NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Years Ended December 31, 2022, 2021, and 2020)
(dollars in thousands, except share and per-share data)
Note 1. Summary of Significant Accounting Policies
Description of Business
Biglari Holdings Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, licensing and media, restaurants, and oil and gas. The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company.
Biglari Holdings’ management system combines decentralized operations with centralized financial decision-making. Operating decisions for the various business units are made by their respective managers. All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.
As of December 31, 2022, Mr. Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and approximately 70.4% of the voting interest.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including Steak n Shake Inc., Western Sizzlin Corporation, First Guard Insurance Company, Maxim Inc., Southern Pioneer Property & Casualty Insurance Company, Southern Oil Company, and Abraxas Petroleum Corporation. Intercompany accounts and transactions have been eliminated in consolidation.
Change in Presentation
Loss and loss adjustment expenses of $1,508 were reclassified to accounts payable and accrued expenses as of December 31, 2021 to conform to current year presentation.
Cash, Cash Equivalents, and Restricted Cash
Cash equivalents primarily consist of U.S. Government securities and money market accounts, all of which have original maturities of three months or less. Cash equivalents are carried at fair value. The statement of cash flows includes restricted cash with cash and cash equivalents.
Investments
We classify investments in fixed maturity securities at the acquisition date as either available-for-sale or held-to-maturity and re-evaluate the classification at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. As of December 31, 2022 and 2021, all investments were classified as available-for-sale and carried at fair value with net unrealized gains or losses reported in the statements of earnings. Realized gains and losses on disposals of investments are determined by the specific identification of the cost of investments sold. Dividends earned on investments are reported as investment income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.
Investment Partnerships
The Company holds a limited interest in The Lion Fund, L.P., and The Lion Fund II, L.P. (collectively the “investment partnerships”). Biglari Capital Corp. (“Biglari Capital”), an entity solely owned by Mr. Biglari, is the general partner of the investment partnerships. Our interests in the investment partnerships are accounted as equity method investments because of our retained limited partner interests. The Company records investment partnership gains (inclusive of the investment partnerships’ unrealized gains and losses on their securities) as a component of other income based on our proportional ownership interest in the partnerships. The investment partnerships are, for purposes of generally accepted accounting principles (“GAAP”), investment companies under the AICPA Audit and Accounting Guide Investment Companies.
Concentration of Equity Price Risk
The majority of our investments are conducted through investment partnerships that generally hold common stocks. We also hold marketable securities directly. We concentrate a high percentage of the investments in a small number of equity securities.
Note 1. Summary of Significant Accounting Policies (continued)
A significant decline in the general stock market or in the prices of our major investments may have a materially adverse effect on our earnings and on consolidated shareholders’ equity.
Receivables
Our accounts receivable balance consists primarily of franchisee, customer, and other receivables. We carry our accounts receivable at cost less an allowance for doubtful accounts, which is based on a history of past write-offs and collections and current credit conditions. Allowance for doubtful accounts was $1,151 and $505 at December 31, 2022 and 2021, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items and supply inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized on the straight-line method over the estimated useful lives of the assets (10 to 30 years for buildings and land improvements, and 3 to 10 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the related leases. Interest costs associated with the construction of new restaurants are capitalized. Major improvements are also capitalized, while repairs and maintenance are expensed as incurred. We review our long-lived restaurant assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For purposes of this assessment, assets are evaluated at the lowest level for which there are identifiable cash flows, which is generally at the individual restaurant level. Assets included in the impairment assessment generally consist of property, equipment, and leasehold improvements directly associated with an individual restaurant as well as any related finance or operating lease assets. If the future undiscounted cash flows of an asset are less than the recorded value, an impairment is recorded for the difference between the carrying value and the estimated fair value of the asset.
Oil and Gas Properties
The successful efforts method is used for crude oil and natural gas exploration and production activities. All costs for development wells, related plant and equipment, proved mineral interests in crude oil and natural gas properties, and related asset retirement obligation assets are capitalized. Costs of exploratory wells are capitalized pending determination of whether the wells found proved reserves. Costs of wells that are assigned proved reserves remain capitalized. Costs are also capitalized for exploratory wells that have found crude oil and natural gas reserves, even if the reserves cannot be classified as proved when the drilling is completed, provided the exploratory well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project. All other exploratory wells and costs are expensed. We did not have any property acquisition or exploration activities during 2022, and our development costs were nominal.
Asset Retirement Obligations
Asset retirement obligations relate to future costs associated with the plugging and abandonment of oil and gas wells, the removal of equipment and facilities from leased acreage, and the return of such land to its original condition. The Company determines its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred, and the cost of such liability increases the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period through charges to depreciation, depletion, and amortization expense, and the capitalized cost is depleted on a unit-of-production basis over the proved developed reserves of the related asset. If an asset retirement obligation is settled for an amount other than the recorded amount, a gain or loss is recognized.
Goodwill and Other Intangible Assets
Goodwill and indefinite life intangible assets are not amortized, but are tested for potential impairment on an annual basis using either a qualitative or quantitative approach, or more often if events or circumstances change that could cause goodwill or indefinite life intangible assets to become impaired. Other purchased intangible assets are amortized over their estimated useful lives, generally on a straight-line basis. We perform reviews for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying value. When an impairment is identified, we reduce the carrying value of the asset to its estimated fair value. During 2022 and 2021, no impairments were recorded to goodwill and other intangible assets. During 2020, we recorded an impairment to goodwill of $300 and an impairment to indefinite life intangible assets of $3,728. Refer to Note 8 for information regarding our goodwill and other intangible assets.
Note 1. Summary of Significant Accounting Policies (continued)
Dual Class Common Stock
The Company has two classes of common stock, designated Class A common stock and Class B common stock. Each Class A common share is entitled to one vote. Class B common stock possesses economic rights equal to one-fifth (1/5th) of such rights of Class A common stock; however, Class B common stock has no voting rights.
The following table presents shares authorized, issued, and outstanding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
| Common stock authorized | 500,000 | | | 10,000,000 | | | 500,000 | | | 10,000,000 | | | 500,000 | | | 10,000,000 | |
| Common stock issued and outstanding | 206,864 | | | 2,068,640 | | | 206,864 | | | 2,068,640 | | | 206,864 | | | 2,068,640 | |
Earnings Per Share
Earnings per share of common stock is based on the weighted-average number of shares outstanding during the year. The shares of Company stock attributable to our limited partner interest in the investment partnerships — based on our proportional ownership during this period — are considered treasury stock on the consolidated balance sheet and thereby deemed not to be included in the calculation of weighted-average common shares outstanding. However, these shares are legally outstanding.
The Company has applied the “two-class method” of computing earnings per share as prescribed in Accounting Standards Codification (“ASC”) 260, “Earnings Per Share.” The equivalent Class A common stock applied for computing earnings per share excludes the proportional shares of Biglari Holdings’ stock held by the investment partnerships. In the tabulation below is the equivalent Class A common stock for earnings per share. There are no dilutive securities outstanding.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Equivalent Class A common stock outstanding | 620,592 | | | 620,592 | | | 620,592 | |
| Proportional ownership of Company stock held by investment partnerships | 322,561 | | | 303,341 | | | 275,400 | |
| Equivalent Class A common stock for earnings per share | 298,031 | | | 317,251 | | | 345,192 | |
Revenue Recognition
Restaurant operations
Restaurant operations revenues were disaggregated as follows.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net sales | $ | 149,184 | | | $ | 187,913 | | | $ | 306,577 | |
| Franchise partner fees | 63,853 | | | 55,641 | | | 22,213 | |
| Franchise royalties and fees | 19,678 | | | 21,736 | | | 18,794 | |
| Other | 8,853 | | | 6,000 | | | 3,082 | |
| $ | 241,568 | | | $ | 271,290 | | | $ | 350,666 | |
Note 1. Summary of Significant Accounting Policies (continued)
Net Sales
Net sales are composed of retail sales of food through company-operated stores. Company-operated store revenues are recognized, net of discounts and sales taxes, when our obligation to perform is satisfied at the point of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated statements of earnings as revenue.
Franchise Partner Fees
Franchise partner fees are composed of up to 15% of sales as well as 50% of profits. We are therefore fully affected by the operating results of the business, unlike in a traditional franchising arrangement, where the franchisor obtains a royalty fee based on sales only. We generate the majority of our revenue from our share of the franchise partners’ profits. An initial franchise fee of ten thousand dollars is recognized when the operator becomes a franchise partner. The Company recognizes franchise partner fees monthly as underlying restaurant sales occur.
The Company leases or subleases property and equipment to franchisees under lease arrangements. Both real estate and equipment rental payments are charged to franchisees and are recognized in accordance with ASC 842, “Leases.” During the years ended 2022, 2021, and 2020, restaurant operations recognized $20,426, $15,483, and $5,675, respectively, in franchise partner fees related to rental income.
Franchise Royalties and Fees
Franchise royalties and fees from Steak n Shake and Western Sizzlin franchisees are based upon a percentage of sales of the franchise restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement.
During the years ended December 31, 2022, 2021, and 2020, restaurant operations recognized $1,810, $2,033, and $1,879, respectively, in revenue related to initial franchise fees. As of December 31, 2022 and 2021, restaurant operations had deferred revenue recorded in accrued expenses related to franchise fees of $3,484 and $5,199, respectively. Restaurant operations expect to recognize approximately $703 of deferred revenue during 2023.
Our advertising arrangements with franchisees are reported in franchise royalties and fees. During the years ended December 31, 2022, 2021, and 2020, restaurant operations recognized $6,386, $6,829, and $5,193, respectively, in revenue related to franchisee advertising fees. As of December 31, 2022 and 2021, restaurant operations had deferred revenue recorded in accrued expenses related to franchisee advertising fees of $2,748 and $4,151, respectively. Restaurant operations expect to recognize approximately $2,061 of deferred revenue during 2023.
Other Revenue
Restaurant operations sells gift cards to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by vintage.
For the years ended December 31, 2022, 2021, and 2020, restaurant operations recognized $5,395, $5,903, and $9,201, respectively, of revenue from gift card redemptions. As of December 31, 2022 and 2021, restaurant operations had deferred revenue recorded in accrued expenses related to unredeemed gift cards of $9,279 and $15,059, respectively. Restaurant operations expect to recognize approximately $5,975 of deferred revenue during 2023.
Insurance Premiums and Commissions
Insurance premiums are earned over the terms of the related policies. Expenses incurred in connection with acquiring new insurance business, including acquisition costs, are charged to operations as incurred. Premiums earned are stated net of amounts ceded to reinsurer.
Oil and Gas
Revenues are derived from the sale of produced oil and natural gas. Revenue is recognized when the performance obligation is satisfied, which typically occurs at the point in time when control of the product transfers to the customer. Payment is due within 30 days of delivery.
Note 1. Summary of Significant Accounting Policies (continued)
Licensing Revenue and Other
Licensing revenue is recognized when earned. We derive value and revenues from intellectual property assets through a range of licensing and business activities, including licensing and syndication of our trademarks and copyrights in the United States and internationally. Magazine subscription and advertising revenues are recognized at the magazine cover date. The unearned portion of magazine subscriptions is deferred until the magazine’s cover date, at which time a proportionate share of the gross subscription price is recognized as revenue.
Restaurant Cost of Sales
Cost of sales includes the cost of food, restaurant operating costs, and restaurant occupancy costs. Cost of sales excludes depreciation and amortization, which is presented as a separate line item on the consolidated statement of earnings.
Insurance Losses and Underwriting Expenses
Liabilities for estimated unpaid losses and loss adjustment expenses with respect to claims occurring on or before the balance sheet date are established under insurance contracts issued by our insurance subsidiaries. Such estimates include provisions for reported claims or case estimates, provisions for incurred but not reported claims, and legal and administrative costs to settle claims. The estimates of unpaid losses and amounts recoverable under reinsurance are established and continually reviewed by using a variety of actuarial, statistical, and analytical techniques. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify policyholders with respect to the underlying insurance contracts.
Oil and Gas Production Costs
Oil and gas production costs are costs incurred to operate and maintain wells and related equipment and facilities, including lease operating expenses and production taxes.
Marketing Expense
Advertising costs are charged to expense at the later of the date the expenditure is incurred or the date the promotional item is first communicated. Marketing expense is included in selling, general and administrative expenses in the consolidated statement of earnings.
Savings Plans
Several of our subsidiaries also sponsor defined contribution retirement plans, such as 401(k) or profit-sharing plans. Employee contributions to the plans are subject to regulatory limitations and the specific plan provisions. Some of the plans allow for discretionary contributions as determined by management. Employer contributions expensed with respect to these plans were not material.
Foreign Currency Translation
The Company has certain subsidiaries located in foreign jurisdictions. For subsidiaries whose functional currency is other than the U.S. dollar, the translation of functional currency statements to U.S. dollar statements uses end-of-period exchange rates for assets and liabilities, weighted-average exchange rates for revenue and expenses, and historical rates for equity. The resulting currency translation adjustment is recorded in accumulated other comprehensive income, as a component of equity.
Use of Estimates
Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the estimates.
Note 2. Business Acquisitions
On September 14, 2022, the Company purchased the Series A Preferred Stock (the “Preferred Shares”) of Abraxas Petroleum for a purchase price of $80,000. On October 26, 2022, the Company exchanged the Preferred Shares for 90% of the outstanding common stock of Abraxas Petroleum. We have concluded that Abraxas Petroleum is a consolidated entity and have recorded noncontrolling interests attributable to the interest held by other shareholders. The Company used working capital including its line of credit to fund the purchase of the Preferred Shares. Abraxas Petroleum operates oil and natural gas properties in the Permian Basin. The Company’s financial results include the results of Abraxas Petroleum from the acquisition date to the end of the year.
The purchase price allocation is provisional and subject to revision as the related valuations are completed.
| | | | | |
| September 14, 2022 |
| Cash and cash equivalents | $ | 21,726 | |
| Receivables and other assets | 6,518 | |
| Property and equipment | 75,400 | |
| Total identifiable assets acquired | 103,644 | |
| |
| Accounts payable and accrued expenses | (10,719) | |
| Asset retirement obligations | (3,587) | |
| Deferred taxes | (449) | |
| Total liabilities assumed | (14,755) | |
| |
| Minority interest | (8,889) | |
| Total consideration | $ | 80,000 | |
On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company and its agency, Southern Pioneer Insurance Agency, Inc. (collectively “Southern Pioneer”). Southern Pioneer underwrites garage liability insurance and commercial property coverage, homeowners and dwelling fire insurance coverage, among other lines. The financial results for Southern Pioneer are included from the date of acquisition. Pro-forma financial information of Southern Pioneer is not material.
Note 3. Investments
Investments were $69,466 and $83,061 as of December 31, 2022 and 2021, respectively. We classify investments in fixed maturity securities at the acquisition date as either available-for-sale or held-to-maturity and re-evaluate the classification at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Realized gains and losses on disposals of investments are determined on a specific identification basis. Dividends earned on investments are reported as investment income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.
Investment losses in 2022 were $3,393. Investment gains in 2021 were $6,401, which includes a $5,047 gain on the sale of real estate. The Company purchased 26 acres of land in Murfreesboro, Tennessee, in 2014 for $2,145 and sold it in the third quarter of 2021. Investment gains were $3,644 in 2020.
Note 4. Investment Partnerships
The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding. The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock.
Biglari Capital is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari.
Note 4. Investment Partnerships (continued)
The fair value and adjustment for Company common stock held by the investment partnerships to determine the carrying value of our partnership interest are presented below.
| | | | | | | | | | | | | | | | | |
| Fair Value | | Company Common Stock | | Carrying
Value |
| Partnership interest at December 31, 2019 | $ | 666,123 | | | $ | 160,581 | | | $ | 505,542 | |
| Investment partnership gains (losses) | (46,997) | | | (3,965) | | | (43,032) | |
| Distributions (net of contributions) | (28,200) | | | | | (28,200) | |
| Increase in proportionate share of Company stock held | | | 14,760 | | | (14,760) | |
| Partnership interest at December 31, 2020 | $ | 590,926 | | | $ | 171,376 | | | $ | 419,550 | |
| Investment partnership gains (losses) | 51,145 | | | 40,192 | | | 10,953 | |
| Distributions (net of contributions) | (167,870) | | | | | (167,870) | |
| Increase in proportionate share of Company stock held | | | 12,234 | | | (12,234) | |
| Partnership interest at December 31, 2021 | $ | 474,201 | | | $ | 223,802 | | | $ | 250,399 | |
| Investment partnership gains (losses) | (80,374) | | | (4,421) | | | (75,953) | |
| Distributions (net of contributions) | (10,823) | | | | | (10,823) | |
| Increase in proportionate share of Company stock held | | | 7,829 | | | (7,829) | |
| Partnership interest at December 31, 2022 | $ | 383,004 | | | $ | 227,210 | | | $ | 155,794 | |
The carrying value of the investment partnerships net of deferred taxes is presented below.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Carrying value of investment partnerships | $ | 155,794 | | | $ | 250,399 | |
| Deferred tax liability related to investment partnerships | (23,643) | | | (44,532) | |
| Carrying value of investment partnerships net of deferred taxes | $ | 132,151 | | | $ | 205,867 | |
The Company’s proportionate share of Company stock held by the investment partnerships at cost was $409,680 and $401,851 at December 31, 2022 and 2021, respectively, and was recorded as treasury stock.
The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock. Fair value of our partnership interest is assessed according to our proportional ownership interest of the fair value of investments held by the investment partnerships. Unrealized gains and losses on marketable securities held by the investment partnerships affect our net earnings.
Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Gains (losses) from investment partnerships | $ | (75,953) | | | $ | 10,953 | | | $ | (43,032) | |
| Tax expense (benefit) | (18,992) | | | 2,054 | | | (10,526) | |
| Contribution to net earnings | $ | (56,961) | | | $ | 8,899 | | | $ | (32,506) | |
On December 31 of each year, the general partner of the investment partnerships, Biglari Capital, will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital includes gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements.
There were no incentive reallocations from Biglari Holdings to Biglari Capital during 2022 and 2021. There were $987 of incentive reallocations from Biglari Holdings to Biglari Capital during 2020, including $253 associated with gains on the Company’s common stock.
Note 4. Investment Partnerships (continued)
Summarized financial information for The Lion Fund, L.P., and The Lion Fund II, L.P., is presented below.
| | | | | | | | | | | |
| Equity in Investment Partnerships |
| Lion Fund | | Lion Fund II |
| Total assets as of December 31, 2022 | $ | 285,071 | | | $ | 330,832 | |
| Total liabilities as of December 31, 2022 | $ | 10,517 | | | $ | 167,847 | |
| Revenue for the year ended December 31, 2022 | $ | (8,353) | | | $ | (79,397) | |
| Earnings for the year ended December 31, 2022 | $ | (8,690) | | | $ | (82,534) | |
| Biglari Holdings’ ownership interest | 88.5 | % | | 86.0 | % |
| | | |
| Total assets as of December 31, 2021 | $ | 114,749 | | | $ | 564,022 | |
| Total liabilities as of December 31, 2021 | $ | 7,763 | | | $ | 130,417 | |
| Revenue for the year ended December 31, 2021 | $ | 20,068 | | | $ | 41,486 | |
| Earnings for the year ended December 31, 2021 | $ | 19,994 | | | $ | 40,621 | |
| Biglari Holdings’ ownership interest | 62.7 | % | | 93.9 | % |
| | | |
| Total assets as of December 31, 2020 | $ | 112,970 | | | $ | 566,663 | |
| Total liabilities as of December 31, 2020 | $ | 189 | | | $ | 25,453 | |
| Revenue for the year ended December 31, 2020 | $ | (4,052) | | | $ | (48,544) | |
| Earnings for the year ended December 31, 2020 | $ | (4,120) | | | $ | (49,832) | |
| Biglari Holdings’ ownership interest | 66.2 | % | | 95.4 | % |
Revenue in the financial information of the investment partnerships, summarized above, includes investment income and unrealized gains and losses on investments.
Note 5. Other Current Assets
Other current assets include the following.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred commissions on gift cards sold by third parties | $ | 1,454 | | | $ | 3,221 | |
| Asset held for sale | 4,700 | | | — | |
| Prepaid contractual obligations | 4,341 | | | 3,867 | |
| Other current assets | $ | 10,495 | | | $ | 7,088 | |
The asset held for sale is Abraxas Petroleum’s office building in San Antonio, Texas.
Note 6. Property and Equipment
Property and equipment are composed of the following.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Land | $ | 143,313 | | | $ | 144,605 | |
| Buildings | 151,627 | | | 148,605 | |
| Land and leasehold improvements | 151,496 | | | 147,349 | |
| Equipment | 222,661 | | | 224,581 | |
| Oil and gas properties | 144,888 | | | 74,147 | |
| Construction in progress | 2,238 | | | 2,815 | |
| 816,223 | | | 742,102 | |
| Less accumulated depreciation, depletion, and amortization | (415,498) | | | (392,751) | |
| Property and equipment, net | $ | 400,725 | | | $ | 349,351 | |
The depreciation and amortization expense for property and equipment for 2022, 2021, and 2020 was $28,879, $22,012, and $19,586, respectively. The depletion expense related to oil and gas properties was $7,024, $7,600, and $11,989 during 2022, 2021, and 2020, respectively. The accretion expense of the Company’s asset retirement obligations was $540, $438, and $497 during 2022, 2021, and 2020, respectively. Depletion and accretion expense are included in depreciation, depletion, and amortization expense within the consolidated statement of earnings.
The Company recorded impairments to restaurant long-lived assets of $3,520, $4,635, and $19,618 during 2022, 2021, and 2020, respectively. The fair value of the long-lived assets was determined based on Level 3 inputs using a discounted cash flow model and quoted prices for the properties.
The property and equipment cost related to finance obligations as of December 31, 2022, is as follows: $45,138 of buildings, $45,148 of land, $26,614 of land and leasehold improvements, and $57,754 of accumulated depreciation.
Note 7. Asset Retirement Obligations
A reconciliation of the ending aggregate carrying amount of asset retirement obligations is as follows.
| | | | | | | | | | | |
| December 31 |
| 2022 | | 2021 |
| Beginning balance | $ | 10,624 | | | $ | 10,258 | |
| Acquired balance | 3,587 | | | — | |
| Liabilities settled | (106) | | | (72) | |
| Accretion expense | 540 | | | 438 | |
| Asset retirement obligation | $ | 14,645 | | | $ | 10,624 | |
As of December 31, 2022 and 2021, $577 and $235, respectively, is classified as current and is included in accounts payable and accrued expenses in the consolidated balance sheets.
Note 8. Goodwill and Other Intangible Assets
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of the net assets acquired in connection with business acquisitions. No goodwill was recorded with the acquisition of Southern Oil or Abraxas Petroleum.
Note 8. Goodwill and Other Intangible Assets (continued)
A reconciliation of the change in the carrying value of goodwill is as follows.
| | | | | | | | | | | | | | | | | |
| Restaurants | | Insurance | | Total |
| Balance as of December 31, 2020 | | | | | |
| Goodwill | $ | 28,183 | | | $ | 25,713 | | | $ | 53,896 | |
| Accumulated impairment losses | (300) | | | — | | | (300) | |
| | $ | 27,883 | | | $ | 25,713 | | | $ | 53,596 | |
| Change in foreign exchange rates during 2021 | (49) | | | — | | | (49) | |
| Balance as of December 31, 2021 | $ | 27,834 | | | $ | 25,713 | | | $ | 53,547 | |
| Change in foreign exchange rates during 2022 | (34) | | | — | | | (34) | |
| Balance as of December 31, 2022 | $ | 27,800 | | | $ | 25,713 | | | $ | 53,513 | |
We evaluate goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value. GAAP allows entities testing for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit for the goodwill impairment test. For our 2022 annual goodwill impairment testing, we elected to perform qualitative assessments for our reporting units. No indicators of impairment were noted. If a quantitative test were to be utilized for our reporting units, it would estimate the fair value of each reporting unit and compare it to its carrying value. To the extent the fair value was in excess of the carrying value, no impairment would be recognized. Otherwise, an impairment loss would be recognized for the amount that the carrying value of our reporting units, including goodwill, exceeded its fair value. In performing the quantitative test of goodwill, fair value would be determined based on a calculation that gives consideration to an income approach utilizing the discounted cash flow method and to a market approach using the market comparable and market transaction methods. No impairment was recorded for our reporting units in 2022 and 2021. The fair value of certain of Steak n Shake’s reporting units declined in 2020, and an impairment to goodwill of $300 was recorded in 2020. An impairment of Western Sizzlin’s goodwill may be necessary if a significant decline in its franchise units occurs.
Other Intangible Assets
Intangible assets with indefinite lives are composed of the following.
| | | | | | | | | | | | | | | | | |
| Trade Names | | Lease Rights | | Total |
| Balance as of December 31, 2020 | | | | | |
| Intangibles | $ | 15,876 | | | $ | 11,917 | | | $ | 27,793 | |
| Accumulated impairment losses | — | | | (3,728) | | | (3,728) | |
| $ | 15,876 | | | $ | 8,189 | | | $ | 24,065 | |
| Change in foreign exchange rates during 2021 | — | | | (602) | | | (602) | |
| Balance as of December 31, 2021 | $ | 15,876 | | | $ | 7,587 | | | $ | 23,463 | |
| Change in foreign exchange rates during 2022 | — | | | (426) | | | (426) | |
| Balance as of December 31, 2022 | $ | 15,876 | | | $ | 7,161 | | | $ | 23,037 | |
Intangible assets with indefinite lives consist of trade names and lease rights. No impairment was recorded in 2022 or 2021. During 2020, the Company recorded impairment charges of $3,728 on lease rights to our international operations because of the adverse effects of the COVID-19 pandemic.
Note 9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accounts payable | $ | 28,431 | | | $ | 36,684 | |
| Gift cards and other marketing | 12,028 | | | 19,244 | |
| Insurance accruals | 6,012 | | | 7,936 | |
| Salaries, wages, and vacation | 4,400 | | | 5,905 | |
| Deferred revenue | 4,445 | | | 6,683 | |
| Taxes payable | 14,896 | | | 11,392 | |
| Professional fees | 600 | | | 11,731 | |
| Oil and gas payable | 3,877 | | | 1,936 | |
| Other | 3,927 | | | 464 | |
| Accounts payable and accrued expenses | $ | 78,616 | | | $ | 101,975 | |
Note 10. Unpaid loss and loss adjustment expense
Other liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under insurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates for incurred-but-not-reported (“IBNR”) claims. A reconciliation of the changes in claim liabilities, net of reinsurance, is as follows.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Amount of claim liabilities at the beginning of the year, net of reinsurance loss recoverable of $1,892 and $1,544, respectively | $ | 13,101 | | | $ | 12,429 | |
| Incurred losses and loss adjustment expenses: | | | |
| Provision for insured events in the current year | 37,837 | | | 29,343 | |
| Change in provision for insured events of prior years | (652) | | | (1,695) | |
| Total incurred losses and loss adjustment expenses | 37,185 | | | 27,648 | |
| Payments: | | | |
| Losses and loss adjustment expenses attributable to insured events of the current year | 27,415 | | | 21,926 | |
| Losses and loss adjustment expenses attributable to insured events of prior years | 6,066 | | | 5,050 | |
| Total payments | 33,481 | | | 26,976 | |
Amount of claim liabilities at the end of each year, net of reinsurance loss recoverable of $715 and $1,892, respectively | $ | 16,805 | | | $ | 13,101 | |
Incurred losses and loss adjustment expenses shown in the preceding table were recorded in earnings and related to insured events occurring in the current year and events occurring in all prior years. Incurred and paid loss and loss adjustment expenses are net of reinsurance recoveries.
We recorded net reductions of estimated ultimate liabilities for prior accident years of $652 in 2022 and $1,695 in 2021. These reductions, as a percentage of net liabilities at the beginning of each year, were 5.0% in 2022 and 13.6% in 2021.
Note 10. Unpaid losses and loss adjustment expenses (continued)
Our net incurred and paid liability losses and loss adjustment expenses are summarized by accident year below. IBNR and case development liabilities are as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred Losses and Loss Adjustment Expenses through December 31, | | | | |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | IBNR and Case Development Liabilities | | Cumulative Number of Reported Claims |
| 2017 | | $ | 29,877 | | | $ | 28,778 | | | $ | 28,944 | | | $ | 28,553 | | | $ | 28,231 | | | $ | 29,452 | | | $ | 229 | | | $ | 4,322 | |
| 2018 | | | | 26,930 | | | 26,660 | | | 26,455 | | | 26,387 | | | 27,616 | | | 359 | | | 3,746 | |
| 2019 | | | | | | 27,675 | | | 26,758 | | | 26,461 | | | 27,295 | | | 1,013 | | | 3,630 | |
| 2020 | | | | | | | | 26,755 | | | 25,176 | | | 25,594 | | | 978 | | | 3,640 | |
| 2021 | | | | | | | | | | 26,892 | | | 27,518 | | | 3,834 | | | 3,633 | |
| 2022 | | | | | | | | | | | | 35,996 | | | 10,392 | | | 3,703 | |
| | | | | | | | | | | | $ | 173,471 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Paid Losses and Loss Adjustment Expenses through December 31, | |
| Accident Year | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | |
| 2017 | | $ | 22,293 | | | $ | 25,491 | | | $ | 26,991 | | | $ | 27,548 | | | $ | 27,815 | | | $ | 29,223 | | |
| 2018 | | | | 20,246 | | | 23,796 | | | 24,844 | | | 25,589 | | | 27,257 | | |
| 2019 | | | | | | 20,755 | | | 23,787 | | | 24,647 | | | 26,282 | | |
| 2020 | | | | | | | | 20,481 | | | 22,614 | | | 24,616 | | |
| 2021 | | | | | | | | | | 19,649 | | | 23,684 | | |
| 2022 | | | | | | | | | | | | 25,604 | | |
| | | | | | | | | | | | $ | 156,666 | | |
*Unaudited required supplemental information
Loss and loss adjustment expense reserves include an amount for reported losses and an amount for losses incurred but not reported. We establish average liabilities based on expected severities for newly reported claims prior to establishing individual case reserves when insufficient time or information is available for specific claim estimates and for large volumes of minor physical damage claims that, once reported, are quickly settled. We establish case loss estimates for claims, including estimates for loss adjustment expenses, as the facts and merits of the claim are evaluated. Such reserves are necessarily based upon estimates, and while management, based on past experience, believes that the amount is adequate, the ultimate liability may be more or less than the amounts provided. We may record supplemental IBNR liabilities in certain situations when actuarial techniques are difficult to apply. The methods for making such estimates and for establishing the resulting reserves are continually reviewed, and any adjustments are reflected in operations annually.
First Guard
First Guard’s claim liabilities predominately relate to commercial truck claims. For such claims, we establish and evaluate unpaid claim liabilities using historical claims data and other data as necessary to determine our best estimate, with an annual review by certified actuaries and certified public accountants. Claim liabilities include average case, case development, and IBNR estimates.
Note 10. Unpaid losses and loss adjustment expenses (continued)
Southern Pioneer
Southern Pioneer’s claim liabilities predominately relate to liquor liability, garage liability, and commercial property as well as homeowners and dwelling fire claims. For such claims, we establish and evaluate unpaid claim liabilities using standard actuarial methods and techniques. The actuarial methods utilize historical claims data, adjusted when deemed appropriate to reflect perceived changes in loss patterns. Claim liabilities include average case, case development, and IBNR estimates.
Note 11. Income Taxes
The components of the provision for income taxes consist of the following.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 1,935 | | | $ | 1,053 | | | $ | (472) | |
| State | 2,925 | | | 467 | | | 476 | |
| Deferred | (15,582) | | | 5,269 | | | (12,216) | |
| Income tax expense (benefit) | $ | (10,722) | | | $ | 6,789 | | | $ | (12,212) | |
| | | | | |
| Reconciliation of effective income tax: | | | | | |
| Tax at U.S. statutory rates | $ | (9,036) | | | $ | 8,875 | | | $ | (10,542) | |
| State income taxes, net of federal benefit | (555) | | | 192 | | | (1,750) | |
| Federal income tax credits | (106) | | | (864) | | | (424) | |
| Dividends received deduction | (1,183) | | | (468) | | | (233) | |
| Valuation allowance | 614 | | | (723) | | | 733 | |
| Foreign tax rate differences | (124) | | | (78) | | | 240 | |
| Other | (332) | | | (145) | | | (236) | |
| Income tax expense (benefit) | $ | (10,722) | | | $ | 6,789 | | | $ | (12,212) | |
The Company did not have a net tax expense or benefit on income from international operations. Losses before income taxes derived from domestic operations during 2022 were $40,624, earnings before income taxes derived from domestic operations during 2021 were $43,886, and losses before income taxes derived from domestic operations during 2020 were $40,989. Losses before income taxes derived from international operations during 2022, 2021, and 2020 were $2,403, $1,619, and $9,212, respectively.
As of December 31, 2022, we had $99 of unrecognized tax benefits, including $13 of interest and penalties, which are included in other long-term liabilities in the consolidated balance sheet. As of December 31, 2021, we had $83 of unrecognized tax benefits, including $4 of interest and penalties, which is included in other long-term liabilities in the consolidated balance sheet. Our continuing practice is to recognize interest expense and penalties related to income tax matters in income tax expense. The unrecognized tax benefits of $99 would impact the effective income tax rate if recognized. Adjustments to the Company’s unrecognized tax benefit for gross increases for the current period tax position, gross decreases for prior period tax positions, and the lapse of statutes of limitations during 2022, 2021, and 2020 were not significant.
We file income tax returns which are periodically audited by various foreign, federal, state, and local jurisdictions. With few exceptions, we are no longer subject to federal, state, and local tax examinations for fiscal years prior to 2019. We believe we have certain state income tax exposures related to fiscal years 2018 through 2022.
Deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Note 11. Income Taxes (continued)
Our deferred tax assets and liabilities consist of the following.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Insurance reserves | $ | 1,490 | | | $ | 1,464 | |
| Compensation accruals | 373 | | | 647 | |
| Gift card accruals | 1,159 | | | 2,350 | |
| Net operating loss credit carryforward | 12,597 | | | 11,018 | |
| Valuation allowance on net operating losses | (6,043) | | | (5,429) | |
| Fixed assets and depletable assets basis difference | (3,867) | | | 588 | |
| Income tax credit carryforward | — | | | 813 | |
| Deferred income | 830 | | | 1,106 | |
| Bad debt reserve | 1,104 | | | 1,052 | |
| Other | 487 | | | 796 | |
| Total deferred tax assets | 8,130 | | | 14,405 | |
| | | |
| Deferred tax liabilities: | | | |
| Investment partnerships | 23,643 | | | 44,532 | |
| Investments | (197) | | | 845 | |
| Goodwill and intangibles | 16,027 | | | 15,561 | |
| Total deferred tax liabilities | 39,473 | | | 60,938 | |
| Net deferred tax liability | $ | (31,343) | | | $ | (46,533) | |
Accounts payable and accrued expenses include income taxes payable of $3,881 as of December 31, 2022. Receivables include income taxes receivable of $344 as of December 31, 2021.
Note 12. Line of Credit and Note Payable
Biglari Holdings Line of Credit
On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000. The line of credit will be available on a revolving basis until September 12, 2024. The line of credit includes customary covenants, as well as financial maintenance covenants. The balance of the line of credit on December 31, 2022, was $10,000. Our interest rate was 6.53% on December 31, 2022, which is based on the 30-day Secured Overnight Financing Rate plus 2.728%.
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan was scheduled to mature on March 19, 2021. The Company repaid Steak n Shake’s outstanding balance in full on February 19, 2021.
Western Sizzlin Revolver
Western Sizzlin’s available line of credit is $500. As of December 31, 2022 and 2021, Western Sizzlin had no debt outstanding under its revolver.
Note 13. Lease Assets and Obligations
Lease obligations include the following.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Current portion of lease obligations | | | |
| Finance lease liabilities | $ | 1,237 | | | $ | 1,414 | |
| Finance obligations | 5,161 | | | 4,944 | |
| Operating lease liabilities | 10,583 | | | 10,540 | |
| Total current portion of lease obligations | $ | 16,981 | | | $ | 16,898 | |
| | | |
| Long-term lease obligations | | | |
| Finance lease liabilities | $ | 4,129 | | | $ | 5,347 | |
| Finance obligations | 58,868 | | | 63,119 | |
| Operating lease liabilities | 28,847 | | | 36,013 | |
| Total long-term lease obligations | $ | 91,844 | | | $ | 104,479 | |
Nature of Leases
Steak n Shake and Western Sizzlin operate restaurants that are located on sites owned by us and leased from third parties. In addition, they own sites and lease sites from third parties that are leased and/or subleased to franchisees.
Lease Costs
A significant portion of our operating and finance lease portfolio includes restaurant locations. We recognize fixed lease expense for operating leases on a straight-line basis over the lease term. For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term.
Total lease costs consist of the following.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Finance lease costs: | | | | | |
| Amortization of right-of-use assets | $ | 1,290 | | | $ | 1,576 | | | $ | 1,404 | |
| Interest on lease liabilities | 422 | | | 521 | | | 582 | |
| Operating lease costs* | 2,736 | | | 1,119 | | | 9,995 | |
| Total lease costs | $ | 4,448 | | | $ | 3,216 | | | $ | 11,981 | |
*Includes short-term leases, variable lease costs, and sublease income.
Supplemental cash flow information related to leases is as follows.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Financing cash flows from finance leases | $ | 1,396 | | | $ | 1,629 | |
| Operating cash flows from finance leases | $ | 421 | | | $ | 506 | |
| Operating cash flows from operating leases | $ | 12,946 | | | $ | 13,195 | |
Supplemental balance sheet information related to leases is as follows.
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Finance leases: | | | |
| Property and equipment, net | $ | 4,352 | | | $ | 5,634 | |
Note 13. Lease Asset and Obligations (continued)
Weighted-average lease terms and discount rates are as follows.
| | | | | |
| 2022 |
| Weighted-average remaining lease terms: | |
| Finance leases | 4.32 years |
| Operating leases | 4.53 years |
| |
| Weighted-average discount rates: | |
| Finance leases | 7.0% |
| Operating leases | 7.0% |
Maturities of lease liabilities as of December 31, 2022, are as follows.
| | | | | | | | | | | | | | |
| Year | | Operating Leases | | Finance
Leases |
| 2023 | | $ | 12,816 | | | $ | 1,569 | |
| 2024 | | 10,109 | | | 1,534 | |
| 2025 | | 8,277 | | | 1,298 | |
| 2026 | | 5,630 | | | 959 | |
| 2027 | | 3,333 | | | 623 | |
| After 2027 | | 5,890 | | | 232 | |
| Total lease payments | | 46,055 | | | 6,215 | |
| Less interest | | 6,625 | | | 849 | |
| Total lease liabilities | | $ | 39,430 | | | $ | 5,366 | |
Rent expense is presented below.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Minimum rent | $ | 14,333 | | | $ | 14,926 | | | $ | 15,672 | |
| Contingent rent | 105 | | | 137 | | | 137 | |
| Rent expense | $ | 14,438 | | | $ | 15,063 | | | $ | 15,809 | |
Lease Income
The components of lease income are as follows.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Operating lease income | $ | 15,698 | | | $ | 13,173 | | | $ | 5,027 | |
| Variable lease income | 5,875 | | | 3,479 | | | 1,738 | |
| Total lease income | $ | 21,573 | | | $ | 16,652 | | | $ | 6,765 | |
Note 13. Lease Asset and Obligations (continued)
The following table displays the Company’s future minimum rental receipts for non-cancelable leases and subleases as of December 31, 2022. Franchise partner leases and subleases are short-term leases and have been excluded from the table. | | | | | | | | | | | | | | |
| | Operating Leases |
| Year | | Subleases | | Owned Properties |
| 2023 | | $ | 747 | | | $ | 162 | |
| 2024 | | 503 | | | 162 | |
| 2025 | | 454 | | | 162 | |
| 2026 | | 134 | | | 154 | |
| 2027 | | 116 | | | 116 | |
| After 2027 | | 125 | | | 347 | |
| Total future minimum receipts | | $ | 2,079 | | | $ | 1,103 | |
| | | | |
Note 14. Related Party Transactions
Services Agreement
During 2017, the Company entered into a services agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under which the Biglari Entities provide business and administrative related services to the Company. The Biglari Entities are owned by Mr. Biglari. The services agreement has a rolling five-year term, with annual adjustments to the fixed fee. The fixed fee has not been adjusted, remaining at $700 per month since inception.
The Company paid Biglari Enterprises $8,400 in service fees during 2022 and 2021. The services agreement does not alter the Company’s hurdle rate connected with the incentive reallocation paid to Biglari Capital Corp.
Investments in The Lion Fund, L.P., and The Lion Fund II, L.P.
As of December 31, 2022, the Company’s investments in The Lion Fund, L.P., and The Lion Fund II, L.P., had a fair value of $383,004.
Contributions to and distributions from The Lion Fund, L.P., and The Lion Fund II, L.P., were as follows.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Contributions | $ | 59,877 | | | $ | 12,300 | | | $ | 70,130 | |
| Distributions | (70,700) | | | (180,170) | | | (98,330) | |
| $ | (10,823) | | | $ | (167,870) | | | $ | (28,200) | |
As the general partner of the investment partnerships, Biglari Capital will earn an incentive reallocation fee, on December 31 of each year, for the Company’s investments equal to 25% of the net profits above a hurdle rate of 6% over the previous high-water mark. There were no incentive reallocations in 2022 or 2021. There were $987 of incentive reallocations from Biglari Holdings to Biglari Capital during 2020, including $253 associated with gains on the Company’s common stock. Gains on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements.
Incentive Agreement
The Incentive Agreement establishes a performance-based annual incentive payment for Mr. Biglari contingent upon the growth in adjusted equity in each year attributable to our operating businesses. In order for Mr. Biglari to receive any incentive, our operating businesses must achieve an annual increase in shareholders’ equity in excess of 6% (the “hurdle rate”) above the previous highest level (the “high-water mark”). Mr. Biglari will receive 25% of any incremental book value created above the high-water mark plus the hurdle rate. In any year in which book value declines, our operating businesses must completely recover their deficit from the previous high-water mark, and attain the hurdle rate, before Mr. Biglari becomes eligible to receive any further incentive payment. No incentive fees were earned during 2022, 2021, or 2020.
Note 15. Commitments and Contingencies
We are involved in various legal proceedings and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided in our consolidated financial statements, is not likely to have a material effect on our results of operations, financial position, or cash flow.
Note 16. Fair Value of Financial Assets
The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting the market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.
•Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
•Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs), such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations, and yields for other instruments of the issuer or entities in the same industry sector.
•Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and we may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.
The following methods and assumptions were used to determine the fair value of each class of the following assets recorded at fair value in the consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of money market funds, which are classified within Level 1 of the fair value hierarchy.
Equity securities: The Company’s investments in equity securities are classified within Levels 1 and 2 of the fair value hierarchy.
Bonds: The Company’s investments in bonds consist of both corporate and government debt. Bonds are classified as Level 1 of the fair value hierarchy.
Non-qualified deferred compensation plan investments: The assets of the non-qualified plan are set up in a rabbi trust. They represent mutual funds and publicly traded securities, each of which are classified within Level 1 of the fair value hierarchy.
Derivative instruments: Options related to equity securities are marked to market each reporting period and are classified within Level 2 of the fair value hierarchy depending on the instrument.
Note 16. Fair Value of Financial Assets (continued)
As of December 31, 2022 and 2021, the fair values of financial assets were as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | |
| Cash equivalents | $ | 17,608 | | | $ | — | | | $ | — | | | $ | 17,608 | | | $ | 18,447 | | | $ | — | | | $ | — | | | $ | 18,447 | |
| Equity securities: | | | | | | | | | | | | | | | |
| Consumer goods | 17,274 | | | — | | | — | | | 17,274 | | | 10,775 | | | 2,368 | | | — | | | 13,143 | |
| Other | 2,031 | | | — | | | — | | | 2,031 | | | 9,400 | | | — | | | — | | | 9,400 | |
| Bonds: | | | | | | | | | | | | | | | |
| Government | 48,456 | | | — | | | — | | | 48,456 | | | 54,584 | | | — | | | — | | | 54,584 | |
| Corporate | 2,199 | | | — | | | — | | | 2,199 | | | 4,512 | | | — | | | — | | | 4,512 | |
| Options on equity securities | — | | | — | | | — | | | — | | | — | | | 2,095 | | | — | | | 2,095 | |
| Non-qualified deferred compensation plan investments | 699 | | | — | | | — | | | 699 | | | 1,607 | | | — | | | — | | | 1,607 | |
| Total assets at fair value | $ | 88,267 | | | $ | — | | | $ | — | | | $ | 88,267 | | | $ | 99,325 | | | $ | 4,463 | | | $ | — | | | $ | 103,788 | |
There were no changes in the valuation techniques used to measure fair values on a recurring basis.
Note 17. Business Segment Reporting
Our reportable business segments are organized in a manner that reflects how management views those business activities. Our restaurant operations include Steak n Shake and Western Sizzlin. Our insurance operations include First Guard and Southern Pioneer. Our oil and gas operations include Southern Oil and Abraxas Petroleum. The Company also reports segment information for Maxim. Other business activities not specifically identified with reportable business segments are presented in corporate. We report our earnings from investment partnerships separate from our corporate expenses. We assess and measure segment operating results based on segment earnings as disclosed below. Segment earnings from operations are neither necessarily indicative of cash available to fund cash requirements nor synonymous with cash flow from operations. The tabular information that follows shows data of our reportable segments reconciled to amounts reflected in the consolidated financial statements.
Note 17. Business Segment Reporting (continued)
A disaggregation of our consolidated data for each of the three most recent years is presented in the tables which follow.
| | | | | | | | | | | | | | | | | |
| Revenue |
| 2022 | | 2021 | | 2020 |
| Operating Businesses: | | | | | |
| Restaurant Operations: | | | | | |
| Steak n Shake | $ | 231,820 | | | $ | 263,135 | | | $ | 344,305 | |
| Western Sizzlin | 9,748 | | | 8,155 | | | 6,361 | |
| Total Restaurant Operations | 241,568 | | | 271,290 | | | 350,666 | |
| | | | | |
| Insurance Operations: | | | | | |
| Underwriting: | | | | | |
| First Guard | 35,914 | | | 33,521 | | | 30,210 | |
| Southern Pioneer | 24,035 | | | 21,890 | | | 19,010 | |
| Investment income and other | 4,591 | | | 3,198 | | | 3,459 | |
| Total Insurance Operations | 64,540 | | | 58,609 | | | 52,679 | |
| | | | | |
| Oil and Gas Operations: | | | | | |
| Southern Oil | 46,091 | | | 33,004 | | | 26,255 | |
| Abraxas Petroleum | 11,455 | | | — | | | — | |
| Total Oil and Gas Operations | 57,546 | | | 33,004 | | | 26,255 | |
| | | | | |
| Maxim | 4,577 | | | 3,203 | | | 4,083 | |
| $ | 368,231 | | | $ | 366,106 | | | $ | 433,683 | |
Note 17. Business Segment Reporting (continued)
| | | | | | | | | | | | | | | | | |
| Earnings (Loss) Before Income Taxes |
| 2022 | | 2021 | | 2020 |
| Operating Businesses: | | | | | |
| Restaurant Operations: | | | | | |
| Steak n Shake | $ | 11,478 | | | $ | 13,524 | | | $ | (4,587) | |
| Western Sizzlin | 1,484 | | | 931 | | | (765) | |
| Total Restaurant Operations | 12,962 | | | 14,455 | | | (5,352) | |
| | | | | |
| Insurance Operations: | | | | | |
| Underwriting: | | | | | |
| First Guard | 6,578 | | | 10,573 | | | 9,379 | |
| Southern Pioneer | (1,277) | | | 1,744 | | | 620 | |
| Investment income and other | 4,603 | | | 2,118 | | | 2,432 | |
| Total Insurance Operations | 9,904 | | | 14,435 | | | 12,431 | |
| | | | | |
| Oil and Gas Operations: | | | | | |
| Southern Oil | 24,539 | | | 9,713 | | | 2,018 | |
| Abraxas Petroleum | 652 | | | — | | | — | |
| Total Oil and Gas Operations | 25,191 | | | 9,713 | | | 2,018 | |
| | | | | |
| Maxim | 1,760 | | | 814 | | | 1,784 | |
| Interest expense not allocated to segments | (399) | | | (1,121) | | | (9,262) | |
| Operating Businesses | 49,418 | | | 38,296 | | | 1,619 | |
| | | | | |
| Corporate and other | (13,099) | | | (13,383) | | | (12,432) | |
| Investment gains (losses) | (3,393) | | | 6,401 | | | 3,644 | |
| Investment partnership gains (losses) | (75,953) | | | 10,953 | | | (43,032) | |
| | | | | |
| $ | (43,027) | | | $ | 42,267 | | | $ | (50,201) | |
| | | | | | | | | | | | | | | | | |
| Capital Expenditures |
| 2022 | | 2021 | | 2020 |
| Operating Businesses: | | | | | |
| Restaurant | $ | 24,470 | | | $ | 60,296 | | | $ | 17,858 | |
| Insurance | 1,558 | | | 1,451 | | | 5 | |
| Oil and Gas | 906 | | | 996 | | | 2,806 | |
| Operating Businesses | 26,934 | | | 62,743 | | | 20,669 | |
| Corporate and other | 2,812 | | | 1,806 | | | 33 | |
| Consolidated results | $ | 29,746 | | | $ | 64,549 | | | $ | 20,702 | |
Note 17. Business Segment Reporting (continued)
| | | | | | | | | | | | | | | | | |
| Depreciation, Depletion, and Amortization |
| 2022 | | 2021 | | 2020 |
| Operating Businesses: | | | | | |
| Restaurant | $ | 27,496 | | | $ | 21,484 | | | $ | 19,042 | |
| Insurance | 193 | | | 176 | | | 414 | |
| Oil and Gas | 8,013 | | | 8,073 | | | 12,527 | |
| Operating Businesses | 35,702 | | | 29,733 | | | 31,983 | |
| Corporate and other | 741 | | | 317 | | | 239 | |
| Consolidated results | $ | 36,443 | | | $ | 30,050 | | | $ | 32,222 | |
A disaggregation of our consolidated assets is presented in the table that follows.
| | | | | | | | | | | |
| Identifiable Assets |
| December 31, |
| 2022 | | 2021 |
| Reportable segments: | | | |
| Restaurant Operations: | | | |
| Steak n Shake | $ | 341,199 | | | $ | 377,676 | |
| Western Sizzlin | 19,431 | | | 17,239 | |
| Total Restaurant Operations | 360,630 | | | 394,915 | |
| | | |
| Insurance Operations: | | | |
| First Guard | 58,997 | | | 74,615 | |
| Southern Pioneer | 75,373 | | | 72,321 | |
| Total Insurance Operations | 134,370 | | | 146,936 | |
| | | |
| Oil and Gas Operations: | | | |
| Southern Oil | 49,416 | | | 53,359 | |
| Abraxas Petroleum | 81,339 | | | — | |
| Total Oil and Gas Operations | 130,755 | | | 53,359 | |
| | | |
| Maxim | 16,093 | | | 16,605 | |
| Corporate | 30,832 | | | 32,593 | |
| Investment partnerships | 155,794 | | | 250,399 | |
| Total assets | $ | 828,474 | | | $ | 894,807 | |
Note 18. Supplemental Disclosures of Cash Flow Information
A summary of supplemental cash flow information for each of the three years ending December 31, 2022, 2021 and 2020 is presented in the following table.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Cash paid during the year for: | | | | | |
| Interest on debt | $ | 359 | | | $ | 994 | | | $ | 9,397 | |
| Interest on obligations under leases | 5,493 | | | 6,039 | | | 6,274 | |
| Income taxes | 1,092 | | | 4,532 | | | 15,402 | |
| Non-cash investing and financing activities | | | | | |
| Capital expenditures in accounts payable | 1,897 | | | 8,733 | | | 2,399 | |
| Finance lease additions | — | | | 733 | | | 3,285 | |
| Finance lease retirements | — | | | 1,216 | | | 4,842 | |
Note 19. Supplemental Oil and Gas Disclosures (Unaudited)
The Company has determined it had significant oil and gas producing activities during the years ended December 31, 2022 and December 31, 2021 in accordance with ASC 932 “Extractive Activities — Oil and Gas.” The Company did not have significant oil and gas producing activities within the meaning of ASC 932 during the year ended December 31, 2020.
Estimated Quantities of Proved Oil and Natural Gas Reserves
The Company classifies recoverable hydrocarbons based on their status at the time of reporting. Within the commercial classification are proved reserves and two categories of unproved reserves: probable and possible. The potentially recoverable categories are also referred to as contingent resources. For reserve estimates to be classified as proved, they must meet all SEC and Company standards.
Proved oil and gas reserves are the estimated quantities that geoscience and engineering data demonstrate with reasonable certainty to be economically producible from known reservoirs under existing economic conditions, operating methods, and government regulations. Net proved reserves exclude royalties and interests owned by others and reflect contractual arrangements and royalty obligations in effect at the time of the estimate. Proved reserves are classified as either developed or undeveloped. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are the quantities expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional information becomes available.
We engaged Netherland, Sewell & Associates, Inc. (“NSAI”), to prepare our reserve estimates for all of our estimated proved reserves at December 31, 2022. All proved oil and natural gas reserves are located in the United States, primarily offshore in the shallow waters of the Gulf of Mexico and in the Permian Basin.
Note 19. Supplemental Oil and Gas Disclosures (Unaudited) (continued)
The following table sets forth our estimate of the net proved oil and gas reserves for the year ended December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Oil (MBbl) | | Gas (MMcf) | | Liquids (Bbl) | | MBOE |
| Total proved reserves at December 31, 2020 | 2,223 | | | 24,917 | | | — | | | 6,376 | |
| Revisions | 433 | | | 4,235 | | | — | | | 1,139 | |
| Extensions | 62 | | | 189 | | | — | | | 94 | |
| Production | (357) | | | (2,798) | | | — | | | (824) | |
| Total proved reserves at December 31, 2021 | 2,361 | | | 26,544 | | | — | | | 6,785 | |
| Revisions | (355) | | | (3,288) | | | — | | | (903) | |
| Extensions | — | | | — | | | — | | | — | |
| Acquisition of reserves | 3,415 | | | 19,334 | | | 1,550 | | | 8,188 | |
| Production | (450) | | | (2,341) | | | (42) | | | (882) | |
| Total proved reserves at December 31, 2022 | 4,971 | | | 40,249 | | | 1,508 | | | 13,188 | |
| | | | | | | |
| Proved developed reserves | | | | | | | |
| December 31, 2022 | 4,507 | | | 32,132 | | | 1,508 | | | 11,371 | |
| December 31, 2021 | 1,897 | | | 18,427 | | | — | | | 4,968 | |
| | | | | | | |
| Proved undeveloped reserves | | | | | | | |
| December 31, 2022 | 464 | | | 8,117 | | | — | | | 1,817 | |
| December 31, 2021 | 464 | | | 8,117 | | | — | | | 1,817 | |
Revisions are affected by commodity prices as well as changes to previous proved reserve estimates based on the evaluation of production and operating performance data.
Bbl — One stock tank barrel, or 42 United States gallons liquid volume.
MBbl — Thousand barrels.
MMcf — Million cubic feet of natural gas.
MBOE — Thousand barrels of oil equivalent.
Natural gas is converted to an oil equivalent basis at six thousand cubic feet per one barrel of oil.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves
The standardized measure of discounted future net cash flows presented in the following table was computed using the 12-month unweighted average of the first-day-of-the-month commodity prices, the costs in effect at December 31, 2022 and 2021, and a 10 percent discount factor. The Company cautions that actual future net cash flows may vary considerably from these estimates. Although the Company’s estimates of total proved reserves, development costs, and production rates were based on the best available information, the development and production of the crude oil and natural gas reserves may not occur in the periods assumed. Actual prices realized, costs incurred, and production quantities may vary significantly from those used. Therefore, the estimated future net cash flow computations should not be considered to represent the Company’s estimate of the expected revenues or the current value of proved reserves.
Note 19. Supplemental Oil and Gas Disclosures (Unaudited) (continued)
The following table sets forth the standardized measure of discounted future net cash flows attributable to proved crude oil and natural gas reserves as of December 31, 2022 and 2021.
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Future cash inflows | $ | 728,382 | | | $ | 247,294 | |
| Future production costs | (288,816) | | | (78,207) | |
| Future development and abandonment costs | (36,719) | | | (32,673) | |
| Future income tax expense | (69,999) | | | (28,904) | |
| Future net cash flows | 332,848 | | | 107,510 | |
10% annual discount for estimated timing of cash flows | (122,781) | | | (29,751) | |
| Standardized measure of discounted future net cash flows | $ | 210,067 | | | $ | 77,759 | |
Changes in Standardized Measure of Discounted Future Net Cash Flows
Principle changes in the standardized measure of discounted future net cash flows attributable to the Company’s proved oil and natural gas reserves are as follows.
| | | | | |
| |
| Standardized measure at December 31, 2020 | $ | 31,330 | |
| Net change in prices and production costs | 67,058 | |
| Net change in future development costs | (85) | |
| Sales of oil and natural gas, net of production expenses | (22,098) | |
| Extensions | 104 | |
| Revisions of previous quantity estimates | 17,754 | |
| Net change in taxes | (14,604) | |
| Accretion of discount | 3,759 | |
| Changes in timing and other | (5,459) | |
| Standardized measure at December 31, 2021 | $ | 77,759 | |
| Net change in prices and production costs | 58,439 | |
| Net change in future development costs | 104 | |
| Sales of oil and natural gas, net of production expenses | (41,859) | |
| Extensions | — | |
| Acquisition of reserves | 141,051 | |
| Revisions of previous quantity estimates | (9,072) | |
| Net change in taxes | (26,456) | |
| Accretion of discount | 9,862 | |
| Changes in timing and other | 239 | |
| Standardized measure at December 31, 2022 | $ | 210,067 | |