the twenty-six weeks ended June 28, 2019 compared to $10.4 million for the twenty-six weeks ended June 29, 2018 due to lower effective interest rates charged on the Company’s outstanding debt and the conversion of the $36.8 million of convertible subordinated notes during the third quarter of 2018.

Provision for Income Taxes

For the twenty-six weeks ended June 28, 2019, we recorded an effective income tax rate of 27.5%. For the twenty-six weeks ended June 29, 2018, our effective income tax rate was 28.5%.

Net Income

Reflecting the factors described above, net income was $8.9 million for the twenty-six weeks ended June 28, 2019, compared to net income of $7.4 million for the twenty-six weeks ended June 29, 2018.

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, equity financing, operating leases, and trade payables.

Senior Secured Term Loan Credit Facility

On June 22, 2016, Chefs’ Warehouse Parent, LLC (“CW Parent”) and Dairyland USA Corporation (“Dairyland”), as co-borrowers, and The Chefs’ Warehouse, Inc. (the “Company”) and certain other subsidiaries of the Company, as guarantors, entered into a credit agreement (the “Term Loan Credit Agreement”) with a group of lenders for which Jefferies Finance LLC (“Jefferies”) 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 $305.0 million with a $50.0 million six-month delayed draw term loan facility (the “DDTL”; the loans outstanding under the Term Loan Facility (including the DDTL), the “Term Loans”). On June 27, 2016, the Company drew $14.0 million from the DDTL to help pay fund the acquisition of M.T. Food Service, Inc. On September 14, 2016, the Company entered into an amendment to the Term Loan Credit Agreement under which the remaining portion of the DDTL was terminated, the Company’s interest rate schedule was modified and the Company repaid $25.0 million of the outstanding balance of the Term Loans. 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 $50.0 million (less the aggregate amount of certain indebtedness incurred to finance acquisitions) plus an unlimited amount subject to the Company’s consolidated Total Leverage Ratio not exceeding 4.90:1.00 on a pro forma basis. Borrowings under the Term Loan Facility were used to repay the Company’s senior secured notes, as well as the prior term loan and revolving credit facility. Remaining funds will be 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 the Applicable Rate (as defined in the Term Loan Credit Agreement) from 475 basis points to 400 basis points over LIBOR. In connection with the repricing, the Company paid debt financing costs of $0.8 million which were capitalized as deferred financing charges. On July 6, 2018, the Company made a $47.1 million prepayment and is no longer required to make quarterly amortization payments on the Term Loan Facility. 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 $0.6 million which were capitalized as deferred financing charges. The Company wrote off unamortized deferred financing fees of $1.1 million as a result of this repricing.

The interest rates per annum applicable to Term Loans, will be, at the co-borrowers’ option, equal to either a base rate or an adjusted LIBOR rate for one, two, three, six or (if consented to by the lenders) twelve-month interest periods chosen by the Company, in each case plus an applicable margin percentage. The interest rate on this facility at ~~March 29,~~June 28, 2019 was ~~6.0%~~5.9% and the final maturity of the Term Loan Facility is June 22, 2022.

The Term Loan Facility contains customary affirmative covenants, negative covenants (including restrictions, subject to customary exceptions, on incurring debt or liens, paying dividends, repaying subordinated and junior lien debt, disposing assets, and making investments and acquisitions), and events of default for a term loan B facility of this type, as more particularly described in the Term Loan Credit Agreement. As of ~~March 29,~~June 28, 2019, the Company was in compliance with all debt covenants under the Term Loan Facility.

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 Facility”) in the aggregate amount of up to $150.0 million. Availability under the ABL Facility 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 Facility are entitled on one or more occasions, subject to the satisfaction of certain conditions, to request an increase in the commitments under the ABL Facility in an aggregate principal amount of up to $25.0 million. The ABL Facility matures on the earlier of June 29, 2023 and 90 days prior to the maturity date of the Company’s Term Loan Facility.

The interest rates per annum applicable to loans, other than swingline loans, under the ABL Facility will be, at the co-borrowers’ option, equal to either a base rate or an adjusted LIBOR rate for one, two, three, six or (if consented to by the lenders) twelve-month, interest periods chosen by the Company, in each case plus an applicable margin percentage. The Company will pay certain recurring fees with respect to the ABL Facility, including fees on the unused commitments of the

lenders. The ABL Facility contains customary affirmative covenants, negative covenants and events of default as more particularly described in the ABL Credit Agreement. The ABL Facility will require compliance with a minimum consolidated fixed charge coverage ratio of 1:1 if the amount of availability under the ABL Facility falls below the greater of $10.0 million or 10% of the borrowing base. Borrowings under the ABL Facility will be used, and are expected to be used, for capital expenditures, permitted acquisitions, working capital and general corporate purposes of the Company. On July 6, 2018, the Company borrowed $47.1 million under the ABL Facility and made an equivalent prepayment on its senior secured term loan. There was ~~$44.2~~$43.2 million outstanding under the ABL Facility as of ~~March 29,~~June 28, 2019, bearing an interest rate of ~~4.0%~~3.7%.

As of ~~March 29,~~June 28, 2019, the Company was in compliance with all debt covenants under the ABL Facility and the Company had reserved ~~$15.8~~$16.8 million of the ABL Facility for the issuance of letters of credit. As of ~~March 29,~~June 28, 2019, funds totaling $90.0 million were available for borrowing under the ABL Facility.

Convertible Unsecured Note

On February 25, 2019, the Company issued a $4.0 million convertible unsecured note (the “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 Note is 4.5% per annum and increases to 5.0% after the two-year anniversary of the closing date. The Company may, in certain instances beginning eighteen months after issuance of the Note, redeem the Note in whole or in part for cash or convert the 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 Note into shares of the Company’s common stock at the conversion price. Upon a change of control event, the Holder may convert the Note into shares of the Company’s common stock at the conversion price or redeem the Note for cash.

Liquidity

We believe our capital expenditures, excluding cash paid for acquisitions, for fiscal 2019 will be in the range of $24.0 million to $26.0 million. The increase in projected capital expenditures in fiscal 2019 as compared to fiscal 2018 is the result of planned expansions of several of our distribution facilities and renovations to our corporate headquarters. Recurring capital expenditures will be financed with cash generated from operations and borrowings under our ABL Facility. Our planned capital projects will provide both new and expanded facilities and improvements to our technology that we believe will produce increased efficiency and the capacity to continue to support the growth of our customer base. Future investments and acquisitions will be financed through either internally generated cash flow, borrowings under our senior secured credit facilities in place at the time of the potential investment or acquisition or through the issuance of equity or debt securities, including, but not limited to, longer-term, fixed-rate debt securities and shares of our common stock.

Net cash provided by operations was ~~$7.4~~$21.9 million for the ~~thirteen~~twenty-six weeks ended ~~March 29,~~June 28, 2019, ~~a decrease~~an increase of ~~$3.1~~$3.0 million from the ~~$10.5~~$18.9 million provided by operations for the ~~thirteen~~twenty-six weeks ended ~~March 30,~~June 29, 2018. The primary reasons for the ~~decrease~~increase was increased cash generated through net income, partially offset by a decrease in cash from working capital ~~changes, partially offset by increased cash generated through net income.~~changes. The primary cause for the increase in cash generated from net income was an increase in operating income and lower interest expense. The decrease in cash provided by changes in working capital was primarily due to a decrease in cash from accounts payable changes and prepaid expenses and other current assets changes of ~~$10.7~~$11.2 million and ~~$3.0~~$2.2 million, respectively, partially offset by increases in cash from accounts receivable changes and inventories changes of ~~$7.3 million.~~$7.6 million and $2.2 million, respectively.

Net cash used in investing activities was ~~$32.1~~$36.8 million for the ~~thirteen~~twenty-six weeks ended ~~March 29,~~June 28, 2019, an increase of ~~$26.8~~$19.4 million from the net cash used in investing activities of ~~$5.3~~$17.4 million for the ~~thirteen~~twenty-six weeks ended ~~March 30,~~June 29, 2018. The increase in net cash used was primarily due to more cash paid for acquisitions and capital expenditures.

Net cash used in financing activities was ~~$0.4~~$3.2 million for the ~~thirteen~~twenty-six weeks ended ~~March 29,~~June 28, 2019, a ~~cash increase~~decrease of ~~$1.3~~$0.2 million from the ~~$1.7~~$3.4 million used in financing activities for the ~~thirteen~~twenty-six weeks ended ~~March 30,~~June 29, 2018. This ~~increase~~decrease was primarily due to the fact we are no longer required to make quarterly amortization payments on our Term Loan as a result of the $47.1 million prepayment we made in the third quarter of 2018, partially offset by the $1.0 million principal payment we made on the ABL Facility during the second quarter of ~~2018.~~2019.

Seasonality

Excluding our direct-to-consumer business, we generally do not experience any material seasonality. However, our sales and operating results may vary from quarter to quarter due to factors such as changes in our operating expenses, management’s

ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages, weather patterns and general economic conditions.

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

Inflation

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

Off-Balance Sheet Arrangements

As of ~~March 29,~~June 28, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

The preparation of the Company’s consolidated financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of the Company’s financial condition and results and require its most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining our allowance for doubtful accounts, (ii) inventory valuation, with regard to determining inventory balance adjustments for excess and obsolete inventory, (iii) valuing goodwill and intangible assets, (iv) vendor rebates and other promotional incentives, (v) self-insurance reserves, and (vi) accounting for income taxes and (vii) contingent earn-out liabilities. There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates described in the Form 10-K filed with the SEC on March 1, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of ~~March 29,~~June 28, 2019, we had an aggregate of ~~$283.9~~$281.4 million of indebtedness outstanding under the Term Loan and ABL Facility that bore interest at variable rates. A 100 basis point increase in market interest rates would decrease our after tax earnings by approximately ~~$2.1~~$2.0 million per annum, holding other variables constant.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of ~~March 29,~~June 28, 2019.

Changes in Internal Control over Financial Reporting

We have implemented new internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to leases on our financial statements as a result of its adoptionon December 29, 2018. There were no other changes in our internal control over financial reporting during the quarter ended ~~March 29,~~June 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There has been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 1, 2019.

ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES

Total Number
of Shares
Repurchased(1)

Average
Price
Paid Per
Share

Total
Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Maximum Number
(or Approximate
Dollar Value) of Shares
That May Yet Be
Purchased Under the
Plans or Programs
December 30, 2018 to January 25, 2019 —
$ —
—
—
January 26, 2019 to February 22, 2019 —
$ —
—
—
February 23, 2019 to March 29, 2019 24,002
$ 30.85
—
—
Total 24,002
$ 30.85
—
—



	Total Number of Shares Repurchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
March 30, 2019 to April 26, 2019	—	$	—	—	—
April 27, 2019 to May 24, 2019	3,501	$	31.67	—	—
May 25, 2019 to June 28, 2019	427	$	34.30	—	—
Total	3,928	$	31.96	—	—


(1)	During the thirteen weeks ended ~~March 29,~~June 28, 2019, we withheld ~~24,002~~3,928 shares to satisfy tax withholding requirements upon the vesting of restricted shares of our common stock awarded to our officers and key employees.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Exhibit No.		Description

10.1		The Chefs’ Warehouse, Inc. 2019 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8 filed on May 17, 2019).*

10.2		Form of Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan.*

10.3		Form of Performance Restricted Share Award Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan.*

10.4		Form of Non-Qualified Stock Option Agreement under The Chefs’ Warehouse, Inc. Omnibus Equity Incentive Plan.*

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Compensatory Plan or Arrangement

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on ~~May 1,~~July 31, 2019.



			THE CHEFS’ WAREHOUSE, INC.
			(Registrant)

Date: ~~May 1,~~July 31, 2019			/s/ James Leddy
			James Leddy
			Chief Financial Officer
			(Principal Financial Officer)

Date: ~~May 1,~~July 31, 2019			/s/ Timothy McCauley
			Timothy McCauley
			Chief Accounting Officer
			(Principal Accounting Officer)

2528



Delaware			20-3031526
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

100 East Ridge Road,	Ridgefield,	Connecticut	06877
(Address of principal executive offices)			(Zip Code)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	CHEF	Nasdaq



Large accelerated filer	☐☒	Accelerated filer	☒☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Bassian
Current assets (includes cash acquired)	$	6,659
Customer relationships	11,984
Trademarks	6,071
Goodwill	11,247
Fixed assets	1,159
Other assets	10
Current liabilities	(1,060		)
Earn-out liability	(4,080		)
Total consideration	$	31,990



2019	$	10,394
2020	12,230
2021	12,204
2022	11,340
2023	10,380
Thereafter	88,694
Total	$	145,242



	March 29, 2019
Operating lease cost	$	6,632
Finance lease cost
Amortization of right-of-use asset	43
Interest expense on lease liabilities	17
Total finance lease cost	$	60
Short-term lease cost	411
Variable lease cost	651
Sublease income	(180		)
Total lease cost, net	$	7,574