Biglari Holdings Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS BIGLARI HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) September 30, 2022 December 31, 2021 (Unaudited) Assets Current assets: Cash and cash equivalents $ 64,842 $ 42,349 Investments 70,032 83,061 Receivables 25,826 28,508 Inventories 3,704 3,803 Other current assets 13,147 7,088 Total current assets 177,551 164,809 Property and equipment 414,497 349,351 Operating lease assets 38,539 42,538 Goodwill and other intangible assets 75,933 77,010 Investment partnerships 144,864 250,399 Other assets 10,761 10,700 Total assets $ 862,145 $ 894,807 Liabilities and shareholders’ equity Liabilities Current liabilities: Accounts payable and accrued expenses $ 101,503 $ 100,467 Loss and loss adjustment expenses 14,613 14,609 Unearned premiums 12,493 11,667 Current portion of lease obligations 17,093 16,898 Total current liabilities 145,702 143,641 Lease obligations 95,980 104,479 Line of credit 30,000 — Deferred taxes 28,515 46,533 Asset retirement obligations 14,721 10,389 Other liabilities 1,819 2,069 Total liabilities 316,737 307,111 Shareholders’ equity Common stock 1,138 1,138 Additional paid-in capital 381,788 381,788 Retained earnings 566,455 608,528 Accumulated other comprehensive loss ( 3,777 ) ( 1,907 ) Treasury stock, at cost ( 409,119 ) ( 401,851 ) Biglari Holdings Inc. shareholders’ equity 536,485 587,696 Noncontrolling interests 8,923 — Total shareholders' equity 545,408 587,696 Total liabilities and shareholders’ equity $ 862,145 $ 894,807 See accompanying Notes to Consolidated Financial Statements. 1 Table of Contents BIGLARI HOLDINGS INC. CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands except per share amounts) Third Quarter First Nine Months 2022 2021 2022 2021 (Unaudited) (Unaudited) Revenues Restaurant operations $ 59,437 $ 59,144 $ 179,608 $ 196,424 Insurance premiums and other 16,312 14,723 47,745 43,729 Oil and gas 14,380 7,353 38,632 24,310 Licensing and media 1,905 863 3,788 2,695 92,034 82,083 269,773 267,158 Cost and expenses Restaurant cost of sales 36,162 41,694 107,469 129,297 Insurance losses and underwriting expenses 13,245 10,672 40,812 31,733 Oil and gas production costs 4,090 2,050 11,752 6,957 Licensing and media costs 345 880 1,975 1,749 Selling, general and administrative 15,469 16,889 48,275 50,848 Impairments — — 20 559 Depreciation, depletion, and amortization 8,456 7,682 24,127 22,239 Interest expense on leases 1,372 1,462 4,169 4,619 Interest expense on borrowings 67 — 67 1,121 79,206 81,329 238,666 249,122 Other income Investment gains (losses) ( 849 ) 4,534 ( 4,184 ) 6,465 Investment partnership gains (losses) 29,658 ( 20,231 ) ( 82,244 ) 27,344 Total other income (expenses) 28,809 ( 15,697 ) ( 86,428 ) 33,809 Earnings (loss) before income taxes 41,637 ( 14,943 ) ( 55,321 ) 51,845 Income tax expense (benefit) 9,598 ( 4,274 ) ( 13,282 ) 11,544 Net earnings (loss) 32,039 ( 10,669 ) ( 42,039 ) 40,301 Earnings attributable to noncontrolling interest 34 — 34 — Net earnings (loss) attributable to Biglari Holdings Inc. shareholders $ 32,005 $ ( 10,669 ) $ ( 42,073 ) $ 40,301 Net earnings (loss) per equivalent Class A share * $ 109.13 $ ( 33.74 ) $ ( 140.30 ) $ 125.79 *Net earnings (loss) per equivalent Class B share outstanding are one-fifth of the equivalent Class A share or $ 21.83 and $( 28.06 ) for the third quarter and first nine months of 2022, respectively, and $( 6.75 ) and $ 25.16 for the third quarter and first nine months of 2021, respectively. See accompanying Notes to Consolidated Financial Statements. 2 Table of Contents BIGLARI HOLDINGS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) Third Quarter First Nine Months 2022 2021 2022 2021 (Unaudited) (Unaudited) Net earnings (loss) $ 32,039 $ ( 10,669 ) $ ( 42,039 ) $ 40,301 Foreign currency translation ( 618 ) ( 49 ) ( 1,870 ) ( 378 ) Comprehensive income (loss) 31,421 ( 10,718 ) ( 43,909 ) 39,923 Comprehensive income attributable to noncontrolling interests 34 — 34 — Total comprehensive income (loss) attributable to Biglari Holdings Inc. shareholders $ 31,387 $ ( 10,718 ) $ ( 43,943 ) $ 39,923 See accompanying Notes to Consolidated Financial Statements. 3 Table of Contents BIGLARI HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) First Nine Months 2022 2021 (Unaudited) Operating activities Net earnings (loss) $ ( 42,039 ) $ 40,301 Adjustments to reconcile net earnings (loss) to operating cash flows: Depreciation, depletion, and amortization 24,127 22,239 Provision for deferred income taxes ( 22,289 ) 16,625 Asset impairments and other non-cash expenses 20 696 Gains on disposal of assets ( 905 ) ( 306 ) Investment and investment partnership (gains) losses 86,428 ( 34,461 ) Distributions from investment partnerships 51,200 172,420 Changes in receivables, inventories and other assets 7,240 3,608 Changes in accounts payable and accrued expenses ( 4,028 ) ( 9,877 ) Net cash provided by operating activities 99,754 211,245 Investing activities Capital expenditures ( 23,437 ) ( 46,486 ) Proceeds from property and equipment disposals 2,201 2,749 Acquisition of a business, net of cash acquired ( 54,899 ) — Purchases of limited partner interests ( 23,886 ) ( 4,800 ) Purchases of investments ( 110,837 ) ( 81,923 ) Sales of investments and redemptions of fixed maturity securities 108,394 74,678 Net cash used in investing activities ( 102,464 ) ( 55,782 ) Financing activities Proceeds from revolving credit facility 30,000 — Principal payments on long-term debt — ( 149,952 ) Principal payments on direct financing lease obligations ( 4,647 ) ( 4,634 ) Net cash provided by (used in) financing activities 25,353 ( 154,586 ) Effect of exchange rate changes on cash ( 150 ) ( 85 ) Increase in cash, cash equivalents and restricted cash 22,493 792 Cash, cash equivalents and restricted cash at beginning of year 43,687 29,666 Cash, cash equivalents and restricted cash at end of third quarter $ 66,180 $ 30,458 First Nine Months 2022 2021 (Unaudited) Cash and cash equivalents $ 64,842 $ 27,795 Restricted cash in other long-term assets 1,338 2,663 Cash, cash equivalents and restricted cash at end of third quarter $ 66,180 $ 30,458 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents BIGLARI HOLDINGS INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) (dollars in thousands) Biglari Holdings Inc. Shareholders’ Equity Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Non-controlling Interests Total Balance at December 31, 2021 $ 1,138 $ 381,788 $ 608,528 $ ( 1,907 ) $ ( 401,851 ) $ — $ 587,696 Net earnings (loss) ( 298 ) ( 298 ) Other comprehensive loss ( 231 ) ( 231 ) Adjustment to treasury stock for holdings in investment partnerships 130 130 Balance at March 31, 2022 $ 1,138 $ 381,788 $ 608,230 $ ( 2,138 ) $ ( 401,721 ) $ — $ 587,297 Net earnings (loss) ( 73,780 ) ( 73,780 ) Other comprehensive loss ( 1,021 ) ( 1,021 ) Adjustment to treasury stock for holdings in investment partnerships ( 6,760 ) ( 6,760 ) Balance at June 30, 2022 $ 1,138 $ 381,788 $ 534,450 $ ( 3,159 ) $ ( 408,481 ) $ — $ 505,736 Net earnings 32,005 34 32,039 Other comprehensive loss ( 618 ) ( 618 ) Adjustment to treasury stock for holdings in investment partnerships ( 638 ) ( 638 ) Transactions with noncontrolling interests 8,889 8,889 Balance at September 30, 2022 $ 1,138 $ 381,788 $ 566,455 $ ( 3,777 ) $ ( 409,119 ) $ 8,923 $ 545,408 5 Table of Contents Biglari Holdings Inc. Shareholders’ Equity Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Non-controlling interests Total Balance at December 31, 2020 $ 1,138 $ 381,788 $ 573,050 $ ( 1,531 ) $ ( 389,617 ) $ — $ 564,828 Net earnings 71,707 71,707 Other comprehensive loss ( 444 ) ( 444 ) Adjustment to treasury stock for holdings in investment partnerships 3,049 3,049 Balance at March 31, 2021 $ 1,138 $ 381,788 $ 644,757 $ ( 1,975 ) $ ( 386,568 ) $ — $ 639,140 Net earnings (loss) ( 20,737 ) ( 20,737 ) Other comprehensive income 115 115 Adjustment to treasury stock for holdings in investment partnerships ( 5,026 ) ( 5,026 ) Balance at June 30, 2021 $ 1,138 $ 381,788 $ 624,020 $ ( 1,860 ) $ ( 391,594 ) $ — $ 613,492 Net earnings (loss) ( 10,669 ) ( 10,669 ) Other comprehensive loss ( 49 ) ( 49 ) Adjustment to treasury stock for holdings in investment partnerships ( 4,208 ) ( 4,208 ) Balance at September 30, 2021 $ 1,138 $ 381,788 $ 613,351 $ ( 1,909 ) $ ( 395,802 ) $ — $ 598,566 See accompanying Notes to Consolidated Financial Statements. 6 Table of Contents BIGLARI HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (dollars in thousands, except share and per share data) Note 1. Summary of Significant Accounting Policies Description of Business The accompanying unaudited consolidated financial statements of Biglari Holdings Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal recurring adjustments. The results for the interim periods shown are not necessarily indicative of results for the entire fiscal year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2021. Biglari Holdings 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 finance 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 September 30, 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. Business Acquisition On September 14, 2022, the Company completed the purchase of 685,505 shares of Series A Preferred Stock (the "Preferred Shares") of Abraxas Petroleum Corporation ("Abraxas Petroleum") for a purchase price of $ 80,000 . On October 26, 2022, the Company converted the preferred stock to 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 third quarter. The revenues and operating results for Abraxas Petroleum were not significant to the Company for the third quarter. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-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. Intercompany accounts and transactions have been eliminated in consolidation. Note 2. 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 Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, 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. On June 8, 2022, The Lion Fund II, L.P. transferred 83,465 shares of Biglari Holdings’ Class A common stock and 890,272 shares of Biglari Holdings’ Class B common stock to The Lion Fund, L.P. 7 Table of Contents Note 2. Earnings Per Share (continued) The following table presents shares authorized, issued and outstanding on September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Class A Class B Class A Class B Common stock authorized 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 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 weighted average equivalent Class A common stock for earnings per share. There are no dilutive securities outstanding. Third Quarter First Nine Months 2022 2021 2022 2021 Equivalent Class A common stock outstanding 620,592 620,592 620,592 620,592 Proportional ownership of Company stock held by investment partnerships 327,317 304,356 320,711 300,215 Equivalent Class A common stock for earnings per share 293,275 316,236 299,881 320,377 Note 3. 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. 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 result. However, we consider investment gains and losses, whether realized or unrealized, as non-operating. Investment losses for the third quarter and first nine months of 2022 were $ 849 and $ 4,184 , respectively. Investment gains in the third quarter and first nine months of 2021 were $ 4,534 and $ 6,465 , respectively. 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 Corp. is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari. 8 Table of Contents 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, 2021 $ 474,201 $ 223,802 $ 250,399 Investment partnership gains (losses) ( 119,864 ) ( 37,620 ) ( 82,244 ) Distributions (net of contributions) ( 16,023 ) ( 16,023 ) Changes in proportionate share of Company stock held 7,268 ( 7,268 ) Partnership interest at September 30, 2022 $ 338,314 $ 193,450 $ 144,864 Fair Value Company Common Stock Carrying Value Partnership interest at December 31, 2020 $ 590,926 $ 171,376 $ 419,550 Investment partnership gains (losses) 110,690 83,346 27,344 Distributions (net of contributions) ( 167,620 ) ( 167,620 ) Changes in proportionate share of Company stock held 6,185 ( 6,185 ) Partnership interest at September 30, 2021 $ 533,996 $ 260,907 $ 273,089 The carrying value of the investment partnerships net of deferred taxes is presented below. September 30, 2022 December 31, 2021 Carrying value of investment partnerships $ 144,864 $ 250,399 Deferred tax liability related to investment partnerships ( 22,176 ) ( 44,532 ) Carrying value of investment partnerships net of deferred taxes $ 122,688 $ 205,867 The Company’s proportionate share of Company stock held by investment partnerships at cost was $ 409,119 and $ 401,851 at September 30, 2022 and December 31, 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. Third Quarter First Nine Months 2022 2021 2022 2021 Gains (losses) from investment partnerships $ 29,658 $ ( 20,231 ) $ ( 82,244 ) $ 27,344 Tax expense (benefit) 6,601 ( 4,946 ) ( 20,153 ) 6,175 Contribution to net earnings (loss) $ 23,057 $ ( 15,285 ) $ ( 62,091 ) $ 21,169 On December 31 of each year, the general partner of the investment partnerships, Biglari Capital Corp., 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 Corp. 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 Corp. during the first nine months of 2022 and 2021. 9 Table of Contents 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 September 30, 2022 $ 247,357 $ 307,446 Total liabilities as of September 30, 2022 $ 9,973 $ 162,520 Revenue for the first nine months of 2022 $ ( 46,341 ) $ ( 88,378 ) Earnings for the first nine months of 2022 $ ( 46,544 ) $ ( 89,771 ) Biglari Holdings’ ownership interest as of September 30, 2022 88.2 % 87.7 % 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 first nine months of 2021 $ 35,639 $ 94,078 Earnings for the first nine months of 2021 $ 35,584 $ 93,548 Biglari Holdings’ ownership interest as of September 30, 2021 62.4 % 93.9 % Revenue in the financial information of the investment partnerships, summarized above, includes investment income and unrealized gains and losses on investments. Note 5. Property and Equipment Property and equipment is composed of the following. September 30, 2022 December 31, 2021 Land $ 142,813 $ 144,605 Buildings 151,138 148,605 Land and leasehold improvements 147,765 147,349 Equipment 230,712 224,581 Oil and gas properties 140,916 74,147 Construction in progress 5,744 2,815 819,088 742,102 Less accumulated depreciation, depletion, and amortization ( 404,591 ) ( 392,751 ) Property and equipment, net $ 414,497 $ 349,351 Depletion expense related to oil and gas properties was $ 4,345 and $ 5,875 during the first nine months of 2022 and 2021, respectively. The Company recorded an impairment to restaurant long-lived assets of $ 559 in the first nine months of 2021 related to underperforming stores. 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. There were no impairments of property and equipment in 2022. As of September 30, 2022, $ 5,002 of property and equipment is recorded as held for sale within other current assets. 10 Table of Contents Note 6. 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. A reconciliation of the change in the carrying value of goodwill is as follows. Goodwill Goodwill at December 31, 2021 $ 53,547 Change in foreign exchange rates during the first nine months of 2022 ( 83 ) Goodwill at September 30, 2022 $ 53,464 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. We use both qualitative and quantitative assessments. The valuation methodology and underlying financial information included in our quantitative determination of fair value require significant management judgments. We use both market and income approaches to derive fair value of reporting units utilizing a quantitative assessment. The judgments in these two approaches include, but are not limited to, comparable market multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results. No impairment was recorded in the first nine months of 2022 or 2021. Western Sizzlin has experienced a decline in its franchised units for several years. If Western Sizzlin’s franchised units continue to decline, an impairment of its goodwill may be necessary. Other Intangible Assets Intangible assets with indefinite lives are composed of the following. Trade Names Lease Rights Total Balance at December 31, 2021 $ 15,876 $ 7,587 $ 23,463 Impairment to lease rights — ( 20 ) ( 20 ) Change in foreign exchange rates during the first nine months of 2022 — ( 974 ) ( 974 ) Balance at September 30, 2022 $ 15,876 $ 6,593 $ 22,469 Intangible assets with indefinite lives consist of trade names and lease rights. Fair values were determined using Level 3 inputs and available market data. Note 7. Restaurant Operations Revenues Restaurant operations revenues were as follows. Third Quarter First Nine Months 2022 2021 2022 2021 Net sales $ 37,448 $ 41,916 $ 113,345 $ 146,269 Franchise partner fees 15,880 11,508 47,929 31,744 Franchise royalties and fees 5,089 4,865 15,472 14,594 Other 1,020 855 2,862 3,817 $ 59,437 $ 59,144 $ 179,608 $ 196,424 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. 11 Table of Contents Note 7. Restaurant Operations Revenues (continued) 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 most of our revenue from our share of the franchise partners’ profits. An initial franchise fee of ten thousand dollars is recognized during the year 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 franchise partners under lease arrangements. Both real estate and equipment rental payments are charged to franchise partners and are recognized in accordance with ASC 842, “ Leases ”. During the third quarter of 2022 and 2021, restaurant operations recognized $ 5,362 and $ 4,277 , respectively, in franchise partner fees related to rental income. During the first nine months ended September 30, 2022 and September 30, 2021, restaurant operations recognized $ 15,193 and $ 10,910 , 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. 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 a liability 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. Note 8. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses include the following. September 30, 2022 December 31, 2021 Accounts payable $ 34,288 $ 36,684 Gift card and other marketing 15,985 19,244 Insurance accruals 5,971 6,428 Salaries, wages and vacation 6,902 5,905 Deferred revenue 4,831 6,683 Taxes payable 21,583 11,392 Professional fees 1,998 11,731 Oil and gas payable 5,586 1,936 Other 4,359 464 Accounts payable and accrued expenses $ 101,503 $ 100,467 Note 9. Line of Credit and Note Payable Bigari 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 September 30, 2022 was $ 30,000 . 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 the balance of Steak n Shake’s term facility on February 19, 2021. 12 Table of Contents Note 10. Lease Assets and Obligations Lease obligations include the following. Current portion of lease obligations September 30, 2022 December 31, 2021 Finance lease liabilities $ 1,214 $ 1,414 Finance obligations 5,119 4,944 Operating lease liabilities 10,760 10,540 Total current portion of lease obligations $ 17,093 $ 16,898 Long-term lease obligations Finance lease liabilities $ 4,431 $ 5,347 Finance obligations 60,009 63,119 Operating lease liabilities 31,540 36,013 Total long-term lease obligations $ 95,980 $ 104,479 Nature of Leases Steak n Shake and Western Sizzlin operate restaurants that are located on sites owned by us or leased from third parties. In addition, they own sites and lease sites from third parties that are leased and/or subleased to franchise partners and 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 cost consists of the following. Third Quarter First Nine Months 2022 2021 2022 2021 Finance lease costs: Amortization of right-of-use assets $ 309 $ 404 $ 1,023 $ 1,205 Interest on lease liabilities 102 126 325 399 Operating and variable lease costs 3,577 4,011 10,782 11,189 Sublease income ( 2,895 ) ( 3,771 ) ( 8,487 ) ( 9,786 ) Total lease costs $ 1,093 $ 770 $ 3,643 $ 3,007 Supplemental cash flow information related to leases is as follows. First Nine Months 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 1,116 $ 1,226 Operating cash flows from finance leases $ 324 $ 384 Operating cash flows from operating leases $ 9,347 $ 9,806 13 Table of Contents Note 10. Lease Assets and Obligations (continued) Supplemental balance sheet information related to leases is as follows. September 30, 2022 December 31, 2021 Finance leases: Property and equipment, net $ 4,619 $ 5,634 Weighted-average lease terms and discount rates are as follows. September 30, 2022 Weighted-average remaining lease terms: Finance leases 4.56 years Operating leases 4.90 years Weighted-average discount rates: Finance leases 7.0 % Operating leases 7.0 % Maturities of lease liabilities as of September 30, 2022 are as follows. Year Operating Leases Finance Leases 2022 $ 4,215 $ 394 2023 11,781 1,551 2024 9,985 1,534 2025 8,290 1,298 2026 5,671 959 After 2026 9,967 855 Total lease payments 49,909 6,591 Less interest 7,609 946 Total lease liabilities $ 42,300 $ 5,645 Lease Income The components of lease income recorded in restaurant operations are as follows. Third Quarter First Nine Months 2022 2021 2022 2021 Operating lease income $ 4,085 $ 3,211 $ 11,737 $ 8,471 Variable lease income 1,556 1,370 4,312 3,375 Total lease income $ 5,641 $ 4,581 $ 16,049 $ 11,846 14 Table of Contents Note 10. Lease Assets and Obligations (continued) The following table displays the Company’s future minimum rental receipts for non-cancelable leases and subleases as of September 30, 2022. Franchise partner leases and subleases are short-term leases and have been excluded from the table. Operating Leases Year Subleases Owned Properties 2022 $ 228 $ 62 2023 767 247 2024 503 247 2025 454 250 2026 134 247 After 2026 241 805 Total future minimum receipts $ 2,327 $ 1,858 Note 11. Accumulated Other Comprehensive Income Accumulated other comprehensive income decreased by $ 618 and $ 49 during the third quarters of 2022 and 2021, respectively. During the first nine months of 2022, accumulated other comprehensive income decreased by $ 1,870 and $ 378 in the first nine months of 2021. There were no reclassifications from accumulated other comprehensive loss to earnings during the first nine months of 2022 and 2021. All changes in accumulated other comprehensive loss were due to foreign currency translation adjustments. Note 12. Income Taxes In determining the quarterly provision for income taxes, the Company used an estimated annual effective tax rate for the first nine months of 2022 and a discrete effective tax rate method based on statutory tax rates for the first nine months of 2021. Our periodic effective income tax rate is affected by the relative mix of pre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions. Income tax expense for the third quarter of 2022 was $ 9,598 compared to an income tax benefit of $ 4,274 for the third quarter of 2021. Income tax benefit for the first nine months of 2022 was $ 13,282 compared to an income tax expense of $ 11,544 for the first nine months of 2021. The variance in income taxes between 2022 and 2021 is attributable to taxes on income generated by the investment partnerships. Investment partnership pre-tax gains were $ 29,658 during the third quarter of 2022 compared to pre-tax losses of $ 20,231 during the third quarter of 2021. Investment partnership pre-tax losses were $ 82,244 during the first nine months of 2022 compared to pre-tax gains of $ 27,344 during the first nine months of 2021. Note 13. 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 14. 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 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. 15 Table of Contents Note 14. Fair Value of Financial Assets (continued) 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 as Level 1 of the fair value hierarchy. Equity securities: The Company’s investments in equity securities are classified as 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 l or Level 2 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 as Level 1 of the fair value hierarchy. Derivative instruments: Options related to equity securities are marked to market each reporting period and are classified as Level 2 of the fair value hierarchy depending on the instrument. 16 Table of Contents Note 14. Fair Value of Financial Assets (continued) As of September 30, 2022 and December 31, 2021, the fair values of financial assets were as follows. September 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 16,389 $ — $ — $ 16,389 $ 18,447 $ — $ — $ 18,447 Equity securities Consumer goods 16,266 932 — 17,198 10,775 2,368 — 13,143 Insurance 49 — — 49 6,513 — — 6,513 Technology 1,832 — — 1,832 2,887 — — 2,887 Bonds Government 44,914 — — 44,914 54,584 — — 54,584 Corporate 3,003 — — 3,003 4,512 — — 4,512 Options on equity securities — 3,531 — 3,531 — 2,095 — 2,095 Non-qualified deferred compensation plan investments 1,299 — — 1,299 1,607 — — 1,607 Total assets at fair value $ 83,752 $ 4,463 $ — $ 88,215 $ 99,325 $ 4,463 $ — $ 103,788 There were no changes in our valuation techniques used to measure fair values on a recurring basis. Note 15. Related Party Transactions Service Agreement The Company is party to a service 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 Company paid Biglari Enterprises $ 6,300 in service fees during the first nine months of 2022 and 2021. The service agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital Corp. 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, along with attaining the Hurdle Rate, before Mr. Biglari becomes eligible to receive any further incentive payment. 17 Table of Contents Note 16. 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. A disaggregation of our consolidated data for the third quarters and first nine months of 2022 and 2021 is presented in the tables which follow. Revenue Third Quarter First Nine Months 2022 2021 2022 2021 Operating Businesses: Restaurant Operations: Steak n Shake $ 56,949 $ 56,993 $ 172,444 $ 190,517 Western Sizzlin 2,488 2,151 7,164 5,907 Total Restaurant Operations 59,437 59,144 179,608 196,424 Insurance Operations: Underwriting First Guard 9,112 8,458 26,858 24,760 Southern Pioneer 6,004 5,443 17,653 16,406 Investment income and other 1,196 822 3,234 2,563 Total Insurance Operations 16,312 14,723 47,745 43,729 Oil and Gas Operations: Southern Oil 12,688 7,353 36,940 24,310 Abraxas Petroleum 1,692 — 1,692 — Total Oil and Gas Operations 14,380 7,353 38,632 24,310 Maxim 1,905 863 3,788 2,695 $ 92,034 $ 82,083 $ 269,773 $ 267,158 18 Table of Contents Note 16. Business Segment Reporting (continued) Earnings (Losses) Before Income Taxes Third Quarter First Nine Months 2022 2021 2022 2021 Operating Businesses: Restaurant Operations: Steak n Shake $ 3,964 $ ( 2,959 ) $ 11,777 $ 5,733 Western Sizzlin 369 247 997 707 Total Restaurant Operations 4,333 ( 2,712 ) 12,774 6,440 Insurance Operations: Underwriting: First Guard 2,354 2,832 4,800 7,922 Southern Pioneer ( 483 ) 397 ( 1,101 ) 1,511 Investment income and other 1,221 613 3,188 1,965 Total Insurance Operations 3,092 3,842 6,887 11,398 Oil and Gas Operations: Southern Oil 6,795 2,982 19,137 9,047 Abraxas Petroleum 446 — 446 — Total Oil and Gas Operations 7,241 2,982 19,583 9,047 Maxim 1,534 ( 56 ) 1,699 867 Interest expense not allocated to segments ( 67 ) — ( 67 ) ( 1,121 ) Total Operating Businesses 16,133 4,056 40,876 26,631 Corporate and other ( 3,305 ) ( 3,302 ) ( 9,769 ) ( 8,595 ) Investment gains (losses) ( 849 ) 4,534 ( 4,184 ) 6,465 Investment partnership gains (losses) 29,658 ( 20,231 ) ( 82,244 ) 27,344 $ 41,637 $ ( 14,943 ) $ ( 55,321 ) $ 51,845 19 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data) Overview 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 finance 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 September 30, 2022, Mr. Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and 70.4% of the voting interest. On September 14, 2022, the Company completed the purchase of 685,505 shares of Series A Preferred Stock (the "Preferred Shares") of Abraxas Petroleum Corporation ("Abraxas Petroleum") for a purchase price of $80,000. On October 26, 2022, the Company converted the preferred stock to 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 third quarter. The revenues and operating results for Abraxas Petroleum were not significant to the Company for the third quarter. Net earnings (loss) attributable to Biglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. Third Quarter First Nine Months 2022 2021 2022 2021 Operating businesses: Restaurant $ 3,320 $ (1,515) $ 9,588 $ 5,146 Insurance 2,389 2,985 5,292 8,902 Oil and gas 5,574 2,325 14,867 7,016 Brand licensing 1,150 (43) 1,274 662 Interest expense (52) — (52) (841) Corporate and other (2,742) (2,526) (7,630) (6,649) Total operating businesses 9,639 1,226 23,339 14,236 Investment gains (657) 3,390 (3,287) 4,896 Investment partnership gains (losses) 23,057 (15,285) (62,091) 21,169 32,039 (10,669) (42,039) 40,301 Earnings attributable to noncontrolling interest 34 — 34 — $ 32,005 $ (10,669) $ (42,073) $ 40,301 20 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Restaurants Our restaurant businesses, which include Steak n Shake and Western Sizzlin, comprise 552 company-operated and franchise restaurants as of September 30, 2022. Steak n Shake Western Sizzlin Company- operated Franchise Partner Traditional Franchise Company- operated Franchise Total Total stores as of December 31, 2021 199 159 178 3 38 577 Corporate stores transitioned (12) 12 — — — — Net restaurants opened (closed) (6) — (19) — — (25) Total stores as of September 30, 2022 181 171 159 3 38 552 Total stores as of December 31, 2020 276 86 194 3 39 598 Corporate stores transitioned (54) 54 — — — — Net restaurants opened (closed) (1) — (15) — (1) (17) Total stores as of September 30, 2021 221 140 179 3 38 581 As of September 30, 2022, 39 of the 181 company-operated Steak n Shake stores were closed. We plan to refranchise a majority of our closed company-operated restaurants. 21 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Restaurant operations are summarized below. Third Quarter First Nine Months 2022 2021 2022 2021 Revenue Net sales $ 37,448 $ 41,916 $ 113,345 $ 146,269 Franchise partner fees 15,880 11,508 47,929 31,744 Franchise royalties and fees 5,089 4,865 15,472 14,594 Other revenue 1,020 855 2,862 3,817 Total revenue 59,437 59,144 179,608 196,424 Restaurant cost of sales Cost of food 11,359 30.3 % 13,123 31.3 % 33,684 29.7 % 43,404 29.7 % Restaurant operating costs 20,745 55.4 % 24,496 58.4 % 61,127 53.9 % 71,751 49.1 % Occupancy costs 4,058 10.8 % 4,075 9.7 % 12,658 11.2 % 14,142 9.7 % Total cost of sales 36,162 41,694 107,469 129,297 Selling, general and administrative General and administrative 9,556 16.1 % 9,255 15.6 % 28,327 15.8 % 27,416 14.0 % Marketing 2,758 4.6 % 2,302 3.9 % 9,589 5.3 % 10,212 5.2 % Other expenses (825) (1.4) % 1,332 2.3 % (1,141) (0.6) % 2,266 1.2 % Total selling, general and administrative 11,489 19.3 % 12,889 21.8 % 36,775 20.5 % 39,894 20.3 % Impairments — — (20) (559) Depreciation and amortization (6,081) (5,811) (18,401) (15,615) Interest on finance leases and obligations (1,372) (1,462) (4,169) (4,619) Earnings (loss) before income taxes 4,333 (2,712) 12,774 6,440 Income tax expense (benefit) 1,013 (1,197) 3,186 1,294 Contribution to net earnings (loss) $ 3,320 $ (1,515) $ 9,588 $ 5,146 Cost of food, restaurant operating costs, and occupancy costs are expressed as a percentage of net sales. General and administrative, marketing and other expenses are expressed as a percentage of total revenue. The novel coronavirus (“COVID-19”), declared a pandemic by the World Health Organization in March 2020, caused governments to impose restrictive measures to contain its spread. The COVID-19 pandemic adversely affected our restaurant operations and financial results. Our restaurants were required to close their dining rooms during the first quarter of 2020. The majority of Steak n Shake’s dining rooms were reopened during 2021, and in doing so a self-service model has been implemented. Net sales for the third quarter and first nine months of 2022 were $37,448 and $113,345, respectively, representing a decrease of $4,468 or 10.7% and $32,924 or 22.5%, compared to the third quarter and first nine months of 2021, respectively. The decrease in revenue of company-owned restaurants is primarily due to the shift of company units to franchise partner units. For company-operated units, sales to the end customer are recorded as revenue generated by the Company, but for franchise partner units, only our share of the restaurant’s profits, along with certain fees, are recorded as revenue. Because we derive most of our revenue from our share of the profits, revenue will continue to decline as we transition from company-operated units to franchise partner units. 22 Table of Contents